Retirement on the installment plan


Among the fraction of the population who manage to put money aside, many view their investments through the lens of retirement.  They've got a number in mind--call it $X--enough that they never need to work again.  Until they've got that, they're stuck working away at the daily grind.  There's another way to do it, though.  Make your goal to live live on your own terms for the whole length of it, not just for a little while at the end.

This is really the story of Sam, a guy I knew back when I lived in Florida, right after I graduated from college.  I had very little student loan debt (generous parents), but I had more than none, which meant that I had no choice but to get a job and start earning some money.  Sam, though, had a little capital.

A little capital

For the past 30 years, most Americans have started their lives in debt, thanks to the way we've decided to fund college education--everyone but the wealthy ends up with student loans.  Before that--and even today, if you can put together low-priced colleges with generous parents--people tended to start out flat broke.  A few people though, even people who don't come from wealth, start out with a little capital, or accumulate a bit on their own. 

My friend Sam had a little, around $5000.  This was the early 1980s, so today's equivalent would be $10,000, maybe $11,000.

He'd gotten it mostly as gifts.  His uncle had given him some railroad stock when he was 14.  A crappy gift, he'd thought at the time.  He didn't even get pretty stock certificates, just a receipt that showed the shares had been transfered into a brokerage account in his name.  Once he had a brokerage account, though, other relatives had taken the opportunity to dump their odd-lot holdings on Sam.  (Back then, the commission on selling less than 100 shares could easily eat up all your profits, even if the stock had done well.)

In those days, brokerage accounts came with brokers.  Sam's broker was pretty good--collected the dividends, sold the crappy shares, held onto the good stuff and bought more.  Sam didn't pay much attention then, and didn't pay much attention later, when he went through a rough patch at an age that most people would be going to college.  By the time I knew him, he was over that, and none the worse for it, except that he hadn't gone to college.

It was the early 1980s, though, and you could get jobs in software without a degree, and that's what Sam did.  He did contract work as a computer programmer.  He made pretty good money, but it was irregular.  The contracts he got ran for a few months at a time, and he could never be sure there'd be a next contract.

For a young guy living in south Florida, with no debt and a little capital, it seemed to me like a nearly perfect life.

He lived pretty frugally.  He had a roommate, which was important because rents were high.  His roommate was a student, which meant that his income was low but stable.  Sam's was higher, but irregular.  When he had a job, he'd put some money aside--in particular, he'd pay himself back for any of his capital that he'd had to spend when he was between jobs.  He might get a few months ahead on the rent and the cable bill.

When he didn't have job, he'd work on his MGB, hang out at the beach, maybe travel down to the Keys, and generally do exactly what he wanted.  It was like taking his retirement a month or two at a time, right along the way.

There are two big downsides to this:  it's expensive, and it's risky.


Think of your long-term investments as buying your future retirement income:  each one-time payment today will provide a certain income starting when you're 65 and going on for the rest of your life.  A $1000-a-year stream of retirement income might cost as little as $1000 when you're in your twenties.  It'll cost twice as much if you buy it when you're in your thirties.  It'll cost you almost five times as much, if you don't buy it until you're in your forties.

If you keep spending your savings when you're in your twenties, you miss out on the chance to buy your retirement income at a huge discount.  On the other hand, lots of twenty-somethings do that without managing spending a few months in early retirement along the way.


 I never knew enough about Sam's finances to know things like whether or not he had health insurance.  Doing without was a risk then, even for a twenty-something, and it's a bigger risk now.

The other big risk was the risk that he wouldn't find another job as good as the one he left.  That's a paralyzing fear for a lot of people.  Even a pretty crappy job, if it pays the bills with enough left over to save for retirement, can seem worth hanging on to.

An option worth considering

You can't do it if you have debts.  If you've got monthly payments to make, it doesn't matter how frugally you live, you've still got to come up with cash, and that generally means that you need to have a job.

Even for someone with no debt, it's not a practical way to live without some capital.  To get by with an irregular income, it's essential to have some savings.  It's also nice if someone else in your household has an income as well.

Some people do well in the daily grind.  If you're not one of them--if you're the sort of person who spends his days checking his stock portfolio, dreaming of the day he'll have enough to retire, this is an option worth considering.

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Guest's picture

What's an MGB?

Guest's picture

A little British made convertible roadster that was famous for several things...chief being that they overheated if driving below the Mason Dixon line in the states until they figured out that the radiator was too small. Remember England is on par with New York so the ambient temperature seldom got anywhere near as hot as it does in the southern US.

They also had a long run of only 1 lug nut holding each wheel on and if you towed the car from the back the nut tended to unscrew and off came the wheel(s).

And being British they had the infamously BAD Alternator/Generator and Starter from Lucas and Son LTD. You needed to keep a spare for each in your Trunk at all times and be conversant with changing it on the side of the road.

Their headquarters/factory was famously refered to as "The Octagon".

~ Roland

Guest's picture

This post reminds me of Tim Ferris' book "The 4-hour Workweek". Your friend's frequent mini-retirements is exactly what Tim argues we should all strive for. Of course he contends that when we are working, we should be working to build a business of some sort that is capable of generating some semblance of residual income.

Guest's picture

If you just want to be a surfer for the rest of your life, you can retire young/early (but, you still need to have a buffer).

But, most people expect more out of their lives than a "surfer's salary" can provide, so you need to find your Number first and plan backwards ... AJC.

Guest's picture

I would be interested in knowing how would this way of living work out when one has kids.

Philip Brewer's picture

As FrugalZen said, the MG MGB was a British sports car notable mainly for the fact that it required constant maintenance to keep it running.  (Not recognizing it makes you sound young, not old.  Surely anybody over 45 would know an MGB, wouldn't they?)

I agree that the retire-early-and-often lifestyle is a lot more appealing to the young than to people who want to, for example, support a family.  But many people reach their thirties with no savings despite having spent a decade working full-time at a regular job.  This strategy lets you reach your thirties with modest capital and having been able to spend a good fraction of your time doing exactly what you want.

I wrote a post on calculating your "number" called How much do I need to retire, how much can I spend.  It's the way I always thought about it.  But I think I might have been happier if I'd been less focused on retiring early and more focused on doing cool stuff when I was in my twenties.

I've also got a review of Tim Ferriss's 4-Hour Workweek.  Yes, his insight that you can set up a small business that continues to spin off money without you having to put time into it day after day is brilliant.

Guest's picture

Sounds like me. Next month I'm quitting my job and heading off to China for 6 months. I've worked three different jobs since graduating as I get pretty bored after a while once they aren't challenging anymore. (I also work as a software developer).

I do have student loan debt though but I've saved up enough to cover those payments while I'm away and also have funded a large chunk of investments over the past year. But you are right, I would be a little more comfortable with this course of action if my debts were paid off.

I hope this risk pays off. Thanks for the article.

Nora Dunn's picture

I was fortunate enough through my 20s to earn some decent cash, save up even more, and stay out of debt.

By the time I hit 30, I "retired". I have enough money saved up to take care of my future, live frugally now, and as long as I proverbially work "4 hours a week" to take care of incidentals, I'm golden! I even have passive income built into the plan.

Great article, Philip - as usual!  

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