It was all about the 9-5 until your 65. Starting work as a fresh-faced 16-year-old and leaving in a pine box. Well, maybe I’m being a little dramatic there. But traditional retirement is changing…fast. The state pension age is rising and that elusive final salary pension is close to dead (apart from the public sector)…certainly for the next generation.
But maybe there’s another way?
Did you know the British State Pension is now the worst in the developed world? British workers will have to work longer than any other nation.
An average worker entering the UK workforce today can expect to receive less than a third (29 percent) of their final working salary as a basic pension income after tax, according to a report published every two years by the Organisation for Economic Co-operation and Development (OECD).
How Does The State Pension Fare in the Rest of Europe?
There are 3 basic models of state pensions:
- Earnings-related i.e. France, Germany, Italy
- Flat-rate i.e. Ireland, Netherlands
- Means tested i.e. Australia, Finland
Because pensions are dependent in many countries on former earnings, any comparison between these countries usually looks at pensions of those on specific levels of earnings. The figures in the table below – the most recent authoritative set for OECD countries – are typical of this sort of comparison.
They consider the pensions of a former worker on average earnings, and express pension benefits as a ‘replacement rate’: a proportion of the (revalued) average earnings of that person. The figures are estimates of the hypothetical level of pension which people would receive if they work for a full career and if today’s pension rules remain unchanged.:
As you can see, the Dutch and the Danes are flying ahead.
How Long Can One Expect to Live?
Also, according to the Office for National Statistics (and dependent on lifestyle, health and family history), the average British male of 65 today, can expect to live to 86 years old.
And the average British female of 65 today, can expect to live to 88 years old.
And those are just averages. About one out of every ten British male 65-year-olds today will live to 100 and one out of every seven British female 65-year-olds today will live to 100.
The fact of the matter is, just like the economy, no one can really predict what age we’re going to kick the bucket. No Monte Carlo calculator can ever predict that. All we know is, life expectancy is thought to increase from generation to generation with improved working conditions, reduced smoking rates and enhanced healthcare and technology.
So, What Does All This Mean Canny Contractor?
Put simply, we need to ensure we have our own employer contributions and private pension savings in place i.e. SIPP. However, we don’t necessarily need a pension (although it’s not a bad idea to have one). And that’s the thing, we can create our own additional passive income streams i.e. rental income, dividends, side business etc.
With these underwhelming state pension payouts, saving and investing earlier and more strategically is pertinent. Especially if we’re expected to live longer.
I know I’m reiterating the obvious for the majority of folk/ FI’ers, but stick with me…
So, if we’re expected to live longer and can’t rely solely on Government support, why adhere to this antiquated system at all?
Maybe there’s a more contemporary solution or retirement strategy…
This is a strategy taken by folk who want to take a long career break. It’s also a great strategy for parents who want to see their kids grow up and live their best years for themselves.
They tend to last years, rather than months.
This is more along the lines of taking a sabbatical or short periods of time off. There’s nothing quite like real life examples though…
My good friend turned contract last year and he opted for a mini-retirement after his first project. He studied for a project management and business certification, got some urgent surgery done on his hand, performed in a play and got to spend quality time at his new apartment he was renovating in Brussels. He achieved a lot in a short space of time.
Time he didn’t have in a corporate environment.
On the same note, I had one of my most memorable mini-retirements (I wasn’t aware of that name back then) around 5 years ago. I flew to Cyprus to address the rental readiness of my apartment, as in organize a new broadband installation and tart the place up.
I also spent quality time on an app I was validating, to serve the Cypriot holidaymaker market (I had two teams of folk developing it from India). It was a useful app with some cool marketing, but unfortunately, the app was going to hemorrhage money and time (more than anticipated). So I pulled the plug which was the right decision.
Anway, I windsurfed most afternoons in the med and opted for some advanced lessons to take my enjoyment and skills to another level. I even met a young lady and had a whirlwind holiday/ mini-retirement romance. I concluded the mini-retirement with a telephone interview from my balcony and negotiated a new contract. Ok, I lied about the balcony part (not much privacy). I performed the interview from my lounge and celebrated the contract offer with a banana milkshake.
You can also go all out adventure and just do something you’ve always wanted to do. During another mini-retirement, I addressed a boyhood dream and took the Transmongolian Express from Moscow to Beijing, crossing 7 times zones, via Siberia and Mongolia. I met up with my Irish friend who happened to be contracting in Beijing and had a long-awaited catchup with some Peking duck.
Advantages of Mini Retirements
- Spend quality time at home
- Travel overseas
- Enhance your education
- Maintain your investments/ yourself
- Fulfill some lifetime dreams
- Build relationships with a mini-retirement
Yes, you get a really nice work/ life balance. And the best bit…you can do this every year!
