Posted by Tim Stobbs on January 20, 2010
It’s hard to find people that have actually retired at 45, so when our commenter, deegee, mentioned that he had done it I quickly followed up on getting a guest post from him. Enjoy. – Tim
I retired in October 31, 2008 at the age of 45. I worked for 23 years in the actuarial field, the first 16 of them full-time and the last 7 of them part-time. I had an awful commute from where I lived on Long Island (New York) to Manhattan for the 16 full-time years and to Jersey City (New Jersey) for the 7 part-time years. My company became a for-profit company in 1997 and I took a big company stock payout (about $300k) in 2008, invested it in a high-yield (not quite junk) bond fund to generate enough money (along with my other considerable savings) to cover my expenses with room to spare. I have an IRA from my old 401(k) which has bounced back nicely since late 2008. After 23 years, it has nearly $300k in it and it is waiting and growing until I can tap into it in 14 years. I have a frozen pension waiting for me, too, at age 65. So, all I have to do is live off my dividends for 14 more years until the “reinforcements” start arriving. Even if I have to tap into principal in 10 years that is okay. I checked this out with a financial adviser. Playing with numbers is something I became very good at in my 23 years in the actuarial field.
I have been debt-free since 1998, having paid off the mortgage on my co-op apartment. I found a decent and affordable individual health insurance policy last year. I bought a new car (a Toyota Corolla) in 2007. My monthly expenses are both affordable and mostly predictable. I am single and am childfree, the latter my biggest reason for being able to retire.
The last year have been great. No more alarm clocks, no more trains, no more commute, no more office stuff (I actually liked the work most of the time, though), no more lousy lunches in New Jersey. Even working two days a week from mid-2007 to my final week at the end of October, 2008, was an awful experience, mainly because of the tiring, annoying, and often sickening commute.
Once I began working part-time in 2001, I was able to reclaim my life. I resurrected an old dancing hobby (at night, something I had no energy to do while I worked full-time) and began doing volunteer work in several area schools as part of the school Scrabble program. Otherwise, I come and go as I please, including spending time with my ladyfriend of 5 years. I am enjoying my second year of retirement and look forward to many more.
My first step toward early retirement unknowingly began when I was 20 years old. That year, I made the important decision that I did not want to ever have children. That step, I believe, makes it much easier for someone to retire early. Children are a huge financial burden, so unless you feel the benefits of having them offset the costs, then don’t have them.
Here are some other reasons I was able to accumulate the large sum of money I needed to retire early.
(1) I never smoked anything (i.e. cigarettes). Now I don’t want to start a debate on smoking. I am only mentioning the money I did not spend by smoking. Today, depending on where you live, it will cost you about $7 a pack. One pack a day will cost you about $2,500 a year. That’s a lot of money available to invest.
(2) My attitude on paying interest on non-mortgage debt is this: It is a waste of money. I paid off 60% of my student loans before the 6-month grace period ended. I had already saved up some money from working and still had some money left over in an old custodial account I used to pay for some of my college tuition and room/board. Back in the 1980s, the tax deductibility of personal interest was being phased out, so there was no indirect subsidy of my student loan interest any more. I have always paid my credit card bills in full each month.
Similarly, I saw paying off debt as a surefire way to get a better return on an investment. For example, if I am using money earning 2% in a bank account to pay off a student loan with an interest rate of 8%, then I am automatically earning a 6% improvement on my money. I am aware that I should keep a “Rainy Day Fund” of several months but I was not as insistent on that back in the 1980s.
Another example of avoiding interest was to pay cash for my cars and avoid the costly car loans. I bought my first one in 1986 (for $6k) when I did not have a lot of money but because I had just moved back with my parents for a few months (and paid them rent), I knew I would rebuild my account balance quickly (and wasn’t too concerned with a “Rainy Day Fund” at the time, either). By the time I bought my second car in 1992, I had more than enough money to pay for it with cash while maintaining a “Rainy Day Fund”. Doing good (and inexpensive, despite no Internet back then) research on that second car saved me a lot of money not having to buy another car for 15 years.
I refinanced the mortgage on my apartment in 1992. Back in 1989, interest rates were very high, especially for co-op apartments. Banks don’t like making loans for co-ops. I shaved nearly 5 points off my mortgage interest rate and saved $200 a month. It took only about 18 months to recoup the closing costs.
(3) I was lucky enough to start investing in stocks in the mid-1990s just when the market was beginning to take off. I was tipped off to a good stock mutual fund by an investment advisor in 1996. I took some of my gains off the table and used them to pay off my mortgage in 1998. This made me debt-free. At that time, I was working full-time so one bi-weekly paycheck more than covered all my monthly expenses, so I was able to quickly replenish the account whose value had doubled in the 4 years I was in it up to that point. I was basically investing with the “house’s money” for a while. When I wasn’t buying cars, apartments, or paying off loans early, my personal savings rate was between 20% and 64% every year.
(4) I was lucky that my company went from not-for-profit to for-profit in the late 1990s. They set up an Employee Stock Ownership Program (ESOP) and I was given lots of shares during my peak earning years (1997-2000) before I switched to part-time in 2001 and earned fewer shares. But it was my years of hard work which earned me above-average raises in the 1980s and 1990s, resulting in many extra shares proportional to my annual compensation. The ESOP exploded in the 12 years I was in it, so when I cashed it out last year (before it tanked a bit), I still cleared a big chunk of money (nearly $300k) after taxes.
(5) I do live a frugal lifestyle. I have local, low-maintenance hobbies including my volunteer work.
(6) While I still had dental insurance coverage, I had some expensive dental work done in 2007 and 2008 before it disappeared in 2009. This saved me a good chunk of money. My dental bills, now all out-of-pocket, have decreased a lot since I retired (but I still visit him every 6 months)
(7) I cook my own food, so I rarely go out to eat. But if I want to go out and eat or bring something in, I can do it. Same for my ladyfriend (who is not wealthy). This saves a lot of money over the years.
(8) I spend little on optional monthly services. Due to a good break from my cable TV provider, I pay little for it. I am not stealing services, as they are fully aware of the channels I am receiving (which do not include any premium channels). I do not own a cell phone, as I have no interest in it. Therefore, the total monthly charges for phone+cable+internet are well under $100.
(9) I found an individual health insurance policy for less than $500 a month (for 2009). The premium did rise by 20% for 2010. I hope the pending health insurance reform will keep the premiums increases in check.
Put all these things together, and you have a financial plan for retiring early. Get rid of debt, keep the monthly expenses low, buy a small place to live, keep the car for a long time…..combine that with hard work at my job and some luck with the ESOP and good personal investments…….and some luck by earning a lot while the market was booming in the 1990s…..and carefully project out a long-term financial plan with the help of an investment advisor…..(and be childfree)…..and you have a recipe for retiring at 45.
Thank you for reading,