Deciding What Retirement Means for You

Before working out how much you need, it helps to decide what you are paying for. Retirement used to mean one thing: stop work completely at a set age and live on a pension and Social Security. Today it can mean several different things, and each one leads to a very different savings target. This chapter describes the main models, what they cost, and the non-financial costs that numbers miss.

Why the old model changed

The traditional picture of retirement was built for a different economy. Many workers stayed with one employer, earned a defined-benefit pension that paid a set income for life, and retired at a fixed age. Three things have changed since.

First, most private-sector workers now save in defined-contribution plans such as a 401(k), where the size of the retirement income depends on what was saved and how it was invested. The risk of running short has moved from the employer to the individual.

Second, retirements can be long. Someone who stops work in their early sixties may need income for thirty years or more, and planning for a shorter span is one of the most common ways a plan fails.

Third, work has become more flexible. Part-time, consulting and project work make it possible to step down gradually instead of stopping all at once. That flexibility is also a financial tool, as the example below shows.

Five ways to retire

Most retirement plans fall into one of these patterns, or a mix of them.

Full retirement at a traditional age. Work stops completely, usually somewhere between 62 and 67, and income comes from savings, Social Security and any pension. The portfolio has to cover whatever those other sources do not, for the rest of your life.

Phased retirement. Hours fall over several years before work stops. Earnings in those years cover part of spending, so the portfolio is drawn on later and less heavily.

Semi-retirement. You leave a demanding career but keep doing paid work you enjoy, at a lower income. In the FIRE community this is sometimes called barista FIRE: the portfolio covers the gap between what you spend and what the lighter work pays.

Coast first, then retire. You save heavily early, until the portfolio is large enough that it would grow to a full retirement target on its own by a normal retirement age. After that point, called coast FIRE, you only need to earn enough to cover current spending.

Early retirement. You save a large share of income for long enough that the portfolio can support you decades before a traditional retirement age. This is FIRE in its full form, and it is the subject of Volume 3 on this shelf.

None of these is the correct one. They differ in how much you must save, how long you must work, and how much risk you carry.

What the choice does to your target

The clearest way to see the difference is to compare full retirement with semi-retirement for the same household. In the first case the portfolio must pay for all spending. In the second, part-time work covers part of it, so the portfolio only has to fill the gap.

A household that spends $60,000 a year and wants the portfolio to cover all of it needs $1,500,000. Starting from $200,000 and saving $2,000 a month, that takes about 24.8 years. If part-time work covers half of spending, the portfolio only needs to pay $30,000 a year, the target falls to $750,000, and the same saver reaches it in about 13.4 years.

The trade is plain: a smaller target in exchange for continued work. Whether that is a good trade depends on whether the work is something you would choose to do, how secure it is, and whether your health allows it. The barista FIRE calculator runs this comparison with your own numbers.

Spending in retirement is not one number

Retirement budgets are often treated as flat, but spending usually changes shape over a retirement. Travel and activity costs are often highest in the early years. Day-to-day spending often falls later. Healthcare costs tend to rise with age, and the cost of long-term care can be large for those who need it. Volume 2 on this shelf covers Medicare and long-term care planning in detail.

Government survey data supports the broad pattern. The Bureau of Labor Statistics' Consumer Expenditure Surveys show that, on average, households headed by older people spend less than households in their peak working years. Averages hide wide differences, though, so your own records are a better guide than any table.

Some costs disappear at retirement: commuting, work clothes, payroll taxes, and the saving you were doing for retirement itself. Others appear: health insurance before Medicare begins at 65, more leisure spending, and sometimes support for family. Planners often start from a rule of thumb of 70 to 80 percent of pre-retirement income, but a budget built from your actual spending is far more reliable than a percentage of income. Chapter 3 shows how to turn that budget into a target.

The costs that do not show up in the numbers

People who have retired often say the hardest adjustments were not financial. Three are worth planning for alongside the money.

Identity. For many people, work supplies a role, a reputation and a reason to get up. Leaving it can feel like a loss even when it was wanted. Knowing what will take its place, whether that is a project, a community role, caregiving or learning, makes the change easier.

Structure and social contact. Work organizes time and supplies daily contact with other people. Without a replacement, days can feel empty. Volunteering, part-time work, clubs and regular commitments all help.

Shared plans. In a couple, two people may picture very different retirements: one wants to travel, the other wants to stay close to family. Agreeing on the vision early saves money as well as conflict, because the vision sets the budget.

Writing down what a good ordinary week looks like in retirement, where you live, what you do, who you see, is one of the most useful planning exercises there is. It turns an abstract goal into a budget you can price.