Rethinking Retirement

Today is the first in a multi-part series about what we think of when we think of “retirement.” In today’s discussion we analyze what “retirement” means colloquially, how it differs from “financial independence,” and we’ll touch on re-thinking it entirely. Let’s get started shall we?

Retirement as we know it

When you mention the word “retired” to the average person we all have a similar mental picture: a silver haired septuagenarian relaxing on a golf course with no boss or job to report to each day. It comes with advanced age, many of us tying it to the age at which you can claim Social Security or start withdrawing penalty free from your IRA and 401(k) accounts. “Retirement” as we think of it is an inevitability that happens someday when you’re too old to keep working.

I’m going to propose a new definition for “retirement”: retirement is removing yourself from the workforce.

That’s it. Full stop. Retirement means deciding you don’t belong in the workforce anymore and simply removing yourself from it. Oftentimes this is voluntary because you’ve finally reached “financial independence” (we’ll get to that concept in a moment) while for others it’s less of a choice due to the impact of health issues and disability as we age.

With the concept of retirement defined let’s consider a new thought: retirement is meaningless without financial independence. So what the hell is that?

True “f*ck you” money

I’ve talked about the best career decision I ever made in a previous article. By saving up an emergency fund I could ensure that even if my wife or I lost our jobs our family would be okay for paying our expenses for months at a time. That gives me an immense sense of comfort at work and has allowed me to focus on excelling in my career instead of fretting about whether we could afford to pay our bills each month.

“Financial independence” is sort of like a permanent emergency fund. No longer do you have to worry about the money coming in from your salary each month; instead, your savings provide you a stream of income equal to what you need to live off of. That’s the moment where you’re financially independent: you no longer rely on an employer in order to afford your life.

Being financially independent is the key to successfully retiring. When your money employs you, you don’t need your employer.

The key to being happy in retirement, then, is saving enough to reach financial independence so that you can afford to remove yourself from the workforce.

Financial independence

Here’s the thing about being financially independent (FI): some people start life FI, while others live their whole lives without ever achieving it. Consider the likes of a Paris Hilton, born into millions of dollars of wealth, successfully financially independent before she had even drawn her first breath on the earth. Then consider the woman I wrote about who was in too deep. Poor planning, poor life circumstances, and advanced age combined to prevent her from ever reaching financial independence. She would spend her silver years struggling to get by at a time when her mind and body were least prepared to help her change that situation.

Somewhere in between a life of decadence and one of extreme poverty are the rest of us, hoping to build enough wealth so that we can reach financial independence and thus retire. The key to doing that is how much we save now to build the wealth we’ll need to generate our income later. You want to hire as many magic dollars to harness the most powerful force in the universe as you can, as early as you can. By building that wealth you’ll create the critical mass of compound interest to push you across the finish line so that those magic dollars are paying you each month the equivalent of your old salary.

Rethinking retirement

In order to reach a successful retirement, to remove yourself from the workforce in a manner that’s comfortable and allows you to continue enjoying the life you’re accustomed to, you need to reach financial independence first. Retirement, then, is really a meaningless byproduct of the pursuit of financial independence. Who cares whether you’ve removed yourself from the workforce so long as you’ve reached enough generated wealth to hire yourself full-time at the salary level you used to earn?

Under that circumstance the perception of retirement I proposed at the opening of this article is totally off base. Instead of imagining ourselves as elderly golfers in “retirement,” we should imagine anyone who has saved enough money to pay themselves 100% of what they need to live on indefinitely being able to call it quits. Age is irrelevant.

What is the impact of pursuing financial independence instead of what we used to think of as retirement? For starters an immense amount of security at work. If my fully funded emergency fund allowed me to work confidently knowing my finances were okay if I suffered a sudden job loss, reaching FI means never having to go into the office again. That means each day you are in the office, you’re there on your own terms. Don’t like a responsibility you’ve been handed? Push back with your leadership and let them know you’re not interested. The most significant leverage they have is letting you go, and that’s not leverage at all when you’re financially independent.

Security in retirement is another big gain. In our initial definition of retirement we talked about people who choose to remove themselves from the workforce because they have enough money to do so, and a group of people who remove themselves from the workforce because they have no choice. When you reach financial independence you can ensure you’re not in the second class by making sure you’ll never be in a position to remove yourself from the work place by force and instead being able to do so on your own terms. Let’s look at a new definition of retirement.

Retirement is voluntarily removing yourself from the workforce once you have achieved financial independence.

No age requirement. No specifics other than being in control of the decision and being able to afford it. The key to a successful retirement is the all-powerful goal of financial independence. In our next installment we’ll dive deeper in to financial independence and a group of people who set themselves on F.I.R.E.