This article was first posted January 15, 2000.
Consumers Digest editor John Wasik takes on the subject of "how to retire early," in this very readable volume Retire Early--And Live the Life You Want Now: A 10-Step Plan for Reinventing Your Retirement. Drawing on some of his own thoughts and experience along with the stories of several retirees, he gives some excellent, real life, examples of what folks contemplating early retirement should be thinking about.
Wasik breaks down the process into 10 easy steps:
Step One talks about how the "New Prosperity" will allow many Americans to retire early if they desire. He writes, "Fortunately, we live in the golden era of retirement vehicles." That's very true. Many folks' IRAs haven't just grown; they've exploded in value beyond all imagination or expectation. I know mine has.
In Step Two, Wasik outlines his concept of the "P factor", as in prosperity. He advises assigning a value (1 to 10, A to F, the scale you choose doesn't matter) to all your possessions and expenditures. All the better to discover if you are spending your treasure on the things that make you most happy. This "P factor" method is very similar to the more rigid calculation of "Life Energy vs. Earnings" advanced by the late Joe Dominguez in Your Money or Your Life. Both authors stress the need to make your own personal cost/benefit analysis of what you're spending and decide where your values lie. I particularly liked the chart on page 33 of Wasik's book that lists "Sample Living Costs by Area." Many people don't realize that housing costs vary much more than salaries for most occupations as you move from city to city. The author's thoughts on the merits of a late-model used car are also right on the mark. There's a high likelihood you'll need to downsize your lifestyle or move to a lower cost area to retire early.
Step Three does a good job outlining the alternatives for generating an income stream in retirement. This is a complicated topic and I found only two points to criticize. The first is that there is no mention of the single biggest disadvantage of a single-premium immediate annuity -- the fact that inflation might severely decrease the spending power of your annuity benefit if you live to a ripe old age. Nobel Laureate William F. Sharpe's FinancialEngines.com software assumes that an individual liquidates his portfolio on the day he retires and buys an annuity. The "95% safe" withdrawal rate calculated by FinancialEngines.com for an annuity is some 30% lower (3.03% vs. 4.44% for a 40 year pay out period) than the withdrawal rate calculated by the Retire Early Safe Withdrawal Calculator for a non-annuity portfolio. Much of the difference may be attributed to the opportunity cost of buying an annuity -- taking the "No-Brainer Way" is often costly in the long run.
Still, many retirees find comfort in a guaranteed monthly annuity benefit, and as economist John Maynard Keynes said, "In the long run, we're all dead."
The second criticism is a small, but potentially lethal, typo on page 70 regarding a popular method for making penalty-free withdrawals from your IRA prior to age 59 1/2. It reads "Once you decide to take the 72(t), you are locked into that payment schedule for at least five years or until you hit 59-1/2, whichever come first. It should read, "whichever is longer." For instance, a retiree starting the 72(t) "substantially equal periodic payments" at age 58 would have to continue the withdrawals until age 63. If he stopped at age 59 1/2, he'd be hit with the 10% penalty and retroactive IRS interest charges on all distributions to date.
Step Four describes the various retirement plans available to Americans. It's a useful overview and Wasik also provides some solid, mainstream advice on asset allocation for retirement portfolios. I would add to his comments on page 88 regarding "The Miracle of Tax-Free Compounding." While we've all been taught to fully fund our IRA/401k plans, many people don't realize that a long-term buy & hold investor in stocks can get "tax-deferred compounding" in a taxable account, and pay lower taxes when he sells the stock and withdraws the money from the account. IRA/401k withdrawals are taxed as ordinary income (max = 39.6%) while the capital gains tax payable on the appreciation of any stock held in a taxable account is capped at 20%. That doesn't mean that one should forgo the company match in a 401k plan or a tax deductible IRA contribution, but I'd think twice before making non-deductible contributions to either retirement vehicle.
Step Five suggests some ways to discover your life's passions. For many, life's passions reside outside the workplace -- otherwise, we wouldn't be contemplating early retirement. The most important point of Step 5 is to make sure you are retiring to something you're interested in.
Step Six shows you how to invest your portfolio with early retirement in mind. Again, Wasik provides mainstream, conservative recommendations that are unlikely to get you in trouble. He also emphasizes the need to seek out low-fee, low-commission investments -- sage advice in any season.
Step Seven on "How to Retire Early Even If You Have Kids at Home" may be the best part of the book if you're a parent. I particularly liked Wasik's points about the cost of children's toys and "Disneyland vacations." This is clearly an arena where time is more valuable than money. Two-income families that try to remedy the lack of time they spend with their children by showering their offspring with material goods don't always end up with the most well adjusted progeny. Even if it means downsizing your lifestyle, the extra time that an early retiree can spend with the kids is a gift beyond measure.
Of course, despite all these good thoughts about parents and children, I'd be remiss if I didn't point out that it's a lot easier to retire early if you don't have kids.
Step Eight "Making Your Money Last As Long As You Do" will be familiar to many readers of the Retire Early Home Page. Wasik interviewed John Greaney, the site's creator, and draws heavily on the Retire Early Study on Safe Withdrawal Rates. (Disclosure: neither John Greaney nor Retire Early received compensation for being interviewed or allowing the use of some copyrighted material for the book.) This chapter also contains some useful tips on shopping for various types of insurance (i.e., health, disability, long-term care, etc.) Wasik closes the chapter with a discussion of how to select a financial advisor. If you're not prepared to go it alone, you need to be very wary about who you'll do business with. Wasik points out "the most objective advice is compensated on a flat-fee or hourly basis through "fee-only" financial planners who charge only for their time." That's very true, but I would lean towards paying for these services on an hourly basis. If you have a large portfolio (and if you're going to retire early, you'll need one) paying your advisor on a "percentage of assets" basis tends to overcompensate the advisor for the hours worked.
Step Nine is chock-full of ideas for what to do after you retire. Everything from "Revisiting Your Failures" to finding a "calling" is considered. Author Wasik points out that the key here (and everywhere else in life) is too keep everything "in balance." Even too much charity and spirituality can burn you out.
Step Ten is much more than a review of the previous nine. Wasik makes a strong case for the idea that we won't be truly rich and prosperous until we lift up those around us. Through examples, he points out that you don't have to go to Tibet to do this. There are plenty of opportunities to do good close to home.
There is much to consider in this volume. As the author points out in the Preface, "This is not a book that you have to start with the first chapter and read all the way to the end." Readers should have no problem starting with the Step that most interests them, and then working forward or back as their needs dictate. While it's too brief to be a comprehensive "how-to" manual for early retirement, Wasik's coverage of the psychological and "spiritual" aspects of retirement are among the best I've seen. You'll be well rewarded for the time spent reading Retire Early--And Live the Life You Want Now: A 10-Step Plan for Reinventing Your Retirement.