The Smart Alternative To Retirement Planning

Planning for retirement is out. Financial independence at any age is in.

It’s so “old-skool” to work like a dog for 40 years scrimping and saving so you can retire and do nothing of substance for the remaining 30 years. That’s no prescription for happiness. It makes no sense.

Increasing longevity has changed every aspect of retirement planning – from asset allocation to life fulfillment and everything in between. People are retiring younger, adding encore careers, lifestyle businesses, and working into their seventies and eighties – not because they have to, but because they want to.

It is time to retire the word “retirement” and redefine our lives toward fulfillment – which means financial independence at any age.

Birth-School-Work-Death… Plus Fulfillment?

There used to be 4 stages to life – “birth”, “school”, and then “career” followed by a progressive decline to “death”. The traditional approach to retirement planning has always been about financing that final decline to death using savings accumulated during “career”.

But something changed. People in their 60’s aren’t declining toward death. 60 is the new 40. Retirees are living longer, healthier lives with dreams and ambitions yet to be fulfilled.

When Social Security was created the average life expectancy was 65 years. Now 90% confidence intervals for a healthy couple at 65 are breaking the age 100 barrier and continuing to rise. What this means in plain English is retirement life expectancies are exceeding 30 years. That is a game-changing result.

The whole concept of “retirement” was never intended to fund 30+ years of leisure. It is a broken model bursting at the seams evidenced by the trouble with Social Security, underfunded pensions, and the rise of self-funded 401(k)s to shift the burden of savings from the institutions to the individual.

The reason for these changes is simple: Financing 30+ years of leisure is mathematically very different from financing traditional retirements of 20 years or less:

• With post-career lifespans exceeding 30+ years (and growing) there is no such thing as a “safe withdrawal rate” in retirement where you can spend principal from savings.
• Instead, workers today must build a nest egg large enough to support post career lifestyle strictly from cash flow for decades.
• Additionally, inflation effects become more unwieldy when compounded over longer time horizons creating an unprecedented level of uncertainty about asset purchasing power.
• Finally, asset allocations must be changed to include growth introducing new portfolio uncertainties about sequence of returns effects and the negative consequences of volatility compounded by spending from assets.

In short, achieving financial security following the old-school retirement planning model requires more savings than most people can accumulate to fund a lifestyle most people don’t really want. It is a serious problem.

Welcome To “The New Retirement”

Fortunately, there is a solution, and those who embrace this “New Retirement” model are finding it a more satisfying life plan than the traditional model.

The New Retirement is about breaking the old “career” stage into two separate periods thus allowing you to achieve financial independence at any age. It is about pursuing fulfillment rather than leading a life of sacrifice.  It works something like this…

You launch a traditional career just like the old model where you pursue income growth and financial security. The financial purpose of this stage is to establish your foundation:

• Buy a home.
• Satisfy base lifestyle needs including furnishings, clothing, transportation, etc.
• Build your nest egg including both tax-deferred and taxable savings.

The problem occurs when you get stuck at this stage repeating this foundational do-loop in an endless quest for more-better-different without ever advancing to the next stage. You get stuck with ever-increasing lifestyle needs while engaging in a futile attempt to build enough savings to retire only to realize late in life how the mountain is simply too tall to climb.

The “New Retirement” is about breaking this do-loop by changing the playing field once the foundation is established so that you move from “accumulation” to “fulfillment”. It’s about enjoying a lifestyle business or encore career that allows you to build a life so satisfying that you never want to retire from it.

Here’s how it works…

Introduction To The New Retirement

The new retirement recognizes that traditional retirement planning was just a euphemism for elderly financial independence and that financial independence can be enjoyed at any age. You don’t have to wait until an arbitrary age like 65: You can be financially independent far sooner than you might have previously believed.

Similarly, financial independence doesn’t have to mean doing nothing and never earning another dime like in the old-world retirement model. You can redefine financial independence to include part time work, encore careers, and other income streams that take the pressure off your savings. (See the parable of the Investment Banker and Mexican Fisherman.) For example, you could…

• Work 6 months out of the year and do whatever you want the remaining 6 months. An accountant could prepare taxes from February through April 15 and again in September-October for late filers taking the rest of the year to pursue his passion for fly-fishing in the summer and snow skiing in the winter.
• A pilot could convert his expensive flying hobby into an additional income stream as a part-time flight instructor and occasional pilot-for-hire to corporate executives.
• An artist could convert his passion for wire-frame sculpture into a community of wire-frame art enthusiasts via a web site that monetizes through selling supplies, courses, and seminars.
• Or a financial junkie like me could grow his passion for sharing financial insights into an income stream that supports a location independent lifestyle while working just 10 days out of each month.

The objective is to interject a new stage following traditional career that isn’t about sacrificing your life to make a buck, but instead focuses on fulfillment and some income generation. In other words, convert the Birth-School-Work-Death life plan into Birth-School-Work-Fulfillment-Death life plan. This gives several huge advantages over the traditional retirement model where no earned income exists…

• The additional income from the fulfillment stage reduces the spending from savings so that your savings accounts can continue to compound and grow.
• You achieve financial independence at any age and lead your dream life much earlier because the total savings required to support lifestyle when small amounts of earned income are included is dramatically lower.
• You reduce the risk caused by long-term inflation since it is far easier for your savings to outgrow inflation when you are not spending from principal at the same time.
• You reduce the negative impact caused by sequence of returns and volatility because spending principal isn’t magnifying these problems.
• You gain the underrated benefits of productive work including a sense of contribution, community, mental stimulation, social connection, and much more.

Balance Is The Key

In short, a whole new stage to life has been created by increasing longevity called fulfillment. Unfortunately, many workers haven’t realized it yet and are still laboring under the old model. This new stage allows you to cut the “work” part of your life plan short and advance to “fulfillment” much sooner.

We used to live in a world of polar opposites where you worked hard and built wealth until you hit the magical age of retirement where you suddenly flipped the switch and lived the pro-leisure circuit. Now, that model no longer makes sense:

• Most people want to enjoy life while they work and not sacrifice their healthiest years at the altar of the almighty buck.
• They want more leisure time to pursue personal interests.
• They want more time for family.
• Few people want to completely stop working because work plays an important role in a balanced, fulfilling life.

The New Retirement has surfaced as an alternative that allows you to build your financial foundation (including a small nest egg) using a traditional career and then switch horses mid-career.  It is a way to redefine life from the polar extremes of career followed by retirement to something more balanced where the focus is on quality of life.

The idea is to build a life so fulfilling that you never want to retire from it. The sooner you make that switch the happier you will be.

The lesson is clear: don’t wait to live your life or put off your dreams until old-age. Redefine financial independence so you can enjoy it earlier rather than later.

If that sounds good to you then the only question remaining is, “What’s keeping you from making it happen?”

What are your next steps? What are hurdles must you clear? What knowledge gaps must be filled?

I know it is self-serving, but that is what financial coaching is all about. You can learn more here.

And let me know what you think about these ideas in the comments below. How does the New Retirement relate to your current life plan? What changes are you motivated to make?

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