The idea of retirement is rapidly changing. When you speak to millennials and Gen Xers, they aren’t motivated by retirement. They think of retirement is a “deferred life plan” – why wait until you’re age 65 to start living the life you always dreamed of?
The 9 to 5, work-until-you’re- 65 path is not desirable anymore. Think about it – the amount of pension plans (designed to replace your salary in retirement) have decreased over 70% since 1990, the future of social security is uncertain, and the gig economy allows virtual, flexible work that didn’t exist 20 years ago. As long as your job is not physically demanding, you are able to work longer than ever before.
Here is an example of the traditional work path vs. a modern work path. The percentages in each bar indicates our work capacity which everyone defines differently (40 hours/week, 60 hours/week, etc.).
Rather than having a “deferred life plan”, you are experiencing life along the way. You work longer, but with more breaks and flexibility during your journey.
This is what some of those breaks and altering work capacity could look like.
Take a Mini-Retirement in your 20’s
For most people, your 20’s are the time in your life where you have the lowest responsibilities. You are likely still renting, you don’t have kids and you have the flexibility to take a mini-retirement. Your first job out of college very likely won’t be your forever job, so a mini-retirement after 4+ years working provides you with the opportunity to travel, pursue your passions and reevaluate your career path.
This stage of life is about you. Take the time to be selfish and pursue those dreams you have always had.
Want to travel for 6 months? Go for it.
Want to work abroad? Go for it.
Want to learn a new skill or hobby? Go for it.
Taking 6 months or 1 year off from work won’t derail your career path. In fact, the time away from work allows you to mentally reset and reevaluate how you want your career to unfold. This may save you from spending the next 20 years going down a career path you never truly loved.
Scale back work when your kids are toddlers
The most consistent value that I have heard from parents is the ability to be present and involved with their children’s lives. Life is crazy when you first have kids – your previously simple life all of a sudden became hectic, sleep-deprived, but wonderfully exciting.
Unfortunately, parents can miss out on these impactful years of a child’s life. Emotionally or physically absent parents have dramatic impacts on a child’s behavior. You may be working 60+ hours with good intention – to pay for education, buy a bigger home, etc. It’s easy to blame the need for money to justify this, but the reality is that we often don’t actually question what that “need” is.
When you start to unpack what that “need” is, you may realize that being present for your children is more important. Instead of funding private college, you fund public college. Instead of buying a bigger home, you renovate your existing home. We often get obsessed with the pursuit of earning money without stepping back and asking ourselves what we are giving up to do so.
Increase your work when your kids are school age
Once your kids hit school age (roughly 6 – 12 years old), they are far more independent. This frees you up to spend more time on work, with your spouse, hobbies, etc. That being said, they are still very dependent on you. Your life is probably dominated by soccer games, gymnastics and driving your kids everywhere.
The ability to be present and share those experiences with your kids is very meaningful.
Ramp up work when your kids are teenagers
To be honest, they probably don’t like you right now anyway 🤷♂️.
Kids are out of the house – take another Mini-Retirement!
This is an emotional, but also exciting time in your life. You’ve poured so much love and energy into raising your kids and now they are off to college. For the first time in a while, you are able to spend more time on you. A mini-retirement allows you to take the much-needed time to focus on yourself and think about what’s next.
Where do you want to live? Many people move or downsize when their kids are in college.
What dreams are possible now? Maybe consider that trip around the world you have always thought about.
How would you like the remainder of your career to unfold? You have valuable life and work experience to give, but you want to make sure you are working a job you love.
Take time to refocus on you and think about how you want this next chapter of your life to unfold.
Ramp up work during your highest earning years
Your mini-retirement provided you with a preview of what it would be like to actually retire. At this point, you probably have a clearer picture of how you want to spend your time. Ideally, you have a job you love and work doesn’t feel like “work”, but rather a passion. You have the ability to put more time into it, which also likely results in the highest earning years of your life.
Rather than all of a sudden stopping work, try to slowly scale back. The idea of stopping is literally unhealthy – we need social interactions, brain stimulation and a sense of purpose for what we are doing. This is why so many retirees go back to work or start a business in retirement – they may have tried retirement, but crave the social interactions and mental stimulation that comes from work.
So how does this impact your financial decisions?
If this type of non-traditional work path resonates with you, you need to reevaluate how traditional financial decisions apply to you. The tax code and government benefits are established based on the traditional work path – it’s costly to access pre-tax IRAs/401(k)s before age 59.5 (unless exceptions apply), the earliest you can collect Social Security is age 62 and Medicare doesn’t start until age 65.
This all makes sense when you work straight until you’re 65 – as people did when Social Security was enacted in 1935 and IRAs were created in 1974.
However, there are some clear gaps that you need to plan for if you follow this modern work path:
- Funding your mini-retirements (pre-tax accounts incur taxation and a 10% penalty before 59.5).
- Maintaining health insurance during mini-retirements.
- Supplementing income when you scale back work while your kids are young (before age 59.5) in order to support living expenses.
You need to save in the right ways in order to work around how the system is established. This is why major money decisions change when you don’t follow this traditional work path – it changes how you save, how you invest, and how much money you need.
I recommend a bucketed investment approach – build flexibility into your investment strategy to better match when you need money. It doesn’t make sense to put all your money in pre-tax accounts if you want the flexibility to access your money before age 59.5. The mini-retirements or reduced work years need to be supplemented by money from your investment portfolio, either a taxable account or a Roth, which means those accounts should be invested differently than your 15+ year money in pre-tax accounts.
- Challenge how the traditional work path serves you and your family. Too often, we accept things for how they are without going through the exercise of figuring out how to break away from it. It’s easier to say no and maintain the status quo instead of saying yes and changing it.
- Build flexibility into your finances to be able to pursue some of these opportunities. It doesn’t make sense to put all your money in a pre-tax account if you want to take a mini-retirement before you are 59.5 years old!
- The gig economy provides us with the opportunity to work when we want, where we want and how we want – this is something that was not possible 20 years ago. As long as your job is not physically demanding, you are able to work longer, but in a way that is aligned with your ideal lifestyle. This dramatically changes how much money you need to actually “retire”.
- Read Tim Ferriss’s 4-Hour Workweek. It’s slightly extreme, but he provides great, actionable tips that you can do to challenge the traditional 9 – 5, work-until-you’re-65 mentality.
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