As you probably already know, I'm a nerd. I'm such a nerd that during my spare time I like to read books about money. But more and more, regular personal-finance manuals aren't enough. I crave something nerdier! And so, I've begun to research the history of retirement. Right now, I have four or five books on my office desk that are all about the origins and evolution of retirement.
Turns out, retirement wasn't always considered desirable (at least not for employees). In the olden days — back in the late 1800s — “mandatory retirement” caused a great deal of resentment among older workers and there was a popular backlash against it. People wanted to keep working, but as big corporations rose to prominence and power, they pushed for a younger workforce.
I haven't really read enough about the history of retirement to write intelligently on the subject, but I wanted to share a quick observation on the nature of retirement in 2018.
You see, while the idea of retirement might be relatively young, it's achieved a level of complexity that I find fascinating. Retirement is no longer one thing. It's many things. Or many possibilities. I thought it might be fun to visualize what I consider the five most common kinds of retirement in our current economy. (Note: Yesterday, we looked at the standard definition of retirement — and how there's not really any standard definition at all.)
During the 20th century, a standard model of work gained prominence in the United States (and other developed countries). You got a good job, you worked hard for forty or fifty years, and then you retired around age sixty to enjoy the last decade or two of your life. (Your retirement was funded through some combination of company pension, personal savings, and government aid.)
Graphed, the traditional model of work looks like this:
By the 1970s and 1980s, standards of living had risen enough that some folks began to challenge traditional assumptions, even embraced the idea of leaving the workplace.
“Why should we wait until the end of our days to make time to enjoy life?” they wondered. “There's got to be a better way.”
This “better way” turned out to be early retirement. These brave pioneers ran the numbers and demonstrated what would have been an impossibility just a few decades before. If you worked hard to increase your income while simultaneously striving to keep costs low, it was possible to save enough so that you can stop working at fifty. Or 45. Or forty.
Graphed, the early retirement model looks like this:
The key difference between early retirement and traditional retirement is your saving rate.
The traditional retirement model requires a saving rate of 10% (or maybe 20%). The early retirement model requires you to save half your income — or more. If you're diligent and build a wealth snowball, you'll eventually reach a “crossover point” (as described in the 1992 classic Your Money or Your Life): The income from your investments will be enough to support your spending. You'll have reached financial independence.
These two approaches are the most popular paths to retirement, probably because they lead to permanent retirement. Once you stop working, you're done. To folks still trapped in the Matrix, these might seem like the only options. But I believe there are at least three other types of retirement. [Read more…]