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Three Approaches to Retirement
The thought of retirement is exciting to some and scary to others, with most feeling a mixture of both emotions. Much of the anxiety surrounding retirement is caused by not knowing where to begin with retirement planning. A great initial step is to decide on one of three approaches to retirement: Traditional, Phased, or FIRE (Financial Independence Retire Early).
I define a retirement approach as the pace and pursuit of accumulating enough resources to step away from paid, full-time work. Is there more to it? Yes. But this is the essence.
Let’s Start with What’s the Same
Regardless of which approach to retirement you take, there are many similarities. For example, you usually have to prudently save and invest to retire on your own terms. In addition, many are motivated to retire from a job they are tired of. Finally, many retire to pursue passions such as:
Volunteering is a passionate endeavor for many retirees. For some, this can take up as much time or more than their pre-retirement job. Those who are searching for a purpose in retirement may find volunteering very rewarding.
Many retirees have not had the time to pursue their passions or hobbies as much as they would have liked during their working years. Whether it be woodworking, crafting, painting, writing, etc., retirement can finally offer you the time to focus your energy into an activity that you love.
For many retirees, pursuing a sport or athletic activity is very exciting. Golf, tennis, swimming and bike riding are just a few that come to mind.
Nature. Fresh air. The warmth of the sunlight hitting your skin. There is just something about being outdoors that can really help someone feel better. Many who have worked most of their life in an office, hospital, factory, etc., find that simply being outside can bring peace and energy. Walking, hiking or gardening are just a few of the outdoor activities that can bring a retiree true joy.
Many retirees view travel as an essential part to their retirement plan. Several didn’t have the time to travel much during their pre-retirement years. Because of this, there tend to be several places that retirees want to see and experience. Some want to travel domestically, some internationally and others want to do both.
I’ve talked about some of the reasons someone may want to retire and some of the activities that motivate retirees. Now let’s discuss the three approaches to retirement.
#1—The Traditional Retirement Approach
The first approach is the Traditional Retirement Approach. This is the idea that at a point in time you will quit working altogether and begin to live off your savings, investments, pensions and Social Security.
With time, consistent saving, investment discipline, and the power of compound interest, any average income earner has a real chance at a secure retirement.
One of the major benefits with this approach to retirement, is that your savings rate doesn’t typically have to be as aggressive as some of the other approaches. Everyone’s personal situation is different, so I would highly encourage you to have a professional retirement plan completed. A strong plan will help you establish a clear retirement vision, show you how much you need to save, if you’re on track, investment strategies, identify risks to your retirement, and discuss tax planning strategies.
I believe this approach makes it easier to live a balanced life. If you are so focused on saving for retirement that you miss out on the life experiences leading up to retirement, it could be a major regret. On the other hand, if you’re spending every cent that comes in, the golden years might not be so golden. Find the balance.
#2—The Phased Retirement Approach
The second approach is the Phased Retirement Approach. This is for someone who isn’t ready to quit earning but would like to work less hours or have less responsibility. This approach is popular because it can be emotionally difficult to step away from a good paying job.
Further, this approach allow you to “try out” retirement. While some have a clear vision of what they’re going to do in retirement, not everyone does. If you cut back your work hours, you’ll be able to replace that time with activities that you might want to do more of when you completely retire. This should help you to start to figure out what you really love.
Another benefit to this approach is that you can finish building up your retirement nest-egg and pay off debt before you completely step away from working.
There may be other financial benefits to a phased retirement. Working part-time allows you to withdraw less from your investments to live off of. The more assets you preserve, the more you have for later. In addition, by working longer, you may see increased future Social Security benefits. This could be from you replacing lower earning years with higher earning years in the Social Security equation or by simply delaying Social Security benefits.
#3—The FIRE Retirement Approach
The third approach is FIRE (Financial Independence Retire Early). This approach is for someone that wants to retire much earlier than the average age; usually in their 30s or 40s. This requires aggressive saving and extreme expense cutting. Frequently, people that use this approach are trying to escape the corporate world so they can pursue other passions.
A significant goal of this approach is to build up a large enough investment portfolio that you can live off of. However, many that take this approach find creative ways to earn income as to not be fully dependent on their investment portfolio.
This is the most challenging of the three approaches to implement because you simply don’t have as much time to save and grow your investments. This approach typically requires a couple to have above average income. The reason is that you need to save a significant amount in a short period of time. You just don’t have as many years to compound your investment earnings as you would under the Traditional or Phased Retirement approach.
With all of that being said, the FIRE approach can be done. It has been done by several people. Just really make sure you understand the sacrifices that will have to be made and the risks involved before diving headfirst into this approach.
Retirement planning involves a very personal series of decisions and is certainly not one size fits all. A great place to start is to first decide on the retirement approach you want to take.
If you’d like to work with a holistic wealth manager that can discuss which of these three approaches to retirement may be best for your personal situation, please schedule a consultation with us.