Lesson 6 of Retirement Planning: Alternative Retirement Definitions

Question 1

Traditional Retirement

Answer 1

Goal is to seek Financial Independence

Financial Independence is defined as the ability to live comfortably without having to work for an income.

The traditional concept of retirement is an individual works until their 60s and then leaves the workforce, with an average life expectancy of 20 to 30 years. This definition of retirement has been developed over the last 50 to 100 years.

It should be noted that Social Security retirement benefits do not, and were never intended to, provide sufficient income in retirement to replace the income earned prior to retirement.

This emphasizes the need for retirement income planning, both saving and distribution strategies.

New views on retirement may change the need to save for 40 years before retiring.

Question 2

Alternative Retirement

Answer 2

Recognizing that youth cannot be preserved, a new movement to achieve financial independence earlier emerged.

It recognizes the point where an individual achieves financial independence and chooses to view working for money differently by incorporating a lifestyle which deviates from traditional retirement at age 65.

Question 3

Alternative Retirement

• FIRE (Financial Independence Retiree Early)

Answer 3

FIRE (Financial Independence Retire Early) - The primary tool of this early retirement is extreme savings, which is used to accumulate sufficient assets to generate investment income that covers living expenses. Once financial independence is reached (defined by accumulating 25 times one’s estimated annual expenses) it provides the flexibility and freedom from working for money and affords opportunity to pursue other ventures.

Question 4

Example of Alternative Retirement FIRE

Answer 4

Jira has estimated expenses of $100,000. She needs to accumulate $2.5 million, or 25 times her expenses.

Dividing 100,000 by $2.5 million gives you 4%, which is a sustainable withdrawal rate.

Question 5

Alternative Retirement

• FIRE (Financial Independence Retiree Early) - Types of FIRE

Answer 5

Lean FIRE - minimalistic lifestyle where investment or supplemental income only covers basic necessities.

Barista FIRE - investment income and supplemental income may not fully cover annual expenses. One may use a part time job or accept lower pay and less stress to supplement lifestyle.

Fat FIRE - investment income and supplemental income more than covers lifestyle expenses allowing one to enjoy retirement and “live it up’

Question 6

Alternative Retirement

• Mini Vacations and Sabbaticals (Extended Trips and or time Away from the Office)

Answer 6

The idea is that one values their youth and chooses to sacrifice current work and income in favor of life experiences.

• This could be working and saving for a couple of years and then taking a year off to travel, and then finding a new job for a couple of years and then traveling again.
• Or, structuring your work schedule to allow for 2 - 6 month vacations each year, or working remotely from another country as an example