“Working people have a lot of bad habits, but the worst of these is work.”
–Clarence Darrow
Hello everyone.
One of my favorite bloggers, who opted out of the workforce in his 30s, is returning to work. As a strong advocate of retiring early, he has found that he can no longer fund his lifestyle based solely on his passive investment income.
That is disturbing.
This man is one of my heroes, one of the founders of the FIRE movement, and an inspiration for my retirement journey at age 50. He is Sam Dogen, the author of The Financial Samurai.
At first, it felt like discovering that Santa is not real.
But after reflection, the headline is not what it seems. Mr. Dogen COULD stay retired if he wanted to. He purchased a new house outright while retaining his current home and real estate holdings. That depleted his savings.
Still, this recent development in his life surprised me. I DID retire by age 50–but I took a brief detour myself. So, is retiring at age 50 a bad idea?
We will discuss that and the circumstances that prompt people to change their most cherished plans.
THE CONTEXT
The Financial Samurai (Sam Dogen) took an impressive road to achieve financial independence. He retired in his early 30s after spending 13 years at Goldman Sachs and Credit Suisse. His MBA is from a top school–UC Berkeley.
He achieved a seven-figure net worth through tight budgeting and hard work at the age of only 28. Shortly after that, he retired, and after starting the blog Financial Samurai in 2009, he got married, had two kids, and bought more property in San Francisco, where he still resides.
If you are wondering, he is in the one percent of net worth, so we are talking about a wealthy and successful person—and one well-worth emulating. Sam is quoted more often than any other blogger on MMH.
He has announced his plans to become a part-time consultant. However, he will likely spend the rest of the time on his blog posts, writing another book, and staying professionally active. He is also looking for more of a role in the AI industry.
However, two recent changes to his life have helped prompt this change. First, he found a more expensive “forever” home in San Francisco and had to liquidate many of his investments to buy it outright. You read that right—he purchased an expensive home with NO debt in one of the most expensive places on earth. Second, his role as a stay-at-home father is no longer strictly necessary since his kids are now going to school.
But with that last change also comes a significant expense. Because of the state of San Francisco public schools, he sends both kids to private schools–which is extremely expensive.
Moreover, he is diligently saving for his kids’ college, which is also expensive too. Altogether, both of those kids’ expenses alone exceed six figures annually.
Real estate and children’s expenses account for most of the current shortfall in his budget.
PILING ON: A HARVARD ECONOMIST SAYS THAT RETIRING EARLY IS A BAD IDEA
My dismay about retiring early by age 50 increased further when an article featuring a Harvard professor appeared that questioned why anyone would think early retirement is a good idea.
Sam Dogen had a good excuse and had reached an inflection point in his life. What was my excuse?
Well, I believe that, in some cases, the arguments against early retirement are wrong.
Think of it as my protest against Harvard. See if you agree.
Here is what Professor Kotlikoff says about retiring early:
- People are not saving enough to pull off early retirement: it is safer for most to retire later. For example, the professor intends to take his own advice and work for as long as possible.
- Retirees underestimate health care costs—among other things, they live longer, so their costs are higher than they think.
- The health care system and safety net may be unreliable. Social Security is underfunded. Professor Kotlikoff believes it may be best to delay the receipt of benefits.
I do not dispute any of those points, except the deferral of Social Security or Medicare benefits. That depends entirely on your situation.
THE REAL RETIREMENT NUMBERS
In a previous post, I pointed out that most people retire sooner than they want. There are three primary reasons:
- Family obligations—the sandwich generation often must take care of their kids and parents, not just their household expenses.
- Health reasons—some people never reach anywhere close to retirement age because their health fails.
- Age discrimination—older workers are more expensive and often have their peak income cut short.
When the post was written, most people were retiring many years before age 65.
In other words, you may not have as long to prepare for retirement as you think. Therefore, I feel that you should prepare for early retirement, even if you have no intention to do so. That is what I did. When it was time, I could just say goodbye to my job. And I did.
That preparation and hitting critical checklist conditions makes first retiring at 50 safer.
