Friday, March 22, 2013

Retire Early

One thing that's nice about rejecting consumerism is that you can consider retiring early.  Owning a bunch of things like boats, fancy electronics, nice cars, this just doesn't do much for me.  I'd rather be at home working on a skill.  Maybe learn to play the piano.  I talk about learning foreign languages.  For me this is more enjoyable, and if you want to teach yourself of course it doesn't cost much.

If I really did live that kind of lifestyle I wouldn't need much on an annual basis to survive, especially if my house was paid off.  Just doing some rough calculations I figure (since I'm married and will pay for two in retirement) that I'd need about $24K per year.  That's probably a bit more than I need, but it gives me a cushion.

How much savings would be required to draw $24K/year?  A conservative method is to resolve to draw no more than 4% of your total savings every year as income.  You assume your savings could grow at 7%, inflation will eat 3% of the value, and so if you draw 4% effectively your savings doesn't ever diminish.  You can draw 4% indefinitely.  So this means I'd need $24K/4%=$600,000 in savings to retire.

A lot of people look at that and say it's all well and good, but when your savings is tied up in a 401k plan it doesn't really matter because you can't withdraw money from that until you are at least 55 if you decide to stop working.  Right?  Wrong.  You can in fact draw from your 401k at whatever age you want as long as you are no longer working, and you still avoid the 10% penalty.  The trick is you just must take the money as a series of equal periodic disbursements, like $24K/yr, and you would have to sustain that rate for a period of at least 5 years.

For me a $24K/yr lifestyle probably won't happen until my kids are through college.  I want to help them with that because I don't want them to be debt slaves.  That means I'll need to work for another 12 years (I'll be 50 then).  At that point I should have more than $600K saved and at that point can afford to retire if I choose to.  That feels good, and it's made possible by living differently than the typical American consumer.

12 comments:

Jonathan said...

Interesting point about the 401k escape hatch. I'm not sure it's as simple as you think it is though- from what I've read you have to withdraw for 5 years or until 59.5, whichever is *longest* to avoid a 10% penalty. So I guess one could argue you can start distribution at 55 then?

Also, it seems to indicate that you must withdraw based on your life expectancy, not just an arbitrary number, which starts at 30 years at age 60. Would have to do some digging on that.

But I guess this is a good problem to have, and if you have enough money and a lifestyle which will allow you to retire at age 50 with or without 10% fee, more power to you!

PS - A third option of course would be to build up a side biz and try and get some passive income until your cost of living is equal to your income, and then have your 401k as a backup plan. Once your kids are off to college and you go live in an airstream trailer in Montana, you might be golden, with your net worth actually increasing...

Chad said...

Ding, ding, ding Jonathan. We work to move p the ladder, at about the time Jon could either demand a certain amount for his labor due to experience or worth - he'll bow out to live on $2K a month when he could be earning well into his 60's and could help his family or others - seems like the most ultimate form of selfishness to me. For me it would be far more important to be able to help my kids, live doing more than sitting at home waiting for death learning a third world language in a 20 year old chair - that sounds like death to me or worse.

It would be foolish to quit when the value of your labor is nearly at its peak.

When it's retirement time for me - I am going to live it up and go out in style while hopefully living a nest egg for our kids/grand kids.

Jon said...

Jonathan, if you do find a source on that 59.5 claim let me know.

Chad, I do agree with you to some degree. My earning potential could be peaking around the age of 50 (probably a bit earlier, but the point is the same) and imagine if I could earn that money and I didn't even need it. How many people out there could I help with the money I could earn but wouldn't need? I did kind of fantasize about remaining on the job and every pay day going out and finding someone that needed the money, like maybe a person in need of car repairs that only earns enough to meet basic needs.

So I do kind of agree with you that what I'm suggesting is a bit selfish. Staying on the job is not really what I want to do, but I could relieve a lot of suffering that way.

Though for my kids, remember that my savings doesn't ever diminish, so if I retire early when I finally die I give my kids that money, and now they can live forever on that savings if they likewise live modestly. Of course my kids will split my money, but then this amount of money is enough to support two people (me and my wife) so it could support each of them too.

