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Subject:  Re: How low can you go? Date:  1/14/2000  12:12 PM
Author:  hocus Number:  2198 of 801219

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 live anywhere in the United States for x dollars a day so long as one refrains from "investing" in the status items. I don't remember the exact figure, but it was between $20 and $25. Assuming it was $25 a day that was Terhorst's magic number, then $9,000 is his annual answer to the question of "how low can you go?"

It gives me some confidence that we are on the right track that the Terhorst number is at least in the same ballpark as the Dominquez number. It's a little unclear whether the Terhorst number needs to be adjusted for families larger than one. In his case, the retirement stash was being used to support himself and his wife.

Terhorst devotes a chapter of his book to estimating the amount of investment stash needed to allow for early retirement. He states that the amount needed to live comfortably is between $400,000 and $500,000. His own stash was a little over $500,000. If one were to adjust these figures for inflation (the book was written in the late 1980s, I believe), you might argue that the Terhorst approach requires at least $500,000 (and perhaps a bit more) for early retirement. (My personal view is that Dominquez makes some reasonable arguments for the view that inflation is overstated in some cases, and that a full inflation adjustment is not always needed--but that some adjustment is definitely required. Intercst argues further that, given the large increases in medical costs in recent years, the official inflation numbers may be under-stated rather than over-stated.)

Using a $500,000 figure for the Terhorst answer to our question, and assuming a 4 percent real return, we come up with an annual living expense of $20,000. This is quite a bit more than the number achieved by using his $25 a day rule.

One explanation of the discrepancy is that the $25 a day rule is Terhorst's estimate of the cost of a rock bottom retirement, while the $500,000 stash estimate is aiming at answering the question of "how low can you go" by giving up luxuries, status items, and waste, but not anything essential to a fulfilling middle-class existence. There's support for this view in the fact that Terhorst puts forward some alternate figures in the chapter on the $500,000 stash rule, saying that early retirement could be done on much less if one wants to make sacrifices (both in terms of security and in terms of creature comforts).

My view is that the question that needs answering is not "how low can you go?" if you are willing