In the world of work, there are three types of people. There are those that love their job, those who hate their job and those who merely see their job as a means to an end. Regardless which of the three you are, chances are you’ve already come to accept that you’ll be working for the majority of your life in order to pay your bills and put food on the table. However, while you may presently see working as a means of keeping yourself financially afloat, it may not be one forever which is an assumption most people mistakenly make. As such, let’s dive into the critical money mistake 99% of people make and how you can be part of the 1% that avoid it!
What’s funny about the world of work is how differently it is experienced by those who operate within it. For instance, there are those who constantly complain about the abysmal minimum wage while there are those whose bonus checks could buy a small private island. Moreover, there are some people who can’t sleep at night because of how excited they are to start work the next day while others can’t sleep as they dread the thought of enduring another day of work. I think we can all agree that work experiences vary person by person, there is one commonality that rings true amongst us all and that is our assumption that we will have access to monetizable work in perpetuity. However, will this be the case? I’m not so sure.
What People Get Wrong
One of the common misconceptions that most humans possess is that current conditions will remain true in the future. Unfortunately, this is rarely the case.
For example, think back to when you were young. Chances are the thought of growing old never crossed your mind. You were too busy enjoying your youth and the joy of your blissful ignorance to worry about bills, sagging skin and graying hair. However, low and behold, over time, you started to see your body change and the process of aging became much more of a reality than you ever imagined it would.
Moreover, think about this in the context of investing. How many times have you found yourself holding a stock you thought would never stop climbing only to have it plummet in price due to an unforeseen event.
Finally, how many times have you been in a wonderful new relationship that you thought would be rosy forever only for the honeymoon phase to end and the relationship to sour. Unfortunately, nothing lasts forever and this is also the case with work, which for most people is their primary source of financial viability.
Now, you may be thinking to yourself, “well I will eventually retire so I won’t have to work forever anyways” and for your sake I hope this is true. However, studies show that 1 in 4 Americans have no retirement savings at all and many more have an insufficient amount to be able to get by financially during their “supposed to be” golden years. As such, for many people, retiring may end up being more of a dream than a reality and because of this, their ability to maintain employment in the long-term becomes much more of a concern.
If you’re feeling a bit hot under the collar right now because you know that you’ve been slacking on your retirement savings then I have to set the record straight right now. For most people, the ability to continuously meet their financial obligations through working alone will not be feasible. Like I already said, people think that current conditions will dictate future states but this is rarely the case.
Future Income Isn’t Guaranteed
At this point, you’re probably wondering what’s stopping you from working well into your later years, especially if it’s going to be the only way you can survive financially, so let me share with you the main reasons your working career can only last so long.
The first reason you can’t rely on an extensive career comes down to obsolescence. Let’s say that right now I offered to give you a Motorola Razr. While it was the hottest phone at the time it came out, nowadays there would be no chance you’d even think about using it over your brand new, state of the art IPhone. Well, unfortunately, as you age, you become more like the Razr and less like the IPhone and as a result, most employers are going to pass on the opportunity to remain or employ you.
Now, some people may argue that if you keep your skills up that the longevity of your career won’t hurt you and they’re partly right. I’ve seen some amazing employees who are up there in age who still excel because they never lost their thirst for learning. However, in most situations, after a certain point, people don’t want to learn any more than they already know and as such they start to lose the competitive edge they once had. I remember one older employee I used to work with that had become so complacent that he didn’t even know how to copy and paste in a word document and as you can imagine, if you don’t even possess remedial skills that are common in today’s workplace, then your career is likely to be shorter than you’d expect it to be.
Next, let’s talk about employer investment. You may have never looked at employment this way before but when someone hires you on, they are taking on the responsibility of training and nurturing your growth. Under the right conditions, this presents a great opportunity for young workers to accelerate the success they achieve in their career, however for older employees, the utility of said training is lesser and employers know this too. I mean think about it, why would an employer spend the same resources to train someone who will retire in 5 years when they could instead train someone younger who may be with the company for decades. Without this ongoing training, as we just talked about, your skills will degrade over time and heaven forbid you lose your job later in life, getting a new one will be extremely tough as you become an investment that will yield employers little future return.
