Blog

Seeking Financial Freedom, Not Just Retirement

Roadsign Financial Freedom Next Exit Once upon a time, in a way of life nearing extinction, people looked forward to retiring at age 65. Some still do. They’ll stop working and settle into a time of leisure, hobbies, travel and time with the grandkids. However, for most of us, the age-65 retirement mark will be a blurred or nonexistent line affected by many factors.

The traditional definition of retirement is changing. More and more people—currently 44% according to the Employee Benefit Research Institute (EBRI) 2011 Retirement Confidence Survey[i]—either plan to postpone retirement or not retire at all. Almost three-fourths of all workers (74%) intend to work for some pay after retirement age.

The Outlook

To some degree, attitudes toward retirement are changing out of necessity. Life expectancies are longer, meaning more years of retirement to fund. Our view of a comfortable lifestyle is likely more expensive than our grandparents’, so more dollars are needed each year. Non-work sources of income are questionable. Pensions are almost a thing of the past, and the Social Security system is in danger. No wonder merely 13% of workers believe they will have enough money to live comfortably in their retirement years.[ii]

When you hear the word retirement, do you roll your eyes and say, “Yeah. Right!”? With all the disheartening news, not everyone’s motivated to put money away in accounts labeled "retirement."

The younger crowd might think there’s time to catch up. According to EBRI survey, over 70% of workers ages 25 to 34 say they’ve got less than $25,000 for retirement. At the other end of the scale, what about 60% of workers age 55 or older with less than $100,000 saved? Just 10 years from the typical retirement age, their savings will only last a few years at best.

Time for a New Label

As I mentioned in an earlier blog on mental accounting, labels are important. The label "retirement" has become so uninspiring that our modest savings might not motivate us.

It's time to rethink retirement and mentally re-label our 401(k) and IRA accounts. Since the age-65 retirement model is on its way out, we’re no longer saving for retirement in the traditional sense. Rather, our real goal is money in the bank—and the resulting financial freedom:

Now you have a Freedom account! It can facilitate life changes long before age 65 and generate happiness much greater than the traditional retirement concept. You can take a sabbatical to travel or change to part-time work to spend more time with your family. You might go back to school for that degree you always wanted or leave your job to start a business you’re passionate about. The possibilities are endless.

Months of Freedom

One problem with retirement savings is measuring progress. Most of us aren’t sure how much we’ll need to save. The survey indicates only 42% of people have even attempted to calculate what they’ll need to retire comfortably. For some, the timeframe is so distant that the amount is a fuzzy moving target on the horizon.

Freedom can be much more measurable. My favorite metric is Months of Freedom:

  1. Calculate your total savings (savings accounts, investment accounts, "retirement" accounts, etc.).
  2. Subtract your total consumer debt (credit cards, auto loans, etc.).
  3. Divide by your total monthly spending.

The result is how many months you could survive at your current spending level if you lived off savings alone. That's months of freedom. The more freedom in the bank, the more choices you have.

So be inspired! You’re not really saving for retirement. You’re saving for freedom.

 



[i] Employee Benefit Research Institute. Fact Sheets, 2011 Retirement Confidence Survey—2011 Results. [www.ebri.org/surveys/rcs/2011/]

[ii] Ibid., 2011 RCS Fact Sheet #3.

Read more