HowToRetireEarly

YourGuidetoGettingRichSlowlyandRetiringonLess

BYROBERT&ROBINCHARLTON

Copyright©2013byRobertCharltonandRobinCharltonAllrightsreservedPrintedintheUnitedStatesofAmericaHowToRetireEarly:YourGuidetoGettingRichSlowlyandRetiringonLess

ISBN:978-1482653724FirstEditionThisbookoranyportionthereofmaynotbereproducedorusedinanyformwithouttheexpresswrittenpermissionoftheauthorexceptfortheuseofbriefquotationsforreviewpurposes.Whileeveryefforthasbeenmadetoprovideaccurate

informationwithregardtopersonalfinancesinthisbook,theauthorisnotengagedinrenderinglegal,accounting,orotherprofessionalservicesbypublishingthisbook.Ifanysuchassistanceisrequired,theservicesofaqualifiedfinancialprofessionalshouldbesought.Theauthorwillnotberesponsibleforanyliability,loss,orriskincurredasaresultoftheuseor

applicationofanyoftheinformationcontainedinthisbook.Authorwebsite:http://www.wherewebe.com

TableofContents

IntroductionChapter1.GettingStartedChapter2.TheSpecifics:HowWeRetiredEarlyChapter3.MoreSpecifics:LifeAfterRetirementChapter4.YourRoadmaptoEarlyRetirement

Chapter5.InvestinYourselfFirstChapter6.GetOutofDebtChapter7.StartSavingEarlyChapter8.DetermineYourRetirementIncomeNeedsChapter9.CalculateYourNestEggChapter10.MakeaLong-TermInvestmentPlanChapter11.InvestRegularly

inIndexFundsChapter12.TakeAdvantageof401(k)sandIRAsChapter13.LiveBelowYourMeansChapter14.KeepHomeandCarExpensesLowChapter15.KeepYourLifePortfolioBalancedChapter16.HealthCareinRetirementChapter17.ExtendedTravel

inRetirementAppendixA.DetailedSalaryandInvestmentInformationAppendixB.CreatingYourOwnInvestmentSpreadsheet

IntroductionAttheageof28mywife

andIhadjust$16.88toourname.IstillhavethecheckbookshowingthatdishearteninglittleentrynexttothedateofAugust15,1991.Weownednohome.WewererentersinanapartmentinBoulder,Coloradoandweweregettingseriouslyworriedbecauseour

monthlyrenthadjustshotupandwehadnoclearwayofpayingit.Iwasunemployedandcouldn’tevenfindtempwork.Wehadcollegeandcarloanstopayoff.MywifeRobinwasworkingasatravelagentforthepainfullylowsumof$14,000peryear.Shewasfrazzledenoughaboutourfinancialsituationthatshewastalkingabouttakingonasecondjobatalocalconveniencestorejust

tomakeendsmeet.Atleastshehadajob.

SincemovingfromBostoninJanuary1990,thebestIhadbeenabletomanagewastempworkasawordprocessormaking$7perhour.Ihadastringoffailedcareerattemptsbehindmeandnoclearcareerpathinsight.Iwassixyearsoutofcollegeandgoingnowherefast.HowhadImanagedtomakesomanywrongturns

sincecollege?WasIevergoingtoturnthingsaround?Sometimesitseemedliketheanswertheuniversewasgivingmewasaresoundingno.

IsRetiringEarlyReallyPossible?

Webeginourbookatthefinanciallowpointofourlivestomakeitclearthatevenfromunpromisingbeginningssuchastheseitispossibletogetbackontrackandretireearly.Notthroughget-rich-quickschemesbutthroughsimplehardworkandconsistentsavings.Nomatter

whatyourstartingpoint,nomatterhowhopelessthingsmaylookrightnow,youcanchangeyourlifearoundandsetyourselfonapathtowardsfinancialindependence.

Anditdoesn’thavetotakeforever.Wediditinjust15years,beginningin1992whenweboughtourfirsthomeandendingin2006whenwewalkedawayfromourfull-timejobsforthelasttime,hardlyabletobelieveit

ourselves.Wewere43yearsoldatthetimeandhadmanagedtoscrimpandsaveourwaytonearlyamilliondollars–enoughtobuyusasimpleearlyretirement.

Frankly,ifwecandoit,socanyou.Thisbookisdesignedtoshowyouhow.Itproposesa“getrichslow”approachtoearlyretirementthathasnothingtodowithmarkettiming,daytrading,options,orhigh-risk

investmentsofanykind.Rather,itprovidespracticaladviceonhowtosetarealisticretirementgoal15or20yearsdownthelineandtakethenecessarystepstoachieveit.

Thesestepsaresurprisinglysimple.Theydon’trequireanadvanceddegreeinbusinessorfinance.Justaboutanyonecandoit,includingyou,aslongasyoutakeaself-disciplined,slow-

and-steadyapproachtoinvesting.

Solet’sgetstartedbyansweringafewquestionsyoumaybewonderingabout.

WhoIsThisBookFor?

Thisbookisprimarilyaimedathopefulearlyretireesintheirtwentiesandthirties.However,anyone–includingthoseintheirfortiesorearlyfiftieswhoarejustgettingstartedsavingforretirementinameaningfulway–canusetheconceptsinthisbooktoretirein15to20

years.Infact,latecomerstothegamemaybeabletoretireinjust10years.Why?Becausetheymayalreadyhaveahighersalary,morehomeequity,andmoremoneysetasidethanyoungerinvestors,givingthemalegup.Emptynestersmayalsohavefewerdistractions,financialandotherwise,allowingthemtofocusinontheirretirementgoalwithgreaterintensity.

Ifyoualreadyhaveahigh-poweredsalaryandareabletoliveverywellinthepresentwhilealsoinvestinglargesumsofmoneyforthefuture,thenyouprobablydon’tneedthisbook.Infactmuchoftheadviceitoffersmaysoundstrangetoyourears.Whybothermakingsacrificesandgettingrichslowlyifyouarealreadyonthefasttracktofinancialfreedom?

Butfortherestofus,it’sgoodtoknowthereisanalternativeapproachtoachievingfinancialindependence.Ittakesaslowertrackbutgetsyouthereallthesame,andwethinkaslowertrackismuchbetterthannotrackatall.

WhyAlltheSpecifics?

Weintendtobeasup-frontandhonestwithyouaspossibleinthisbookandnotsugar-coatthetruth.Welayourownfinancesbare,showingyouhowwegotwherewegotandhowlongittook.Wegiveyouhardnumbersonwhatweearned,howmuchwesavedperyear,

andhowmuchwespendperyearnowthatwe’reretired.We’llsharewithyouthesimpleExcelspreadsheetwesetuptotrackourinvestments.We’lltellyouwherewewentwrongandwhatwewouldhavedonedifferentlyifwehadittodoover.

Ofcoursethespecificsofyourownsituationwilldifferfromours,butourfeelingisthatthemoreconcrete,

quantifiableinformationyouhave,theeasieritwillbeforyoutoplanyourownearlyretirement.Youcanextrapolatefromthespecificsweprovideandapplythatinformationtoyourownsituation.IfyouhappentoliveinaveryexpensivecitylikeNewYorkCityorSanFrancisco,forexample,youmayhavetocompensateforthemuchhighercostoflivingtherebyadjustingourincome

andexpenseinformationupwards.

AreYouFinancialExperts?

Wearen’tfinancialexpertsbutwedoconsiderourselvesfinanciallysavvy.IpassedtheSeries7Examandactuallyworkedabriefstintasalicensedstockbrokerearlyoninmycareerbeforedecidingtotakeadifferent

tack.Butwebothlearnedthemostaboutinvestingsimplybydoingitoverthepasttwodecades:whatworks,whatdoesn’twork,what’sthesimplestapproach,andwhatmaysoundgoodonpaperbutisn’tsogoodinpractice.Wemadeenoughmistakesalongthewaytoserveashumanguineapigsforwhatdoesn’twork,andwesharethosemistakeswithyouinthisbooksoyourownpathcanbe

alittleeasier.Frankly,wethinkwe

havesomethinginterestingtosaynotbecausewe’reexpertsbutbecausewe’renot.We’reordinarypeoplewhosetalong-termfinancialgoalandachievedit.Ifyou’relookingforspecializedadvicefromafinancialguru,wesuggestyoulookelsewhere.Butifyouwantpracticalguidancewithplentyofexamplesonhowtoretireearlyfrom

peoplewhohavebeenwhereyouarenow,youmaywanttoconsiderwhatwehavetosay.We’reprobablynotallthatdifferentfromyou,anditcanhelptogettheperspectiveofothertravelerswhohaveventureddownthesameroadyou’rethinkingoftaking.

DidYouHaveHigh-PoweredJobs?

Iworkedprimarilyasatechnicalwriterandproposalcoordinatorintheaerospaceindustry,andmywifeworkedasatravelagentthenasaregisterednurse.Ourjobsstartedoffpayingpoorlyandgotbetterwithtime,asmost

people’sdo,butneitherwouldbeconsideredhigh-powered.Infactourcombinedgrosssalariesforthe15yearsfrom1992to2006averagedjustover$89,000.

Mostpeopletakecomfortinhearingwewereabletoachieveourearlyretirementdreamswithrelativelynormaljobs.Weprovideourannualsalaryinformationandinvestmentamountsinthis

booksoyoucanjudgeforyourself.

DidYouGetAnyFinancialHelp?

Wehadnofinancialhelpinachievingourearlyretirementgoals.Wedidnotreceiveaninheritance.Wedidnotwinthelottery.Therewasnotrustfundtodrawfrom,nocashsettlement,andnosecretgiftsofmoneyfrom

richparentstoseeusthroughhardtimes.Wehavebeenfinanciallyindependentthroughoutouradultlives,andwelikeitthatway.

Intheinterestsoffulldisclosure,ourparentsdidpayformostofourcollegeeducation(butnotgraduateschoolornursingschool),andtheydidloanus$7,000tohelpwiththedownpaymentonourfirsthomebackin1991–anamountwepaid

backoverthenextthreeyears,with8%interest.Wementionthisupfrontsoyoucandecideforyourselfifweachievedourearlyretirementgoalessentiallyonourown.

DoYouHaveChildren?

Wedon’thavechildren,andthatdidofcoursemakeiteasierforustoretireearly.Whilewehadoriginallyplannedonhavingkids,theuniversehaddifferentideasforus,soearlyretirementbecameourplanB.Givenourmodestsalariesduringmostofourinvestingyears,wecan

saywithsomecertaintywewouldnothavebeenabletoretireatage43withchildren.However,webelievewestillcouldhaveretiredbyage50orearlierwithchildren.

Ifyouhavekidsorplanonhavingthem,youcanstillusetheconceptsinthisbooktoretireearly:yousimplymaywanttogiveyourselfsomeextratimetoachieveyourgoal.Insteadofa15-yearplan,youmaywantto

puttogethera20-yearplan.Thatway,ifyouweretostartinvestingbyage30,youcouldstillretirebeforeage50.Thepowerofcompoundingissuchthatanextrafiveortenyearsofinvesting(andnotdrawingdownonyourinvestments)canmakeahugedifference,eveniftheamountsinvestedperyeararesmallerthantheywouldhavebeenotherwiseduetothemyriadexpenses

associatedwithchildren.

What’sItLikeBeingRetiredEarly?

Earlyretirementisoneofthefewthingsinlifethatreallylivesuptoitsexpectations.It’swortheverypennyyouputintoit.It’sworththeyearsofsacrificetoachieve.Andachievingitonyourownwillgiveyoua

senseofsatisfactionandaccomplishmentinitsownright.

Whilewedon’twanttoboreyouwithendlesstalesofouradventuressinceretiring,wedowanttoinspireyouwithwhat’spossibleonceyourtimeisyourown,sowe’llbrieflymentionourveryfirsttripafterretiringandletthatspeakforalltherest.In2007,celebratingournewfoundfreedom,wewent

onafive-monthtriptoNewZealandandFijiandpushedourpersonallimitswithadventureslikeskydiving,bungeejumping,hanggliding,jetboating,andaerobaticflying.Weswamwithdolphinsandseals,snorkeledwithsharksandmantarays,rompedwithlioncubs,rolleddownhillinaZorb,kayakedinDoubtfulSound,andlogged300milesonNewZealandtrails,

includingsuchGreatWalksastheMilford,Routeburn,Kepler,andAbelTasmantracks.Inshort,wehadablast,andsocanyouonceyouretireearly.Ifyou’dliketoreadmoreabouttheseandotheradventureswe’vehad,youcancheckoutourpersonalwebsiteatwherewebe.com.

We’reataninterestingjunctureinourownlivesrightnow,havinghad15

yearsofexperienceworkingtowardsearlyretirementand6yearsofexperiencebeingretiredandseeingwhatit’slikeontheotherside.(Spoileralert:It’sgreat!)Thatgivesussomeusefulperspectiveonbothsidesofthegreatretirementdivide.Wehopewecananswerafewquestionsyou’vewantedtoaskbuthaven’tbeensurewhotoask.Andmaybewecanevenansweraquestionor

twoyouhaven’tthoughttoaskyet.

Ifwecanempoweryoutostopdreamingandstartplanning,tostopwishingandstartwillingyourearlyretirementintoexistence,we’llhavedonewhatwesetouttodointhisbook.

Chapter1.GettingStarted

Soyou’vedecidedearlyretirementsoundsgoodtoyou.Infactyouthinkitsoundsgreatandwouldsuityoutoatee.Travelingtheworld,rediscoveringleisure

time,turninghappyhoursintohappydays(andweeksandmonthsandyears),followingyourdreamswherevertheymaylead....Yeah,sure,youcouldgetusedtothat.

Soyouknowwhatyouwant,you’rejustnotsurehowtogetthere.Butyou’vestartedaskingquestions:Whatwouldittaketomakeithappen?HowmuchwouldIneedtosaveup?Howmany

yearswouldittake?HowexactlywouldIgetstarted?

Well,inawayyou’vealreadygottenstartedjustbyaskingthosequestions.You’realreadyonthemovementallyandthat’sagoodthing,becausegettingstartedisinmanywaysthehardestpart.

Inertiamakesiteasytokeepdoingthesameoldsameold,especiallywhenmakingachangemeansdoing

somethinghard,likegoingtothegymforthefirsttimeorchangingyourspendinghabitssoyoucanbeginsavingforretirement.Puttingsuchthingsoffmakesperfectsense,doesn’tit?Butyou’vegottotaketheplungeatsomepoint,andthattimemayaswellbenow,sincenoneofusisgettinganyyounger.

Thegoodnewsis,inertiaworksintwoways.It’struethatanobjectatresttendsto

stayatrest,butit’salsotruethatanobjectinmotiontendstostayinmotion.Ifyoucangetyourselfmovingintherightdirection,thenthelikelihoodisyou’llkeepmovinginthatdirection–andmaybeevengainmomentumthroughtheyears–righttowardsfinancialindependenceandearlyretirement.

Ourgoalistogetyoumovinginthatdirection.And

thefirststepdoesn’tevenrequireyoutogetupoffthecouch.

DeclareIndependence

Thefoundingfathersdeclaredindependencebeforetheyactuallyachievedit,andsoshouldyou.Theyknewtheyhadahardfightaheadofthem,butthatdidn’tstopthemfromputtingtheirintentionsdownonpaperanddeclaringtheirlibertytotheworld.ThatwasonJuly4,

1776,sevenyearsbeforetheRevolutionaryWaractuallyendedin1783.

Soit’sreasonabletoask,Whendidtheyactuallybecomefree?Fromacertainstandpointtheybecamefreethemomenttheydeclaredthemselvesindependentandsawthemselvesasfree.Onceyoudeclareyourfinancialindependenceandsetyourwholeheartandsoulonit,you’vechangedyourmental

outlookonlifeandyourexpectationsforthefuture.Atthatpointyou’vealreadywonthefirstbattleinyourcampaignforfinancialfreedom.

Intheearlyyearsofthewar,GeneralWashingtonmarkedIndependenceDay1778withanartillerysaluteandadoublerationofrumforhissoldiers.Werecommendyoudosomethingsimilartocelebrateinthemidstofyour

campaign.Anartillerysalutemightbeabitextreme,butadoublerationofrumorafinebottleofwinemightdothetrick.Whileyou’resavoringit,remindyourselfwhatyou’refightingfor:alifefarremovedfromtheratrace,libertyfromthetyrannyofstressandmoneyworries,andofcoursethepursuitofhappiness.

Sopickaday.Maybeit’syourbirthdayoryour

anniversaryorthelastdayofthecalendaryear.Pickadateandputacirclearoundit.Nowvisualizeretiringonthatdate15to20yearsfromnow–andcelebrateeachyearasyoumoveclosertoyourgoal.

InourcasewechoseDecember20,ourweddinganniversary,asourfinancialindependenceday.WehadextrareasontorejoiceeachyearasDecember20rolledaround.Itmaysoundcorny,

buttrustus,havingadatetocelebratemakesitallseemabitmorereal–andyouneedthatintheearlyyears.Ittakesalotoffaithtobelievethatpunylittleaccountyoujustopenedwithafewhundreddollarsinitcansomedaytransformitselfintotheenginethatwillpoweryourretirement,butitcan,anditwill.

SetYourGoalThisbookwillhelpyou

developadetailedinvestmentplantailoredtoyourownfinancialsituation,butyoucangetstartedrightnowbysettingapreliminarygoal.Wesuggestsettingitforsomethingotherthan40or50yearsinthefuture.That’stoodistant.Youreallymightwanttoretireintheold-

fashionedsenseofthewordandsimplyliedownforagoodlongnapbythatpoint.Wethinkeven30yearsfromnowistoofaroff.No,youneedagoalthatisattainablebutnottooremote.Ifit’stoodistantitwillfeelunreal,likeashimmeringmiragethatnevergetsanycloser.

Wethink15to20yearsisideal,with25yearsbeingtheouterlimitforarealisticearlyretirementgoalyoucanstill

getexcitedabout.Thattimeframewillgiveyouplentyoftimetoachieveyourgoalwithoutbeingsofarremoveditfeelsdreamlike.

Youwantyourgoaltohavesomesoliditytoit,someheft.Youwanttobeabletopickitupinyourhandsandturnitaroundandsay,“Yes,that’swhatIwant.That’swhyI’mwillingtoworkhardrightnow.AndthesoonerIgetstarted,thesoonerI’llget

there.”Specifically,wewould

recommend:–15yearsifyouarehighlyambitious,motivated,andhavenokids(anddon’tplanonhavingthem)–20yearsifyouhavekidsbutareatleastasambitiousandmotivatedasyourdouble-income-no-kids(DINK)andsinglefriends

–25yearsifyouhavekidsandarereasonablymotivatedbutalsowanttolivealittlemorealongthewayNow,these

recommendationsaren’tsetinstone.Ifyouaresuper-earnersorsuper-saversextraordinaire,youmightbeabletodoevenbetterthanthesegoals.Youmightretireinjust10years,say,ifyou

haveahigh-payingjob,saveaggressively,andgetasolidlegupfromthemarkets.Oryoumayalreadyhavealittleretirementmoneysetaside,inwhichcaseyou’realreadyaheadofthegameandmaybeabletoretirealittlesooner.

Norisitimpossibletohavekidsandretirein15years–especiallyifyouhavesalariesthatarewellaboveaverage–butit’scertainly

morechallenging.That’swhy,forsanity’ssakeifnothingelse,wesuggestyoutackonafewextrayearstogiveyourinvestments(andyourkids)moretimetogrow.

Ifyoudon’twanttopushsohardandaren’tchompingatthebittoretireuncommonlyearly,youcansetyourgoalfor25oreven30yearsdowntheroadandallowyourselfabitmorefreedomtoliveinthepresent

whilealsosavingforthefuture.It’suptoyou:aslongasyouhaveagoalyoucangetexcitedabout,that’sthemainthing.

Oneofthefundamentalpurposesofthisbookistohelpyourefineyourpreliminarygoaltomakesureit’sachievable.Howmuchyou’llneedtosaveeachyear,howbigyournesteggneedstobe,wheretoinvestyourmoney,howmuchyoucan

expectthemarketstoreturn,howtotrackyouractualprogressagainstgoals,andhowtofine-tuneyourinvestmentplanarealltopicsattheheartofthisbook.Startingintheverynextchapterwe’llprovideyouwithplentyofconcretedetailsandreal-lifeexamplesfromourownexperiencesoyoucanseehowaplanonpapercanbecomearealityinlife.

WorkWithaPurpose

“RightatthismomentIhatemyjobsomuchIcouldspit.Sittinghereatthisdeskforthenext30yearssoundslikehelltome.”

IwrotethesewordsinajournalIkeptveryearlyoninmycareerwhenIwasfranklymiserable.Ifelttrappedinmyjobasanovicetechnical

writerandIwantedout.Itdidn’thelpthatthefirmIwasworkingforwasbeingboughtoutbyanothercompanyandafulltenthoftheemployeeshadbeenlaidoff.Therewasamalaiseintheairthatmadeithardtobeatworkeachday.

Unfortunatelyalotofpeoplefeelasimilarsenseofdespairatthedrudgeryoftheirjobs.Recentsurveyshavefoundthatnearly60%ofAmericansarenothappyat

theirworkandwouldchooseadifferentcareeriftheycouldoverwhattheydonow.Feelingtrappedandfrustrated,stressedoutandunhappy,istheregrettablefirststagemanyofushavetopassthroughbeforeweformthehardresolveittakestoretireearly.

Ifyoufindyourselfinasimilarsituation,takeheart:thingsdogetbetter.Simplyhavingaplanforearly

retirementcangiveyouarenewedsenseofhope.Fromtheverystartofour15-yearplan,IfeltlikeIcouldseelightattheendofthetunnel,nomatterhowdim.ItmademyjobbetterjustknowingIwasn’tchainedtoitforeverlikeaslavetotheoarsofagalleyship.

Andoncewestartedtakingconcretestepstowardsachievingourgoal–mostimportantlybymaking

regularinvestmentseachmonth–itchangedmyattitudeevenmore.IrecommittedtoworkbecausenowIrealizedIhadastakeinearningabettersalary.Itwasnolongerjustaboutpayingthebillsandgettingby.Weneededtomakeextramoneysowecouldinvest.Wewantedtoachievefinancialindependence,andweweresuddenlyalivetothepossibilitythattheharderwe

worked,thesoonerwecouldgetthere.

Asaresult,weworkedwitharenewedsenseofpurposeandwithamuchbetterattitude.Themoreeffortweputintoourjobs,thebetterwedid,andthateventuallytranslatedintoraisesandpromotions.Speakingformyself,IevencametolikewhatIdidforaliving.Ironically,bythetimeIretired,IfeltlikeIcould

havekeptworkingquitehappily–ifnotforever,atleastforseveralmoreyears.Butbythenwehadsomanyotherthingswewantedtodoinlifethatweknewwe’dbettergetbusy,soattheageof43weleftfull-timeworkbehindandneverlookedback.

Togettothatpointyourself,you’regoingtoneedtoworkharderandwithmorepurposethanyoueverhave

before.Yourlong-termgoalshouldbetosaveupenoughmoneythatyourmoneycanworkforyousoyoudon’thaveto.Ittakestimetobuildupanesteggofsufficientsizetomakethispossible,butonceyoudo,youcangetoffthetreadmillforeverandgetonwiththerestofyourlife.

Havingaclearlydefinedend-dateforyourworkingyearschangesyourperspectiveonthings.Your

careerbecomesjustonephaseofyourlife,aphaseyou’dliketobeabletolookbackonwithacertainamountofprideandfeellikeyouaccomplishedsomethingusefulduringthatperiod.Thischangeinattitudecanturnworkintosomethingmorethanjustachoreandmakeitrewardingandoccasionally(darewesayit?)evenapleasure.

Onceyoudecidetoretire

early,you’reworkingforyourselfasmuchasyou’reworkingforthecompanyyou’reemployedby.Sopreparementallytoworkwithapurposeforasetnumberofyearsandseewhatcomesofit.Takeonthehardassignmentsnooneelsewants.Putsomeenergyintoitandletyourjourneytoearlyretirement–thehardworkyoudotogetthere–becomepartofyoursuccess

story.

BuyTimeWhenyoudecidetoretire

earlyyou’rereallydecidingtobuytime–timewhenyouareonyourownclockandnotsomeoneelse’s.Becauseyourtimeisvaluable,wethinkyoushouldbuyasmuchofitaspossiblebyworkinghardforaconcentratednumberofyearssoyouhavemoretimetospendlateron

howeveryoumaychoose.It’snolongerenoughfor

youtomakeendsmeet–youneedtomakethemexceed.Yourgoalinyourworkingyearsshouldbetocreateseedmoneythatisn’tearmarkedforbills,groceries,mortgagepayments,andalltheothernecessitiesoflife.Thisseedmoneycouldbethrowntothewinds(spentonstuff),oritcouldbeplantedandallowedtogrowintosomethingthat

couldcastawholelotofshadeonyourfuture.Whichdoyouthinkwerecommend?

Ifyoucouldhaveabighouseoranearlyretirementbutnotboth,whichwouldyouchoose?Ifyou’relikeus,you’dchoosetheearlyretirementandtoheckwiththebighouse!“That’sallyourhouseis,”jokesthecomedianGeorgeCarlin,“it’saplacetokeepyourstuffwhileyougooutandget

morestuff.”We’reallguiltyofbuyingmorethanweshouldsometimesandsowelaugh,butit’snotsuchalaughingmatteronceyoumakethedecisiontoretireearly.Buyingstuffandbuyingtimeareindirectcompetitionforyourhard-earnedmoney,andthechoicesyoumakeinthisregardhaveadirectbearingonyourfuture.

Toomanymaterial

possessionscanfranklybeaburden,andtheycertainlysubtractfromhowmuchtimeyoucanbuy.Asyouapproachretirement,there’safairchanceyou’llbetryingtounburdenyourselfofstuffsoyoucandownsizetoasmallerspace,sodoyourselfafavoranddon’toverburdenyourselftobeginwith.Keepyourpacklightasyoutravelthroughlifeandyou’llbeahappiercamper.Livesimply,

staylean,buyonlywhatyouneed,andyou’llmakefasterprogressontheroadtoearlyretirement.

We’renotadvocatingyouputallyoureggsinonebasketandonlyliveforthefuture.Youshouldhavefunandadventuresalongthewayevenwhilesavingupforearlyretirement.Youdon’twanttomissoutonlifetodaybecauseyouweretoobusysavingupfortomorrow.Stay

balancedandrememberit’samarathon,notasprint.Paceyourselfaccordingly.

Yougetrichslowlybyputtinginmanyyearsofconsistenteffort,notbypushingsohardyoumakeyourselforthosearoundyouunhappy.Ifyoufollowthesuggestionsinthisbook,you’llspreadyourinvestmentsoversuchanextendedperiodoftimethattheywon’tcauseundue

stress.You’llkeepyourinvestmentsuncomplicatedsotheywon’toccupyyoureverywakingmoment,andyou’llputthemonautopilotsothey’llessentiallytakecareofthemselvesonceyougetthemupandrunning.

Theideaistohavealifewhilealsoplanningforabetterone.

Whenyoufirststartdownthispath,fewwillbelieveyoucandoit.Peoplewill

smileandnodwhenyoutellthemaboutyourplans,butinsidetheymaybethinkingit’sjusttalk.Doyourselfafavorandprovethemwrong.Makeyourdreamcometruethroughathousandsmallactionsanddecisionsyoutakefromdaytodayoverthecourseofyears,allofwhichadduptobuildingwealthslowly.

Ifyou’reluckyandlivetoaripeoldage,youcould

invest15yearsoftimeandtripleorquadrupleyourinvestmentwith45to60yearsoffinancialfreedom.Nowthat’swhatwewouldcallatimelyinvestment!

DreamBigNearlyeveryweekend

duringourworkingyears,RobinandIwouldtakelongwalksintheColoradomountainsnearwherewelived,andmoreoftenthannottheconversationwouldturnatsomepointtoallthefunthingsweweregoingtodoonceweretired.Whereweweregoingtotravel,where

weweregoingtoliveoverseas,theadventuresweweregoingtohave.Thoseweregoodwalks!Keepingthedreamalive–talkingaboutitandmakingitrealtoeachother–madeallthescrimpingandsavingseemworthwhile.

Anditwasworthwhile.Retiringearlyisnotapipedream:it’sachievable,anditreallydoesgiveyouthefreedomtodowhatyoulove

most.Forusitmeansbeingabletotravelforlongerperiodsoftimethanthetwoorthreeweeksourfull-timejobsusedtoallow.Nowourtripscanlastaslongaswewantthemto;wecanimmerseourselvesinanothercultureandgettoknowitfromtheinsideout.

Earlyretirementalsomeanswecanpursueourowninterestswithoutparticularregardtomoney.Wecan

write,takephotographs,andkeepatravelwebsitesimplybecausewewantto,notbecausewehaveto.Wealsolovethefactthatwhenaperfectlysunnydaycomesalongunexpectedlyinthemiddleofthe“workweek,”wecanabandonwhateverplanswemighthavehadandgoforahikewhentherearevirtuallynopeopleonthetrailsandnatureisatitsbest.

It’sliberatingtobeableto

makedecisionsabouthowtospendyourtimeoncemoneyisnolongertheprimarydriver.Doorsopenonawholenewworldofpossibilities:–Volunteerandcommunityworkthatwouldhavebeenclosedtoyoubeforebecausetheydidn’tpayasalary.–Personalprojectslikewritingorpaintingthat

fulfillaninternaldesiretocreatebutmayneverrewardyoufinancially.–Outdoororculturalpursuitsthatenrichyoursoulbutnotyourpocketbook.Whatmattersmostis

beingabletomakeyourownchoiceeachmorningwhenyouwakeup–tohaveasayinhowyouspendyourday–becausetimereallyisthe

ultimatelimitedresource.Soletyourselfdream

aboutwhatyou’lldoonceyouretireandarestillyoungenoughtopursueyourdreams.Visualizeyourselfretiredearly,thenreadontolearnhowtobuildthefinancialbridgetogetyouthere.

Chapter2.TheSpecifics:HowWe

RetiredEarlyItmayhelptohavea

concreteexampleofwhatwedidduringourinvestingyearsasaguidetowhatyoumay

alsobeabletoaccomplish.Weprovidealotofspecificsinthischaptertoallowyoutomakeareasonablejudgmentastowhatmaybepossibleinyourownlifewhenitcomestoearlyretirement.Youcanextrapolatefromoursituationtoyours,usingthedetailedinformationbelowasakindoffinancialyardstick.

AnnualSalariesLet’sstartwiththischart

summarizingourannualsalaries.AdetailedtableofsalaryinformationisprovidedinAppendixA.

Asthechartsuggests,atfirstweweremakingverylittlemoney–lessthan$25,000combinedin1990and1991.By1992wewereupto$38,000.WehadjustpurchasedourhomeinNovember1991andweren’tevenofficiallysavingforretirementyet.Thebeginningsofameaningfulinvestmentplandidn’toccuruntillate1994.However,

sinceourhomeendeduprepresentingaboutonethirdofournetworthatretirement,wethinkitmakessensetostarttheretirementsavingsclockin1992justafterweboughtit.

Forthefirst8years(from1992to1999)weearnedanaveragecombinedsalaryofjust$55,000gross.Ourafter-taxincomeaveragedaround$40,000.Outofthisamountwehadtopayahome

mortgage($1,050permonth),finishpayingoffcarandcollegeloans,andcoveralltheothertypicalbillsandexpensesthatcomewithdailyliving.Investingontopofallthiswasn’teasybutweatleastmadeabeginning,savinganaverageofabout$8,900peryearduringthisperiod.Wehopeyouwilltakesomeencouragementfromthis.Itdemonstratesyoudon’tneedapowerhouse

salarytobeginsavingforearlyretirement.Youcanmakeasmallstartnow,thenworkpurposefullytoimproveyourfinancialprospectsoverthecourseofyourinvestingyears.

Between1999and2000ourincomejumpeddramaticallyduetoRobin’sretrainingasanurse.Aquickglanceatthechartshowswhatapowerfuldifferenceitcanmakehavingtwogood

salariesworkingforyouinsteadofjustone.Intheend,helpedbyRobin’snewcareerandareasonablystrongfinishinmyown,ourcombinedgrosssalariesaveragedabout$89,000forthe15yearsfrom1992to2006.

Let’slookatonefinalsalarystatistic.Ourcombinedgrosssalariesduringour12primaryinvestingyears(from1995to2006)averagedabout$99,000.Thisisthefinancial

yardstickthatmaybethemostusefultoyou.

Basedonthisinformation,it’sreasonabletoassumeacouplewithnokidswithcombinedsalariesaveraging$100,000grossperyearcouldaccomplishwhatwedidorbetter.Thisshouldholdtrueevenwhentakinginflationintoaccountsinceoursalaryaverageovertheentire15-yearperiodwasactuallyunder$90,000.If

eachofyouearn$50,000,say,thatwoulddothetrick.Thegoodnewsis,youdon’tneedsky-highsalariestomakethiswork,yousimplyneeddecentwages.Salariesinthe$50,000to$60,000rangearecertainlyattainableintheU.S.thesedayswithalittleretrainingifnecessary.Robin’ssecondcareerasanurseisagoodcaseinpoint.

Webelieveasingleindividualsavingforearly

retirementcouldachievesimilarresultswithanaveragesalaryofabout$75,000.

Parentsearning$100,000combinedmightneedtotackonanextra5to10yearstoachievefinancialindependenceduetothehigherexpensesassociatedwithchildren.However,ifyoursalariesaverage$125,000peryearormore,youmightbeableto

accomplishsomethingsimilartowhatwedidevenwithkids.

Inflationtendstoplayhavocwithhardnumbersinbookslikethese,soyoumaywanttoadd3%peryearbasedonthebook’spublicationdatetotranslatethesalaryyardstickslistedaboveintocurrentdollars.

AnnualInvestmentAmounts

Thefollowingchartshowshowmuchweinvestedeachyearfor15years.(ExactamountsareprovidedinAppendixA.)Thisiswhatweinvested,withoutreferencetomarketreturnsorcompounding.

You’llnoticethedollaramountsstartoutsmallandgrowmuchbiggerwithtime.Thearrowhighlightsthebigjumpinyearlysavings(+$14,000)thatoccurredonceRobinbecamearegisterednursein2000.Thatamountjumpedbyanother$14,000in2001onceweweredonepayingoffover$15,000instudentnursingloansandcouldchannel

virtuallyalloftheextramoneyshewasearningstraightintoinvestments.Themoralofthestoryis,investinyourselffirstbeforeinvestingforretirementifyouwanttomaximizeyourresults.

Ifyouaddupthetotalamountweputintoinvestmentsfrom1992to2006,itcomestojustover$342,000.Again,thisistheamountweputin,notcountingmarketreturnsor

compounding.Thataveragesouttoabout$22,800ininvestmentsperyear.

Keepinmindthefirst3yearsofthis15-yearperiodwereinsignificantintermsofinvesting–ourcumulativetotalfrom1991to1994waslessthan$6,600.Atthatpointwewereprimarilyfocusedonbuyingandfurnishingourhome,payingoffloans,andswitchingtoa15-yearmortgage.Duringour12

primaryyearsofinvesting(1995-2006),weaveragedjustover$28,000ininvestmentsperyear.

Let’ssplitthedifferenceandsay$25,000peryearisadecentyardstickforanaverageannualinvestmentamount(plustheequitybuildinginyourhome)ifyouareaimingforearlyretirementin15years.Likeus,though,yourannualsavingsratemaystartout

muchsmallerthanthis.Inourfirst3yearsweonlysavedabout$1,750peryearonaverage,sodon’tbediscouragedif$25,000seemslikeanimpossiblybignumberatthemoment.Witha15-or20-yearplan,youhaveplentyoftimetomakecareerimprovementstosuperchargeyoursavings.

PercentageofNetIncomeInvested

Thenextchartshowsthepercentageofournetincomeinvestedeachyear.Asyoucansee,thepercentagesincreaseddramaticallyastheyearspassed.

Thepercentageofournetincomeinvestedaveragesoutto33%peryearover15years,or40%peryearduringour12primaryinvestingyears(1995-2006).Foryardstickpurposes,ifyou’reinvestingonethirdofyournetincomeeachyear(andyoursalaryisatleastroughlycomparabletoours),it’sreasonabletoassumeyou’reontracktoretireinabout15

years.Overtheyears,wehadto

resistthenaturaltendencytospendmorejustbecauseweweremakingmore.Insteadwedirectedany“bonus”moneyintoinvestments.Bykeepingourexpensesflat,wewereabletosaveincreasinglylargeamounts–especiallyafterRobin’sswitchtoabetter-payingjob.Thistooksomeself-discipline,butitmadeaworldofdifferencein

termsoftheamountswewereabletoinvesteachyear.Bymakingdozensofsmallcost-savingdecisionseachday–alongwithafewbigoneslikenevermovingfromourstarterhomeandkeepingthesamecarsthroughoutourinvestingyears–wewereabletodramaticallyincreasethegapbetweenearningandspendinginthelateryearsofourplan.