It's a cliche but I think it's true that the best things in life are free. Maybe you don't agree so you best keep working.

Jon said...

Jonathan, let's also remember the fourth option. Hit the lotto. :)

Yeah, an income stream that doesn't require work is a nice option.

Jonathan said...

Chad,

Personally I hope to never tap into my 401k plan, although it's on track to provide plenty for my retirement.

Instead, I hope to have enough residual income from business endevors, and/or be able to leverage my time doing what I love 1 day a week to provide for a upper-middle class lifestyle without the need to utilize interest from a large nest egg. I do not ever plan to "retire" per-se in the sense of engaging and helping people, but I do plan on being able to extract myself from the 9-5 rat race over the next few years.

That being said, I wouldn't characterize my objective as trying to move up a "ladder", but rather to make a positive impact on my family and those around me. Financial gain allows me to stop exchanging time on things I do not enjoy/do no not excel at for money, but I do not think a given salary or income (or lack thereof) indicates anything noble in and of itself.

If I could make $100 an hour in the corporate world but instead chose to volunteer my services pro bono, that could be equally or more noble.

In that way, I have no problem with Jon or anyone else's plan to retire early. If someone wishes to live frugally, save up their money, and then live off of the interest or even the principle until they die, more power to them.

Regardings providing for children, I personally feel the most valuable contribution to my children will be to teach them the following:

1) to have a personal relationship with Christ
2) follow their dreams and have the entrepreneurial skills to not be reliant on a diploma and a 9-5 job
3) work hard
4) provide them a global perspective

Providing financially for my kids education will not be at the expense of other opportunities (although presently we've got a pretty good start). If given the choice between making 150k a year living in the States, or travelling to a third world country to help at an orphanage for a year, and have less money for my childrens education, I would do the latter in an instant, if I felt so called.

In fact, the main reason we are not doing so now, and have not completely unplugged from the US and moved abroad for at least part of the year is that I do feel that personally I should be able to provide for my expenses and not reliant on a church or others to act in a "missionary" type capacity, and so I am currently developing my side business which will eventually take the place of my 9-5 job and provide the location independence in line with my familie's priorirties.

Jonathan said...
This comment has been removed by the author.
Jonathan said...

Jon,

http://www.401khelpcenter.com/faq/faq_11.html#.UVcnxByTjSg

"they must continue for a period of five years or until you reach age 59½, which ever is longest."


Also, an example from:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments


How are payments determined under the three methods?
Example:
Bob, age 50, is the owner of an IRA from which he would like to start taking distributions beginning in 2011. He would like to avoid the §72(t) additional 10% tax imposed on early distributions by taking advantage of the substantially-equal-periodic-payment exception.
Bob’s IRA account balance is $400,000 as of December 31, 2010 (the last valuation prior to the first distribution)
120% of the applicable federal mid-term rate is assumed to be 2.98%, and this will be the interest rate Bob uses under the amortization and annuitization methods
Bob will determine distributions over his own life expectancy only
Required minimum distribution method
The required minimum distribution method consists of an account balance and a life expectancy (single life or uniform life or joint life and last survivor each using attained age(s) in the distribution calculation year). The annual payment is redetermined each year.
For 2011, the annual distribution amount is calculated by dividing the December 31, 2010, account balance ($400,000) by the single life expectancy (34.2) obtained from I.T. Regs. §1.401(a)(9)-9 Q&A-1, using age 50 ($400,000/34.2 = $11,696).
For subsequent years, the annual distribution amount will be calculated by dividing the account balance as of December 31 of the prior year by the single life expectancy. Use the same single life expectancy table used in prior year calculations, but use the current age. For example, if Bob's IRA account balance, after the 2011 distribution has been paid, is $408,304 on December 31, 2011, the annual distribution amount for 2012 ($12,261) is calculated by dividing the December 31, 2011 account balance ($408,304) by the single life expectancy (33.3) obtained from Q&A-1 of I.T Regulations §1.401(a)(9)-9 using age 51 ($408,304/33.3 = $12,261).
Fixed amortization method
The fixed amortization method consists of an account balance amortized over a specified number of years equal to life expectancy (single life uniform life or joint life and last survivor) and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
For 2011, the annual distribution amount is calculated by amortizing the account balance ($400,000) over a number of years equal to Bob’s single life expectancy (34.2) (obtained from Q&A-1 of I.T. Regs. §1.401(a)(9)-9 using age 50), at a 2.98% interest rate (April 2011 rates). The annual distribution amount is $18,811.
Fixed annuitization method
The fixed annuitization method consists of an account balance, an annuity factor and an annual payment. The annuity factor is calculated based on the mortality table in Appendix B of Rev. Rul. 2002-62 and an interest rate of not more than 120% of the federal mid-term rate. Once an annual distribution amount is calculated under this method, the same dollar amount must be distributed in subsequent years.
Under this method the annual distribution amount is equal to the account balance ($400,000) divided by an annuity factor that would provide one dollar per year over Bob’s life, beginning at age 50. The age 50 annuity factor (21.345) is calculated based on the Rev. Rul. 2002-62 Appendix B mortality table and an interest rate of 2.98%. The annual distribution amount is calculated as $400,000/21.345 = $18,740.

