Is Retirement Flawed?

A few days ago, a reader named Jerry sent me the following quote
from the book
The 4-Hour Workweek
by Tim Ferriss and asked me my thoughts on
it:

Retirement as a goal or final redemption is flawed for at least
three solid reasons:

1. It is predicated on the assumption that you dislike what you
are doing during the most physically capable years of your life.
This is a nonstarter — nothing can justify that sacrifice.

2. Most people will never be able to retire and maintain even a
hotdogs-for-dinner standard of living. Even one million is chump
change in a world where traditional retirement could span 30 years
and inflation lowers your purchasing power 2–4% per year. The
math doesn’t work. The golden years become lower-middle-class
life revisited. That’s a bittersweet ending.

3. If the math does work, it means that you are one ambitious,
hardworking machine. If that’s the case, guess what? One week
into retirement, you’ll be so […] bored that you’ll want to
stick bicycle spokes in your eyes. You’ll probably opt to look
for a new job or start another company. Kinda defeats the purpose
of waiting, doesn’t it?

This quote is interesting to me for a few reasons.

One, I personally aim to retire shortly after age 50. My hope is
to spend my fifties in a state that many would refer to as
“retirement” where I’m basically doing things purely because
I feel drawn to do them, not out of a financial motive.

Two, I have found significant value in a number of Tim
Ferriss’ books and particularly his podcasts. Some of his podcast
episodes have sent me down journeys of learning and self-education
that have provided a ton of personal value and growth for me.

Three, he makes a pretty persuasive anti-retirement case, at
least on the surface, by subtly painting a distorted picture of
retirement and then claiming how messed up retirement is.

That being said, I disagree almost entirely with the case that
Tim Ferriss made here. Let’s start from the top.

“It is predicated on the assumption that you dislike
what you are doing during the most physically capable years of your
life.”
Wanting to have the financial freedom to be able
to disconnect the need to earn an income from the passion for doing
work that’s personally meaningful doesn’t mean that you have to
hate your current job.

I’ll use myself as an example. I will probably always want to
write, simply because it’s something that I enjoy doing. Will I
want to write about personal finance and personal improvement for
the rest of my life? Probably not, but I haven’t grown tired of
it yet. Regardless, I want to have the freedom to choose to write
something different if I want to without having to make hard
financial choices about my own family’s future.

Retirement doesn’t mean you hate your job. It just means you
want the freedom to be able to choose different paths without
having to sacrifice the financial security of your life or your
loved ones. It means having enough money to walk away and try
something else if you want to.

“Most people will never be able to retire and maintain
even a hotdogs-for-dinner standard of living.”
That’s
because they choose not to save for it as a meaningful goal. This
does not inherently mean that retirement is bad, it just means that
saving for retirement isn’t a goal into which most people choose
to invest their money.

It’s like saying “Most people will never be able to achieve
the level of fitness needed to climb El Capitan.” That’s true,
but it’s because most people are making different choices with
how to use their time and energy.

In other words, this statement isn’t an indictment of
retirement, but rather an observation about how people choose to
spend their money. For example, most people choose to live a
paycheck to paycheck lifestyle, and that’s because most people
choose other life goals rather than getting their financial life in
order. That doesn’t mean that living a life where you don’t
live paycheck to paycheck is inherently bad, just like living a
life where you’re saving for retirement isn’t inherently
bad.

“Even one million is chump change in a world where
traditional retirement could span 30 years…”
This just
tells me that Tim is unfamiliar with the Trinity
study
.

The Trinity study is an informal name given to a research study
done at Trinity University in the 1990s that concluded that a
well-invested portfolio should allow a person to withdraw 4% of
that balance each year and still have money in the bank after 30
years. If you lower that percentage even a little, to 3.5% or
especially 3%, you could effectively withdraw that amount forever,
even accounting for inflation.

So, let’s say you had a million dollars in a 401(k) that was
appropriately invested (and this isn’t hard to do, but it’s
outside the boundaries of what this article is about unless this
article approaches the length of a short book). You could withdraw
$35,000 per year from that account to live on and adjust it upwards
each year to match inflation for the rest of your life. On top of
that, you would also have your Social Security income and other
benefits such as Medicare. Given that you no longer had
work-related expenses like commuting and so on, you’d have a
lifestyle roughly equivalent to the average American for the rest
of your life. Any more than $1 million cinches you a lifestyle
better than the average American for the rest of your life.

