early retirement http://www.wisebread.com/taxonomy/term/8492/all en-US Why Taking Social Security Could Cost You Thousands http://www.wisebread.com/why-taking-social-security-could-cost-you-thousands <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-taking-social-security-could-cost-you-thousands" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/social-security-finance-Dollarphotoclub_37675746.jpg" alt="social security" title="social security" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>I recently attended a weekend barbecue with some neighbors, and at one point the conversation shifted from the usual topics &mdash; family updates, local news, sports, and politics &mdash; to retirement. Strangely enough, it was raised by a friend's daughter, Barbara, who is in her early 30s. I was a little surprised (but encouraged) that she was already doing some retirement planning at that age.</p> <p>Barbara is a bright, hard-working human resources manager with a promising future, but after 10 years in a challenging work environment, she said she was beginning to feel a little fatigued. That's certainly understandable. She and another 80 million millennials have had the misfortune of joining a workforce that's experiencing some major disruptions. For most workers, America's recent economic restructuring has led to less job security, lower wages, fewer benefits, and longer hours. That's not exactly a recipe for long-term optimism if you're a thirty-something.</p> <p>With this in mind, it didn't take long for me to realize that Barbara raised the issue of retirement not because she was interested in long term financial planning, but instead out of sheer frustration. Barbara's question was, &quot;What is the earliest age I can begin receiving my Social Security retirement benefit?&quot; Age 62 was the answer. &quot;Then that's when I'll take it,&quot; she said.</p> <p><a href="http://www.socialsecurity.gov/planners/benefitcalculators.htm"><img width="605" height="340" src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5123/Whelan%20Blog%20Table%20-%20Social%20Security%20Benefit%20Reductions.jpg" alt="" /></a></p> <p>What Barbara didn't realize is that by doing so, she'd forfeit 30% of her full benefit amount. If her full amount was, say, $2,000 per month, then she would be giving up $600. So I said to her, &quot;What if you needed $2,000 a month from Social Security just to break even financially? And what if, by taking your Social Security benefit at age 62 instead of age 67, your benefit amount is reduced by $600 a month, to $1,400?&quot; Barbara's reply: &quot;I'd still take the lower amount.&quot;</p> <p>Of course I couldn't just let the issue end there, so I asked a follow-up question: &quot;But that would put you $7,200 in the hole each year. By your mid 70s your debt would add up to $100,000. How would you pay for it?&quot; &quot;I don't care,&quot; she said. &quot;I just want to stop working the moment I first qualify for a monthly retirement check.&quot;</p> <p>At that point I sensed I was stepping on a nerve, so I let it go. But, I'm glad she raised the topic and I give her credit for starting the conversation. Now that the issue has been framed with real numbers and dates, she is in a better position to make a sound decision when the time comes.</p> <p>For some, the loss of $600 each month for the duration of their retirement would be difficult to absorb. For others, it would be less of an issue. And for others still, there might be health-related concerns or other extenuating circumstances that make early distribution a reasonable choice.</p> <p>The point is, before choosing to give away so much of what you earned and accumulated over many decades, be sure to consider the trade-offs. Let reason, not emotion, drive your decision.</p> <p><em>At what age are you planning on taking Social Security?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/keith-whelan">Keith Whelan</a> of <a href="http://www.wisebread.com/why-taking-social-security-could-cost-you-thousands">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/tiny-nestegg-retire-abroad">Tiny Nestegg? Retire abroad!</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-more-exciting-affordable-american-cities-to-retire-in">4 More Exciting, Affordable American Cities to Retire In</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/12-things-you-didnt-know-about-retirement">12 Things You Didn&#039;t Know About Retirement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement early retirement pension social security Fri, 23 Jan 2015 14:00:06 +0000 Keith Whelan 1282530 at http://www.wisebread.com 14 Ways to Retire Early http://www.wisebread.com/14-ways-to-retire-early <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/14-ways-to-retire-early" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/seniors-beach-3630112-small.jpg" alt="relaxing" title="relaxing" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>It seems like the economy is making it more difficult for people to retire at 65. That's true in some ways, but what if you had more control over your own retirement than you realized?</p> <p>What if there were some practical things that you could do that would enable you to retire closer to 60 instead of 70? While we can't control the economy around us, there are some practical financial things we can do to round down our retirement age. (See also: <a href="http://www.wisebread.com/retirement-planning-if-you-re-under-30?ref=seealso">Retirement Planning if You're Under 30</a>)</p> <h2>1. Know What You'll Need to Live On</h2> <p>Simply knowing what your monthly expenses will be during your retirement years can be helpful when it comes to planning when exactly you'll be able to quit working. This <a href="https://personal.vanguard.com/us/insights/retirement/tool/retirement-expense-worksheet">worksheet from Vanguard</a> covers most expenses and will give you a rough estimate of what you'll need to live on a monthly basis.</p> <p>Let's assume that currently you're 27 years old and earning around $35,000 per year. We'll also assume (generously) that between a 401(k), savings, and other assets, you already have $30,000 saved.</p> <p>According to <a href="http://money.cnn.com/calculator/retirement/retirement-need/">CNN's retirement calculator</a>, if you can save 15% of your income, you can retire at 65. That's $5250 a year or $438 a month at your starting income. (The calculator assumes that your income will grow at an annual rate of 3.8%, so your savings in actual dollar amounts should also increase each year.)</p> <p>Now, if you knock your hopeful retirement age down to 60, 15% of your income suddenly isn't enough, as it falls quite short of what you'll need. It's not until you're saving 21% of your income that you make the cut to retire at 60. That's $7350 a year or $613 a month.</p> <p>So your challenge is to increase your savings by 6%, or $175 a month.</p> <h2>2. Start Early</h2> <p>Starting to plan and save for retirement in any capacity is far easier in your mid-20s than your 40s or 50s. The earlier you start, the more time your money will have to accumulate and grow.</p> <p>In the retirement calculator above, the starting age was set to 27. Knock that number down to 24, and you can get away with saving 19% instead of 21%.</p> <h2>3. Contribute a Weekly Amount to a Long-Term, Low-Risk Investment</h2> <p>If you start early, contributing as little as $20 a week to a money market mutual fund can grow to five figures (six if you start with a five-figure initial balance) by the time you're ready to retire.</p> <p>Depending on your income and what you're saving already, $20 a week is $80 a month (plus two bonus weeks every year!), which gets us almost halfway to $175.</p> <h2>4. Save Your Salary Increases After a Certain Point</h2> <p>Our habit is to increase our income and upgrade, always hovering at the ceiling of what we can afford. If you get to a certain point where you're content with your lifestyle and living situation, stop upgrading when your salary increases, and instead, save that increased amount every year as a lump sum for your retirement accounts.</p> <p>If you've been saving 21% of $35,000 (or even 15%), it's okay to loosen up a little. But keep your eyes on the prize. (See also: <a href="http://www.wisebread.com/lifestyle-inflation-the-ultimate-financial-trap?ref=seealso">Lifestyle Inflation: The Ultimate Money Trap</a>)</p> <h2>5. Keep Your Living Expenses Low</h2> <p>Keeping your living expenses capped will allow you to put more money aside for retirement and contribute more to investment accounts or a 401(k).</p> <p>Stay practical for this one.