Ourinvestmentsasa

percentageofnetincomehitanall-timehighof57%in2001,thentailedoffpercentage-wiseeventhoughthedollaramountsinvestedcontinuedtoaveragearound$40,000peryear.That’sbecausewebeganlivingabitmorefortodayandabitlessfortomorrowatthatpoint.Bythenoursalarieswerehighenoughandourmoneywasworkinghardenoughforusthatwefounditeasierto

reachouryearlygoalswithoutneedingtosacrificesomuch.Webegantravelingmoreafter2001,butwewerestillcarefultopayourselvesfirst,makingcertainwecouldmeetouryearlyinvestinggoalsbeforeventuringoffonthatnextbigtrip.

Taxablevs.Tax-AdvantagedAccounts

Ifyouplantoretireveryearlylikewedid,youneedtosaveatleastsomeofyourmoneyintaxableaccountssincetax-advantagedoneslike401(k)sandIRAspenalizeyouforwithdrawingmoneybeforeage59½.As

thischartindicates,wehadtoplaycatch-upinvestingintaxableaccountswhenwerealizedhalfwaythroughourinvestmentplanwewouldberetiringearlierthanexpectedandwouldneedpenalty-freeaccesstomoreofourmoney.

Atretirementweheldalmost$350,000intaxableinvestmentsand$280,000intax-advantagedinvestments(a55/45split).Includingtheequityfromthesaleofourhome($200,000ofwhichwasinvestedinataxablebondfundatretirement),thesplitwascloserto65/35.

Ifyouplantoretireinyourthirtiesorforties,wethinkagoodyardstickforthe

ratiooftaxabletotax-advantagedsavingsisaround50/50.Ifyouexpecttodownsizelikewedidandputaportionofyourhomeequityintotaxablebonds,thenaimfor60/40inclusiveofthebonds.

Thecloseryougetto59½asyourlikelyretirementage,themoreitmakessensetoputallormostofyoursavingsintotax-advantagedaccounts.Therearewaysto

accessmoneyinyourtax-advantagedaccountswithoutpenaltyevenbeforeage59½(see“AllocatingBetweenTaxableandTax-AdvantagedAccounts”inChapter12).Ifyouplantoretireatage55orover,werecommendyoumaxoutyourtax-advantagedsavingsoptionsfirstbeforeputtinganymoneyintotaxableaccounts.

CumulativeNestEgg

Thischartshowsthecumulativenesteggweaccruedoverthe15-yearperiodfrom1992to2006.Thenesteggshownisforliquidassetsonlyanddoesnotincludeequityinourhomeofabout$300,000.

Ifyouaddupthetotalamountweputintoinvestmentsfrom1992to2006,itcomestojustover$342,000(asdiscussedearlierinthischapterunder“AnnualInvestmentAmounts”).Nowcomparethisamounttothecumulativenesteggshownfor2006of$626,000.Thedifference,whichcomestoabout$284,000,isduetotheeffectsofcompounding.This

isessentiallyyourmoneyworkingforyoutoearnmoremoney,anditdemonstrateswhatapowerfulforcecompoundingcanbe.Considerthatabout45%ofthetotalnesteggshownfor2006istheresultofcompounding.

It’sinstructivetonotethateventhoughwewerechannelinglargeamountsofmoneyintothemarketsfrom2000to2002,ourreturns

wereunimpressivebecausetheeconomyasawholewasinthemidstofasignificantbearmarket.Thedot-combubblehadfinallyburstandtheS&P500wasdown-9%,-12%,and-22%in2000,2001,and2002.However,throughoutthebearmarketwewerebuyingmoreshareswithourmoneyandweknewthatinthelongrunourstrategyofconsistentinvestingwouldpayoff.And

itdid.Wesawbigreturnsinthefollowingfouryears.From2003to2006theS&P500gained29%,11%,5%,and16%,respectively.Ourcumulativenestegggrewrapidlyundertheseconditions.Nowthemarketswereworkingforusevenaswecontinuedchannelingmoremoneyintothem.

Thetakeawaylessonisthis:keepinvesting–orinvestmore–whenthe

marketsaredownandyouwillreapbigrewardslateron.

EventhoughtheS&P500gainedmorepercentage-wisein2003thanitdidin2006(29%vs.16%),ourindividualreturnsweregreaterin2006.Why?Becauseourcapitalbasewasgreater:wehadmoremoneyinvestedinthestockmarketbythen.Thinkofitthisway:Ifyouhave$5,000investedinthestockmarketandthe

markethasabanner20%year,that’sagainof$1,000;butifyouhave$500,000invested,you’vejustmadeyourself$100,000.Yourdollarreturnsaretypicallymuchhigherinthelateryearsofyourinvestmentprogram.That’sthenatureofcompounding,andit’swhyevenafewextrayearsofworkcanmakeabigdifferenceintermsofthesizeofyournestegg.Ifthe

marketscooperate,youcanmakeimpressiveandrapidstridesforward–andiftheydon’tcooperate,atleastanynewmoneyyou’reinvestingcushionsyourportfoliofromgoingdownasmuchasitwouldhaveotherwise.Yournesteggmayevencontinuetoincreaseslightlyduringabearmarket,asoursdidfrom2000to2002.

Despitethecompellingargumentforstayinginthe

workforceafewyearslongerandwatchingyournestegggrowbigger,thesirencallofearlyretirementcansometimesbeimpossibletoresist.Suchwasthecaseforus.Aftercarefulthought,wedecidedtoquitfull-timeworktwoyearsearlierthanplannedandretireatage43insteadof45.Weturnedthepageandstartedanewchapterinourlives.

Wasitagooddecision?

Asyouturnthepageyourself,we’lllookathowthingsturnedoutforusonceweleftfull-timeworkandventuredintothepromisedlandofearlyretirement.

Chapter3.More

Specifics:LifeAfter

RetirementWeretiredearlierthan

originallyplannedbecause

wedidn’twanttoalmostarriveatthepromisedlandbutnotquitegetthere–likeMosesleadinghispeoplethroughthedesertforfortylongyearsbutbeingdeniedentrywithinsightofhisgoal.Robin’sworkasanursehadtaughtherfrompersonalexperiencelifedoesn’talwaysgoasplanned.Thatreinforcedourdeterminationtoretireasearlyaspossiblewhilebothofuswerestill

youngandhealthyenoughtofullyenjoyit.

Sowetooktheplunge.Ithelpedknowingoneorbothofuscouldalwaysgobacktoworkonatemporarybasisifneedbesincebothourjobsweresuitedtoit.Italsohelpedhavingarelativelyhightoleranceforriskandfeelingmoreexcitedthanscaredatthethoughtofventuringintotheunknown.

Then,too,whenwe

lookedatourportfoliobalance,wefeltlikewehadenough.Notapennymore,mindyou,butenough.Onlyyoucandefinewhatenoughisforyou,butinourcasewehadclosetoamilliondollarssavedupaftersellingourhome,whichwasenoughtogenerateabout$40,000inincomeperyear.Thatwasanamountweknewfromexperiencewecouldliveoncomfortably.

Aluxuryretirementhadneverbeenourgoal.Fromthebeginningwewantedtosaveupjustenoughtobeabletotraveltheworldaffordablyandfollowotherpursuitsofourownchoosinglikewritingandphotography.Whatwewantedmorethanmoneywastime.

Somemaybesurprisedweretiredonlessthanamilliondollarsandthinkusfoolhardy.Othersmaythink

weshortchangedourselvesbynotputtinginafewmoreyearsandsavingupforamoredeluxeretirement.Stillothersmaythinkwewaitedtoolongandcouldhavemadethejumpsooner.Allwecansayinresponseisthatdecidingwhentoretireisadeeplypersonalchoice.Whatyoudecidemaydifferfromwhatwedecided,andthat’sfine.Partofthepurposeofthisbookistohelpyoufind

yourrightbalancebetweentimeandmoney,workandplay,presentandfuture.

Didwemaketherightdecision?Didwejumpattherighttime?Forustheanswerisanunqualifiedyes.Evenwith20/20hindsightwewouldmakethesamedecisionagain,andthat’sdespiteretiringrightintothearmsoftheworsteconomiccrisissincetheGreatDepression.We’llprovide

insightsintohowweweatheredthatfinancialstormtowardstheendofthischapter,butfirstlet’stakealookatsomespecificstoseewhatourfinancialpicturelookedlikeatthemomentweretired.

NetAssetsinRetirement

ThefollowingchartpicksupwheretheCumulativeNestEggchartinthepreviouschapterleftoff.Itshowsourtotalnetassetsatretirementandbeyond,includingstocks,bonds,andrealestate.

Whenweretiredattheendof2006,ourstockholdingsstoodatabout$587,000.Theyincreasedby$40,000in2007beforeplummetingdramaticallywiththeGreatRecession.Byyear-end2008theyhaddroppedbynearly40%tojustunder$379,000,butby2010theyhadalreadyrecoveredmostoftheirlostground.

Ourbondholdings

amountedtojustunder$300,000in2007afterwesoldourhomeandinvestedtheentireproceedsinafundmirroringthetotalbondmarket.Abruptlywewentfromhavinganegligiblebondpositiontoamuchlargeronerepresentingnearlyathirdofourportfolio.Thiswasamuchhealthierportfoliobalanceforearlyretireesthana100%stockportfoliowouldhavebeen

andwasalwayspartofourplanforearlyretirement.Asthechartindicates,ourbondfundheldsteadythroughouttheGreatRecession–andinfactgrewsteadily,butwekeptwithdrawingdividendstoliveonsoitstayedflatoverallasaresult.

Ourrealestateholdingsbeganat$300,000,droppedtozerofortwoyears,thenremainedatroughly$100,000after2008.Aftersellingour

homein2007,welivedfortwoyearswithnohomeatall,rentinginsteadaswetraveled.Forthosetwoyearsourassetswereallliquid.In2009,whenrealestatepriceswereneartheirlowestduetothehousingcrisis,weboughtasmallcondoinBoulderforunder$100,000,payingforitincashwithproceedsfromourbondfund.Thecondogivesusasmallplacetocallhomewhenwe’renotonthe

road,plusasmallfootholdintherealestatemarket.

Justaftersellingourhomein2007,ourinvestmentportfoliostoodatitsall-timepeakof$975,000.Atthatpointwehadabout$350,000intaxablestockfunds,$300,000intaxablebondfunds,and$325,000intax-advantagedaccountsthatwouldremainoff-limitsandcontinuetogrowundisturbeduntilwetappedintothem

sometimeafterage59½.Thetax-advantagedaccounts,consistingofmy401(k)planandaRothIRAforeachofus,were100%investedinstockindexfunds.Allofourassetsatthatpointwereliquid,soournesteggstoodtantalizinglyclosetothe$1millionmarkinourfirstyearofretirement.

Fromapurelyfinancialperspective,itmighthavebeenwiserforustoworka

bitlongeruntilourliquidassetswereworth$1millionplusanother$100,000toputtowardssomekindofrealestateinthefuture.Slightlyover$1millionistheyardstickwewouldrecommendtoyouastheminimumamountforyournestegggoingintoretirement.Onemilliondollarsisaniceroundsumofmoney,butitdoesn’tgoasfarasitoncedid,anditwill

goevenlessfarduetotheeffectsofinflationinfutureyears.Thatamountcansafelygenerate$40,000peryear,whichisenoughforacoupletoliveonatpresentifthecoupleisreasonablyfrugalbynature.

Ifyouareveryfrugalorplantoliveoverseasinalessexpensivecountry,youmightbeabletogetbyonevenless.Wethinkwecouldliveon$30,000peryearifwedidn’t

travelsointensivelyorspentmostofourtimelivinginacountrywherethedollarstretchedfurther.Weknowotherretiredcoupleswhogetbyon$30,000orless–withtravelofamoreprudentnatureincluded–whoarequitehappywiththelivestheyareliving.

BillyandAkaishaKaderliareacaseinpoint.Theyretiredatage38andrunthehighlyusefulwebsite

retireearlylifestyle.com.Theyare“perpetualtravelers”whohavelivedonanaverageof$22,295peryear–oranaverageof$61.08perday.Theyknowthisbecausetheyhavecarefullytrackedtheirdailyexpenseseverydaysincetheyretiredin1991.

IfyouvisitBillyandAkaisha’swebsiteyouwillseethey’vehadallsortsofadventuresandhavelivedaveryfulllifeindeedonvery

littlemoney.Theyaregreatexamplesofwhatispossibleforallofusifwecanonlyconquerourfearsandtakeonthechallengeoflivinglifetothefullest.Theirstyleoftravelistobasethemselvesinacost-friendlycountrylikeMexico,Thailand,orGuatemalaandstaylongerthanwetypicallydo–oftenforyearsatatime.Thatapproachmakestheirtravellifestylemoreaffordableand

theirexperiencesallthericher.

Ifyouexpecttosupplementyourretirementincomewithsomekindofpart-timeworkorsemi-retirementoption,thatcanalsoreducethesizeofthenesteggyouneed,asdiscussedtowardstheendofthischapter.

InvestmentMixatRetirement

Thetwopiechartsshowhowourinvestmentswereroughlyallocatedbeforeandafterretirement.

Wewerevirtually100%investedinstockswhilesavingupforretirement,butweshiftedtoamixof70%stocksand30%bondsuponretiringandsellingourhome.Shortlythereafter,wefoundourselvesgratefulforeverypercentwehadinvestedinbonds,becausetheyremainedstableduringtheGreatRecessionevenwhilestocksplummeted.Afterpurchasing

ourcondofor$100,000in2009usingproceedsfromourbondfund,ourportfoliomixshiftedcloserto75%stocksand25%bondsandhasremainedinthe25-30%rangeeversince.

Asayardstickforyouonceyouretire,wewouldrecommendastock-to-bondportfoliomixof:–70/30ifyouareanaggressiveinvestor

–60/40ifyouareamiddle-of-the-roadinvestor–50/50ifyouareaconservativeinvestorAcontinuedstrong

presenceinstocksisimportantbecausestockshavethegreatestpotentialforgrowthoverthelongtermandgiveyouthebestchanceofstayingaheadofinflation.

Wecontinuetobelievean

80%to100%investmentinstocksorstockmutualfundsmakessensewhileyouarefullyemployedandactivelysavingforretirement,butyourneedschangedramaticallyonceyou’reretiredandbegindrawingdownyourinvestmentsonaregularbasis.

Atpresentwefindourselvesreluctanttolessenourpositioninstocksbecausetheyseempoisedtomake

stronggainsastheeconomymendsandmoneyflowsbackintothemarkets.We’dliketoseeournetassetscrossthemillion-dollarthresholdforthefirsttime,andwebelievestocksofferthebestpotentialtogetusthere.Thatsaid,wedoconsiderourselvesslightlyoverweightedinstocksatpresent.Astheycontinuetomovehigher,wehopetograduallyrebalanceourportfoliotoincreaseour

safetynetandmoveclosertothe70/30(orperhapseven60/40)stock-to-bondmixwe’vesuggestedtoyouasbeingidealonceyou’reinretirementmode.

AnnualWithdrawalsSinceRetirement

Sincethisisabookaboutretiringearlyonless,itwon’tsurpriseyouwetrytokeepourexpensesaslowasreasonablypossibleinretirement.Duringoursix

yearsofretirementsofar,wehavelivedon$40,000peryear,oranaverageofabout$3,300permonth.Thatamountincludesalllivingexpenses,travelexpenses,creditcardbills,andsoon.Thefollowingtableshowsourannualwithdrawalssinceretiring,includingthesourceofeachwithdrawal.

Ourtwobiggestrecurringmonthlyexpensesatpresentarecatastrophichealthinsurancepremiums($350totalatage49/50)andourcondoHOAfee($200).Otherrecurringexpenseslikecellphoneservice,basiccableandinternet,andgas/electricaveragelessthan$50eachpermonth.Carinsuranceandpropertytaxesalsoaverageouttolessthan$50per

month.Wekeepasingleprimary

creditcardanduseitforeverythingfromtraveltofuel,groceriestotakeout,andbricks-and-mortarpurchasestoAmazonpurchases.Wedonottrackexpensesorkeepamonthlybudgetperseanymore,althoughwedidsoforaperiodoftimeuntilitbecamesecondnatureforustokeeponeeyeonexpensesatalltimes.Wedobudgeton

ayearlybasis,andwehavebeencarefultostaywithinourself-imposedyearlylimitthusfar.Wehavenotneededtoadjustforinflationsofarbutmayfinditnecessarytodosoeventually.

Ourpreferrednormistowithdraw$10,000perquarter,whichmakesiteasytogaugewhetherwe’reontrackfortheyear.Weusuallywithdrawmoneyfromwhicheverfundisperforming

thebestatthemoment.Wecanrebalanceourportfoliotosomedegreesimplybytakingfromwhateverfundhasperformedbestoflate.Rebalancingataxableaccountalwayshastaxconsequences,sowetrytominimizeourrebalancingeffortstothesetypesofwithdrawals.

Ourprimarysourceofwithdrawalsoverthepastsixyearswasourinvestments:

$165,000total,or$27,500peryearonaverage.Asecondimportantsourcewasashort-termconsultingjobItookduringthedepthsoftheGreatRecession.Iearnedapproximately$65,000netduringasix-monthperiod,whichwasenoughtofund1½years’worthofretirementlivingwithoutourhavingtodrawdownourinvestmentsduringanextremelydifficultperiodinthemarkets.We’ll

talkmoreaboutpart-timeworkandsemi-retirementattheendofthischapter.

Withstocksandstockmutualfunds,itisalwaysourgoaltobuylowandsellhigh,andofcoursethatshouldbeyourgoalaswell.Ifwecan’tsellhigh,thenwerelyinsteadonadifferentstockfundthatisperformingbetter,orelseonthedividendsandinterestfromourbondfund.DuringtheGreatRecession,for

example,thestockofthecompanyforwhichIonceworkedcontinuedtoperformwellenoughthatwewereabletosellsharesofitin2008and2011whenitwasatornearitsall-timehighs.Similarly,wesoldsharesofVanguardTotalInternationalStockFundinJanuary2008whenitwasatornearitsall-timehigh.

Mostinvestmentwithdrawalssinceretirement

havebeenfromourbondfunds,whichhaveservedasourworkhorsesoverthepastsixyears.AtfirstweusedtheVanguardIntermediate-TermBondFund,relyingonitessentiallyasourcashfund.During2006(theyearbeforeweretired),weploughed$30,000intothisfund,knowingwewouldneedaccesstoreadycashoverthecomingyear.

Eventuallyweswitchedto

usingtheVanguardTotalBondMarketIndexFundbothasourprimarybondsavingsvehicleandasour“cashfund.”Wehavekepttheprincipalamountessentiallysteadyandhaveusedthedividendsitgeneratesforlivingexpenses.Thebondfundprovidesmuchbetterratesofreturnthanourbankcheckingaccountwould.Thefund’saverageannualreturnsinceinception

hasbeen6.7%.It’seasytoelectronically

transfermoneyoutoftheVanguardbondfundstoourWellsFargocheckingaccount.Theprocessonlytakestwoorthreebusinessdays,anditissoreliablewenolongerfeeltheneedtokeepaseparateemergencyfundsinceweknowwecanaccessthismoneysoeasilyinapinch.Sincethebondfundgeneratesdividendsona

monthlybasis,ittendstoreplenishitselfinareliablemanner.

Wekeepourbankholdingstoaminimumandhavejustasimplecheckingaccount.Wehavenosavingsaccount,CDs,ormoneymarkets.Bankratesaresolowinthecurrenteconomicclimatethatwefindthemunattractiveforanythingotherthanparkingthecashweanticipateneedingover

thenexttwoorthreemonths.While$40,000isthe

amountwefeelcomfortablelivingoneachyear,itmaynotbetherightamountforyou.Partofthepurposeofthisbookistohelpyoudecidewhatyouryardstickforannualwithdrawalsshouldbe.InChapter8(“DetermineYourRetirementIncomeNeeds”),wewalkyoustepbystepthroughtheprocessofhowtoestimate

youryearlyexpensesinretirementbasedonyourcurrentlivingexpenses,whichinturncanhelpyoudeterminethesizeofthenesteggyou’llneed.

IncomeTaxesinRetirement

Thefollowingtableliststheannualincometaxeswepaidfrom1990to2012,includingallfederal,state,socialsecurity,andMedicaretaxes.You’llnoticethere’squiteadifferenceinthepercentageofincometaxespaidbeforeandafterretirement.Beforeretirement

ouraverageannualincometaxasapercentageofgrosssalarywas25%.Afterretirementwetypicallypaid$0inincometaxes.EvenwhenyouincludethetemporaryconsultingassignmentIworked,theaverageincometaxoversixyearsofretirementstillcomesouttolessthan9%.

Thetableillustrateshowprecipitouslyincometaxescandroponceyouarenolongerearningwages.Forexample,inourfinalworkingyearswewerepayingnearly$40,000peryearinincometaxes–whichisthesameannualamountweareabletoliveoninretirement.In2009and2010weonceagainpaidincometaxesduetothesix-monthconsultingassignment

Itookon,whichjustgoestoshowthatsalaryandtaxestendtogohandinhand.

Itcomesdowntothis:ifyou’replanningasimpleearlyretirement,youstandagoodchanceofpayingmuchlowerincometaxesthanyou’vebecomeaccustomedtoinyourworkingyears.Youmaywanttofactorthatintoyourretirementplanning.Whileyourincometaxmaynotalwaysbezeroin

retirement,itcouldquiteconceivablybe10%orless.

Thisisgoodnewsifyou’rethinkingofretiringearlyonless:notonlydoyougetoutoftheratracesooner,youalsogettoreduceyourincometaxessooner.

DividendIncomeinRetirementLet’stakealookatone

particularyeartogetasense

ofhowincometaxesworkinretirement,especiallywithregardtodividendsandcapitalgains.In2008wehadnoincomefromwages.Insteadourincomewasbasedsolelyonwithdrawalsfromtaxableinvestments:$15,000fromVanguardTotalInternationalStockFund,$15,000fromcompanystock,and$10,000fromVanguardTotalBondMarketFund.

Thebondfundgenerated

about$1,200permonthindividendsin2008,or$14,500peryear.Weinitiallyassumedwewouldtakequiteataxhitfromthat.However,sinceourbondincomewasnolongerbeingaddedontopofearnedincomefromasalary,itnolongerhadthesametaxconsequencesitwouldhavehadduringourworkingyears.

Instead,thisdividendincomewasmorethanoffset

bytheIRS’sstandarddeductionsandexemptionsforamarriedcouplefilingjointly(totaling$17,900in2008).ThustheIRSstandarddeductionsandexemptionscanbeusedasasortofbenchmark:ifyourdividendsstayatorbelowthisbenchmark,thenyoushouldowenotaxesonsuchincome.

CapitalGainsin

RetirementInthatsameyearour

capitalgainstotaled$17,196.However,from2008to2012,qualifieddividendsandlong-termcapitalgainsweretaxedat0%ifyoufellwithinthe15%taxbracketorbelow.Partofthereasonwesoldcompanystockin2008wastotakeadvantageofthis0%ratesinceweknewourcompanystockhad

appreciatedmorethananyotherassetweowned.

It’simportanttorememberthatyouneverowetaxesonthecostbasisofthemoneyyouputintostocks,bonds,andmutualfunds.Sowhenwetook$15,000outofourInternationalStockfund,forexample,wedidn’thave$15,000incapitalgainsbecauseabout$9,800ofthatamountwascostbasis(moneyweputin).Theother

$5,200representedthelong-termcapitalgainswehadrealized,andthatwastheamountwewouldhaveowedtaxesonifourlong-termcapitalgainstaxratehadn’tbeenzero.

Withthecompanystock,onlyabout$3,000ofthe$15,000wascostbasis,sowewouldhaveowedtaxeson$12,000ofcapitalgainsina“non-zero”taxyear.

Withourbondfund,

$9,988ofthe$10,000wewithdrewwascostbasis,soweonlywouldhaveowedtaxesonabout$12ofcapitalgains.Thebondfundhadbarelyappreciatedatallfromacapitalgainsstandpoint,althoughitdidgenerateplentyofdividendsasdiscussedabove.

RetiringIntoRecession

“Ifyoudidn’tlosealotofmoneyduringthePanicof2008,youwereprobablydoingsomethingwrong,”writeBenSteinandPhilipDeMuthinTheLittleBookofBulletproofInvesting.

Well,apparentlyweweren’tdoinganythingwrong.Welostplentyover

theshortterm,andweweren’ttheonlyones.TheFederalReserverecentlyreleasednumbersindicatingthewealthoftheaverageAmericanfamilyplunged40%from2007to2010.

TheGreatRecessioncertainlytestedthetwoofusfinanciallyinwayswenevercouldhaveimaginedheadingintoearlyretirement,butwealsofoundwaystoweatherthestormandevenprosper

overthelongrun.Here’sabriefaccountofhowweretiredintosevererecession.Welearnedsomeimportantlessonsalongthewayandwouldliketosharethemwithyouhere.

WhereWeStoodPre-RecessionDuringourfirstyearof

retirementin2007,justbeforetheGreatRecession,

welivedonjustunder$40,000andsawournetworthholdsteady,evenwiththefive-monthtripwehadtakentoNewZealandandFiji.Wetookthatasagoodsign:ourinvestmentswereearningenoughtokeepupwithourwithdrawals.Weweredoingexactlywhatwehadhopedtodo:livingofftheearningsfromourinvestmentswhiletheunderlyingcapitalremained

intactandevencontinuedtogrow.

OnOctober9,2007,theDowstoodatitsall-timehighatthetimeof14,164.53andourpersonalportfoliostoodatitsall-timehighofjustover$975,000.Wewerestartingtoflirtwiththeideaofcrossingthemilliondollarthresholdforthefirsttimeandnaturallyfeltexcitedaboutit–butitwasn’ttobe.

TheRecessionStrikesDuringtherestof2007

andinto2008themarketsslidslowlybutrelentlesslydownward.TheninSeptember2008thebottomfellout.LehmanBrotherswentbankruptandalltheotherdominoesbegantofall.

Wewatchedindismayas,overthenextseveralmonths,ourportfolioshrankin

spectacularfashion.Ournetworthwentfrom$975,000inOctober2007to$683,000bytheendof2008.Thecarnagecontinuedinto2009whenourportfoliohititslowpointof$592,000onMarch9.MeanwhiletheDowhaddroppedtoanewlowof6,547–53.8%lowerthanitsOctober2007high.

Ourportfoliowasdownnearly$400,000fromitshighpoint.Thatnearly40%loss

wouldhavebeenevenworseifwehadbeen100%investedinthestockmarket,butfortunatelywehadinvestedthe$300,000fromthesaleofourhomeintoabondfundmirroringthetotalbondmarket.Thatfundstayedstableandevenwentupinvalue.Suddenlywefoundourbondholdingsrepresentedmorethan50%ofourportfoliovaluesimplybecauseourstockfund

valuationshadsunksolow.Thebondfundwasour

silverliningduringthatturbulenttime.Itprovideduswithatleastonesourcefromwhichwecouldwithdrawmoneywithoutfeelingdistraught.

PaperLossesAsforourstockfunds,

theywereterriblybeatenup,butweknewaslongaswedidn’tsellsharesofthose

funds,thelosseswereonlypaperlosses.Thatistosay,thelossesweren’tlockedinunlessweactuallysoldsharesofanyofourstockfunds,andweweredeterminednottodothat.

Toputitanotherway,westillhadthesamenumberofsharesinourstockfundsaswehadwhenthemarketswereattheirall-timehighs–it’sjustthateachsharehadlessvalue.Ifwewerepatient

enoughandwaiteduntilsharevaluationsincreasedagain,ourpaperlosseswouldbeerased.

Andindeed,aftertheMarch2009lows,stocksralliedandsharevaluationsincreaseddramaticallyduringtherestoftheyear.By2009ournetworthatyear’sendstoodat$780,000,andby2010westoodat$880,000.Thatwasstill$45,000downfromthe2007year-endclose,

butneverthelessthatwasaheckofalotbetterthanbeing$400,000down.

TreadingWaterThemainreasonour

portfoliorecoveredsowellduringthisperiodwasbecausewewithdrewverylittlemoneyfromit.Itookatemporaryconsultingjobforsixmonths,whichprovideduswithacashcushionthathelpedusrideoutthestorm

untilthemarketsrecovered.Inessencewetreadedwater,makingjustenoughsowedidn’thavetotakefromourinvestmentswhilethemarketswereattheirworst.

Inthenextsectionwetalkinmoredetailaboutpart-timeworkandsemi-retirement,butfornowsufficeittosaythatstayingflexibleandpragmaticinearlyretirementcanbeanimportantattributewhenyou’refacedwiththe

unexpected.

NoBufferforPoorMarketReturnsOneimportantlessonwe

learnedfromtheGreatRecessionwasthatonceyouenterretirementandstartlivingoffyourinvestments,youaremuchmorereliantonmarketperformancethaneverbefore.Youhavenonewmoneygoingintothemarkets

tobuffertheeffectsofpoorreturns.

Youalsolosethepsychologicalbenefitthatcomesfrominvestingnewmoneyintothemarketsduringadownturn.Youcannolongersay,“Well,atleastI’mbuyingnewsharesonsaleatalowprice,”becauseyou’renolongerbuyingnewshares.Ifanything,you’rehavingtosellsharestocoverlivingexpenses.

Technicallyspeaking,youcouldrearrangeyourexistingportfoliotoputmoremoneyintostocks,butit’sawfullyhardtotakemoneyoutofabondfundthat’sprovidingyouwithyoursolereliablesourceofincomeandputitintostocksinthemidstofavolatilemarket.Notonlywouldyoubereducingyourincomestreamatexactlythewrongmoment,butyou’dalsobeincreasingyourrisk.

Evenifyouweretotakeonatemporaryjobtotideyouoveruntilthemarketsrecovered(aswedid),you’dlikelyneedwhatevermoneyyouwereearningjusttoliveonandwouldn’tbeabletoinvestitinthestockmarketnomatterhowgoodtheopportunitiesmightlook.

WhenBadNewsIsGoodNews

Untilweretired,wehadalwayswelcomedbadnewsinthemarkets.Why?Becausebadnewsisactuallygoodnewsforbeginningandmiddle-yearsinvestors.Badnewsspellsopportunity.Thismayseemcounterintuitivebutitmakesperfectsenseonceyouthinkaboutit.IfyouhadboughtstocksinMarch2009,forinstance,whentheDowstoodataround6,500,youwould

havebeenparticipatinginanamazing50%offsale.IfyoucouldbuythelatestiPhoneforhalfoff,wouldn’tyouthinkitwasagreatdealandrushouttobuyit?Andyetwedon’talwaysbringthatsamelogictoourinvestments.

Asabeginninginvestor,yourtimehorizonissolongthatyoushouldbeexcitedaboutbadfinancialnews.Itmeansyougettobuymore

sharesforlessmoney.Ifstockpricesstayeddepressedforanotherdecade,thatwouldbefinefromyourstandpoint.Bearmarketsarelikeextendedsalesatyourfavoritestore:scoopupasmanydealsasyoucanwhilethegettingisgood.

Likewise,whileitmightbepsychologicallychallengingtowatchyourinvestmentssoarandplummetrepeatedly,such

volatilityhasnorealeffectonthebeginningormiddle-yearsinvestor.Allthatreallymattersiswhereyourinvestmentsstandwhenyoucashthemout.Ifthestockmarketgoesonamajorbullruninthelastfiveyearsofyourinvestmentplan,allthosesharesyoupurchasedatlow,lowpricesaresuddenlygoingtobearremarkablefruit.

Soforbeginningand

middle-yearsinvestorsouradviceissimple:keepinvesting.Keeptellingyourselfthemarketshavetogoupeventually.Ifyouhavea15-to20-yeartimehorizon,you’realmostcertaintobeprovenright.

WhenBadNewsReallyIsBadNewsForendgameinvestors

andretirees,badnewsreally

isbadnews.Bothgainsandlossesaremagnified.Ifthemarketssuddenlylose20%andyouhave$500,000investedinthestockmarket,that’sa$100,000lossyouhavetostomach(atleastonpaper).

Nordoyouhavetheluxuryofalongtimehorizoninwhichtorecover.Asanewretireeyouneedaccesstoatleastsomeofyourmoneynow.Ifstocksplunge,you

won’tfeelhappyabouthavingtosellthematadeeplossjusttopaythebills.It’sforthisveryreasonthatabondfundbecomescrucialonceyouretire.

SafeHavensforRetireesIfthere’sonelessonwe

learnedfromtheGreatRecession,it’sthatsavingforretirementandbeingretired

aretwoverydifferentanimals.Whilesavingforretirement,werecommendyouinvestaggressivelyinstockindexfunds.Butasyounearretirement,yourneedschangedramaticallyandyoubecomeatleastasinterestedinprotectingthecapitalyoualreadyhaveasyouareinmakingmoreofit.

Forthisreasonwerecommendyouhaveabondindexfundonceyouretire

thatrepresentsatleast25%ofyourportfolioandpreferablymore.A30%stakewouldbewiser,and40%oreven50%isn’toutofthequestionifyouconsideryourselfamoreconservativeinvestor.

Ifyouarewillingtodownsizeonceyouretire,theequityfromyourhomecanmakeforaperfecttransfusionofcashintoabondfund.Theequityinyourprimaryhomeistax-freeupto$250,000per

individualor$500,000percouple.Takethatmoneyandputitintoabondfundsothecapitalremainssafeandhopefullycontinuestogrow.OurVanguardTotalBondMarketIndexFund,forexample,hasreturned6.7%onaveragesinceinception,whichisn’thalfbadforarelativelysafeinvestment.

TwoothersafehavensworthmentioningareTIPSbondfundsandprecious

metalsfunds.TreasuryInflation-ProtectedSecurities,orTIPS,haveinflationprotectionbuiltintothemandarebackedbythefullfaithandcreditoftheU.S.government.Ifadayevercomeswhenhighinflationrearsitsuglyheadagain,TIPSshouldofferretireesasafeportinthestorm.

Forthesamereason,asmallpositioninapreciousmetalsfund–ifboughtat

reasonablevaluations–isworthconsideringbecausesuchfundstendtoruncountertothemarkets.Theyprovideyouwithasmallpoolfromwhichyoucandrinkuntilthedroughtendsandtherestofyourportfoliohastimetoheal.

Part-TimeWorkandSemi-Retirement

Thereisneveragoodtimeforasevererecession,buttheworsttime,expertssay,isrightafteryouretirebecauseyoucanendupdepletingyourcapitalfasterthanyouexpected.Yournesteggcantakeadramatichit

duringasevereandextendeddownturnintheeconomyandneverfullyrecover.Wecertainlydidn’twantthattohappenafterhavingworkedsohardtoreachthepointwherewecouldretireearly.Instead,wewantedtodoallwecouldtominimizeourwithdrawalsuntilmarketconditionsimproved.

SowhentheGreatRecessionhitandwerealizeditwouldn’tbeendingany

timesoon,webegantoconsiderouroptions.Eitherwecouldtightenourbelts–reallytightenthem–tothepointwhereweweretakingouttheminimumpossibleamounttoliveonuntilthemarketsrecovered,orwecouldearnalittlemoneyonthesidesowedidn’thavetowithdrawfromourportfolioduringatroublingtime.

Thebelt-tighteningoptionhaditsappeal,especiallyif

wecoulddoitinaforeigncountrywhereourdollarwouldstretchfurtherandwecouldenjoynewexperiencesatthesametime.Wewereactivelyconsideringsuchanoptionwhenadifferentkindofopportunitycameknockingatourdoor.

WhenOpportunityKnocksIntheendthedecision

practicallymadeitself.OutoftheblueIwasofferedatemporaryconsultingassignmentatanaerospacefirmwithineasydrivingdistanceofourcondo.Itwasforabigproposaleffortthatwasrightupmyalley.Theassignmentwasonlyexpectedtolastthreemonths,whichwasperfectasfarasIwasconcerned.Itookthejobandconsideredmyselffortunate.

Ofcourse,asoftenhappenswithproposals,theassignmentendeduplastinglongerthanexpected,soinsteadofthreemonthsIwoundupworkingsix(fromSeptember2009toFebruary2010).Butthatsixmonthsprovideduswithenoughcashfornearlytwoyears’worthofretirementliving–includinganexpensivetriptoItalyandSwitzerland(withacruisetoGreeceandTurkeythrownin

forgoodmeasure).Thatsplurgetripwasour25thweddinganniversarygifttoeachother,anditwouldn’thavebeenpossiblewithoutthetemporaryworkIhaddone.

Interestinglyenough,theconsultingassignmentturnedouttobethebestworkexperienceofmylife.Theveryfactthatitwastemporarymadeallthe

difference.IenjoyedgettingtodosomethingIwasgoodatonmyownterms.ForthatshortwindowoftimeIputmywholeheartandsoulintowinningtheproposaleffort(whichwedid,bytheway)–andthenitwasdone.TheverynextdayRobinandIjettedofftoIndiaandNepalforanunforgettablethree-monthtrip.Innotimeatalltheworkassignmentfadedawaylikeapleasantbut

distantdream.Now,wemighthavebeen

abletoliveonminimumwithdrawalsfromourinvestments–say,$25,000peryear–withsomeseriousbelttightening,butwecertainlywouldn’thavebeenabletogoonanextendedtriptoEuropewithoutthehelpofthattemporarysalary.Soyoumaywanttothinktwicebeforedismissingoutofhandthethoughtofalittlepart-

timeworkinretirement.