Describing one million in your 401(k) as “chump change”
indicates either that the lifestyle of the average American is for
“chumps” or indicates a really poor understanding of
investing.

“…and inflation lowers your purchasing power 2–4%
per year.”
As I noted above, the Trinity study takes
inflation into account. If you have a solid investment portfolio in
your 401(k), you can withdraw 3.5% of the balance each year in
perpetuity, and it will adjust upward with inflation.

This additional statement mostly makes me believe that Tim
Ferriss has never really taken a serious look at lower-risk
investment strategies as a backbone for retirement. This is in line
with the other content he produces, where his investments seem to
mostly center around angel investing for ideas he considers cool
and his ongoing income to fund those investments comes from media
products like, well, his books and podcasts.

Emotional well-being also rises with log income, but there is no
further progress beyond an annual income of ~$75,000.

“The golden years become lower-middle-class life
revisited. That’s a bittersweet ending.”
The reality
is that income above a “lower-middle-class life” – around,
say, $75,000 a year or so – doesn’t actually do anything to
improve one’s emotional well being. Take a look at the work of
the highly respected psychologist Daniel Kahneman, who has spent
much of his career studying this issue. In a well-regarded paper by
him and Angus Keaton in 2010 entitled High income improves
evaluation of life but not emotional well-being
, the authors
conclude that “[e]motional well-being also rises with log income,
but there is no further progress beyond an annual income of
~$75,000.”

$75,000 isn’t very far off the average annual household income
of the average American, by the way, which was a subject we talked
about earlier.

The point is that more money beyond the
“lower-middle-class” life that Ferriss derides here doesn’t
actually bring additional happiness or fulfillment.
Money
simply doesn’t buy happiness.

“If the math does work, it means that you are one
ambitious, hardworking machine. If that’s the case, guess what?
One week into retirement, you’ll be so […] bored that you’ll
want to stick bicycle spokes in your eyes.”
As I sit
right now, I have a list of projects that I want to work on that
will take me longer than my natural life to complete. There are
just tons and tons and tons of things that I want to do before my
time on this earth expires.

The idea that having enough money in the bank to simply walk
away from whatever employment or entrepreneurial opportunities I
don’t want to do would somehow equal with being “so bored that
[I will] want to stick bicycle spokes in [my] eyes” is just
utterly bizarre to me.

Boredom when you retire means that there’s literally nothing
else on earth that you’re interested in and passionate about
doing other than your current career, and if that’s the case,
then by all means you should stay in your current career until they
literally shove you out the door with a gold watch in your
hand.

I’m not wired like that, though. I don’t think Tim is wired
like that. I don’t think most of my readers are wired like
that.

I know that there are some people who feel purposeless once they
retire, and I think if you’re feeling that way after retirement,
you need to do everything you can to find purpose and not just idle
away your days.

“You’ll probably opt to look for a new job or start
another company. Kinda defeats the purpose of waiting, doesn’t
it?”
Why, exactly, does the freedom of retirement for an
ambitious person have to go directly back to working for an
organization or starting a business? To narrow one’s options to
just those two things is an extreme narrowing of the possibilities
that financial freedom gives to you.

Just a week ago, I was with my family camping in Mesa Verde,
without electricity or internet access. A park volunteer stopped by
our campsite to greet us and I found myself chatting with him a
bit. He was in his late fifties and had always dreamed of being a
park ranger, a dream I had when I was in high school. His life took
him in a different direction, but he was able to basically retire
at age 55 and took on a volunteer job at Mesa Verde, visiting
campsites and telling people about the bear-related regulations of
the park. That’s what he does about eight months out of the year
– he walks through Mesa Verde, going to campsites and talking to
campers. The other four months, he loads up his van and travels
around the country, visiting his kids and seeing various things,
including other national parks.

That’s not a new job. That’s not starting another company.
That’s a much different dream.

My dream? I want to spend the late fall, winter, and early
spring working as a volunteer in our area and writing novels and/or
other books. In May or so, Sarah and I will load up our vehicle and
hit the road for three or four months, visiting family and friends
and just migrating across America, stopping at places for a few
days or a week then moving on to somewhere new.

