Thursday, September 30, 2010

Retirement Strategies

Not retirement investment strategies - retirement strategies. In the time that I have been reading about personal finance, I have come across four primary retirement strategies (or life strategies). I want to discuss them, what they might mean to you, and how to achieve them.

The Four Retirement Strategies
  • Standard retirement
  • Mid-life unemployment
  • Early retirement
  • Live now, work later

Standard retirement
This is the "American Dream" retirement (minus the pension, since those don't really exist anymore). Work hard for 40 years, save a modest amount, and Social Security will make up the rest. This is the realty for most of Gen X. My generation will probably see a reduced SS payout, so we'll need to save more and invest better. I don't think I need to say much more about this.

Live now, work later
I have known quite a few people who have started down this path. The general idea is that you spend part or most of your 20-something years living meagerly and traveling the world. Some have done this instead of going to college or immediately after finishing college.

There are many ways to make this work, but the easiest path is to stay out of debt; it's much harder to travel the world with Sallie Mae or Visa calling every month. You can get a job teaching English in South Korea; go to graduate school in Europe; alternate working and traveling every 6 months; have a benefactor fund it all. Since you're young you can elect to go without health insurance, and you won't need to pay car insurance (or even have a car). You can get by on surprising little, especially in certain areas (South America comes to mind).

I think this may be the hardest path of all; you may not know that you want to do it in advance and, being new to the working world, probably have few resources at your disposal. Then again, you might have a generous family member willing to pay for it all. Most of my acquaintances who have taken this route had Mommy and Daddy to fall back in case of emergencies.

If you really want to slum it, you can make it for a while almost anywhere if you have a couple thousand dollars. Just make sure you have enough to get home at the end if you don't intend to stay.

Coming late to the workforce could have a detrimental impact on your professional life. That's all I'll say about that.

Mid-life unemployment
This is probably the least-discussed option, mostly because it often stalls professional development. It's also more difficult for those who chose to start families before reaching this point.

Mid-life unemployment is much like the previous option, except you use your 20s and early 30s to fund 2-5 years of self-imposed unemployment. Maybe you have a family to take with you. Maybe you have a mortgage but will rent out the house while you're gone. Regardless, this mini-retirement is used to cross things off of your bucket list while you're still young and healthy enough to do them.

This isn't actually that hard to do if you want to do it. If you can save 20% of your net pay for 10 years, you should be able to make it at least 2 years without working as long as you don't spend extravagantly on your time off. I'm not fond of this, though, because you'll probably end up working until much later in life than you would have otherwise. Additionally, if you have a 401k, you can't make a withdrawal from it without facing a pretty stiff penalty.

Early retirement
A lot of people shoot for this one, and it's sometimes hotly contested within the PF community. There are those who want to work as hard as possible for as long as it takes to build enough of a nest egg to retire. The limit seems to be 20 years, though, and I understand why: I don't know how anyone could voluntarily work more than 60 or 70 hours per week for longer than that. Still, some people crack their own whip with the goal of retiring at 40 or 45. I work with a guy who works up to 100hrs per week (if we let him), but the bosses have started cracking down on him because he's just not that productive; most of us could do in 60 or 70 hours what he does in that 100. (He also spends much of that time trying to do other people's jobs, which doesn't make him many friends).

Personally, I love this idea. I think everyone does. Well, at least the part where you retire early. For people with more traditional career paths (like me), this is pretty much impossible. I'm going to need another 8 or 10 years to pay off my student loans before I can seriously start saving for retirement. I might make it big with one of my side hustles between now and then, but probably not. And while I don't have a traditional family, I have a a half-dozen hobbies and a girlfriend who will probably become my wife. I'm working pretty had to get out of debt, but I don't know if I'll have that same level of motivation for retirement.

The problem here, again, is that you can't (shouldn't) touch your 401k until you're of proper retirement age. You'll also have to wait to collect Social Security, but since you made so much bank when you were working you'll probably be able to collect the maximum benefit when the time comes.

Lots of government employees get a good crack at this one; they are pretty much the only remaining group to get pensions in the USA, and most get them after 20 or 25 years of service. They can choose to continue working after they qualify for retirement, which grows their pension even more. My landlord is a former firefighter who retired at 50 and lives a nice upper-middle-class lifestyle, though he also ran a hauling business on the side when he wasn't on the clock.

Right now I'm just hoping for a comfortable retirement by the age of 65. Maybe once I get out of debt I can start dreaming bigger.

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