</p> <p>Start with a <a href="http://www.wisebread.com/build-your-first-budget-in-5-easy-steps">simple budget plan</a> and then carve out unnecessary expenses. You also can work to <a href="http://www.wisebread.com/4-ways-to-win-the-war-against-this-summers-electric-bill">lower your utility bill</a>, which can save anywhere from $30 to $100 per month. (See also: <a href="http://www.wisebread.com/5-things-you-can-do-in-15-minutes-that-could-save-you-1500-this-year?ref=seealso">Save $1,500 a Year in 15 Minutes</a>)</p> <h2>6. Pay Off the Principal on Your House</h2> <p>If you can get your house paid off, you'll free up all the money that would normally go to a mortgage payment every month, which can go to retirement savings. Also, the more principal you've paid, the more you get to keep when and if you sell your house.</p> <h2>7. Take a State- or Federal-Level Government Job</h2> <p>Those who were born after 1970 and work for the state or federal government have a minimum retirement age (MRA) of 57, and often retire before 60 with a pension. These employees are entitled to <a href="http://en.wikipedia.org/wiki/Public_employee_pension_plans_in_the_United_States">public employee pension plans</a>, though they vary by state.</p> <h2>8. Max Your 401(k) Contribution</h2> <p>If you have a 401(k) and can afford to contribute more, try to contribute as much as your employer will match.</p> <p>If you're able to contribute an extra $1,500 a year total (starting when you're 25) that will give you roughly an extra $15,000 a year to live on if you want to retire at age 60.</p> <h2>9. Downsize Your Home When the Market Is Good</h2> <p>This can be a particularly good move if your house is paid off and the kids are all grown and moved out. Assuming the market is good, sell your home at a profit and move into a place that's smaller, cheaper, and better suited for just a couple people. Odds are that you'll have a sizeable amount to put away; perhaps even enough to get you through a year or two. (See also: <a href="http://www.wisebread.com/this-is-how-you-downsize-your-home-and-start-living-a-better-life?ref=seealso">How to Downsize and Live a Better Life</a>)</p> <h2>10. Move to a State With Lower Taxes</h2> <p>Some states are easier to retire in than others. <a href="https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/States-with-the-Highest-and-Lowest-Taxes/INF23232.html">Property, income, and sales tax</a> should all be taken into consideration if you plan to move. Reduced taxes mean reduced living expenses which means your retirement dollars go farther.</p> <h2>11. Exercise and Manage Your Health</h2> <p>One way that you can help to prevent increased expenses in your later years is to exercise and take care of your body. If you do, you might be able to qualify for cheaper health insurance plans and be less susceptible to increases in your monthly premiums. (See also: <a href="http://www.wisebread.com/live-long-and-prosper-with-these-15-small-healthy-habits?ref=seealso">Live Longer With These Small Healthy Habits</a>)</p> <h2>12. Start a Roth IRA</h2> <p>A Roth IRA is a retirement account that allows you to contribute after-tax money. The appeal over a traditional IRA is that withdrawals won't be taxed in retirement, and that your contributions can be withdrawn anytime without penalty (with some caveats), for emergencies.</p> <h2>13. Work the Tough Hours While You're Young</h2> <p>Working overtime and weekends, and doing what you can to bring in more cash flow is much easier in your 20s and 30s than when you're older. Work those hours now and put money away so that you can wind down as you get closer to retirement age.</p> <h2>14. Cultivate a Skill That You Can Do Part-Time in Retirement</h2> <p>Many people work part time in their retirement, if for nothing else as a means to kill time. Try to plan for a way to continue to bring home a paycheck even after you've retired. This can mean continuing in your line of work part time or perhaps going from a business owner to a consultant for another company. It also means your retirement funds won't be your sole means of support.</p> <h2>Planning Ahead</h2> <p>The most important thing you can do when it comes to securing your retirement is to do as much advanced planning as you can. While certain things can't be predicted, like exact living expenses or the cost of insurance, you don't have to wait until your 50s to start putting money away.</p> <p>Be prudent when you're still young, and you'll make an early retirement far easier.</p> <p><em>Do you have other ideas on how to retire early? Let me know in the comments below.</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/mikey-rox">Mikey Rox</a> of <a href="http://www.wisebread.com/14-ways-to-retire-early">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-simple-ways-to-boost-an-underperforming-401k">5 Simple Ways to Boost an Underperforming 401(k)</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/50-ways-to-save-money-on-clothing">50 Ways to Update Your Wardrobe for Cheap</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/put-off-saving-for-retirement">Put Off Saving for Retirement</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-one-third-of-americans-havent-saved-for-retirement">Why One-Third of Americans Haven&#039;t Saved for Retirement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/getting-by-on-a-lot-less-money-3-ways-its-easier-than-you-think">Getting by on a lot less money: 3 ways it&#039;s easier than you think</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> General Tips Retirement early retirement retirement savings saving Mon, 07 Apr 2014 08:36:22 +0000 Mikey Rox 1134347 at http://www.wisebread.com Trading Work for Never-Ending Weekends: How to Retire Early http://www.wisebread.com/trading-work-for-never-ending-weekends-how-to-retire-early <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/trading-work-for-never-ending-weekends-how-to-retire-early" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/4747349294_5cf24ecd73_z.jpg" alt="man on hammock" title="man on hammock" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>I&rsquo;m a long way from retirement, but I&rsquo;ve definitely had those days. You know the ones I mean &mdash; when you&rsquo;re tired and irritable, when it&rsquo;s cold and gray and windy, when everything feels like more of the same old thing, when you haven&rsquo;t had time to do your laundry let alone spend time with your friends, and, on top of it all, the thought of grinding out a few more decades at the office seems utterly insurmountable.</p> <p>If you hear the word &ldquo;retirement&rdquo; on a day like that, it probably sounds a lot more like &ldquo;emancipation&rdquo; (I know it does for me). After all, if you didn&rsquo;t have to work, you could spend more time with your family and your friends, catch up on your golf game, take up new hobbies, travel the world...</p> <p>Hold on a minute. If you&rsquo;re slipping away into sweet reverie, you might need a reality check. Here it goes. Retiring early is no dream &mdash; it&rsquo;s a goal, and an ambitious one at that. That isn&rsquo;t to say you can&rsquo;t or shouldn&rsquo;t go for it. But unless you strike it rich in the lottery, succeeding at retiring early will mean careful planning, hard work, and near-superhuman self discipline. Here&rsquo;s what you&rsquo;ll have to do to make it happen. (See also: <a href="http://www.wisebread.com/deciding-what-you-want-out-of-retirement">Deciding What You&nbsp;Want Out of Retirement</a>)</p> <h2>Save &mdash; a Lot</h2> <p>You probably already know that experts recommend that you save a lot for retirement. Exactly how much is a matter of debate. It&rsquo;s also highly personal, as it depends on your lifestyle, what you want to do during retirement, and (everyone&rsquo;s least-favorite calculation) how long you think you&rsquo;ll live. This is where things get tricky in terms of retiring early. In essence, working for a shorter period of time puts you at a disadvantage on both ends of the saving equation: you&rsquo;ll have fewer earning years, and more years during which you&rsquo;ll have to rely on your savings.</p> <p>So how much might you need to save? Rather than start with someone who makes six figures, let&rsquo;s look at averages. The medium income in the U.S. is $50,000. Average life expectancy is almost 78 years. If you are 35 and would like to retire at 60 with 80% of your pre-retirement income, you will need to save about $1 million &mdash; and that&rsquo;s assuming you get the estimated Social Security payment. You can check out the <a href="http://cgi.money.cnn.com/tools/retirementneed/retirementneed_plain.html">retirement calculator</a> I used to figure this out, but no matter how you fiddle with the numbers, retiring early will add up to a big one.