Do we have to wait 40 years to reach retirement? It just seems like such a long time and there's
only so often that we can say "Are we there yet?" before the phrase just loses all meaning. Thankfully, the answer is of course not, but
not everybody knows that or maybe they've heard of some of the other options but they
don't yet believe any of them would work. Because if it is actually the case, if we
don't actually have to wait and work for 40+ years in order to reach retirement then why
would anyone do it? Well in addition to the either not having
heard of other options or just not believing in the other options out there or just being
one of the lucky few that really genuinely loves the job that they're already at and
wouldn't trade it for retirement even if they did have the option, there are a couple of
reasons why some people would still choose the traditional path to retirement. As you can tell by the title today we're going
to be talking about the various paths to and forms of retirement as well as their advantages,
disadvantages, and some other things that you might want to consider before choosing
your path to Financial Independence. Hey everyone Daniel here and welcome to Next
Level Life a channel where you can learn about Investing, debt, retirement, and many other
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video with a friend, and leave a comment below letting me know what topics you’d like me
to cover in future videos. Today I'm going to be covering for different
types of retirement: coasting Financial Independence, mini-retirement, traditional FIRE (or Financial
Independence; retired early), and of course traditional retirement. I'm going to talk about what each of these
types of retirement are, the potential advantages and disadvantages of each particular type,
and who I think the type might be particularly ideal for. Let's get started. So traditional retirement is the one we're
all familiar with but it is also the one that all the other forms of retirement are compared
to so I figure it's probably a good idea to just quickly start with that. If you're following the traditional path to
retirement you find a career and work for 40 to 50 years while saving enough money so
that by the time you reach the age that the government says you should be retiring by
you have enough money to live on. Now everybody's situation is different but
the general rule of thumb that a lot of people use for trying to figure out how much money
they need to be able to retire on is the 4% rule which I've covered in previous videos,
but the too long didn't watch version is you need roughly 25 times your annual expenses
saved for retirement in order to have a reasonable chance of not running out of money. Some people say that nowadays the 4% rule
doesn't hold up for various reasons and as a result, they use the more cautious 3% rule,
which works pretty much the same as the 4% rule except that your goal is to have about
33 times your annual expenses saved for retirement. The primary advantages of this type of retirement
is that you have as much time as possible to save that amount of money at least in comparison
to the other paths and in comparison to the other paths your money does not have to last
as long. As of the writing of this script, the full
or normal retirement age in the states anyway is 67 years old if you were born after 1967. That means you could have anywhere from 40
to nearly 50 years depending on when you start working in order to save up that 25 times
your annual expenses or 33 times your expenses if you're using the 3% rule. The disadvantage or at least potential disadvantage
of using this path to get to retirement is, ironically pretty similar to the second advantage,
in that your retirement is likely going to be shorter than any of the other paths since
it won't begin until your sixties. This means that you will have less time to
do whatever it is you want to do when you are free from the need to have a job. Now, this is obviously not going to be seen
as a disadvantage by everybody because there are those lucky few who legitimately enjoy
their jobs as I said but for those of us who do have other things we would rather be doing
than working our full-time job, this is certainly something
to consider. It is also possible that our retirement years
will not be fully healthy. We can't say this for sure as medical technology
is always advancing and we're living longer than ever before but it is possible depending
on how we manage our health and what happens to us in our lives that there may or may not
be too many of the post age 67 years that are truly healthy enough for us to do what
we want when we want. And as far as who I think that this path would
be ideal for... Well, it's a pretty short list. I think that this particular path would be
the ideal path for those who genuinely love their jobs and would still be doing that in
retirement. That's pretty much it. That doesn't mean it's a bad option for everyone
else I just think there are possibly more ideal options out there for others. The next type of financial Independence that
I want to talk about is coasting Financial Independence. Now coasting Financial Independence isn't
retirement in the traditional sense since you are still working for a fair portion of
the process possibly even as long as you are for traditional retirement. The difference here is that if you choose
to pursue coasting Financial Independence you are able to step down from a higher paying
but more stressful or less enjoyable job to a lower-paying but less stressful or more
enjoyable job. The idea is that in the early stages of your
career or the more recent stages of your career you save up a ton of cash and let it compound
over the next 20, 30, or 40 years until it has grown to be enough that it's able to support
you when you fully retire. Just as a hypothetical example to show how
this works take Jane who works as an accountant and takes home about $70,000 a year, which
is not half bad, but she really, really hates her job. She wants, no needs, to get out for her own
sanity if nothing else. however, she went to school for many years
to get this opportunity financially she doesn't want to just give it up. So she does a lot of research and figures
out how to minimize her expenses so she can stash as much cash as humanly possible now
so that she can quit her current job and move into a different one that she'll enjoy more
as soon as possible. She lives on a shoestring budget, takes advantage
of various rent hacking techniques, pays off all of her debts and as a result is able to
get her annual expenses all the way down to an incredible $18,000 a year. Maybe not the most luxurious lifestyle but
worth it so that she can get out of this job as fast as possible and not squander the opportunity
that she has given herself at the same time. She figures that once she is out of the job
she would want to be able to live a $2,500 a month lifestyle in today's dollars in retirement
which given what she has recently learned about making her money stretch is not a bad
lifestyle for one person. However obviously $2,500 a month in today's
dollars is not actually $2,500 a month when she retires. Jane is 27 now and assuming she was able to
work a job that she doesn't hate she has nothing against holding off for retirement until age
67. If we assume a 3% rate of inflation, $2,500
a month or $30,000 a year is going to be a little under $98,000 a year in 40 years. Therefore, following the 4% rule, she would
need to have $2.45 million or thereabouts saved by the time she's 67 in order to fund
