The five types of retirement

The five types of retirement

A History of Retirement by William GraebnerAs 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.)

Traditional Retirement

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:

Traditional Retirement

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.”

Early Retirement

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:

Early Retirement

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.

The Crossover Point

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.

Temporary Retirement

In 1988, Paul Terhorst published Cashing in on the American Dream, one of the first books to explore alternative retirement options. While Terhorst advocated early retirement (as described above), he also explored another kind of retirement, one that we'll call temporary retirement.

Here's how the author describes it:

We used to work and then retire. [I suggest] you work, then retire, then consider going back to work. Under this plan you devote your middle years to yourself and your family. During those years your mental and physical powers reach their height. You can explore, grow, and invest your time in what's most important to you. You can enjoy your children while they're still at home. Later, after you've lived the best years for yourself, you can go back to work if you want to. The choice will be up to you.

Under Terhorst's plan, you go to work for ten or fifteen years, then you take time off to pursue your passions for as long as your money lasts. This could be ten years or twenty — or it could turn into the rest of your life.

Graphed, the temporary retirement model looks like this:

Temporary Retirement

I haven't thought much about temporary retirement, but it seems to have some interesting features. For one, you do get to spend your prime years on whatever is important to you. But what I like best is that if you return to work later in life, you ought to have higher earning power and you'll probably have access to better health insurance. (Finding affordable, quality health insurance is a huge issue for early retirees, especially in the past five years.)

Semi-Retirement

Temporary retirement is one novel approach to leaving the workplace. So too is semi-retirement, which was popularized by Bob Clyatt in his excellent 2005 book Work Less, Live More.

According to Clyatt, semi-retirement is about finding work-life balance. For some, that means continuing with their previous career, but in some sort of reduced capacity. For others, it could mean changing jobs completely to something that pays poorly but offers a sense of satisfaction. And for others, semi-retirement could simply mean supplementing investment income with a care-free job at the local coffee shop or fabric store.

Graphed, the semi-retirement model looks like this:

Semi Retirement

As I've said many times before, I consider myself semi-retired. I'm financially independent, it's true, but I choose to continue working. Having extra income provides and added layer of security. More than that, however, my work here at Get Rich Slowly (and elsewhere) gives me a sense of purpose.

One of the biggest advantages of semi-retirement is it allows you to leave the rat race at a much earlier age than you might otherwise be able. Even if you're not ready to quit work entirely, you can opt to find less stressful and/or more fulfilling work. Your financial needs aren't as great, so you don't have to choose a job based on income.

Mini Retirements

The last of the five types of retirement comes from Tim Ferriss' 2007 bestseller, The 4-Hour Workweek. In that book, he asks: “Why not take the usual 20-30-year retirement and redistribute it throughout life instead of saving it all for the end?” With this model, you work in fits and starts. You might work for five years then take two years off — and then repeat the process all over again. Ferriss refers to these career breaks as “mini-retirements”; you might know them better as sabbaticals.

The advantage of using the mini-retirement model is that you're able to get the best of both worlds — work and retirement — at every age. The disadvantage is that you never really build up a huge buffer of savings because you're using that money to fund your sabbaticals every few years.

Graphed, the mini-retirement model looks like this:

Mini Retirements

When I read The 4-Hour Workweek, I felt like Ferriss was vague on how to make mini-retirements happen. Naturally, I dug deeper into the subject when I got a chance to interview him for Get Rich Slowly in May 2008. Sabbaticals and mini-retirements are terrific options for folks who are looking for a non-traditional career path, and who want to take time off to experiment with travel and entrepreneurship while they're young. (Kim essentially took a mini-retirement while she and I spent fifteen months traveling across the U.S. in a motorhome.)

Which Type of Retirement is Right for You?

I know those timelines are teensy-tiny, and I apologize. By their nature, they're long and wide. Plus, it probably doesn't help that they're spread throughout the article. In an effort to add clarity, here's what they look like next to each other. (You can click the image below to see a larger version that might be more readable.)

Five Types of Retirement

The brown part of the bar is “training”, the period during which we're in school as children and young adults. The green part of the bar is retirement. An orange section is work with a traditional saving rate. A red section is work with a high saving rate.

After all this, here's what's important to understand: There's no one right way to retire. Despite what the Internet Retirement Police would have you believe, each of the options I've listed here is valid. They're each a type of retirement. (Still, I try to use the term “financial independence” instead of “retirement” just to avoid confusion — and arguments.)

Which type of retirement is right for you? It depends. Only you can answer that. How's your health? Do you like your job? How much money have you saved? What's your purpose? What are your goals? All of these answers will have a bearing on your decision.

More about...Retirement

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Retire Before Dad
Retire Before Dad
2 years ago

JD,
I’m planning to combine semi-retirement and early retirement. Semi-retirement in that I’ll leave my full-time job on the sooner side but continue to earn through entrepreneurship. Then completely retire early, or at least earlier than the average. I try to avoid the IRP and all the nuances with FI and retirement terminology. Whatever term people self-associate with is fine by me!
-RBD

Joe
Joe
2 years ago

I like the combination of early and semi retirement too. I’m making some money from blogging, but that’s temporary. Ideally, the work will keep tapering down until it’s just a few hours per week. Working a bit after retirement is good. It keeps you busy and give a little structure to your days.

Your chart is neat, but the dividing line between working and retiring is more blurry now.