</p> <h2>Live Cheap</h2> <p>Saving enough to retire early will mean living on less than you make, and you&rsquo;d better get used to it; your Spartan lifestyle will become even more crucial when you stop working. When you&rsquo;re working eight (or more) hours a day, a wide-open schedule can seem like a dream come true. But there&rsquo;s another financial benefit to working that you may not have thought of &mdash; being stuck at work all day leaves you with much less time to spend money.</p> <p>So what about when you&rsquo;re retired and have nothing but time? Can you keep yourself occupied and keep your spending in check? This can be a real challenge, especially when expensive hobbies and travel are part of your plans. This is why having a lot of savings and using careful planning are so important. A good financial planner can help you with this, but when you don&rsquo;t have earning power, you need a good cushion to ensure your money lasts. After all, the last thing you need is to run up against the end of your savings when you&rsquo;re too old to go back to work.</p> <h2>Stick to the Plan</h2> <p>Because retiring early is a challenge, it&rsquo;s important to have a clear plan for how you&rsquo;re going to get there. Exactly how early do want to retire? How much will you need to save to make that possible? These are questions you need to answer to ensure you&rsquo;re on the right track to making your goal a reality. A <a href="http://www.wisebread.com/9-signs-you-need-to-fire-your-financial-planner">financial planner</a> can help you run the numbers. Then it&rsquo;s up to you to keep that plan on track. The numbers make it sound easier than it really is, at least for most of us. Living on less can be tough &mdash; especially when everyone around you is spending like there&rsquo;s no tomorrow.</p> <h2>Find a Source of Passive Income</h2> <p>If you&rsquo;re not familiar with the term passive income, you&rsquo;re missing out on one of the sweetest deals in the investing world. In essence, passive income is income that&rsquo;s generated without your labor. In other words, you don&rsquo;t have to work for it &mdash; or at least not as hard as you have to work for most of the other income you&rsquo;ll earn in your life. Investments such as dividend stocks and real estate, or royalties generated from something you&rsquo;ve created such as a website or book, are considered passive income. Once a source of passive income is up and running, all that&rsquo;s left for you to do is accept the check in the mail.</p> <h2>Rethink &ldquo;Retired&rdquo;</h2> <p>A member of my family retired in his 60s, but was soon back to working part-time. Why had he chosen to go back to the grind?</p> <p>&ldquo;You can only play so much golf,&rdquo; he told me. As an energetic, healthy, and active guy, he just wasn&rsquo;t happy without some real <i>work</i> to do. He has flexible, part-time work that he enjoys, and he&rsquo;s still home in time to have lunch with his wife.</p> <p>Retiring at 65 used to mean a handful of years of retirement. Now, it can mean 20 or more. So, while you may relish a lazy Sunday now, those long, uneventful days may not have the same appeal when they become an everyday reality. If you&rsquo;re hoping to retire early, consider including work in the picture. It&rsquo;ll make it easier to afford the things you enjoy. Plus, the time you spend working might even make that extra leisure time more enjoyable.</p> <h2>Understand the Risks</h2> <p>Retiring early isn&rsquo;t easy. It does have its rewards, but it isn&rsquo;t without risk. Medical or other unexpected expenses can dry up your savings too soon; you may not enjoy a life of leisure as much as you&rsquo;d hoped, and, not least of all, the financial and personal sacrifices you have to make to retire early can have a cost, too. If it&rsquo;s really a different kind of life you want, you might want to ask yourself whether you can start living it now, perhaps by pursuing more of the things you love, or <a href="http://www.wisebread.com/25-awesome-websites-to-help-you-get-a-job">finding a job</a> that you can be happy going to for a few more years. No matter what you choose, just be sure to avoid jumping at a dream. Those coveted post-work years can be sweet, but don&rsquo;t kid yourself &mdash; it&rsquo;ll take a lot of hard work to get there.</p> <p><em>Are you working toward punching out early? Or have you successfully made the leap to early retirement? I'd love to hear about how you made it happen!</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tara-struyk">Tara Struyk</a> of <a href="http://www.wisebread.com/trading-work-for-never-ending-weekends-how-to-retire-early">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/14-ways-to-retire-early">14 Ways to Retire Early</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dream-job-or-day-job">Dream Job or Day Job?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-taking-social-security-could-cost-you-thousands">Why Taking Social Security Could Cost You Thousands</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement early retirement passive income saving for retirement Tue, 20 Mar 2012 10:00:20 +0000 Tara Struyk 912724 at http://www.wisebread.com Book Review: Early Retirement Extreme http://www.wisebread.com/book-review-early-retirement-extreme <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/book-review-early-retirement-extreme" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/early-retirement-extreme-cover.png" alt="Cover of Early Retirement Extreme" title="Cover of Early Retirement Extreme" class="imagecache imagecache-250w" width="250" height="200" /></a> </div> </div> </div> <p><a href="http://www.amazon.com/gp/product/145360121X?ie=UTF8&amp;tag=wisbre08-20&amp;linkCode=as2&amp;camp=1789&amp;creative=9325&amp;creativeASIN=145360121X"><em>Early Retirement Extreme: A philosophical and practical guide to financial independence</em></a> by Jacob Lund Fisker.</p> <p>If you live cheaply enough, you can chose to do whatever work you want (rather than whatever pays the most). That's been my message here on Wise Bread right from the start. Jacob's message is much the same. He's just more extreme about it.</p> <p>I like to point out that there's value in having some income-earning capital even when the income is fairly small. Investment earnings that come to just one-tenth of income from employment open up a world of possibilities: They could be spent to raise your standard of living or reinvested to compound your way toward retirement; they definitely provide a great cushion if your earnings fall.</p> <p>Jacob prefers to point out that if you can live on a tenth of the income from your job, then as soon as your investment earnings add up to that much money, you can go ahead and retire.</p> <p>Faced with the suggestion that they could live on a small fraction of their income, most people simply throw up their hands and call it impossible. Jacob points out that it's not impossible at all. It's simply extreme.</p> <p>It's a bit hard to summarize Jacob's model, but very briefly, there are several pieces that interlock:</p> <h3>Don't specialize.</h3> <p>Instead, develop the skills to do many ordinary things yourself. It doesn't take nearly as much effort to develop and maintain a basic level of competence as it does to become good enough at something that you can do it professionally. This cuts costs and provides additional sources of income.</p> <h3>Develop a new understanding of needs.</h3> <p>Many people own homes with numerous rooms that are vacant almost 24 hours a day &mdash; rooms that are unused except to store stuff that the owners hardly ever use. Getting rid of stuff you don't use enables the option of moving to a smaller, cheaper space.</p> <h3>Lose the car.</h3> <p>As long as you're moving anyway, move someplace close enough to where you work and shop that you don't need a car. You will quickly and easily save a small fortune while becoming thinner, healthier, happier, and wealthier.</p> <h3>Invest the savings from these cost-saving moves.</h3> <p>In as little as five years, you can be generating enough investment income to cover your living expenses.</p> <p>Yes, it's extreme &mdash; but really, only in the sense of being very different from what most people do. It's not difficult or mysterious. It requires little more than a willingness to be unconventional.