Should You “Ditch Your Retirement Plan?”

July 19, 2012

I’ve written before about the Early Retirement Extreme concept, in which people save as much as 75% of their after-tax income in order to become financially independent in as little as 5 years. I recently came across a post in Forbes called Why You Need to Ditch Your Retirement Plan that was surprisingly written by another financial planner who argues essentially the opposite: that people should stop worrying about saving for retirement and enjoy life now. That could mean taking a lower paying job that you like more or working fewer hours, even if it means saving less and retiring later. He points out that working longer wouldn’t be so bad if you love what you’re doing.

I see several problems with this though. First, as appealing as the idea of “doing what you love” is, it’s just not realistic or even desirable for everyone. At a basic level, there are always going to be jobs that are unpleasant to almost everyone and someone has to do them. The good news is that those who are willing are often compensated with either higher pay or having to do less schooling.

We all have to decide for ourselves how we want to make that trade-off. For example, I could have tried to get a job at a big law firm and would probably be making more money than I do now but my summer stint at a securities litigation firm taught me that it just wasn’t my cup of tea. On the other hand, I could take a less stressful job (yes, this job can be stressful at times but some stress is good) and work fewer hours but earn a lower income.

But there is a downside to earning and saving less that it’s important to be aware of: it will take you longer to build the financial security that comes from having enough savings at minimum to pay your necessary expenses for a few months and ideally to live off of indefinitely. That provides its own form of stress relief. After all, you can have the best job in the world but practically no job is completely secure these days. Even if you’re able to keep your job or find a new one quickly, there will inevitably come a point when you’re simply physically unable to work and that day may come sooner than you think.

On a lighter note, building wealth and getting closer to financial independence gives you something to look forward to. Studies have shown that the feeling of making progress and moving towards something often gives you more happiness than actually attaining it. That’s why we always look for the next mountain to climb after we’ve reached a peak. I guess it really is about the journey rather than the destination.

Along those same lines, I would also argue that the journey towards financial independence isn’t as painful as the author claims. The main challenge is finding a career and a job that you can at least reasonably tolerate and that allows you to pay the bills. After that, one of our guest bloggers, Mr. Extreme Saver,  does a great job pointing out how spending less can mean living more.

This is all really more a question of degree rather than kind. For most people, it doesn’t make sense to either suffer and scrimp to save for retirement or to live only for today. As with many financial questions, it’s all about finding the right balance for you.