Do we have to wait 40 years to reach retirement?
It just seems like such a long time and there's only so often that we can say "Are we there
yet?" before the phrase just loses all meaning.
Thankfully, the answer is of course not, but not everybody knows that or maybe they've
heard of some of the other options 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+
years in order to reach retirement then why would anyone do it?
Well in addition to the either not having heard of other options or just not believing
in the other options out there or just being one of the lucky few that really genuinely
loves the job that they're already at and wouldn't trade it for retirement even if they
did have the option, there are a couple of reasons 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 paths 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.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
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Today I'm going to be covering for different types of retirement: coasting Financial Independence,
mini-retirement, traditional FIRE (or Financial Independence; retired early), and of course
traditional retirement.
I'm going to talk about what each of these types of retirement are, the potential advantages
and disadvantages of each particular type, and who I think the type might be particularly
ideal for.
Let's get started.
So traditional retirement is the one we're all familiar with but it is also the one that
all the other forms of retirement are compared to so I figure it's probably a good idea to
just quickly start with that.
If you're following 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 by you have enough money to live on.
Now everybody'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 on is the 4%
rule which I've covered in previous videos, but the too long didn't watch version is 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 hold up for various reasons and as
a result, they use the more cautious 3% rule, which works pretty much the same as the 4%
rule except that your goal is to have about 33 times your annual expenses saved for retirement.
The primary advantages of this type of retirement is that you have as much time as possible
to save that amount of money 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 the writing of this script, 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 nearly 50 years depending on when you start
working in order to save up that 25 times your annual expenses or 33 times your expenses
if you're using the 3% rule.
The disadvantage or at least potential disadvantage of using this path to get to retirement is,
ironically pretty similar to the second advantage, in that your retirement is likely going to
be shorter than any of the other paths since it won't begin until your sixties.
This means that you will have less time to do whatever it is you want to do when you
are free from the need to have a job.
Now, this is obviously not going to be seen as a disadvantage by everybody because there
are those lucky few who legitimately enjoy their jobs as I said but for those of us who
do have other things we would rather be doing than working our full-time job, this is certainly
something to consider.
It is also possible that our retirement years will not be fully healthy.
We can't say this for sure as medical technology is always advancing and we're living longer
than ever before but it is possible depending on how we manage our health and what happens
to us in our lives that there may or may not be too many of the post age 67 years that
are truly healthy enough for us to do what we want when we want.
And as far as who I think that this path would be ideal for...
Well, it's a pretty short list.
I think that this particular path would be the ideal path for those who genuinely love
their jobs and would still be doing that in retirement.
That's pretty much it.
That doesn't mean it's a bad option for everyone else I just think there are possibly more
ideal options out there for others.
The next type of financial Independence that I want to talk about is coasting Financial
Independence.
Now 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
for traditional retirement.
The difference here is that if you choose to pursue coasting Financial Independence
you are able to step down from a higher paying but 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, or 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 how this works 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 for her own sanity if nothing else.
however, she went to school for many years to get this opportunity financially she doesn't
want to just give it 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.
Maybe not the most luxurious lifestyle but worth it so that she can get out of this job
as fast as possible and not squander the opportunity that she has given herself at the same time.
She figures that once she is out of the job she would want to be able to live a $2,500
a month lifestyle in today's dollars in retirement which given what she has recently learned
about making her money stretch is not a bad lifestyle for one person.
However obviously $2,500 a month in today's dollars is not actually $2,500 a month when
she retires.
Jane is 27 now and assuming she was able to work a job that she doesn't hate she has nothing
against holding off for retirement until age 67.
If we assume a 3% 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 $2.45 million or thereabouts
saved by the time she's 67 in order to fund that lifestyle.
Given Jane's shoestring budget she is able to save $4,333 a month at her current level
of income and if we assume an 8% average rate of return before inflation she would be able
to switch jobs in 29 months or about two and a half 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.
Now if Jane wanted to speed this process up 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 jobs and maybe even into full retirement.
The mathematical effects on Jane's situation could be enormous if she managed to do that
and I've gone more in-depth on the why that is in my top 3 reasons you need a side hustle
video.
But even if she doesn't, two and a half years or 5 years and some change is certainly a
lot better for someone like her then 40 or 50 years is.
And that's the main advantage to this path to financial Independence.
It allows you to change careers fairly safely much earlier on in life than traditional retirement,
which makes it particularly ideal for those who are not necessarily looking to retire
in the traditional sense but just don't really like the career path that they found themselves
on.
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 your estimating
these numbers or again find a way to generate some sort of an income without the need for
a job because that seriously does make a huge difference!
The third path to retirement is fire (which stands for Financial Independence; retired
early).
Within the fire community, there are two schools of thoughts known as lean fire and fat fire.
Leanfire 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 usually follow the 4% rule which means that their retirement savings goal is
usually no more than $1 million.
The advantages to this method at least in comparison to the fat fire method is that
it is comparatively easier to achieve simply because you don't need to save quite as much
as you do with fat fire.
The disadvantage to leanfire is, of course, the lifestyle is not going to be quite as
luxurious as it would be 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 be a pretty darn good lifestyle but it's still not going
to be the same as six figures with that same knowledge.
Fat fire, on the other hand, prioritizes achieving financial independence on at least an upper-middle
class lifestyle.
The actual numbers involved will vary depending on your personal situation and where you live
but is that you have a lifestyle that does not involve scrimping and saving in your day
to day life after retirement.
The advantages and disadvantages of this method are pretty much the opposite of the leanfire
method.
On the one hand, you don't usually get to retire quite as early as you would with lean
fire but on the other, your lifestyle is a little more luxurious or maybe a lot more
luxurious depending on how far you go.
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 mean you actually have to retire.
Or at least I don't think so the concept that I take from this is the importance 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
Independence or retiring like many do when they achieve Financial Independence or just
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
achieving Financial Independence in one form or another.
The last form of retirement that I wish to talk about today is something that was introduced
to me in the book The 4-Hour Workweek by Tim Ferriss, which I really recommend checking
out if you haven't already it's a great book.
In it, Ferris talks about the concept of mini-retirements which are basically a form of sabbatical that
you can take multiple times throughout your career without the need to actually be super
rich.
The idea behind it is you work for 6 months or a year or two years or whatever the case
maybe for you and then you take a one-month sabbatical or two-month sabbatical and do
whatever it is you want.
during those 6 months or a year or two years, 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 a remote working agreement unless of course, you work for yourself but it is
doable and if you are interested in learning more like I said Tim Ferriss talks about remote
working agreements and how to do this in his book, I'll leave a link in the description
below if you want to check it out.
The advantages to this particular form of retirement is that you get to experience it
early and often.
So you're able to recharge your batteries as Tim puts it and you don't have to give
up your ability to earn an income.
The potential disadvantages to this is first if you don't or can't negotiate some sort
of a remote working agreement and you can't find a way to work for yourself it is more
difficult to achieve this form of retirement.
So 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 a mini-retirement if there is a year where you just don't make
as much you can just hold off on that next mini-retirement for a couple more months so
that you can cover your long-term Investments as you go along.
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 them or even combine a few of them.
For instance, many entrepreneurs will combine either mini-retirements and financial Independence
retire early or mini-retirements and coasting Financial Independence in order to give themselves
a break and recharge their batteries while continuing to grow their businesses.
So don't be afraid to get creative with these or come up with an entirely new path.
Anyways what do you guys think of these various paths to or forms of financial Independence
and retirement?
Are you pursuing any of them or are you pursuing an entirely different path that I didn't cover?
Let me know in the comments section below!
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
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