</p> <p>There are a lot of things to like about Jacob's book. I like the way he proposes achieving the cooperation of a spouse who is uninterested in being different: &quot;Unless you possess superior persuasive skills, it's no use arguing. Most people (and especially children) will follow your example rather than your suggestions, if they follow at all.&quot;&nbsp;He then goes on to suggest that once your emergency fund has grown large enough to support you over a five-year job hiatus, your spouse may start thinking his or her regular ol' six-month emergency fund looks kind of meager.</p> <p>I like the way he points out that there is a vast range of choices for every decision, running the gamut from vastly excessive to utterly minimalist &mdash; a much wider range than most people recognize &mdash; and how he proposes that <em>frequency of use</em> is the right criterion by which to select from the list.</p> <p>For example, he proposes that a stand mixer is perfectly appropriate for a professional baker who uses it multiple times a day. If you use it just once a day, a hand mixer is entirely good enough. If you use it less than daily, you can probably get by with a whisk. And if you use it once a month or less, even a whisk is overkill &mdash; he suggests that two forks rubberbanded together is the right tool for the job.</p> <p>He offers a similarly graded range of suggestions for housing &mdash; roughly in the middle of the list, with three steps between them, he includes &quot;living in a shack or cabin&quot; and &quot;living in an RV.&quot;</p> <p>I like his whole &quot;renaissance man&quot; conceptualization of someone who chooses not to specialize, and his &quot;businessman, working man, salary man&quot; conceptualization of the alternative choices.</p> <p>I particularly like the way he explains that having a <em>flexible</em> household cost structure is much more important than having <em>low</em> costs.</p> <p>It's a point I've tried to make &mdash; I've called it <a href="http://www.wisebread.com/the-best-way-to-avoid-the-worst-financial-problems ">the best way to avoid the worst financial problems</a>. But I've usually couched it in terms of avoiding recurring monthly expenses. Jacob puts it in terms of the size of your emergency fund: If most of your money goes for wants rather than needs, then even a low savings rate can keep your emergency fund topped off &mdash; because during an emergency, you only need to pay for your needs. (Plus, your standard of living is higher, because so much of your income is available to pay for wants.)</p> <p>I love the fact that he derives the equation for determining how long your capital will last at a given withdrawal rate.</p> <p>Probably the best thing about the book is its moral center. It's a book about making the personal choices that lead to freedom, health, being able to support your family in changing circumstances, and being able to help others.</p> <p>One thing a book like this always has to deal with is the argument, &quot;What if everyone lived like you? Wouldn't the economy collapse?&quot; Jacob points out that there's essentially zero chance of everyone making that choice. Even if they did, after a period of adjustment the economy would be just fine &mdash; and the people (who, after all, matter a lot more than an abstraction like &quot;the economy&quot;) would be better than fine. Households that follow his plan are more stable; they're much less likely to need help from the government (or anyone else).</p> <p>One thread that runs through the whole book, but mostly lingers just below the surface, is that living this way is lighter on the planet. Consuming less means that the earth's resources don't need to be depleted on your behalf. Further, consuming less leads directly to producing less waste, further reducing your impact on the planet.</p> <p>Another book that describes a similar path &mdash; the classic <em><a href="http://www.wisebread.com/book-review-your-money-or-your-life">Your Money or Your Life</a> </em>&mdash; is&nbsp;careful not to advocate any particular level of spending. Instead, it just advocates that you start being thoughtful about your choices &mdash; about just how much time and energy it takes to earn enough money to buy yet another thing that you'll use a few times and then store in an otherwise empty room. Although the author's own choices were just about as extreme as Jacob's, the book made a pretense of being neutral about how extreme your choices ought to be. Jacob, on the other hand, makes no such pretense. He's a strong advocate for being extreme.</p> <p>If there's a downside to Jacob's book, it's that it's probably only going to useful to people if it falls into their hands at just the right moment. Give it to people three years before they're ready, and they'll dismiss it as preposterous. Even one year before they're ready, they'll dismiss it as interesting but impractical &mdash; too extreme. Give it to people eighteen months later, and they'll say, &quot;Gee, this would have been useful a year ago.&quot;</p> <p>But if you give it to someone when they're ready for it, I have no doubt that <em><a href="http://www.amazon.com/gp/product/145360121X?ie=UTF8&amp;tag=wisbre08-20&amp;linkCode=as2&amp;camp=1789&amp;creative=9325&amp;creativeASIN=145360121X">Early Retirement Extreme</a></em> will change that person's life.</p> <p><em>Note: I received a free review copy of the book, and links to the book title are affiliate links.</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/book-review-early-retirement-extreme">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/book-review-cash-rich-retirement">Book review: Cash-Rich Retirement</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/14-ways-to-retire-early">14 Ways to Retire Early</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/trading-work-for-never-ending-weekends-how-to-retire-early">Trading Work for Never-Ending Weekends: How to Retire Early</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement book review downsizing early retirement Wed, 24 Nov 2010 14:00:05 +0000 Philip Brewer 321161 at http://www.wisebread.com Just Saving More Is Not the Answer http://www.wisebread.com/just-saving-more-is-not-the-answer <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/just-saving-more-is-not-the-answer" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/forest-steps-4.jpg" alt="Forest steps" title="Forest Steps" class="imagecache imagecache-250w" width="250" height="181" /></a> </div> </div> </div> <p>Whenever I write about calculating how much money you need to retire, some people vehemently disagree with the whole idea that there is such a figure. One told me, &quot;The only correct answer is as much as possible!&quot; Well, that's crazy.</p> <p>Now, it's certainly true that many people aren't saving enough. If you've made it to your 30s or 40s and your retirement savings hasn't cracked five figures, then &quot;as much as possible&quot; is a reasonable suggestion for how much of your paycheck to put into your 401(k).</p> <p>But if you're talking about the size of your retirement portfolio, &quot;as much as possible&quot; is a wrong-headed goal.</p> <p>Here's a thought experiment to show that it's wrong: Suppose you're 75 with savings of $10 million, or 85 with savings of $50 million. Would it make your retirement more secure if you dragged yourself to work for one more year and socked away another $20,000? I don't think so.</p> <p>But the theory of &quot;as much as possible&quot; is worse than just wrong. Thinking that way <strong>leads to bad decisions</strong>. You have limited time, energy, and money, so you want to address the risks to a secure retirement as efficiently as possible. How many of these risks would be best addressed by an extra $10,000 in your retirement portfolio?</p> <ul> <li>The market might fall.<br /> &nbsp;</li> <li>The market might stay up, but your investments might fall.<br /> &nbsp;</li> <li>Interest rates might stay low.<br /> &nbsp;</li> <li>Inflation might eat up your savings.<br /> &nbsp;</li> <li>Even if prices in general stay down, the price of things you need (food, medicine, fuel) might surge.<br /> &nbsp;</li> <li>You might overspend.<br /> &nbsp;</li> <li>You could lose everything in a lawsuit or a natural disaster.<br /> &nbsp;</li> <li>You could become disabled, and have to pay people to do things you'd planned to do yourself.<br /> &nbsp;</li> <li>Your pension might go kaput.<br /> &nbsp;</li> <li>The government might change the rules on retirement savings (or taxes, or something else).