Plan For Financial Independence, Not Retirement

drseussWhen the Social Security program was started in 1935, the average life expectancy was 61 years old. Today, life expectancy is around 80, with more and more people living into their 90s and beyond. Yet, much of society continues to expect people to stop working in their early to mid 60s and retire, because giving up work is “simply what most people do.”

Yet, times are changing. People are working longer. And it’s not about economic distress. The WSJ recently reported that this trend is being driven by many highly educated workers in professional-services jobs who are sticking around by choice, doing something they love to do. Dr. Jan Abushakrah, 69, typically works 60 hour weeks as chairwoman of the gerontology department at Portland (OR) Community College. Retirement isn’t on her agenda. She says “As long as I am healthy and happy every morning when I wake up and have something exciting on my plate to look forward to, it is easy to say I could keep doing this forever.” Personally, I feel the same way. Helping people is a great way to spend your time.

Money isn’t the main factor that people keep working in later years. 67% do it because they want to stay active and involved. 51% enjoy working. 50% want to keep health insurance and other benefits. 47% need money to make ends meet. 38% want money to buy extras. 15% try a new career.

We have our clients target their “financial independence” date rather than their retirement date for planning. This is the date at which you have enough assets for the rest of your life without needing to work for money. The beauty is that once you reach this point, you keep working only if you want to. For those that have a vocation- a higher calling, rather than a job, and are making an impact, continuing to work is a likely possibility.

As someone approaches financial independence and can afford to stop working, they need to ask themselves a series of hard questions starting with “What would I do if I didn’t have to go to work today?” Certainly, there are physical activities, grandchildren, travel, education, charities and lots of other options. What combination produces a “series of successful days” that becomes a successful life? With financial independence, there are thousands of choices. You can make your own “cocktail” of choices every day.

Of course, it is important for spouses to work on these planning issues together. As financial independence approaches, both spouses should create an individual vision of what each wants to achieve in the next phase of life and then compare notes. Sometimes you have a situation where one person in the couple loves their job and the other only likes theirs. That’s a big difference. Communication, compromise and negotiation is key.

At the same time, older Americans are exercising more, which keeps them young. A recent study showed that how we age physically is, to a large degree, up to us. A recent study of recreational cyclists aged 55-79 by King’s College in London showed that on almost all measures, their physical functioning remained fairly stable across decades and was much closer to that of young adults than of people their own age. As a group, even the oldest cyclists had younger people’s levels of balance, reflexes, metabolic health and memory ability. However, the study showed that endurance and strength does decrease to some extent over time. All in all, though, aging is simply different for active people. On a personal note, for those of you who know I annually run the 10k Cooper River Bridge run here in Charleston, I am happy to report that due to some extra training and use of a coach, I was able to run my best time in 7 years last month. Not sure if I can turn back the hands of time, but maybe at least slow them down a little.

With Americans living longer, we suggest you focus on financial independence rather than retirement. At that point, you’re in control. You can determine what every day’s activities will be- hopefully, all things you want to do. You hold the keys to your future. As Dr. Seuss would say: “Oh, the Places You’ll Go.”

Needs, Wants and Wishes: Impact on Leisure Time and Financial Independence

wants-vs-needs-25216765 (1)We hope everyone had a wonderful Memorial Day weekend. What a great time to remember the men and women who have served us in the armed forces. And, a perfect time to get together with friends and family for a barbeque or other event. It’s also the weekend of the Indy 500 and a time when most of us “start our engines” thinking about summer and leisure time activities.

Yes, we Americans have a hard time relaxing. When did you last hear someone complain about not having enough to do? Brigid Schulte, author of “Overwhelmed: Work, Love, and Play When No One Has the Time” believes part of it is social status. “The busier you are the more important you seem.” Thus people compete to be harried. Apparently, for some young families, competing with the Joneses now means trying to out-schedule them.

More and more women in the workforce certainly has reduced leisure time. In fact, in dual income households, one-third of women earn more than their husbands. And, while dads help more with family responsibilities these days, they still, according to Ms. Schulte, spend half the time their wife does with the house and kids. Furthermore, for many middle class families, wages have been stagnant for decades which means everyone is working harder and longer to make ends meet.

The noted economist, John Maynard predicted just the opposite for Americans and Europeans almost a century ago. In a 1928 essay entitled “Economic Possibilities for our Grandchildren” he imaged a world in which the standard living would be so improved that no one would “need to worry about making money.”  People would be working 3 hour days and have all that they needed. Well, he was correct about the standard of living increasing. Real per capita income has in fact grown 6 times since then. But, he was wrong about the making money part.

It seems Keynes figured that people would stop working once they had enough to meet their needs. But, human nature didn’t stop Americans at that point. Their wants and wishes became needs and so, instead of quitting early, they would work longer to buy the new “needs.” Of course, many of these discretionary items, including larger houses, second houses, fine dining, worldwide travel, etc. weren’t as readily available in Keynes’s time.

University of Chicago Nobel Prize winner Gary Becker, who recently passed away, was one of the first economists to study the aspects of human behavior. He summed it up this way “Most types of material consumption are strongly habit-forming. After an initial period of excitement, the average consumer grows accustomed to what he has purchased and… rapidly aspires to own the next product in line. Human beings evolved so that they have reference points that adjust upwards as their circumstances improve.”

In short, Americans are different from the rest of the developed world. We consume more and work harder. The average employed American now works 140 more hours per year than the Brits and 300 hours more than the average Frenchman. Furthermore, Europeans have become more skilled in taking time off, while Americans, having become masterful consumers, will continue to work more hours to buy more stuff. Keynes presumed that leisure was preferable to labor. Yet, for many Americans, hard work is the only way. In addition, for many, a career provides most, if not all, of their self-realization. We didn’t and we don’t fit Keynes’s model.

As time marches on and one achieves increasing success (and the “reference points adjust upward”), wishes and wants are often perceived as additional needs. This is the American way. It’s a fundamental reason why the United States is the #1 country in the world.

At the same time, for some, ever expanding consumption impacts their leisure time and their financial future. Working longer hours to pay for all their stuff reduces leisure time. Purchasing additional “needs” reduces their ability to save sufficient funds to provide future financial independence.

It’s a good idea to regularly review your financial and personal goals, including financial independence and leisure time. Before you decide to convert some wants and wishes into “needs”, it’s important to understand the choices you are making may impact your leisure time and ultimate financial independence. As a result, we discuss financial and personal goals with our clients regularly. For us, it’s a key part of DWM’s Total Wealth Management services.