Wednesday, 1 January 2020

4 Paths to Retirement And Financial Independence

4 Paths to Retirement

Do we have to wait 40 years to reach retirements? It just seems like such a long time and there's only so often that we can say "Are we there yet?" before the phares just lose all meaning. Thankfully, the answer is of course not, but not everybody knows that or maybe they've heard some of the other options out there but they don't yet believe any of them would work. Because if it is actually the case, if we don't actually have to wait and work for 40 or 50 years in order to reach retirement then why do so many people do it?

Well in addition to the either not having heard of the other options or just not believing in the other options out there would work or just being one of the lucky few would really genuinely loves their jobs and wouldn't choose retirement even if they did have the option, there are a couple of reason why some people would still choose the traditional path to retirement. 

As you can tell by the title today we're going to be talking about the various path to and forms of retirement as well as their advantages, disadvantages, and some other things that you might want to consider before choosing your path to financial independence. 

Today I'm going to be covering 4 different types of retirement:


  1. Traditional Retirement
  2. Coasting Financial Independent
  3. Traditional Fire (or Financial Independence; Retired early)
  4. Mini-retirement

  • Topics covered for each path
  1. What Is It?
  2. Advantage/disadvantage of each type
  3. Who Is This Type Particularly Idea For?


Let Get Started


The Traditional Path To Retirement

Traditional retirement is the one we're all familiar with but it is also the one that all the other forms are compared against so I probably should talk about that one first.

If you choose to follow the traditional path to retirement you find a career and work for 40 to 50 years while saving enough money so that by the time you reach the age that the government says you should be retiring, you have enough money to live on. Now, of course, everyone's situation is different but the general rule of thumb that a lot of people use for trying to figure out how much money they need to be able to retire is the 4% rule which I covered in the previous article.

Read: How Much Should You Spend Annually In Retirement? 4% Rule & Safe Withdrawal

In that article, you need roughly 25 times your annual expenses saved for retirement in order to have a reasonable chance of not running out of money. Some people say that nowadays the 4% rule doesn't actually hold up for various reasons and as a result, they use the more cautions 3% rule, which works the same way as the 4% rule except that your goal is to have about 33 times your annual expenses saved for retirement.


Advantages Of Tradition Retirement

The primary advantage of this type of retirement is that you have as many times as possible to save that amount of money that you need at least in comparison to the other paths and in comparison to the other paths your money does not have to last as long. As of writing this article, the full or normal retirement age in the states anyway is 67 years old if you were born after 1967.

That means you could have anywhere from 40 to maybe even 50 years depending on when you start working in order to save up that 25 times your annual expenses or 33 times if you following the 3% rule.


Disadvantages To Traditional Retirement

Ironically similar to the second advantage, and is that your retirement is likely going to be shorter than any of the other paths since you won't be until you're 60. This means that you will have a little less time to do whatever it is you want to do when you are finally free from the need to have a 9 to 5 job.

Now, this is obviously not going to be seen as a disadvantage by everybody because there are all those lucky few who legitimately enjoy their jobs as I said but for those of us who do have things we would rather be doing than working our 9 to 5 job, it's something to consider. Another thing to consider which may or may not relevant to all of us, unfortunately, we won't know until we get there is that it is possible that not many of our retirement years will not be fully healthy. If we don't retire until our late 60. 

Obviously, we can't say this for sure since medical technology is always advancing and we're living longer than ever before but there is always the possibility depending on how we manage our own health and what happens to us in our lives that there may or may not be too many of those postage 67 years that are truly healthy for us to do what we want when we want.

You could make the same argument for any of the other paths but when you're waiting until 67 it is a little more likely that your 70s are going to be a little less healthy than saying you're 40 or 50.


Who Is This Ideal For?

As far as who I think that this path would be particularly ideal for... Well, some may disagree, but to me, it's a shortlist. I think this particular path would be the ideal path for those who genuinely love their jobs and would still be doing that in retirement. That is it. That doesn't mean it's a bad option for anyone else I just think there is probably more ideal option out there.


Coasting Financial Independent

Coasting financial independence isn't retirement in the traditional sense since you are still working for a fair portion of the process possibly even as long as you are with traditional retirement. The difference here is that if you choose to pursue coasting financial independent you are able to step down from a higher-paying but probably more stressful or less enjoyable job to a lower-paying but less stressful or more enjoyable job. 

The idea is that in the early stages of your career or the more recent stages of your career you save up a ton of cash and let it compound over the next 20, 30, maybe 40 years until it has grown to be enough that it's able to support you when you fully retire. Just as a hypothetical example to show you how this works in concept,

Let's Look At An Example


Take Jane who works as an accountant and takes home about $70,000 a year, which is not half bad, but she really, really hates her job. She wants, no needs, to get out of it for her own sanity of nothing else. Whoever, she did go to school for many years to get this financial opportunity to make this kind of money she doesn't want to just give that up. So she does a lot of research and figures out how to minimize her expenses so she can stash as much cash as humanly possible now so that she can quit her current job and move into a different one that she'll enjoy more as soon as possible.

She lives on a shoestring budget, takes advantage of various rent hacking techniques, pays off all of her debts and as a result is able to get her annual expenses all the way down to an incredible $18,000 a year. Not the most luxurious lifestyle to be sure but worth it for her so that she can get out of this job as fast as possible and not squander the opportunity that she gave herself at the same time.

She figures that once she is out of her job she would want to be able to live on around $2,500 a month in today's dollar once she reaches her retirement, which given what she has recently learned about making your money stretch is not a bad lifestyle especially if it's just for one person. However, obviously, $2,500 a month in today's' dollar is not actually $2,500 a month when she retires.

