Anyone who knows me understands that personal finance is a big part of my journey. Straight out of college I was immersed in the topic as an employee of Dave Ramsey. Later, Dolly and I used his methods to become debt free. Most recently we made a down payment on a house where we can establish some roots as a family. I’ve largely been following the Ramsey plan for over a decade, and the far-off vision was always to retire at sixty-five with a paid-off house and enough savings to last for the rest of our lives.
With the next milestone on the distant horizon, I was kind of on auto-pilot. That was until someone at my current job brought up the concept of FI/RE – being financially independent and retiring early. I had heard the idea before, but frankly I forgot about it because it seemed like it would never apply to me. This time, my mind wandered a bit what it would be like to work only when I wanted to, or for our family to travel the states for months at a time. I did some very light research. It turns out that FI/RE almost always boils down to having enough of the the right kinds of investments that one can live off of the residual income alone while the principal remains level. Was that possible for us? A coworker in the chat mentioned the book Quit Like a Millionaire as a practical summary of how early retirement can be achieved. From a place of daydream inspiration, I bought the Kindle version and read the whole thing in a single weekend.
I’ll first say that I think the title is terrible. A better title may be How to Retire Early, but I guess the publisher wanted something more provocative. The book doesn’t jump right into the details of investing, however. The first few chapters are about the female author’s life growing up poor in communist China, which helps to give context for her mindset around wealth. The meat of the information arrives in the middle chapters: how does one actually do this? The very short answer is that, statistically, if you can save twenty-five times your annual expenses into a diversified portfolio, you can withdraw four percent per year indefinitely.
Now, for most people that is a big number to save. For the authors, it meant that they had to invest literally $1 million. Astonishingly, they were able to do this by age thirty-one. The math experts among us will determine that the authors must live on $40,000 per year, and actually that’s what they require as a married couple. How is that possible? This is where certain circumstances and views give the author a distinct advantage over most people, myself included.
Firstly, the authors have no children, which is a choice I respect. Secondly, they explicitly denounce home ownership. I can see their perspective in some ways; it is a large expense, and someone with a million dollar portfolio can pay rent indefinitely if they want to. Thirdly, their hedge against inflation is to move to another part of the world for a while. They specifically mention living in southeast Asia and eastern Europe. I’m sure those are wonderful places, but if periodically packing up and moving across the globe is a prerequisite for this financial plan, that’s quite a hurdle. Lastly, they advocate for never owning a car. That may be possible in some scenarios, but certainly not mine. Altogether, it explains how they are able to live well on a modest annual withdrawal from their investments. They do cite a few other “early retirees” that have kids and own homes, though they don’t delve into the exact details of their finances; I may follow up on some of those references later.
The cost-of-living question aside, I think the book does a solid job laying out the details of the financial plan. Concepts such as portfolio rebalancing, the “yield shield,” and the “cash cushion” make a lot of practical sense. Nothing with investments is guaranteed, and their methods largely account for that. I found it particularly interesting how they use legal and above-board methods to avoid taxes when withdrawing from retirement accounts before the standard age thresholds. If the federal government provides vehicles to sidestep taxes, I will certainly take them. So far, so good, even if my situation doesn’t completely align with theirs. It may be possible yet, even with a substantially larger cost of living.
Things took a turn, however, when they began to rebut common criticisms of their plan. For anyone who isn’t working, health insurance would rightfully be a huge concern. In one section, the authors advocate taking advantage of large subsidies offered by the Affordable Care Act, also known as Obamacare, since the low cost of living typically puts one under income thresholds which allow that. Call me crazy, but someone with a $1 million net worth should not be getting any subsidies from the government, even if their annual income is small on paper. The authors’ personal solution for healthcare seems to be seeking it outside of the United States, either through “expat insurance” or countries with liberal policies around socialized medicine. For me, all of this was the largest sticking point. None of the above are reasonable solutions for me and my family, so we would have to figure out a different way to manage the huge cost of health insurance should we ever shoot for early retirement. There were other facets such as children’s education which would be problematic for me with the solutions they offer.
From that point in the book, it became clear that their particular approach is not a fit for me and my family. Dubious civics aside, it seems like a very self-centered, if austere, existence. Sure, it’s cheaper to go live in another country for a while, but what about investing in a community? What about being available for family? Personal needs may be met, but what about meeting the needs of others? In an appendix, the authors provide budgets for the years they were saving toward financial independence. Notably, charitable giving and gifts are effectively zero. That is not the way I would choose to utilize my income and wealth, both now and once it is large, growing, and tax-sheltered. For someone with my worldview and convictions, the methods described here don’t work – often for practical reasons, but more often for ethical ones.
Would I love to retire at age forty or forty-five? Of course. It’s a lovely daydream. However, with a family that is striving for community and sharing the blessings we’ve been given, there are higher goals to attain. I plan to follow up on some of the other FI/RE advocates who have kids and homes, but for now I guess I’ll get back to Baby Step 6 – paying off the mortgage early.
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