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Early vs. Traditional Retirement

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“Retirement” is a slippery concept. Yes, that R-word is commonly used, and that’s why I chose it for this blog. But it can describe radically different situations: a 20-something Internet tycoon; an extremely frugal 30-something software engineer; a 40-something ex-military officer on a pension; a 50-something who achieved financial independence with prudent investing; or a 60-something on Social Security. They might all be considered “retired.”

The conventional definition of retirement is to stop working, to “withdraw from one’s occupation.” But when I use the word “retirement,” especially early retirement — in your 50’s or earlier — what I really mean is “a level of financial independence that allows foregoing the security of a full-time job.” That means having the freedom to live life at your own speed, being creative and productive on your own terms. And, for many of us, that will still lead to something that looks, at least occasionally, like work.

In my experience there are two distinct classes of retirement: early retirement and traditional retirement. There is no official definition, but the following table of relevant factors might help clarify what I mean by those terms, and where you fit into the picture:

Retirement Age Length Pension Health Insurance Could work?
Early 50’s or younger 40+ years no purchased yes
Traditional 60’s+ 20-30 years yes Medicare/benefit no

Of these factors, one stands out as a fundamental dividing line, with critical implications for the retirement equation: Are you willing and able to return to some enjoyable, part-time work if needed? That option can substitute for a great deal of savings, and it can prevent a great deal of anxiety over certain scenarios that could lead to running out of money in retirement.

To be frank, given the uncertainties around modern retirement, it’s probably irresponsible to leave a secure, good-paying career for early retirement, unless you also have the option to return to work if things don’t go well. Unless you’ve saved a great deal of money, the range of possible investment returns, inflation rates, and health care costs over the long time spans involved in early retirement, introduce unknowable variables into most retirement equations.

The ability and desire to work, in some capacity, is a hallmark of early retirees. However, it might not even be an option for traditional retirees.

So, where exactly is that fundamental dividing line for you? Personally, I see my 60’s as a point where I would in no way want to be forced to return to work. Before that though, I’m willing to work, if certain dire economic scenarios were to take shape. It would not be a catastrophe in my life and could even be fun and rewarding.

In fact, I’m working on my blog and books right now. I might have withdrawn from my original career, but I’m not at all withdrawn from the productive world. However I do this work on my own terms, at my own speed, with financial considerations taking a back seat to quality of life.

There is another important distinction between early and traditional retirement: the older you are, the shorter your retirement, the more predictable your retirement planning can be. A 20-year traditional retirement is a very different animal from a 40+ year early retirement. Anyone who has spent much time with a retirement calculator can attest: scenario results begin to diverge dramatically as the decades add on. The need to predict the future accurately — always a questionable pursuit — multiplies as the years in retirement increase.

Because of the decades-long time spans involved, and the unknowability of future events, a key component of any retirement, in my opinion, is having a backup plan. The essence of such a backup plan is having the ability to either cut your expenses, or raise your income, possibly significantly, if required.

Early retirees especially need such a plan, and usually have more flexibility to create one. But even traditional retirees have options available, particularly on the income side of the equation. Some of the most common ones for those traditional retirees include annuitizing assets to create a higher income stream (with diminished ability to leave a legacy), or taking out a reverse mortgage, to generate lifetime income from home equity (again reducing value that might be left to heirs). Both mechanisms can, to an extent, bail traditional retirees out of unforeseen circumstances.

Early retirees, on the other hand, may be less able to take advantage of annuitizing — because of unfavorable or unknown real yields over long time spans, or of reverse mortgages — because of age requirements. However, they are more likely to have the flexibility to implement a backup plan on the expense side of the equation — dramatically cutting living expenses, in one or more categories, for example. Younger retirees are more likely to be spending on extensive travel or other recreation that could be pared back. And they are more likely to have options for moving to a cheaper region or into a downsized home that could substantially cut their cost of living.

However, in many cases, those early retirees would be better served, or might simply prefer, to return to work. Working would likely impact their preferred lifestyle less than other options. So work, at least part-time, serves as the preferred backup plan for many early retirees.

If the ability to work is the critical dividing line for early retirement, then you must realistically consider at least two factors before taking the plunge into retirement:

  1. How marketable will your skills be in the future economy?
  2. How plentiful will such jobs be at precisely the time you are likely to need to shore up your retirement finances — probably during a major and extended recession?

Given those questions, early retirees, who hope to enjoy living for many more decades, need to guard their personal productivity more carefully than traditional retirees. If you’re a younger retiree, you should maintain your professional contacts, or develop new ones. You should stay informed about advancements in your chosen field, or develop experience in another area that interests you. And you should always be on the lookout for easy and fun ways to be of service or produce value for others.

Because, in my experience, if you are a competent and informed early retiree who enjoys helping others, you will never want for ways to produce income if necessary. The traditional retiree, of which there will be fewer and fewer in the future, does not usually need to be concerned with such matters….

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Comments

  1. Well said and very timely for me. My backup plan for early retirement includes some low stress/low volume paid work – at least for a while after hitting FI. Given the variables you mentioned and the unknown expenses of small kids, it’s hard to convince myself to cash out completely. At the same time I’ve realized that once many of the big ticket items are completed like saving for retirement (getting closer) and mortgages/debt service (already done), it takes a whole lot less money to pay expenses. Thanks for another great post.

    • Thanks Prob8! Sounds like we’re on the same wavelength. I definitely agree those big ticket items have to be laid to rest before pulling the plug on a career. Then a bit of side income can take care of many future uncertainties.

  2. Darrow, thanks for a thorough post that doesn’t re-ignite the debate over “financial independence vs retirement”. Even some of those 40-something retired military can get a little nervous about predicting the future for six decades.

    The conundrum about going back to work is that most people pursue ER to get away from their current career. Unless they retire from a vocation like doctor, lawyer, or professor then it’s probably better to approach the “return to work” question as a perishable skill– or a career change into some form of service job or self-employment..

  3. Thanks again for some thoughts on ways to “bucket” the different periods of retirement. Ironically when your article talked about shoring up finances, an ad for a nice Niner mtn bike appeared on your article. (Probably from some of my research on a used bike.) I laughed and thought about how much more I would have to work if I bought it new. However, a used bike is not out if the question in ER. Keep up the great writing. It keeps me focused on working my plan.

    • Hi Stan, that’s interesting. I don’t usually endorse consumption, but I tend to think that a mountain bike, especially used, is a good investment in fun/transportation. Thanks for the comment!

  4. I’m bookmarking this post for when we get close to our early retirement date. I love the thoughtful analysis. These are all things (backup plans, the ability to work if need be, thinking of additional sources of income that don’t require true work) that immediately make sense but I haven’t thought of yet.

  5. I may have done it backwards. I did the traveling, adventures, and chasing dreams, that most people do during retirement way back in my 20s instead and am now doing the office jobs to pay for it (Never mind that I love my current job too).

    I think I’m more focused on doing something I enjoy as I get older rather than being “retired” as you traditionally defined it.

    • I think it makes sense to try to maximize happiness at each stage of life. There is always a trade-off between mortgaging the future and not enjoying the present enough. Best wishes for finding your balance!