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By Jonathan Chevreau
The Financial Independence Hub
I’ve been doing lots of reading lately about a new stage of life between MidLife and traditional Retirement. You can read the details in Marc Freedman’s The Big Shift, which confirmed what I’ve been slowly piecing together since my career change this time last year.
The Financial Independence Hub organizes blogs in six categories that are quite similar to the Ages & Stages that MoneySense has long espoused, both in its articles and in its Special Interest Publication, Guide to Retiring Wealthy. You can find these six blog categories in the horizontal grey band that appears below the horizontal blue band at the top of the Hub’s home page.
Ages & Stages: The Life Cycle approach to Investing
It’s a valuable way to look at what I call “the life cycle approach to investing,” which is roughly how I structured my financial novel, Findependence Day. (That was written in 2008 so I hadn’t filched the concepts from MoneySense, although it certainly consolidated my subsequent thinking about the human financial life cycle.)
When I look at the six stages, I realize that I’m only half way through my own life journey. Yes, I turned 62 in April, which a generation ago might have been viewed as “practically dead,” as my daughter may have quipped on occasion.
The first stage is what I call Debt & Frugality: you graduate from college perhaps with some student loans and credit-card debt. To pay it off, you need to practice what I call “guerrilla frugality.” Then you fall in love, marry and consider children, which brings you to Stage 2: Family Formation & Housing. As I’ve long said, “marriage, mortgage and kids” all go together.
Soon enough, the honeymoon is over and you settle down for the long haul of raising a family and establishing a base for Financial Independence. This is Stage 3, a very long one we call Building Wealth (aka Wealth Accumulation). This is the focus of the entire financial services industry and could easily last 30 years: from 30 to 60. When I say I achieved financial independence, I mean that my focus is no longer Wealth Accumulation per se, although I fully intend to keep active and the more activities that allow me to attach an invoice, the better!
At mid-life we’re only half way through the cycle
Right now, I’ve embarked on Stage 4 of the 6, which I call Encore Acts. Again, this has evolved. Originally, on the Hub we called this Business Ownership, reflecting the fact that many Baby Boomers leaving the full-time employed workforce were starting their own Businesses, often late in their 50s or even, like me, in their early 60s. My term for these is Boomerpreneurs. However, as I continued my research, I realized not everyone wants to start companies and employ people. An Encore career or Encore Act may include business ownership but it may also entail just being a free agent or freelance person unencumbered by the need to have a business location and/or employ people.
It’s this stage that Marc Freedman suggests is a new one and one that may prove to be a long one: perhaps not as long as the three or four decades of Wealth Accumulation but it could easily run two decades.
Decumulation & Downsizing
At some point, though, you may decide you’re ready for what we used to call traditional Retirement. The occasion could be triggered by a health problem or some disability (for which hopefully you have Disability Insurance). If still employed, an employer may decide it no longer needs your services. If you own your own business, the loss of a major client or two could prompt you to close the operation, sell it or other things.
In any case, you’ve now fully converted your Human Capital into Financial Capital and it’s time to start drawing down pensions and withdrawing money from your investments. This Stage 5 we call on the Hub Decumulation & Downsizing. Decumulation is of course the opposite of (Wealth) Accumulation. Downsizing we all know: once the kids have left the nest and you no longer need to live close to an employer, you may choose to sell the big city home and either find a smaller one further away, or move to a condo or rent an apartment. You start getting rid of lots of your “stuff” and start to simplify your life. (This week in the Globe & Mail, Rob Carrick described the strategy of one downsizing family.)
The last stage
Finally comes Stage 6, which we call Longevity & Aging. It’s quite possible that many boomers will sail through their 90s and even pass 100. There will be issues like dementia and long-term care. Your working days are truly over, although if you’re a creative person, you may continue to dabble at things like painting or writing. For the most part, however, you’ll be getting ready to meet your maker, a spiritual journey that is beyond the scope of this blog or the Hub, but which could indeed be the most exciting stage of all.
I think a case can be made for combining stages 4 and 5. For me working at a job you love for as long as you can is the way to go. If you can’t find one, create one. Decumulation and downsizing in stage 4 will allow you to travel light through your remaining life like when we were kids after graduating from school.
Life was fun back then and we can make it fun now. Maybe I should list the house?
You could argue that too but the distinction I’m making here is that at some point — health or an employer’s choice, for example — you may no longer have the choice. A reader comment earlier this week was on those lines: not everyone can keep spinning money out of an encore career. I’m all for continuing to use human capital for as long as possible but at some point, one may have to rely on accumulated financial capital. Hence, Decumulation & Downsizing
I’m inclined to agree with Michael – a merging of 4 & 5 wouldn’t be a bad idea. I’m hoping that my work at age 60 will be more about something I have a “passion” for, rather than something I “desperately need the income” for. If that means a paying hobby and a bit of decumulation – then that would be okay.