IntheDriver’sSeatPart-timeworkcangoa

longwaytowardspaddinganesteggthat’snotquiteashealthyasyou’dlike,oritcangiveyousplurgemoneytodosomethingyoumightnotletyourselfdootherwise.Anymoneyyouearngoesstraightintoyourpocketinsteadofbeinginvested,soevenalittlecanmakeabig

difference.Wethinkit’sabettersolutionthanfrettingaboutfinancesorfeelingstrappedforcashunnecessarily.

It’simportanttoremembernooneisholdingaguntoyourheadonceyouretireandsayingyoucan’twork.Thesedaysit’salluptoyouwhatyouwantyourretirementtobe.AsFredBrockwritesinRetireonLessThanYouThink,

“Retirementisbecomingatimenotwhenwestopwork,butwhenweworkatwhatwelove–onourownterms.”

Wecouldn’tagreemore.Financialindependenceputsyouinthedriver’sseatwhenitcomestowork.Youcantakeitorleaveitdependingonhowyoufeel.Speakingformyself,Iremainopentofutureworkassignmentsoftwotothreemonths,althoughsofartheonlynotablework

eitherofushasdoneinsixyearsofretirementhasbeenthatoneproposalassignment.

Takingamoreflexibleapproachtoretirementfranklymakesitlessfrighteningtoretireearly.Insteadofallornothing,thereistheenticingpossibilityofsomethinginbetween.It’snotsoscarytakingtheplungeifyouknowyouhavealifelinewaitingforyoujustincaseyoushould

needit.Certainlywefinditcomfortingknowingthatifthingsgettight,Robincanworkashort-termnursingstintorIcantakeonanothertemporaryproposalassignment.Orwecouldgoinacompletelydifferentdirectionandworkforasmalleramountofmoneyinaforeigncountrybutatsomethingthatwouldbringuspleasureanyway.Justconsiderthefollowingthree

opportunities.

TemptingOverseasAssignmentsWillingWorkersOn

OrganicFarms(WOOFF)offerstemptingworkassignmentsallovertheworldinexchangeforyourpart-timelaborharvestinggrapesorfeedingchickensorlearninghowtomakegoatcheese.Hey,whynot?Ifyou

haveaninterestinorganicfarminganyway,orsimplythinkitsoundscooltotryyourhandatsomethingdifferent,thenyoucouldlearnalotwhilealsohelpingsomeoneelseout.Plusyou’llgettoknowthelocalsinawayyouneverwouldhaveotherwise,whilealsovisitingapartoftheworldyou’recuriousaboutanyway.

TheCaretakerGazette(caretaker.org)offers

caretakingassignmentsallovertheU.S.andtheworld,fromwatchingsomeone’spettotemporarilyrunningaB&Btostraightforwardhousesittingrequests.We’resubscribersandhavetakenonahandfulofcaretakingopportunitiesourselves.We’veseenundemandingopportunitiesonofferinEngland,France,Italy,Australia,theCaribbean,Belize,allfiftyU.S.states,

andmanymoretemptinglocales.Someassignmentsareformoneybutmostareforlodginginexchangeforsimplework.Caretakingcanmakeyourtravelsabroadveryinexpensiveandcanletyoufitinwiththelocalcommunityinawaythetypicaltravelerdoesn’tnormallygettoexperience.

TeachingEnglishabroadhasalreadybecomesomethingofatime-honored

traditionforAmericanswhowanttodomorethanjustvisitacountryforaweek.Ifyoulovethethoughtofteachingkidsoradultssomethingyoualreadyknowbyheartanyway–thatis,yourownnativetongue–whynotconsiderit?Thiscanbeanespeciallygoodoptionincountriesthatotherwisewouldbeexpensivetovisit,suchasJapanorTaiwanorcertaincountriesinthe

MiddleEast.Whereveryoudecidetodoyourteaching,itcanaffordyouadecentsalary(comparedtothelocalcostofliving),freeorinexpensiveaccommodation,andreimbursementforyourplaneticket,nottomentiontheopportunityforculturalimmersionandregion-widetravel.

TheAppealofSemi-

RetirementSemi-retirementisa

particularlycompellingoptionforthosewhoseretirementsavingsaren’tquiteasrobustasthey’dlikethemtobe.We’vemetmanyexpatsinforeigncountrieswhoarerunningtheirownbusinesses–smallcafescateringtoAmericanswhomissburritosandpizza,forexample–tosupplement

meagerretirementsavingsorsocialsecuritychecks.Theyputinafewhoursofworkadayduringthelunchordinnerhourinexchangeforgettingtoliveinaninterestingpartoftheworldwhilealsoparticipatinginlocalcommunitylife.

Youcansemi-retiresoonerthanyoucanfullyretire,whichisanimportantbenefitinitsownright.Yournesteggcanbesmaller

becauseitonlyhastofundaportionofyourretirement.Aminimalamountofworkcanfundtherest.Whetheryouchoosetoworkjustafewhourseachdayorcarveoutafewmonthseachyearandhavetherestoftheyeartoyourselfisuptoyou,buteitherapproachcangetyoutoyourgoalofgreaterfreedominashorteramountoftime.

Semi-retirementalsoappealstothosewhoare

worriedaboutbeingboredorhavingtoomuchtimeontheirhands.“Fully80%ofAmericansbetweentheagesof40and58expecttoworkinretirement,”writesBobClyattinWorkLess,LiveMore.“Whileathirdofthoseexpecttoneedtheincome,two-thirds–orfullyhalfoftheBabyBoomgeneration–saytheyareinterestedinrotatingbetweenleisureandworkduringretirementasa

waytokeepmentallychallengedandactive.”

Workinstantlybecomeslessonerousonceit’smixedinwithbreaks–preferablylongbreaksinouropinion!Workingafewmonthsayearatsomethingyouenjoyanywayishardlyaburden,anditcanbalancenicelywithalifestyleoftravelandculturalexploration.Workinginshortburstscanbeapleasure,andmoreandmore

retireesarethinkingofretirementinjustsuchaway.Ifthisapproachappealstoyou,thenputsemi-retirementonyourradarscreenasapossibilityinyourfuture.

Semi-retirementoffersawaytodipyourtoesintotheretirementwatersandseeiftheyaretoyourliking.Itcanofferanicetransitionintofull-timeretirement,oritcanbecomeyourmodusoperandiforyearstocome.It’syour

choice.

Chapter4.Your

RoadmaptoEarly

RetirementOurgoalinthenextten

chaptersistoprovideyou

withpracticaladviceonhowtogetfromPointAtoPointB–fromfull-timeworktofinancialindependence–intheleastamountoftimeandwithaminimumoffussanddetours.InessenceChapters5to14constitutearoadmaptoearlyretirementthatyoucanfollowstepbysteptogettoyourdestination.

TaketheHighway

Sometimesitjustmakessensetotakethehighwayandavoidallthestoplightsandtrafficonlocalroads.Insimilarfashion,youwanttomakesureyougetontothefinancialhighwayasearlyaspossibleandstaythereuntilyoureachyourexit.Thatmeansinvestingprimarilyin

stocksandstockmutualfunds,notcashorbonds,duringmostofyourinvestingyears.Why?Becausestocksarethehighway:theyofferthefastest,mostdirect,andmostreliablewaytogettoyourgoal.

Youalsowanttomakesureyourvehicle–whichistosayyourcareer–isuptothetaskofgettingyouthere.Don’tgetontothehighwayinaclunkerandfindyoucan’t

keepup–orworseyet,breakdownbythesideoftheroad.Instead,purchaseareliablecar(apracticalcareer)firstandsaveyourselfawholelotoftroubleontheroadahead.

AvoidShortcutsShortcutsmakeforlong

delays,asthesayinggoes.Tryingtotaketoomanyshortcutsontheroadtoearlyretirementcanendupbackfiringonyou.Byshortcutswemeananyhigh-riskinvestmentaimedatgettingrichquickratherthangettingrichslowly.Daytrading,currencytrading,

optionstrading,investinginhedgefunds,investinginriskystocks,goingall-inonthenextbigthing,investinginfinancialproductsyoudon’treallyunderstand,andinvestinginanythingthatseemstoogoodtobetrueallfallunderthecategoryofshortcutstobeavoidedifyou’refollowingagetrichslowlyapproach.

Wedon’tmeantoimplythere’sanythingwrongwith

gettingrichquickifyoucandoitreliably,butit’snotwhatthisbookisabout.Plentyofotherbookscoverthattopic.Gettingrichquickisabitlikebobbingandweavingthroughtraffictogettoyourdestinationjustasfastasyoucan,whereasgettingrichslowlyismorelikedrivingonthehighwaybutstayinginthemiddlelane.Itmaynotbewind-in-your-hairexhilarating,butitoffersa

relativelysafeandpredictablewayofgettingyoutoyourgoal.

MilestonesAlongYourRoute

Hereisapreviewofwhat’scomingdownthepike.Thefirstmilestoneonyourrouteisentitled“InvestinYourselfFirst”(Chapter5),anditcomesfirstforareason.Withoutareliablecareer,everythingelseabout

yourjourneybecomesmoredifficult.

Thenextmilestoneis“GetOutofDebt”(Chapter6),anditcomessecondforareasontoo.We’llexplainwhywerecommendyoupayoffallcreditcards,carloans,andcollegeloansfirstbeforebeginningtoinvestinearnestforretirement.

Thenextsixmilestonesarealldedicatedtothespecificsofhowtoinvest

successfullyforearlyretirement:

–Howtousecompoundingtoyouradvantage(Chapter7)–Howtocalculateyourlikelyincomeneedsinretirement(Chapter8)–Howtodeterminethesizeofthenesteggyou’llneed(Chapter9)–Howtoputtogethera

personalizedinvestmentplan(Chapter10)–Howtoputyourindexfundinvestmentsonauto-pilot(Chapter11)–Howtoallocatebetween401(k),IRA,andtaxableaccounts(Chapter12)Arewethereyet?Not

quite.Therearetwomoremilestonesalongyourroute,bothofthemhavingtodowithhowtokeepyour

expenseslowsoyoucanretiresoonerandstayretiredonless.It’sfranklyhardtofindaretirementbookouttherethatdoesn’thaveachapterdevotedtothesubjectoflivingbelowyourmeans(Chapter13).Why?Becauseit’sprobablythesinglemostimportantthingyoucandotoreachearlyretirementandstayretired.“Livebelowyourmeans”mightseemlikeoverlyobviousadvice,but

obviousdoesn’talwaysequatewitheasytoimplementinreallife.Weprovidepracticalguidanceonhowtoputthisadviceintopractice.Thelastroadmapchapter(Chapter14)providesfurtherdetailsonhowtokeeptwoofyourbiggestexpensesinlife–homeandcars–aslowasreasonablypossible.

Afterthatit’sabouttimeforareststop.“KeepYourLifePortfolioBalanced”

(Chapter15)remindsyoutobalancelivingfortodaywithlivingfortomorrowlestyourunoutofenergyalongtheway.

Thefinaltwochaptersinthebookcoversubjectsofparticularinteresttothosewhohavealreadyreachedtheirdestination.Howtopayforhealthcarehasalwaysbeenaconcernforjustaboutanyonewhohaseverconsideredretiringearly.In

“HealthCareinRetirement”(Chapter16),wesharegoodnewsabouttheAffordableCareActinAmericaandmedicaltourismoverseas,bothofwhichbodewellforearlyretireesonabudget.

Wefinishupwithachapteronextendedtravelinretirement(Chapter17).Hereweoffersuggestionsonhowtokeepyourtravelcostsdownasyouheadoffonjourneysthelikesofwhich

youcouldonlydreamaboutduringyourworkingyears.Sincelong-termtravelisboththemotivationandtherewardformanyearlyretirees,wethinkthismakesforafittingandfunfinalchapter.

Chapter5.Investin

YourselfFirstBytheageof31Robin

andIonlyhadatotalofabout$6,500investedforretirement,andthatwasprimarilyinmy401(k)atwork.Itwasastartbutwe

wantedtodomore–alotmore.Wewantedtoaccelerateoursavings.Buthow?Wehadverylittlefatlefttotrimoutofourbudget.Whatweneededwasn’tawaytocutexpensesmorebutawaytomakemoremoney.

“IshouldprobablyfindoutwhatI'mworthinthebusinessmarketplacenowthatI'vegotthreeyearsofexperienceundermybelt,”Iwroteinmyjournalaround

thatsametime.“Increasingmysalarywouldbethequickestwaytospeedusalongonourfinancialhighway.”

Yes!Nowyou’retalking,youngerme.

Ittookmelongerthanmostpeople,butIwasfinallywakinguptothefactthatIhadtomakestridesinmycareerifIeverwantedmyearlyretirementdreamstobemorethanjustdreams.It

wouldtakeusanotherfiveyearsbeforewerealizedthatRobin,too,neededtoswitchcareersandretrainasanurse.Callusslowlearners,buteventuallywecametotheconclusionthatweareourownbestinvestments.Hopefullyyoucanlearnthislessonsoonerthanwedidandprofitfromit.

WhyMinimumWageWon’tWork

Ifyoufindyou’rebarelyabletomakeendsmeetwiththesalaryyou’recurrentlymaking,weadviseyoutoinvestinyourselffirstbeforedoinganyotherinvesting.Workingalow-wagejobwon’tgetyouwhereyou

wanttogofastenough.Toretireearlyyouhavetolivebelowyourmeanssoyoucaninvestanyextramoneyandstartbuildingupacapitalbase.Howcanyoudothatifittakeseverycentyouhavejusttogetby?

Thefederalminimumwageiscurrently$7.25perhour.Assumingaforty-hourworkweek,that’s$15,000peryear.That’sbarelyenoughformostpeopleto

surviveonintheU.S.thesedays.Itdoesn’tgiveyouthewherewithaltoputsufficientmoneyasidetoallowforanearlyretirement.Youmaybethehardestworkerintheworld,butifyou’reinafieldthatpayslowwages,you’regoingtofindithardgoingatbest.Soinsteadwesuggestyouputyourhardworkethictoworkonyourselffirst.

ChoosingaPracticalCareer

Investinginyourselffirstmeansgettinganeducationinsomethingpracticalthatyouknowaheadoftimewillpaywellonceyougraduate.Theeducationmaybeexpensive,butifyouknowthereareattractivejobsthatpaywellandareinhighdemandontheothersideofthat

education,itwillbewortheverypennyyouspendonitandmoretomakeithappen.

Theeducationwe’retalkingaboutisn’tnecessarilyafour-yeardegreeatacollegeoruniversity.Itcouldbethatifyouhaveaspecificcareerinmindthatexpresslyrequiresit.Butbeforeyougodownsuchalongandfinanciallyarduouspath,makesurethereisastrongdemandforworkersinthat

field,thattheonlyindividualswhocanfillsuchjobsarepeoplewiththeeducationyou’reabouttoget,andthatthejobspayhighlyenoughtojustifysuchaprolongedeffort.

Otherwise,therearemanycareersthatpayreasonablywellbutcallforamorefocusedsetofcoursesthatcanbecompletedinayearortwo.ThinkLPNinthenursingfield(orRNifyou

alreadyhaveacollegedegree);EMTorparamedic;dentalhygienist;loanofficer;paralegal;technicalwriter;executiveassistant;policeofficer;plumberorelectrician;automechanic;realestateagent;customsofficer;securityalarminstaller;HVACtechnician;salesrepresentative;etc.Dosomebrainstormingandwebsurfingtogetideasflowingasyouconsiderawiderangeof

possiblecareerchoices.Don’tbeafraidtothink

outsidethebox.Forinstance,youmightconsiderthepossibilityofgoingtoatradeschool,orstartingyourownbusiness,orrunningafranchise,orbecominganentrepreneur.Youmaywanttofocusyourattentiononfieldsinwhichhumansaren’tlikelytobereplacedbycomputersanytimesoon.Theclassicexampleisnursing.

Youdon’tneedtobecomeadoctororalawyerorearnanoutrageouslyhighsalarytoretireearly,butyoudoneedtohaveadecentjobpayingadecentwage–say,inthe$50,000range.Ifyou’reearning$30,000orlessandhavelittlehopeofmakingmore,youshouldconsideracareerchangebecauseotherwiseyou’remakingitharderonyourselfthanithastobe.

Thecareeryouchoosedoesn’thavetobeyourall-timedreamcareer.Itshouldcertainlybesomethingyoudon’thatedoingbecauseyou’regoingtohavetodoitforawhile–probably15yearsormore.Itwouldbevastlypreferabletolikewhatyoudo,butit’ssomecomforttorememberyouaren’tweddedtoyourjobforlifebutonlyuntilyouretireearly.

BitingtheBulletandRetraining

Robin’sfirstcareerwasasatravelagent.Backthenjustabouteveryonewenttoatravelagenttobooktheirairfare,hotels,cruises,carrentals,andsoforth.TherewasnoExpediaorTravelocityoronlineairfarebooking.Travelagentswerethedefactoexpertsinall

thingstravel.Itwasanenjoyablecareerwithgreattravelperks,butitneverpaidwell.Robin’sstartingsalarywas$14,000grossperyearanditneverwentupmuchfromthere,despitethefactshebecameahighlycompetenttravelagentwithmorethan12yearsofexperienceinthebusiness.

Bythemid-1990sithadbecomepainfullyobviousthatpersonalcomputerswere

makingRobin’sjobobsolete.Moreandmorepeoplewerebookingtheirtravelonline,andwhocouldblamethem?Itwasfast,simple,anddirect.Airlinesandhotelsbegantorealizetheydidn’tneedtravelagentsanymoretorepresenttheirbusinesses.Theynolongerhadtorelyonamiddleman:theycouldselldirecttotheircustomers.Asaresulttheystartedcuttingcommissionstotravelagents.

Robincouldseethewritingonthewall.Beingatravelagentsimplywasnotacompatiblecareerchoicewithwantingtoretireearly.

ReinventingYourselfRobinrealizedsheneeded

toinvestinherselffirstbeforeshecoulddomuchtohelpwithinvestingforourretirement.Bythenitwas1998andwehadbeensavingfor7years.Thatwasnearly

halfofour15-yearplan,andyetwestillonlyhadanesteggsavedupofabout$68,000.

Wefeltproudofthataccomplishmentonapersonallevelbecauseweknewhowhardithadbeentosetasideeventhatmuchmoneywithsalariesaslowasourshadbeen.Butclearlyweweregettingnowherefast.Ineededtorededicatemyselftomakingmoreprogressin

myownfield(Iwasaproposalcoordinatormakingabout$40,000peryear),andRobinneededtochangefieldsaltogether.

Aftermuchsoul-searchingshechoseacareerinnursing.Shelikedtheideaofhelpingpeopleanddoingsomethingmeaningful,and,onthepracticalside,nursingpaidreasonablywellandtherewereopeningsalloverthecountryfortrainednurses.

Therewasjobsecurityinthesensethatnocomputerwasgoingtomakethiscareerobsoletelikeitdidherlast.

Sofor1½yearsRobinwentbacktoschoolagaintoreinventherselfandbecomeanurse.Shepassedherprerequisitesatalocalcommunitycollege,gotacceptedtoarigorousone-yearacceleratednursingprogramatRegisUniversityinDenver,andendedup

graduatingthirdinherclass.Ithelpedthatshewasmotivatedandknewexactlywhatshewanted.ShewastednotimegettinghiredasanursestraightoutofRegisandimmediatelyputhernewfoundknowledgetotheteststartingin2000.

TheCostofRetraining–andtheReward

Theone-yearnursingprogramsetusback$20,000(plusthelostopportunitycostofherbeingunemployedfor1½yearsandnotmakingthe$15,000peryearsheotherwisewouldhavemade).Wehadtoborrow$10,500inStaffordloansandanother$5,000fromthebanktohelpcovertheeducationcosts.

Thinkofit:herewewere,rightinthemidstofourprimaryinvestingyears,and

insteadofearningmoney,Robinwasneedingtospenditonre-educatingherself.Butitwasanecessaryexpenseandwebothknewit.Shehadtoinvestinherselffirst,andwetrustedthatinthelongrunitwouldbetherightdecisionandbearfruit.

Anditdid.Inherfirstyearofnursingshemorethandoubledherprevioussalary.Shewentfrommaking$15,000asatravelagentto

$39,000asanurse.Justsixmonthsafterfinishinghernursingprogram,wehadalreadymanagedtopaybackeverycentoftheloans.

Bythefollowingyearshewasmaking$45,000,andtheyearafterthat$50,000andstillgoingup.Nowshewasearningasalarythatcouldgenuinelyhelpuswithinvestingforearlyretirement.

Canyouseehowimportantitwasforustobite

thebulletandpayforthistrainingfirst?Eventhoughitmeanthavingtospendmoneyovertheshortterm,Robinearnedenoughinherfirstyearofnursingtomorethanpaybackherstudentloans.One-and-a-halfyearsofretrainingsetheronareliableearningspathforlife.

Suddenlyshewaseminentlyemployable.Wecouldliveanywhereinthecountryandknowshecould

findwork.Andifweweretoretireearlyanddiscoverourfinancesweretootight,weknewinapinchshecouldfallbackonhernursingbackgroundandfindtemporaryworktotideusover.

Thisgaveusanewfoundsenseofconfidence.Weendedupbeingabletoretireearlierthanoriginallyplanned,inlargepartbecauseweknewbothourcareers

offeredgoodopportunitiesfortemporaryemploymentshoulditeverbecomenecessary.Youmaywanttoconsiderwhetheryourowncareerskillsareportableandcanbecarriedintoearlyretirementtomakethetransitionalittlelessintimidating.

EarningDoubleImagineforamoment

whatitwouldbeliketohaveasalarydoublewhatyou’reearningnow.It’snotimpossible,especiallyifyourcurrentsalaryisunder$30,000.Justpictureit:ifyouwereearning$50,000or$60,000,thenwithalittleself-disciplineyoucouldcontinuelivingatthesame

(orslightlyhigher)standardoflivingwhileinvestingtheresttowardsrapidlyachievingfinancialindependence.

Investinginyourselffirstwillalmostcertainlybethebestinvestmentyouevermake.Thinkofitthisway:Ifyou’reearning$30,000peryear,it’sgoingtotakealotofscrimpingandsavingtoinvesteven$5,000peryear.Butat$60,000peryearyoucouldeasilyinvest$20,000

andstillhaveasufficientamountleftovertoliveon.That’sfourtimestheamountyoucouldhaveinvestedotherwise.Thestockmarketisn’tgoingtogiveyouthosekindsofreturns.Butforaslongasyoustayemployed,whetheritbefor10yearsor20,youcancountonsimilarlyamazingresultsyearafteryear.Howmanyotherinvestmentscanmakethatclaim?

Retoolingforasuccessfulcareerissoimportantthatwebelieveitistheoneandonlythingforwhichyoushouldtakeoutaloanevenafteryou’vebegunsavingforearlyretirement.Everywhereelseinthisbookwerecommendpayingoffyourdebtsfirst,butifyoufindyourselfinalow-payingordead-endjob,yousimplyhavetoremedythatsituationfirst.Justbesuretochooseapractical

careerpaththatwillrapidlybearfruitafterwards.

DoingYourCareerHomework

Asanexampleofanimpracticalapproachtocareerdevelopment,Iofferupmyowncautionarytale.Iearnedmymaster’sdegreeinEnglishliteraturein1989.AtthetimeIintendedtobecomeacollegeprofessor,which

wasafinegoalinandofitself.FineexceptforthefactthatIhadneverdonealickofteachinginmywholelifeandhadnoideawhetherIwouldlikeitornot.IknewIlikedtheperksofteachingandtheprospectofworkinginanacademicenvironment,butwhataboutthejobitself?IfIhadgivenanythoughttohowIwouldfitintotherole,itmighthavesavedmealotofmisdirectedtimeandenergy.

Asitwas,whenIfinallydidgetupinfrontofmyfirstclassroom,ittookmealloffiveminutestodiscoverIwasn’tatallsuitedtobeingateacher.Iwasn’tcomfortablestandinginfrontofalargegroupofcollegefreshmenandbeingthecenterofsomuchattention.HowcoulditbethatIwasalreadypartwaydowntheroadtowardsgettingmyPh.D.beforediscoveringthis?

Isomehowmadeitthroughthatfirstsemesterofteaching,butInevergrewmorecomfortableintherole.IcouldhavesavedmyselfandmypoorstudentsawholelotoftroubleifIhaddonetheslightestbitofcareerhomeworkfirst.MydegreeinEnglishliteraturewasnotveryusefuloutsidetheacademicworld,soitiswithmyownnaiveapproachtocareerdevelopmentinmind

thatIurgetodoalittleresearchfirstbeforegoingdownaparticularcareerpath.Firstandforemost,makesureit’sajobyoucanstomachdoing!

Robindidhercareerhomeworkbeforeshebecameanurse.Earlyonintheprocesssheshadowedanurseforaday,talkedtootherpeoplewhowereLPNsandRNs,andlearnedfromthemwhichnursingprogramswere

mosthighlyrespected.Duringhereducationshegotplentyofhands-onexperienceinclinicalsettings,soshealreadyknewwhatshewasgettingherselfintobythetimeshegotherdegree.

SuperchargingYourCareer

Mostofuslivelongenoughthesedaystohavemorethanonecareer–sogoahead,reinventyourself.Pickanewcareerpathandmakeithappen.Thetruthis,youneedtoflourishfinanciallyinordertobuildupanestegglargeenoughtoletyouretireearly.Youcan’tjustgetby.

Onceyoumaketheswitchtoabettercareer,allthingsbecomepossible.WithRobinmaking$50,000peryear,wecouldliveonhersalaryaloneandinvestallofmysalary.Suddenlywecouldtakegiantstridesforward.WedidmostofourreallygoodinvestingafterRobin’snursingcareergotunderway–andthatwasn’tuntilmorethanhalfwaythroughour15-yearplan.Atthatpointwe

werehittingonallcylindersandwereabletosockawaysignificantamountsofmoneyinarelativelyshortperiodoftime.

ImagineifRobinhadbegunherretrainingatthebeginningofourretirementplanning.Insteadof7yearsofhigherwages,wemighthavehad14yearsofsolidearningshelpingusalongonourpathtofinancialindependence.

Investinginyourselffirstdoesn’talwaysmeangoingbacktoschoolformoreeducation;itcouldmeansimplyapplyingyourselfmorevigorouslytothejobyoualreadyhave.ThiswasthecaseformeonceIbecameaproposalcoordinator.Ialreadyhadthenecessaryeducationandskillsetformyjob,butwhatIneededwastoapplymyselfwithgreaterenergy.Ihadto

tryharder,sayyesmoreoften,takeontheharderprojectsnooneelsewantedtoundertake,andworkwithincreasedefficiencyandenthusiasm.Ihadtotreateachproposalasifitmatteredtomepersonally.

WhenIdidthat,theresultsspokeforthemselves.Wewonmoreproposals,andovertimeIbecamemorevaluabletomycompanybasedontheskillsIhad

developed.AsIgainedabettersenseofmyworthinthemarketplace,Iwasabletoparlayajobofferfromacompetingfirmintoanincreasedsalaryatmyexistingjob.Ifyouknowyou’redoingmeaningfulworkthataddstothecompany’sbottomline,thenbeingwillingtoaskrespectfullyformorecompensationcanbeanimportantcontributortoyour

careergrowth.Ouroriginalretirement

worksheetswoefullyunderestimatedjusthowmuchoursalarieswouldgrow–andhowmuchextramoneywewouldbeabletoinvestasaresult.Wehadtoreviseouryearlysavingsestimatessignificantlyupwardsinordertoaccountforthenewrealityoftwojobspayingsolidwages.Youmaylikewisefindyourself

pleasantlysurprisedontheupside.Dowhatyoucantosuperchargeyourcareerandyou’llendupsuperchargingyourinvestmentsaswell.

Chapter6.GetOutof

DebtIfyou’renotindebt,

congratulations–youcanskipthischapter!Otherwisewestronglyrecommendyougetoutofdebtfirstbeforeyoustartsavingfor

retirement.Payoffcreditcarddebts,carloans,collegeloans,andanyotherloansyoumighthavesotheonlydebtyouhaveleftisyourhomemortgage.

Whydowemakeanexceptionforhomemortgages?Becausebuyingahomeissoexpensivethatmostpeoplefinditimpossibletoownahomewithoutfirstgettingalong-termloanfromafinancial

institution.Yourhomeisalsoaninvestmentoverthelongterm,sothereisgoodjustificationforowningratherthanrentingforsomanyyears.Butallotherdebtbesidesyourhomemortgageismanageable–andshouldbemanagedaggressively.

Yourfirstpriorityshouldbetoeliminatedebtsoyoucanstartyourinvestmentprogramwithacleanslate.Yoursecondpriorityshould

betobuildupasmallreserveofcashtofallbackonincaseofemergency.Oncethosetwoprioritieshavebeenmet,you’rereadytobegininvestinginearnestforearlyretirement.

WhyYouShouldPayDownDebtBeforeInvesting

Youmaybesayingtoyourself,“ButI’mreallyanxioustostartmakingsomeinvestmentsnow!Whycan’tIpaydownmydebtandbeginmakinginvestmentsatthe

sametime?”Well,inonespecific

instanceyoushould.Ifyouhappentohavea401(k)atwork,wewouldrecommendyouinvesttheminimumamountnecessarytotakeadvantageofthefullcompanymatch,whichisessentiallyfreemoney.Butotherwise,unlessfreemoneyisinvolved,itusuallymakesbettersensetogetoutofdebtfirstbeforebeginningto

invest.Here’swhy.Let’ssayyouget

ambitiousandmanagetopayoffyourcreditcardbalancewiththe17%interestrateawholeyearearlierthanyouwouldhaveotherwise.That’sonewholeyearofnothavingtopay17%interest–andthat’stheequivalentofgettinga17%guaranteedreturnoninvestmentfortheyear.Toputitanotherway,nothavingtopay17%ona

$1,000balanceonyourcreditcardsavesyou$170,justasmaking17%ona$1,000investmentmakesyou$170.Making$170andsaving$170aretwosidesofthesamecoin.

Mostpeoplewouldagree17%isaprettygoodreturnoninvestment.We’dfeelverypleasedindeedifwecouldgetthatkindofreturnonaconsistentbasis.Soitonlymakesfinancialsenseto

payoffthe17%creditcardbalancefirst,beforebeginningtoinvestelsewhereatwhatwillprobablybealowerrateofreturn.Evenifyouhappentohaveloansthatonlychargeyou8%or9%interest,that’sstillaprettydecentrateofguaranteedreturn.Sopaythemofffirstandbedonewiththem.

Beyondtheobviousfinancialrationaleforpayingoffyourdebtearly,there’s

alsothepsychologicalone.Simplyput,itfeelsgoodtobeoutfromunderaloadofdebtandnotoweanyoneanymoney.It’slikeaburdenhasbeenliftedoffyourshoulders.

Anemergencycashreservelightenstheloadevenmorebygivingyouafinancialcushionifyourcarshouldsuddenlybreakdownoryourfurnaceshouldgoonthefritzorsomeotherbigexpenseshouldhit

unexpectedly.Asmallstashofcashisyourgetoutofjailfreecardforwhentheunforeseenhappens–whichitinevitablywill.

WhyYouShouldn’tBorrowFromYourself

AsofJanuary2013,averagecreditcarddebtamonghouseholdscarryingsuchdebtwasawhopping$15,442.Whenyouconsidertheaveragerateofintereston

thatdebtisaround15%,it’snowonderweheartalkofpeople“drowningindebt”orbeing“uptotheireyeballsindebt.”Meanwhile,averagestudentdebtisnearly$35,000,soyoungpeopleinparticulararestrugglingtogetoutfromunderamountainofdebtthatmustoftenfeellikeitiscrushingthem.

IfyouareamongthehalfofAmericanhouseholds

carryinganunpaidcreditcardbalanceoverthepast12months,yourfirstorderofbusinessafterlandingasolidjobshouldbetoaggressivelypaydownthatdebtbeforeitcanbecomeanymoreunmanageable.

PoorFutureYouThesadtruthis,eachtime

youletthebalanceonyourcreditcardsrolloveranothermonth,you’reborrowing

fromyourownfuture.You’reessentiallysubsidizing“currentyou”bytakingfrom“futureyou”andsaying“putitonhistab.”Let’sbehonest:futureyouisn’tgoingtohaveanymoremoneythancurrentyouhasifyoukeepstickinghimwiththebill!

Youpayinabigwaywhenyouborrowfromyourownfuture.Youparticularlypayintheformofexorbitantinterestrateschargedby

creditcardcompanies,whichgooutoftheirwaytomakeitaseasyaspossibleforyoutopaytheminimumbalanceeachmonthandstayunderwaterforanotherday,anothermonth,anotheryear.It’sfranklyintheirownfinancialinteresttokeepyouunderwater.Theyreallydon’tmindseeingyoudrowningindebt(oratleaststrugglingalittle)becauseitmeansmoremoneyforthem.

WhataDeal:19½YearsatTwicethePriceHere’sagoodruletolive

by:nevermakejusttheminimummonthlypaymentonyourcreditcards.Here’swhy.Let’ssayyouhave$4,000onacreditcardwitha20%annualpercentagerateonoutstandingbalances.Andlet’ssayyoucurrentlymake

theminimumpaymentof3%permonth.Nowlet’sfigureouttogetherhowmuchandhowlongitwilltakeyoutopayitback:1.$4,000(creditcardbalance)x3%(minimumpayment)=$120minimumpaymentforthefirstmonth.2.Outofthat$120minimumpayment,$66.66isinterest($4,000x20%annualinterestrate÷12

months=$66.66).3.Theremaining$53.34isprincipal($120–$66.66interest=$53.34principal).4.Attheendofthefirstmonth,yourremainingbalancestandsat$3,946.66($4,000–$53.34principalpayment=$3,946.66).5.Thesamecalculationisperformednextmonth,andthemonthafterthat,andsoon,untilthecreditcarddebt

isfinallypaidoff.Ifyoukeepmakingjusttheminimumpayments,youroriginalcreditcarddebtof$4,000willcostyou$8,741topayback.That’s$4,000tocovertheoriginalprincipalplusanother$4,741ininterest–morethantheoriginalcreditcarddebtitself!6.Itwilltakeyou19½yearstomakethe235minimum

payments!Canyouseehowyouend

upsabotagingyourownfuturewhenyouplaybytherulesofthecreditcardcompanies?Stopplayingbytheirrulesandstartplayingbyyourown.Let’sseewhatspecificstepsyoucantaketostartgettingoutofdebtrightnow.

UsingCreditCardCalculators

Creditcardcalculatorsallowyoutoinstantlycalculatehowlongitwilltakeyoutogetoutofdebtbasedonthemonthlypaymentamountyouenter.Thesefreecalculatorsareusefultoolsthatletyouexperimentwith

differentmonthlyscenarios.Payingeven$50morethantheminimummonthlypaymentamountcanmakeahugedifference,forexample,intermsofthetimeitwilltaketopayoffthebalanceandthetotalinterestyou’llpay.Themoreaggressiveyourpaybackplan,themoreimpressivetheresults.

Weparticularlylikethetoolsofferedatcreditcards.com/calculators.

TheirMinimumPaymentCalculatorinstantlyshowsyouhowpainfullylonganddrawn-outtheloanpaymentprocessisifyouonlymaketheminimummonthlypayments.TheirPayoffCalculatorisevenmorehelpful:itletsyouruntwousefulscenarios.Inthefirst,youenterthe“DesiredMonthstoPayOff”yourdebtandthecalculatorautomaticallydeterminesthe

monthlypaymentyouwouldneedtomaketopayoffyourbalanceinthedesiredtime.Inthesecondscenario,youenteryour“DesiredMonthlyPayment”amountandthecalculatorautomaticallydeterminesthenumberofmonthsitwouldtaketopayoffyourbalance.Calculatorslikethisallowyoutomakeinformedchoicesaboutyourfuturebasedonthespecificsofyourownsituation.

DecidingWhichDebtsToPayOffFirst

Werecommendpayingoffthedebtwiththehighestinterestratefirst,thenmovingontothenext-highestrate,andsoon,inalogicalprogressionuntilallyourdebtsarepaidoff.Ourthinkingis,whygiveaway

anymoreofyourmoneythanyouhaveto?

Butanotherschoolofthoughtsuggestsyoushouldgetsomequickwinsunderyourbeltbypayingoffthesmallestdebtfirst,enablingyoutobuildupmomentumtogetyour“debtsnowball”rolling.Thisapproachhassomevaliditytoo.It’slesslogicalfinanciallybutperhapsmoreagreeablepsychologically.

Whicheverapproachworksforyouisfine,aslongasyou’remakingrealprogresstowardsreducingyouroveralldebt.

SettingMonthlyGoalstoTackleDebt

Thebestwaytotackledebtistosetmonthlygoalsforyourself.Settinggoalsgivesyouagameplanandletsyouknowwhatyou’reaimingfor.It’simportanttobeasrealisticaspossiblewhenmakingyourplan.If

yousetthebartoohigh,you’resettingyourselfupforfailure.Ifyousetittoolow,itwilltakeyoutoolongtoreachyourgoal,andthatcanbediscouraginginitsownright.Youwanttofindabalancepointbetweentimeandmoneythatfeelsrighttoyou.

