The traditional approach to retirement has been relatively straightforward – to save and invest as much as you can, for as long as you can, starting as early as you can, to accumulate enough retirement savings that you no longer need to work, and instead can enjoy a life of leisure. For those who struggle to save, Social Security provides some retirement safety net, and for everyone else, the more and faster you save, the earlier you can retire and the more leisure time there may be.
However, the problem is that a growing base of retirement research finds that fewer and fewer people actually want a retirement of all leisure and no work. Retirement is actually boring for many! Barely half of today’s retirees state that they never intend to work again, and barely 1/3 of pre-retirees have an intention to make retirement a period of not working indefinitely. Instead, whether it’s part-time work, entrepreneurialism, an encore career, or some other path, retirement is less and less about not working at all, and more and more about finding a different kind of engagement, which may still generate income.
The significance of these changes is that if an intense period of work followed by an extended period of leisure turns out not to be the ideal approach retirement, instead, better alternatives might be an extended period of ‘semi-retirement’, including part-time work, or a series of ‘temporary retirements’, interspersed with breaks and new careers. With these alternative ‘retirements’, the traditional retirement savings approach might not make sense either.
The reality is that if retirement is really more about doing different and perhaps more fulfilling work, still earning some income, then it really might not take nearly as much to ‘retire’ as commonly assumed. And ‘retirement’ portfolios themselves might look very different if their primary purpose is to be a buffer for retirement transition and scaled back work, rather than earning nothing at all. Some actually necessitate more savings, but have a smaller average balance, as savings are built up and spent, while other types of retirement would actually allow for less ongoing savings and smaller retirement account balances, supplemented by work in ‘semi-retirement’ that could last for years, or decades.
In turn, a future with different types of retirement could also increase demand for income insurance, as a greater reliance on the ability to work and earn income puts us at even greater risk if that goes away, and increase the need for emergency savings, for more extended mid-career transitions.
The Evolution of Retirement
For most of human history, work was something we did for survival, as long as we were physically capable. Of course, the caveat is that the longer we live, the more likely it is we’ll reach a phase in our lives where we physically or mentally can’t work anymore. Yet continued medical advances over the past century have fundamentally shifted retirement, from a period of worker obsolescence,into a world where retirement itself lasts so long that it’s actually a ‘phase of life’.
As retirement shifted from a period of obsolescence to one of leisure, it is not surprising that many wanted to maximise the leisure time, with the caveat that retiring earlier means it’s necessary to save more in order to retire.
For those who are working – particularly in a job they don’t enjoy – the idea of an extended retirement of leisure sounds like a highly appealing goal to reach. However, the problem is that not everyone seems to enjoy it once they arrive.
A growing number of retirees are seeking ways to stay active even after retirement. In other words, retirement doesn’t necessarily mean retiring from work altogether. This is important, from the perspective of the focus on saving for retirement.
The traditional type of retirement is the one that we’re all most familiar with – save early and often, invest prudently for growth, and retire as soon as you’re financially able. If you can grow your retirement portfolio fast enough, you can retire early. The time in retirement is filled with leisure or perhaps engagement through volunteer work, without any financial remuneration.
One alternative is a form of semiretirement, where work is scaled back, but not eliminated. This might entail starting a business, pursuing a new career, or engaging in consulting or parttime work in a prior career. In essence, semi-retirement in this context means retirement from the current full-time work, but not necessarily from all work.
The third type of retirement is engaging in a series of temporary retirement/s, in essence, planned sabbaticals, after which the individual returns to the working world, perhaps in a new job or career track. In this approach, retirement is not something that comes at the end but instead is dispersed more regularly throughout the individual’s productive years, perhaps as transitions between extended careers. The phase of retirement at the end would be shortened, as those initial retirement years are intentionally redistributed in earlier phases of life.
The reason why these different types of retirement are so important is that the ‘standard’ saving for retirement approach is really only effective for traditional retirement. This is because in other forms of retirement as there is not such an extended period without work income, it’s simply not as necessary to generate a huge pile of retirement dollars in the first place!
For instance, if leisure periods are going to be shorter and temporary, followed by returning to work, then the reality is that you never need as much of a lump sum in retirement savings, as it only peaks at the very end, to cover the last decade or so when some sort of work is no longer feasible.
With a series of ongoing temporary retirements (or sabbaticals), the retirement savings account never quite accumulates as high, and doesn’t need to be accumulated nearly as rapidly, because the retirement phases just aren’t that long. On the other hand, it’s notable that with shorter ramp-ups and faster spend-downs, the portfolio never has as much time to grow and compound, nor will it be invested as aggressively given the shorter time horizons, which means the retiree will need to spend less and save more to make the balance work and maintain the same standard of living. Yet ultimately, that’s simply a trade off decision to consider when choosing your ideal type of retirement.
Similarly, someone who chooses to engage in semi-retirement and continues to partially work while being financially independent, also drastically reduces the required upfront savings for retirement.
Notably, in the semi-retirement scenario above, where it is assumed that the retiree works part-time to cover household expenses from age 55 to 80, there may still ultimately be a final period without any work at all, but again, it tends to be much shorter in duration and occurs later. In this context, retirement savings is less about a period of ‘leisure’ and more about ensuring expenses are covered. The fact that the portfolio itself has longer to grow also drastically reduces the required retirement savings.
The key point is not merely that these alternative paths to retirement may entail different retirement savings strategies, but specifically that alternative forms of retirement may require far more in ongoing monthly retirement savings or far less, depending on the type of retirement. Either way, most will have a much smaller retirement account balance for most of their lifetime. In the context of today’s prospective retirees in particular, for those able to engage in ‘semi-retirement’ and still partially work, you may be unnecessarily stressing about your ability to save for a ‘retirement’ that won’t actually necessitate nearly as much in retirement savings.
One of the key risks to consider in these alternative types of retirement is that as retirement savings do not generally accumulate as high, or at least, not until much later, and are more reliant on earned income and ‘human capital’, you don’t have as much of a buffer against truly unexpected retirement, due to disability for example. Social Security provides at least some safety net, but may be far below the standard of living you are accustomed to.
Arguably, this makes income and disability insurance even more important in the future of retirement. An important consideration, given that in practice today, these insurances often go until age 65 and provide a bridge to relying on Social Security in ‘traditional’ retirement. At a minimum, having an even larger emergency savings to help navigate the transitions becomes more important.
Alternative types of retirement will by necessity require alternative considerations regarding appropriate retirement savings advice for you. This highlights the importance of engaging in an open, honest discussion about how you see your retirement goals. Are you seeking a traditional type of retirement, do you plan to take ‘minicareer breaks’ and perhaps use this time to go exploring whilst you are able, or do you plan to keep engaged in some form of paid work whilst enjoying your ‘retirement’.
With planned semi-retirement or sequential temporary retirements, retirement savings will not be invested nearly as long, which demands a different portfolio composition, and will be unlikely to accumulate as high, since there is not as long a non-work period. In turn, emergency savings and disability insurance become even more important, as do other key humancapital-related elements of financial advice, from guidance on career advice and job retraining to help navigate each ‘re-entry’ after a transition phase, or to find an appropriate semi-retirement role.
However you see your ‘retirement’ future, we are able to assist to construct a suitable financial plan to help you meet your retirement goals.
Source Michael Kitces and InterPrac FP
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