The Myth of Early Retirement for the Middle Class

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Last updated on January 21, 2019 Comments: 21

Financial independence has become an important topic for me over the course of my adult life. It’s been a progression. First, I discovered the concept of spending less than I earn — simple mathematics but a behavioral change — and how that, in addition to making better choices, could eventually lead to financial independence through the slow path to wealth.

Yet, I have been bothered by problems with the “getting rich slowly” concept, some of which I addressed in this video about quantum leaps in finance, and which I explained better in the article linked in the previous paragraph. Just because I’m not sold on the idea that just making better decisions over the course of a lifetime will lead to wealth doesn’t mean that I think there’s a consistent method of getting rich quicker.

I am fascinated be people who report success finding financial independence early by making some extreme choices in their lives. Several years ago, during the first few weeks of the Consumerism Commentary Podcast, host Tom Dziubek and I interviewed an individual with a popular website who preaches about early retirement and the extreme choices he made to get to that point.

What is retirement, anyway?

Before I can talk about the interview, I have to point out there is some disagreement, or at least variation, regarding the meaning of retirement. I entered the interview with a traditional view. Retirement is the point at which your career has come to an end. If you work in an office or at a police station, your co-workers will throw you a going-away party with cake. You leave your job, perhaps collect a pension, move to Florida or Arizona, and live out the rest of your life in leisurely activities like sitting by the pool, playing golf, traveling, cultivating hobbies, and doting on your grandchildren.

This is, of course, a narrow view of retirement, despite it being a relatively accurate, if stereotypical, picture of a form of retirement that has certainly been popular in American culture over the last generation or two, especially with corporate workers who stay with the same company or a small number of employers within one industry throughout their lives. The disappearance of pensions in favor of 401(k) plans and a lower prioritization of human capital have encouraged employees to be less loyal to their employers and more faithful to their own needs and desires.

Average lifespans are increasing. Access to healthcare, despite the industry’s troubles, is helping people live healthier in older age. Add these to a decreased reliance on government support like Social Security and increased expectations for quality of living, retirees need more money than ever to provide the cash flow necessary to live as they are accustomed.

One result to this increased financial pressure is that many of today’s workers think they’ll never be able to retire. According to a recent Wells Fargo study — keep in mind that Wells Fargo sells “retirement planning” as a product — 37% of middle class Americans believe they will need to work until they’re too sick or until they die, at which point, retirement will lose some or all of its enjoyment.

As the world changes around us, so does the concept of retirement. The motivation for working is changing. It’s less likely that one can expect to follow the traditional path of working for thirty years and living in retirement on a pension or from returns from a risky 401(k) portfolio, so people who preach taking a more active approach to earning and saving wealth have grown in popularity. That takes me back to the interview.

Is he really retired?

In retirement, what should disappear is the need to trade time and effort, a function of labor, for capital needed to pay for living expenses. When we work, we take a certain amount of time that could be spent on activities that are more enjoyable, and use that time in manual or mental labor. Assuming a person like most people is not lucky enough to truly enjoy the work they do and to continue that enjoyment for years after turning a passion into an occupation, there’s eventually some desire to stop.

Other income sources take the place of trading labor for capital.

  • Income can come from converting retirement savings into cash flow, quickly depleting a finite resource.
  • Investments can generate income while depleting a resource at a slower rate. Financial planners suggest a safe withdrawal rate of 4% for the first year with a portfolio balanced between stocks and bonds.
  • Retirees can rely, to some extent, on government benefits for income or to pay for expenses like healthcare.

The main idea is that trading labor for income stops. Does it count as retirement when the supposed retiree is not only still working to produce income (whether he claims to need it, despite this work being different than his initial, primary career) or if he continues to rely on his wife’s income for covering expenses? It’s certainly a different level of financial independence. In this podcast guest’s particular case, a vigorous approach to saving as much income as possible, reducing material needs, and continually considering methods of downsizing all helped him reach a point at which he could quit and take more risk by starting his own business with savings and his wife’s income as a cushion.