Let’slookatanexample.Let’ssayyouhave$20,000indebt.Thatincludesallyourdebt–creditcards,thelast

fewpaymentsonacarloan,andacollegeloan.Youwanttopayitoffasquicklyaspossible,soyougotooneofthedebtpaymentcalculatorsonlinetodeterminewhatisfeasible.

Firstyoutrypluggingin12monthsasyourdesiredpayoffdate.Theresultssayitwouldtakenearly$1,800permonthtopayoffthedebtinthatperiodoftime,andyourealizestraightawaythere’s

nowayyoucanaffordthatkindofmonthlypaymentgivenwhatyou’recurrentlyearning.Nextyoutry24monthsand36months,andtheresultscomeinataround$950and$700permonthrespectively,bothofwhichseemfeasible.Last,youtry48monthsanddiscoverthatwouldrunyou$550permonth,whichisn’tthatmuchlessthanpayingitoffin36months.Foranextra$150per

monthyoucouldbedoneinthreeyearsinsteadoffour.Plus,somethinginsideyoujustgroansatthethoughtofstillbeingindebtfouryearsfromnow,soyoudecidetoeliminatethatoption.

Nowyou’vebracketedyoursolution.Youknowyoucan’tpayitoffin12monthsandyouknowyoudon’twanttowaitfouryearstopayitoffifyoucanhelpit.Thatleavesyouwithtwosolutionsinthe

middle:either24monthsor36months.

Whichoftheoptionsyouchooseisuptoyou.Ifyouwanttogetoutofdebtmorethananythingelseintheworld,gowiththetwo-yearplan.Ifyouwanttolivealittlemorecomfortablyinthecomingyears,gowiththethree-yearplan.Eitherway,you’vemadeagoodplan.You’vecomeupwithawaytopayoffyourdebtsintwo

orthreeyears’time,whichfeelsaboutright.Ithitsthatbalancepointbetweentimeandmoney.

Witheitheroftheseplans,youcanmakeadjustmentsasyougo.Ifyouchoosethe36-monthoptionbutyoursalaryjumpssignificantlythefollowingyear,youcanalwaysincreaseyourmonthlypayments.Orifyouchoosethe24-monthoptionbutunanticipatedexpensescrop

up,youcanalwaysdecreaseyourpaymentstobringtheminlinewiththe36-monthplan.

Thegoodnewsis,theself-disciplineittakestosetmonthlygoalsandgetoutofdebtisexactlythesamedisciplineneededtosavelargeamountsofmoneyforearlyretirement.Thinkofgettingoutofdebtasatrialrun.Onceyou’vedonethat,you’rereadyforthemain

event:savingupenoughmoneytobecomefinanciallyindependentforlife.

UsingOnePrimaryCreditCard

Werecommendyouusejustoneprimarycreditcardandpayoffthebalanceinfulleachmonth.Don’tshortchangeyourownfuturebylivingindebtforevenonemonthifyoucanhelpit.

Havingasinglecardyou

activelyusemakesiteasytotrackexactlyhowmuchyouoweeachmonthsotherearenounpleasantsurprises.Webelievekeepingthingssimpleandknowingwhereyoustandeachmonthtrumpsthesmallsavingsyoumightrealizebyusingaslewofdifferentcreditcards,eachspecifictoonestore.Yourwalletandyourfinancialburdenswillbelighterwithjusttheonecreditcard.

Onceyou’recertainyouhavetheself-disciplineittakestouseonlyonecard,youmaywanttoconsiderhavingabackupcreditcardstoredsomewheresafejustincaseyourmaincardislostorstolenorotherwisebecomesinactive.Morethanoncenow,we’vehadourprimarycardstopworkingduetoapotentialsecuritybreachatsomestoreorother.Althoughanewcardwasautomatically

reissuedandmailedtoourhomeaddress,wewereoverseasatthetimeandcouldn’tpickitup.Insuchcircumstancesabackupcreditcardcanbeareallifesaver.

Chapter7.StartSaving

EarlyWesometimeswishwe

couldhaveado-overofourtwentiesfromapersonalfinancesstandpoint.Insteadofmakingfocuseddecisionsthatcouldhaveallowedusto

startsavingforfinancialindependencesooner,wedriftedsidewaysanddidn’tstartsavinginearnestuntilage31.Ifwehadsteppedintogood-payingjobsimmediatelyoutofcollege,whoknowshowearlywemighthaveretired?

Wecertainlyencourageyoungerreaderstobemorepracticalthanwewereintermsofyoureducationalandcareerchoices,becauseifyou

domaketherightdecisionsearlyon,youcouldbefinanciallyindependentbyage35or40.Alternatively,youcouldchoosetokeepworkingfiveortenyearslongerandletthepowerofcompoundingreallyworkitsmagicforyou,givingyouasubstantiallylargernestegg.

ThePowerofCompounding

Theearlieryoucanstartsavingforretirementthebetter,sinceitgivesyourinvestmentsmoretimetocompound.Compounding,simplyput,isearninginterestonyourinterest.Wheninterestisaddedtoyourprincipal,fromthatpointforwardittooearnsinterest.

Compoundingisattheveryheartofagetrichslowlyapproachtoinvesting.

Supposeyouput$10,000inabankcertificateofdepositthatpays5%interestannually.Attheendofoneyearyourbalancewillhavegrownby$500(5%ofyourinitial$10,000)to$10,500.AssumingyouleavetheentireamountintheCD,yourprincipalthenextyearwillstandat$10,500+5%=

$11,025.Overthecourseof25years,here’showyourinitialinvestmentwillgrow:

That’sthepowerofcompoundingforyou.Simplyby“doingnothing”andleavingyourinvestmentinplacetogrow,youcanwatchyourinitialinvestmentdoubleanddoubleagain.Yourmoneystartstomakemoneyforyou,whichinturnmakesyourroadtoretirementthatmucheasierastheyearspass.

Timeisyourfriendwhenitcomestoinvesting.That’swhytheearlieryoucanget

startedthebetter.Ifyouweretostartinvestingatage25,youcouldretireatage50andstillhavea25-yearinvestmenttimehorizon,givingyourmoneyplentyoftimetogrow.Compoundingispowerfulenoughthatitcantakeanaverageinvestorandmakehimintoagreatonesimplybyvirtueofhishavingstartedinvestingatayoungenoughage.

Didyouknowcompound

interestwasonceregardedastheworstformofusuryandwasseverelycondemnedbyRomanlaw?Timescertainlyhavechanged:nowgladiatorialcombatisoutandcompoundingisin.Sincecompoundingisfullylegalnow,wesuggestyoutakefulladvantageofitasyousaveforretirement.

Theeffectsofcompoundingbecomeevenmoreevidentifyour

investmentearnsahigherannualrateofreturn.Intheexampleaboveweassumea5%annualreturn.Butlet’ssayyouputthesame$10,000intoamutualfundearning,onaverage,10%peryear.Here’showyourinvestmentwouldgrow:

Byacceptingmoreriskandinvestinginastockmutualfundinsteadofabank

CD,ourhypotheticalinvestorhasearnedamuchgreaterreturn.Noticehowtheeffectsofcompoundingbecomemorepronouncedinlateryears.Forinstance,thebalancejumpsfromaround$67,000atthe20-yearmarkto$108,000atthe25-yearmark.That’s$41,000earnedinjustfiveyears.Thisremarkablegrowthstemsfromthefactthatthecapitalbaseismuchlargertobegin

withatthe20-yearmark,soa10%averagereturnoverthenextfiveyearshasamuchgreatereffect.

Thisgoestoshowwhyalonginvestmenttimehorizonissoimportant.Thelongeryouwaittotapyourmoney,themoredramaticthereturnscanbecomeinlateryears.(Assuming,ofcourse,thatthemarketscooperateonyourbehalf,whichisn’talwaysthecase.)

Asafinalcomparison,let’ssaythatinsteadoflettingthemoneycompound,yousimplytakethe10%earningsouteachyearanduseitforcash.That’s$1,000peryearinyourpocket,butatquitetheprice.Here’showthetwoscenariosmeasureup:

That’sadifferenceofover$73,000betweenthetwoscenarios.Enoughsaid!

UsingInvestingCalculators

Onlineinvestingcalculatorsmakeiteasytoseehowyourmonthlycontributionscompoundovertime,helpingyoutogetrichslowly.Oneofourfavoritesisatdaveramsey.com(underthe“Tools”tab).Youpluginyour1)startingbalance(ifany),2)estimatedannualrate

ofreturn,3)monthlycontribution,4)numberofyearsyouplantocontribute,and5)totalnumberofyearsyou’llbeallowingthemoneytocompound,thenhitthe“Calculate”keyanduppopsabarchartshowingyoutheresults.

Thechartisintuitivelyeasytounderstand.Foreachscenarioyourun,itinstantlyshowsyouthetotalcontributionsmadebyyou

versusthetotalamountearnedasaresultofcompounding.Italsoshowstheyearinwhichyoucrossthe$1millionmark.It’sagreattoolandfreetouse.

Trypluggingindifferentvaluestoexperimentwithdifferentscenariosuntilyouhituponascenariothatfeelsrighttoyou.Agoodscenarioisonethatbalancestheneedsoftodaywiththeneedsoftomorrow.Youdon’twantto

driveyourselfcrazybysettingthemonthlyinvestmentbartoohigh.Also,keepinmindthatanyscenarioisjustthat:areasonableguessaboutthefuturethatmaynotmatchupallthatcloselywithreality.Butthat’sokay,planscanbeadjusted.Theimportantthingistohaveaplan.

HowCompoundingCanHelpParentsinParticular

Themagicofcompoundingisespeciallyimportantforparentswonderinghowtheycanever

managetosaveupenoughforearlyretirement.Byaddingfiveortenyearstotheiroverallinvestmentplan,parentscanstillreachtheirfinancialgoalswhileprovidingfortheirchildren’sneedsatthesametime.Theycandorightbytheirkidsandbythemselvesbymethodicallyinvestingsmallersumsofmoneybutdoingitoveralongerperiodoftime.Itmaytakethema

fewextrayears,buttheresultisstillanice,tidynestegg–andatanageyoungenoughtoenjoyit.Takealookatthesetwoscenariostoseewhatwemean:

Scenario#1.Couplewithnokidssaves$3,000permonthfor15yearswitha9%annualreturntoaccumulatea$1.1

millionnestegg

Scenario#2.Couplewithkidssaves$1,000permonthfor25yearswitha9%annualreturntoaccumulatea$1.1

millionnesteggIneachcasetheendresult

isroughlythesame,andquiteimpressive:anesteggofover$1.1million(notincludinghomeequity).Thecouplewithnokidshasinvested$3,000permonthfor15yearstoreachtheirgoal.The

parentshaveinvestedsmalleramountsbutoveralongerperiodoftime–$1,000permonthfor25years–toreachtheirgoal.

Takeamomenttocomparethetotalcontributionsandtotalinterestinthetwoscenariosandnotethehugevariationbetweenthem.Thecouplewithnokidshasinvested$540,000oftheirownmoneyandearned$604,000asa

resultofcompounding.Notbad.Buttheparentshaveinvested$300,000oftheirownmoneyandearnednearly$830,000asaresultofcompounding!Theyhavehadtoputinalotlessefforttoachieveasimilarresult,thankstothepowerofcompoundingovertime.

Ifthesefolkshadallstartedinvestingatage30,thecouplewithnokidswouldbe45whentheyretiredand

theparentswouldbe55.Compoundinghelpsinbothcases,butitisespeciallyimportantfortheparentswhohavewiselygiventhemselvesalongertimehorizoninwhichtoinvest.

RidingtheCompoundingTailwindtoRetirement

Webelievethehardestyearsofinvestingbyfararetheearliestonesbecauseyou’regettingsolittletailwindintermsofcompounding.Itfeelslike

you’regoingnowherefast.Forusitseemedtotakeforevertoreachthatfirst$100,000mark.

Thenthingsgoteasier.The$100,000alreadysavedupstartedworkingforus,compounding,givingusthatall-importanttailwindwehadbeenmissingbefore.Itdidn’ttakenearlyaslongorseemnearlysoarduoustogetfrom$100,000to$200,000,andthistrendcontinuedintothe

future.Sobeginninginvestors,

takeheart:itreallydoesgeteasierastheyearsgoby.Youcanthankthepowerofcompoundingforthat.Ifyouhangtoughandkeepinvestingasmuchasyoucaninthoseearlyyears,yourperseverancewillpayoffintheend.Ithelpstorememberthatthemoneyyousaveearlyonisthemoneythatwillcompoundthemostoverthe

years.

Chapter8.DetermineYour

RetirementIncomeNeeds

Figuringouthowmuchmoneyyou’relikelytoneed

onanannualbasisinthesomewhatdistantfutureisnoeasymatter.Butyoucanstartwiththissimplepremise:yourexpenseswillalmostcertainlybelowerthenthantheyarenow.

Why?Well,forstarters,youwon’tbeneedingtoinvestforretirementanymoreonceyou’reretired,obviously,sothose“expenses”willgoaway.Inaddition,youwon’tbe

makingmortgagepaymentsanymore,andanyexpensesassociatedwithraisingchildrenandsendingthemofftocollegewillnolongerapply.Certainwork-relatedexpenseswilldropawayonceyounolongerneedtomakethedailycommute.Significanthomeandyardimprovementsshouldbeathingofthepast.Andyourtaxeswillalmostcertainlygodowncomparedtowhat

you’repayingnow.Ontheotherhand,your

healthcarecostsmayincreasesomewhat,aswellasyourtravelandleisureexpenses.Thenthere’sinflation,whichcontinuallyeatsawayatthevalueofyourdollaryearafteryear.Inflationaddsawholenewdimensiontothediscussion.

We’lltalkabouteachofthesefactorsinamoment,butfirstwe’dliketodiscussthe

strongdifferencesofopinionthatexistabouthowbesttodetermineyourfutureyearlyincomeneeds.

TwoMethodsforCalculatingFutureIncome

Oneapproachtoutedbymanyfinancialandinsurancefirmsistostartwithyourcurrentincomethenmultiplythatincomeby70%or80%todeterminetheamountyou’relikelytoneedinthefuture.Wethinkthismethod

isfundamentallyflawed.Ittendstoresultinanoverestimatethatmakespeoplethinktheyneedtosaveabiggernesteggthantheyreallydo.Itgoeswithoutsayingthisbenefitsthesamefinancialfirmsthatrecommendit,sinceitmeansmoremoneyflowingintotheircoffers.

Becausesalariestendtobeattheirhighesttowardstheendofaperson’scareer,a

catch-22situationcanresultinwhicheverhighersalariesleadtoeverhigherestimatesoffutureneeds,whichinturndrivestheperceivedneedforaneverbiggernestegg.Allofthisleadstothebeliefthatyouneedtokeeponworking,keeponsaving,keeponstriving.Butthetruthis,currentincomehaslittletodowithhowmuchyou’llneedonceyouretire.Let’suseourownexampleasacasein

point.Towardstheendofour

workingyearsweweremakingthemostwehadeverearned,astendstobethecase.Firmsrecommendingtheincomeapproachtocalculatingyourretirementneedstypicallysuggestyoutaketheaverageofyourfinaltenyearsofannualincome.Theytellyoutomultiplythatamountby70%and80%togetarangerepresentingthe

lowendandhighendofwhatyou’relikelytoneedinordertomaintainyourcurrentstandardoflivinginretirement.

Applyingthisformulatoourownsituation,ouraverageannualincomeovertheten-yearperiodpriortoretirementwas$106,885.Multiplyingthisamountby70%and80%givesyouarangeof$74,820to$85,508,withthemedianpointofthe

rangebeing$80,164.Butinactualfactwehave

livedquitecomfortablyon$40,000peryeareachyearsinceretiring.Ourstandardoflivinghasremainedvirtuallythesameasbeforeexceptthatitincludesalotmoretravel.Youcanseefromthisexamplejusthowflawedthe70-80approachcanbe.Anymethodthatmissesthemarkbymorethandoubleshouldbeconsideredsuspect.

Ifyouareaggressivelysavingforearlyretirement,thentheresultsofthe70-80methodtendtobeparticularlyskewed.Alargechunkofyourincomeisgoingtowardsinvestmentsandisthusoffthetableintermsofwhatyou’reactuallylivingonatpresent.Ourinvestments,forinstance,oftenamountedtoover40%ofourincomeduringthelatteryearsofouremployment.Ourtaxeswere

alsoattheirhighestduringthisperiod.Thusanyonepushinghardtoretireearlyislikelytobeledastraybyusingcurrentincomeasthemeansfordetermininghowmuchthey’llneedoncetheyretire.

Insteadwerecommendyoustartwithcurrentexpensestodetermineyourretirementneeds.Actuallivingexpensesinthepresentdaygiveyouabettertakeon

whatyou’llneeddowntheroad,onceyouhavesubtractedouttheonesthatnolongerapplyandhavemadeappropriateadjustmentsforinflation.

It’sparticularlyimportanttogettheyearlyretirementincomenumberrightsinceitfeedsdirectlyintothecalculationofhowbigyournesteggneedstobe.Thedifferencebetweenbeingabletoliveon$40,000peryear

and$80,000peryearisthedifferencebetweenneedingtosaveupanesteggof$1millionand$2million.Thinkofhowmanyextrayearsofworkitwouldtaketoamassanextramilliondollarsinsavings.Thustheyearlyretirementincomeestimatebecomesmagnifiedintermsofitspotentialimpactonyourlifeandthedecisionsyoumakeaboutyourownfuture.

MakinganInitialEstimateBasedonCurrentExpenses

Let’sbeginbytakingalookatyourcurrentlivingexpenses.Let’ssayyouandyourspousecurrentlyhavea

combinedgrossincomeof$100,000,or$75,000netaftertaxes.Now,usingbroadbrushstrokes,let’seliminateafewofthemajorexpensesyouprobablywon’thaveonceyouretire.

Forstarters,themortgagewillbepaidoffbythetimeyouretire,sothat’s,say,$1,250permonthor$15,000peryearyouwon’thavetoworryabout.Perhapsyou’vealsobeenputtingaway

$3,000peryearforyourkids’collegeeducation.Andlet’ssayyou’veidentifiedanother$1,000peryearinadditionalexpensesrelatedtokids,jobs,homerenovation,yardmaintenance,andsoforththatyoufeelfairlycertainwillnolongerapplyonceyou’reretired.

Finally,let’ssayyou’reinyourprimaryinvestingyearsandhavebeensockingaway$20,000peryearintoyour

retirementfunds.Ofcourse,that“expense”willnolongerbethereonceyou’reretired.So:$100,000(combinedgrossincome)-$25,000(taxesat25%)-$15,000(mortgagepayments)-$3,000(kids’collegefund)-$1,000(misc.expensesrelatedtokids,jobs,homeimprovements,etc.)

-$20,000(retirementinvestments)$36,000(adjustednetincome)Thishypotheticalscenario

suggestsyouandyourspousecouldbegettingbyonaslittleas$36,000netperyearifitweren’tformortgagepayments,extraexpensesassociatedwithkidsandjob,andtheneedtosaveforcollegeandretirement.That’s

someprettyfrugallivingyou’redoingwhenyouconsideritthatway.

Butnowthependulumhastoswingtheotherway.You’vedonesomesubtraction,nowyouneedtodosomeaddition.Tomakeanaccurateassessmentofhowmuchyou’llneedonceyouretire,youhavetoaddmoneybackintoaccountforinflation,taxes,andpotentiallyhigherhealthcare

costsinretirement.(Wewon’ttrytoaccountforincreasedtravelexpensesinthisexamplebecausetheycanvarysomuchfromonepersontothenext,butyoumaywanttopadyourestimateslightlyhigherifyouexpecttotravelintensivelyonceretired.SeeChapter17,“ExtendedTravelinRetirement,”foradiscussionofaffordablelong-termtravel.)

AdjustingforInflation

Inflationonanationwidebasisrisesbyanaverageofroughly3%peryearaccordingtotheConsumerPriceIndex,whichmeasuresthecostofabasketofcommongoodsandservicesAmericansbuy(food,clothing,housing,medicalcare,energy,etc.).TheCPIis

anationalaverageofprices,butbasedonourownexperiencewethink3%isabithighforcalculatingyourpersonalinflationrate.Ifyouliveconsciously,youcankeepinflationfromhavingasstrongofanimpactonyourlifeasitmighthaveontheeconomyasawhole.

Forinstance,thepriceofseeingamovieinatheatermayhavegoneupto$12perticket,butthatdoesn’tmean

youcan’tmaketheconsciousdecisiontowaitandseethesamemovieathomeforadollar.Andjustbecausearestaurantraisesitslunchpriceto$20doesn’tmeanyoucan’tmaketheconsciousdecisiontoeatsomewhereelsemoreaffordably.Youmightdotakeoutforhalfthepriceormakelunchathomeforevenless.Sowhilewecan’tignoretheeffectsofinflation,wecanmitigateits

effectstosomedegreebymakingintelligentdecisionsinourpersonallives.

Wethinkapersonalinflationrateof2%isclosertothemarkthan3%,andthat’sthenumberwe’llusehere.Butkeepinmindhighinflationcanrearitsuglyheadatanytimeandposeaseriousproblemforretireesonafixedincome.Keepaneyeonwhat’shappeningintherealworldandadjustyour

calculationsandthoughtprocessesaccordingly.

Basedonapersonalinflationrateof2%,tohavetheequivalentof$36,000intoday’sdollarsyou’dneed$36,000+2%=$36,720nextyear.Theyearafterthatyou’dneed$36,720+2%=$37,454,andsoon.In15years’time,tohavethebuyingpower$36,000givesyoutoday,you’dneed$48,451.Forsimplicity’s

sakelet’sroundthenumberupto$49,000.

AdjustingforTaxesinRetirement

Thenetamountourhypotheticalcouplewillneedinretirementis$49,000.However,whentheywithdrawmoneyfromtheirretirementaccountsthey’lltypicallybewithdrawinggrossproceedsandmayneed

topaysomeamountofincometaxonthatamount.Let’sassume10%taxes,whichmaysoundlow,butinactualfactwe’vehadseveralyearsgobysinceretiringinwhichwe’veowedzerodollarsintaxes(see“IncomeTaxesinRetirement”inChapter3fordetails).

Fornowlet’sassume10%incometaxesandadd$5,444tothe$49,000toarriveatagrossincomeof

$54,444.(Incaseyou’reinterestedindoingthemath,dividethenetamountof$49,000by90%toarriveatthegrossamount.)Forsimplicity’ssakewe’llroundthenumberupto$55,000.

AdjustingforHealthCareinRetirement

Youmayalsowanttoaddsomemoneyinforpotentiallyhigherhealthcarecostsinretirement.Asof2014,theAffordableCareActwillmakehealthcaremuchmoreaffordableforearlyretireesonabudget,aswediscussin

Chapter16(“HealthCareinRetirement”).Theeffectsofthisnewlegislationaresignificantenoughthatwe’reonlygoingtoadd$1,000toourhypotheticalcouple’stotal,andthat’smostlytoaccountforhigherout-of-pocketexpensesassociatedwiththingslikedentalandvisioncarethataren’tnecessarilycoveredunderthenewlaw.

Keepinmindyou’re

probablynotpayingzerodollarsforhealthcarecurrently.Evenifyouremployercoversyou,you’realmostcertainlypayingsomethingintothesystem.AccordingtotheEmployerHealthBenefits2011SurveybytheKaiserFamilyFoundation,forexample,workerswithfamilycoveragecontribute,onaverage,$344permonth($4,129annually)towardstheirhealthinsurance

premiums.The$1,000we’readdingisontopofwhateveramountourhypotheticalcoupleisalreadypayingforhealthanddentalcareduringtheirworkingyears.

If,afterreadingChapter16,youstillexpectyourhealthcarecostsinearlyretirementtobesignificantlyhigher,youcanusewhatevernumberyoufeelmostaccuratelyreflectsyourfuturereality.

CalculationSummary

Ourcouple’sestimatedannualretirementexpensesnowstandat$56,000.Thisestimateoftheirfutureincomeneedsisgroundedintherealityoftheircurrentsituationwhilealsohavingbeenappropriatelyadjustedforinflation.Whileitmaynotbeexact,itletsusproceed

withareasonabledegreeofconfidence.

Sincewe’veprovidedalotofdetailedinformationhereinvolvingafairamountofmath,let’stakeamomenttosumup:

Nowallthatremainsistocalculatethesizeofthenesteggitself–whichisthesubjectofthenextchapter.Wethinkyou’llbegladtodiscoverthere’sverylittlemathinvolvedindoingthat.

Chapter9.CalculateYourNest

EggPerhapsthethoughthas

occurredtoyou,Whatexactlyconstitutesmynestegg?Istheequityinmyhomeapart

ofit?Andwhataboutthemoneyinmy401(k)andIRAthatIdon’tplanontouchinguntilafterI’m59½?DoesthatcounttowardsmynesteggwhenI’mtryingtodeterminehowmuchissafetowithdrawintheinitialyearsofmyearlyretirement?

Thesearefairquestionsandonesweponderedourselvesaswewerenearingearlyretirement.We’lldoourbesttoprovidesome

guidancebasedonourownthinkingabouttheseissuesbothbeforeandafterretiring.

WhatConstitutesYourNestEgg?

Yournesteggshouldconsistonlyofliquidassetssuchasstocks,bonds,andcash,notilliquidassetssuchasrealestate.Realestateishardertosellandmorecumbersometoworkwithifyouwanttogeneratecashfor

currentlivingexpenses.Thatsaid,ifyouplanondownsizingyourhomeonceyouretire,whateveramountyouwon’tbeneedingforhome-buyingpurposesinthefuturecanbeturnedintoliquidassetsthatdocounttowardsyournestegg.

HowMuchofYourHomeCounts?Priortoretirementwe

includedalloftheequityinourhomeaspartofournesteggcalculationsincewedidn’tplanonowningahomeonceweretired.Andindeedwedidsellourhomeafterretiringandlivedfortwoyearsasnomadsbychoice,rentingwhereverourtravelshappenedtotakeus.Forthosetwoyearsourassetswereallliquid.

Butwecametomisshavingahomebase,sowe

endeduppurchasingasmallcondo,whichmeanttaking$100,000offthetableintermsofliquidassetsandputtingitbackintoilliquidrealestate.Ineffectthisamountnolongercountedtowardsourretirementnesteggbecauseitnolongergeneratedfundswecouldusetoliveon(shortofrentingitoutforperiodsoftime,whichwehaveconsidereddoingbuthaven’tdonesofar).The

condostillcountstowardsournetassetsbutnottowardsournestegg.

Inretrospectitwouldhavebeenwiserforustofactorintheneedforadownsizedhomeinretirementasopposedtonohomeatall.Bysubtracting$100,000outofourtotalholdings,wecouldhavemoreaccuratelyassessedtherealsizeofournesteggaswewereplanningforretirement.

Forthisreasonwerecommendyousetasideaportionofyourhome’sequity(say,betweenonequarterandonehalf)forfuturerealestatepurposes.Thisamountcanbeappliedeithertoadownsizedhomeortocoveringrentalcostswhereveryoumayhappentoliveintheworldifyouchoosenottoownahomeforaperiodoftime.Eitherway,you’reaheadofthegameifyoudon’thaveto

subtractthisamountoutofyournesteggonceyouretire.

AreYour401(k)andRothIRAAssetsPartofYourNestEgg?Decidingwhether401(k)

andRothIRAassetsareliquidorilliquidintheyearsbeforeyoucanaccessthemwithoutpenaltyisadmittedlysomethingofagrayarea.Hereareourthoughtsonthe

matter,althoughothersmightreasonablydisagree.

Werecommendyoudoinclude401(k)andRothIRAamountswhencalculatingyournestegg,evenifyouplanonrelyingsolelyonthemoneyinyourtaxableaccountintheyearspriortoturning59½.Thestock,bond,andmutualfundassetsintheseaccountsreallyareliquidandcouldbesoldforcashquicklyifneedbe.Of

courseyourintentionistoleavethemuntouchedforyearstocomesinceyouwouldotherwisehavetopayapenaltytaxforaccessingthemprematurely,buttheyareneverthelessstillliquidinnature.

Justbecauseyouchoose(wisely)torelysolelyonthetaxableportionofyourliquidassetsduringyourearlyretirementyearsdoesn’tmeantheothertax-advantaged

liquidassetsdon’texist.Theydoexistandinfactarelikelytogrowintheyearstocome,providingyouwithasteadystreamofincomewhenthetimeisright.Notfactoringthemintoyournesteggwouldbetoignoreasignificantandever-increasingportionofyourportfolio.

Usingthe4%RuletoCalculateYourNestEgg

Onceyou’vedeterminedyourannualretirementincomeneeds,aswedidinChapter8,thenextstepiseasy.Youcanusewhat’sknownasthe4%ruleto

estimatethenesteggyou’llneedinordertosafelygeneratethatamount.Let’sstartwith$56,000,theannualretirementincomeamountfromourexampleinthepreviouschapter.Usingavariationofthe4%rulecalledthe“Ruleof25,”youcanperformaquickback-of-the-napkinnesteggcalculation.Simplymultiplytheincomeamountby25todeterminethesizeofthenest

eggyou’llneed.Forexample:$56,000(annualretirementincome)x25=$1.4million

nestegg

It’sasstraightforwardasthat.Anesteggof$1.4millionwillgenerateanannualretirementincomeof$56,000forourhypotheticalcouple.Notethatdividingtheincomeamountby4%willgetyouthesameresultasmultiplyingby25.Thetwo

approachesaremathematicallythesameintermsofprovidingyouwithananswerastothesizeofthenesteggyouneed.

Perhapsaneasierwaytovisualizehowthe4%ruleworksistostartwiththenesteggamountitselfandmultiplyby4%todeterminetheyearlyincomeamountitwillsafelygenerate,asfollows:

$500,000nesteggx4%=$20,000incomeperyear$750,000nesteggx4%=$30,000incomeperyear

$1,000,000nesteggx4%=$40,000incomeperyear

$1,250,000nesteggx4%=$50,000incomeperyear

$1,500,000nesteggx4%=$60,000incomeperyear

$1,750,000nesteggx4%=$70,000incomeperyear

$2,000,000nesteggx4%=$80,000incomeperyear

Don’tbesurprisedifthenesteggamountyoucalculateislargerthanyouwereanticipating.Inflationcanhavethateffect.Butkeepinmindyoursalarywillalsobekeepingupwith–andhopefullyoutpacing–inflationoverthecoming15to20years,sowhatmayseemlikeanimpossiblylargenumbernowshouldfeelmoreattainableastheyearspassandyoursalaryincreases.

Compoundingwillalsoassistyouinreachingyourgoal,givingyouatailwindinthelateryearsofyourplan.

WhyIs4%aSafeWithdrawalAmount?

Youmaybewondering,Why4%?Whynotmoreorlessthanthat?Doesn’t4%seemartificiallylow?Couldn’tyoutakeout,say,6%andstillbeokay?Andhowsafeissafewhenpeopletellyou4%isasafeamount

towithdraw?Let’strytoanswerafewofthesequestions.

TheOriginal4%RuleMostfinancialplanners

thesedaysagreeonsomevariationofthe4%rule.AsoriginallyformulatedbyWilliamBengen,acertifiedfinancialplannerintheearly1990s,therulestatesyoucan

safelywithdraw4%ofyournestegginyourfirstyearofretirementandincreasethatamountannuallythereafterforinflationwithouttoomuchriskofdepletingyournesteggover30years.

Let’ssayyouhavea$1millionnestegg.Accordingtothetraditionalapplicationofthe4%rule,yourfirstyearofretirementyoucouldtakeout$1millionx4%=$40,000.Nextyear,adjusting

forinflation(let’ssayit’sat2%),youcouldtakeout$40,000+2%=$40,800.Theyearafterthat,ifinflationwereat3%,youcouldtakeout$40,800+3%=$42,024,andsoon.That’sthe4%ruleatitsmostbasic.

Economistshavedonecarefulhistoricalmodelingandrunextensivealgorithms(calledMonteCarlosimulations)toarriveattheconclusionthat4%isa

reasonablysafeamounttowithdrawfromyourportfolioeachyear.Bengenhimselfconcludedthatdrawingdownjust1%morethanthatperyear–thatis,5%plusinflationadjustments–resultedina30%chanceofaretiree’snesteggbeingdepletedtoosoon.Fortheaverageretireethatissimplytoohigharisk.

AtorNeartheLimit

ofSafetyWhenwewereoriginally

planningforearlyretirement,itseemedtousthe4%rulewasoverlyconservative.Wewonderedwhywecouldn’tsafelywithdraw6%ormoreperyearifourinvestmentswereearning,say,9%.Butwe’vecometorealizethatprolongeddownturnsinthemarketcanwreakhavocwithaninvestmentportfolio,

especiallyintheearlyyearsofone’sretirement,andanygoodruleofthumbhastoaccountforthatpossibility.Afewyearsofnegativereturns,combinedwithhigherthannormalwithdrawals,coulddepleteaportfoliotothepointwhereitcannolongersustainitselfbutinsteadbeginsaslowspiraltowardszero.

Whilethestockmarketmayreturnanaverageof9%

overthelongterm,itcanbealloverthemapintheshortterm,andthe4%ruleisdesignedtocompensateforthat.It’salsohelpfultorememberthatpostedannualreturnsaretypicallypre-taxanddonotaccountforinflation.A9%returnisclosertoa7%realreturnafterfactoringininflation,andit’sevenlowerthanthatafterfactoringintaxes.Whenalloftheseissuesare

takenintoconsideration,4%turnsouttobethepercentagethatisatornearthelimitofsafety.Nearlyalleconomicmodelsagreethatyournesteggisatseriousriskofbeingdepletedtoosoonifyouareconsistentlywithdrawing6%ormore,sokeepyourwithdrawalsinthe4%to5%rangeifyouwanttostandareasonablechanceofseeingyourportfoliolastlongerthanyoudo.

Unfortunatelythereisnosuchthingasironcladsafetywhenitcomestoinvesting,onlyrelativesafety.Underterribleeconomicconditionsitwouldbepossibletodepleteyourportfolioevenifyouonlytookout4%peryear.Butthebestyoucandoiserrontheconservativesidesotheoddsareinyourfavorandrecognizetherearenoguaranteeseitherinlifeorininvesting.

Modifyingthe4%RuletoAddressLimitations

Ofcoursethe4%ruleisonlyaruleofthumbandnotanexactscience,butitservesasagoodfinancialyardstickfordeterminingtheapproximatesizeofthenest

eggyou’llneed.Wethinkitworksbestwhen,likeanyruleofthumb,itisappliedwithastrongdoseofcommonsense.Theruleasoriginallyformulatedhassomeimportantlimitations,sowerecommendyouuseitbutinamodifiedfashionasdescribedbelow.

IsThirtyYearsEnough?

Thechiefproblemwiththe4%ruleasoriginallyarticulatedisthatitwasonlymeanttoapplyto30years’worthofretirementliving.Butwithpeoplelivinglongerandretiringearlier,thisassumptionnolongerholdstrueineverycase.Youmightneedtofund40oreven50years’worthofretirementliving.

Oursolutiontothisproblemistoeffectivelyturn

offtheautomaticinflationadjustmentfeaturebuiltintotheoriginalrule.Ifyoudonotadjustforinflationeveryyearormakeonlyminimaltweaks–especiallyintheearlyyearsofyourretirement–thenyouarehedgingyourbetsinfavorofahealthyinvestmentportfoliothatislikelytooutlastyou.

Inflationhasbeensolowoverthepastfewyearsthatwehavebeenabletogosix

yearssofarwithoutneedingtoadjustourannualwithdrawalamounts.Onlynowarewebeginningtonoticearealdifferenceinourbuyingpower.Byminimizinginflationadjustments,wegiveourportfolioabetterchanceofnotonlysustainingitselfbutgrowingoverthelongterm.Thisincreasestheoddsitwillbetheretosupportus40oreven50yearsdownthelineifnecessary.

Asforinflationinourlateryears,wefeelwecanrelyonfuturesocialsecuritypaymentstohelpwiththat.Infactthatisexactlyhowwethinkofsocialsecurity:asahedgeagainstinflationinthedistantfuture.Wearen’texpectingmuchmorefromitthanthat,especiallysinceourpaymentswillbereducedfromthenormsinceweretiredsoearly.(Socialsecuritypaymentsare

calculatedbasedonyour35highest-earningworkingyears;ifyouworklessyearsthanthat,you’llhavesomeyearswithzeroincomeaveragedin–whichwillloweryourpayout.)

TweakingWithdrawalsBasedonActualConditionsAnotherproblemwiththe

4%ruleastraditionally

formulatedisthatitmakesnoattempttoaccountforchangesinspendingbehaviorduetobig-picturechangesintheeconomy.Theruleisappliedblindly,inessence.Whetheryouareinthedepthsofarecessionorattheheightsofaroaringbullmarket,italwaysrecommendsyouwithdrawexactlythesameamountperyear(otherthancompensatingforinflation).

Thismakesitsimpletoapplybutinflexiblewhenitcomestorollingwiththepunchesthatthefinancialmarketssometimesthrowatyou.

