Photo by Alexandra Luniel on Unsplash
Recently I wrote that it is time for me to re-write my Forward Story. That is because my wife and I recently achieved a major goal that we had been working on for well over a decade. With that accompished, it would be foolish to just meander without a new focus.
As I always do when I re-write my story, I start with the most distant timeframe I can envision. For me that is retirement.
The concept of retirement is a bit challenging. What does it mean to retire? We have all either known people or have heard stories of people that retired after a long employment and within a short time were either bored out of their minds or had actually passed away. Some people view retirement as a time to do nothing but relax and play.
Have you thought of what retirement means to you? I am fortunate to have many family members and friends that have already retired. By observing them I have a clear understanding of what retirement means to me. To me, retirement is simply that state of no longer needing to work for earned income. It is when passive income and/or retirement income supplies my needed standard of living. Let’s break this down:
- Earned Income. Pretty self-explanatory, this is the most common form of income. I trade my time and talent for money. This could be hourly wages, salary, salary and commission, or contract. The biggest component of this that impacts my life is time.
- Passive Income. This is income I receive from my investments. This can include equity appreciation through markets increasing, interest income, dividend income, etc. I get rewarded for putting my capital at risk. Very safe investments yield lower rates of return. Riskier investments typically have to pay higher rates to induce me into putting my money into them. Regardless of the actual investment vehicle and its returns, I get passive income from it. Instead of me working for my money, my money works for me.
- Retirement Income. Increasingly rare, the company pension plan is an example of retirement income. Another example in the USA is Social Security.
- Needed Standard of Living. Now we get a bit more complicated. I had to go and throw in the word “needed.” If I live in a tent on a friend’s property, my needed standard of living is very low relative to what it would be if I live in a four story house with a a gigantic mortgage. Of course, I get to determine my standard of living and whether I live in a tent, a four story house, or anything else. It is important to think through all of the implications of my needed standard of living vs my desired standard of living. I always need far less than I desire. You get to wrestle with all of that just like I do. As it pertains to retirement, the higher your standard of living, the more passive income you will need. This will likely delay your retirement.
Now that I have defined things, the main benefit for me once I retire will be more freedom over my time and talent. Without needing to use them for earned income, I now get to decide what is worthy of both.
Conclusion
Given this understanding of retirement, I have to calculate what that magic number is that combines both passive income and retirement income in such a way as to meet my needed standard of living. There is a lot of financial calculations and math involved in that. Nerds like me love this stuff. With all of the usual disclaimers about not knowing the future, we can then project a potential timeline for retirement.
Then I get to the more exciting part of writing the new story – envisioning the ways in which I will invest my time and talent in that new retired state. There may be some golf, tennis, and skiing in that for me, but that will be on the fringes. The retired people I know that are in their 80s and 90s are usually very active people that continue to serve and help their family, their friends, and their world. My plan will involve all of that.