It’s hard to care about something when you’re not sure what it is. My dentist keeps telling me that flossing prevents gum disease, and I ignored him for years. Then I searched for images of gum disease on Google. Now I floss twice a day.
It can be just as hard to care about retirement when you’re not sure what it is. Most people might define it as when you stop working, but the idea of retirement means so much more.
Here is an imaginary conversation with a friend to help you understand the nuances of what retirement means and how you might be able to explain it to someone else.
The Paycheck Keeps Showing Up
LAUREN: Dan, you’re good with this money stuff. What does retirement actually mean?
ME: Well, that’s kinda hard to answer. It depends on the person. Why are you asking?
LAUREN: I keep seeing these commercials for financial advisors that are supposed to help me with retirement. I asked my parents about it, but they’ve got Social Security and a military pension. I don’t have a pension at work, and I doubt Social Security will be worth much by the time I retire.
ME: Do you have a 401(k) at work?
LAUREN : Yeah, I signed up when I started my new job. I get some matching and money goes in every month, but I don’t pay attention. I know I should, but I have no clue where to start or who to talk with. Honestly, I just don’t care.
ME: Okay, that helps out. You like eating and drinking, right?
LAUREN: Well, Sherlock, the empty baskets and glasses on the table should serve as some decent clues.
ME: And did you spend any time or energy growing your own food at home?
LAUREN: No, I don’t have any time to garden. Plus, I got a degree in marketing so I don’t have to be a farmer.
ME: Sure. Rather than spending time and energy growing your own food, you have a job. Which means you trade most of your time and energy each week for a paycheck. Not to get too personal, but is the money good?
LAUREN: I do fine. It’s nothing extravagant, but I don’t worry about feeding my family.
ME: That’s good to hear. So you trade your time and energy for money. Then you trade that money for food to feed yourself and your family.
LAUREN: Yeah, I get that. But what does it have to do with retirement?
ME: Well, I’m guessing when you decide to stop working someday, you still want to eat, drink, and travel.
LAUREN: Hopefully, as long as I have the money for it.
ME: You’re sitting here with me, eating and drinking. You haven’t traveled far, but would you call this retirement?
LAUREN: After a day like today?! Not even close. I work most every day, including weekends.
ME: So the difference between right now and retirement is not having a job?
LAUREN: Well, I hope so.
ME: Okay, so here’s where I need to change your thinking. Everyone understands you need money to eat, even during retirement. The key difference is in retirement, you have the choice to spend your time and energy on whatever you want and still have money to live.
LAUREN: Sounds about right.
ME: What if you change the definition of retirement from a specific day you stop working to a day you have the choice to stop working?
LAUREN: Uh…I guess that sounds good. I don’t see the difference.
ME: Take Bill Gates and Warren Buffett for example. They are two of the richest men in the world. Combined, they have more money than they know what to do with. Bill Gates is trying to rid the world of disease and hunger, and Warren Buffett keeps showing up to work to buy businesses and grow his company.
LAUREN: And I wish I were them.
ME: Hold on. I think you’re missing the point. Every day, both guys still get out of bed, shower, and get dressed. They still do stuff even though they have way more money than they need. Gates and Buffett choose to keep working.
LAUREN: But how does that relate to me?
ME: As you save more towards retirement, there will be a point where you will have enough money to choose to go to work. You have the freedom to choose where and how to spend all your time and energy.
LAUREN: Oh, now I get it. Is that why I keep seeing articles and books about financial freedom?
ME: Right. Saving and investing for retirement helps you buy the freedom of choice. To do what you want with your time and energy. Choose to work 40 hours a week? Paycheck shows up. Want to travel around Europe for a month? Paycheck still shows up. Going to visit every MLB stadium in one season? Paycheck still shows up…
LAUREN: Okay, I’m going to throw a wrench into your plans. My parents have Social Security and pension checks coming in the mail, right?
ME: So I’m told.
LAUREN: And I’m saving in a 401(k). Why not start my own business or get into real estate investing?
ME: That’s a good question. In order for you to have financial freedom–to have that choice of how to spend your time and energy–you still need a paycheck coming in the mail every month.
LAUREN: Okay, so right now, I go to work and I get a paycheck. If I choose to stop showing up to work, that paycheck stops showing up. So I’m not financially free?
ME: Correct. Instead of working a job, your paycheck could come from selling investments in your 401(k) or IRA. It could come from a business that you start and have other people run. It could come from renting out houses, condos, or other investment properties.
LAUREN: And my parents get their check from Social Security and the military?
ME: Yup. There are also teachers, police officers, and firefighters that get similar pensions. The check comes automatically after they stopped working.
LAUREN: Okay, I like the sounds of that. When will I know I have enough saved up to make the switch? How will I know I’m financially free?
ME: Unfortunately, it gets a bit more complicated and needs some math. Let’s leave it there for now. I still need to ask you what in the world you do in marketing.
LAUREN: Sure. I’ll buy the next round and tell you about it.