Unfortunately, as this was one of the first podcast interviews we produced, the audio quality was not sufficient. I decided not to re-record the interview because I felt there was a bit of a lack of authenticity. I did not feel the early retirement in this case was not real enough to serve as a legitimate story. There are some interesting concepts behind the philosophy, but the holes in the logic were too large for me to feel comfortable with the story.

Is real early retirement a myth?

Let’s say you have no savings, but you also have no debt. You can “retire” any time you want. You can live off the land. Find unclaimed space and build a shelter and hunt for food. Barter for any needs you have. I suppose that can be a legitimate retirement if that type of life sounds good to you. If you change how you approach your needs for the rest of your life, you don’t need a lot of money to retire.

Or, you can plan to retire with a combination of lowering your expectations and increasing your savings for, say, five years. If you and your spouse expect to earn $400,000 over the next five years and manage to save 90% of that, your nest egg totals $360,000. If you can live off $12,000 a year — and I know people who have — you can make that nest egg last thirty years without even investing in the stock market.

It can be done. Early retirement is real for the middle class, but only those who are willing to make extreme changes to expectations and behavior today. But it’s not very realistic, and the extreme savings path is fraught with problems.

In most cases, because most will not be interested or able to make those sacrifices, early retirement is a myth, and setting that goal is a recipe for disappointment in the long run. Most people are not willing to make the kind of sacrifices necessary to make early retirement — the kind in which you actually do stop trading labor for capital and do not have a spouse’s salary to rely upon — a reality. Be sure, if you follow a guru who preaches early retirement, that you maintain realistic expectations and a good understanding of the guru’s actual retirement situation.

For the most part, the middle class is not interested in denouncing the consumerism culture perpetuated not only by the media but by our communities and society at large, but the more a guru professes early retirement, the more likely he or she is still working and generating an income in exchange for some type of labor.

Are you on a path towards early retirement? What does retirement look like to you, and what are you doing to make it happen?

Article comments

Anonymous says:

Most people aren’t able and/or willing to do what it takes to even attempt early retirement. For instance I calculated for a friend what it would take to retire at age 50. It came to about 50%, based on their current age. Very, very few people are either willing or able to save 50% of their income, never mind both.

Anonymous says:

And once you pass that hurdle. Then you start facing the challenges of what to do with your life for a couple decades, how to get access to and pay for unknown and rapidly increasing health care costs, and numerous other issues.

Anonymous says:

At this point in my life, with this economy, I don’t foresee have a classic retirement of leisure like my parents.

The reality is that high tech, like professional sports, is a young person’s game. The older you get, the harder it is to find traditional employment. There will likely come a time when I will be willing to work in the corporate world, but will be unable to find someone willing to hire me. I’ve seen it happen to several older colleagues in the past.

My retirement plan is to work as long as I can, earn as much as I can, save as much as I can, and build as many non-employment streams of income as I can.

After all, there’s only so much you can control, and the rest is up to fate, and how you react to it.

Anonymous says:

This is an excellent wake up call for the middle class, Luke.

I worry about retirement all the time (and I’m only 34 years old). How much money is enough? Am I on the right path? These types of questions haunt me at night.

I believe I’m on the right path because I’m investing in real estate. My definition of retirement is having my home paid off completely and enough income to pay the bills without working.

Donna Freedman says:

That’s a pretty good definition of “financial independence,” I think.

Anonymous says:

Very interesting take, Luke. I am actually more and more sold on “early retirement”, but prefer the term “financial independence”. We run a pretty bare bones budget at the moment because we have a fairly large mortgage. Our savings rate isn’t “great”, but we are constantly making moves to cut down expenses where we can, because until we either 1) sell the house and get a fixer/upper or 2)Up my income by 30%+, we are NOT on track to financial independence before, say, age 55.