The mini-retirements probably helped me get through some tough projects, as they provided a focus at the end of each one. What’s more, I was able to maintain a healthy work/ life balance.
Mini-Retirements are also unique from the point of view, you get a glimpse at what retirement or semi-retirement/ FI looks like further down the line. You can get a relevant insight into what city or country you wish to live in (if that floats your boat), experiment with different investments/ business ideas, upskill and generally enjoy life.
From the finance side, this is great for a while. However, it will take longer to FIRE using this type of retirement, as you’re funding your mini-retirements every year.
After a while, I stopped the mini-retirements and started to nail down on the savings and go a little early retirement extreme.
Because ultimately, I want to achieve the semi-retirement phase below…
Semi-Retirement/ Financial Independence
So, you’re not quite retired. You only need to supplement your passive income by means of part-time work or doing short-term gigs/ contracts. I’ve collected some excerpts from the web to better describe this, as each individual has their own interpretation of what semi-retirement or being financially independent really means to them…
“Financial Independence doesn’t mean you quit your job. It just means that your job needs you more than you need them. This gives you an upper hand to be able to negotiate things like hours, vacation time etc.”
“FI is less for people who hate their jobs and more for those who have a clear idea of a different lifestyle or goal they may want to pursue”
“A good reason for FI is that you have an alternate vision for your life that you are eager to pursue, but which you can’t pursue while employed full time. Achieving FI allowed us to leave that career chapter of our lives from a place of gratitude and appreciation, and move onto our next chapter that we’re in control of”
“It’s less about retiring early and more about having the freedom to pursue your dreams and ambitions.”
Semi-retirement or financial independence seems to be the optimal retirement strategy for me. Personally, I think it will provide the best work/ life balance.
Yes, you retire early by reaching financial freedom by working smart i.e.through several passive income streams and/or a side business. I knew someone, who knew someone a little bit famous. I always remember him saying, his friend retired early by selling a business. He retired a millionaire, before the age of 40. I always remember this exciting me. But the bit that stuck with me, was the fact he was bored and at a loose end.
That kind of scared me.
You can be rich, kind of famous and live a glamorous lifestyle. However, if you don’t serve a purpose then what’s it all for…
The thing is, I’m not going to play golf every day, or windsurf in the med every day (I validated this scenario a little). Passion’s don’t work on their own, they aren’t enough to live a fulfilling life
Based on that and several other reasons, I’ve decided never to fully retire. I wholeheartedly think I would be bored. Instead, I aim to create something that matters to me and create change in other people, and have my passions on the side.
I’ll keep ‘working’ on stuff I care about, but I won’t ‘job’.
But each to their own and whatever retirement option suits them.
Why These Alternative Retirement Options Could Be More Favourable
- You live the healthiest years of your youth. Opting for traditional retirement is like delayed gratification
- These alternative retirement solutions prevent burnout and possibly stress-related illnesses
- They bring some purpose to your life, as you can fulfill your desires in your prime years
- You can spend more time with the people that matter to you, rather than some strangers in an open space
How Will Employers React?
Depends on the employer really. Old fashioned companies/ departments probably won’t tolerate it. However, ‘gaps’ on resumes are becoming more acceptable in this day and age. That isn’t a blanket statement. Being a contractor, I do a lot of digging and ask the right questions to agents, clients and colleagues.
One of my colleagues (who used to hire permanent staff) talked about this recently. If the person was the right fit, then the gap was irrelevant (no matter the duration). He never mentioned the gap to the candidate. As long as the career gap wasn’t jail time, then he was happy!
Also, my client just assumed I worked a few months a year (not quite yet), as if it was the norm. It’s expected that freelancers, consultants/ contractors will take time off. My good Irish friend (another contractor) has taken off more than a year at this stage (sounding more like a temporary retirement). Every time I check Instagram, he’s in another country.
Sabbaticals are becoming a more commonplace with permanent employees. Sabbaticals are being offered to employees in an increasing variety of lengths and styles. Some companies offer this benefit after as few as six months’ service, although it’s more common for employees to qualify after five or seven continuous years with a company.
They’re offered in durations from a week to a year. These periods of paid time off are often used for travel, volunteering, education, with family, or a combination of several of those.
The world is changing and the government is forever changing the rules.
We don’t know how short or long our lives are going to be, so we best make the most of them, in the time we have.
Money is a means, not an end. The maths is the simple part, it’s the lifestyle surrounding retirement thats important. We all have different versions of the optimum life we would like to lead.
With these retirement options on the table, a little determination and a sharp focus, we can execute our plans and use this tool (money) to help us achieve our vision of a better lifestyle and retirement. Whatever type of retirement that may be.
Now I would like to hear from you in the comments
The question is, what sort of retirement strategy best fits your lifestyle?
Do you think there are any more advantages for adopting these alternative retirement strategies?