Work Less, Live More By Bob Clyatt | Book Review
What would you do if you could retire a decade or two earlier? Would you travel the world? Volunteer for a worthy cause? Develop a hobby?
Just because the government suggests that you work until age 67, it doesn’t mean that you absolutely must follow their suggestion. In this book, Clyatt shows us that with disciplined saving, a detailed examination of your expenses, and the drive to stay focused, semi-retirement can become a reality.
What is Semi-Retirement?
Simply put, it’s transitioning out of the full-time careers that many of us currently in, so that we’ll have more free time. With this new found time, you could pick up new interests, find a more fulfilling avocation, or just look for other ways to be more fully engaged in living your life.
Today, American workers take fewer paid vacation days than workers in any other developed country, at an average of only 10 days per year. Contrast that with the Chinese, who take 15 days per year. Or the Japanese, who take 17 days per year. If that’s not discouraging enough for you, the top ten European countries take an average of 29 days (almost 6 weeks!) of paid vacation every year.
According to Clyatt,
“Most career-track professional employment requires 55 or more hours a week of sustained in-the-workplace effort, along with more labor at home or on the road checking email and catching up on relevant business news. The average American worker logs nearly 48 hours a week on the job.”
So why semi-retire? Think about all the work-related stress that you’ll no longer have to go through. Or the fact that you’ll no longer have to stay late at the office. Or that you’ll no longer be chained to your blackberry.
The bottom line is that a lot of us are overworked. Do you want to stay on this cycle for the remainder of your working life?
How Do You Do It?
First of all, you need to decide why you want to semi-retire. To be quite honest, this is the challenging part for me. I’m not exactly sure what I’d actually do with all of my free time. With such a tremendous resource as more time, I feel like I would want to use it wisely.
Do you want more time so you could exercise more, take better care of your health, or nourish deeper relationships with your family and friends? If you had all the time in the world and no financial worries, what would you do?
Semi-retirement isn’t something that many people currently pursue, or even think is possible for that matter. So in reality, you may not find a lot of encouragement in your pursuit. Therefore, defining the “why” will help you push through weariness, obstacles, self-doubt, or any other difficulties that may arise.
Once you figure out the “why”, the “how” isn’t rocket science. It should come as no surprise that it involves aggressive saving, a certain detachment from the high-end lifestyle, and disciplined investing. However, Clyatt does remind us that moderation is key. You don’t want to overdo the saving and penny-pinching, work hard, yet burn out quickly. Semi-retirement is about savoring life and living it fully.
How Do You Know When You’re Actually Ready?
To know when you’ll be able to semi-retire, you have to determine the amount that you need to accumulate to meet your annual expenses during those years. Depending on your circumstances, this could be $30,000, $50,000, or more. Clyatt offers a few ways to figure this out. One method is through taking your annual pay, and subtracting expenses you’ll no longer need, such as savings, work-related expenses, and paid debts. Then you’ll add to this figure the new expenses you will incur, such as lower income taxes, fund management fees, and home and car repair costs. However, you should be entering retirement without need for any kinds of loans whatsoever.
Once you have this number, an easy way to get a rough estimate of the total amount you need is to multiply your annual expenses by 25. So if you need to live off $30,000 per year, you’ll need to accumulate $750,000 before you can semi-retire comfortably.
How Do You Invest To Earn That Much?
By allocating your money into various asset classes (stocks, bonds, real estate, etc.), you can create a portfolio that has achieved historical returns between 8-10%. Clyatt lays out three examples of such portfolios that you can choose from.
If you want to put your investments on autopilot, you can simply select a single balanced mutual fund. But if you’re a more of a hands-on investor, you can select several mutual funds to create a more diversified portfolio with less volatility.
So if you’d like to retire in 20 years with $750,000, and you assume an 8% annual return, you’ll need to save about $15,200 every year.
Where Do You Invest?
Generally speaking, there are two types of savings accounts that you’ll need. One of them is a tax-advantaged plan such as an IRA, 401k, or 403b. The other is a taxable bank and brokerage account that doesn’t have favorable tax treatment.
The reason for having these two types of accounts has to do with accessibility. Since the tax-advantaged plan limits your ability to withdraw money before you reach age 59 1/2, it helps to have a taxable account that you can access in your 40’s and 50’s.
How Much Can You Withdraw?
Clyatt uses a term called the Safe Withdrawal Rate, which is 4% every year. Here’s how the math works:
If your portfolio grows at an average rate of 8% interest per year, you’ll need to subtract an assumed inflation rate of 3% a year, subtract portfolio management fees of roughly 0.5% a year, and state and federal taxes of around 0.3% a year.
After doing this, you’re still left with enough interest to withdraw 4% each year, while keeping the inflation-adjusted value of your portfolio constant every year. So with this method, you won’t have to withdraw any of your principal, and you should be able to live off of just the interest for the rest of your life.
What About Taxes?
When you semi-retire, your tax situation should be a lot better than it is now. This is because the highest tax rates are on earned income. Since you’ll be living off of interest, dividends, capital gains, and maybe some income from part-time work, you’ll be left with a more manageable tax bill.
While interest income is taxed at the same rates as earned income, qualified dividends and capital gains are taxed at just 15% in 2010, and at 0% if you’re in the lower two tax brackets. However, tax rates are subject to change in the future.
When you semi-retire, your tax situation should be a lot better than it is now. This is because the highest tax rates are on earned income. Since you’ll be living off of interest, dividends, capital gains, and maybe some income from part-time work, you’ll be left with a more manageable tax bill. If you are semi-retired military you should take advantage of some of the excellent software on the market dealing with military taxes.
I suppose the challenge most of us will face is saving the required amount each year to reach our goal. To help with this, there are tips in this book on ways to save on both smaller and larger expenses.
Nonetheless, if you want to reach semi-retirement bad enough, and have some clear ideas of what you’d like to do with all the free time you’ll gain, then you should check this book out.
Do you want to semi-retire before you turn age 67? Are you willing to make some sacrifices to do this?
This post was included in the Carnival of Personal Finance for the week of April 19, 2010. You can find it at Debt Ninja’s blog, along with many other excellent posts related to the world of personal finance.
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