Moving on, one consideration that few people think about during the course of their career is the potential that one day they may not be able to work. Maybe, you work in a physically demanding job and down the road your body simply won’t be able to keep up. Alternatively, you may suffer a health event that leaves you with a much reduced capacity to work. Now, obviously we hope this never happens but as you know, anything can happen in life and if your ability to work becomes impaired then your financial viability may be at risk.
Finally, let’s talk about the ultimate reason that you won’t be working forever which is that you will over time lose your desire to work. There is absolutely nothing worse than the feeling that every day for the next 40 years, you will have to suffer through 8 or more hours a day at a job you dislike all in the hopes of maybe one day retiring. Well, if you feel this dread now, can you imagine how much deeper this pain will resonate 30 or 40 years down the road?
It’s funny because I can remember as a child my parents always enjoying what they did for work. As such, it truly inspired me to give it my all in school so that I could find a job I liked and enjoy the same fulfilment that my parents did. However, as I got older, I noticed that my parents’ sentiment towards work began to change. Praises about work became complaints and eventually their once love for their jobs were extinguished by a lifetime of work.
All of the examples I just gave basically sum up to the point which is that you probably won’t be working for as long as you think. As such, you need to have a plan in place because while the work may end, the bills never will. Let’s now get into how you can build a work escape plan and avoid this money mistake that just about everyone unfortunately makes.
The Escape Plan
The goal of any good escape plan is to build up a means of covering your expenses long after your working years are behind you. Typically, this is done in one of two ways. The first is to amass enough of a nest egg that you can withdraw from in your later years and the other is to create an income system that pays you without having to work.
I’m going to go over both methods right now and present the challenges and means of making either approach work!
First, let’s talk about taking the standard retirement route of amassing your financial freedom number that can support you for the rest of your years. This is the path that the majority of people are familiar with and while it’s a path many claim to be on, less people than you would think actually make it work.
You see, there are numerous problems people face when trying to save up enough money to retire. Maybe they started too late and have a little short retirement saving runway. For others, their poor spending habits don’t even afford them the ability to save towards retirement in the first place. Alternatively, many people have not even the slightest of clues as to how much they actually need to retire. For instance, most people think that if they just regularly invest for the next few decades to the point where they have $1 million to their name they will be set. However, simple errors like forgetting to factor inflation into the mix is just the tip of the iceberg of their retirement blunders.
The reality is that to make this method work, you must understand the three components of a good retirement plan. Any good retirement plan includes a target retirement amount, an investment amount and a budget.
Your target retirement amount is going to be the total amount you’ll need to have invested. This is the pool of money that you will withdraw from throughout your golden years so it’s essential that you properly calculate this figure. Generally, the rule is that this number is 25 times your annual living costs, however I suggest 30 times just to be on the safe side.
The second element in your retirement plan is going to be your required monthly contribution. You see, you won’t amass your golden retirement goose egg without putting in the work and as such you will need to determine how much you must contribute to reach your retirement amount.
Once you have your goal retirement amount and know how much you need to contribute to amass your golden goose egg, the final step is to ensure you can actually afford to make these regular contributions. How do you do this? You budget.
With these three elements in place, as long as you meet your regular contribution and no major unexpected financial events come your way then this is certainly a viable way of planning and pulling off your escape.
The other approach you can take, which I recommend you use in conjunction with the first, is to start building up a roster of cash-producing assets.
Now, the challenge with this approach is two-fold. First, many people lack any understanding of how to generate cash flow outside of their jobs so the notion of using money to access more cash is foreign to them. Simply put, you can’t act on information you don’t have. Second, generating cash flow through the assets you possess can be capital intensive. I say “can be” because there are means to build assets that will cash flow you without a lot of money being required such as online businesses. That being said, more traditional cash producing assets like dividend stocks and real estate will take a lot of money to get off the ground.
However, the journey of a thousand miles starts with just a single step and as such there is no reason you can’t start to build up your position in these cash-producing assets over time. Your goal should be to acquire these assets and get to the point where they will produce enough net cash to cover all your routine expenses.
As I alluded to earlier, each approach can work but combining the two is ideal. Regardless of the path you choose, the main thing is that you acknowledge that you will not be working forever and will have to rely on the systems you set up now to support you in your later years. Fortunately, if you do the work, they will!