While every situation is different, there are only a few types of retirement for those of us in the working class. Before I get to the retirement concept, here’s what I mean by “working class.” The working class includes those who need to survive by trading their time and effort for an income. They could be management level workers or not, they could be small business owners. They could be educators or administrators. They could have an office in a commercial building, they could sit most of their day in a cubicle, or they could work from home. The working class is a broad category, and it includes the working poor as well as the upper-middle class with investments they hope will sustain them in their future.
If we just take “retirement” to be defined as the point at which someone either stops working because they need to or want to, or the point at which someone no longer needs to work to pay for their expenses for what they assume will be the rest of their lives, there are only several categories of retirement.
The working retirement. The working retirement defies a traditional definition of retirement, stopping work, but it’s still commonly considered retirement. It may include downsizing from a career to just a job, or it may signify a late career change. In one situation, a working-class individual, perhaps someone living paycheck-to-paycheck in an office job, is asked to retire at a certain age of seniority. Perhaps his employer even offers an incentive for retiring.
Either the retiree hasn’t built up enough wealth to live comfortably his remaining years — a difficult task for a member of the working class — or he has but yet still has trouble managing expenses in retirement. For any reason, the retiree needs to supplement his government benefits or meager savings with additional cash flow. That cash flow must come from trading time and effort for income, that is, working. Without sufficient financial planning throughout his life, whether a result under-earning or over-spending or both, he must remain in the working class.
Those who love their jobs and can continue working until they are no longer physically able, due to death or disability, and never retire. A future with no retirement in sight could be the new reality for many within today’s generation of young workers. The situation might exist due to necessity — a working retirement is no retirement at all — or due to the idea of letting your career follow your passion. If you love what you do, perhaps “working” is not working at all, it’s just living.
But sometimes even people who love what they do want the flexibility to stop working at some point.
The reliant retirement. It’s fallen out of favor in modern American culture, at least for now, but sometimes the elderly who can no longer work to support themselves and who aren’t prepared to be financially independent in their retirement, can move in with their children. Family support has been a cornerstone of many societies, but with the acceleration of wealth in the twentieth century, the typical retirement life marketed so strongly and successfully involves separation from grown children, perhaps living in a community for seniors or at destination away from the cities, and a life of leisure.
Now, those who can’t afford to live that life and must rely on their children may feel like they have failed, but family support has been how societies historically deal with those in the working class who can no longer work.
In a reliant retirement, today’s retiree may also rely on assistance from the government. Social Security and Medicare exist to help maintain the solvency and health of a class of citizens that continues to grow as elderly health and longevity continue to improve. In decades past, a reliant retirement would find its funding source from pension plans and employee-sponsored benefits, but these have all but disappeared in favor of 401(k) plan where individuals bear the responsibility of sound investing.
In this category, retirees are most vulnerable to financial products that prey on financial insecurities. The promise of an up-front payment lures people to trade in their future pension checks. Reverse mortgages allow seniors to trade in the value of their home for an additional income stream. These conversions can be costly, and seniors tend to be particularly susceptible to clever marketing and high-pressure sales pitches.
The draw-down retirement. This, also known as the spend-down retirement, is a category that would satisfy most retirees. It takes work to get to this point, and for those who don’t start planning for retirement until late in their career, it might be the best possible outcome. The draw-down retirement is the state at which a worker or former worker can almost transcend socioeconomic classes. She has saved money through her lifetime, paid off debt and properly managed investments. She’s willing to cut back expenses when necessary.
Now, with her nest egg, she can afford retirement — perhaps not everything she dreamed of, but at least living enjoyably — by reducing the size of her assets each month. With $500,000 in the bank, more than many of today’s retirees, living off $40,000 each year might provide income for twelve years, more if the $500,000 is in investments which end up doing well, less if the nest egg is conservatively invested (such as in a savings account) or if the market crashes during retirement.
The result is the end of her life with declining assets, no assets, or worse, debt. She has no financial legacy, but for many, that’s not that much of a problem.
The independent retirement. This is financial nirvana, Enlightenment, the Holy Grail, heaven on Earth. Independent retirement is what everyone in the working class wants, but few will achieve. Financial independence is the only key for class transcendence: the true American dream. While financially independent persons don’t need to work to afford to live the life they want, many do, and are able to pursue the type of work that most satisfies them.
But even those who work during their financial independence may wish to stop at some point. And they can, because their financial independence means they don’t need to draw down their assets in order to live the life they want. They live off their interest and dividends from investments. For the working class, this is achievable when assets, invested in a good mix of stocks and bonds — relatively safe but by no means invincible to market forces — reach a level of twenty times what’s needed to cover expenses each year.
Someone who starts retirement by withdrawing the “safe withdrawal rate” of 4 percent of assets the first year and adjusts the amount of that withdrawal every year during retirement qualifies for “independent retirement” at the minimum level. This independence doesn’t always look like fancy living; with $1 million invested, that safe withdrawal provides only $40,000 in income at first. A retired family can live off $40,000, but it may not be the high-class retirement featured in the Florida or Arizona brochures. It may not be the the image of retirement depicted in investment managers’ television commercials. It may involve living in a low-cost area and finding activities that are inexpensive.
Independent retirement can be achieved at any time. It’s not limited to those who have worked for thirty or more years. “Early” independent retirement is possible, but you’ll find that most who promote this idea are often not financially independent. They may have scrimped and saved throughout the first ten years of their working lives, but you’ll find there are aspects of their lives they may not discuss much that belie their concept of early retirement:
- He claims to have retired early, but he is still depending on income from some type of work. He may call it “passive income,” but there are very few routes to income that are truly passive.
- He may have stopped working, but his spouse or another family member is contributing to the household income with a job. That’s a reliant retirement. It’s surely better than working yourself, but I bet your wife is bitter she’s continuing to work while you’re going around telling everyone you’re independently wealthy.
- Some just use the term “early retirement” to mean a change in careers, usually from a job that is not personally fulfilling to one that is. The word “retirement” can have a variety of meanings or senses, so it helps to clarify.
For many in the working class, this final type of retirement, independent retirement, is the ultimate financial goal. It is the only option that offers the freedom to explore without fear of financial obstacles. Will you be able to reach this level of retirement in your lifetime? Perhaps, but if not, you can still survive and find happiness.
Updated June 12, 2013 and originally published June 10, 2013.