THE EARLY RETIREMENT CHECKLIST
Here are the items to achieve before retiring early. Here are the characteristics of someone who can retire early:
- Stable income. Have a stable source of passive or pension income you can count on or a high enough net worth.
Passive income is often generated from real estate investments.
As for net worth, read here for a reasonable guess at the wealth level you need if you are retiring by drawing down your net worth instead of using income.
- Rising retirement income. Don’t count on static income unless you have a very high net worth (see above). Inflation eventually erodes flat income streams.
- Retaining the ability to continue to save after retirement. Check your budget to see if you are still saving during retirement. If not, retiring early may be a bad idea.
- Maintaining business contacts. Have a plan if you must return to work (don’t be a hermit and throw away your contacts)
- Attaining stable housing costs. “Fix” your housing cost by paying off your house.
- Looking ahead at the post-retirement ladder to see if you can make expenses over time (See below)
- Having reserves that cover expenses if your situation changes (especially changes to your health).
- Avoiding major purchases. Make sure that you do not have significant purchases coming during retirement.
- Having children’s expenses covered. Set aside enough money to cover your kids’ needs for college or other costs.
The decision to keep existing real estate holdings and the last two factors are the primary drivers for the Financial Samurai’s decision. And I think that in the blogging world, Sam Dogen has nothing left to prove.
THE POST-RETIREMENT “LADDER”
Here is the “ladder” of events that help fund or impact an early retirement. I did not have all of these covered when I retired, but I could see where, with time, I would get there. When considering early retirement, these dates should also be taken into account.
The sequence below represents a rough timeline and applies to me. However, it may not apply to you. Check carefully with a fiduciary financial advisor before considering any action on early retirement, and double-check what dates/events apply to you:
- 50’s—develop passive income streams to fund living expenses after early retirement—this wealth-building phase allows you to consider retiring early.
- 59 ½–the first date to use money from some types of retirement funds, without penalty (it is not advisable to withdraw funds then if you can avoid it–later is better).
- 62—Social Security income is available if you qualify.
- 65 is the first day that individuals are eligible for Medicare. Enrollment usually saves money versus private coverage.
- 70 ½–Some individuals can fund charitable deductions from qualified charitable contributions from taxable IRAs.
- 73—Required Minimum Distribution (RMDs) are required from taxable IRAs
NEVER SAY NEVER: WHEN OPPORTUNITY AND CHALLENGE MAKE YOU CHANGE YOUR MIND ABOUT EARLY RETIREMENT
I briefly changed my mind about early retirement, as Sam Dogen did. I also did it because of my extended family.
In my case, it became clear that we needed to provide permanent housing for a family member, probably for the rest of their life. However, that need appeared during one of the most trying times for my personal finances. It happened during the Great Recession.
First, the Great Recession not only derailed my spouse from a return to full-time work, but it forced her into an early retirement with a significant loss of income. Second, we owned rental real estate that plunged by a third in value. Third, investments crashed, especially in the stock market. Banks failed, one after another, because many ignored qualifying standards for those applying for a loan. As a result of lax oversight, loan after loan failed, causing chaos and forcing many banks to close.
But the situation produced opportunities, too. For the first time, the crash in real estate values meant we could purchase a small unit for the family member.
And interest rates plunged, too. But that was not as favorable as it seemed. Unfortunately, stricter funding requirements made getting a new loan to free up rental property equity impossible. We should have been able to refinance easily, but the new requirements made that impossible unless I got a job and could show a more reliable source of income.
So, since I had no choice, I did.
I only worked part-time for a nonprofit for a year and a half, but it did the trick.
And we eventually purchased a tiny unit outright after refinancing our rental properties.
THE MORAL
It is fine to change a plan if circumstances change. That includes early retirement.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Urip Dunker
License: Unsplash
NOTE
An apology: I wanted to write a follow-up to the last post. Unfortunately, to do that adequately will not take a single post but 3 or 4. Hence, this post instead. I will address updating the “classic” formula to wealth, providing information about the changes to various living costs, and investing in the future.