The “traditional” approach to retirement is relatively straightforward: save and invest as much as you can, for as long as you can, starting as early as you can, to accumulate enough retirement savings that you no longer need to work, and instead can enjoy a life of leisure. For those who struggle to save, Social Security provides some retirement safety net, and for everyone else, the more and faster you save, the earlier you can retire and the more leisure time there may be.
The problem, however, is that a growing base of retirement research finds that fewer and fewer people actually want a retirement of all leisure and no work. Thanks in large part to our “hedonic adaptation” abilities – where we quickly adjust to our new circumstances – retirement is actually boring for many! Barely half of today’s retirees state that they never intend to work again, and barely 1/3rd of pre-retirees have an intention to make retirement a period of not working indefinitely. Instead, whether it’s part-time work, entrepreneurialism, an encore career, or some other path, “retirement” is less and less about not working at all, and more and more about finding a different kind of engagement (which may still involve a non-trivial amount of employment income).
The significance of these changes is that if an intense period of work followed by an extended period of leisure turns out not to be the ideal approach retirement – and that instead, better alternatives might be an extended period of “semi-retirement” (with part-time work) or a series of “temporary retirements” (interspersed with sabbaticals and then new careers) – that the traditional retirement savings approach might not make sense either.
Because the reality is that if retirement is really more about doing different and perhaps more fulfilling (but not necessarily zero-income) work, then it really might not take nearly as much to “retire” as commonly assumed. And “retirement” portfolios themselves might look very different, if their primary purpose is to be a buffer for retirement transitions and perhaps scaled back work, rather than a period of earning nothing at all. Some actually necessitate more savings, but have a smaller average balance (as it’s built up and spent), while other types of retirement would actually allow for less ongoing savings and smaller retirement account balances (supplemented by partial work in “semi-retirement” that could last for years or decades).
In turn, a future with different types of retirement could also increase demand for disability insurance (as a greater reliance on the ability to work and earn income puts us at even greater risk if that goes away), and increase the need for emergency savings (for more extended mid-career transitions). Though from the financial advisor’s perspective, perhaps the greatest potential disruption of different types of retirement is that for most of the alternatives to the “traditional” approach, retirees will never accumulate as large of a retirement portfolio in the first place, which could substantially impair the feasibility of the AUM-based retirement planning approach!