It’s a changing financial world out there and the notions of retirement are changing along with it. Sentiments are changing the way people view saving for retirement and many are now considering themselves retired–or even “semi-retired”–at an earlier age. Traditional ideas of employment are falling by the wayside and fundamentally shifting retirement planning.
Some folks have gone so far to call this new outlook “The New Retirement.” But no matter what name you want to give it, there’s no denying that this isn’t your father’s retirement.
The Changing Environment
“The U.S. retirement system is too small,” Munnell said. “Only half the private sector workforce is covered by an employer-sponsored pension at any moment in time, and private sector employers have shifted from defined benefit plans to 401(k)s with modest balances.”
This has not only changed the view for those already saving for their retirement. For members of Generation X and Y, or those born between the ‘60s and late-‘80s, the process has quietly shifted away from what their parents had previously been taught.
Kiplinger’s Stacy Rapacon wrote about the changes young people should expect when it comes to retirement last September and touched on many of these points.
The 10 percent savings rule has long been a practice of the savvy saver. However, on the advice of many experts and in the shadow of retirement structuring, Rapacon recommended a 12 percent rule for those just starting to build their nest eggs.
Munnell strongly feels that there needs to be a new outlook on how one should plan for those twilight years.
“Younger generations should plan on working to their mid-to-late 60s,” she said. “They should contribute early to their 401(k) plans and leave the money in the plan when they change jobs.”
But while Munnell sees plenty of room for change and improvement, many young people are actually feeling optimistic about retirement.
U.S. News & World Report spoke to a group of savers between the ages of 18 and 34 and found the economic crisis has jump-started some good saving habits. Seventy percent report building their savings, 66 percent paid down their credit card, 61 percent reduced spending and 44 percent regularly contribute to their 401(k).
“This is the generation that isn’t going to have a pension plan, so building for retirement early is important,” said MetLife’s Vice President for Retirement Products Julia Lennox in the article. “They are learning the lessons about spending within your means and having a cash cushion and responding in those ways is the right first step.”
Stepping Back From Full Time
But what about the mindset of those whose retirement goals are expected to be in the nearer future?
In a March 2009 post, Get Rich Slowly’s J.D. Roth pointed out that in many ways, retirement is basically just financial independence. Once the focus moves beyond paying off bills and mortgages, Roth posits, circumstance stops managing an individual’s finances and freedom from financial burden is achieved.
The catch? It doesn’t have to happen when you’re 65.
“People have tired of working for 40-plus years before they enjoy the ‘good life’ of retirement,” said personal finance blogger Free Money Finance. “Many are wanting a portion of the good life while they are young enough to enjoy it.”
While it might not look much different than part-time employment, the idea of “semi-retirement” has entered into the saver psyche. It differs in that it finds you exhibiting strong saving habits that allow you to do many of the things you’d be doing if fully employed.
It’s not just a shift in personal finance tactics, but a fundamental change in lifestyle.
Free Money Finance, who writes anonymously on his site, spoke with a reader who wanted to reach that level of financial independence and shared his experience. The reader spoke candidly about career frustrations and the desire to spend more time with his family. He eventually negotiated a four-day work week with his employer and cut back his spending in small but significant ways like dropping his disability insurance and checking out books from the library instead of buying them.
Shortly after making the switch to semi-retirement, he was able to pay off his mortgage and send his child to a private school. He also continued to save a substantial percentage of his salary for his eventual full-retirement.
“I think the process is now like this: work full-time, early semi-retirement, then complete retirement,” FMF said. “How much time you spend in each stage depends on your goals in life as well as how well you manage your finances.”
Many are calling self-employment another potential aspect of the New Retirement. Justmeans wrote about this trend and pointed out the surprising number of retirement age individuals who are working for themselves, or what they refer to as “unincorporated businesses.”
Older Americans saw the sharpest increase in self-employment among age demographics from 2008 to 2009, according to the Kauffman Index of Entrepreneurial Activity. In fact, the Bureau of Labor Statistics lists those older than 65 as a staggering 18.1 percent of the 9.8 million unincorporated self-employed businesses.
A post at Redeeming Riches touches on this trend and relates it to three proposed pillars of “true wealth”: People, Passion and Purpose. It claims that focusing on following your dreams and focusing on positive personal connections can lead to a life filled with a multitude of benefits, many of them financial. For them, this is a natural stepping stone to a lifestyle that many consider to be the New Retirement.
Changing technologies and longer lifespans have also made it easier than ever for retirement-age individuals to pursue possible moneymaking opportunities that are also close to their hearts. These people are turning activities that were once viewed as hobbies or side-interests and turning them into sources of income during the later years of their life.
It stands to reason that a hobby that happens to make you a bit of cash doesn’t really count as working. Therefore, these people are being considered part of this new lifestyle trend.
So What Can You Do Now?
Advocates for The New Retirement seem to fall into two camps: those who are looking for new ways to reach the classic idea of retirement, and others who are looking to completely redefine the way they work, save and live.
What about you? How are you saving for retirement? Are you already retired or semi-retired? If so, what kind of financial plan got you to where you needed to be? Tell us about it in the comments.