Jonathan said...

"No, I haven't read his biography. What I'm taking from Bill Burr is not that Jobs wasn't critical in the development of certain products. What I'm taking is that there's a whole army of people involved, and he's standing up there in his black shirt giving us the impression that he's Tesla, doing it all by himself. He wasn't Tesla. He was incredible and in many ways admirable, but he wasn't Tesla."

Jon,

First you're saying Steve Jobs wasn't successful because he wasn't Tesla, and then later you're saying you don't have to be Tesla to be successful. I agree, he wasn't Tesla, but I disagree that he wasn't critical in both the development and success of the vast majority of Apple's major products. I think you're probably taking what you've heard about Bill Gates and assuming it applies to Steve Jobs. I would agree with you in a lot of ways on Gates, but not Jobs.

I think it's pretty clear that without him in the picture, not only would be not have as intuitive products in the market, we wouldn't even have many technologies in the same class as what he provided. Take iTunes for instance - getting the music industry to allow 99 cent downloads of individual songs, and then to have them easily available for the general public simply wasn't going to happen without Apple.

If you disagree with this, I encourage you to some research and see just how instrumental he was. As you've previously criticized capitalism for, the cream doesn't always rise to the top, but often require a large force, political force of will, marketing, buzz, etc. Jobs was that force of will to get artists, the music industry, and consumers to all intersect in a nice neat package. If his products were detrimental to society or poor replacements for superior products, I'm guessing you'd give Jobs the blame for that. You should conversely give him the credit for the great products.

No, he wasn't the inventor of all the technologies, but as you well know, that's hardly a criteria for bringing a product to market. Just like with your flour and sugar pill supplement example, the mechanism for adoption en masse is often times marketing. Jobs was a master at marketing, which provides for the very interesting scenario of using marketing and charisma to get people to adopt something that all parties will ultimately be very happy with.

Jonathan said...

"And you could even set aside the people that worked along side him and also consider the people that went before him. People act like we wouldn't have computers without Steve Jobs and Bill Gates. They don't mention the geniuses that went before them that created computers in the first place (incidentally it was done with public funds)."


It's not a revelation that we all stand on the backs of giants, but if your beef is that Gates and Jobs pretend they dropped an amazing technology from heaven and we should all put them on a pedestal, ok - I'm not sure who's arguing that, but I don't think it's Jobs or Gates. And even if it was, that's a separate issue from if they were a necessary component or not to have the types of technologies that we have today.

With regards to Gates, I will completely agree that another OS could have immerged - so on this point, I think we would be in much agreement. It's sort of like the Betamax vs VHS debate. When it comes to Jobs however, I think you need to dig a bit deeper.


"I see a lot of middle ground between a hard working guy like Jobs on the one hand who succeeds and the guy that sits on his couch doing nothing. In between we have others, like people that also worked really hard, contributed a lot, but just don't get any of the credit because Jobs sucks that all up for himself. And so I really don't think anybody should listen to me if I tell them what they should aspire to be. They might work really hard, they might do all the innovating, and then some CEO or program manager will steal their idea and take all the credit and they may not end up with much to show for what they've done and they might just wish they'd instead gone fishing."