</li> </ul> <p>If your retirement savings are small, probably the most efficient things you can do are work hard, earn money, live frugally, and save for retirement. (And you should be taking advantage of standard tools like diversification and insurance right along.) But right from the start &mdash; and especially as your retirement portfolio grows &mdash; there are other things to do. Here are some things that might address the above risks more efficiently than just putting the equivalent amount of money aside (or the equivalent amount of time into earning money):</p> <ul> <li><strong>Learn new skills.</strong> In particular, skills that will open up new options for earning money if necessary, but also skills that will allow you to do things yourself, rather than having to pay to have them done.<br /> &nbsp;</li> <li><strong>Grow a garden.</strong> A garden can produce healthy, tasty food very cheaply.<br /> &nbsp;</li> <li><strong>Make friends with your neighbors.</strong> There are a lot of problems where good relations with your neighbors are much more likely to produce a solution than an extra $10k in your investment portfolio.<br /> &nbsp;</li> <li><strong>Build your connections with your family.</strong> Same as with neighbors, only more so.<br /> &nbsp;</li> <li><strong>Insulate your house.</strong> Something that reduces your heating and cooling bill by $100 a year is worth about as much as $2500 in your retirement portfolio. And you can be sure your insulation isn't going to declare bankruptcy.</li> </ul> <p>Yes, you want to save up some money for retirement. But trying to save &quot;as much as you can&quot; will only distract you from the work that really will ensure a secure retirement:</p> <ul> <li>Paying attention to your spending, your portfolio, and the world around you.</li> <li>Building and maintaining your productive capacity.</li> </ul> <p>Although having some savings is nice, real security in retirement will never come from your investment portfolio. Real security comes from your ability to react to changing circumstances.</p> <p>That's the context in which it makes sense to say that some amount of retirement savings is &quot;enough.&quot; It's not that more money wouldn't make you more secure. It's that putting more money into your retirement portfolio wouldn't make you as much more secure as putting the money (or the effort it would take to earn it) someplace else.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-5"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-end-of-the-4-rule">The End of the 4% Rule?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Choosing a Retirement Account: What&#039;s Available, and What’s Best for You?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/canada-and-us-retirement-showdown-which-offers-more-for-retirees">Canada and U.S. Retirement Showdown: Which Offers More for Retirees?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-five-types-of-people-who-never-retire-are-you-one-of-them">The Five Types of People Who Never Retire (Are You One of Them?)</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement early retirement financial planning retirement planning Thu, 07 Oct 2010 13:00:10 +0000 Philip Brewer 256928 at http://www.wisebread.com The End of the 4% Rule? http://www.wisebread.com/the-end-of-the-4-rule <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-end-of-the-4-rule" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/nyse_3.jpg" alt="New York Stock Exchange" title="New York Stock Exchange" class="imagecache imagecache-250w" width="250" height="235" /></a> </div> </div> </div> <p>There's a rule of thumb that's pretty well known to retirement planners: the 4% rule. It states that if you spend 4% of your capital in your first year of retirement, you can go on spending that much &mdash; and even adjust it for inflation &mdash; and you won't run out of money before you die. That rule is starting to look kind of iffy.</p> <p>The rule has its roots in an older 5% rule that's long been used by university endowments and non-profit foundations. If you have a well-diversified portfolio, you can spend 5% of your capital each year and reasonably expect investment returns will grow your capital over time.</p> <p>The rule works for non-profits and such because they can react to market downturns by cutting spending: making fewer grants, canceling projects, etc. If the market goes down 40%, they can cut spending by 40%. Most households don't have the flexibility to do that &mdash; it's not practical to cut your housing, grocery, or health insurance expenses by 40% just because the market was down last year. Hence, the 4% rule, which provides some slack. Since you're spending your capital down more slowly, you have time to wait for the market to recover from a downturn.</p> <h2>Looking at the past</h2> <p>The rule is just an observation: Over the past hundred years you could have followed the 4% rule starting in any year and you wouldn't have run out of money. That's been true because the return to capital has been pretty high, and because downturns have been pretty short.</p> <p>Until the 1990s you could get most of your 4% just from dividends on stocks &mdash; any price appreciation was just a bonus. At the same time, government bonds were returning more than 4% as well. In fact, you could earn more than 4% on cash as well from the late 1970s until just the past 10 years.</p> <p>The upshot was that it was trivially easy to put together a portfolio that had an average return of well over 4%. You had to be careful to allow for inflation (which was pretty high during the late 1970s and early 1980s), but pretty much any portfolio that held a mix of stocks, bonds, and cash was going to return enough over 4% that following the 4% rule worked fine.</p> <h2>Looking at the present</h2> <p>Sadly, recent returns have been lower:</p> <ul> <li>The dividend yield on stocks has been <strong>well under 4% for the past twenty years</strong>. (For the past ten years, it's been under 2%!) Stock investors saw some price appreciation in the 1990s, but there's been no appreciation since then. In fact, your stock portfolio is probably down over the past decade, even with reinvested dividends.<br /> &nbsp;</li> <li>The return on bonds held up somewhat better, but has been <strong>below 4% for most of the past three years</strong>, and below 5% for most of the past 10 years.<br /> &nbsp;</li> <li>The return on cash dropped below 4% in 2001 (during the dotcom bust). It recovered briefly in 2006, but <strong>fell sharply in 2007 and remains near zero</strong>.</li> </ul> <h2>Looking at the future</h2> <p>The 4% rule only works if two things are true:</p> <ol> <li>Periods of low returns are <strong>short enough</strong> that retirees retain substantial capital, even while spending continues based on their old, higher portfolio value.<br /> &nbsp;</li> <li>The returns the rest of the time are <strong>high enough</strong> to restore the portfolio.</li> </ol> <p>As the current period of low returns is already long by historical standards, and there's no sign yet of returns rising at all&mdash;let alone any sign that returns will rise enough to make up for a decade of flat-to-down market&mdash;things don't look good for the 4% rule going forward.</p> <h2>What can you do?</h2> <p>If you're living off capital, you can't depend on any rule of thumb. You need to <strong>pay attention to what's actually happening</strong>. If your capital isn't growing, you need to hold down your expenses. And if your capital shrinks over a period of years (as it probably has been doing lately), then you need to start cutting your expenses (and probably look for some additional income).</p> <p>Fortunately, Wise Bread is full of tips on cutting your expenses and on earning extra income.</p> <p>The 4% rule is still useful as a <strong>planning tool</strong>. It means that, for whatever level of spending you hope to maintain in retirement, you need about 25 times that much capital. But the key word there is &quot;about.&quot; It was never safe to just look at your portfolio level on the first day of retirement, set a 4% payout, and then carry on no matter what the markets did.</p> <p>Back in the days when only rich people had any capital to speak of, nobody thought about the 4% rule. The rule in those days&mdash;for the past several hundred years&mdash;was that you only spent income. Everybody knew that spending down your capital&mdash;even a little bit of capital&mdash;meant that you'd eventually go broke. The 4% rule only works for retirement if you take the position that it's okay to go broke as long as it doesn't happen until after you're dead. Even that is beginning to look a bit optimistic.</p> <p>If you're building a retirement portfolio, you can still use of the 4% rule for making early estimates of its target size. But don't stop there:</p> <ul> <li>As you build your retirement portfolio, invest for income. You're much safer spending income than you are spending capital, even if you spend it slowly.