Retirement is a phase of life that gets a lot of media attention. Some reports claim very few will ever be able to retire at all. Most conventional financial advice is aimed at the traditional retiree — one who retires around age 65. At the extreme opposite end of the spectrum, there are Internet communities centered on attaining financial independence from the working world and retiring as early as age 30 or 40.
So when it comes to planning for the future, what is the best path to wealth?
Financial Independence vs. Regular Retirement
First, let’s define these two approaches to retirement. The financial independence, retire early crowd (abbreviated “FIRE“) typically starts saving early in their careers for their eventual retirements. By mid-career, FIRE-seekers will often be making the maximum contributions to their 401(k)s and IRAs and may have additional brokerage accounts where they invest surplus savings.
Paying off a mortgage is often a step on the path to financial independence. Some attain financial independence through careers in government or the military where pensions are prevalent. Though there is no strict definition of an early retiree, let’s say it’s anyone who manages to retire well before the usual retirement age of 65.
In contrast, regular retirees tend to have lower savings rates during their working careers and traditionally retire around age 65 (when Medicare eligibility begins) or age 66 or 67 (when full Social Security benefits can be taken). While they may have small savings in workplace savings plans like the 401(k), a significant portion of their retirement income comes from Social Security.
The choice between regular retirement and financial independence/early retirement is a question of tradeoffs.
Financial independence at an early age is much harder to attain than regular retirement. Someone retiring in their 40s will need a much larger portfolio to sustain an additional two decades of retirement expenses than someone retiring in their 60s. Saving more during one’s working years means less spending on wants and needs.
There’s no way to get around the sacrifices required to save enough to permit financial independence and early retirement. But for those with high incomes, saving a significant portion (20 percent or more) of one’s income may not feel like much of a sacrifice when the benefit to be gained is a comfortable retirement decades earlier than their peers.
Along with high incomes often come higher levels of stress, longer working hours, and significant work-related travel, which are all sacrifices in themselves versus a relatively easy 40-hour-per-week job that might pay less. Many high-income earners decide to use their higher wages to fund a more extravagant lifestyle. Those seeking financial independence follow the more conservative path and tend to save a significant part of their income.
For those in careers without high income potential, some try to skip ahead on the path to financial independence by investing in real estate. By committing the time to actively manage their real estate investments, they can make a smaller upfront investment in a house or condo and turn that investment into a stream of long-term income higher than what they could get from traditional investments in the stock market.
It’s a tradeoff of labor and effort for higher expected investment returns. Being a hands-on landlord is still a lot of work even with the help of handymen and property managers.
Should You Aim for a Regular Retirement?
There are advantages to aiming for regular retirement age. You get to spend more during your working years and not worry as much about budgeting. If you like your job and hope to work forever, early retirement holds little incentive.
Some lower-income jobs like teaching and social work tend to reward employees with something more than a paycheck — the feeling of doing good in the world. For those with lower incomes, it can be very difficult to save a significant percentage of one’s income (although jobs like teaching and social work tend to come with government pensions after 30 years of service). For some, financial independence and early retirement are out of reach without major lifestyle sacrifices.
The decision to pursue financial independence at an early age or to aim for a regular retirement around age 65 comes down to personal preference. Gaining financial independence at a young age requires sacrifices, and not everyone is interested in making those sacrifices, instead preferring to live life to the fullest today while they know they are healthy.
At the very least, financial independence versus regular retirement is a choice that should be considered earlier in life rather than later. Starting to save in one’s 20s or 30s can lead to early retirement, whereas waiting to save for retirement until one is in their 40s or 50s means a more traditional retirement.