Say Jan is 27 now and assuming that she was able to work a job that she doesn't hate she would have nothing against holding off for retirement until the normal age 67. If we assume a 4% rate of inflation, $2,500 a month or $30,000 a year is going to be a little under $98,000 a year in 40 years. Therefore, following the 4% rule, she would need to have at least $2.45 million or thereabouts saved by the time she's 67 in order to fund her current lifestyle. 

Jane's shoestring budget is able to save about $4,333 a month at her current level of income and if we assume an 8% average rate of return over the long haul before inflation she would be able to switch jobs in 29 months or about 2½ years. If we assume a 6% average rate of return before inflation then she would be able to switch jobs in a little over 5 years.


Speeding Up The Process

Now if Jane wanted to speed up this process even further she could obviously get a part-time job just to increase her income or better yet find a way to generate an income outside of her job, possibly through some sort of side hustle, that she could keep up after she switches is jobs and maybe even into full retirement. The mathematical effects on Jane's situation could be enormous if she managed to do that

Read: Why You Need A Side Hustle And How A Side Hustle Can Change Your Life

But even if she doesn't, 2½ years or 5 years and some change are certainly a lot better for someone in her particular situation than 40 or 50 years would be.


Advantages To Coasting Financial Independent

That, of course, is the main advantage of this path to financial independence. it allows you to change careers fairly safety much earlier on in life than traditional retirement would, which obviously makes it particularly ideal for those who are not necessarily looking to retire in the traditional sense early but just really don't like the career path that they found themselves on. 


Disadvantages To Coasting Financial Independent

The biggest potential disadvantage to this path is that you may either underestimate the amount of money you'll need in retirement or overestimate the rate of return you will get on your money between now and when you start withdrawing it in retirement. So it may not be a bad idea to give yourself some sort of a buffer when you're estimating these numbers or again find some way to generate an income without the need for a job because it seriously does make a huge difference!


Traditional Fire (or Financial Independence; Retired Early)

  • Lean Fire
  • Fat Fire

Within the fire community, there are two schools of thought known as lean fire and fate fire.


Lean Fire 

Is the path taken by those who focus primarily on keeping their expenses as low as possible. The aim for those who are attempting to achieve lean fire status is to have their retirement expenses add up to no more than $40,000 annually. They also follow the 4% rule which means that their retirement nest egg is usually no more than $1 million. 


Advantage To Lean Fire

The advantage of this method at least in comparison to the fat fire method is that it is comparatively easier to achieve simply because you don't have to save quite as much as you do with fat fire.


Disadvantage To Lean Fire

The disadvantage to lean fire is, of course, the lifestyle is not going to be quite as luxurious as it would have been had you achieved fat fire. Now don't get me wrong $40,000 a year, especially for those who know how to stretch their money out and control their expenses, can still be a pretty darn good lifestyle but it's still going to be the same as six figures lifestyle with that same knowledge.


Fat Fire

Fat fire, on the other hand, prioritizes achieving financial independence on at least an upper-middle-class lifestyle. The actual numbers involved, of course, vary depending on your personal situation and where you live but the idea is that you have a lifestyle that does not necessarily involve scrimping and saving in your day to day life after retirement.  


The Advantage And Disadvantages Of Fat Fire

This method is pretty much the opposite of the lean fire. On the one hand, you usually don't get to retire quite as early as you would with lean fire but on the other hand, your lifestyle is a little more luxurious or maybe a lot more luxurious depending on how far you take it.


Who Is This Ideal For?

Whichever method you end up choosing I think that this path to financial independence is ideal for just about anybody. Even though the fire acronym technically stands for financial independence retired early it doesn't necessarily mean you actually have to retire. Or at least I don't think so, the concept that I take from this is the important of saving particularly early and becoming financially independent so that you have the option to do whatever it is you want whether that's changing jobs like in the coasting financial independent or retiring like many do or continuing to work at a job that you enjoy without having to worry about the finances.

Any of those routes are perfectly acceptable but not all of them are accessible without first achieve some level of financial independent 


Mini-Retirement

The last form of retirement that I wish to talk about today is mini-retirements which are basically a form of the sabbatical that you can take multiple times throughout your career without the need to actually be super wealth. The idea behind it is you work for 6 months or a year or 2 years or whatever the case may be for you and then you take a one-month sabbatical or two-month sabbatical and do whatever it is you want during that time.

During those 6 months or 1 year or 2 years, or whatever it ends been, you're saving up for that next mini-retirement. Now obviously this one is probably going to be a little bit harder to achieve without some sort of remote working agreement unless of course, you work for yourself but it is doable. 


Advantages To Mini retirement

The advantage of this particular form of retirement is that you get to experience it early and often. So you're able to recharge your batteries and you don't have to give up your ability to earn an income.


Disadvantages to Mini-Retirement

The potential disadvantage to this is first if you don't or can't negotiate some sort of a remote work agreement and you can't find a way to work for yourself it is more difficult to achieve this form of retirement. The barrier-to-entry is possibly a little bit higher depending on how you look at it. 

There's also the potential disadvantage of not being able to save enough for full retirement down the line which for most of us is still going to be a thing eventually unless you got some sort of passive income coming in to cover your later retirement years. But this can usually be solved by just planning ahead since there's no hard-and-fast rule as to how often you need to take this mini-retirement if there is a year where you just don't make as much money as you expected, you can just hold off on that next mini-retirement for a little bit longer so that you can cover your long-term investments as you go along. 


Don't Be Afraid To Get Creative

The last thing that I want to mention is while I did list these individually there's no reason that you can't mix and match or even combine a few of them. For instance, many entrepreneurs will combine either mini-retirements and fire or mini-retirement and coasting financial independence in order to give themselves a little of a break and recharge their batteries while continuing to grow their businesses.

So don't be afraid to get creative with these or even come up with an entirely new path yourself. 

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