Inresponsetothisconcern,manyeconomistsadvocatestartingwiththe4%rulebuttweakingyourwithdrawalsfromyeartoyearbasedonactualmarketconditions.Thismakesperfectsensetous.Ifthestockmarketisperforming

splendidlyyearafteryear,thenyoushouldn’tfeelobligedtoartificiallylimityourselfto4%plustheinflationrate.Insuchasituationyoumightbewarrantedintakingout6%ofyournestegg(ormore)inagivenyear–aslongasitdoesn’tbecomeyournewnorm.Afteraparticularlygoodstringofyears,youmightsplurgeonthataround-the-worldtripyou’vealways

dreamedofbeforereturningtoamorenormalwithdrawalratethefollowingyear.

Ontheotherhand,iftheeconomyisinadeepandprolongedrecession,thenblindlyapplyingthe4%rule–whichtraditionallywouldcallforyoutoincreaseyourwithdrawalamountsinordertoaccountforinflation–wouldbequestionableatbest.Youmightendupmateriallyweakeningthehealthofyour

portfolioanddecreasingitschancesofsurvivaloverthelongterm.Undersuchconditionsitwouldbewisetowithdrawlessthan4%(oratleastnotadjustforinflation)inordertoprotectyourportfoliofromfurthererosion.Increasingtheflexibilityofthe4%ruleinsuchafashionoffersamorepragmatic,eyes-wide-openapproachtodrawingdownyournestegg.

AchievingaSelf-SustainingPortfolioAself-sustainingportfolio

isyouroverallfinancialgoalonceyouretire.Aportfoliothatisgrowingataslowpaceisaportfoliocapableofkeepingupwithinflationandprovidingyouwithaslightlyhigherannualincomeastheyearspass.Modifyingthe4%ruleby1)turningoffautomaticinflation

adjustmentsinfavorofmanualadjustments,and2)tweakingyourwithdrawalratesbasedonactualmarketconditionsshouldallowyoutoachievethisgoal.

UsingRetirementCalculators

Youcanuseonlineretirementcalculatorsinconjunctionwiththe4%ruletodeterminetheapproximatesizeofthenesteggyou’llneed.InChapter7wementionedoneweparticularlylikeat

daveramsey.com(underthe“Tools”tab).Itcreatesabarchartshowinghowyourmoneycompoundsfromyeartoyearandletsyouplugindifferentvaluestoexperimentwithdifferentscenarios.

AnotherniftyonlinetoolistheRetirementNestEggCalculatoronVanguard’swebsite.(Justtype“Vanguardnesteggcalculator”intoGoogleanditwillprovideyouwiththelink,whichis

ratherlongandcumbersome).Thecalculatorruns5,000independentMonteCarlosimulationswithjusttheclickofabutton.

Slidingbarsletsyouspecifyfourdatapoints:1)howmanyyearsyourportfolioneedstolast,2)yourcurrentportfoliobalance,3)howmuchyouexpecttospendfromyourportfolioeachyear,and4)thepercentageofstocks,bonds,

andcashinyourportfolio.Basedonthisinformationitcalculatestheprobabilityofyourportfoliolastingthenumberofyearsyou’vespecified.Ifyou’renotsatisfiedwiththeresults,youcantweaktheslidingbarstoexploredifferentwhat-ifscenarios.

Chapter10.MakeaLong-

TermInvestment

PlanWhenmakingalong-term

investmentplanithelpstobe

abletoclearlystateyourgoalsothereisnoconfusionaboutwhereyouareheading.Forexample:“Iwanttoretirein15yearsandhaveanesteggof$1.5millioninordertogenerate$60,000inincomeannually.”Tobeabletoputtogetheragoalstatementlikethisyouneedtoworkbackwards,inessence,andcompletethreesteps,twoofwhichyou’vealreadycompletedintheprevious

twochapters:1)Estimateyouryearlyincomeneedsonceyouretire.2)Calculateyournesteggbasedontheseyearlyincomeneeds.3)Puttogetheradetailedplanoutlininghowmanyyearsitwilltaketosaveupyournesteggandhowmuchyou’llneedtoinvesteachyear.

Thischaptertacklestheall-importantthirdstep.Youmayalreadyhaveaninitialsenseofthenumberofyearsuntilyourtargetretirementdate,butcompletingthisstepwillhelpyourefinethatunderstanding.Bytheendofityou’llhaveamuchbettergrasponhowmuchyou’llneedtoinvesteachyearinordertoaccomplishyourgoalinthedesirednumberofyears.

Exercise#1:InvestingtheSameAmountEachYear

Let’sgetstartedbytakingalookatthefollowingcharts,whichshowtheresultsofsteadilyinvesting$15,000,$20,000,$25,000,and$30,000peryearfor15years

and20yearsassumingaconsistent9%annualreturn.

Roundingofftheresultsinthecharts,20years’worthofinvestmentscomesto:–$836,000basedoninvesting$15,000peryear–$1.1millionbasedoninvesting$20,000peryear–$1.4millionbasedoninvesting$25,000peryear–$1.7millionbasedoninvesting$30,000peryearSimplyeliminatethelast

fiveyearsonthechartstoseewhereyournesteggwouldstandafter15yearsofsaving.Inthiscasetherounded-offresultscometo:–$480,000basedoninvesting$15,000peryear–$640,000basedoninvesting$20,000peryear–$800,000basedoninvesting$25,000peryear–$960,000basedoninvesting$30,000peryear

Keepinmindtheseresultsareirrespectiveoftheequitybuildinginyourhome,asizableportionofwhichcanbeaddedtothetotalsshownabove,assumingyouarewillingtodownsizeafterretiring.

Thisshouldbegintogiveyouaroughideaoftheaverageamountyou’llneedtosaveeachyearinordertoreachyourgoal.Ofcoursethisissimplyahypothetical

example.It’shighlyunlikelyyou’llbeabletosaveexactlythesamedollaramountperyearfromthebeginningtotheendofyourworkingcareer,andit’sprettymuchaguaranteethestockmarketwon’tconsistentlyreturnthesamepercentageyearinandyearout.

Farmorelikely,you’llbeginbyinvestingsmallamountsearlyon,thenwatchthoseamountsgrow–

hopefullydramatically–asyoursalarygrows.Thiswasthecaseforus.Meanwhile,thestockmarketwillhavegoodyearsandbad,buthopefullyitwillbalanceoutintheendtosomethingclosetolong-termhistoricalaverages.

Exercise#2:InvestingDifferentAmountsEachYear

Nowlet’sengageinanotherhypotheticalexercise,thisonemixinginacertainamountofreal-worlddata

basedonourownexperience.Inthisexercisewe’lluseactualdollaramountsweinvestedeachyearfor15years,butwe’llplugthemintoaspreadsheetthatassumesaconsistentannualreturnof9%peryear.The“GrandTotal”columninthefollowingchartshowstheresultsbasedonthishypothetical9%return,whilethe“ActualResults”columnnexttoitcomparesreal-world

returnsreceivedduringthissameperiodoftime.

Asyoucanseefromthechart,ouryearlyinvestmentamountsfluctuateddramaticallyfromthebeginningofourinvestmentplantotheend.Theybeganatjustafewhundreddollarsperyear,thenratchetedconsistentlyhigherbeforekickingintooverdrivein2000followingRobin’scareerretraining.Ouraverageyearlyinvestmentoverthe

entire15-yearperiodwasslightlylessthan$23,000peryear.

Weweresurprisedourselveswhenweranthesenumbersforthefirsttimeandsawthatouractualresultshadoutpacedaconsistent9%annualreturn.Infacttheyhadoutpacedaconsistent10%return,whichwouldhaveresultedin$586,890.Aconsistent11%returnwouldhaveresultedin$620,868–

moreorlessinlinewithouractualresultsof$626,219.

Howcanweexplainsucharobustreturn?Wasitsimplytheresultofstrongstockmarketperformanceduringtheyearsinwhichwehappenedtobeinvesting?

Thesimpleanswerisyes.Duringthe15-yearperiodfrom1992to2006,theS&P500returned12.02%basedonsimpleaveragesand10.66%basedoncompound

annualgrowthrates(moreonthatinamoment).Thusourannualizedreturnof11%wasmoreorlessinlinewiththestockmarketasawhole.

Thischartshouldlendsomeconfidencethat,despitefluctuatinginvestmentamountsandwildlyvaryingratesofreturnthroughtheyears,real-worldresultsreallycanmatchorevenoutperformhypotheticalresultsbasedonaconsistent

9%return.Yourinvestmentamounts,

likeours,maystartoutsmallbutbuildovertimeasyoursalarygrows.Wesuggestyouincorporatethislikelydollarprogressionintoyourfinancialplans.Ifyoutakeouradvicetoheart,however,andinvestinyourselffirst,thenyourinvestmentsshouldstartouthigherthanoursdidandremainmoreconsistentthroughtimethanourswere.

Thismoreconsistentapproachhasitsbenefits,chiefamongthemthefactthatmoredollarsarebeinginvestedearlyon,translatingintomoretimeforthosedollarstocompound.Amoreconsistentapproachalsomakesplanningforthefuturethatmucheasier.

Whichleadsustoournexttopicofdiscussion.Whatannualratesofreturnshouldyouassumewhen

puttingtogetheryourfinancialplanforthefuture?

EstimatingFutureStockMarketReturns

Whenwebeganinvestinginthemid-1990s,peoplewerealmostmanicallyupbeataboutthestockmarket.Theideathatwewereinaneweraofinvestingwasverymuchintheair.Wewereinthemidstofmultipleback-to-backyears

of20%+returnsandthereseemedtobenoendinsightastohowhightheS&P500couldgo,letalonetheNASDAQ.Justtakealookattheseannualizedreturnsfrom1995to1999togetanidea:

Don’tweallwishwecouldhavethosefiveyearsofreturnsbackagain!In1999theNASDAQreturnedanastonishing85%–andthat

wasafterfouryearsof20%to40%gains.Nowonderpeoplethoughtwewereinaneweraofinvesting–orelseinthemidstofoneofthebiggestinvestmentbubblesofalltimes.

Irememberreadingarticlesinfinancialmagazinesabout“Dow30,000”and“Dow40,000,”andthearticleswerenotwrittentongueincheek.TothisdayabookisavailableonAmazon.com

calledDow30,000by2008!:WhyIt’sDifferentThisTime.Firstpublishedin2003byacharteredfinancialanalystafterthedot-comboomhadalreadygonebust,itclaimedareturntogoodtimeswasjustaroundthecorner.Weallknowhowthatpredictionturnedout.

IstillhaveanarticlefromKiplinger’sdatedJanuary1995thatclaimsanaverageannualreturnof15%overthe

longrunisareasonableexpectationforindividualswhoinvestregularlyinadiversifiedportfolioofsmall-capgrowthstocks.Backthen,talkof15%averageannualreturnsdidn’tseemsofar-fetched,andwhenyoulookatthereturnsshownaboveyoucanbegintounderstandwhy.Iwentontowriteinmyjournal,“Ifthisisso,mycalculationsmaybeoverlyconservative.I’vebasedmy

expectationsonanaverageannualreturnof9%.”

Becauseofarticleslikethisone,Ibumpedmyestimatesupto10%andstillfeltlikeIwasbeinghopelesslypessimistic.NowadaysifIweretosuggestannualizedreturnsof10%,manywouldsayIwasbeinghopelesslyoptimistic.

WhattheHistorical

RecordShowsYouhavetomake

assumptionswhenplanningforthefuture,there’ssimplynowayaroundit.Aslongasyourassumptionshaveabasisinfact–andnotjustovertheshorttermbutoverthelongterm–you’reonrelativelysolidground.Butitwouldbeamistaketoassume20%annualizedstockmarketreturnsjustbecauseyou’re

luckyenoughtoexperiencea20%returninanygivenyear,oreveninastringofyears.Why?Becausethehistoricalrecordsimplydoesn’tsupportit.

Whatthehistoricalrecorddoessupportistheprobabilityofstockmarketreturnsinthe8%to10%rangeoverthelongterm.Doesthatmeanyou’redefinitelygoingtogetthosereturnsduringtheyearsin

whichyouareactivelyinvesting?No,ofcoursenot.Butyou’vegottostartsomewhere,andasgoodaplacetostartasanyiswiththehistoricalreturnsofthestockmarketoveraverylongperiodoftime–say,frombeforetheGreatDepressionin1929tothepresentday.

Gettinganaccuratereadonhistoricalstockmarketperformanceisasurprisinglytrickythinginitsownright.

You’dthinkeveryonewouldagreeinhindsight,forexample,onwhattheannualizedreturnshavebeenfortheS&P500.Afterall,theS&P500isanindexofthe500biggestandbest-capitalizedcompaniesintheU.S.Nevertheless,differentwebsitespostslightlydifferentannualizedreturnsforthesameyear,althoughmostareinroughagreement.

Werelyondatapostedby

moneychimp.comundertheirhelpfulfeaturecalled“CAGRoftheStockMarket:AnnualizedReturnsoftheS&P500.”CAGRstandsfor“compoundannualgrowthrate”andtheir“CAGR-lator”makesitpossibletoenteranyrangeofyearsduringtheentirehistoryoftheS&P500andinstantlyseetheannualizedgrowthrateforthatperiod.

Accordingtotheir

website,from1871to2012,thelongestpossiblerangetodate,theS&P500’sannualizedreturn(dividendsincluded)hasbeen10.60%basedontakingthesimpleaverage–thatis,addingupeachyear’sannualreturnpercentagethendividingitbythetotalnumberofyears.

TheProblemWithUsingSimple

AveragesUsingthesimpleaverage

seemsstraightforwardenough,doesn’tit?However,itisn’talwaysthebestapproach.Let’slookatanextremeexampletoillustrate.Let’ssayyouhave$10,000investedinaparticularstockandyoumake100%onyourinvestmentinthefirstyear.Thatmeansyoumade$10,000onyourinvestment,

leavingyouwithanewtotalof$20,000.

Nowlet’ssayyoulose50%ofthatinvestmentthenextyear.That’salossof$10,000,puttingyourightbackwhereyoustartedat$10,000.Yourrealannualizedgainiszerosinceyoustartedandendedatthesamedollaramount.However,thesimpleaveragewouldsuggestyourannualreturnwas25%.Why?

Because(100%gain-50%loss)÷2=25%.Weintuitivelyseethisdoesn’tmakepracticalsense–andthat’swherecompoundannualgrowthrates(CAGR)comeinhandy.

WhyCompoundAnnualGrowthRatesAreMoreReliableAcompoundannual

growthrateessentiallyshowstherateatwhichaninvestmentwouldhavegrownifitgrewatasteadyrate.Byusingthegeometricmeanratherthanthearithmeticmeanitprovidesatruerpictureofactualreturns.Unfortunately,calculatingtheCAGRisnoeasymatterunlessyou’reamathwhizorhappentohaveafinancialcalculatoronhand.Ifyouwanttoknowtheequation,

hereitis:

Calculatingafractionalexponentisnotsomethingyoucaneasilydoonanordinarycalculator.However,websiteslikemoneychimp.comandinvestopedia.comnowofferCAGRcalculatorsyoucanuse.Forourpurposes,the

importantthingtounderstandisthatcalculationsbasedonCAGRprovideamoreaccurateassessmentoflong-termannualizedreturns,andthat’swhatourfocusisonhere.

Accordingtomoneychimp.com,theannualizedreturnoftheS&P500from1871to2012basedoncompoundannualgrowthratesis8.92%.TheCAGRisusuallyapercentortwoless

thanthesimpleaverage(whichyoumayrecallwas10.60%).Inflation-adjustedannualizedreturnsoverthissameperiodwere6.71%basedontheCAGR.

WhatAnnualRateofReturnShouldYouUse?TheS&P500isa

reasonableproxyfortheentireU.S.stockmarket,soit

wouldbefairtosaythat,overthelongrun,thestockmarkethashadanannualizedreturnofapproximately9%andaninflation-adjustedreturnofapproximately7%.Ifyouwanttoplanforthefuture,youcoulddoworsethanbasingyourassumptionsonthesepercentages.

Nowifyou’reoptimisticbynature,youcanassumestockmarketreturnsof10%orpossiblyeven11%per

yearandstillbemoreorlessinrangeofwhatthehistoricalrecordsupports.Butgoingmuchhigherthanthatmightstarttolookmorelikewishfulthinkingthanconscientiousplanning.

Whenputtingtogetheryourownfinancialplanforthefuture,wesuggestyouuseapercentagerateofbetween8%and10%peryearifyouareinvestingprimarilyinthestockmarket,

with9%beingtheobviousmiddlegroundassumption.Somewillsaythisistoohigh,otherstoolow,butatleastitisintheballpark.Keepinminda9%returnisbasedoninvestingthebulkofyourmoneyinstocksduringyourprimaryinvestingyears.Ifyouwishtoinvestmoreconservatively,withbondsmakingup25%ormoreofyourportfolio,youmaywanttoassumeaslightlylower

annualrateofreturn.Youmaybewondering

whetheryoushoulduseinflation-adjustedreturnswhenmakingassumptionsaboutfutureinvestmentgrowth.(Inflation-adjustedreturnsareusuallyabouttwopercentagepointslowerthanunadjustedreturns.)Withregardtoyourpersonalinvestmentplanwewouldsayno,andhere’swhy:youalreadyfactoredininflation

(i.e.,byadding2%peryear)whencalculatingyourfutureretirementincomeneeds.Thatmeansyournestegghasalreadybeenadjustedupwardstoaccountforinflation.Adjustingannualreturnsdownwardsaswellwouldbetoaccountforinflationtwice.

Eveniftheassumptionsyoumakeaboutfuturestockmarketreturnsaren’ttotallycorrect(andthere’sagood

chancetheywon’tbe),themerefactthatyouhavemadeaplanandadheredtoitmeansyou’reaheadofthegameandalmostassuredlybetteroffthanyouwouldhavebeenotherwise.

MarketResilienceIt’sacomfortto

rememberthatthestockmarkethassurvivedandthriveddespitesuchcatastrophiceventsasthe

StockMarketCrashof1929,theensuingGreatDepression,andtwoWorldWars.Itputsintoperspectivetheconcernsofourowntimeandmakesusrealizethemarketsaresurprisinglyresilientoverthelongterm.Returnsmaybeflatterthanwewouldlike,orevennegativeforaperiodoftime,butovertheverylongtermthemarketshavealwaysbouncedbackandproventhemselvesquiterobust.

Foranyonejustbeginningtoinvesttoday,it’salsosomethingofacomforttorealizethattheGreatRecessionhaswrungsomeriskoutofthemarkets.Duringthefive-yearperiodfrom2008to2012,theS&P500returnedjust1.63%basedonthecompoundannualgrowthrate(or-0.17%whenadjustedforinflation).Thissuggestsstocksmayofferabettervaluethanthey

didbeforetherecession,whichcouldbodewellforthefuture.Marketsmay(andweemphasizemay)outperformintheyearstocome,bringingannualreturnsmoreinlinewithlong-termhistoricalaverages.

PreparingYourInvestmentSpreadsheet

Nowthatyou’vehadachancetoexaminesomehypotheticalspreadsheetexamplesandconsidertheprobableratesofreturnyoushoulduse,it’stimetoprepareyourowninvestmentspreadsheet.Thisspreadsheet

willserveasyourmasterplangoingforward.Itwilltrackyourtaxable,401(k),andRothIRAinvestmentsandwillincludeaGrandTotalcolumnsoyoucanquicklyseewhereyoustandattheendofeachyear.

Onceyourspreadsheetissetup,allyouhavetodoisrevisititonceayeartoassesshowyou’redoingagainstplan.You’llupdateitatthatpointtoincludeactualresults

insteadofestimatesfortheyearjustpast.Thatwillincreasetheaccuracyandrelevancyofyourplangoingforward.

Weurgeyounottoskipthisstepevenifthewordspreadsheetgivesyouchills.Wepromisetokeepitsimple.Moreimportantly,weofferaspreadsheettemplateonlineifyou’dprefernotbuildthetemplatefromscratch.(Andwhywouldyou?)

Toavailyourselfofthisshortcut,simplyvisitourwebsiteatwherewebe.comanddownloadtheExcelspreadsheettemplateunderthe“EarlyRetirement”tab.It’sthesametemplatewepresenthere,anditalreadyhasallofthecolumnsandformulassetupforyou.There’sevenahelpfulinstructionsheetonaseparatetabwithinthedocument.

You’llstillneedtogointo

thespreadsheetitself,ofcourse,andmanuallyenterthedollaramountsyouexpecttoinvesteachyear,butthisisasimplematterofdataentry.Oncethisisdone,thespreadsheetistailoredtoyoursituationandyoucanbegintweakingittoplaywithdifferentinvestmentscenarios.

AFirstLookatthe

SampleSpreadsheetWecreatedthefollowing

investmentspreadsheettoguideusonourownjourneytoearlyretirement.Becausewefounditgenuinelyuseful,wewantedtoshareitwithyoutoo.

SampleInvestmentSpreadsheet

(9%AnnualReturn)

Asyoucansee,thereare

separatecategoriesfortaxable,401(k),andRothIRAaccounts.We’lltalkmoreabouteachtypeofaccountinChapter12,butfornowsufficeittosaythattherearesignificanttaxadvantagesto401(k)andRothIRAaccountsthatmakethemvaluabletovirtuallyeverypersonplanningforretirement.

Anychangesyoumaketothespreadsheetareinstantlyreflectedinthebottomline.Forinstance,ifyouchangetheannualrateofreturnfrom9%to10%,youcaninstantlywatchyourtotalsincrease.Ifyouadjustyourtaxableinvestmentamountsfrom$5,000to$10,000peryear,youcanseehowyournesteggatthebottomofthespreadsheetimmediatelygrowsbigger.

Don’tfeellimitedbythesamplenumbersincludedinthespreadsheet;theyaresimplyillustrativeandhavenomorebearingonourownrealitythantheydoonyours.Asyoumayrecallfromourearlierhypotheticalexample,ouractualinvestmentsweremuchmoreerratic(toputitmildly)thanthecarefulprogressionofnumbersshownhere.Ourannualinvestmentamountsranged

fromnegligibleatthebeginningofourplantosubstantialattheend,sodon’tartificiallylimitwhatyourowninvestmentpicturehastolooklike.

MakeYourSpreadsheetaLivingDocumentWeencourageyouto

thinkofyourmasterplannotasasingledocumentsetin

stonebutasaflexibledocumentthatcanbealteredandfine-tunedatwill.Theideaistoplaywithdifferentscenariosuntilyouarriveatonethatfeelsrighttoyou.Ifyourmaterialsituationchanges,youcanalterthespreadsheettoreflectyournewreality,thuskeepingitcurrentandrelevanttoyourlife.Earlieriterationsofyourplancanalwaysbesavedfortherecord,butmakesurethis

year’splanisasaccuratetoyourreal-worldsituationaspossible.

Aspreadsheetwithnoapplicabilitytoyourreallifefranklymissesthewholepoint.Ifyouthoughtyoucouldsave$10,000peryearbutitquicklybecomesapparentyoucannot,don’tabandonyourplanaltogether.Instead,simplyalterittomakeitfitwhatyoucando.Tryhalvingyourgoalto

$5,000peryear.Seeifthatworksbetterforyourcurrentsituation.Youcanalwaysraiseyourinvestmentgoalslateron.It’sbettertoaimalittlelower–especiallyearlyonwhenyou’retryingtocreategoodinvestinghabits–thantogetdiscouragedaltogetherandgiveup.

ModifyingYourSpreadsheet

IfyoualreadyhavearudimentaryunderstandingofExcel,thenthepracticaltipsthatfollowshouldbeenoughtoguideyouthroughhowtomodifyandupdatethespreadsheet.Otherwise,detailedinstructionsareprovidedinAppendixB.Thatappendixalsoprovidesinformationonhowtocreateyourownspreadsheetfromscratchshouldyouprefertodoso.

Thedefaultspreadsheetshows20years’worthofdata(plusatoprowforanybeginninginvestmentamounts).Ifyouonlywanta15-yearplan,simplydeletethebottomfiverowsthatyoudon’tneed.Besuretoselecttheentirerowyouwanttodelete(e.g.,byclickingontherownumberatthefarleftthenhittingdelete).

Tocreatea25-yearplan,copythelastfiverows,put

yourcursorontheappropriatecell(e.g.,A30),thenpastetoaddfivemorerowstothebottomofthespreadsheet.Again,besuretoselecttheentirerowsyouwanttocopyandpaste.

Youcanmanuallyupdatetheyearsinthe“Year”columnsimplybyclickingonthecellsyouwanttochange,typinginthecorrectinformation,andhittingenter.

Ifyouhavealreadybegun

savingforretirementbeforereadingthisbook,thenchangethezerosinthetoprowofdatatothecorrectamounts.The“GrandTotal”numberattheendoftherowwillautomaticallyupdate.

Theshaded“AmountInvested”columnsaretheprimarycolumnsyouwillneedtoupdatetomakethespreadsheetyourown.Manuallyentertheamountsyouplantoinvesteachyear

inyourtaxable,401(k),andRothIRAaccounts.Thesecolumnscurrentlycontainsampledataonly,buttheyneedtoreflecthowmuchyouactuallyintendtoinvestfromoneyeartothenext.Plugindifferentamountsandseehowthespreadsheetautomaticallyupdates.Asthenumberschange,sodothetotalsatthebottomofthespreadsheet.

Mostoftheothercolumns

inthespreadsheetupdateautomaticallyanddonotrequireinputsfromyou.However,youcanadjustthe“Annual%Return”columnsinordertotestoutdifferentreturnscenarios.Thesecolumnsareallsettoadefaultof9%,butifyou’dliketousealowerorhigherpercentageyoucaneasilydothat.Double-clickonthecellyouwanttoupdateandsimplychangethenumber–

forexample,fromthedefault0.09(for9%)to0.08(for8%)or0.1(for10%)oranyotherpercentyouwishtoexperimentwith.Afteryou’vedonethisonce,youcancopyandpastethiscellinformationtoalloftheothercellsbelowittoapplythesamepercentageratetothosecells.

Theonlyothercolumnyoumightwishtoupdateisthe“401(k)Match”column.

Thiscolumnautomaticallycalculatesa401(k)matchforyou.Thedefaultissetto50%oftheamountinthecolumnpriortoit.Manyemployersmatchtheiremployees’401(k)contributionsatfiftycentstothedollar,althoughothersaremoregenerousandmatchdollarfordollar.Thepercentagecanbeadjustedtobringitinlinewiththeparticularsofyour401(k)plan.Double-clickonthefirst

cellyouwouldliketoupdateandchangethepercentage–forexample,from“0.5”(50%)to“1.0”(100%).Youcanthencopyandpastethiscelltoallotherapplicablecellsbelowit.

GettingtoYourNestEggAmountYourultimategoalin

usingtheinvestmentspreadsheetistoplugin

numbersuntilyouseethenesteggamountyouarrivedatinChapter9(“CalculateYourNestEgg”)appearintheGrandTotalcolumnacrossfromtheyearinwhichyouideallywishtoretire.Playingwiththenumbersandpercentagescanhelpyoufigureouthowbesttoachievethatgoal.

Ifyourearnenoughtobeabletoinvestsizableamountsofmoneyeachyear,the

processmayberelativelystraightforwardandyoumaybedoneinnotime.Butfortherestofus,itmaytakeabitmoretimeandeffort.

Youmayrealize,forinstance,thatyouhavetosavealotmorethanyouthoughtyoudidinordertoreachyourgoal.Atthatpointyouhavesomeimportantdecisionstomake.Youcaneitherkeepyourambitiousyearlyobjectivesinplaceand

committoworkingevenhardertoachievethem,oryoucanincreaseyourtimehorizon(e.g.,from15to20years)togiveyourselfmoretimetoreachyourgoal,oryoucanreconsideryourannualincomeneedsinretirementandstartthinkingcreativelyabouthowtoretireonless.

Alloptionsareonthetableatthispoint.Don’ttakeitalltooseriously:aplayful

andexperimentalattitudewillhelpyoumorethanastressed-outandfrustratedone.Tryondifferentapproachesliketryingondifferenthatsandseewhichonefitsyoubest.Retiringearlyisnotaone-size-fits-allsolution.Yoursolutionneedstobetailoredtofityourowncircumstancesandneeds.

What-IfScenariosSincenoneofuscanread

thefuture,itmakessensetoexperimentwithdifferentwhat-ifscenariostoseehowtheymightaffectyoudowntheroad.Whatifyourinvestmentsonlyreturn8%insteadof9%?Canyoustillreachyourgoals?Whatiftheyreturn11%or12%instead?Whynottestitoutandsee?Whatifyourjobprospectsimprovedramaticallyandyoustartinvestingdoublewhatyou

thoughtyoucouldhalfwaythroughyourinvestmentyears?Suchwasthecaseforus.Whynotrunawhat-ifscenariothatassumesadoublingofinvestmentamountshalfwaythroughyourplanandseehowitaffectsyourresults?

Afteryou’vereadChapter12,whichdiscussesallocatingmoneybetweentaxable,401(k),andRothIRAaccounts,youmaywant

torevisityourspreadsheetandtryexperimentingwithdifferentallocationstogetabetterhandleonhowbesttoapportionyourmoneyandreachyourgoal.

IsMyGoalAchievable?Onceyou’vepluggedin

numbersthatletyoureachyourgoalinthetimeyou’dlike,thenyouhavetoask

yourselftheall-importantquestion:Isthisreallyachievableformegivenmycurrentsituation?CanIreallysave$10,000nextyear?

Becauseintheendyournumbershavetobegroundedinrealityifthisistobemorethanjustanexerciseinnumbercrunching.Theyhavetojivewithyourreal-worldcircumstances.Sostarttothinkaboutwherethat$10,000isreallygoingto

comefromnextyear.Perhapsyouhavea

401(k)planatworkandyoucanautomaticallydeposit10%ormoreofyourpaycheckdirectlyintothat.AndperhapsyoucansetupautomaticpaymentsfromyourcheckingaccountintoaRothIRAaccounteachmonth.Howmuchcanyoureallyspareeachmonthwithoutpushingthingstoofar?Remember,thisisa

marathon,notasprint,soyoudon’twanttopushsohardyoumakeyourselforyourfamilymiserable.

Ifyoubegintosenseyourpreferredscenario,howeverdelightfulinitsoutcome,isoverambitiousintermsofitsday-to-daydemandsonyouoryourfamily,trybackingoffabit.Loweryourinvestmentamountsintheearlyyearsandseehowthataffectsyouroverall

retirementplan.Maybe15yearsissimply

tooambitiousforthetimebeingandyou’llhavetosettlefor20years–atleastuntilyourmaterialcircumstanceschangeforthebetter.Remember,whateverplanyouarriveat,it’snotsetinstone.Youmayreluctantlydecidetoaimfor20yearsonlytogetanunexpectedpromotionatwork,andsuddenly15yearsisbackon

thetable.That’sthetimetopulloutyourspreadsheetandhaveanotherlook.

Letyouractuallifedictatethenumbersyouplugintoyourspreadsheet,especiallyduringtheearlyyears.Tiethemtoreality.Trytoimaginereallysavingtheamountyouseeonpaperinthecomingyear,andifyoucandothatandfeelgoodaboutit,thenthatisatruenumberthathasrealvalueto

youandyoursituation.If,ontheotherhand,next

year’snumbermakesyoucringe,thenit’sbacktothedrawingboard.Tryasmallernumberuntilyoucanlookatitwithoutfeelingpanicky.Intheendyouwantanumberthatdoesn’tmakeyourpalmssweat!

GettingBuy-InonYourInvestmentPlan

Thisisasgoodatimeasanytomentiontheimportanceofinvolvingyourspouseorsignificantotherintheearlyretirementplanningprocess.It’sawfullyhardtogoitalonewhenitcomestosavingforearlyretirement–

unlessyouhappentobewellandtrulysingle.Ifyou’reacouple,thenthetwoofyoushouldideallybeonthesamepage.

TeamworkandCompromiseWeencourageyoueither

tolookatthespreadsheettogetherandtrydifferentscenariosasateam–orelsesharetheresultsoftwoor

threedifferentscenarioswithyourspouseandgetinputandbuy-inearlyon.Seeifheorsheisonboardwithyourgeneralapproach.Ifyougetthesenseyourplansaretooaggressivefromtheirstandpoint,seewhatyoucandototonethemdownabit.

Hopefullyyourspousewillbeasexcitedasyouareabouttheideaofretiringearly,butifnot,youmayhavetocomeupwitha

compromisesolution.Besuretoletyourspouseknowhowimportanttheideaofearlyretirementistoyou,butalsotrytobeflexibleaboutspecificretirementdatesandyearlyinvestmentamounts.

Ifyourspousegenuinelydoesn’twanttoretireearlylikeyoudo,thatdoesn’tmeanyounecessarilyhavetoabandonyourplansaltogether.Infactitcouldmakeplanningforretirement

easierinsteadofharder.Ifheorshegenuinelypreferstocontinueworkingandisn’tundulyputoutatthethoughtofyourretiringearly,thenyoumayneedtosavelessthanyouotherwisewouldhave.Yourspousewillcontinuetoreceiveasalary,soalessrigorousscheduleofinvestingmaybeneeded–whichcouldbebettersolutionforbothofyou.

EarlyRetirementasaSharedGoalIntheearlydaysofour

retirementplanning,RobinthoughtshewantedtocontinueworkingevenafterIretiredearly.Shesupportedmydesirebecauseshecouldseehowimportantitwastome,andshewasevenwillingtomakesomesacrificessowecouldsavemoreandhelpmakethatdreamcometrue.

SoIpluggednumbersintothefirstiterationofourspreadsheetandbeforelongwewereoffandrunning.Weinvestedsmallamountsatfirst,butatleastitwasabeginning.

Afewyearsintotheplan,Robincametotherealizationshewantedtoretireearlytoo.AtthatpointIpulledthespreadsheetoutagainandlookedatitwithfresheyes.Iexperimentedwithdifferent

scenariosandrejiggeredittoallowforthepossibilityofbothofusretiringearly.

Atfirsttheresultsweren’tpromising.OursalariesweresolowIsimplycouldn’tmakethenumbersaddup.Butwebothkeptthinkingandtalkingaboutituntilwearrivedatasolution.Robinwouldneedtoretrainandgetajobthatpaidmorethanhertravelagentjobcurrentlydid.Herhighersalarywould

allowusbothtoretireatthesametime.MeanwhileIwoulddowhatIcouldtoimprovemyownprospectsatworktogetustoourgoalfaster.

Fromthatdayforwardwebegantalkingandthinkingaboutearlyretirementasasharedgoal,oneforwhichwewerebothwillingtoworkhard.Itmeantbigchangesintermsofourjobsandourspendinghabits,butitalso

gaveussomethingmeaningfultofocusonandgetexcitedaboutinthenot-so-distantfuture.Wewouldgoonhikesonweekendsandtalkexcitedlyaboutthetravelpossibilitiesinourfutureoncejobsnolongertiedustoasingleplace.

Ourinvestmentspreadsheetbecameourroadmaptothefuture.Wecouldlookatitandseeweweremakingrealprogress

fromoneyeartothenext.ThedollaramountsintheGrandTotalcolumnkeptgoingup–andtheyweregoingupfastereachyearasourannualinvestmentamountsincreasedandcompoundingbegantomakearealdifference

AttheendofeachyearIwouldupdatethespreadsheetandwewouldhavealookatittogetherandseewherewestood.Itwasanexcitingtime,

andallthemoresobecauseitwasshared.

UpdatingYourSpreadsheetwithActualResults

Onceyourspreadsheetissetup,allyouhavetodoisrevisititonceayeartoassesshowyou’redoingagainstplan.You’llpluginactualresultsattheendofeachyear

soyoucanplanforfutureyearsusingrealnumbersinsteadofestimates.Eachyearyoudothis,thefuturebecomesalittlelessfuzzybecauseyouhavemorerealdatatoworkwith.Also,thewindowuntilyourtargetretirementdatecontinuestonarrow,sotherearefeweryearsinwhichyouhavetorelyoneducatedguessworktogettoyourgoal.

TakingaYear-EndSnapshotHereistheapproachwe

taketoupdatingthespreadsheetattheendofeachcalendaryear.OnDecember31wetakea“snapshot”ofourinvestmentsatthatmomentintime.Weaddupeachcategoryofinvestmentseparately–taxable,401(k),andRothIRA.Thenweplugthoseamountsintothetop

rowofthespreadsheet,replacingtheestimatedsubtotalswithrealdata.Wedeletealltheformulasandestimatesinthatrowandreplacethemwithasingletyped-innumberinstead–onefortaxable,onefor401(k),andoneforRothIRA.TheGrandTotalnumberupdatesautomatically,butweusuallyreplaceitanywaywithahardnumberinsteadofaformula

togiveitasenseoffinality.

UpdatingtheSpreadsheetAnnually:AnExampleLet’ssayit’sDecember

31,2014andthemarketshavepostedtheirfinalnumbersfortheyear.Atthatpoint2014isnolongeranunknownbutaknown,soyoucanpluginactualresults.On

thatdayyoutakeasnapshotofyourportfolio,addingupthesubtotalsforeachtypeofinvestment,pluggingthemintothetoprowofthespreadsheet,anddeletingalltheextraneousformulasandestimatesintheprocess.Upuntilnowthefirstfiverowsofyourspreadsheethavelookedlikethis(note:wehavedeletedthe401(k)columnsforreadabilitypurposes):

Nowtheylooklikethis:

Noticehowtherowfor2014nowonlyhasafewnumbersonit.Alltheotherdatahasbeendeleted.Thenumbersarehardnumbers

thathavebeentypedinratherthanbeingbasedonformulas,andanydatafrompreviousyearshasbeeneliminatedfromthechart.Theyear2014isnowthebeginningyearonthiscurrentiterationofthespreadsheet.

