Why Traditional Retirement May Not Be For You
Traditional Retirement is Outdated
We always hear from our parents and friends that we should start saving for retirement early. A regret that many older people say is that they wish they had started investing or saving earlier so they could have more of a nest egg for their retirement. We all want to have a large sum of money to live off of when we’re older so we don’t have to delay our retirement past 65 years old. However, not everybody wants to suffer day in and day out at their job for 40+ years.
The Traditional Financial Independence, Retire Early (FIRE) Movement isn’t Optimal
For those who are pursuing financial independence to retire early, another problem exists. They still have to build up a sizable nest egg to make up for the later earning years they’re missing from retiring early. Retiring at 40 means 25 years of missed income. This just means you either have to work harder and smarter while keeping more of your income to save for retirement. Most do this by living below their means and investing everything into their tax-advantaged accounts and using methods like the backdoor Roth IRA method. There are some sophisticated ways to optimize the withdrawal of these accounts before the age of 59.5 years old like the 5 year rule and using a Roth IRA, but this still restricts your access to this income and can get complicated. It also limits how much you can withdraw every year if you’re trying to minimize your tax liability if it’s not a Roth account.
There are other reasons why I don’t prefer the traditional FIRE method, but people may disagree because it’s a matter of preference. This doesn’t mean I don’t take advantage of these tax-advantaged accounts. I have a Roth IRA and I contribute to match my employer’s match in my 401(k). I just don’t stack all my money into these accounts and be at the mercy of the stock market and the government.
Retirement is Overrated
While I do want to quit my corporate job as a consultant to “retire”, I don’t actually want to retire. People aim to retire so they can travel and to be free of a job, but at that age, traveling takes a toll on our bodies and you’re not physically capable of doing things you could’ve done at a younger age. Many retirees retire and just sit around at home and live their life the same way. I don’t want to wait to travel when my body is old and frail. I rather do it when I want, which is when I’m young.
I realized that I didn’t want a normal retired life when I was in Mexico at an all-inclusive resort. After the second day, I was really tired of just staying at the resort, even though it was a very luxurious resort with amazing restaurants. It sounds like paradise, but it became boring really fast. That’s when I realized that I didn’t want to just lay around all day in paradise or in retirement and I didn’t want to wait until I accumulated millions to decide to quit because even with my income, it would take longer than I wanted.
Traditional Retirement Method Isn’t Efficient And Won’t Lead to Generational Wealth
In 2022 so far, the market has already tumbled almost 20%. A portfolio of $3M would have dropped to $2.4M. Relying on your nest egg by liquidating your assets, especially in a downturn, lessens your potential for regaining those losses.
Let’s say a portfolio consists of 10,000 shares of an ETF at $100 a share. That’s a $1M portfolio. If the market is down 20% making the ETF at $80 a share, the portfolio is valued at $800K now. If you needed $5K a month to maintain your lifestyle, you only needed 50 shares with the ETF priced at $100. During the downturn, you’ll need to liquidate 62-63 shares. This will lessen your upside with lesser shares if the market turns around and you don’t have any additional income that’ll ever be invested into that portfolio.
One recession can last long enough to never come back to the portfolio’s all-time-high if enough shares are liquidated.
Why I Focus on Cash Flowing Retirement
My main goal isn’t to sit back and retire. I want to retire from my corporate job, but I want to do something I’m passionate about, which could be a different W-2 job or being a full-time investor. For me to comfortably quit my corporate job, I would have to produce enough income outside of it. I plan to do this mainly through real estate investments, a small business, and consulting sessions with clients on how to get into real estate investing.
My target goal is a consistent $20K a month in cash flow. I believe making $20K cash flow a month is a faster goal than accumulating $3M. Rather than throwing as much money into the stock market by contributing the maximum amount to tax-advantaged accounts and a taxable brokerage until it reaches $3M, I rather put in a bit more work in other asset classes to produce $20K/month in cash flow.
The ability to repeatedly make significant cash flow increases the ability to scale rather than hoping that the stock market doesn’t nosedive at an inconvenient period during my retirement but also gives me the ability to enjoy the earlier years of my life in the way I want.
Is a Cash Flowing Retirement For You?
Here are some reasons why it may not be the best fit for your retirement:
Career-driven: There are many people who are seriously career-driven. They want to make it into a C-suite role, become a managing partner, or become an entrepreneur of a successful startup. Those people devote the majority of their waking hours to their career, going above and beyond what is expected of them. These people are the ones who are really good at what they do and love what they do. While others struggle to get out of bed to go to work, these people wake up for another day to be successful in their career. There isn’t much free time to work on other ventures and from many people I’ve spoken with, they think it’s more profitable to reach the upper levels in the corporate ladder. In the consulting industry, a partner can make $1M annual compensation within their first 3 years as partner. Partners stay on for at least a decade with usually increasing compensation each year.
Passive investor: Some people don’t want to use their time and energy on investments that are outside of investing in a market index. They are risk averse or don’t feel comfortable with starting something new. It’s much easier to automate your investments and wait rather than dealing with tenants or customers and investing significant capital into a different asset. There’s a lot more factors to deal with in a small business and in real estate than the stock market and people don’t want to deal with the ambiguity or the fear of being unsuccessful.
A cash flowing retirement isn’t for everyone. It depends on what your goals are and how active you want to be in creating different streams of income.
