When I started this blog, I promised myself not to write endless articles about how to finance your retirement. They are dull, redundant, and there are many people more qualified than I to advise you on this topic. Many people… maybe all of the people.
But several of you have asked, so –
Here is the only post I’ll ever write about financing your retirement
Let me warn you up front that you are probably not going to like this post. I don’t have any tricks, fancy formulas, or clever hacks. But I got started very late and I was pretty successful in a relatively short amount of time. So here’s what I did. I’ve listed all the resources at the end and I’d encourage you to take a look if this approach interests you.
This is kind of long, but there might be bears if you stick with me. If you want to jump straight to dessert, go to the last section.
So, Sherman, set the Wayback machine to the year… 1994. I’d just turned 40 and was still picking at the scab of a fresh divorce. As part of our remarkably amicable split, we paid off all of our debt (except the mortgage which I kept). Doing so made for a clean break but reset my financial status back to almost zero. I was pretty much broke. Time to start over.
I spent the next decade rebuilding my life and changing jobs a few times – I thought it might be smart to jump into this new “Internet” thing. Suddenly I looked up and I was fifty and I had saved a total of $25,000 towards retirement. Over the previous decade, I had spent almost every dime I had earned.
I clearly remember spending an entire afternoon in 2004 wandering around the UPS InnoPlex (a workplace built for wandering), worried about how I was ever going to retire – and if I couldn’t retire… what would happen to me when I couldn’t work anymore? It scared the shit out of me.
Somewhere about this time, I started thinking about the concept of “enough.” How much is enough? When will I have enough? What did I already have enough of? And for the first time in my life, I started tracking what I was spending created something resembling a budget. After a few months, it was eye-opening – I was just bleeding money. Something had to change.
So, like a good nerd, I started reading. I went back and read, or re-read, a few books that had gained a lot of attention by bucking the conventional wisdom:
Your Money or Your Life
The Millionaire Next Door
These books changed the way that I was thinking about money and retirement.
Roads and Bears
At this point, I had, as Jules Winnfield said, “what alcoholics describe as a moment of clarity.” Here’s a stupid analogy to try and explain it. At some point in your career, you will come to a split in the road. Nicely paved roads lead off in two directions. In between the two roads are woods, and the woods are full of bears.
Road A – In one direction is the conventional wisdom – “Do what you love, and the money will follow.”
Road B – In the other direction is the alternate view – “Work is not meant to be fun, work hard in your own best interests. Don’t sacrifice more money for work you love, go for the money. You want love, buy a dog. Make as much as you can, save as much as you can, as fast as you can, and GTFO. Bail and enjoy the rest of your life.”
I think that BOTH of these are equally good choices. They will both get you where you want to be. But ONLY as long as you aggressively follow one or the other.
You can’t be wishy-washy about this choice. If you choose Road A then you need to focus on finding work you really love. If that means changing jobs ten times, then do it. Keep trying something new and searching until you find that job that lights you up. You know the old quote, “if you love what you do you’ll never work a day in your life.”
If you take Road B then you need to get serious about making money, saving money, keeping costs down, and investing to make your money grow. Period. That is your focus.
The problem is that most people never choose either road. They sort of go left, then they sort of go right. Without direction they wander into the woods and bears eat their faces off.
I really thought about following Path A. But being over 50 and rather cynical, I figured it was a little late to start chasing a new career. I had been working a long time and never really experienced working in a job I loved. Maybe that job is out there and maybe it isn’t, but I wasn’t willing to take that risk. So… Road B it is.
Now I had a new, and intense focus. I needed to have enough money to retire, get out of this job, and live well as quickly as possible. How much money is that? How much is enough? Is it even possible given my income? Hell if I knew. Back to the Internet and spreadsheets. Lots of lovely spreadsheets.
It turns out that a guy named William P. Bengen did some amazing research and wrote a journal article back in 1994, that almost everyone missed, that took the first real steps to finally identify – how much is enough. He looked at every economic cycle since the crash in 1928 and discovered that if you start with a savings/investment portfolio and make a first-year withdrawal of 4 percent… followed by inflation-adjusted withdrawals in subsequent years, you should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.
So, you need to figure out how much a year you need to live on, then it is easy to calculate how much money you need to have invested, plus any other sources of income, to throw off 4% of that. This came to be known as the 4% Rule. There has been some controversy about 4% in the following years, but it is still a great place to start.
Now if you do the math, it seems like a lot of money. But if you can live cheaply, and add some part-time work income, and then factor in Social Security, it’s not that bad. Even more so if there are two of you providing income.