Notice,too,howallthesubtotaldollaramountsintheyearsbelow2014aredifferentfromwhattheywerebefore.That’sbecausetheactual2014datahasrolled

forwardintotheestimateddataforfutureyears.

Comparingthetwospreadsheets,youcanquicklytellyou’reaheadofplan.That’sgreatnews,ofcourse.Whenyoulookatthebottomlineofyourspreadsheet,youcanseetheGrandTotalnumberstillmeetsorexceedsyourdesirednestegg.

TrackingYourProgress

Trackingyourprogressletsyoufine-tuneyourplanalongthewayandmonitorifyouarestilloncoursetoretirebyyourtargetdate.Weencourageyoutotakeagoodhardlookatyourspreadsheetatleastonceayearinordertocompareactualperformanceagainstplan.Givesome

carefulattentionastohowbesttoproceedbasedontheactualfactsinfrontofyou.

WhatIfYou’reAheadofSchedule?Beingaheadofschedule

isafineproblemtohave:enjoyyourgoodfortune.Ifyourmaterialsituationhaschangedforthebetter–ifyou’vereceivedasubstantialraiseatwork,forexample–

nowmightbeagoodtimetoconsiderraisingyourannualinvestmentamountsfortheyearstocome.Bydoingsoyoumightdiscoveryoucanretireevensoonerthanexpected,orelsethatyou’regoingtohavealargernesteggthanyouthoughtyouwould.Eitherprospectisquitewonderfultoconsider.

WhatIfYou’re

BehindSchedule?Ifyou’rejustalittleoff

courseinanygivenyear,there’snoneedtoworry.Thatmaysimplybetheresultofpoormarketconditionsovertheshortterm,somethingoverwhichyouhavevirtuallynocontrol.Ifyou’reinabearmarket,thenit’shardlysurprisingyouaren’treachingyourexpectedgoalsfortheyear.Butthat’s

allright,youshouldtellyourself,becauseyou’rebuyingmoresharesofstockatalowerpricethanyoucouldhaveotherwise.Inthebullmarketyearsthattypicallyfollowafterabearmarket,yourreturnsarelikelytoexceedexpectations,andinthoseyearsyoushouldbeabletomakeupforlostground.

Ourthoughtprocessduringbearmarketswas

simplytoshrugourshouldersandsay,“Well,wedideverythingweplannedtodofortheyear.Wemetourpersonalgoalsintermsoftheamountsweinvested.Therestisuptothemarkets.”Thekeyasfaraswewereconcernedwasnottogetdiscouragedormakeabruptchangesbecauseofapanickyfeelingweneededtodosomething.Instead,weneededtostaythecourseand

continueinvestingaccordingtoplan.Aslongaswekeptdoingthethingsweknewwererighttodoandthatwereinourcontroltodo,therestwasamatterofhavingfaithinthelong-termtendencyofthemarketstogoupratherthandown.

WhatIfYou’reWayOffTrack?Ifyou’rewayofftrack

andhavesignificantlylesssavedupthanyouthoughtyouwouldbytheendofaparticularyearorstringofyears,thenyouhavesomeseriousthinkingtodo.

First,trytodeterminewhyyoufellshortofyourgoals.Didyouinvestasmuchasyouhadhopedto?Ifnot,perhapsyourgoalsweresimplytooambitious.Youmayneedtobringthemmoreintolinewithwhatyoucan

actuallyaccomplishandadjustyourmasterplanaccordingly.

Ontheotherhand,perhapsthemarketsexperiencedaseveredownturnandthroughnofaultofyourownyouwereblownoffcoursefromwhereyouthoughtyouwouldbebythispoint.Inthatcaseyouryearlyinvestmentgoalsaren’ttheproblem,butyoustillneedtofindawaytogetback

ontrack.It’snogoodwishingthingswerebetter:youhavetomakethemso.Sodecidewhichofthefollowingyouwanttodo:–Investextrainthecomingyearsinordertocatchbackupwithyouroriginalgoals.–Increaseyourtimehorizontogiveyourinvestmentsmoretimetocompoundandgrow.

–Plantomakedowithlessinretirement,whichmeansrethinkingyourspendingandlifestylechoicesasyouheadintothefuture.Ofcourseyoucanalways

hopeagainsthopethemarketsstronglyoutperformintheyearstocomeandfixtheproblemforyou.Butsincethatiscompletelyoutsideyourcontrol,it’sriskytorelyon–especiallyif

you’resignificantlybehindwhereyouthoughtyouwouldbe.Bettertotakemattersintoyourownhandsandreviseyourmasterplantorealignitwithyoursituationasitstandstoday.Otherwiseyouriskfallingfurtherandfurtherbehindonyourgoalsandfeelingmoredisheartenedtothepointwhereyousimplydecidetogiveup–andthatwouldbearealshame.Raiseorloweryourgoalstomake

themjibewithreality,butdon’tgiveupaltogetheroryou’llbedoingyourselfadisserviceinthelongrun.

TrackingYourPortfolioYoucantrackyour

portfolioperformancedirectlyonyourinvestmentfirm’swebsite,ofcourse,butyoumayalsowanttocreateasimpleportfoliotrackeron

Yahoo’sFinancewebpage.Youcanpullitupatamoment’snoticewithouthavingtoenterausernameandpasswordeachtimesincethereisnosensitiveinformationonthesite.Allitconsistsofisthemutualfundsymbolsandthenumberofsharesyouown.Thusitoffersaquickwaytocheckyourtotalsandtrackyourprogressonaregularbasis.Thebottomportionofour

portfoliotracker,showingourtaxableinvestmentsandourgrandtotal,lookslikethis:

Tocreateyourown

portfoliotracker,gotoYahoo’sFinancesite,clickon“MyPortfolios,”andselect“CreatePortfolio.”Giveyournewportfolioaname(wecallours“Total”)andbeginaddingmutualfundsymbolstoit,followedbythenumberofsharesyouownforeach.Hitsaveandyou’regoodtogo.Justclickon“Add/EditHoldings”ifyouwanttochangeorupdateanyinformation.

Theonlydownsidetoportfoliotrackerslikethisisthatyouhavetoperiodicallyupdatetheshareinformationifyouwanttokeepitcurrent.Theshareamountsdon’tautomaticallyupdateastheywillonyourowninvestmentfirm’swebsite.

KeepingaRecordofPerformance

Werecommendyousaveacopyofyourinvestmentspreadsheeteachyearbeforemakinganychangestoit.Thatwayyouhaveabackupincasesomethingshouldgowrong.Italsogivesyouahandyhistoricalrecordifyou

shouldeverwanttocompareyourcurrentspreadsheettoonesfrompreviousyears.Wekeepourspreadsheetsinafinancialfolderonourcomputerandlabeleachonebyyear:spreadsheet_2014,spreadsheet_2015,andsoon.Keepingonespreadsheetforeachyeargivesyouasolidrecordofwhereyou’vebeenandwhereyou’regoing.

TrackingCumulative

Goalsvs.ActualsWhenyoufirstestablish

youryearlygoals,youmaywanttocreateachartthatletsyoucomparecumulativegoalsvs.cumulativeactuals.Ouroriginalchartisshownonthenextpage,followedbythesamechartafterithadbeenfilledinwithactualsyearbyyearuntilweretiredin2006.Totalsincludestocks,bonds,andcashbut

nothomeequity.Thegoalslistedinboth

chartsareidentical,althoughyoumayhavenoticedtheoriginalchartextendsoutto2008andthefinaloneonlyto2006.That’sbecausewewereabletoretiretwoyearsearlierthanoriginallyplannedduetosalariesandinvestmentamountsinthelatterhalfofourplanthatweresignificantlyhigherthananythingwecouldhave

anticipatedbackin1994.Thisjustgoestoshowthatnoplanisperfect.Yourinitialplanrepresentsabeginningonly,sodon’texpectprecisionofitbeyondayearortwointothefuture.

Achartliketheoneabove

isinstructiveinthatitprovidesaseriesofsnapshotsintime,thefirsttakenatthebeginningofyourplan,theresttakenatintervalsoneyearapart.Whileyourspreadsheetisalivingdocument–oneyoushouldmodifytokeeprelevanttoyourlife–thechartaboveissimplyahistoricalrecordofyourprogress.

TrackingAnnualInvestmentAmountsThefinalnumbersyou

maywanttotrackareyourannualinvestmentamounts(goalvs.actual).Asimplechartliketheonebelowshoulddothetrick.Thesearesamplenumbersonly,ofcourse;youshouldenteryourowngoalnumbersfromthespreadsheetyoucreate.

Chapter11.Invest

RegularlyinIndexFundsOnceyouhaveprepared

yourinvestmentspreadsheet,youshouldknowexactlyhowmuchyouneedtoinvestover

thecomingyear.Nowtakethatamountanddividebytwelvetodeterminetheexactamountyouneedtoinvesteachmonthinordertomeetyourannualgoal.Allthatremainsistomakesureyouactuallyinvestthatamounteachmonth,regardlessofhowthemarketisperforming.

Thereshouldbenoquestionfromonemonthtothenextifyouaregoingto

invest:ofcourseyouaregoingtoinvest.Itdoesn’tmatterwhatthemarketsaredoing–whethertheyareup,down,orsideways.Youhavenocontroloverthatsoyoushouldn’tconcernyourselfwithit.Butyoudohavecontrolovermakingyourmonthlyinvestmentsasplanned.Staytruetothosemonthlycommitmentsandyou’llhavetakenyourbiggeststeptowards

achievingyourgoalofearlyretirement.

PutYourInvestmentsonAuto-Pilot

Thesecrettoinvestingregularlyistoputyourinvestmentsonauto-pilot.Ifyouautomatethesavingsprocess,ithappenswithoutyourhavingtothinkaboutit–andthat’sagoodthing,becauseyoumaywellbe

yourownworstenemywhenitcomestoinvestingonaregularschedule.Thingsgetintheway,expensesaddup,money’stight,themarketsaredown,you’refeelingdiscouraged,youdon’twanttowritethecheck,youdon’twanttothinkaboutitrightnow,youdon’thavethetimeortheenergy–theexcusesthehumanmindcancomeupwithnottodosomethingarenothingshortofamazing.

Auto-pilotgetsridofmostofthoseexcuses.

SetItandForgetItThebestplacetostart

automatingyourinvestmentsisatwork.Ifyourcompanyoffersa401(k)planthenyoushouldsignupforautomaticdeductionsfromyourpaycheck.Becausethemoneyistakendirectlyoutofyourpaycheckbeforeyoueverseeit,it’salmostasifitnever

existedinthefirstplace,soyoudon’tmissitsomuch.Youdon’thavetopartwithitbyhand–bywritingacheck,say,andseeingyourcheckbookbalancegetlower.Byautomatingtheprocess,you’veeliminatedthemiddleman–you–fromtheequation.

Youcanalsosetupautomaticmonthlytransfersdirectlyoutofyourcheckingaccountintoyourtaxableand

RothIRAaccounts.Youdecideontheamounteachmonthandwhichdayofthemonththetransferismade.Itwon’tbequiteasinvisibleasthe401(k)processbecauseyou’llseethemoneydisappearoutofyourcheckingaccounteachmonth,butatleastit’shands-offandyouhavelesstothinkabout,whichisyourgoal.“Setitandforgetit”isagoodmottowhenitcomesto

investing.Automatingyour

investmentskeepsyouonthestraightandnarrowtoyourannualinvestmentgoalinawaynothingelsewill.Youronlyresponsibilitythenbecomesmakingsureyouhavesufficientfundsonhandtocovertheautomatictransfers.Thinkofyourmonthlyinvestmentsasyouwouldyourmonthlymortgagepayment.There’s

noquestionyou’regoingtomakethatpayment:it’snotanoption,it’sanecessity.That’sthemindsetyouwanttofoster.

PayYourselfFirstYou’veprobablyheard

theexpression“payyourselffirst,”whichmeansinvestinyourownfuturefirstbeforepayingotherbillsorexpenses.Thatmaysoundalittleextreme,butitgivestop

prioritytoyou.Automatingyourpaymentsmakesitfarmorelikelyyouwon’tskipoutonapaymenttoyourself.Itforcesyourhandinaway,whichisn’tallbadwhenyouconsiderhowmanyotherthingsinlifearecallingoutforyoutospendmoneyonthem.ThesirencallofspendingisalittleeasiertoresistifyoutieyourselftothemastlikeOdysseusandgiveyourselfnootherchoicebut

tostaythecourse.Thatsaid,besuretoleave

yourselfalittlebufferwhenyouselectyourmonthlyinvestmentamountsoyouaren’tpushingrightupagainstthelimitsofwhatyoucanhandlefinancially.Bettertoselectasmalleramountyouknowyoucanmanagemonthinandmonthoutthantopushtoohardandfindyourselfstrappedforcashinanygivenmonth.

Consistencyisyourgoal,notstressandfinancialhardship.Letyourmonthlycontributiontoyourfuturebeapositiveaspectofyourlife,somethingyoucanfeelgoodabout,ratherthananegativeburdenthatputsastrainonyourexistence.

UseDollarCostAveraging

Puttingyourinvestmentsonautopilotletsyoutakeadvantageofatechniquecalleddollarcostaveraging.Withdollarcostaveragingyouinvestanequalamountofmoneyeachmonthinanassetregardlessoftheshareprice,whichmeansyouenduppurchasingmoreshareswhen

pricesarelowandfewershareswhenpricesarehigh.

Thisapproachtendstoreduceyouraveragesharepriceovertime.Alumpsuminvestedallatoncecouldbeinvestedatjustthewrongmomentwhenpricesareespeciallyhigh.Dollarcostaveraginghelpsinsulateyouagainstmarketrisktosomedegreebecauseyouspreadyourpurchasesoutevenlyoveralongperiodoftime

andoverarangeofprices.Let’ssayyoudecideto

purchase$100permonthofaparticularmutualfundforthreemonths.Inthefirstmonththefundisvaluedat$50,soyourfixedmonthlyinvestmentof$100buysyoutwoshares.Nextmonththevaluationis$33soyour$100buysyouthreeshares.Thelastmonthitis$25soyour$100buysyoufourshares.That’sninesharesaltogether

whichyou’veboughtforanaveragepriceofabout$33each($300÷9).Ifyouhadinvestedall$300inalumpsuminthefirstmonth,youwouldhavepaid$50pershareandonlyreceivedsixshares.Bydollarcostaveragingyouhavereducedyouraveragesharepriceandlessenedthemarketriskthatcancomewithinvestingalumpsumallatonce.

Dollarcostaveragingalso

helpsoffsetthenaturalhumantendencytobuyanassetwhenitisperformingwellandnotbuyitwhenitisperformingpoorly.Wealllikeawinner,don’twe?Butbuyinganassetwhenitisflyinghighmeansbuyingitatahighershareprice.Logicallyweshouldwanttobuyitwhenitisunderperformingandwecangetmoresharesforourmoney,butthisisn’talways

howhumannatureworks.Dollarcostaveraginghelpsusdowhatweshoulddoanyway,whichisbuymoresharesofaninvestmentwhenitis“onsale”andlesswhenitisnot.

DecideonanOverallInvestmentMix

Oneofthemostimportantdecisionsyoucanmakeasaninvestorisselectingyouroverallinvestmentmixofstocks,bonds,andcash.Yourindividualinvestmentswithinthatmixareofsecondaryimportancetotheportfolio

allocationitself.Whetheryoubuythisparticularstockorthatparticularstockislessimportantthandecidinghowmuchofyourportfolioshouldconsistofstocksinthefirstplace.

RiskToleranceandTimeHorizonYourinvestmentmix

shouldbeareflectionofyourownrisktoleranceandtime

horizon.Let’ssayyouhavealongtimehorizonandarelativelyhightoleranceforrisk(oratleastyouthinkyoudo;you’llknowforcertainafteryou’veriddenoutyourfirstmajorrecession).Inthatcaseyoumaywanttoinvestheavilyinstocksandhavejustatoeholdinbondsduringyourprimaryinvestingyears,sincestocksofferthegreatestpotentialforlong-termgrowth.

Ontheotherhand,ifyouhavearelativelylowtoleranceforriskandsuspectyouwon’tbeabletosleepatnightiftoomuchofyourmoneyisridingonstocks,thenyou’llwanttokeepamorebalancedportfolioofstocks,bonds,andcashtohelpbufferthevolatilitythatinevitablycomeswithowningjuststocks.

Yourtimehorizontoretirementisparticularly

importanttoconsiderwhendeterminingyourinvestmentmix.Aportfolio80%to100%investedinthestockmarketmightmakesenseinyourbeginningandmiddleinvestingyears,butasyounearretirementyouhavelesstimetorecoverfromseriousdownturnsinthemarket.Certainlyonceyouretireyouneedareliablesourcefromwhichtowithdrawmoneyifthestockmarketshould

nosedive,sohavingasolidpositioninbondsbecomescrucial.Capitalpreservationandincomegenerationbecomeatleastasimportantastheneedforadditionalcapitalappreciationonceyouretire.

Duringourprimaryinvestingyearsweinvested100%(orveryclosetoit)instocksandstockmutualfunds.Ouroverridinggoalduringthoseyearswascapital

appreciation.Weweren’tconcernedaboutmarketvolatilitybecauseourtimehorizonwaslongenoughatthatpointthatweknewwecouldrideoutwhateverstormsmightcome.Infactwevieweddownturnsinthemarketasbuyingopportunities,andwebenefitedfromthemoncethemarketsbouncedbackandstockpricesroseagain.

Wewaitedlongerthan

wasprudent,however,tocarveoutasignificantpositioninbondsasweapproachedretirement.Infactitwasn’tuntilwesoldourhomeinthefirstyearofretirementandputthemoneyintoabondfundthatweestablishedourfirstmeaningfulpositioninbonds.(Althoughwedidhave$30,000savedupinabondfundforuseoverthefirstyearofourretirementasa

partialhedgeagainstrisk.)Luckilyforusthings

workedout,butinhindsightitwouldhavebeenwisertoincrementallyincreaseourbondholdingsoverthelastfiveyearsleadinguptoretirement.Thenwecouldhaveapportionedsomeofthemoneyfromthesaleofourhometostocksandtheresttobondsbasedonourpreferredinvestmentmixasweenteredretirement.

TheCaseforaMoreAggressiveApproachThefollowingtable

makesitclearwhyyoushouldinvestprimarilyinstocksduringyourearlyyearswhenyoustillhavealongtimehorizonuntilretirement.Duringthisperiodyouwanttodoeverythinginyourpowertomaximizegrowth.

Thetableisbasedonhistoricaldatafrom1926to2011.That’s86years’worthofdata.Itillustrateshowyouraverageannualreturngoesupasyourallocationtostocksgoesup–from5.6%withanall-bondsportfolioto9.9%withanall-stocksportfolio.Italsoillustrateshowyourriskgoesupasyourallocationtostocksgoesup.Outof86years,youwouldhavehadto

stomach25yearswithalossifyouhadanall-stocksportfolio,ascomparedto13yearswithanall-bondsportfolio.

Thetablemakesitclearriskandrewardgohandinhand.Themoreriskyouarewillingtotakeon,themorerewardyouarelikelytoget.Afterall,ifitweren’tforthepotentiallyhigherreturnsofferedbystocksoverthelongrun,theneveryone

wouldinvestinbondsorcashbecausethosetendtobethesaferinvestments.

Nowaskyourself,Whenisthebesttimeinmylifetotakeonthemostrisk?Theanswerformostofusis,WhenIamyoung,healthy,andworkingfulltime.Whenbettertoskewyourinvestmentstowardshigher-riskstocksthanwhenyouareintheprimeoflifeandfullycapableoftakingonsuch

risks?Youshouldhaveyearsandyearsaheadofyoubeforeyouneedtotouchthemoneyyou’reinvesting,soyoucanaffordtoleaveitinplaceevenifitgoesdowninvalueforaperiodoftimeastheresultofabearmarket.

Inalllikelihoodyouwillneverbebettersuitedtotakingonmoreriskthanyouarerightnow.

TheCaseforaMore

ConservativeApproachYoumighthavenoticed

fromthetablethatyouonlyhavetosacrificeasmallamountofgrowthifyouhaveaportfolioconsistingof80%stocksand20%bondsascomparedto100%stocks.Thedifferenceintheaverageannualreturnisonly0.5%(9.9%vs.9.4%),whichisn’tmuch,especiallywhenyou

factorintheextrapeaceofmindthosebondsmaygiveyou.Evena70/30stock/bondportfoliooffersaveryrespectableaverageannualreturnof9.0%basedonhistoricalaverages.

Ifyouareaconservative,risk-averseinvestor,youcantakegreatcomfortinthis.Itisstillpossibleforyoutotakeagrowth-orientedstancewhilemitigatingyourrisktosomedegreebyinvesting70%in

stocksand30%inbonds.Thatwouldsatisfytheneedforcapitalappreciationduringyourprimaryinvestingyearswhilestillreducingsomeofthevolatilityalongtheway.

Onecouldarguablydoworsethansettinga70/30portfoliomixfromtheverybeginningandmaintainingthatmixthroughlife.

Ifyouareinvested70%ormoreinstocks,thenyou

standagoodchanceofreachingyourearlyretirementgoals.Muchlessthanthat,however,andyoubegintogetintoagrayareawhereyoucanstillexpecttoreachyourgoaleventually,butperhapsnotasquicklyasyoumighthaveotherwise.

TheRiskofBeingOverlyConservativeAnythinglessthan50%

stocksand50%bonds/cashduringyourprimaryinvestingyearsandyoubegintoenterwhatwewouldthinkofasanoverlyconservativespacewherecapitalappreciationtakesabackseattotheperceptionofsafety.Wesayperceptionofsafetybecauseit’safairquestionwhetheryoureallyaresaferwithanoverlyconservativeportfoliomix.Why?Becausethereismorethanonekindofrisk

whenitcomestoinvesting.Extremelyconservative

investorstendtofocussolelyonmarketrisk,whichistheriskoflosingmoneyfromfluctuationsinstockmarketprices(i.e.,ifstocksgodown,youlosemoney).Alotofpeoplearesoafraidofmarketrisktheywon’tevenconsiderinvestinginstocks.Theywouldratherputalltheirmoneyinabankaccountearning1%interest.They

believethey’replayingitsafethatway.

Butthey’reprobablynotadequatelyawareofinflationrisk,whichistheriskinflationwilleatawayattheirinvestmentsfasterthantheycangrow,makingtheirmoneyworthlessandlessovertime.Ifinflationgrowsat3%peryearandtheirinvestmentsonlyearn1%,theninessencetheyarelosing2%eachandevery

year.Suddenlythatsafebankaccountdoesn’tseemsosafeanymore,atleastwhenitcomestotheirlong-termbuyingpower.

Oncepeoplehaveanunderstandingofinflationrisk,they’regenerallymorewillingtotakeasecondlookatabalancedstockandbondportfolio.Despitetherealitiesofmarketrisk,thestockmarketonaveragereturnsabout9%peryearoverthe

longtermandbondsreturnonaverageabout5%to6%peryear.Thusawell-balancedstockandbondportfolioshouldkeepyouaheadofinflation.You’llgetabetterrealreturnonyourinvestmentthanyouwouldwitha“safe”bankaccount.

ChooseanInvestmentFirm

Whenwefirststartedinvesting,wehadinvestmentsscatteredalloverthemap,withpaperworkandelectroniccommunicationsstreaminginfrommanydifferentdirections.Itwassomethingofarelief,therefore,toswitchtoasimplerapproachandhold

justafewindexfundswithasingleinvestmentfirm.Suddenlywecouldseeallofourinvestmentsinasinglestatementandmanagethemwithmuchmoreease.

TheInvestmentFirmWeChoseAllofourmutualfund

investmentsarecurrentlywithTheVanguardGroupandhavebeensincewell

beforeweretired.Vanguardisgenerallyknownforhavingthelowestexpensesintheindustry.Theiraverageexpenseratioisanextremelylow0.20%(that’sone-fifthofonepercent),whichis82%lessthantheindustryaverageof1.12%.Thatmeansverylittleisgoingoutofyourpocketintothebehind-the-scenesmanagementandoperationofthefunds.

Weparticularlylikethe

factVanguardfundshareholdersownthecompany.Asanot-for-profitcorporation,thefund’sinterestsalignnaturallywiththoseofitsshareholders,whopayonlywhatitcostsVanguardtooperatethefunds.Therearenootherpartiestoanswertoandthusnoconflictingloyalties.Wethinkthisissomethingspecialinthemutualfundindustry.

Vanguard’senormousassetbase–consistingof20millionshareholderaccountswithmorethan$1.7trillioninU.S.mutualfundassetsasoftheendof2011–letsittakeadvantageofhugeeconomiesofscale.Theyareabigplayerinthefinancialinvestmentworldinthebestsenseoftheword.

WereceiveVanguard’semailnewslettersandalwaysfindtheiradvicerefreshingly

straightforward.ThewholeworldmightbeturningupsidedownasfarastheTVfinancialnewschannelsareconcerned,butyoucanalwayscountonVanguardtocounselyoutostaythecourse,keepabalancedportfolio,andtrustinthelong-termperformanceofthemarkets.Theirprudentadviceoftenrunscountertothepanickytoneofthemedia,andthatcanbeacomfort

duringdifficultfinancialtimes.

Justtobeclear,wehavenothingtogainfinanciallyorotherwisebyrecommendingVanguardtoyou.It’ssimplythefirmwehavechosentodoourbusinesswith.Thereareothergreatfirmsoutthere–Fidelity,CharlesSchwab,andT.RowePriceamongthem,tonamejustafew.Ifyouarealreadydoingbusinesswithoneofthesefirms,orwith

anotherofthemanyreputableinvestmentfirmsoutthere,wearen’tsuggestingyougothroughthehassleofswitchingfirmsunlessyouareunhappyinsomerespectwiththeserviceyouarereceivingorthefeesyouarepaying.Butifyouarejuststartingoutandarelookingforagoodinvestmentfirm,wewouldcertainlyrecommendVanguardbasedonourownexperience.

KeepingFundExpensesLowTheaveragemutualfund

companychargesfeessixtimeshigherthanVanguard’s.Thesefeesaddupovertimeandmakeasignificantdifferencetolong-termperformance.

Considerthis:withnofeesatall,a$100,000portfolioearning9%peryearwouldgrowto$560,000in

20years.Witha1%annualfeethefinalvaluewouldbe$458,000–morethan$100,000less.Iftheannualfeewere3%,whichisnotoutofthequestionwithsomemutualfunds,thefinalvaluewouldonlyreach$305,000–morethan$250,000less.YoucanseewhyfeesmatterandwhywemightdecidetogowithaninvestmentfirmlikeVanguardforthisreasonalone.

Thequestionoffeesisevenmoreimportantwhenitcomestobondfunds.Ahighfeecanquicklyoverwhelmabondfund’sperformance.Forexample,ifabondfundreturns4%inagivenyear,thena1%feeisequalto25%ofthatreturn.Ifthesamefundreturns1%inagivenyear,thena1%feeeffectivelytranslatesintoa0%return.Thusalow-returnenvironment,whetherfor

stocksorbonds,onlyincreasestheimportanceofkeepingfeeslow.

Vanguard’sultra-lowexpensesapplytobothstockandbondfunds.Tohighlightjusttwoexamples,theexpenseratiosforitsflagshipIndex500FundanditsTotalBondMarketIndexFundareanastonishinglylow0.05%and0.10%respectively.(ThesearetheexpenseratiosforthepreferredAdmiral

Shares,whichrequireaminimumfundbalanceof$10,000.)It’shardtoexpectmuchbetterthanthat.

Whicheverinvestmentfirmyouendupchoosing,werecommendyoumakesuretheirexpensesarelowerthanthenormandthatyoukeepyourinvestmentswithinthatsinglefirmasmuchaspossibleforsimplicity’ssake.Wealsorecommendyoucomparenotjustthefees

chargedbuttherangeofservicesofferedbydifferentinvestmentfirmsbeforemakingafinaldecisionastowhichoneisrightforyou.Forinstance,ifyouprefertodomostofyourinvestinginindividualstocksratherthanmutualfunds,youmightfindanonlineinvestmentfirmspecializinginlow-coststocktradesthatsuitsyourneedsbetterthanVanguard.

WhyIndexFundsMakeSense

Ifyouthinkofinvestingasprimarilyameanstoanendandnotapassioninandofitself,thenindexfundinvestingmightbetherightanswerforyou.It’sagreatsolutionifyouwanttokeepyourfinanciallifeassimple

andlow-maintenanceaspossible.

Withindexfundsyoustoptryingtobeatthemarketsandinsteadsimplykeepupwiththem.Indexfundsmirrorthemarketstheytrackinsteadoftryingtobeatthem.Theyreplicateascloselyaspossibletheinvestmentweightingandreturnsofthebenchmarkindextheyaredesignedtotrack.

Perhapsthemostfamousindexfundofallisalsothefirstevercreated:theVanguard500IndexFund,whichtrackstheS&P500Index.ItwascreatedbyJohnBogleofTheVanguardGroupin1975.VanguardisnowthelargestmutualfundcompanyintheU.S.,andthefundhasbecomeamainstayofmanyaninvestmentportfolio.

Built-InDiversificationWhenyoubuyanindex

fund,youarebuyingawholeportfolioofstocksinasinglefund,soyourriskislowerifanyoneofthecompaniesinthatfundshouldplummetinvalueorgooutofbusiness.Thediversificationprovidedbyanindexfundmeansyourinvestmentsarespreadoutovermanycompaniesand

usuallyovermanyassetclasses.Thiscanbeacomforttothosewhofeeltheyarenotquiteuptothetaskofaccuratelyevaluatingasinglecompany’shealthandfinancialprospectsbasedonabalancesheetalone.Ratherthenbettingyourfutureononestockorahandfulofstocks,youcanspreadyourriskoverhundredsoreventhousandsofstocksandsleepbetteratnightbecauseofit.

BetterPerformanceBecauseindexfundsare

passivelymanaged,theirfeestendtobeverylow,andbecauseofthattheyactuallytendtoperformbetteroverthelongrunthanmostactivelymanagedmutualfunds.Thiscomesassomethingofasurprisetomostpeoplewhentheyhearitforthefirsttime.Afterall,you’dthinkaninvestment

managerwithallhisaccumulatedknowledgeandexperiencewouldconsistentlybeabletobeatapassivelymanagedindexfund,andyetexceptinrareinstancesthisisnotthecase.

Why?Becausetheactivefundmanagerhastochargehigherfeesthanapassivelymanagedindexfunddoes.Ofcoursetheactivemanagerexpectstobepaidforhisservices,andhealsotendsto

trademorefrequentlythanapassivelymanagedfunddoesandthushastocoverthosehighertradingexpenses.Overtimethosehigherfeesserveasadragonperformance–adragthevastmajorityofactivefundmanagerscan’tovercomeoverthelongterm.Bycomparison,indexfundschargeverylowfeesfortheservicestheyprovideandasaresultofferhard-to-beatvaluetotheindividualinvestor.

Welikethefactindexfundsaren’tatthemercyofanyoneperson,nomatterhowwellintentioned.Evenagoodfundmanagersometimesmakesbadinvestmentchoices.Then,too,activefundmanagerssometimesretireorchangeinvestmentfirmsorarereplaced,andthenextmanagermayfollowaconsiderablydifferentandriskierinvestmentstrategy.

Youdon’thavetoworryaboutthiswithapassivelymanagedindexfund.Wethinkthismakesindexfundsamorereliableinvestmentoverthelongterm.

TaxEfficiencyIndexfundstendtobe

quitetax-efficientbecauseshareturnoverisminimal.CompaniesarerarelyaddedtoorremovedfromtheS&P500,forexample,sofunds

trackingitrarelyneedtobuyorsellshares.Thatmeanstherearefewercapitalgainsdistributionstoworryaboutattaxtime.

Indexfundsarealsosimpletoownattaxseasonbecausethemutualfundcompanyprovidesyouwithalltheinformationyouneedtoreportonyourtaxforms.Comparethistoanindividualstockwhereyouareresponsibleforcalculating

andreportingthecostbasisofthesharesyouhavepurchased,sometimesoveraperiodofmanyyears,oncethesharesaresold.Speakingfrompersonalexperience,wecantellyouthisaddsunwelcomecomplicationsattaxtime.

ASimplerApproachWithindividualstocksit

helpstobeabletoreadandunderstandabalancesheet

andaprofitandlossstatementinordertocorrectlyassessacompany’sfundamentalhealth.Ittakestime,effort,andskilltoaccuratelyassessasinglecompanyanditsstock,decideifthestockpricerepresentsagoodvalue,anddeterminenotonlywhentobuythestockbutalsowhentosellit.Stockindexfundsbycomparisonrequirefewerdecisionsandlessanalysis.

Becausetheyaremadeupofhundreds(orsometimesthousands)ofindividualstocks,stockindexfundsarebuy-and-holdinvestmentsthatbytheirverynaturerequirelittleinthewayofpersonalizedattention.Theycanonlybeassessedintheaggregate.YoumightevaluatetheexpenseratioofanIndex500fund,forexample,anddecidewhetherornotthefundisagoodfit

foryourportfolio,butitwouldmakelittlesensetoanalyzeall500individualcompaniesmakinguptheindexsincetheyarebeingsoldasapackageanyway.Youcouldn’ttakethemapartevenifyouwantedto.

Bythesametoken,bondindexfundsofferamucheasierapproachtoinvestinginbondsthangoingthroughtheheadachesofladderingindividualbonds.Witha

bondfundyougetprofessionalmanagement,broaddiversification,andhighliquidityatverylowcost.Therearenofeesforbuyingorsellingsharesofano-loadbondindexfund,whereasthebid-askspreadtobuyandsellindividualbondscanbequitehigh.Foreaseofuseandlowcost,it’shardtobeatagoodbondindexfund.

Withindexfundsingeneral,yourlifedoesn’t

havetorevolvearoundyourinvestments.Youliveyourlifeasnormalanddothethingsyoulovetodo.Meanwhileyourinvestmentsareworkingforyouinthebackgroundwithoutyourhavingtopaymuchattentiontothem.

Nomoretryingtobeatthemarkets.Nomorespendinghoursreadingfinancialmagazinesandtryingtofigureoutthenexthotstock

orthenexthotmutualfund.Simplyinvestit,forgetit,andbedone.Thisbuy-and-holdstrategymakesyourlife(andyourtaxes)muchsimpler.Insteadofreactingtothelatestmarketnews,youinsulateyourselffromthoseconcernsandfocusonwhatyoucancontrol,whichisyourmonthlycontributionstotheindexfundsyouhavechosen.

EaseofAccessandUsabilityAfinalbenefitofmutual

fundsingeneralisthattheyofferwonderfullyeasyaccesswhenitcomestobuyingandsellingshares,transferringsharesbetweenfunds,andwithdrawingmoney.Thiscanbeanimportantfactorwhendecidingwheretoinvestyourmoney.

Wecontinuetoowna

littlestockinthecompanyforwhichIworked,andeachtimewewithdrawsharesweneedtopayatransactionfeetothebrokerandanotherfeetohavethemoneywiredelectronicallytoourcheckingaccount.Thesefeesapplyeachandeverytimewewithdrawmoney,nomatterhowbigorsmallthetransaction.BycomparisonwecanwithdrawfundsfreeofchargefromVanguard

withnobrokerinvolved,andthemoneyautomaticallyappearsinourcheckingaccountinamatteroftwoorthreebusinessdays.Theirwebsiteiseasytouseandletsuscompleteatransactioninlessthanaminuteortwo,andwecanquicklygetanoverviewofourtotalportfolioholdings.

InvestinYourCoreHoldings

Yourcoreholdingsarethehandfulofinvestmentsthatformthefoundationofyourportfolio.Theyaretheinvestmentsyouholdontoforalifetime.Forthatreasonyouwanttomakesuretheyarehigh-qualityinvestmentswithahistoryofsteadyperformance.