Here’s my stance: We don’t need much….consumerism is not all that appealing, and we’re pretty content where we are. If our income doubles, our spending is NOT going to double. So our goal is to now have our money passively produce the income needed for our current expenses (including rental income, etc.). I don’t care all that much for the word “retirement”, but once my assets produce the income needed to cover ALL expenses, I am then financially independent of using labor to produce income. And I like that goal. I like it a lot 🙂

Donna Freedman says:

I’m the author of that $12k-a-year piece, and at age almost-56 I’m still working — but not in a traditional setting. About nine months after that article ran MSN Money started the Smart Spending blog and hired me to write it. From then until fairly recently I was working more or less full-time as a writer, although the job was pretty flexible.
Microsoft fired all its writers in mid-September 2013. I didn’t retire, though, because (a) there’s still a lot I’d like to say and (b) I don’t want to start drawing down on the retirement savings I have because people in my family tend to live a long time.
Mostly it’s (a), though. I still like what I do. However, I’m starting to see the appeal of retirement: moving at a comfortable speed vs. racing through chores and tasks, spending more time with my sweetheart (who is a little older than me but can’t afford to retire just yet), traveling a bit, auditing classes at the state university for free.
Maybe later. Maybe not!

Anonymous says:

We live in an area that’s got an absolute ton of what people would consider “traditional” retirees. Many of them still do a ton of work, both paid and volunteer. They don’t do it out of monetary need, but to stay busy, engaged, and relating with people. (One old guy golfs in the mornings and comes in and cooks and hands out samples at the Apron’s station in our local grocery store in the afternoon. Sure, he’s getting paid nominally, but he LOVES it! When he cooks at home he has no one to share it with…) But because they’re old, no one questions whether or not they are “really retired”. They’re financially independent, removed from the obligation of selling one’s time to sustain a lifestyle to which they have become accustomed.
I don’t care what it gets called, naming it is a “problem” I look forward to having some day. And earlier than is considered “traditional”. =)

Anonymous says:

I’m not on a path towards early retirement. I could have chosen a profession that was more financially rewarding, and therefore made that an option, but I chose to do something I love instead. It pays alright. But that honestly isn’t my focus. What a weird thing to say from a dude who blogs about money 😉 I really love my job and my co-workers. I’m happy going in every day. I would be content to do this for the next 30 years. I’m certainly saving more than the average for my eventual retirement. But early retirement just doesn’t hold much appeal to me.

A lot of folks spend some of their best years working their tail off for the hope of eventually quitting. I prefer to live more leisurely now. I travel. I hang out with friends. I enjoy my neighborhood and the beauty around me. I don’t think I need to be “retired” in order to slow down and really appreciate those awesome things I already have in my life.

Anonymous says:

I retired over 3 years ago at age 51 with a nest egg large enough that I won’t need to work again unless I want to. Part of that nest egg came about from some stock options that did well during the 1990s – but the majority of it just came about from investing regular taxable savings, a company profit sharing plan and maxing out my 401(k) and IRA contributions over 25 years while living well within my means. I’ve got enough set aside in taxable savings/investment accounts to get me to at least age 65 without the need to touch any of the tax-advantaged retirement $ – thus another 10+ years of growth. So, while I was probably able to retire earlier than most, financial independence via the ‘slow path to wealth’ can be done if one sets their mind to it.

Anonymous says:

I consider a lot of people “retired” who have jobs. I guess it is because they have gone from careers to part-time, “for the love of it” ventures. They work, although they don’t have to at all. I once thought that I would be in that position fairly early in life—-and then the cost of health insurance intervened. I can live a very simple, cheap life, but I won’t go without health insurance.

Anonymous says:

This is a tangent comment but for this bit :

“You can “retire” any time you want. You can live off the land. Find unclaimed space and build a shelter and hunt for food.”

Can you really just find “unclaimed” space to live? I’m pretty sure that all the land in the USA is owned by someone. So there isn’t any unclaimed land any more. I don’t think you can legally squat anywhere really. Its actually trespassing. Even federal lands limit how long you can legally stay. I found that there is a 14 day limit on camping in undeveloped federal lands. But then maybe you can just move your camp site ever 2 weeks. So that kind of thing might work but you wouldn’t be able to build any permanent shelter.

