Re-Thinking Retirement: Beyond Conventional Wisdom
When planners talk about retirement, they often use the metaphor of a three-legged stool. The three legs of this metaphorical stool include:
- Social Security
- Employer-sponsored retirement plans (pension, 401k)
- Personal savings (IRAs, CDs, savings accounts)
With Social Security income becoming less and less reliable, and traditional pensions all but extinct, the three-legged stool has become quite a balancing act: Today's retirement plan is not your father's retirement plan!
Two Legs Down, One Questionable
Social Security will pay out more this year than it gets in payroll taxes, and leaders in Congress are now seriously talking about raising the retirement age to 70. Also, the traditional pension plan, especially in the wake of the Great Recession, is all but dead.
Who needs the federal government and the boss? One would think that 41 years after the birth of the financial planning industry, and 36 years after the creation of the self-directed retirement plan (401k), the do-it-yourself era would be alive and well, and the old three-legged stool would be replaced.
Unfortunately, conventional wisdom takes too long to change. People (and many financial planners) are still including Social Security in financial plans; and the disappearance of traditional pension plans has profoundly highlighted the debilitating human element of procrastination: Reports reveal that nearly 50 percent of Americans are not adequately saving for retirement.
The three-legged stool has been reduced to a pogo stick! How's your balance?
Fortunately, the Baby Boom generation, beginning with those who started retiring five years ago, and including those who are retiring today and up to 10 years from now, is beginning to change the conventional meaning of retirement. Let's learn a few things from today's retirees, observe what they are discovering, and form our own retirement philosophies, strategies and tactics.
Time to Rebuild the Three-Legged Stool
Mitch Anthony, modern-day expert on the behavioral aspects of retirement and the author of The New Retirementality, says retirement is not defined by financial means but rather “a time to write a new chapter in your life.” He's not just making this up; he gets his ideas directly from people in retirement!
The first step in alternative retirement strategy formation (and to rebuild the three-legged stool), therefore, is in alternative thought formation:
- Think of retirement in non-financial terms. Too many people make the mistake of defining retirement only in financial terms: “I need X amount of dollars to retire.” This is what I call money planning. The conventional retirement plan is a money plan, which often makes you a tool for money, rather than money being a tool for life. Think, therefore, in terms of life planning (e.g. life goals, life mission); think more of what you need money to do for you and less of what you need to do for money: As today's retirees are discovering, seek meaning — not money — first; find purpose before you plan.
- Stop thinking of retirement in terms of age. Conventional wisdom (originating from the federal government) says that the retirement age is 65. Why? If retirement can only be achieved by saving a massive amount of money, aided by Social Security income at age 65, I can see why many people mistakenly make this their default retirement age. If the government changes the retirement age to 70, will you be disappointed? If so, why? When you change your thinking, and move away from conventional wisdom, you are free to make retirement anything you want it to be at any age!
- Think of your own definition of retirement.. This point dovetails naturally with the two previous points: What is your definition of retirement? We recently had a wonderful and productive discussion here at GRS about defining financial freedom. Try your best to remove conventional wisdom from your thoughts, and form your own definition of retirement. Who knows, you might discover, by your new-formed definition, that you are already retired now!
Now that you've begun to alter your thoughts regarding retirement, you may now begin to consider alternative financial strategies and tactics.
Career Planning as Retirement Planning
Many retirees return to work, not just for lack of money, but for lack of meaning. In The New Retirementality, Anthony says the definition of work, inspired by recent retirees, is “a meaningful and productive engagement, paid or unpaid.”
Working is a large part of being productive and mentally active; and it can be a viable (and meaningful) way of replacing one of the legs of your retirement plan's three-legged stool. In JD's book, Your Money: The Missing Manual, he describes this as “finding your sweet spot,” which originates from another outstanding book, Good to Great by Jim Collins. The sweet spot is where your passions, what you do best, and what people will pay you to do overlap.
If retirement is a time to write a new chapter in your life, start writing the chapter now! As Aristotle said, “If you enjoy what you do, you will never work a day in your life.” If you enjoy your work, you will replace one of the legs of the conventional three-legged stool: Retirement will no longer be defined and created by money alone.
Start a Business
Starting a business isn't for everyone. It carries a lot of risk, perhaps even more than the market risk associated with investing in stocks. The rewards, however, both in money and in meaning, can far outweigh that of stocks, which can make the risks of starting a business worthwhile.
Similar to the preceding point on career planning, you may reduce risk by starting the business long before you plan to retire; by starting the new chapter in life now. Who knows, your moonlighting prior to retirement may produce retirement savings in addition to the formation of another income leg during retirement. Just be sure that the business involves something you are passionate about (see previous point).
Reduce the Size of Your Nest; Increase the Size of Your Nest Egg
Many people find themselves house rich and cash poor; yet conventional retirement planning doesn't consider the home as a retirement asset. While this strategy steps a bit outside of financial planning and into the realm of emotion and sentimentality, an empty nest that is larger than you need is also a retirement nest egg that is smaller than necessary: Home equity can be another leg in your three-legged stool.
Consider downsizing/relocating your home, getting a reverse mortgage, doing a sale-leaseback, or renting unused space:
- Downsize/Relocate Your Home: Get into a smaller home and consider relocating to another city or state. You may be able to buy the smaller home with cash, have equity “profit” remaining, and/or reduce your mortgage payment (if applicable) to help finance retirement. The new home's size and location may also translate into savings on property taxes, insurance, maintenance, and utilities. Also, consider making the location for the new home within walking or bike-riding distance to most of the things you need or to some of your favorite relaxation spots. This will add to gas and car maintenance savings (and to your physical and mental well-being). You might even consider relocating to one of the many different states with tax laws friendly to retirees.
- Reverse Mortgage: This alternative retirement income tactic has received poor press (and understandably great apprehension by those who choose not to consider their home as a “retirement asset”). Common misconceptions include: 1) The home is owned by the bank; 2) My home will not pass to beneficiaries. Both of these are false. While closing costs and interest rates can be relatively high, this income production tactic has recently become more mainstream and flexible. Reverse mortgages can work for some but remember to read the fine print and consider other alternatives first, such as home downsizing and/or relocation.
- Sale/Lease-back: You can sell your home to your children and lease it back from them. This might satisfy those who want to stay in their home and/or keep it in the family while producing retirement income, without the reverse mortgage tactic.
- Rent Unused Space: After the kids have moved out (and before the mother-in-law moves in), you might consider renting extra home space for additional income.
You Know the Rest
The rest of retirement planning is familiar territory to GRS readers. Continue to form and reinforce money habits that work: Reduce and eliminate consumer debt; drive used instead of new; automate your savings; if you get a raise at work, save it, don't spend it; track your spending and eliminate unnecessary expenses; take advantage of the 401(k) at work, especially if there is an employer match; and keep educating yourself (but try to have some fun while you're at it)!
Do your best to enjoy life. Worrying about tomorrow takes away from today; and remember, retirement is not something defined (or created) by money alone. An online savings calculator, for example, will not tell you how to find meaning and purpose in retirement: Savings calculators are quantitative; life is qualitative.
To rebuild the conventional three-legged stool, you must think (and plan) in non-conventional ways. What you do — not what you have — creates meaning. So be sure to make what you do meaningful first and let the money follow. It may sound corny, but the old saying, “life is about the journey, not the destination,” is wise (and true)!
The journey never ends as long as you live; therefore the proper perspective is to make life, which is always in the present moment, the best it can be…
How (and what) are you doing in your retirement planning? What unconventional retirement philosophies, strategies and tactics have you found useful? What are the “legs” of your retirement stool?