Werecommendyouusebroadlydiversifiedindexfundsasyourcoreholdings.Justthreestockindexfundsareenoughtogiveyouworldwidecoverageforequities.Youreallydon’tneedmorethanthat!TothoseyoushouldaddonemorefundforU.S.bonds.Herearethefourfundtypeswerecommendforyourcoreholdings:

1.S&P500IndexFund.AnindexfundthatmirrorstheS&P500willgiveyoubroadexposuretothetop500large-capcompaniesintheU.S.Large-capstandsforlargecapitalization,andthesearethelargest,mostpowerful,andmostwell-capitalizedcompaniesintheU.S.Togethertheyaccountforaboutthree-fourthsoftheU.S.stock

market’svalue.It’sfairtosaynoU.S.-basedportfolioiscompletewithoutanS&P500indexfund.2.ExtendedMarketIndexFund.AnindexfundthatmirrorstherestoftheU.S.stockmarketgivesyoubroadexposuretoU.S.mid-capandsmall-capstocks.Suchfundstypicallyinvestinabout3,000stocksaccounting

foraboutone-fourthofthemarketcapoftheU.S.stockmarket.Anextendedmarketfund(orS&Pcompletionindex)isconsideredacomplementtoanS&P500indexfund,andtogetherthetwoprovideexposuretotheentireU.S.equitymarket.Mid-andsmall-capmarketstendtobemorevolatilethanthelarge-capmarketbutalsoofferthe

potentialforhigherreturnsoverthelongrun.3.TotalInternationalStockIndexFund.TheworldisbiggerthanjusttheU.S.,soitmakessensetohaveexposuretothebiggest,best,andfastestgrowingequitiesfromothercountriesaroundtheglobe.Lookforanindexfundthatgivesyoubroadexposuretothetotal

internationalstockmarket,includingbothdevelopedandemergingeconomies.Emergingmarketstockscanbemorevolatilethandomesticstocks,andcurrencyriskcanaddevenmorevolatility.Ifthisisaconcernforyou,considerinvestinglessinthisfundthantheothertwoequityfunds.4.TotalBondMarket

IndexFund.AbalancedportfolioshouldincludeacorefundthatmirrorstheoverallU.S.investment-gradebondmarket.Atotalbondmarketfundwilltypicallyinvestaboutone-thirdofitsassetsincorporatebondsandtwo-thirdsinU.S.governmentbondsofvaryingmaturities(short-,intermediate-,andlong-term).Whilebondfunds

tendtobesensitivetoincreasesininterestrates,theiroverallrisksarelowerthanstockfunds.Anymajorinvestment

firmwillofferindexfundsofthesefourtypes,sowhicheverfirmyouchoose,youshouldbeabletofindgoodmatches.

CoreVanguardFundsWe

RecommendSinceourown

investmentsarewithVanguard,weprovideadditionaldetailsaboutthecoreVanguardfundsweownandrecommendinthefollowingtable.Foreachfundlistedtherearetwoversionsbasedontheamountyouhavetoinvest.TheInvestorSharesversionrequiresaminimuminitial

investmentof$3,000,whiletheAdmiralSharesversionrequires$10,000andoffersalowerexpenseratio.ThetypicalinvestorstartsinInvestorSharesthentransferstoAdmiralShareswithafewclicksofthemouseoncehisorherinvestmentcrossesthe$10,000threshold.

Ifyouwanttoownevenfewercorefunds,thereisaneasywaytodoit.InsteadofowninganIndex500FundandanExtendedMarketFund,youcaninvestinsteadinaTotalStockMarketIndexFund,whichessentiallycombinesthetwointoone.WithonefundyougainexposuretotheentireU.S.equitymarket,includingsmall-,mid-,andlarge-capgrowthandvaluestocks.

PercentagetoInvestinEachFundTheapproachwetook

wastoinvestonethirdofourmonthlyinvestmentamountineachofthethreecoreequityfundsdescribedabove:onethirdintheIndex500fund,onethirdintheExtendedMarketfund,andonethirdintheInternationalStockfund.

Atfirstyoumayhaveto

saveupenoughtomeetminimumdepositrequirementsforeachfundbeforemovingontothenext.Butonceallthreefundsareupandrunning,youcaninvestaslittleas$100permonthautomaticallyintoeachfundfromthatpointforward.Thatmakesitpossibletoinvestonamonthlybasisinequalincrements.

Ifyoupreferamorerisk-

averseapproach,youmaywanttoinvestahigherpercentageintheIndex500fundandalowerpercentageintheothertwo.Ofthethreefunds,theInternationalStockfundisprobablythehighestriskbecauseitaddsbothcurrencyriskandemergingmarketriskintotheequation.Letyourpersonalpreferencesguideyouintermsofthespecificpercentagesyouchoosetoinvestineachtype

offund:forexample,50%Index500,30%ExtendedMarket,20%InternationalStock.

Whenyourfinancialsituationallowsforit,youshouldalsomakeaninitialinvestmentinaTotalBondMarketindexfund.Ifyouareallocatingessentially100%tostocksduringtheearlyandmiddleyearsofyourinvestmentprogram,simplykeepthebondfundatthe

minimumlevelforthetimebeing.Then,aboutfiveyearspriortoyourtargetretirementdate,beginaddingmoretoit.

Ifyouprefertomaintaina70/30or80/20mixfromtheverybeginning,thenaddtothebondfundaspartofyourongoinginvestmentallocationthroughoutyourprimaryinvestingyears.Keepinmindifyoudownsizeyourhomeonceyouretire,anyextraequityfromthesalecan

makeforanice“surge”investmentintoyourbondfund.

AvoidChasingReturns

It’stemptingtoshootforbigreturns,especiallyasabeginninginvestor.Youwanttoscorebigandmakealotofmoney,sosometimes,unfortunately,yourfirstinvestmentsturnouttobeamongyourworst.Certainlythatwasthecaseforus.Insteadofbuyingmeat-and-

potatoesindexfunds,whichseemedfranklyboringtousatthetime,wechasedthepotentiallyhigherreturnsofferedbyactivelymanagedandspecialtyfunds.

TheLureofTop100ListsAsnoviceinvestorswe

scouredthefinancialmagazinesforthe“bestofthebest”mutualfunds.Top100

liststhatrankedfundsbasedontheirrecentperformancewereaparticulardraw.Perhapsitisn’ttoosurprisingthereforethatwefoundourselvesavidlytrackingthebestfundsontheselistsandmakingourinitialselectionsfromtheonesatornearthetop.Whateverfundhadperformedthebestoverthepastfiveortenyearswastheonewewantedtoinvestinnext.Well-placedadsforthe

self-samemutualfundstendedtounderscorethewisdomofinvestinginthesefundsaboveallothers.

Theysaypastperformanceisnoguaranteeoffutureresults,anditturnsouttheymeanit.Theproblemwithchasingreturnsisthatyouendupbuyinghighandsellinglow–theexactoppositeofwhatyouwanttodo.Fundswithoutsizedreturnshaveoften

hadtotakeoutsizedrisksinordertogetwheretheyareatthetopoftheleaderboard.Theyrarelystaythereforlong.Thebigbetsthatgotthemthereinthefirstplaceoftensinkthemoncemarketsshiftorinvestorsentimentchanges.Expenseratioscanalsobedramaticallyhigherforthesehigh-flyingfunds,andthattendstopullthembackdowntoearthoverthelongrun.

Ourfirsttaxableinvestmentisagoodcaseinpoint.In1994weput$2,000intoanoverseasemergingmarketsfundrightatthetail-endofanamazingfive-yearrunforemergingmarketsstocks.Itwashardlysurprisingsuchfundswereatthepinnacleofallmutualfundsatthatpoint,rightatthetopoftheTop100lists.Predictablyenough,givenitshighvaluationanditshigh

fees,thefundperformedsubstantiallybelowparafterweboughtit.Weeventuallyhadtosellitforaslightlosssomesixorsevenyearslaterwhenwefinallymadetheswitchtoindexfundinvesting.

Oursecondtaxableinvestmentwasequallyquestionable,amomentumgrowthfundridinghighinthe#1positionontheleaderboardwhenwebought

it.Thefundfullyembracedtheconceptofmomentuminvesting–thatis,buyingagrowthstockwhenitisonatearandridingitupevenhigher.Thiswasaverymid-1990’sinvestmenttomake.Wewererightinthemidstofthedot-comboomanditseemedliketechnologystockscouldnevergodownagain.Thefundreallydidgoonatearatfirst,thenthemomentumfizzledbefore

goingthewrongwayfast.Wegotoutintimetoavoidtheworstofthecarnage,butonceagainwefoundourselvesdisappointedwithafundwehadfeltveryexcitedaboutatfirst.

HighValuations,HighRisks,HighExpensesIttooktwoorthree

setbackslikethisbeforewe

learnedourlessonthehardway.Buyingactivelymanagedfundswithhighvaluations,highrisks,andhighexpensesinthehopesofscoringbigdidnotmakeawholelotofsense.Nordiditmakesenseforusasbeginninginvestorstobebuyingfundswithsuchanarrowfocus–suchasemergingmarketsormomentumgrowthfunds.Insteadweshouldhavebeen

concentratingoureffortsonbuildingahealthycoreportfolio.Inotherwords,weshouldhavebeenbuyinghighlydiversifiedstockindexfundswithlowfees.

Ittookusalongtimetolearnthislesson,andwehopeyoucanlearnfromourmistakesandmakeahealthierstarttoyourinvestingprogramthanwedid.Ifyouwanttobuynichemarketfunds,atleastwaittodoit

untilafteryouhaveahealthycoreportfoliobuiltup.Sectorandspecialtyfundsshouldbeconsidereddessert,notthemaincourse.

Steadilybuyinglow-costindexfundsmaynotbethemostglamorousthingintheworld,butaskyourselfwhyyouareinvestinginthefirstplace.Isitfortherushthatcomesfrommakingabigreturn?Orisitfortherewardofreachingyourretirement

goalsuccessfully?Therushtoscorebighasmoretodowithgamblingthaninvesting,whereasabuy-and-holdapproachtoindexfundinvestingisoneyoucanusethroughoutyourlifeasareliablestrategyforgettingrichslowly.

OtherOptionsBesidesMutualFunds

Mutualfundsaren’ttheonlygameintown:thereareotherviableoptionsforgettingrichslowlythroughaprogramofsteadyinvestments.We’dliketotouchbrieflyonafewofthese.

ExchangeTradedFundsExchangeTradedFunds,

orETFs,areclosecousinsofmutualfunds.Theytendtobelow-costandtax-efficientandtheytradelikeastock.Whereasmutualfundsareboughtorsoldattheendofeachtradingday,ETFstradethroughoutthedayatpricesthatcanbehigherorlowerthantheirnetassetvalue.

ThereisnominimuminvestmentrequirementforETFs–akeybenefittobeginninginvestors–andyoucaninvestasmuchoraslittlemoneyasyouwish.

ETFsalsooffertaxbenefitstoinvestors.Mutualfundsmustdistributecapitalgainstotheirshareholdersonayearlybasis(i.e.,whenevershareshavebeensoldataprofitinordertokeeptheportfolioinlinewiththe

weightedindexbeingtracked).Thesegainsaretaxableevenifyoureinvestthedistributionsinmoresharesofthesamefund.Bycomparison,investorsinETFsgenerallyonlyrealizecapitalgainswhentheysellshares.Thisgivesthemabitmorecontroloverwhentheyrealizecapitalgainsandhavetopaytaxesonthem.

MostETFstrackanindexandarethushighly

diversified.Theycanholdstocks,bonds,andevencommodities.Theirexpenseratiostendtobelowerthanthoseforcomparablemutualfunds.OnereasonforthisisthatanETFdoesnothavetomaintainacashreserveforredemptions.TheVanguardS&P500ETF(VOO),forexample,hasanultra-low0.05%expenseratio.Thatmatchestheexpenseratioforthe“AdmiralShares”version

ofitsIndex500fundandislowerthanthe“InvestorShares”version.

BrokeragecommissionssometimesapplywhenyouarebuyingorsellinganETF.Animportantexceptionistypicallymade,however,whenyouarebuyingorsellingETFsofferedbyyourowninvestmentfirm.Forexample,VanguardETFscanbeboughtandsoldcommission-freethrough

VanguardBrokerageServices.Todiscouragedaytrading,Vanguardallows25freetradesofthesameETFina12-monthperiodbeforerestrictingfurthertradingfor60days.

AdiversifiedETFindexfundheldoverthelongtermcanbeasolidinvestmentchoice,buttheveryabilityofanETFtotradelikeastockcansometimesbeadownsideinthatitincreasesthe

temptationtoengageinmarkettimingorshort-termspeculation.

Still,thereisalottolikeaboutETFsandnotmuchtodislike.Wecancertainlyseethevirtuesofinvestinginthem.Perhapsoutofasenseoffamiliarityifnothingelse,wehaveremaineddedicatedmutualfundinvestors.WebelievemutualfundsandETFsofferroughlycomparableexperiencesas

longasyouarealreadyinvestingwithalow-costinvestmentfirmlikeVanguard.

IndividualValueStocksIndividualstocksoffer

anotherworthyalternativetomutualfundsorETFs.Ifyoudecidetogothisroute,besuretogiveyourselfabasiceducationinfinancialmatters

firstsoyouhavethegroundworkneededtobeanastuteinvestor.WerecommendyoureadabookortwoaboutWarrenBuffett,widelyconsideredthemostsuccessfulinvestorofthe20thcentury,togetanideaofhisvalueapproachtoinvesting.

Buffett’sadviceatitsmostbasicistopurchasebusinessesatalargediscounttotheirintrinsicvalue,which

meansavoidinghigh-flyinggrowthstocksandstickinginsteadtocompaniesthatareundervaluedbythemarketforonereasonoranother.Thesecompaniesmaybetemporarilyontheropesbutarelikelytomakeastrongcomeback.

Ifyoucanlearntobeacontrarianinvestorandbuystockswhenthey’rebeatendownbutfundamentallysound,you’llhavegonea

longwaytowardsbecomingawiseinvestor.It’seasytobeluredbytechcompaniesmakingsexyproducts,butthesesamestocksarefrequentlyoverpricedbecausetoomanyotherpeoplewantthemtoo,andusuallyforthewrongreasons.Bycomparison,whatmightlooklikeaboringoldvaluestockatfirstglancecanpackalotofpunch.Insteadoffocusingonwhatacompanydoes,we

recommendyoufocusonwhatitreturns.Letthatbethedeterminingfactorinwhetheryoudeemacompanytobeexcitingornot.

Bearmarketscanbeasmartinvestor’sbestfriend.Keepaneyeoutforstocksthathavebeenbatteredalongwiththemarketasawholeeventhoughtheirfundamentalsaresound.Youcanalsolookforcompaniesthathavebeenbeatenupin

thenewsrecentlybutareintrinsicallysound.Netflixcomestomindasarecentexample.Aseriesofmanagerialmisstepssentthestocksharplydownward,yettheunderlyingbusinessmodelwassoundandthecompanycontinuedtoearnprofits.Anastuteinvestormighthavesteppedinandpurchasedshareswhentheywereatorneartheirlowsandreapedtherewardslateron.

Sometimesanopportunitycomesalongthatisn’tavailabletothegeneralpublic.Asanemployeeatmyaerospacefirm,forexample,Iwasabletotakeadvantageofmycompany’semployeestockpurchaseplan.Itallowedmetopurchasesharesoftheirstockwhichthecompanymatched20%uptocertainmonthlydollarlimits.That’squiteadealwhenyouthinkaboutit:it’s

likegettinga20%freereturnonyourinvestmenteveniftheunderlyingstockpriceremainsflat.Oncewehadwrappedourmindsaroundthatidea,weboughtafairamountofcompanystockovertheyears.Notsurprisinglyitturnedouttobeoneofourbestinvestments,especiallywhenthestockpriceitselfstartedtoriseappreciably.Keepaneyeoutforsimilaropportunities

inyourownlife,especiallywithregardtothecompanyforwhichyouwork.

Themajordownsidetoinvestinginindividualstocksisthatyourriskishigherbecauseyou’reinvestedinonlyahandfulofstocksatatime.You’remuchlessdiversifiedthanyouwouldbewithanindexfund,andifoneortwoofyourstocksshouldplummet,itcouldhaveabigimpactonyourportfolio.On

theotherhand,ifyou’reashrewdinvestorandyourstocksperformwell,youstandtobenefitinabigway.

Unfortunatelymostofusaren’tasastuteatstockpickingasWarrenBuffett,sounlessyouareparticularlyconfidentofyourabilitiesinthisregard,wewouldrecommendyousticktoindexfundinvestingasthesaferandmorereliableapproach.However,ifwe

weretodoitalloveragain,wewouldatleastconsidervaluestockinvestingasaworthyalternativesolutiontoachievingfinancialindependence.Somecombinationofindexfundinvestingandvaluestockinvestingisalsoworthconsidering.

AnyOtherOptions?We’llbrieflymentiontwo

otheroptionsthatcometo

mindforreachingyourearlyretirementgoals.

Buyingandsellingrealestateoffersafeasibleapproachtoachievingfinancialindependence,providedyouhaveagoodunderstandingofyourlocalrealestatemarketandasharpeyeforvalue.Insomecasesthismightinvolveflippinghomes,whereyouputsweatequityintoafixer-upperthenresellitataprofit,andin

othersitmightinvolveestablishingacollectionofrentalpropertiesinyourlocalareathatyoumanageandrentoutonamonthlybasis.Wedon’tpresumetogiveadviceonthissubjectsinceitwasnottheapproachwetook.Wemerelymentionitbecauseweknowofotherswhohavetakenthistacktocreatingamonthlyincomestreamanditworkedforthem.Wesuspectitwoulddemandmorehands-

oneffort,though,andmightrequireyoutobephysicallypresenttomanagethebusinessafteryouretired.

Anotheroptionworthmentioningisbecominganentrepreneurandstartingyourownbusiness.Ofcoursetheskyisthelimitwiththisapproach:youcouldnotonlygetrichslowlybutgetrichquickifyouhitupontherightbusinessopportunity.Ontheotherhand,theriskofbeing

anentrepreneurcanbequitehighsoittakescouragetochoosethisoption.Ineffectallyoureggsareinonebasket–yourbusiness–soifitfailsyourdreamofearlyretirementcanfailalongwithit,oratleastbesidetrackedforatime.Butifitsucceedsitcouldoffersubstantialfinancialwell-beingandagenuinesenseofaccomplishment.

Notlongagowemeta

couplenamedSteveandLynnMiller(webetripping.com)whosuccessfullytooktheentrepreneurialapproachtofinancialindependence.Theystartedasoftwarebusinessin1998witha$10,000investmentoftheirownmoneyandmaintained100%ownershipofthebusinessuntiltheysolditin2009.Earlyretirementwasapartoftheirplanfromthevery

beginning.Theyachievedtheirgoalandretiredatages50and52–whileraisingtwokidsnoless.Wemetupwiththemjustastheyweredroppingtheirkidsofftocollegeandventuringoffonathree-monthtriptoEcuador,Peru,andtheBahamas.Wewereimpressedbythegutsittookforthemtostarttheirownbusiness,managecashflowissues,worklonghours,andeventuallyselltheir

softwarebusinessforahealthyprofit.

Forthosewhohavetheingenuityandtemperamentforit,theentrepreneurialpathcanbeasatisfyingandrewardingone.Fortherestofus,areliablejobandsomesimpleindexfundinvestingmaybethepreferableroute.Slowandsteadywinstheraceformostofusandofferswhatmaybethesafestpathtoearlyretirement.

Chapter12.Take

Advantageof401(k)sand

IRAsIrememberreadingfor

thefirsttimeasabeginning

investorabouttheadvantagesofinvestingina401(k)planandfeelingenergizedaboutsavingforthefutureinawayIneverhadbefore.Thetriplebenefitofacompanymatch,tax-deferredgrowth,andlowertaxeswassimplytoogoodtopassup.Igotstartedrightawayinvestinginthe401(k)planofferedthroughmycompany.Itfeltlikewewerebeinghandedthekeystoashinynewcarthatcould

speedusfastertowardsourgoal.Notonlydiditletuscutthroughtheheadwindsoftaxeswithlesseffort,italsoincentivizedustodowhatwewantedtodoanyway:saveforthefuture.

Abouthalfwaythroughourinvestingyears,anewkindofindividualretirementaccountbecameavailablecalledaRothIRA,andonceagainitfeltlikewewerebeinghandedasurprisingly

generousgift.Thisoneofferedunlimitedpotentialforearningstocompoundwithoutbeingtaxed–ever!Thatseemedalmosttoomagnanimousonthegovernment’spart–butitdidn’tstopusfromtakingfulladvantageofit.

BenefitsofTax-AdvantagedAccounts

Tax-advantagedaccountsofferacarrotintheformoftaxbreakstothosewhoarewillingtoputasideaportionoftheirmoneytodaytopreparefortheirownfuturetomorrow.Inthischapterwefocusprimarilyontwotypes

oftax-advantagedaccounts,401(k)sandRothIRAs.Bothofferdistinctadvantages,whichiswhywerecommendyoudon’tlimityourselftoonebutinvestinbothtypes.

TaxShelteringShelteringyourretirement

moneyfromtaxesisagenuinecomfortcometaxseason.It’sasifthismoneywereinvisibletotheIRS(butinacompletelylegalway,of

course).Aslongasyoudon’twithdrawitbeforeage59½,youdon’tevenhavetothinkaboutitattaxtime.Butwithtaxableaccountsyoudohavetothinkaboutit,becausecertaininvestments–mutualfundsandbondsamongthem–generatedividendsandcapitalgainsthatyouhavetopaytaxesonevenifthosedividendsandcapitalgainsarereinvested.Taxableaccountsareapay-as-you-go

system,whereastax-advantagedaccountsletyoushelteraportionofyourmoneyfromUncleSamuntilamuchlaterdate,whichisdefinitelytoyouradvantage.

FasterCompoundingYou’lloftenhearitsaid

that401(k)sandtraditionalIRAsletyourinvestmentscompoundfasterthantheywouldinataxableaccount.Thisistrueafterafashionbut

requiressomeexplanation.Ifyouinvestexactlythesamedollaramountsinexactlythesameinvestmentsinataxableandatax-advantagedaccount,theywillcompoundatexactlythesamerate.Butitisusuallyassumedyouarecontributingmoredollarstoatax-advantagedaccountthanyouaretoataxableone.Why?Becauseit’seasiertoinvestpre-taxdollarsthanitistoinvestafter-taxdollars.

Thinkaboutitthisway:investing$10,000pre-taxisroughlytheequivalentofinvesting$7,500after-tax(assumingyouareina25%taxbracket).Ittakesnoextraeffortonyourparttogetthe$2,500“bonus”byinvestingpre-taxdollarsinatax-advantagedaccount.Thusitisfairinasensetocompareinvesting$10,000inpre-taxdollarsto$7,500inafter-taxdollars.Withthisassumption

understood,thenitbecomesclearwhya401(k)oratraditionalIRAcompoundsfasterthanataxableaccount:because$10,000reallydoescompoundfasterthan$7,500.

Ofcoursenotalltax-advantagedaccountsarethesamethesedays.WithaRothIRAyouinvestafter-taxdollars,sothefastercompoundingassumptiondoesn’tapplytoyourcontributionamounts.It

couldbearguedearningscompoundfastersincenotaxesareowedonreinvesteddividendsandcapitalgains,butthisisafairlyhollowdistinction.Why?Becausetaxesareusuallypaidoutofyourcurrentincomestream,notoutofyourinvestmentsthemselves.Thuspayingtaxesonreinvesteddividendsandcapitalgainsinataxableaccountmaymakeyourpocketbooklighter,butit

doesnotgenerallyinhibitthecompoundingoftheinvestmentsthemselves.

EasyRebalancingTax-advantagedaccounts

letyourebalancefundsandtransferassetswithinthesameaccountwithnotaxconsequences.Bycomparison,everytimeyoutransferdollarstorebalanceyourportfolioinataxableaccount,itresultsinataxable

eventfortheyear.Werebalanceourtaxable

portfolioafterafashionbywithdrawingmoneyforlivingexpensesfromwhateverfundhasperformedbestoflate.However,werarelymovemoneyfromonefundtoanotherbecauseofthetaxconsequencesofdoingso.Bycomparison,it’sabreezetomovemoneyaroundinatax-advantagedaccountbecausetherearenotax

consequences.Thisconsiderablyincreasesyourflexibilitytomakeadjustmentsandfine-tuneyourportfoliothroughtheyears.

OneDisadvantage:LimitationsonAccessForearlyretirees,the

biggestchallengeofinvestingintax-advantagedaccountsis

thelimitationonaccessingyourmoneybeforeage59½.Withdrawingmoneybeforethatpointtypicallyresultsinhavingtopayasteep10%penaltytaxontopoftheordinaryincometaxesowed.Thislimitationisespeciallysignificantforthoseretiringextra-earlyintheirthirtiesorforties.Thenextsectiondiscussesstrategiesyoucanemploytoaddresstheseconcerns.

AllocatingBetweenTaxableandTax-AdvantagedAccounts

Thepreferredorderofinvestingforatypicalretirementisusuallysummarizedasfollows:

1.Investenoughinyour401(k)toreceivethemaximumpossiblematch2.InvestthemaximumyearlyamountinyourRothIRA(s)3.Investmoreinyour401(k)uptoyouryearlycontributionlimit4.InvestanyadditionalamountinyourtaxableaccountThisruleofthumbmakes

perfectlygoodsenseifyouplantoretireatage55orolder.However,ifyouplantoretireveryearly–say,inyourthirtiesorforties–thenyouneedtogivethemattersomeadditionalconsideration.You’regoingtorequirefundsyoucanaccesswithoutlimitationorpenaltybeforeage59½.Inasenseyou’regoingtoneedtosavefortworetirements–thenear-termoneandthepost-age-59½

one.Sinceitisn’tthenormto

retireinyourthirtiesorforties,yourarelyseethisissueaddressedinthefinancialmedia.Neverthelessitisaveryrealoneforanyonehopingtoretirewellbeforetheageof59½.

TaxableAccountsandtheUltra-EarlyRetiree

Thesimplestoptionifyouareplanningaveryearlyretirementistoinvestmoreinyourtaxableaccount.Thisgivesyoucompletefreedomtoaccessyourmoneyhoweverandwheneveryoulike.Therearenopenalties,noagelimits,andnoregulatoryorbureaucratichoopstojumpthrough.That’sthebeautyofataxableaccount:themoneyisyoursandyoucandowithitasyou

wish.Themaindownsideof

thisapproachisthattheburdenoftaxescanbeheavyduringyourfinalworkingyearswhenyounotonlyhaveahighsalarybutmayalsohavelargeamountsoftaxableinvestmentsthrowingoffdividendsandcapitalgainsasyouprepareforyourimminentretirement.Youmaywanttovoluntarilyincreaseyourwithholding

amountsduringtheseyearstoaccountforthehighertaxesyou’relikelytoexperience.However,theinstantyouretirefromtheworkforce,thisburdenisliftedandyourtaxesdropdramatically.

Whenwefirststarteddreamingaboutearlyretirement,wecontemplatedleavingtheworkforceatage55.Withthatretirementageinmind,itmadesenseformostofourmoneytobe

investedinmy401(k)planatworkandinourRothIRAs.Wefiguredasmalltaxableaccountwouldbeallwewouldneedtocoverusforthe4½yearsorsountilage59½.However,aswebeganmakingdetailedplans,wekeptpushingourtargetretirementageearlier,firsttoage50,thentoage45,andintheendtoage43.

Abouthalfwaythroughourprimarysavingyears,we

realizedwewerewoefullyunderfundedforthefirst15yearsofourretirementbeforeage59½.Asaresultwedramaticallyincreasedthepercentageofourinvestmentdollarsgoingintoourtaxableaccount,realizingwewouldneedthosedollarstocoverusforalongerperiodoftimethanwehadoriginallyanticipated.

Intheendweovershotabitandsavedmoreinour

taxableaccountthanwedidinourtax-advantagedaccounts.Atretirementweheldalmost$350,000intaxableinvestmentsascomparedto$280,000intax-advantagedinvestments(a55/45split).Wethinka50/50split(notincludingtheequityinourhome)wouldhavebeenclosertoideal.

Ourtotaltaxableaccountatretirementstoodatnearly$550,000.(Thisincludes

$200,000inbondfundsfromthesaleofourhomebutexcludes$100,000setasideforfuturehome-buyingpurposes.)Thisamountgeneratedenoughcapitalgains,interest,anddividendstoprovideuswithadecentsourceofincomeduringourearlyretirementyears.Thewithdrawalswemadewerereplenishedforthemostpartbyourtaxableinvestmentearnings.

Notsurprisingly,ourtaxableaccounthasslowlydiminishedoverthepastsixyearswhileouruntapped401(k)andRothIRAinvestmentshavecontinuedtogrow.Comparetheyear-endtotalsin2006(whenweretired)totheyear-endtotalsin2012:

Youcanseethetotalsforbothyearsarealmostidentical,buttheallocationofinvestmentshasshiftedtowardsmoremoneyinour401(k)andRothIRAsandlessinourtaxableaccount.

Thisisinlinewithouroverallexpectations,inwhichweenvisionourtaxableaccountstayingevenorslowlydiminishingwhileour401(k)andRothIRAaccountscontinuetogrowuntilage59½.Atthatpointwecantapintothosefundsaswellwithoutpenalty.Thisstrategyhasworkedwellforusoverall,andwewouldrecommendittoothersasaviableapproachtoultra-early

retirement.Keepinmindtheabove

resultsencompasstheGreatRecessionanditsaftermath,adifficultperiodbyanyone’sreckoning.Breakingevenisprobablyaboutthebestwecouldhavehopedforduringthischallengingtime,butitseemsreasonabletohopeforbetterresultsintheyearstocome.

Tax-Advantaged

AccountsandtheUltra-EarlyRetireeWefinditsomethingofa

comforttohaveasubstantialportionofourinvestmentscontinuingtogrowuntouchedinour401(k)andRothIRAs.Wefeellikewestillhavearetirementfundofftothesidethat’smeantforthelongterm,evenwhilewetapintothetaxableaccountforourshorter-termneeds.

Ourhope,ofcourse,isthatouroverallinvestmentportfoliowillcontinuetogrowthankstoour401(k)andRothIRAinvestments.Thatshouldallowustowithdrawmoremoneyinfutureyears,whichinturnwillallowustokeepupwithinflationandmaintainastandardoflivingsimilartoorbetterthantheoneweenjoytoday.Onlytimeandmarketconditionswilltellif

ourexpectationsaretoberealizedornot,butwecontinuetobelievewe’reontherighttrack.

AnotherGoodOptionforRetireesAge55andOverForthoseretiringator

aroundtheageof55,thereisanothergoodoptiontoconsider:relyingonthedirectcontributionsyou’vemade

overtheyearstoyourRothIRA.

You’realwaysallowedtowithdrawyourowncontributionstax-andpenalty-freefromaRothIRA(butnottheearnings).Whetherthosecontributionswillbeenoughtocoveryouuntiltherestofyourtax-advantagedfundskickinatage59½isfoodforcarefulthought.Butifyouliketheideaofinvestingsolelyin

tax-advantagedaccounts,thisgivesyouapromisingstrategytopursue.

Todetermineifthisisfeasibleforyou,adduphowmuchofyourRothIRAaccountislikelytoconsistofyourowncontributionsbythetimeyoureachyourtargetretirementage.Forexample,let’ssayyouandyourspouseareage30andeachofyouhasstartedinvestingthecurrentmaximumof$5,500

peryearinaRothIRAaccount.Youhopetoretirebyage55.Thatgivesyou25yearsx$11,000peryear=$275,000ofcontributionstoyourRothIRAs(orpossiblymorethanthat,assumingcontributionlimitsgoupinthefuture).

You’llneedtocoveraboutfiveyearsofearlyretirementuntilage59½,sothatworksoutto$275,000÷5=$55,000ofincomeper

year.That’snottoobad.Overthecourseofthosefiveyearsyoumaydepletemostofthecontributionsfromyouraccount,butyourearningswillcontinuetogrow.

RelyingonRothcontributionsalonebecomeslessfeasibletheearlieryoudecidetoretire.Forinstance,ifyouweretoretireatage50insteadof55intheexampleabove,thatwouldgiveyou20yearsinsteadof25in

whichtosave,resultingin20yearsx$11,000peryear=$220,000ofcontributions,whichwouldneedtolastforroughly10yearsinsteadof5.Thatworksouttojust$22,000ofincomeperyearuntilage59½,whichisprobablyinsufficientinandofitself.However,ifyouplannedtosupplementthisamountwithincomefromataxableaccountorapart-timejob,thenitwouldbecome

morefeasible.

OtherWaystoAccessYourMoneyEarlyOtherstrategiesfor

accessingyourmoneyearlyarelessattractivebecausetheytendtobemorecomplicated.Forexample,undercertaincircumstancesitispossibletomakewithdrawalsfromyour401(k)

accountpenalty-freeafterage55.Butforthistowork,youhavetobesuretoterminateyouremploymentnoearlierthanage55.Ifyoustopworkingatage54¾,thenpenaltiesforearlywithdrawalwouldstillapply.Your401(k)alsohastobewithyourcurrentcompany,notwithacompanyyouworkedforearlierinyourcareer,soyouwouldwanttobesuretoalwaysrolloveryour401(k)

toeachnewemployerwithwhomyoutakeajob.

Nowlet’ssayyouturn55andit’stimetotakethemoneyoutofyour401(k).Youmaybeofferedthechoicetodoitintheformofperiodicwithdrawals.Sincealumpsumwithdrawalwouldrocketyouintothehighestpossibletaxbracketfortheyear,periodicwithdrawalsarethesmartwaytogo.However,manycompanies

don’twantthehassleofmanagingperiodicwithdrawals,soyoumaynotbegiventhisoption.Inthatcase,assumingyoudon’twanttopaytaxesontheentirelumpsumamount,youwouldneedtorollitoverintoatraditionalIRA.Atthatpointtheage59½limitwouldonceagainapply.Butreadon,there’sawayaroundthattoo.

Theloopholefor

traditionalorrolloverIRAsisthis:youcanwithdrawmoneypenalty-freebeforeage59½ifyoutakethemoneyoutinwhattheIRScalls“substantiallyequalperiodicpayments”(SEPP).ThisinvolvesannuallywithdrawingafixedsumofmoneyfromyourIRAasdeterminedbyanIRSformulathattakesintoconsiderationyourlifeexpectancyamongother

factors.Youwouldhaveto

continuemakingSEPPwithdrawalsforatleastfiveyearsoruntilyoureachage59½,whicheverislonger.Thatmeansifyouretireatage50,youwouldneedtocontinuewithdrawingSEPPsfor9½yearsuntilyouturned59½.Ifyouwere58you’dhavetotakethemuntilyouwereage63sincethe5-yearminimumwouldapply.

Otherwiseyou’llgethitwiththe10%penaltyandretroactiveinterestcharges.

Honestly,wefindallthisabittoointimidating,andsowedecidedlongagonottotakethisroute.Itseemedtouslikethepotentialforbureaucraticandtaxheadacheswassimplytoohigh.However,itdoesofferanotherviableapproachtotappingintoyour401(k)andtraditionalIRAmoneysooner

thanyoucouldotherwisewithnopenalty.

InaNutshellOnlyyoucandecideon

theexactpercentagesthatarerightforyou,buthereareourgeneralrecommendationsregardingallocationsbetweentaxableandtax-advantagedaccounts:–Ifyouplantoretireinyourthirtiesorforties,

invest50%ofyourmoneyintax-advantagedaccountsand50%inataxableaccount.–Ifyouplantoretireinyourearlyfifties,allocate75%totax-advantagedaccountsand25%toataxableaccount.–Ifyouplantoretireinyourmidtolatefiftiesorbeyond,allocate100%totax-advantagedaccounts,

withanyoverflowgoingintoataxableaccount.Ifyoufeelyoualready

knowallyouneedtoknowabout401(k)sandIRAs,feelfreetoskipaheadtothenextchapter.Otherwise,readon.Weprovideaquickoverviewofeachmajortypeoftax-advantagedaccount:401(k),RothIRA,andTraditionalIRA.Wealsomakebriefmentionofeducational

savingsaccounts.

401(k)PlansNearlyeveryinvestorthe

worldoverwillagreeononething:neverturndownfreemoney.That’swhynearlyeverybookorarticleyou’lleverreadonretirementwillurgeyoutocontributeatleastenoughtoyouremployer-sponsored401(k)plantogetthefullcompanymatch.Infact,contributingenoughto

getthemaximummatchistheveryfirstthingyoushoulddoasaninvestor.

The401(k)CompanyMatchMatchesdifferfromone

companytothenext.Somecompaniesoffernomatchatall.Othersmatchtheiremployees’contributionsatfiftycentstothedollaruptoaspecifiedpercentageofpay

(commonly6%).Othersareevenmoregenerousandmatchdollarfordollar.Butanymatchisanofferoffreemoneyjustforparticipatinginaplanthatisgoodforyouanyway.It’ssuchano-brainerthatmanycompaniesautomaticallyenrollyouintheir401(k)plans,requiringyoutooptoutifyoudon’twanttoparticipate.

Let’ssayyou’reearning$80,000grossandyour

companymatchesfiftycentstothedollarupto6%ofpay.Yourmaximummatchwouldbecalculatedasfollows:$80,000x6%=$4,800x$0.50=$2,400.Youwouldneedtocontribute$4,800(6%ofyourgrosspay)toreceivethemaximumcompanymatchof$2,400peryear.That’s$7,200altogether,makinganicedentinyourinvestmentgoalsfortheyear.

Tax-DeferredGrowthAnymoneyyouinvestin

your401(k)comesstraightoutofyourgrosspaycheckandgrowstax-deferred.Usingpre-taxmoneytofundtax-deferredgrowthisaverynicedealindeed.Supposeyouearn$100,000grossperyearandput10%ofyourpaycheckintoyour401(k).That’s10%ofyourgross

salary,notyournet.Thatmeansyou’reinvesting$10,000,not$7,500aswouldotherwisebethecaseaftertaxes.Thislargertax-deferredamountcompoundsmorequicklythanasmalleramountwould,givingyoualeguponreachingyourretirementgoalssooner.Thedividends,interest,andcapitalgainsinsideyour401(k)accountalsogrowtax-deferred.

