This article was posted September 1, 2006.
Early retirement plans typically fail for three reasons; 1) retiring before you've saved enough money to be financially-independent, 2) inadequate diversification of your retirement assets, and, 3) underestimating your annual living expenses in retirement.
Most people who've studied the topic define financial independence as having a nest egg equal to 25 times your annual living expenses, some a bit more, some a bit less. In other words, a retiree with $40,000 in annual living expenses would need a $1 million portfolio to be considered financially independent. If you're old enough to qualify for a pension or Social Security, that of course reduces the amount of money you need to draw from your savings and allows for financial independence on a smaller nest egg. For example, If you need $40,000 per year to live on, and get $20,000/year in Social Security benefits, you only need to draw $20,000 per year from your retirement portfolio, allowing financial independence on a $500,000 nest egg with a 4% withdrawal rate.
Some folks who come up short of having savings equal to 25 times their expenses may decide to accept the risk of retiring and try to make up the difference with some kind of part-time work. While purists would argue that you're not retired if you rely on regular employment to make ends meet, this might be a sound plan if it's reliable, readily available work -- say the $8-$10/hour you can get at Walmart or Home Depot. Similiarly, a retired professional like an accountant or an engineer might be able to line up some part-time consulting work -- at least for the first few years until his or her technical skills start to become obsolete. If your part-time work plans are more exotic, say branching out into something entirely new, like becoming an opera singer or a bestselling author, your chances of success diminish greatly.
Virtually the whole body of work on retirement and investment planning suggests that retirees hold some mix of equity and fixed income securities in their portfolio. A few analysts even suggest adding more exotic asset classes to the mix such as individually-owned real estate, commodities, hedge funds, or venture capital pools. You won't find any credible advisors who counsel putting all of your eggs in one basket whether it be a US Treasury bond, a single stock with an outstanding long-term record of performance like ExxonMobil or Berkshire Hathaway, or even gold and diamonds.
Other investing mistakes that can lead to a failed retirement include active trading of a portfolio, attempting to time the market by picking highs and lows, and paying excessive fees and commissions to an advisor.
Underestimating Annual Living Expenses in Retirement
While some research on aging like the U.S. Bureau of Labor's Consumer Expenditure Survey shows that the average retiree spends less money as time goes on, many early retirees report their living expenses are rising at a rate higher than the CPI. Higher health insurance premiums and medical costs, homeowner's insurance and property taxes, or even "voluntary" expenditures on travel and recreational activities can stress your budget.
Early retirement with young children requires special examination. The cost of raising a child and paying for college is typically a considerable expense. Funding for this needs to be an explicit part of your plan, not something "we'll work out when we get there."
Failed Retirement Case Study
Perhaps the most well-documented and widely discussed early retirement plan failure belongs to Rob Bennett, a self-proclaimed financial advisor and career counselor based in Purcellville, VA. Bennett hit the trifecta by making all three of the errors listed above. He is a frequent contributor to several investing and retirement planning discussion forums posting under the screen name "hocus". His early retirement plan is laid out in great detail in a robust collection of long-winded posts on these forums. To the extent that we believe he is being truthful about the status of his retirement plan, it provides a wonderful teaching tool.
Bennett famously quit his high-paying job with accounting firm Ernst & Young in August 2000 to retire on a $400,000 nest egg invested entirely in fixed income securities. The fact that Rob was only 43 years of age at the time, lives in the Washington D.C. area, and heads a household with a stay-at-home Mom and two small boys made the decision all the more baffling to those who understand the risks and perils of an early retirement plan that might require funding 50 or 60 years of living expenses.
Prior to his retirement, Rob collected some 20 binders of information on saving, investing, and retirement planning. This accumulated research and his special "spidey sense" led him to sell all his stocks in 1996 (just before one of the greatest bull markets in history) and put everything in CDs and US Treasury securities. Mr. Bennett's self-professed ignorance of mathematics led him to believe that an ill-defined market timing scheme would secure his family's future much better than a diversified portfolio of equities and fixed income securities.
The last six years haven't been kind to the Bennett household. Their annual living expenses have increased at a rate far higher than inflation (as measured by the CPI.) In 2005, they had annual expenses of $38,000 which amounted to almost a 10% withdrawal from their $400,000 nest egg -- a clearly unsustainable rate. Indeed, Bennett recently lamented that he lacks the money to take his two small boys to Disney World.
Polls show that more than 80% of the people who've reviewed the Bennett retirement plan find it irresponsible and selfish for a father of two small boys to attempt early retirement on a portfolio of only $400,000 in assets.
Salvaging the Bennett retirement plan
Since Mr. Bennett quit his job well before he'd saved enough money to become financially independent, some kind of paid employment was an integral part of his retirement plan. Forgoing the certainty and stability of a part-time job at a big-box retailer, Rob decided to become a successful author and get himself interviewed on Oprah and Larry King Live. Unfortunately, he's spent the past four years making long, delusional posts on the various Internet discussion forums devoted to investing and retirement planning and produced little in the way of marketable editorial content. Unable to find a legitimate publisher for his poorly written manuscript, Rob decided to go the vanity publishing route and spent $10,000 to $20,000 of his dwindling nest egg on thousands of hardcover copies of Passion Saving -- The Path to Plentiful Free Time and Soul Satisfying Work. The book got poor reviews and has sold few copies beyond Rob's family. To add insult to injury, Bennett is on the hook for the rental of a climate-controlled warehouse to store his inventory of unsold books.
Unwilling to alter course as his portfolio balance declines, Mr. Bennett recently wrote on his blog that he believes "God wants me to figure out what I need to do to retire early. God wants me to figure out what I need to do to be able to spend my time doing fulfilling work. God wants me to figure out what I need to do so that I can afford to take my boys to Disney World." I hope Rob's prayers are answered. Of course, more than one successful early retiree has observed that "God seems to help those who help themselves."
Rob Bennett now a lawyer and tax specialist who gives advice on video games.
Since he's been thoroughly discredited as a financial advisor and career counselor, Bennett is now selling himself as a "lawyer and tax specialist" who gives advice on video games. Here's what he advised in a recent article that appeared in the Houston Chronicle:
For more on Passion Saving author Rob Bennett see -- Morningstar exposes Passion Saving author Rob Bennett as a fraud.
There's also a new thread on the Morningstar Diehards forum where some very successful early retirees comment on Bennett's retirement plan and this article, see link:
Hocomania: A Poll for [Morningstar] Diehards -- members of the Morningstar forum assess the value and quality of Rob Bennett's robust collection of musings on that board, see link: