The Myth of Early Retirement for the Middle Class

Financial independence has become an important topic for me over the course of my adult life. It’s been a progression. First, I discovered the concept of spending less than I earn — simple mathematics but a behavioral change — and how that, in addition to making better choices, could eventually lead to financial independence through the slow path to wealth.

Yet, I have been bothered by problems with the “getting rich slowly” concept, some of which I addressed in this video about quantum leaps in finance, and which I explained better in the article linked in the previous paragraph. Just because I’m not sold on the idea that just making better decisions over the course of a lifetime will lead to wealth doesn’t mean that I think there’s a consistent method of getting rich quicker.

I am fascinated be people who report success finding financial independence early by making some extreme choices in their lives. Several years ago, during the first few weeks of the Consumerism Commentary Podcast, host Tom Dziubek and I interviewed an individual with a popular website who preaches about early retirement and the extreme choices he made to get to that point.

What is retirement, anyway?

Before I can talk about the interview, I have to point out there is some disagreement, or at least variation, regarding the meaning of retirement. I entered the interview with a traditional view. Retirement is the point at which your career has come to an end. If you work in an office or at a police station, your co-workers will throw you a going-away party with cake. You leave your job, perhaps collect a pension, move to Florida or Arizona, and live out the rest of your life in leisurely activities like sitting by the pool, playing golf, traveling, cultivating hobbies, and doting on your grandchildren.

This is, of course, a narrow view of retirement, despite it being a relatively accurate, if stereotypical, picture of a form of retirement that has certainly been popular in American culture over the last generation or two, especially with corporate workers who stay with the same company or a small number of employers within one industry throughout their lives. The disappearance of pensions in favor of 401(k) plans and a lower prioritization of human capital have encouraged employees to be less loyal to their employers and more faithful to their own needs and desires.

Average lifespans are increasing. Access to healthcare, despite the industry’s troubles, is helping people live healthier in older age. Add these to a decreased reliance on government support like Social Security and increased expectations for quality of living, retirees need more money than ever to provide the cash flow necessary to live as they are accustomed.

One result to this increased financial pressure is that many of today’s workers think they’ll never be able to retire. According to a recent Wells Fargo study — keep in mind that Wells Fargo sells “retirement planning” as a product — 37% of middle class Americans believe they will need to work until they’re too sick or until they die, at which point, retirement will lose some or all of its enjoyment.

As the world changes around us, so does the concept of retirement. The motivation for working is changing. It’s less likely that one can expect to follow the traditional path of working for thirty years and living in retirement on a pension or from returns from a risky 401(k) portfolio, so people who preach taking a more active approach to earning and saving wealth have grown in popularity. That takes me back to the interview.

Is he really retired?

In retirement, what should disappear is the need to trade time and effort, a function of labor, for capital needed to pay for living expenses. When we work, we take a certain amount of time that could be spent on activities that are more enjoyable, and use that time in manual or mental labor. Assuming a person like most people is not lucky enough to truly enjoy the work they do and to continue that enjoyment for years after turning a passion into an occupation, there’s eventually some desire to stop.

Other income sources take the place of trading labor for capital.

• Income can come from converting retirement savings into cash flow, quickly depleting a finite resource.
• Investments can generate income while depleting a resource at a slower rate. Financial planners suggest a safe withdrawal rate of 4% for the first year with a portfolio balanced between stocks and bonds.
• Retirees can rely, to some extent, on government benefits for income or to pay for expenses like healthcare.

The main idea is that trading labor for income stops. Does it count as retirement when the supposed retiree is not only still working to produce income (whether he claims to need it, despite this work being different than his initial, primary career) or if he continues to rely on his wife’s income for covering expenses? It’s certainly a different level of financial independence. In this podcast guest’s particular case, a vigorous approach to saving as much income as possible, reducing material needs, and continually considering methods of downsizing all helped him reach a point at which he could quit and take more risk by starting his own business with savings and his wife’s income as a cushion.

Unfortunately, as this was one of the first podcast interviews we produced, the audio quality was not sufficient. I decided not to re-record the interview because I felt there was a bit of a lack of authenticity. I did not feel the early retirement in this case was not real enough to serve as a legitimate story. There are some interesting concepts behind the philosophy, but the holes in the logic were too large for me to feel comfortable with the story.

Is real early retirement a myth?

Let’s say you have no savings, but you also have no debt. You can “retire” any time you want. You can live off the land. Find unclaimed space and build a shelter and hunt for food. Barter for any needs you have. I suppose that can be a legitimate retirement if that type of life sounds good to you. If you change how you approach your needs for the rest of your life, you don’t need a lot of money to retire.

Or, you can plan to retire with a combination of lowering your expectations and increasing your savings for, say, five years. If you and your spouse expect to earn $400,000 over the next five years and manage to save 90% of that, your nest egg totals $360,000. If you can live off $12,000 a year — and I know people who have — you can make that nest egg last thirty years without even investing in the stock market.

It can be done. Early retirement is real for the middle class, but only those who are willing to make extreme changes to expectations and behavior today. But it’s not very realistic, and the extreme savings path is fraught with problems.

In most cases, because most will not be interested or able to make those sacrifices, early retirement is a myth, and setting that goal is a recipe for disappointment in the long run. Most people are not willing to make the kind of sacrifices necessary to make early retirement — the kind in which you actually do stop trading labor for capital and do not have a spouse’s salary to rely upon — a reality. Be sure, if you follow a guru who preaches early retirement, that you maintain realistic expectations and a good understanding of the guru’s actual retirement situation.

For the most part, the middle class is not interested in denouncing the consumerism culture perpetuated not only by the media but by our communities and society at large, but the more a guru professes early retirement, the more likely he or she is still working and generating an income in exchange for some type of labor.

Are you on a path towards early retirement? What does retirement look like to you, and what are you doing to make it happen?