The Eliot Rose Blog
Different Ideas of Retirement and Their Very Different Lifestyles
Added 01/13/2017 by Jason Siperstein, CFA, CFP
Not too long ago when people heard the word “retirement” they knew exactly what it meant. It used to be relatively straightforward – save as much as you can, invest as well as you can, let your money grow, and then when you hit 65, retire and enjoy! This idea of retirement only had 2 stages:
(1) the working stage
(2) the retired stage
However, there are many non-traditional retirement variations. This is important to keep in mind because the savings and investing strategies for these different lifestyles are completely different!
The retirement that I hear most about is semi-retirement. Usually this entails working for a period of time and then at some point either reducing your hours or taking on an entirely new career on a part-time basis. I have seen some clients semi-retire as early as 40 and some as late as 85.
This type of retirement has 3 stages:
(1) the working stage
(2) the semi-retired stage
(3) the retired Stage
An advantage to semi-retirement is that you don’t need to amass as large a retirement nest-egg as you would for traditional retirement. This is because your human capital (value of your earnings associating from working) is worth a lot more.
For example, if you earned $25,000 on a part-time basis during semi-retirement, this would be the equivalent to living off a $625,000 investment portfolio (assuming a 4% wtihdrawal rate)! This means that you may not need to save as much during your working years due to your almost pension-like income during semi-retirement. This of course, assumes you are healthy enough to work in your later years.
This idea of retirement can take two distinct forms. The first form has 4 stages:
(1) work and save
(2) temporarily retire
(3) work and save
Under this plan, people may devote their middle years to themselves and their families. They can explore the world, master a skillset, and focus on what is most important to them. For instance, individuals may work from 21 to 35, then retire for 15 years and go back to work until 75.
Another way to engage in temporary retirement is to have multiple retirement periods that last shorter periods of time. This may look like working for 5 years and retiring for 2 and repeating this pattern. This may be ideal for individuals looking to enjoy “retirement” periods evenly throughout their lives rather than just in their golden years. This is a great option for individuals in non-traditional career paths.
However, in order to achieve this type of lifestyle, you need to save a very high percentage of your salary. Since you will be enjoying multiple retirement periods, your money will never fully be able to take advantage of compounding since you will be living off your savings throughout life. Also, your investment portfolio will not be able to be invested as aggressively due to the shorter time horizons in which your portfolio is able to grow uninterrupted. Again, in order to maintain this lifestyle, it will require saving a higher than average percentage of your income during your working period.
Bottom line – figure out what retirement you want and map out a plan to get there!
If you would like to explore the financial planning process, feel free to email me here or call me at 401-588-5122!