that lifestyle. Given Jane's shoestring budget she is able
to save $4,333 a month at her current level of income and if we assume an 8% average rate
of return before inflation she would be able to switch jobs in 29 months or about two and
a half years. If we assume a 6% average rate of return before
inflation then she would be able to switch jobs in a little over 5 years. Now if Jane wanted to speed this process up
even further she could obviously get a part-time job just to increase her income or better
yet find a way to generate an income outside of her job, possibly through some sort of
side Hustle, that she could keep up after she switches jobs and maybe even into full
retirement. The mathematical effects on Jane's situation
could be enormous if she managed to do that and I've gone more in-depth on the why that
is in my top 3 reasons you need a side hustle video. But even if she doesn't, two and a half years
or 5 years and some change is certainly a lot better for someone like her then 40 or
50 years is. And that's the main advantage to this path
to financial Independence. It allows you to change careers fairly safely
much earlier on in life than traditional retirement, which makes it particularly ideal for those
who are not necessarily looking to retire in the traditional sense but just don't really
like the career path that they found themselves on. The biggest potential disadvantage to this
path is that you may either underestimate the amount of money you'll need in retirement
or overestimate the rate of return you will get on your money between now and when you
start withdrawing it in retirement. So it may not be a bad idea to give yourself
some sort of a buffer when your estimating these numbers or again find a way to generate
some sort of an income without the need for a job because that seriously does make a huge
difference! The third path to retirement is fire (which
stands for Financial Independence; retired early). Within the fire community, there are two schools
of thoughts known as lean fire and fat fire. Leanfire is the path taken by those who focus
primarily on keeping their expenses as low as possible. The aim for those who are attempting to achieve
lean fire status is to have their retirement expenses add up to no more than $40,000 annually. They also usually follow the 4% rule which
means that their retirement savings goal is usually no more than $1 million. The advantages to this method at least in
comparison to the fat fire method is that it is comparatively easier to achieve simply
because you don't need to save quite as much as you do with fat fire. The disadvantage to leanfire is, of course,
the lifestyle is not going to be quite as luxurious as it would be had you achieved
fat fire. Now don't get me wrong $40,000 a year especially
for those who know how to stretch their money out and control their expenses can be a pretty
darn good lifestyle but it's still not going to be the same as six figures with that same
knowledge. Fat fire, on the other hand, prioritizes achieving
financial independence on at least an upper-middle class lifestyle. The actual numbers involved will vary depending
on your personal situation and where you live but is that you have a lifestyle that does
not involve scrimping and saving in your day to day life after retirement. The advantages and disadvantages of this method
are pretty much the opposite of the leanfire method. On the one hand, you don't usually get to
retire quite as early as you would with lean fire but on the other, your lifestyle is a
little more luxurious or maybe a lot more luxurious depending on how far you go. Whichever method you end up choosing I think
that this path to financial Independence is ideal for just about anybody. Even though the fire acronym technically stands
for financial Independence retired early it doesn't mean you actually have to retire. Or at least I don't think so the concept that
I take from this is the importance of saving particularly early and becoming financially
independent so that you have the option to do whatever it is you want whether that's
changing jobs like in the coasting Financial Independence or retiring like many do when
they achieve Financial Independence or just continuing to work at a job that you enjoy
without having to worry about the finances. Any of those routes are perfectly acceptable
but not all of them are accessible without achieving Financial Independence in one form
or another. The last form of retirement that I wish to
talk about today is something that was introduced to me in the book The 4-Hour Workweek by Tim
Ferriss, which I really recommend checking out if you haven't already it's a great book. In it, Ferris talks about the concept of mini-retirements
which are basically a form of sabbatical that you can take multiple times throughout your
career without the need to actually be super rich. The idea behind it is you work for 6 months
or a year or two years or whatever the case maybe for you and then you take a one-month
sabbatical or two-month sabbatical and do whatever it is you want. during those 6 months or a year or two years,
you're saving up for that next mini-retirement. Now obviously this one is probably going to
be a little bit harder to achieve without some sort of a remote working agreement unless
of course, you work for yourself but it is doable and if you are interested in learning
more like I said Tim Ferriss talks about remote working agreements and how to do this in his
book, I'll leave a link in the description below if you want to check it out. The advantages to this particular form of
retirement is that you get to experience it early and often. So you're able to recharge your batteries
as Tim puts it and you don't have to give up your ability to earn an income. The potential disadvantages to this is first
if you don't or can't negotiate some sort of a remote working agreement and you can't
find a way to work for yourself it is more difficult to achieve this form of retirement. So the barrier-to-entry is possibly a little
bit higher depending on how you look at it. There's also the potential disadvantage of
not being able to save enough for full retirement down the line which for most of us is still
going to be a thing eventually unless you got some sort of passive income coming in
to cover your later retirement years. but this can usually be solved by just planning
ahead since there's no hard-and-fast rule as to how often you need to take a mini-retirement
if there is a year where you just don't make as much you can just hold off on that next
mini-retirement for a couple more months so that you can cover your long-term Investments
as you go along. The last thing that I want to mention is while
I did list these individually there's no reason that you can't mix and match them or even
combine a few of them. For instance, many entrepreneurs will combine
either mini-retirements and financial Independence retire early or mini-retirements and coasting
Financial Independence in order to give themselves a break and recharge their batteries while
continuing to grow their businesses. So don't be afraid to get creative with these
or come up with an entirely new path. Anyways what do you guys think of these various
paths to or forms of financial Independence and retirement? Are you pursuing any of them or are you pursuing
an entirely different path that I didn't cover? Let me know in the comments section below! But that'll do it for me today once again
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