The History of Retirement
In 1881, the German Chancellor, Otto Von Bismarck, in a maneuver against Marxists who were burgeoning in power and popularity, announced that anyone over 70 years old would be forced to retire and that he would pay a pension to them.
Participation in the retirement system was mandatory and contributions were taken from the employee, the employer and the government.
As you can see, the idea of retirement goes back to the 18th century. There had been a long practice beginning in the Roman empire to the modern nation states of providing pension to those who had served in the military.
In Kenya, the National Social Security Fund (NSSF) was established in 1965 by an Act of Parliament (CAP 258 of the laws of Kenya) in order to administer a provident fund scheme for all workers.
The Modern Day Retirement
With evolution and the advancement of technology, human life keeps on improving. Nowadays, the thinking behind retirement has also changed. More so since Tim Ferris Best Selling book, The Four Hour Work Week: Escape 9-5, Live Anywhere, and Join the New Rich was published in 2007.
The idea of retirement has now changed from working until you are sixty and then never working again until you die.
Modern Retirement has shifted from having to hit a certain age and never working again, to hitting a certain financial figure and having the freedom to choose what to do with your life.
Instead of waiting for one mega retirement when you are 60, people now take mini retirements throughout their careers. Mini retirements were also invented to replace the short two week vacations or breaks from work.
The idea of postponing living the life you want and taking long breaks from work until you hit a certain age is ridiculous for a couple of reasons:
Your health declines with age. Most people above 60 years are struggling with heart conditions and other health problems that come with old age. Hence it makes more sense to travel the world when you are young and healthy than when you are old and weary.
As Bill Perkins writes, “The ability to extract enjoyment from your wealth declines with age. When you are young, you have fewer responsibilities and better health to enjoy what life has to offer. One thing that prevents people from enjoying life experiences is their health conditions. When you are old, you can barely travel for long hours.”
2. Youth & Energy Levels
When you are young, you have fewer responsibilities. You also have the energy to do crazy and thrilling activities like surfing on the beach, traveling for long hours, hiking Mt Kenya etc.
But as you grow old, responsibilities increase and your body also becomes weary. It becomes hard for you to enjoy traveling for long hours or even doing some crazy physical activities.
As Bill Perkins writes in his book,
“We forget that we die many deaths in our lives. With time, the teenager in you dies, the college student dies, the single version dies. When these mini-deaths happen, there is no going back. You can delay gratification, but not beyond a certain point.
We end up becoming the bookworm teenager who missed out on all fun in high school by making too many sacrifices for a bright future. Then we become the middle-aged dad who skipped irreplaceable experiences with his own kids hustling for job promotions.”
Preparing for Old Age
Even if we talk about taking mini retirements when we are young, most of us will definitely make it to that age when we can no longer work competitively. By this I mean, we cannot be employed nor can we run very demanding businesses.
This means we also have to prepare a retirement kitty that we can rely on during that time.
Planning for retirement is one of the most complex topics to decipher in personal finance. To young people who have just joined the workforce, retirement seems too far to even think about. On the other hand, those leaving the workforce wake up in retirement with little or no savings in their retirement accounts.
Planning for retirement is hard because it requires you to answer difficult questions like, how long do you think you will live? What lifestyle do you want to lead in retirement?
How Much Money Do You Need To Retire?
To determine this, you need two things. You need to approximate your average annual expenses in retirement. Secondly, you need to approximate the average return rate that your investments can fetch.
The Crossover Point
Here, you reach financial independence when your monthly income from your investments exceeds your monthly expenses. This point is called the Crossover point. To calculate this;
Crossover point = Annual spending / Expected return rate on your investments.
To put this into perspective, if your annual spending is 1M (83K per month) and you expect a return rate of at least 4%, then you need around 25M to retire.
Retirement is Not All About Money
Just like how money alone cannot bring you all the happiness and satisfaction in life, being financially prepared for your retirement may not be the only thing you should worry about when preparing for retirement.
As Nick Maggiulli writes,
“The most important decision you can make in your retirement is how you are going to spend your time, not your money.
Many people end up retired and lose their sense of purpose despite having sufficient financial resources.
While money is important for your retirement, once you have had some base level of financial security, your day- to-day happiness in retirement will be more heavily impacted by your relationships, your hobbies, and your sense of purpose than your financial assets.”