Luke Landes says:

Maybe “unattended” land? Abandoned land? I guess it’s squatting. I’m not condoning anything illegal, but the reality is that people do live this way. There is a lot of land in this country where you can set yourself up, if you have the skills to live outside of a mainstream community. Maybe you can find a community of like-minded people in terms of living off the land and self-sufficiency. Maybe you can live out of your car like many others do. Maybe you need to move around, maybe you don’t.

Anonymous says:

You could probably buy some undeveloped land in the middle of nowhere with a relatively small amount of money.

Anonymous says:

Most people who are pursuing “early retirement” just want to make work optional and then do whatever they feel like doing. Most don’t plan to stop working but change what they do with their free time. I am also working on being able to add these options to our family life so no, it is certainly not a “myth”.

Luke Landes says:

I like the idea of making work “optional.” I’m all for that, and it’s a legitimate target for someone’s life.

But if someone’s still working, that’s not really retirement — at least not in the classical sense — is it? How’s this: let’s make breathing optional. Wouldn’t that be nice, to live a life without the need to breathe? It’s easy — just change the definition of “breathing.”

Anonymous says:

This is the old argument about one’s definition of “early retirement”. I think you are using the traditional view (FL, beach, golf, gold watch, zero work that pays money…) while what I’m talking about, of course, is much closer to FI. I would argue that most people that seek early retirement are really seeking FI, which is a great place where work becomes optional. If I reach that place when I’m 45 I won’t stop doing work for which people happen to pay me, because I can’t imagine not doing some sort of work for the rest of my life. Frankly, I would not care what people call me at that time since I will be in complete control of what I do with every hour of my life.

Anonymous says:

There are various definitions of ‘work’.
When you say “doing some sort of work” what do you mean? Do you mean punching a time card and getting a paycheck from an employer with a W-2?
Or do you mean anything along the lines of starting a hobby business, working on projects on your house, volunteering, or simply keeping busy?

When I say I don’t want to work, I mean that I prefer not to have an employer with a W2. I may very well spend time managing rental properties, writing my blog or volunteering or trying to start a hobby business.

Anonymous says:

I wasn’t until two years ago, now I’m gunning for it. The “Early Retirement Extreme” mentality doesn’t have to literally be taken to the “extreme”. It’s not black or white. Adapting just a few of the ideas into one’s lifestyle can knock years off how long you have to work. (e.g., Would to trade having 500 satellite TV channels down to 30 if it meant you get 2 years of your life free as a result?)

I love the extremist and I’m rooting for them. I want them to stand on soapboxes and yell “Waste!,” every single chance they get. If just to remind me that I don’t need a whole bunch of expensive material junk find happiness. …That driving a big, gas guzzling car is bad idea. …That I should save electricity wherever I can. Almost all of their messages all have two sides which are equally beneficial–the first side saves my pocketbook and the second is environmental awareness. I dig it!

Anonymous says:

Great article! We both want early retirement, and are working towards that. However, to us, early retirement does not mean that neither of us would be working. We both would still want to do something, but early retirement means that we get to decide where and when. We would have the freedom to do what we wanted and not have to worry about how we would survive.

Anonymous says:

I am very fortunate in that I work in federal law enforcement and will be able to draw a pension when I turn 50. It will be about 42% of my high-three salary, which I anticipate being able to live comfortably on as long as I live in a low to moderate cost of living area. Several reasons this is possible is because I paid off all my debt and am past the phase of buying “stuff”. I try to use the “one in/one out” rule of thumb when making purchases. I have been maxing out retirement savings in the Thrift Savings Plan and also have a Vanguard brokerage account that I add money to every month. I anticipate using the money from my retirement and savings accounts when I make purchases such as buying another vehicle or traveling. I see myself staying active with volunteer work or maybe even a part-time paying job if I find something I love doing (and can actually get paid for doing it!).