Retirement means different things to different people.
To my parents, it largely means a simple day-to-day life. It means plenty of time to engage in their hobbies and interests at home. It doesn’t include any major changes in lifestyle after retirement, just a lot of additional free time. Without the expense of having to work and without the cost of some of the conveniences necessary to keep working, their life is actually far cheaper than it was before.
To my wife, it means travel. Not necessarily high cost travel, but doing things like visiting every national park in the United States or going on fairly low key international trips together. While the cost of our professional lives will drop, our life will take on additional expenses due to the travel and other things she wants to do. We’ll probably need as much or more in retirement than what we do now.
Then there’s my vision. For me, retirement simply means the financial freedom to launch whatever career I want to launch, and that means the freedom to throw my heart and soul into becoming a successful novelist. I’ll earn some income from this – and potentially a lot of income – and the expenses are pretty much nonexistent, all things considered. The amount of money needed in retirement for this path is the lowest of all of these options, because it’s pretty cheap like my parents and has a good possibility of additional income.
(For those curious, Sarah and I are planning on a hybrid of our two paths. When we’re not traveling, I plan to be writing as much as I can, so we’re meeting in the middle.)
Obviously, a person’s retirement planning changes radically depending on the kind of path they wish to follow. Let’s take a look at some of the potential routes one might follow.
Retirement as Perpetual Vacation – $$$ Needed
To an extent, this is the path that Sarah envisions for our retirement. She’d love to spend the summer on the road in an RV, going all over the United States and Canada, visiting cities and national parks and weird roadside attractions, just the two of us. Although it’s not quite as expensive as some things we might be doing, it’s certainly expensive.
Does your vision of retirement involve doing or buying a lot of expensive things? Does it involve tons of golf? Does it involve lots of travel? Does it involve no more work?
If those things sound like the retirement you’d like to have, you’re going to probably need more income than you currently have, which means you’re going to need to kick your retirement planning into overdrive.
You’re going to have to save as much as possible each year. The general rule of thumb is that if you save 10% of your income starting at age 25, you’ll be right on time with retirement at age 65. This assumes a “normal” retirement, meaning that your expenses go down a little bit mostly because you’re not commuting and buying a work wardrobe, but living your life more or less the same as before. If you’re going to elevate your lifestyle in retirement, you need to be saving more than 10% per year starting at age 25 in order to retire with this lifestyle.
You’re probably going to have to retire later rather than earlier. There are two big reasons for this. First, people often don’t start saving for retirement until after age 25, and since 40 years of retirement savings growth is necessary to make these numbers work, you’re going to have to retire later if you started later. Similarly, many people do not commit to saving more than 10% of their income to retirement. If you add both of those factors together, it’s very likely that in order to have this type of retirement, you’re going to have to wait unless you’re willing to save far more than 10% per year.
Retirement as Hobby Time – $$ Needed
This is the path that my parents have taken. It’s what I like to think of as a “quiet” retirement, in that it doesn’t involve a lot of travel or flashy purchases, but it also doesn’t involve a continuation of work.
This is the perfect path for someone with low-cost hobbies or interests that they really want to dig into when they retire. My father, for example, is a voracious gardener, and my mother has a ton of hobbies that have bloomed since they both stepped away from the workforce. None of them are particularly expensive hobbies, but they’re all personally fulfilling ones.
This path will require much less money than the “expensive” retirement plan. In fact, your overall living expenses will drop as you’ll no longer need to pay for commuting or other such expenses.
You can save a modest amount each year and make it here. If you start saving around 10% of your income each year starting at age 25, you’ll have a very solid financial basis for this type of retirement when you reach 65 or even when you reach 60 or 62. You can save a little less than 10% of your income and still make it by age 65, or you can start a little later (preferably before age 32 or so) and still make it by age 65.
You can actually retire early (or retire on time if you have a shorter timeline) if you save aggressively. If you’re at age 25 and you start saving, say, 15% per year, you’ll be able to retire with this lifestyle around age 50 or 55. Similarly, if you wait until age 35 or 40 and start saving 15% of your income each year, you’ll be able to retire at a typical retirement age with this lifestyle.
Retirement as Second Career – $ Needed
This is the path I want to follow. I want to be working until I am actually incapable of it, though I eventually want to move more and more toward working purely on projects of my own interest, such as my long-planned sci-fi series of novels. I’ve got a lot of ideas of things I’d enjoy doing once I stop writing for The Simple Dollar (should that become less interesting to me down the road), but none of them really involve just digging into hobbies.
The reality of this path isn’t too different than a quiet retirement described in the previous section, except that there’s a strong chance of earning significant income during this “retirement.” Thus, you really don’t have to save as much and you can actually get started even earlier.
You can save a fairly small amount each year and “retire” at a normal age with this approach. If this type of retirement sounds appealing at age 25, you can get away with it by saving a fairly small amount each year – 7% or 8%. However, I’d encourage you to save at least 10% for the simple reason that your life may change between now and then and, even if it doesn’t, saving a little more means “retiring” early.
You can save even a modest amount and retire a little early, or save a lot and retire very early. This is the path that I’m on. I didn’t really start planning in earnest for this until I was in my early 30s, but once I figured out what I wanted to do, I started socking away a large percentage each year. I hope to be doing this full time when my last child leaves the nest, which is when I’m approaching age 50. If you start saving 15% or more of your income with the intent of diving into an unknown career when you “retire,” you can make it in just a decade or two.
Many financial articles and books talk about this “ready-made” retirement plan and give you a hard and fast number that you should be saving each month. The problem with that approach is that it removes the “personal” from the equation. It doesn’t take into account how different “retirement” might look for different people.
My vision of “retirement” looks a lot different than my parents’ vision, and that looks different than my wife’s parents’ vision, and that looks a lot different than my wife’s vision. We all have different ideas of what we want retirement to look like, so it makes a lot of sense that our retirement savings plans are going to be quite different from one another.
When you start thinking about your own retirement, don’t start with just dollars and cents. Instead, start thinking about the destination and how quickly you want to get there. The faster you want to get there, the more you want to save; the more expensive the destination, the more you want to save.
The path is up to you.