<br /> &nbsp;</li> <li>Pay attention to what your yield actually is, and don't expect your total return to be much higher than your yield. If your actual investments are just yielding 2% or 3%, don't expect some market magic to produce returns that are higher than that.</li> </ul> <p>If you want more information, the book <em><a href="http://www.amazon.com/gp/product/1413307051?ie=UTF8&amp;tag=wisbre08-20&amp;linkCode=as2&amp;camp=1789&amp;creative=9325&amp;creativeASIN=1413307051 ">Work Less, Live More</a></em>, that I <a href="http://www.wisebread.com/book-review-work-less-live-more ">reviewed</a> for Wise Bread, has a carefully worked-out analysis of the 4% rule. I also talk about the rule in the context of figuring out how much you can spend in retirement in my post <a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend ">How much do I need to retire? How much can I spend?</a></p> <p>The 4% rule was never a magic shield. It was just an observation that a certain payout pattern has worked over a historical period during which the return to capital was reasonably high. There's no law of nature that says that that the return to capital will be over 4%, so there's no guarantee that it will work in the future.</p> <p>[Data on stock market returns from <a href="http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm ">Simple Stock Investing</a>. Data for bond and cash returns from the <a href="http://research.stlouisfed.org/fred2/categories/22 ">Federal Reserve Bank of St. Louis</a>.]</p> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/the-end-of-the-4-rule">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-6"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/book-review-cash-rich-retirement">Book review: Cash-Rich Retirement</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-just-think-about-income-when-saving-for-retirement">Don&#039;t Just Think About Income When Saving for Retirement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Choosing a Retirement Account: What&#039;s Available, and What’s Best for You?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement early retirement retirement funding retirement planning retirement plans Mon, 04 Oct 2010 13:00:07 +0000 Philip Brewer 254168 at http://www.wisebread.com Why You Shouldn't Plan to Retire at Age 65 http://www.wisebread.com/why-you-shouldnt-plan-to-retire-at-age-65 <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-you-shouldnt-plan-to-retire-at-age-65" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/860275_watching_time.jpg" alt="watching retirement time" title="watching retirement time" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>Most traditional retirement advice columns I read are written as a guide to retiring in your 60s. Although the advice contained in these columns may be useful to some, I think that no one should count on retiring in their 60s &mdash; you should plan to retire earlier.</p> <p>A typical retirement guide advises that you should have the equivalent of your salary saved up by age 35, and two times your salary saved up by 45. These are good goals if you plan to work until you are 65 or later, but personal issues like an illness could easily take you out of commission. Additionally, because there is really not much job security anymore, even if you wanted to keep your job for 40 years, there is no guarantee that you will be able to. It is best to save as much as you can while you have a steady income so that you can retire early if you are forced to.</p> <p>For those who have a pension, it is still a good idea to save as much as you can because pension programs are being cut by many companies, and even governments, due to lack of funds. There is also no guarantee that you will be able to work until your pension is vested. I have heard of situations where employees were fired just a year or two before their pensions vested. If these people were betting on the pension and did not have personal savings, then they could no longer afford to retire.</p> <p>Personally I am not planning to retire at age 65 because I just think the idea that most people have to work 45 years or more is ludicrous. I feel that these traditional retirement planning guides reinforce the idea that you must work until you are past 60, and that is just not something I plan to do. I plan to retire much earlier than that and spend more of my life as I want it.</p> <p>Personal finance is personal, and you have the choice not to follow the masses. You can retire early if you want to, but it will take a mindset that is considered abnormal by the mainstream. </p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/xin-lu">Xin Lu</a> of <a href="http://www.wisebread.com/why-you-shouldnt-plan-to-retire-at-age-65">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-7"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/14-ways-to-retire-early">14 Ways to Retire Early</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/trading-work-for-never-ending-weekends-how-to-retire-early">Trading Work for Never-Ending Weekends: How to Retire Early</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dream-job-or-day-job">Dream Job or Day Job?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement early retirement Fri, 01 Oct 2010 13:00:06 +0000 Xin Lu 249775 at http://www.wisebread.com Dream Job or Day Job? http://www.wisebread.com/dream-job-or-day-job <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/dream-job-or-day-job" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/this-section-of-the-trail-is-closed.jpg" alt="This section of the trail is closed" title="This Section of the Trail is Closed" class="imagecache imagecache-250w" width="250" height="179" /></a> </div> </div> </div> <p>Most people I know have a frustrated passion. There's something they'd rather do a lot more of, but making a living gets in the way. Some people simply accept that their passion will get short shrift, while other people make great efforts to arrange their life so they can follow their passion. For the latter folks, I'm familiar with three general strategies: dream job, day job, and early retirement.</p> <h2>Dream Job</h2> <p>The dream job, of course, is making a living by following your passion. However small the fraction of writers, artists, actors, dancers, musicians, and athletes actually making a living at their art, you know it's at least possible &mdash; you can see people actually doing so any time you turn on the TV. With some hard work, a little luck, and the talent you were born with, maybe you could be one of them.</p> <p>Of course, not everyone's dream job is in the arts. There are plenty of people who dream of jobs in engineering, science, politics, teaching, business, medicine, and so on. Contrariwise, many passions offer no hope of a dream job &mdash; raising your kids being an obvious example. WC Porter just had a good post on <a href="http://www.wisebread.com/do-what-you-love-idealistic-nonsense-or-good-advice">doing what you love</a> and trying to make money at it, and it's good to keep all your options in mind &mdash; if you can't find your dream job, maybe you can create it. (Still, it's worth trying to <a href="http://www.wisebread.com/find-work-worth-doing">find work worth doing</a> and then trying to <a href="http://www.wisebread.com/how-to-get-a-job-learn-the-secret-from-a-bad-movie">land a job</a> doing it. Certainly, it's better than doing work you hate.)</p> <p>It's easy for a dream job to become a nightmare. Sometimes your passion isn't quite as much fun when you have to perform on schedule. Sometimes your dream job turns out to include less following your passion and more filling out status reports, soothing customers, and running everything past legal. And, more than just sometimes, you find yourself competing with people who'll do the work for free, because it's their passion too.</p> <p>Still, none of that is to say that you should give up on your dream job. Just be realistic about it and go into it with your eyes open. One part of keeping your eyes open is considering the other two possibilities: day job and early retirement.</p> <h2>Day Job</h2> <p>If you want to follow your passion, but also have to earn a living, one practical option is a day job. There are whole categories of day jobs that are popular with people whose passion makes demands on their time. Aspiring actors and dancers, for example, often end up working as waiters &mdash; because it's a job that lets them schedule around casting calls, auditions, and rehearsals.