FoxTesla
FoxTesla
2 years ago

I’m curious if anyone has been able to effectively use the temporary or mini retirement path. The key difficulty (based on the preferences of my employers/managers) would be the lack of immediate previous work experience. In their minds, two years out of the loop is the same as twenty years out of the loop, and it is always ranked below someone currently employed. The viewpoint is you no longer have the cutting edge knowledge, so if we have to train a person, it may as well be a new college hire for half the cost.

Kristin
Kristin
2 years ago
Reply to  FoxTesla

I’m curious too, especially for the “Temporary Retirement” path. Even though we all know that age discrimination is illegal, we also know it tacitly happens. I’m not sure someone taking an extended period off in the middle of their working years would be able to easily reenter the workforce at 60-ish as your graph suggests. I agree with FoxTesla that employers would be inclined to favor younger workers they could get away with paying less. If the older worker were willing to take less, that may not work out well for being able to retire again at a more traditional… Read more »

Will
Will
2 years ago
Reply to  J.D. Roth

That would be a great article or two. I have the same questions as the other folks – but mostly about temporary retirement. I could see mini-retirements working out fine in a lot of industries.

Bruce
Bruce
2 years ago
Reply to  FoxTesla

My spouse and have historically taken the mini-retirement path. Both separately and then together once we met. Into our mid 40s with school age children we are now shifting more towards semi-retirement. But as to mini-retirements choices that have helped included: – shifting from being an employee to that of a contractor – working for more than one company, manager, etc who value your work so there is always someone who wants to hire you for their current project – timing the start of mini-retirements with completion of job tasks and ending mini-retirements earlier when opportunities present themselves – not… Read more »

Barb Drees
Barb Drees
2 years ago

To me, temporary retirement is the classic stay at home parent that leaves the job when the kids are born and re-enters the work force when the kids are in high school or college. And if you ask most of those mothers (this may be different for the fathers), when they return to work they would not say they have “higher earning power”.

sequentialkady
sequentialkady
2 years ago

I’m over 1/2 way to 30 continous years of employment as a public servant, and the rules under which I was hired say that after 30 years of continous employment you can draw your full pension at any age. In my case this would be 57. Though I am saving to retire at that age, because of the cost of healthcare, I’m thinking of a period of semi-retirement which is what my dad did (for 10 years), a good friend of mine is doing (she’s heading into “full time” retirement this year after 10 years), and what a colleague of… Read more »

lmoot
lmoot
2 years ago

I think I am aiming for a combo of the mini and semi retirement. I took a career break from working full time when I turned 30, which lasted six months. All of the stress of working or going to school without a break, just melted away during that time, and I learned a lot of coping methods, and how to listen to my needs and recognize my limits. Nearly 4 years later and I am still reaping the emotional benefits of that break. I’d like to take several more career breaks, before slipping into semi-retirement, to go back to… Read more »

maria@moneyprinciple
2 years ago

Gosh, I fit no where in these. To begin with, I trained till I was in my early 30s (my second PhD I got when I was 33). I have mini-retirements, I suppose (a year sabbatical every six years). I intend to ‘retire’ within about a year but it will be semi-retirement (I like working, I don’t like being employed) and it will be ‘early’ (at 56) but not early according to your ‘early retirement’ graph (45). Now, I’ll stop being flippant (it is not the first time I don’t fit in any category and it likely won’t be the… Read more »

timemoveson
timemoveson
2 years ago

JD, it is clear to me that once you were able to get your various new-house issues, GRS site acquisition and tech issues calmed, you have had time to write some fantastic pieces. Congratulations on these recent several posts. Very inspirational, thought provoking, and well done!

Thank you.

Rick
Rick
2 years ago

If there ever was a word that created such heated arguments, in depth discussion and SELF PRIDE, retirement would be it. I prefer a black and white definition, To me you either work or you don’t. Just because you do what you “love” or you work part time does not fit my definition of retirement, if you have to answer to others or you will face a consequence than you are not Free/retired. I for one am retired right now, but my wife does not want to quit her job, so I am finding myself bored in the wet and… Read more »

Danielius Goriunovas
Danielius Goriunovas
2 years ago

Wow! Thanks, I had no idea that there are SO MANY retirement ideas. I heard of the sabathical one from some TED talk – 7 years of work, 3 of vacation 🙂

Bibs
Bibs
2 years ago

I am 53 and worked since 23 (post univ) and at 50-51, I found that headhunters and employers would refuse to hire me despite looking early 40s (I should lie about my age) and living in Japan for 30 years now I can’t find work though I have tried every avenue for the past few years. Rent, cost of living in Tokyo and traveling do take their toll but I was lucky to have saved a lot. At this point I think it is time to give the big “sayonara” as being a workaholic but no work to do is… Read more »

Ms ZiYou
Ms ZiYou
2 years ago

I love the graphics!

And I think society needs to start seeing more alternate options like these, so people can realise they don’t have to take the study > work > retire at 65 path, that it is a choice.

Personally I’m an all or nothing… so I’m aiming for the early at 40, but you never know may end up back in the paid workforce.

Foxy Michael
Foxy Michael
2 years ago

Quite enlighting! You broke the retirement concept down to simple terms as there’s no right way to retire. I found this article after a reader pointed to it as a response to a case study.

I like to think more in terms of financial independence which makes you pursue other things for fun that inevitably brings you an income. So Train -> Work, save, invest -> Early retire on a low budget while making money from hobbies/side activities.

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