About this time in my life, two movements came together in an important way. There had always been the Simple/Frugal Living people like The Minimalists – Joshua Fields Millburn & Ryan Nicodemus, but there was never really a point to it. Just ways to cut costs and have less stress. Then, after the 4% Rule started to gain popularity there emerged a new group of young people who were questioning the whole corporate America job thing. They were looking to use the 4% Rule to figure out how long they had to work before they could safely quit work and play video games all day.
These two ideas were combined by two bloggers, Jacob Fisker of Early Retirement Extreme and Peter Adeney, writing under the pseudonym Mr. Money Mustache, who (with others of course) started a movement know as FI/RE – Financial Independence and Early Retirement. They took the best from the Simple Living culture and gave it a “why” that resonated with people. Live cheaply and simply – WHY? – so you can retire really, really early! Oh, OK, I’m down with that.
I’ll add the links below you so can dig deeper but the basic ideas of FI/RE are:
- After college, continue to live like a student. Keep your housing and transportation costs as low as possible. These are normally the biggest costs.
- It’s easier to reduce your costs than it is to increase your income
- Don’t buy into the American consumer culture. Drive a used car. Like Tyler Durden told us, “You’re not your job. You’re not the contents of your wallet. You’re not your khakis.”
- Pay off and avoid debt.
- Put as much distance as possible between your income and your costs.
- Max out any tax-deferred savings vehicles as you can. 401k, 457, 403b, IRA, HSA, etc.
- Invest as much as you can in low-cost index funds
- Add multiple income streams – side hustles
- Then use the 4% Rule to figure out when you have enough to pull the cord and quit your job.
So, Finally, What Did I do?
OK, so if you skipped right to the bottom here, that’s cool. But you missed out on the story about bears eating people’s faces off. Just sayin’.
Being a little older than the FI/RE people was actually a benefit. I had a higher income and I had already bought most of the consumer goods I needed or wanted. My house was already furnished. What I mainly needed to do was to stop spending. Which brings us back to the concept of “enough.”
When I looked around my house I figured out that I already had enough of most things. I had enough clothes to last the rest of my life. I had all the entertainment electronics I’d need for years. Same with computing power. I was good. So, I just… stopped.
It turns out to be much easier than I thought. I just stopped buying new stuff. No more new books, no more new DVDs and BluRays, or games. I stopped going to the mall just because I was bored. I started buying groceries at Aldi and Walmart. No upgrades.
Sure, I replaced a shirt when it got a rip, and added a pack of underwear as needed. And I went out and had fun, but I just got out of the shopping habit.
So in 12 years, I went from only $25K to having enough invested to comfortably retire by doing the following:
- Stopped spending
- Used the money saved to pay off all credit card debt and auto loans
- After that, I paid off my credit card debt 100% every month
- Once that was paid off I used the extra to max out my 401K every year
- Once that was maxed I put any extra money into a low-cost index mutual fund (including tax refunds, rebate checks, etc.)
- I saved all the money I received as part of the UPS bonus plan
- UPS stock started throwing off a decent dividend payment 4 times a year, but I didn’t use the Dividend Reinvestment Program, I took the money and put it into the mutual fund which as growing faster than UPS stock value.
- I wrote a book that generated a little side income – all of which I added to the Index Fund.
- I kept investing right through the 2008 crash.
- I kept my head down and waited
So that’s about it. Pretty boring. Nothing sexy or clever. I just used the same plan that the FI/RE folks were using to retire early to be able to retire on time (maybe a little early).
Did I make mistakes? All the time. The biggest being that stupid BMW I bought. Sure, it was fun, but it started to fall apart the moment the warranty expired. In the last several years of working, I spent over $10,000 on repairs. Dumb.
Also, I’ve not paid off my mortgage. I could, but right now the return I’m getting on my money invested is higher than my mortgage rate so it makes more sense to keep that money working. That could change.
And I had a few advantages. I did get a UPS pension, but since I was only a UPS employee for 14 years it’s not huge. I’d be in the same position without it. And yes, I don’t have kids which can be a big expense, but then I also don’t have a spouse and a second income. So it kind of balances out.
In the end, I’m comfortable in retirement. But I’m not wealthy. Had I started in my 30s or 40s I’d be in much better shape. But even starting in my 50s was not too late.
I’m not suggesting this method, I’m not saying this is how you should do it. I’m just saying this is how I did it. So that’s out of the way, let’s never speak of this again.
Resources Mentioned – All are worth checking out:
The Journal of Financial Planning article by William P. Bengen entitled “Determining Withdrawal Rates Using Historical Data