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Subject:  Re: How low can you go? Date:  1/14/2000  12:12 PM
Author:  hocus Number:  2198 of 844131

My question is "How low can one go" with annual expenses?

This is a very important question, in my view. Most advocates of the Retire Early philosophy would probably argue that each person's desires are different and that the "low point" needs to be determined on a person by person basis. Others would question whether there is even a need to find a low point--that the purpose of the Retire Early calculations is to determine how soon one can safely retire, but that cutting back expenses and "sacrifice" need not be part of the equation.

The first reaction of people not familiar with the Retire Early approach, however, is shock that retirement prior to age 65 is even possible. Many seem to be thinking that even retirement at 65 is not really possible from a financial standpoint, but are presuming that, since they are doing no worse than most of their peers, somehow (perhaps by magic or government subsidy) their retirement will be funded. In trying to demonstrate the viability of the Retire Early approach to such people, I think it helps to put forward real numbers and invite examination and debate. "Here's a budget that works," I would like to tell them--"if you don't accept the idea, show me why it doesn't."

And I would like the income level of that budget to be as low as possible for two reasons: (1) to make the point in a powerful way; and (2) to make the idea inviting to people with a wide range of incomes. It is certainly a true statement to tell people that they can retire early if they have $2 million put aside. If that's the price of admission to the Retire Early club, though, not many are in a position to ever see it become a reality. The lower the number for a "just the basics" early retirement, the greater the number of wage slaves who will become interested in the question.

So how low can you go? You are right that Joe Dominquez (author of "Your Money or Your Life") lived on about $6,000. As much as I love the book, though, Dominquez was just wrong about inflation (he argued that one need not consider its effects in devising a Retire Early plan). Since he retired in 1969, he only had about $100,000 put aside to generate the $6,000. He never ran out of money until his death, so one could argue that it worked for him. But I would never recommend that someone ignore inflation in crafting a long-term Retire Early plan.

But we can calculate the value of Dominquez's plan in today's dollars. The value of money today is about one-fourth what it was in 1969. So one would need $400,000 in today's dollars to retire at the level that worked for Dominquez. My impression is that his spending was one the low side for most items (he lived in a group house, didn't take vacations, etc.), so I would put $400,000 forward as one figure to consider as an answer to the question of "how low can you go?"

It's not a final answer, though. For one thing, I've never seen details of Dominquez's budget. I would not feel comfortable in proposing that someone live on it without knowing more details about specific categories. Also, I believe that Dominquez was using his retirement stash only to support himself--higher figures would be needed for someone with a spouse and/or children. How much higher? I don't think that two people would need twice the amount needed for one--perhaps two can live as cheaply as one and a half. So a married couple might need $600,000, and a couple with children a bit more than that.

Other possible answers to the "how low can you go" question were supplied in the book "Cashing in on the American Dream" by Paul Terhorst. One section of the book discusses this specific question (not with as much detail as I would like, unfortunately). Terhorst was not really a believer in frugality. He likes to spend on travel, eating out, and other fun things. His big insight is that it is spending on the big status items--houses and cars and expensive toys--that kills early retirement dreams.

Terhorst argues at one point that one can