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.
Photo: Flickr
Updated June 12, 2013 and originally published June 10, 2013.
{ 19 comments… read them below or add one }
Unfortunately a working retirement is becoming a reality for more and more people. I am one of the people who does not have a large nest egg, but to me it is all a matter of perception, how much is enough? Although I do not have a lot by this countries standards, compared to the rest of the world I am doing great. I guess the moral is be happy with what you have.
Like Sam said, I think the working retirement is becoming much more of a norm than it was in previous generations. I am not certain which one we will have, though I imagine it’ll be somewhat decided on how successful we’ll be at growing our business. One thing I do know is that I do not want the traditional retirement, or at least the perceived one. We want to be active and contributing to society, whether it be through volunteering or entrepreneurship and mix in doing some of the things we want to do like travel.
It has often occured to me how few people these days will be able to afford any but the first two options. With wages having stagnated for 30 years, with economic shocks and resulting unemployment, It’s inconceivable to me that any of the blue-collar workers I know, and few of the white-collar ones, will ever be able to afford a “draw-down” retirement, even with Social Security supplementing it. I’ve made good money most of my life, but my SS check will only be on the order of $2500/mo *IF* I retire at 67. That’s $30K/yr minus taxes, or around $25.5K. How many people could afford to live off that alone, especially with healthcare costs shooting up rapidly and the threat of benefit cuts both to that SS check and to Medicare?
As for the draw-downers, safe investments that throw off cash yield virtually nothing now, with after-inflation returns very likely negative. Other than the for the very, very, very wealthy, the cashflows from bonds would not today throw off income that would support even a modest lifestyle in most places.
The situation keeps getting worse and worse for the average American. Contrast the state of things to, say, the America of the 50s and 60s with guaranteed pensions for even blue-collar workers and sacrosanct earned benefits from the government. The average person could actually expect to retire in the sense of not working. This change has not come about because of something akin to a force of nature, something as unavoidable as a hurricane. It’s come about because of deliberate political decisions that have been made for the benefit of the ultra-wealthy, while imposing dire consequences on the rest of the population. Those first three categories you describe don’t *have* to exist, either now or in the future if we have the will for political change.
The growth of the middle class through the last century, the establishment of new wealth, and the rise of the power of corporations have all contributed to a fundamental change in American society. Policies have followed suit. “Individual responsibility” is perceived as a strong virtue, despite the inability of the individual to break through multi-generational patterns that create socio-economic conditions without outside assistance. I don’t know if society can turn back from movement in that direction. I don’t think we can return to the idea that society is inter-responsible.
Unions have almost no power now. I think that’s the big difference. Unions kept the pensions as part of the contract. With global competition, those days seem to be gone for good. Even with lower wages and no pensions, the jobs have still left the US. I don’t see how this works out well for US workers, much less retirees. So many people say they will have to work till they’re 70, but what if their health won’t permit it? That’s a reality many will have to face. Keeping up your health via good foods and stamina through exercise can help, but it’s no guarantee. A lifetime of bad habits tends to catch up with you after 60.
My husband is lucky in that he has a pension, though it has no inflation adjustment. That combined with our not huge 401k money is a pretty good cushion. But he is 70 years old and one of the last who got a pension. I continue to work as a blogger just because I love it. We travel some, but we don’t live lavishly. Mostly we just enjoy our free time and time with our family. We paid for our kids’ college years, so if we have to depend on them a bit later on we don’t feel too badly about it.
While right now I plan to work, I plan to work by choice, not necessity. So I want an independent retirement where I have the option to do whatever I like. :)
I disagree on the reliant retirement being out of fashion. Millions upon millions of Americans plan to rely on Social Security, even though it is SUPPOSED to be supplemental. And then when they retire they complain that it’s not enough to live on…..
Where do you get the idea that Social Security was supposed to be supplemental to some other source of income? Citation?
From a Ways and Means Committee report:
74TH CONGRESS HOUSE OF REPRESENTATIVES
1st Session
Report No. 615
THE SOCIAL SECURITY BILL
APRIL 5, 1935
Committed to the Committee of the Whole House on the state of the Union and ordered to be printed Mr. DOUGHTON, from the Committee on Ways and Means, submitted the following REPORT
[To accompany H. R. 7260]
The Committee on Ways and Means, to whom was referred the bill (H R 7260) to provide for the general welfare by establishing a system of Federal old- age benefits, and by enabling the several States to make more adequate provision for aged persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws, to establish a Social Security Board, to raise revenue, and for other purposes, having had the same under consideration, report it back to the House without amendment and recommend that the bill do pass.
=======================
It says “adequate provision” not “supplemental provision”.
“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”– President Roosevelt upon signing Social Security Act
“It is impossible under any social insurance system to provide ideal security for every individual. The practical objective is to pay benefits that provide a minimum degree of social security—as a basis upon which the worker, through his own efforts, will have a better chance to provide adequately for his individual security.” — From the Report of the Social Security Board recommending the changes which were embodied in the 1939 Amendments.
All citations are from the Social Security Website.