I don’t hate what I’m doing now; I quite enjoy it, in fact.
However, having the freedom to have complete self-control over what
I write about and my writing schedule would be pretty nice, as
would the ability to just spend the summer migrating from place to
place like that, something that’s at least somewhat difficult to
do right now due to non-professional concerns.

The big issue in all of this, in my opinion, is the word
“retirement.”
For some, including Tim Ferriss, the
word seems too imply a very specific vision of retirement, where
someone just suddenly stops working at a particular age (65?) and
just goes home and doesn’t do anything any more, living on just a
Social Security check and living a very threadbare existence
that’s probably also really boring.

That specific vision requires a number of elements that I
strongly reject.

First of all, it seems to assume that a retiree has no other
interests or goals aside from their career path that they just
walked away from. As I noted earlier, if you’ve just walked away
from and walled yourself off from your only real interest and have
no capacity for developing new interests and new ways to fill your
time, then, yes, you’re going to have a pretty dull life.
However, as I also said earlier, I don’t think that this is true
for a lot of people.

Second, it assumes that a person has basically no retirement
savings other than Social Security. For many people, that’s true,
but it’s not an indictment of retirement itself, but an
indictment of how people don’t prepare for their own future and
overvalue their present life.

The negativity toward this assumption is alluded to when Tim
writes about his disdain for “lower middle class” life, but as
I pointed out earlier, once you get to roughly the average American
income, your happiness level doesn’t really increase. Once you
have a roof over your head and food on your plate and clothes on
your back and a few friends and enough financial freedom for just a
bit of serendipity, more money does not add more happiness to your
life. You just raise your expenses a little more and then it all
becomes ordinary.

Sarah and I earn a little more than the average American
household income, but we save so much that our spending is below
that level, and there are a number of things we could easily cut
out that wouldn’t really affect our happiness in life. I could
easily be less of a hobby dilettante, for example, and cut down on
my hobby spending, which is easily my least vital area of
spending.

Third, it seems to assume that a person is wasting their time
saving and investing for the future because they can’t even
“beat” inflation. It is absolutely ludicrous to buy into the
idea that a person can’t invest well enough to beat inflation.
It’s easy – just put your money into a 401(k) or Roth IRA and
put your money into an total stock market index fund or a target
retirement fund. Boom. Done. You’re beating inflation with your
money. When you decide to stop investing and start withdrawing,
calculate 3% of the balance at that point and you can safely
withdraw that amount each year, increasing that amount with
inflation, and it should last basically forever. In fact, it will
likely continue to grow, albeit at a slow rate. Boom. Done.
You’re matching inflation on withdrawal.

The real issue isn’t that saving for retirement is a waste of
money, but that people frequently choose to not do it in order to
raise their current standard of living, not realizing that raising
their current standard of living does not add to their happiness
with their lives.

Here’s my alternative plan.

Aim to separate your living expenses from your work. Do that by
saving for “retirement” using the usual retirement tools – a
401(k), a Roth IRA, and so forth. Along the way, consider how
you’re spending money and whether or not those things you spend
money on really bring you lasting happiness. (I personally think
this is the big difference maker – people rarely consider whether
the things they spend money on bring them lasting happiness.) If
they don’t, cut those expenses out of your life or at least
minimize them, and be particularly careful about any big expenses.
When in doubt, wait to buy it and see if you care in a month. Along
the way, put as much as you can into an emergency fund, then into
getting rid of your debts, then into those “retirement” tools,
aiming for a point where you can live your current life off of 3%
of the balance of your savings. Treat Social Security as gravy on
top.

Eventually, you reach a point where you can do whatever you want
without having to worry about living expenses. Ideally, you can do
this well before traditional retirement age. Don’t like your job?
Quit and do something else. Want to spend a year volunteering in a
national park? Go for it. Want to spend two years trying to write a
great novel that might turn out to be trash? Go for it. Want to
start some goofy business idea? Go for it.

Retirement isn’t flawed, but a really narrow definition of
retirement is. If you decide to cut off some of the possibilities,
you can certainly create a flawed result. Don’t fall into that
trap.

Good luck.

The post Is
Retirement Flawed?
appeared first on The Simple Dollar.

Source: FS – All-News2-Economy
Is Retirement Flawed?