</p> <p>The main criterion for a day job (aside from paying enough to support you) is that it doesn't drain you of whatever you need to follow your passion. A day job that leaves you exhausted might make it impossible to pursue your passion for music with late-night gigs. Working as a software engineer, I found that certain kinds of work seemed to use up whatever it was that let me write fiction. It was just certain tasks, so generally I could work at the day job all day and then come home and write in the evening. If that hadn't been true, I might have needed to find a new day job.</p> <p>The best sort of day job for someone with a passion is one where you put in your hours and then you're done. Any kind of hourly work is good. Salaried work is less good &mdash; you're expected to get the job done no matter how long it takes. Worst is the sort of high-stress job where you're spending your nights worrying about your bosses, clients, customers, processes, or deliverables, and find that you can't focus on your passion. Because of that, a lot of people who go with the day job end up working what would otherwise be considered a low-end job, because it's one that leaves them with time and energy to follow their passion.</p> <p>Even so, resist the temptation to settle for a job that's bad &mdash; in particular, for a job where either they don't respect you or where you don't respect the work. There is so much work that's worth doing, it's just stupid to flush your life away doing work that's worthless &mdash; even if it pays a little more. The downside of the &quot;day job&quot; strategy is that you're spending forty hours a week doing something other than your passion. Don't compound that by spending those hours doing <a href="http://www.wisebread.com/and-did-you-do-it-with-respect">something that you don't respect</a>.</p> <h2>Retire Early</h2> <p>You can retire early if you combine a high-paying day job with a certain amount of frugality. The more frugality, the earlier you can retire. (Higher pay lets you retire earlier too, but if you work out the math, it doesn't help as much as you'd think. Between taxes, the almost inevitable higher standard of living, and the extra work that the higher-pay jobs tend to require, it turns out that <a href="http://www.wisebread.com/what-ive-been-trying-to-say">frugality is the adjustment</a> that ends up making the big difference.)</p> <p>I covered the &quot;retire early&quot; scenario just a few days ago in my post on <a href="http://www.wisebread.com/can-you-buy-your-way-out-of-the-rat-race">buying your way out of the rat race</a>.</p> <p>The main thing I'd caution against is the tendency to defer following your passion.</p> <p>It's one thing to have to fit your passion into the spaces left around a job, a family, and all the other things you have to do. That's normal. It's fine. It's even good. Unless your passion is an odd one, the connections that grow out of living your life will feed into your passion.</p> <p>But it's altogether different to put your passion aside until some future when you'll have enough time. That's almost always the wrong choice. Follow your passion right along. That's how it grows. That's how you remember why you're putting in the time and effort. That's what keeps your soul together.</p> <p>As long as you don't put off following your passion, any of these strategies can work.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/dream-job-or-day-job">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-8"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-quotes-to-inspire-your-dream-career">8 Quotes to Inspire Your Dream Career</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-roth-iras-are-ideal-for-young-professionals">Why Roth IRAs Are Ideal for Young Professionals</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-find-unlisted-jobs-and-win-every-salary-negotiation">How to Find Unlisted Jobs and Win Every Salary Negotiation</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Career Building Retirement day job dream job early retirement Fri, 13 Nov 2009 16:29:27 +0000 Philip Brewer 3820 at http://www.wisebread.com How much do I need to retire? How much can I spend? http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-much-do-i-need-to-retire-how-much-can-i-spend" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/sailboat-cabo_0.jpg" alt="Colorful sailboat off Cabo San Lucas " title="Sailboat off Cabo San Lucas" class="imagecache imagecache-250w" width="250" height="181" /></a> </div> </div> </div> <p>Especially for people hoping to retire early, but also those just hoping they can retire at all, there&#39;s the question, &quot;How much money do I need?&quot; People who are already retired want to know &quot;How much can I can spend, without running out of money?&quot; Some people refer to the answer to the first question as &quot;The Number.&quot; Really, though, these are both the same question.</p> <p>There are a lot of ways to calculate your number. They all suffer from the same fundamental problem: nobody knows the future. To come up with the correct number you&#39;d need to know (at a minimum) how long you&#39;d live and what interest and inflation rates will be between now and then. Even if you knew those things, though, reality could come back and bite you.</p> <p>Still, even without knowing the future, it&#39;s possible to take a useful stab at calculating your number. Here are a few of the classic methods.</p> <h2>Living on income</h2> <p>If there were no inflation, and you weren&#39;t desperate to retire early, this would be the number one choice: Save and invest until your interest and dividends reach the point that they cover your expenses. Once that happens, you&#39;re done and you can retire.</p> <p>Of course, there <strong>is</strong> inflation. To deal with that, you need to reinvest enough of your income to replenish your starting capital each year.</p> <p>For example, if your number were $1,000,000 and inflation turned out to be 2%, then you&#39;d need to reinvest enough of your income that your capital was boosted to $1,020,000 by the end of the first year. As a practical matter, what you need to do is estimate future inflation and make sure that your income covers not only your expenses, but does so with enough left over to make those reinvestments.</p> <p>If the government&#39;s inflation data could be trusted, this wouldn&#39;t be too hard. In fact, there&#39;d an easy way to do it: invest in <a href="/TIPS-and-i-bonds">TIPS (Treasury Inflation-Protected Securities)</a>. They automatically do exactly what I&#39;ve described--the face value of the bond adjusts so as to keep the inflation-adjusted value of the principle constant.</p> <p>Unfortunately, the government&#39;s reported inflation numbers have been seriously understating the actual rise in the cost of living just lately. I don&#39;t tend to assign malice to this. (I&#39;ve read some of the papers written by the economists at the Bureau of Labor Statistics, and they sound to me like sincere people trying very hard to produce honest numbers.) In the final analysis, though <strong>it doesn&#39;t matter</strong> what the overall inflation rate is. What matters is <a href="/roll-your-own-cost-of-living-index">your own cost of living</a>. You need to adjust your capital by however much your cost of living is going up, or else you&#39;re going to gradually fall behind.</p> <p>Having some of your money invested in stocks can cushion this--there&#39;s a good chance dividends will rise, and there&#39;s a good chance the values of the stocks will rise. There&#39;s no guarantee that it&#39;ll match inflation (or even that it will happen at all), but it has generally happened for decades now.</p> <p>Two other gotchas to beware of:</p> <ul> <li>Be sure that you know what your expenses actually are--any unexpected ones (taxes? a new car, new roof, new furnace? health insurance?) eat into your standard of living (or worse).</li> <li>Be sure your income is secure--it can be very tempting to take a little extra risk, to boost your standard of living, but that can bite you badly.</li> </ul> <p>Now, all the fiddly detail work of adjusting for inflation aside, the real downside of living on income is that it takes too much money. Let&#39;s say you can live on $50,000 a year. The amount of money that you&#39;d need to invest in TIPS to earn that $50,000 (guaranteed by the government and adjusted for inflation) would be something like $2.8 million. Now, if you&#39;ve got $2.8 million (and you can live on $50,000), then you&#39;re pretty much all set. I wouldn&#39;t invest it all in TIPS--diversify into stocks as well--but a very straightforward investment plan will do the trick for you, and I think you can safely retire right now.