Oh – for the record – from a retired person – “Working Retirement” is a oxymoron ;-)
Steve, the first quote from the report is merely stating the obvious, the inability of any large scale endeavor to achieve 100% success. The quote does not say or even imply that Social Security was intended to be, “supplemental” any more than the impossibility of the military winning each and every battle shows that the war is “provisional”.
The second quote from the report reiterates the message of the obvious practical impossibility of the task of providing “ideal security” for each citizen. And yes, it reads “a minimum degree of security”, recognizing again that in contrast a “maxumum” degree of security is unattainable.
More quotes, likewise from the SSA website. FDR himself, one who presumably knew his own intent in pursuing the enactment of Social Security, in ’38 – ” and about forty thousand blind people are assured of peace and security among familiar voices.” That’s *assured security* not “a little help getting along”.
From the same speech – “The Social Security Act offers to all our citizens a workable and working method of meeting urgent present needs and of forestalling future need.” That says *meeting* present needs, not providing a supplement to *help* meet them.
From the same speech – “The Act does not offer anyone, either individually or collectively, an easy life–nor was it ever intended so to do. None of the sums of money paid out to individuals in assistance or in insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold; and that is the kind of protection Americans want.” – Furnish the minimum necessity. Completely furnish the *minimum* necessity. It doesn’t say “*help* to furnish the minimum necessity.”
Social Security today doesn’t come close to furnishing the minimum necessity for most retired people. It doesn’t even give them that foothold, and it’s increasingly threatened with cuts to the program by the same forces that were aligned against it in the 1930s, big-business and the wealthy. In fact that’s something that leaps off the page as I read these speeches – the fact that little has changed in the ideological and de facto war between the aforementioned contingents and the ordinary American.
“Now this is interesting to consider. The first to turn to Government, the first to receive protection from Government, were not the poor and the lowly–those who had no resources other than their daily earnings–but the rich and the strong. Beginning in the nineteenth century, the United States passed protective laws designed, in the main, to give security to property owners, to industrialists, to merchants and to bankers. True, the little man often profited by this type of legislation; but that was a by-product rather than a motive.”
“The powerful in industry and commerce had powerful voices, both individually and as a group. And whenever they saw their possessions threatened, they raised their voices in appeals for government protection.”
Just two examples, the rich and corporations seeking and obtaining protections from the government, while fighting against those same things for the average person, and the use of the “trickle down economics” defense. It’s astonishing how little has changed in all the intervening decades.
What dollar amount do you think a retired person needs to cover a minimum standard of living? And what items are included in that?
It’s plenty enough to survive on, which was the most that was ever intended. It wasn’t meant to be a comfy retirement, which is what people complain about not having.
And even that much was a horrific and short sighted mistake, dependent on a growth pattern that no mature, post-industrial economy has ever had.
It was meant as a FALLBACK, not a primary method of retirement. Among other things, the age it kicked in was the average life expectancy at the time. If it were intended as a pension plan, it would have been designed very differently.
If I were retiring soon, I’d probably do the “working retirement” with blogging on the side. It’s flexible, enjoyable and brings in decent income per time spent. However, I do question whether I’ll even be able to make any money at this in 30 years. You’d think with the flood of new blogs every day, eventually competition for views would be fierce and freelance rates should drop to an amount that makes it not worth your time (at least for me). On the other hand, I suppose this same argument could have been made 5 years ago and I’m still at it. Either way, I think a retirement with absolutely nothing else to do might be a bit boring and without purpose. I’d love to be watching grandkids or whatever, but also have something providing some income on the side as well.
When I retired 5 years ago I to feared that a “nothing to do” existence would send me scurrying back to the office. On the other hand my wife feared that increased “togetherness” might drive her to starting looking for work. This worrying was truly a waste of time as neither scenario played out. We have absolutely no trouble filling our time and have found numerous ways to spend almost every waking hour engaged in one activity or another. The ability to focus on family and things we enjoy doing, including volunteer activities, have paid tremendous dividends both in our health and overall well-being. Back to the office – not a chance!
Wow Steve… that sounds like a dream come true! Well done!
THE INDEPENDENT RETIREMENT!!!!!! Of course, why pick anything else?
Granted, it’s difficult to achieve, but if you save enough over a long period of time and invest correctly, you can reach, as you say, “financial nirvana.”
I have a $1MM/$1MM/$1MM plan that uses $3 million, split into three different investments to get me to an income that fully covers my retirement needs. Just a few years away from putting it all together.
The oxymoron of working retirement is becoming the new normal. Of course everyone would like to have the independent retirement, travel, enjoy life and just live the dream but many people fail to accurately plan for it. There are many “non-traditional” route one can chose – Equity Indexed Universal Life being one of them…
I’m aiming for the independent retirement, and I think I have a pretty good shot because I’m young and saving a lot for it!
I think I’ll probably end up with a hybrid of all of these except the “reliant retirement.” I don’t have kids so there will be no one to rely on. The truth of this is, it all depends on how long you live. You may think you have enough for an independent retirement. Then you live to 105. Still sound possible? I can say from experience with my own family that homecare services and nursing facilities are extremely expensive. (Hiring a home health aide through an agency in our area costs between $19 and $24 per hour.)