Again, I think Jobs does in fact deserve a lot of the credit. Not all of it, but a lot of it. He worked his employees like dogs, sometimes with inspiration, or sometimes with humiliation. This doesn't give him the moral high ground to espouse how to live one's life, but you need to keep in mind that 1) that same employee would not have developed the same technology somewhere else and 2) that technology would not have made it to a successful product elsewhere. That was the deal when you worked at Apple - you work like a dog, but then you helped contribute to a really popular product.

Jonathan said...


"I think laziness is underrated. I think I've mentioned the residents of Okinawa before. They have very high levels of happiness and long lives, but they aren't rich. They focus more on spending quality time with each other, interacting, rather than trying to pull in as much money as possible. Sitting on couches isn't so bad. Not that I'm telling anybody else what they should aspire to do. People should do whatever they want to do, and they shouldn't let external factors like societies expectations or what society says is success distract them from what really feels like success in their own mind. If a man lives an impoverished life but enjoys himself and has no regrets, then that's the right choice for him, right? Maybe Jesus would fit in that category. I'll take someone like Jesus over Steve Jobs. Jesus was more successful than Jobs, but he wasn't rich."


Are you equating laziness with monetary gain? Do you think someone can be lazy and be self disciplined? I absolutely agree you can be successful without monetary gain, but I disagree that you can be happy and lack self discipline. Living on a tropical island without a care in the world, to live successfully in a community you still need to "work" at relationships and keeping your word, being a consistent parent, maintaining your home, etc.

I'm not arguing that monetary gain is the metric for success, and I will agree that one could be highly "successful" in all sorts of different areas. Absolutely you could be successful raising a family, or helping your community, or a host of other things. But here's the thing, when you look at the bulk say, Americans, how many of them do you think are really spending their time and effort to the best of their ability? The average American has the TV on for 5 hours a day http://www.nielsen.com/content/dam/corporate/us/en/newswire/uploads/2011/04/State-of-the-Media-2011-TV-Upfronts.pdf.

I'm going to go out on a limb here and say that 99% of those who criticize Steve Jobs online devote more time to unproductive and mind numbing activities than engaging with their family or community, or trying to better themselves. It's kind of a self-selection process - those who spend their time criticizing others who are successful often are more focused on bringing down strangers than lifting up their neighbors. I could classify this blog as the rare exception, however. :-)

Jon said...

Looks like you posted in the wrong thread Jonathan. But anyway, you write:

First you're saying Steve Jobs wasn't successful

Where did I say that?

but I disagree that he wasn't critical in both the development and success of the vast majority of Apple's major products.

How is that a disagreement with me. That's exactly what I said. Here's what I said:

What I'm taking from Bill Burr is not that Jobs wasn't critical in the development of certain products.

You write:

Again, I think Jobs does in fact deserve a lot of the credit. Not all of it, but a lot of it.

I want to point out that again this is my view as well.

Are you equating laziness with monetary gain?

No.

I absolutely agree you can be successful without monetary gain, but I disagree that you can be happy and lack self discipline

For me I'd have to say I just don't know about that.

I'm going to go out on a limb here and say that 99% of those who criticize Steve Jobs online devote more time to unproductive and mind numbing activities than engaging with their family or community, or trying to better themselves

You're probably not far off there, but I don't think that matters too much. The point is the way he's treated in terms of hero worship is unjustified. He's claiming credit that is not due to him. This does not mean he deserves NO credit. It's just that many others that deserve as much credit or more are people we will never hear of.

I wrote about this for another somewhat famous person here:

http://bigwhiteogre.blogspot.com/2011/04/west-coast-customs.html

These amazing Mexican car workers do the actual work. The owner gets all the credit. I'm not saying the owner did nothing and deserves zero credit, but he's taking credit he really hasn't earned, and that is what Jobs did.

Thomas Watson said...

I'm looking for articles about signs that you are ready to retire.