Tag Archives: passive income

Rethinking Retirement

21 Mar

Retirement to most people today means the end of working a job and living off of portfolio income (401k), a pension and social security. This concept, which is fairly new, is already obsolete. To understand this let’s examine its origins and progression.

Traditionally, in early America (from its founding until the mid 1880’s), when a family member was too old or physically unable to work, the other members of the extended family took care of him. However, four important demographic changes happened in America beginning in the mid-1880s that rendered the traditional systems of economic security obsolete: The Industrial Revolution, rapid urbanization, the disappearance of the extended family and a marked increase in life expectancy.

The Industrial Revolution transformed the majority of working people from self-employed agricultural workers into wage earners working for large industrial corporations. This meant mass migrations to urban centers where the work was to be found. In the crowded urban environments, family sizes were forced to get smaller. The cost of housing, clothing and feeding an extended family (grandparents, parents and children) was undoable in the new economy. This fostered the creation of the “nuclear family” (parents and children only) which most of us are accustomed to seeing today.

The final significant change happened in the early decades of the 20th century. Better health care, sanitation, and the development of public health programs, led Americans to live significantly longer. Between 1900 and 1930, average life spans increased by 10 years. This was the most rapid increase in life spans in recorded human history.

The net result of these historical demographic and social changes was that the traditional strategies for the providing for those no longer able to work quickly dissolved.

The decade of the 1930s found America facing the worst economic crisis in its modern history. Millions of people were unemployed, and the majority of the elderly lived in dependency. The traditional sources of economic security: assets, labor, family, and charity had all failed. Radical calls for action were being made by the public. President Franklin Roosevelt responded by signing into law The Social Security Act on August 14, 1935 to pay retired workers age 65 or older a continuing income after retirement.

Fast forward to today… Four major demographic changes have made that system obsolete as we emerge from the second worst economic crisis in US history. Change from the Industrial Age to the new Innovation Age, globalization, further dissolving of the nuclear family, and another marked increase in life expectancy.

The loss of manufacturing jobs, the increase of exportation of jobs, and importation of goods from the global economy has changed the face of the job market forever. Companies no longer promise work until retirement and a pension plan for your twilight years. Nuclear families have gotten even smaller and young people are more detached from their parents as this society celebrates individuality and independence over cooperative living. Finally, as medical technology improves, people are now outliving the age for which social security, their pensions and portfolios were designed to last.

The solution… the whole concept of retirement should be reevaluated. You only retire from a job (earned income) – especially a job you don’t enjoy. There is no retirement from passive income sources. With passive income sources that pay dividends (real estate, securities and business ownership), you work hard to acquire the asset and then it continues to pay you continuously until the market changes and it can no longer provide positive cash flow. You don’t retire; you simply shift your resources into a new cash producing asset.