</p> <p>Most people, though, would like to retire without having to save up quite that much capital relative to how much money they&#39;re going to need to live on. Happily, that&#39;s almost certainly possible, if you make the (rather likely) assumption that you&#39;re not going to live forever.</p> <h2>Spending down capital</h2> <p>If you invest $2.8 million in TIPS and just spend the income, you&#39;ll eventually die with a nest egg worth (an inflation-adjusted) $2.8 million. That&#39;s great for your heirs, but doesn&#39;t otherwise do you a lot of good.</p> <p>If you knew how long you were going to live, you could calculate how much of your capital you could safely spend each year, and die with any particular sum you wanted. </p> <p>If you have a financial calculator, here&#39;s how to do the calculation. (If you don&#39;t, there are plenty of <a href="http://www.arachnoid.com/lutusp/finance.html">financial calculators</a> on the web.)</p> <p>Suppose you knew you were going to live for 34 years in retirement and wanted to die broke. You could plug in a Future Value of zero (dying broke), a payment of $50,000 (or whatever you need to live on), an interest rate of 1.85% (the current rate on 20-year TIPS) and solve for Present Value (the amount you need to invest today to get those 34 payments of $50,000 (adjusted for inflation because you&#39;re buying TIPS). It&#39;ll tell you that you need about $1.25 million--a big improvement over the $2.8 million income-only solution, assuming that you want to retire early.</p> <p>If you knew you were going to die younger--for example, that you&#39;d only live in retirement for 12 years--you wouldn&#39;t need nearly as much. In fact, just a bit over $500,000 would do the trick.</p> <p>That&#39;s still pretty conservative, mainly because we&#39;re using the very low interest rate that TIPS are currently paying (just 1.85% over inflation). If you invest in a diversified portfolio of stocks and bonds, you can probably earn more than that. The average return in the stock market runs in the 10% to 12% range. Deduct 3% or 4% for inflation, and there&#39;s a good chance the stock market portion of your portfolio can return 6% or even 7% after inflation. Use that rate in place of the 1.85% you could get on TIPS, and you&#39;ll find that you can retire on a very modest amount of capital, as long as you&#39;re sure that you&#39;ll die on schedule.</p> <p>People have long looked for a sweet spot somewhere in between assuming that you&#39;ll live forever (income-only spending) and assuming that you&#39;ll die on schedule (spending down capital). They&#39;ve come up with a couple rules of thumb.</p> <h2>The 4% and 5% rules</h2> <p>Among people who invest for large institutions, there&#39;s a rule of thumb that you can spend 5% of your endowment each year, and then expect to have a bit more to spend next year than you spent this year.</p> <p>Of course, they can&#39;t expect that 5% to be more every single year. Some years the investment portfolio does poorly--and after one of those years, the 5% that&#39;s available for spending will be less than the previous year. Maybe much less.</p> <p>That may be okay for institutions, but it doesn&#39;t work so well for households. Most people, especially most retired people, don&#39;t have the flexibility in their budgets to easily accept, let&#39;s say, a 20% budget cut--an amount that&#39;s not only possible but entirely to be expected, if a good bit of your investment portfolio is invested in stocks.</p> <p>For households, therefore, the rule of thumb is 4%. If you have a well-diversified portfolio of stocks and bonds, you can spend 4% the first year, and then increase the amount by the inflation rate each year, and you will very likely die before you run out of money. (In fact, you will very likely die with quite a large portfolio indeed, because you probably could have started out spending 5%.) But if you have enough capital that 4% will support you at an acceptable standard of living, then you&#39;re in a position to ride out a good bit more in the way of bad luck. (Such as, for example, a 20% drop in the market the very first year after you retire.)</p> <h2>Social Security, pensions, and other annuities</h2> <p>An annuity is a stream of money that gets paid to you until you die. You can buy one from an insurance company. Annuity payers are in a position to (roughly) follow the 5% rule, because they can play the averages. Some people will buy their annuity just before the market takes a 20% dive, but most people won&#39;t. Some people will live a very long time, but most people will live an ordinary length of time and a few will die young. If you die young, they keep the rest of the money, and that puts them in a position to pay out more than you could safely spend yourself.</p> <p>It&#39;s worth having some sort of an annuity, as a fall-back in case you both face poor investment returns and live a long time. As I said, you can buy one from an insurance company, but you may not need to, if you have a pension.</p> <p>Pensions are a special case of annuity. In the old days, many people earned some sort of pension, if they worked for a largish company for many years. These days, they&#39;re pretty rare, but lots of older folks are still owed a pension from jobs that they worked back when they were more common.</p> <p>If you have a pension, even a pretty small one, you may not need to annuitize any more of your capital. But, if you don&#39;t have any pension at all, an annuity is worth considering.</p> <p>Besides the now-rare pension, almost every worker in the US is promised a Social Security pension (and people in other wealthy countries have similar promises from their governments). I don&#39;t know about the situation in other countries, but in the US a lot of people are dubious about that promise being paid in full--and with good reason. My own take on the situation, though, is that most people will actually get a large fraction of what they&#39;ve been promised. In fact, it would be pretty easy to adjust things to pay people nearly all of what they&#39;d been promised, if they did the adjusting sooner rather than later.</p> <p>At any rate, the way to deal with any sort of annuity, Social Security or otherwise, is to discount it by however much you think is appropriate (against the risk that you won&#39;t get the whole thing), and then deduct what&#39;s left from the amount that you want to spend each year. Your investment portfolio needs to cover the remainder.</p> <h2>The answer</h2> <p>So, that&#39;s your answer for the questions we started with.</p> <p>How much do you need to retire? Take what you want to spend, subtract the amount you confidently expect to receive from Social Security and any other pensions or annuities you&#39;ve got coming to you, and then divide by 0.04.</p> <p>How much can you spend? Multiply your investment portfolio by 0.04 and then add whatever you&#39;re getting from Social Security and other pensions (suitably adjusted, if you&#39;re not confident you&#39;ll keep getting them).</p> <p>There are too many variables for it to be safe to put any of these things entirely on autopilot. When you figure the inflation adjustment for next year&#39;s spending, cross check to see if you&#39;re spending more than 4% of your capital. (If the market hasn&#39;t kept up with inflation, you probably will be.) If that&#39;s true, you&#39;d be well advised to cut your spending a bit--a few bad years, especially early in retirement, can put a portfolio into a hopeless downward spiral if you go on spending without regard to how much money is really there.</p> <p>If you can earn some money in retirement, even a pretty modest amount, that can take a big weight off the investment portfolio. Well worth trying, even if just for a few years early on.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. 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Retire abroad!</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/capital-substitutes-for-labor-and-vice-versa">Capital Substitutes for Labor — and Vice Versa</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/personal-financial-advisors-awaiting-your-call">Personal Financial Advisors awaiting your call</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/just-saving-more-is-not-the-answer">Just Saving More Is Not the Answer</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Retirement annuities capital dividends early retirement pensions retirement planning social security tips Wed, 09 Jan 2008 15:23:03 +0000 Philip Brewer 1606 at http://www.wisebread.com