CHAPTER EIGHT
FINANCIAL INDEPENDENCE IS THE NEW RETIREMENT
Even with the creative strategies outlined in these pages, the story will not end the same way for Millennials as it did for our elders. But this shouldn’t be all that surprising.
Retirement is defined as the time when work is optional because not working is affordable. Typically, people retire when the money they’ve saved and income they’ve secured is enough to cover their lifestyle. Because it’s so capital intensive—meaning it takes a lot of money—retirement is often the hardest goal for a person to achieve.
In the past, retirement was not an elusive concept; it was a concrete and predictable milestone. My grandparents lived a classic retirement on the golf course in South Florida, where their biggest concern was whether the deli meat in the fridge had spoiled. They saved up by living within their means during their working years. They received Social Security benefits, and my grandpa had a pension for his time served in World War II. His battle was harder than anything I’ll ever do, so I am by no means diminishing their hard work. But they had a simple roadmap and entitlements. We simply might not.
For Millennials, retirement will be much more difficult to achieve than it is for our parents and was for our grandparents. As the Millennial Problem pointed out, we carry more student debt than any other generation. Servicing this debt is significantly hindering our ability to save for our financial goals—especially retirement, because it has the longest time horizon and is most likely to be placed last on our priority list. And there’s no shortage of debate about whether our generation will be able to participate in programs like Social Security, which might be a thing of the past by the time it matters to us.
Other entitlements, such as employer pensions, are also slipping away. Heather’s former company froze its pension plan a couple of years ago, citing costs of operation as the primary reason for the decision. But employees knew it went beyond the dollars and cents. Reflecting the sentiment of the labor environment shift, her company’s CEO spoke quite publicly about the notion of careers, stating that people shouldn’t plan to have one there. Rather, they should utilize their time at the company to receive top-notch training and move on. It should be a stop on their journey rather than their final resting place.
Sure, the “lifers” were pissed, but how could Heather be? She’s had many jobs. She made swift moves early in her career to generate the earning power needed to service her debt, and then later found a way to balance her income and quality of life in a way that works for her. She gets what her former CEO was aiming for. Nonessential management jobs were being eliminated, so reaching for the next level wasn’t possible. And that was okay. Why should that company incentivize people to plop in a cubicle for the next 20 years when that doesn’t reflect their business model, or the realities of today’s workforce?
The question remains, if fewer jobs are “for life,” so to speak, how do Millennials account for career volatility while trying to plan for a stable future? This is most unsolvable problem for Millennials yet. We don’t know what retirement will look like for us because it’s unclear whether government or employer-funded programs will exist in the coming decades, or what additional surprises may come our way.
Keeping this in mind, I’ll take a crack at a framework that combines the traditional retirement planning model with a new way of thinking about our future.
First, let’s examine a traditional retirement planning calculation. The goal of retirement planning is to determine the probability that you will be able to maintain a lifestyle, defined in today’s dollars, for a specific length of time in the future. Here are the basic variables and assumptions that many retirement calculators use:
Time: at what age you want to retire and for how long.
Lifestyle: the type of lifestyle you’d like to live during retirement, using today’s after-tax dollars.
Rate of Return: the return you can get on your retirement assets.
Inflation: how much the cost of your lifestyle will increase each year.
Retirement Assets: what you’ve currently saved for retirement.
Retirement Savings: how much you are planning to save for retirement each year.
Retirement Income: how much you can expect to receive from various income sources, such as pensions and Social Security.
Playing with these variables is really just a game of push and pull. For example, if you want to retire earlier but would like retirement to last for the same amount of years, your probability of success will be decrease (all else remaining equal). But if you choose to retire at an older age, your probability of success will increase. There’s a positive effect on your retirement outcome by increasing your rate of return, retirement assets, savings, or income. There’s a negative effect on your retirement outcome by increasing your lifestyle or because of inflation.
The relationship between these variables is commingled. When one of them changes, your retirement outcome changes for better or worse. Consider this a throwback to your lesson on goal priority, where funding one goal will affect your ability to fund another. Similarly, to make constructive decisions around retirement planning, you need to remember that changing just one of the variables above will affect the end result.
But again, using just a traditional retirement planning model will not give Millennials all the answers. There’s no guarantee that historical rates of returns driving the models will continue to hold true in the future. Some of us could end up repaying our student debt forever, never ridding ourselves of our earlier financial decisions. If Social Security is reduced or eliminated, we face greater pressure on our need to save so that someday work is optional. There is also the real likelihood that science and medicine could push average life expectancies well beyond our 80s, creating a need for more financial resources to sustain our lifestyles.
Then how can Millennials really achieve success, when retirement, as our predecessors know it, may not exist?
We need to view it differently.
Chapter by chapter, we’ve planned for your quest to achieve the Great Things in Life, as you defined them. There’s a good chance that by prioritizing your goals, you will experience some of those things in your 20s and 30s. But other things—such as honing your career ambitions and finding time to pursue passion projects that inspire you—might take longer. Those are the Great Things in Life that not only fulfill your soul, but can also fill your wallet.
If Millennials are unabashed creators and constant disrupters, our ultimate goal should be to achieve something greater than doing nothing.
Maybe our retirement is not retirement at all. Maybe it’s called financial independence: the pinnacle of our ability to do what we want.
Every Monday morning, I walk off my train and I am eager to work. It’s the definition of happiness to know I’m about to embark on a week’s worth of solving the problems and sharing in the successes of my clients. But who’s to say that feeling will last forever? I would certainly like to teach financial literacy and personal finance as a professor in a more formal setting. Maybe having more financial independence will give me the flexibility to pursue that instead of marketing for new business all the time. But by saying I love what I do and that it doesn’t feel like work, I realize I am one of the few Millennials (not the many) who can say that right now.
My wife—the self-proclaimed Millennial Problem—must maintain a six-figure salary to service her six-figures of student loan debt. For now, it’s a reality of the situation she created and the needs of our family. Yet, she was able to pivot out of private law practice to something still challenging and with more predictable working hours. She reclaimed time to spend with our little Hazelnut and to pursue her relationship with writing. She even put her personal projects aside to write this book with me, in hopes of teaching others to ask the questions she should have years ago.
Writing a book was one of her Great Things in Life, and the mistakes of her 20s couldn’t stop her from achieving it. Through her own actions, she gets closer to financial independence every day.
The truth is that Millennials didn’t borrow to depths below our bank accounts to be told what to do. We did it because even if it wasn’t crystal clear just yet, we felt a purpose somewhere deep inside for something. If we are acting with intent, with knowledge and that purpose in mind, we are getting closer to freedom.
Throwing out the traditional definition of retirement is not a rationalization for our shortcomings, but like everything else, a true change in course. Our issues require a new set of answers that combine the best tools we have with a fresh outlook on success. It’s about the freedom to do what we want to do, whether that’s nothing at all or everything at once.