ReducedIncomeTaxesMatchingfundsplustax-

deferredgrowthisaprettypowerfulcombinationinitsownright,butwhatmakesitevenmorepotentisthis:youactuallyloweryourfederalincometaxesinthecurrentyearbyinvestingina401(k)plan.Intheexampleabove,it’sasifyoueffectivelyerased$10,000offthetopof

yoursalaryasfarastheIRSisconcernedandonlyearned$90,000insteadof$100,000.Youwouldhavehadtopayabout$2,500intaxesonthatextra$10,000,butinsteadthattaxpaymentisdeferredintothefardistantfuture.

Ofcourseyou’llhavetopaytaxesonthatmoneyeventuallywhenyouwithdrawitinretirement,butbythenyou’llundoubtedlybeinalowertaxbracketthan

youarenow.Atpresentyou’reearningahealthysalaryandpayingtaxeslikethere’snotomorrow,inpartbecauseyou’repayingtaxesonallyourincomebutonlyusingaportionofittoliveon(withtherestbeinginvested).Butwhenyouretireyou’llbelivingafinanciallysimplerlife,andyourtaxbillwillreflectthat.Thusitmakessensetoinvestasmuchaspossibleinyour401(k)to

reduceyourcurrenttaxload.

RaisingYourPercentageWheneveryougetaraise,

it’sagreattimetorevisityour401(k)percentages.Sinceyouhaven’tbecomeusedtolivingonthehigheramountyet,youcantakealloraportionofthepayincreaseoffthetableandputitintoyour401(k)instead.

Youcanbe“pretendpoor”andconvinceyourselfyoustillhavetomakedoonroughlythesameamountasyoudidbeforetheraise.Thisisapowerfulwaytoincreaseyoursavingsforthefuture.Ifyouneverseethemoneyinyourcheckbookaccount,it’salmostasifitneverexisted.Butwhenyoulookatyour401(k)statementattheendoftheyear,you’llrealizeallthoseextradollarsaremaking

abigdifferencetoyourbottomline.

Ifyouincreaseyourpercentagesincrementallyandtimethemtocoincidewithpayraises,youmaynotnoticethatmuchofadifferenceintermsofyourtake-homepay.Sinceyour401(k)deductionsloweryourgrosssalary,thetaxesbeingwithheldfromyourpaycheckarealsocomparablyless,sotheoveralleffectonyour

take-homepayisoftensmallerthanyoumightexpect.

InvestingforLong-TermCapitalAppreciationMost401(k)plansoffera

widerangeofmutualfundoptions.Werecommendyoudoyourmostaggressiveinvestingintax-advantagedaccountslikeyour401(k)and

IRAsinceyouwon’tbetouchingthismoneyforalongtimetocome.Compoundingcanworkitsgreatestmagicifyouinvestinassetssuchasstock-basedmutualfundsthathaveastrongpotentialforlong-termcapitalappreciation.

Onecaution:manycompaniesallowyoutopurchasesharesofcompanystockwithinyour401(k),andwhileyoumaywanttoinvest

somemoneyinsuchafashion,wesuggestyoudon’tgooverboard.It’sriskytoputallyourretirementeggsinonebasketincaseyourcompanyshouldturnouttobe(heavenforbid)thenextEnron.

SetItandForgetItOnceyou’vemadeyour

selections,you’redonefortheyear.Youdon’thavetorevisityour401(k)planor

makeanyotherdecisionsuntilnextyear’sbenefitsreview,whenyoushouldreevaluateyourpercentagesandinvestmentselectionstomakesurethey’restillrightforyou.Meanwhile,automaticdeductionsfromyourregularpaycheckallowyoutosimply“setitandforgetit.”

ContributionLimits

andVestingTheIRSsetslimitson

howmuchyoucancontributetoyour401(k)planinanygivenyear.Thelimitfor2013is$17,500;thislimitmayriseinthefuturebasedoncostoflivingincreases.Yourcompanymayalsoimposeamaximumpercentagesalarylimitsuchas15%ofsalary.Someplansallowforcatch-upcontributions,withhigher

limitsforpeopleage50andolder.

Many401(k)plansmakeyouwaitbeforeyoubecomefullyvestedinmatchingfunds.Thisisdesignedtoincentivizeyoutoremainemployedwiththecompanyforlongerthanjustayearortwo.Youarealways100%vestedinmoneyyoucontributedirectly,butacompanymay,forinstance,giveyou25%vestingof

matchingfundsafteryourfirstyearofemployment,50%afterthesecondyear,75%afterthethirdyear,and100%afterthefourthyearandbeyond.

401(k)PortabilityIfyouleaveyourjob,you

caneitherkeepyour401(k)fundsinplaceortakethemwithyou.Takingthemwithyouentailsrollingyour401(k)moneyover,withits

tax-deferredstatusintact,toyournewemployer’splan.Alternatively,youcanrollitoverintoatraditionalIRAsetupwithanaccountproviderofyourchoice,suchasVanguardorFidelity.Thisisworthconsidering,especiallyifyournewcompany’splanislimitedintermsofitsinvestmentchoices.Theonethingyoushouldnotdounderanycircumstancesiscashouttheproceedsfromyour

401(k)planwhenyouleaveyourjob.Besideshavingtopaytaxesatordinarytaxratesplusa10%penaltyfee,youloseoutonpotentiallydecadesworthoftax-deferredcompounding.

PenaltiesforEarlyWithdrawalTherulesarequitestrict

withregardtoearlywithdrawalsfroma401(k).

Almostanywithdrawalsbeforeage59½willresultinyourhavingtopaytaxesatordinarytaxratesplusa10%penaltyfee–givingyouastronginducementtoleaveyour401(k)moneyinplaceonceit’sthere.Evenso-calledhardshipwithdrawals(i.e.,tocoverthedownpaymentonafirsthome)aresubjecttothesetaxesandpenalties.

Ifyousimplymustaccessyour401(k)moneybecause

youhavenootheroption,considertakingouta401(k)loan.Wedon’trecommendthisapproachexceptasalastresort,sinceyouarereducingtheamountofmoneythatcancompoundinyouraccountuntiltheloanisrepaid,butit’sbetterthantakingthemoneyoutaltogether.

401(k)TaxesinRetirement

Allmoneywithdrawnfroma401(k)oratraditionalIRAafterage59½istreatedasordinaryincome.Eventax-favoredcapitalgainsaretreatedassuch.Thisisonereasonwerecommendyouinvestsomemoneyina401(k)andsomeinaRothIRA.Thatwayyoucanchoosehowmuchmoneytowithdrawfromeachtypeofaccountdependingonyourtaxsituationinanygiven

retirementyear.Youmustbeginmaking

requiredminimumdistributionsfromyour401(k)ortraditionalIRAafteryouturnage70½.TheamountyouneedtotakeouteachyearisbasedonIRSlifeexpectancytables.OnebenefitofaRothIRAisthatitdoesn’thavetheseminimumdistributionrequirements.

Roth401(k)HybridsAhybrid401(k)

investmentcalledaRoth401(k)hasbecomepopularinrecentyearsandisbeingofferedbymoreandmorecompanies.Itcombinessomeofthebestfeaturesofbothtypesofinvestmentinthatittypicallyincludesamatchwhilealsoallowingyourearningstogrowuntaxedforever.

Thedownsideisthatyouhavetoinvestafter-taxdollarsinsteadofpre-taxdollars,soyouloseoutonsomeofthetaxdeferralbenefitsofatraditional401(k).Somecompaniesofferbothtypesof401(k)soyoucanchoosewhichportionofyourretirementplancontributionsshouldgointowhichtypeofaccount.

RothIRAsBynowyouknowthe

mainbenefitoftheRothIRAisitsabilitytoperpetuallyshelteryourinvestmentearningsfromtaxation–andthat’squitethebenefit.WhenyouwithdrawmoneyfromaRothIRAafterage59½,youneedpaynotaxesonitwhatsoever.Yourcontributionswerealready

taxedbeforehand,andyourearningsescapetaxationaltogetherbyvirtueoftheRoth’sdesign.Sinceearningsareperpetuallysheltered,aRothistheperfectplacetodosomeofyourmostaggressiveinvesting.Ifyouareconvincedaparticulartypeofinvestmentwillappreciatedramaticallyoverthelongterm,makethatinvestmentinyourRothaccount.

NoRequiredMinimumDistributionsAnimportantadvantage

ofaRothisthatminimumdistributionrulesatage70½don’tapply.Thatmeansifyou’reabletogetbyonotherresourcesinretirement,youdon’thavetodrawdownyourRothasyoumusta401(k)ortraditionalIRA.Asaresult,

yourRothearningscancontinuetogrowtax-freeeventhroughyourgoldenyears.ThismakestheRothIRAagreatsavingsvehicleforthelongterm–andwhenwesaylongtermwemeanit,sincetheassetsinaRothIRAcanbepassedontoheirs.

OnlyasurvivingspousecancontinuetocontributetoaninheritedRothIRAorcombineitwithhisorherown.Otherbeneficiariescan,

however,setupdistributionsoverthecourseoftheirownlifetimes–andpassonwhatevermightremaintoasecondarybeneficiarywiththetax-freestatusstillintact.

WithdrawalsofContributionsandEarningsWe’vealreadytouchedon

thefactthatwithaRothIRAyourowndirectcontributions

canalwaysbewithdrawntax-freeatanytimewithnoearlydistributionpenalties.Ofcourseyouwouldwanttoavoiddoingsoifatallpossibleduringyourinvestingyears,sinceitwouldruncountertotheveryreasonyouinvestedintheRothinthefirstplace.

FivetaxyearsmusthaveelapsedsinceyourveryfirstRothIRAcontributionwasmadebeforeearningsare

consideredqualifiedandcanbedistributedtax-free.Thisholdstrueevenifyouareoverage59½.However,thefive-yearclockdoesnotreseteachtimeyoumakeanothercontributiontoyourRoth.

NoEffectonSocialSecurityAnymoneywithdrawn

fromaRothIRAisnotincludedintheformulaused

todeterminehowmuchofyoursocialsecuritybenefitsaretaxable.Othersourcesofincome–suchaswages,interest,dividends,andpensions–canallresultinyourhavingtopaytaxesonyoursocialsecuritybenefits,butnotRothwithdrawals.

Supposeyou’reearningsocialsecuritybenefitswhiledoingabitofworkontheside.Ifyou’remarriedfilingjointlyandearnedbetween

$32,000and$44,000in2012,thenupto50%ofyoursocialsecurityincomemaybetaxable–orupto85%ifyouearnedover$44,000.However,anyamountswithdrawnfromyourRothIRAhavenotaxconsequenceswhatsoeverandwon’taddtoyourpotentialtaxburden.

First-Time

HomebuyerExceptionTheusualearly

withdrawalpenaltiesapplyifyouwithdrawearningsfromyourRothIRAbeforeage59½–withoneimportantexception.Youcanwithdrawupto$10,000inearningstax-andpenalty-freeifyouareafirst-timehomebuyerorhavenotownedaprincipalresidenceformorethantwo

years.(ThisassumesyourRothaccounthasbeeninplaceformorethanfiveyears.)Ifyouareacouplewithtwoaccounts,youcaneachwithdrawupto$10,000.Wearen’trecommendingyouuseyourRothinsuchafashion,butagain,itincreasesyourflexibility.

RothContributionandIncomeLimits

Asof2013youcancontributeupto$5,500toaRothIRA(plusanextra$1,000ifyou’reoverage50).Limitsarelikelytoincreasein$500incrementsinthefuturebasedoninflation.Formarriedcouples,eachspousecancontributeuptotheyearlylimit.Aworkingspousecancontributeonbehalfofanonworkingspouse.

Youcanonlyinvestina

RothIRAifyouhaveearnedincomefromajob.Youcannotuseunearnedincomesuchasinterest,dividends,capitalgains,rentalpropertyincome,pensions,orsocialsecuritybenefits.WehadinitiallyplannedoncontinuingtofundourRothIRAsduringourearlyretirementyearsusingproceedsfromourtaxableaccount,butweeventuallycametorealizethiswasnot

anoption.Ifyou’reahighlypaid

worker,incomelimitscanaffecthowmuchyou’reallowedtocontributetoaRothIRAorwhetheryoucancontributeatall.Asof2013theupperincomelimittoqualifyforafullcontributionis$112,000forsinglefilersand$178,000forjointfilers.Ifyou’rerunningupagainsttheselimits,onewayyoucanreduceyourgrossincomeis

tomakecontributionstoyour401(k)plan.

RothConversionsConvertingatraditional

IRAor401(k)toaRothIRAhassignificanttaxconsequences.Sincesuchmoneyhasneverbeentaxed,incometaxesareowedontheentireconversionamount.Thetaxbillforsuchaconversionshouldideallybepaidnotoutofthe401(k)or

IRAitself,butratheroutofnon-IRAfundstoavoidreducingyourinvestedamount(andtoavoidpayinga10%penaltyontheportionofthemoneyusedtopaythetax).

Youdonothavetoconvertyourentireaccountinonefellswoop.Ifyouhave$100,000youwanttoconverttoaRoth,forexample,youcanconvert$10,000eachyearfortenyears,thus

spreadingyourtaxbilloveralongertimeperiod.TherearenoincomelimitsforconvertingtoaRoth,whichgiveshighearnerswhootherwisemightnotqualifytocontributetoaRothabackdoorintoaRoth.

SettingUpaRothAccountYoucansetupaRoth

IRAaccountwithanymajor

investmentfirm(Vanguard,Fidelity,CharlesSchwab,etc.).Youcannotopena“jointIRA”account;eachIRAneedstobeopenedinthenameofanindividualperson.Thatmeansyou’llhavetosetupaseparateaccountforyourselfandoneforyourspouseifyou’remarried.Thistendstoresultinsomeinevitableduplicationoffundswithinyouroverallportfolio.Whileyoucould

choosetoowndifferentfundswithineachaccount,it’susuallyeasiesttohavethetwoaccountsmirroroneanother.

Inourowncaseweactuallyhavefourdifferenttypesofaccounts:aRothIRAinmyname,aRothIRAinRobin’sname,a401(k)inmyname,andajointtaxableaccountinbothournames.Thisjustgoestoshowthatevenwhenyoutrytokeep

thingssimple,somecomplexityisunavoidablewhenyouinvest.

SynergyBetween401(k)sandRothIRAsWelikethesynergythat

comesfrominvestinginbotha401(k)andaRothIRA.Theyaretheyinandyangoftheinvestingworld.The401(k)givesyoumatching

funds,tax-deferredgrowth,andcurrenttaxdeductions,whiletheRothIRAgivesyouentirelytax-freewithdrawalsandnominimumrequireddistributionsatage70½.Thetwoworkwelltogetheranddon’tinterferewitheachotherthewaya401(k)andatraditionalIRAsometimescan,asdiscussedbelow.

TraditionalIRAsandOtherOptions

AtraditionalIRAfunctionssimilarlytoa401(k)butwithoutthematchingfundaspect.Investmentearningsgrowtax-deferred,andinmostcasesyoucandeductyourcontributionsfromcurrent

taxes.Contributionlimitsin2013are$5,500perindividual,plusanother$1,000ifyou’reoverage50.Theusualagelimitof59½appliesbeforeyoucanwithdrawmoneywithoutpenalty.

TraditionalIRARestrictionsThereasonwe’reless

enthusiasticabouttraditional

IRAsisthattheyhavemorerestrictionsonthembothintermsoftaxdeductioneligibilityinthepresentandwithdrawalsinthefuture.Forinstance,youcangenerallydeductcontributionsfortaxpurposes–butnotalways.Supposeyouandyourspousefilejointlyandarebothcoveredbyaretirementplanatwork.Iftogetheryouearnmorethan$95,000(asof2013),thenyoucannotfully

deductyourtraditionalIRAcontributions.Beyond$115,000youcannotdeductthematall.Thisistheconflictwereferredtoabovewhenwesaida401(k)andtraditionalIRAcansometimesinterferewithoneanother.

Ifonlyoneofyouiscoveredbyaretirementplanatwork,thelimitsarehigherbuttheystillexist.Yourdeductionbeginstophaseout

beyond$178,000,andnodeductionisallowedbeyond$188,000.Yourearningsstillgrowtax-deferredwithintheIRAaccount,butyouhavetopaytaxesupfrontoncontributionamounts,whicheliminatesoneoftheincentivesforinvestinginatraditionalIRAinthefirstplace.

TraditionalIRAsalsorequireyoutobeginmakingrequiredminimum

distributionsatage70½.Ifyoudon’tmakethem,youautomaticallylose50%ofthemandatoryyearlyamounttotheIRS.

WhenTraditionalIRAsStillMakeSenseTraditionalIRAsarestill

worthconsideringundercertaincircumstances.Ifyourcurrenttaxbracketisvery

high,forinstance,andyouexpecttobeinamuchlowertaxbracketonceyouretire,theremightbegoodcausetoconsiderinvestinginatraditionalIRAinordertoloweryourcurrentincometaxes.Also,ifneitheryounoryourspousearecoveredbyaretirementplanatwork,oryouclearlywon’tbebumpingupagainsttheincomelimitsanytimesoon,thentraditionalIRAsbecome

moreattractive.Atsomepoint,decisionsabouthowbesttoallocateyourmoneycomedowntoweighingthespecificsofyourownpersonaltaxsituation.

OtherEmployment-SpecificAccountsWhilewewon’tgointo

detailhere,thereareotherkindsoftax-advantagedaccountsthatfocuson

specificemploymentsituations.–403(b)plansofferpublicschoolteachersandnon-profitemployeesessentiallythesamebenefitsas401(k)plansintheprivatesector.–SEPIRAsbenefittheself-employed,particularlybusinessownerswithoutemployees.Theyoffertax-deferredgrowthandvery

highcontributionlimits($51,000in2013)whichare100%taxdeductible.–SIMPLEIRAsletsmallbusinessownerssetuplow-cost,easy-to-manageretirementplansfortheiremployeesthatincludematchingfundsandtax-deferredgrowth.–ThriftSavingsPlans(TSPs)are401(k)-likeplansforfederal

employeesandmembersofthemilitary.

Tax-AdvantagedEducationalAccountsManyparentsfacethe

unenviabletaskofsavingatthesametimeforboththeirownretirementandtheirchildren’shighereducation.Tax-advantagededucationalaccountsmakethetaskalittle

easier.Perhapsthemostpopulartypeofaccountisa529plan,whichcanbeusedtocovertuition,roomandboard,andotherexpensesataccreditedinstitutions.Moneycanbewithdrawntax-freefromtheseaccountstopayforqualifiededucationalexpenses.Studentloansandstudentloaninterestarenotcovered.Ifadistributionisn’tforaqualifiededucationalexpense,thentheusual

incometaxand10%penaltyapply.

Eachstateadministersitsown529plans,andwhileyoucaninvestinonefromoutofstate,it’susuallybesttoselectonefromyourownstatesoyoucanqualifyforstateincometaxdeductionsandhavethepotentialtoreceivematchinggrantsandscholarshipsiftheyareoffered.Since529plansarecountedaspartofyourassets,

theyhavelittleimpactonyourchild’seligibilityforfinancialaidwithinyourownstateofresidence.

Unfortunatelyyoudon’tgettodeduct529plancontributionsfromyourfederalincometaxes,butyourmoneydoesgrowtax-deferred.Youmaintaincontroloftheaccountandcaneventransferanyunusedamountstootherqualifiedmembersofyourfamily

(includingyourselfandyourspouse).Youdon’tmakeyourowninvestmentselectionswitha529plan;insteadyouenrollinaparticularplanwhichisprofessionallymanaged.

Chapter13.LiveBelowYourMeans“Mindthegap.”WhenwevisitedLondon

forthefirsttimeasyoungadultsbarelyoutofcollege,westoodatHeathrowAirportwaitingforthemetrotoarrive.

Asitapproachedandthedoorsopened,adeepBritishvoiceintonedovertheloudspeaker,“Mindthegap.Mindthegap.”Thevoicewassimplyremindingustowatchourstepandnotfallintothespacebetweentheplatformandthetrainasweboarded,butthephrasesoundedoddenoughtoourAmericanearsthatitstuckwithus.Overtimewecametoapplyittoourfinancialsituation:welearned

tomindthegapbetweenmakingandspendingaswesavedforthefuture.

Learningtolivebelowyourmeansisabsolutelycrucialifyouwanttoretireearlyandstayretired.Toachievefinancialindependenceyouneedtobuildcapital,andtheonlywaytodothat(withouthelpfromanoutsidesource)istomakemorethanyouspend.Thegapbetweenmakingandspending

hastobebigenoughthatyoucanputasignificantamountofmoneyasideonamonthlybasis,yearinandyearout,forthesolepurposeofinvesting.

Onewaytoincreasethemake-spendgapistoincreaseyoursalary–whichiswhywesuggestyouinvestinyourselffirst.Theotheristoalteryourspendinghabitsuntilyouarelivingwellbelowyourmeans.Toachievefinancialindependence,mostpeople

needtotackletheproblemfrombothends–makingmoreandspendingless.Thistwo-prongedapproachgivesyouthebestchanceofwideningthegapdramaticallyenoughtomakearealdifference.

We’vealreadydiscussedtheimportanceofinvestinginyourselffirst,solet’smoveontotheothersideoftheequation,spendingless.

TrackingYourExpenses

Thebestwaytoreducespendingistobecomeaconsciousconsumer.Considertheprice,lookatittwice,anddecideifit’sreallyworthittoyougivenhowhardyouhavetoworkforyourmoney.Makethisonesimpleadjustment–becomeconsciousofeachdollaryouspend–anditcan

makeaworldofdifferenceinhelpingyoureachyourearlyretirementgoals.

ConsumerBootCampThemosteffectivewaywe

knowtobecomeamoreconsciousconsumeristoputyourselfthroughtheequivalentofconsumerbootcampandcarefullytrackyourexpensesdowntothepenny

foraperiodoftime.Wetrackedourexpenses

downtothepennyforonewholeyearandfounditburdensome,tobehonest,butalsoenlightening.Wewouldsuggestyoutrackyourexpensesforaperiodofthreemonths.Theexercisewillmakeyoufocuslikeneverbeforeonwhereyourmoneyisgoing.Theresultsmaysurpriseyou,andyoumaywellcomeawaywithaclearer

understandingofwhereyouneedtocutspendingthemost.

Duringbootcampyouraimistolookforpatternsinspending.Suchpatternsareeasiesttoidentifyifyoucategorizetheinformationyou’vecollectedattheendofeachmonth.Wesuggestyougroupyourexpensesintothefollowingmaincategories:food,shelter,utilities,clothing,transportation,health,recreation,and

miscellaneous.Undereachcategoryyoucancreatesubcategoriesasneeded.Forexample,underfoodyoumighthavesubcategoriesforgroceries,diningout,andtakeout.Letyourownspendinghabitsdictateyoursubcategories.

Youroverallgoalistoidentifyblindspotsinyourspendinghabitswherecutscanbemade.Forexample,youmightdiscoveryou’re

spendingmuchmorethanyourealizedondiningout,oronclothing,oronsomeformofentertainment,oronfancycoffeedrinksforthatmatter.Ifyoufindyourselfsaying,“IneverknewIspentthatmuchonsuch-and-such,”you’veidentifiedablindspotwhereyoumightbeabletomakesomecuts.

Duringourownbootcampexperience,wehadseveral“aha”momentsinthe

firstfewmonths.Wemadecutsinthoseareas,butafterthatwecouldn’tfindanywhereelseobvioustoreducespending.Wehadtrimmedawaymostofthefatbythen.Wantingtofinishwhatwehadstarted,wecontinuedwiththeexercisefortherestoftheyearbutfounditlesshelpfulafterthat.

Infact,theexerciseeventuallybecamecounterproductiveforus.Our

spendinghabitsactuallybecametooconstrained,ifsuchathingispossible.Sincewe’realreadyfrugalbynature,wereallydidn’tneedanyextraencouragementtocutbackonspendingevenmore.Ifyou’reonthefrugalsidetoo,rememberit’simportanttokeepasenseofbalance.Savingupforearlyretirementdemandsself-discipline,certainly,butitshouldnotdemandself-denialtothe

pointwhereyoufeellikeyou’remissingoutonthings.

Intheend,howlongyoucontinuetheexerciseoftrackingyourexpendituresdependsonyourownpersonality.Somepeoplekeepabudgetforlifeandswearbyit,whileothersdoitforaperiodoftimethendecidetomoveon.Ifyouspendmoneyfreely,orifyoufrequentlyfindyourselfwonderingwhereithasallgone,youmaywant

tocontinuetrackingyourexpensesforalongerperiodoftime.

ThebookYourMoneyorYourLifebyVickiRobinandJoeDominguezisonewewouldrecommendforitsdescriptionofhowtobecomeaconsciousconsumer,trackyourexpenses,andreininspending.Theauthorsclearlydescribehowtotrackexpensesdowntothepennyanddevelopamonthlybudget

basedontheinformationyoucollect.Thebookintroducesaconceptthatwasnewtous:thatmoneyissomethingwetradeour“lifeenergy”for,soweshouldmakecertainwearegettingafairtradeforit.

TrackingandBudgetingSoftwareTrackingandcategorizing

expensesbyhandcanbelaborious,soyoumaywantto

useasoftwareprogramtosimplifytheprocess.PersonalfinancewebsiteslikeMint(mint.com)arefreetouseandmakeiteasytomanageyourmoneyonline.MintcomesrecommendedbyMoneyMagazineandTheNewYorkTimes,whichdubsit“yourfinancialsituationinthepalmofyourhand.”

ThefirststeptousingMintisalsothemostintimidating:youhavetoadd

yourbank,creditcard,homeloan,andinvestmentaccountstothewebsitesoMintcansecurelypullintheinformationandorganizeitforyou.Fromthatpointforwardyoucanseeallyouraccountsinoneplace,anywhereandanytime,includingonyourmobilephone.Mintusesbank-levelsecurity,soifyoucangetpasttheconcernsofhackers,thentherearealotofbenefits

tousinganonlineprogramlikethisthatcanlinkallyourfinancialaccountstogetherandgiveyouthebigpictureinrealtime.Ifyou’reuncomfortablewiththeonlineoption,youcanuseasimilarstand-aloneprogramlikeQuicken.

BothMintandQuickenletyouorganizeallyouraccountsinoneplace,trackyourspending,andcreateapersonalizedbudget.Theyuse

simplepiechartsandgraphstoshowyouwhereyourmoneyisbeingspenteachmonth.Expensesareautomaticallycategorized–soyoucankeeptracknotonlyofhowmuchyou’respendingbutwhere.Programslikethesetakealotofthehassleoutoftrackingandbudgetingandaredefinitelyworthalook.

LivingSimplyThereisanattractionto

notover-buying,tonotoverdoingthings,tokeepingthingssimple.Beingunencumberedbytoomanypossessionscanactuallybeareliefbothforthepocketbookandforthemind.Spendinglessdoesn’thavetoequatewithbeinglesshappy–infact,itcanbejustthe

opposite.Livingsimplymeans

adoptinganewmindset.ItmeanslettinggoofconcernsaboutkeepingupwiththeJonesesandfocusinginsteadonyourownwell-being,financialandotherwise.Asyoubecomemoremotivatedaboutachievingfinancialindependence,you’llleaveoldwaysofthinkingbehindandadoptnewonesthataremoresuitedtoachievingyour

goal.Doingwhatsomany

othersaredoing–namely,spendingtillthey’redeepindebtorbarelybreakingeven–willnevergetyouwhereyouwanttogo,sowhynottakeadifferenttack?Learntothinkoutsidetheboxwhenitcomestoyourownfinancialwell-being.Openyoureyestowhatlifecanbelikeifyouliveitonyourowntermsandrejectmindlessconsumerism.

Moreandmorepeoplearecomingtorealizethattheendlesspursuitofstuffdoesnotmakethemhappy,andinfactcluttersthepathtohappiness.

We’renotadvocatingyoulivelikeamonkandneverpartwithapenny,butwedosuggestyoukeepasenseofbalancewhenitcomestospending.Findingthatrightbalancehastodowithdefiningwhatisgenuinely

importanttoyouversuswhatyoucandowithoutatminimalsacrificetoyourself.

KidsandSpendingExercisingfinancial

restraintbecomesevenmorechallengingwhenchildrenareinvolved.It’sawfullyhardtodenyachildsomethingheorshereallywants.Wewanttobegenerousanddenythemnothing.Wesaytoourselves,“Whyshouldtheyhavetogo

without?It’sonethingformetodenymyselfsomething,butwhoamItodenythem?”ItaddsawholenewtwisttokeepingupwiththeJoneseswhenit’syourkidswhoareseeingwhattheJoneses’kidshaveandwantthesame.

Butyou’renotdoingthemanyfavorsifyou’reteachingthembyexamplethatit’sokaytooverspendandlivebeyondyourmeans.Frankly,it’snothealthyfor

anyonetolivebeyondtheirmeansforaprolongedperiodoftime.It’sstressfulandeatsawayatyoursenseofhappinessandself-esteem.Thestressyoufeelaboutitinevitablyrubsoffonyourkidstoo.Wouldn’titbebettertoteachthembyexamplewhatittakestoactuallylivewithinyourmeansasafamily?Thatacertainamountofsacrificeinpursuitofalong-termgoal–whetherit

beretirementorcollegeeducation–isagoodthing?

Bysettinganexampleforyourkidsandinvestingforthefuture,you’reteachingthemanimportantlifelesson.Afterall,itwon’tbelongbeforeit’stheirturntomakeasimilarjourneytowardsfinancialindependence.Thatjourneywillbeeasieriftheyhaveanexampletolookuptoandcansay,“Myparentsdidit.Iftheycoulddoit,socan

I.”

RetiringEarlyonLessAdoptingasimpler

lifestylemakesiteasiertoretireearlyforonesimplereason:yournesteggcanbesmaller.Ifyoulearntoliveon$40,000peryear,thenyouonlyneedanesteggofabout$1million.Anincomeof$80,000peryearwillrequirea

nesteggofabout$2million.Ofcourseittakeslongertosave$2millionthanitdoes$1million,soyourretirementwillnecessarilycomelaterthanitwouldhaveotherwise.

Bysimplifyingyourneeds,yousimplifythewholeequationofyourlife.Ifyourcurrentneedsareless,youspendless,whichletsyousavemore.Andifyourneedsinretirementareless,thenyoudon’thavetosaveas

muchasyouwouldhaveotherwise.Lesseningbothyourcurrentneedsandyourfutureneedsmakesiteasiertobalancethemake-spendequationofyourlifeandfreesyoufromhavingtoworkanylongerthanyouhaveto.

Whereyouliveisalsoanimportantfactorinbeingabletoretireearlyonless.Ifyouresideinanexpensivecity,youmaywanttoconsidermovingtoalessexpensive

locationonceyouretire.Otherwise,you’llneedtocompensateforthehighercostoflivingwhereyouresidebysavingupalargernestegg.Retiringearlyonlessismuchmoredifficultifthecostoflivingisdoublewhatitwouldbeinalessexpensivepartofthecountry.

ReducingSpending

Everydaywemakealotoflittledecisionsabouthowtospendourmoney,andthosedecisionsaddup.Whentakentogether,theyplayabigroleindeterminingouroverallfinancialhealthandwell-being.Learningtopayattentiontothesmallthingsthatescapemostpeople’s

noticehelpsusreininspendingandtakecontrolofourpersonalfinances.

Wheneveryouwalkintoastoreorshoponline,ithelpstorememberyou’reonthewrongsideofthemake-spendequation.You’reinenemyterritory,sotospeak.Ofcourseweallneedtoshop,butthere’sadifferencebetweenshoppingoutofnecessityandshoppingforpleasure.Shoppingtillyoudropisa

funnyexpression,butit’salsoalittledepressingwhenyouconsiderhowmanypeopletakeitliterally.It’scertainlynotagoodfitfortheaspiringearlyretiree.

Exercisingalittleself-restraintshouldnotbeconsideredabadthing,butnowadaysitissometimesseenasanindicationofnotvaluingyourselfhighlyenoughtogetwhatyouproperlydeserve.Thewords

“Ideserveit”havebecomethemantraforthosewhowouldjustifybuyingwhatevertheywantwithoutregardfortheirfinancialwell-being.It’sashamethosesamewordsaren’tusedmoreoftentodescribewhyweshouldbuylessinordertoachievefinancialindependencesooner.

Let’stakealookatafewareasofourlivesinwhichweallregularlyspendmoneyand

considersomestrategiesthatcanbeemployedtoreducespendingandkeepitundercontrol.

Food,GloriousFoodWeadmittobeingfoodies

whoenjoyamemorabledinneroutjustasmuchasthenextperson.It’soneofthegreatpleasuresoflifeandshouldn’tbemissed.Sowearen’tsuggestingyougocoldturkeyandonlyeatcold

turkey!Butwearesuggestingyoulimitdiningoutduringyourprimaryinvestingyearstoonceaweekorspecialoccasions.

Let’sfaceit,restaurantdiningcanbeexpensive.Bythetimeyoufigureinthecostofthefood,drinks,taxes,andtip,itcantakequiteachunkoutofyourbudget,especiallyifyou’rediningoutmultipletimesperweek.Thesimplestsolutionistolimityour

numberofoutings.Whenyoudodineout,

somestrategiesforkeepingcostsdownmightincludesplittingagenerouslysizedmeal,bringingleftovershomeforasecondmeal,ortakingadvantageofcouponoffersandhappyhourspecials.Orderingtakeoutcanalsobeagoodin-betweenoption.Sometimeswewouldbehard-pressedtocookamealforanythinglessthanwepayto

splitadelicioustakeoutdinner.

Thatsaid,buyingyourownfoodatthesupermarketandcookingitathomeisusuallythemosteconomicalwaytogo.It’swhatwerecommendasthenormwhenyouarein“fullsavemode”anddoingeverythinginyourpowertokeepcostsdown.Theeconomicsbecomeevenmorecompellingifyou’reafamily.

Provenstrategiesforspendinglesswhenyougogroceryshoppingincludeclippingcoupons,takingadvantageofin-storespecials,buyinginbulk,checkingoutthebottomshelveswheresupermarketstendtoputtheirlowest-priceditems,andbuyinggenericinsteadofbrand-nameproducts.Wholebooksarededicatedtothesubjectofshoppingforgrocerieseconomically,sowe

won’tgointofurtherdetailhere.

Onlyyoucandecideifapremiumgrocerystoreisworththeextraexpense,butwedosuggestyoumakesuchdecisionswithatleastoneeyeoncost.

It’salsowisetolimitimpulsepurchasesatthegrocerystore.IknowofwhatIspeakinthisregard.Ioncecamehomewithashoppingcart’sworthofnewtaste

sensations–andasensationallyhighreceipttomatch.IcametorealizeI’dbeenthinkingofsupermarketsascheapbydefinitionbecausetheydidn’tinvolvediningout.Butsupermarketscanbeexpensivetoo,andyoucan’tjustshoponauto-pilotwithnoregardforprices.

Youmayhavesimilarblindspotsinyourownspendinghabitsthatneedto

bereinedin.Ifso,identifythemandcomeupwithastrategyfordealingwiththem.Myownsolutioninvolvedlearningtoshopwithalist,limitingmyselftooneortwoitemsoff-listeachtrip,andshoppingwhenpossibleonafullstomach.

ClothingandtheJoysofMadMoneyIfyoulovetoshopfor

newclothingandknowyou’respendingmoreonitthanyoushould,tryreininginyourspendingbysettingamonthlyclothingbudgetandkeepingtoit.Thismaybeoneareainwhichyouandyourpartnerhavedifferingopinionsaboutwhatisasensibleamounttospendeachmonth.Sitdowntogetherandseeifyoucancometoanagreementaboutwhat’sreasonablegivenyouroverallbudget.Yourclothing

budgetandyourpartner’smaydifferinamount,butthat’sokayaslongasthetotalisacceptabletobothofyou.

Onestrategythatworkswellforusistokeepasmallstashofpersonalmoneytotheside.Thisisourmadmoneythatwecanuseanywaywewantwithoutfeelingguiltyorfeelinglikewehavetojustifyourpurchasestoeachother.(Notthatwereallyhaveto,butit’sapsychologicalthing.)

Robinusesherpersonalmoneytobuy“unnecessary”clothing,andIuseminetobuy“unnecessary”videogames.It’sasimplethingthatkeepsusbothhappyanddoesn’tbreakthebank.

Thankfullyyoucanreturnimpulseclothingpurchasesifyourealizeyou’vegoneoverboard,butanothertackistowalkawayfromanitemifyou’reunsureaboutbuyingit.Ifit’sstillonyourmindlater

on,thenyouknowit’ssomethingyoureallywant.Thisgivesyoutimetomullthingsoverbeforemakingapurchase.Occasionallyyoumaycometotheconclusiontheitemistoosimilartosomethingyoualreadyownorissomethingyouwouldn’twearoftenenoughtogetyourmoney’sworth.Thisiswhatbeingaconsciousconsumerisallabout:thinkingaboutyourpurchasesbeforemaking

them.Anotherstrategyistoshop

forclothingatsecondhandstores.Robinenjoysthetreasurehuntaspectoffindingclothingshelikesatsignificantlylowerpricesthanshewouldpayelsewhere.Thegentlyuseditemsatthesestorescanbeofsurprisinglygoodquality.Youcanalsosavetimeandmoneybystickingwithclassiclooksinsteadofchasingtrendsthat

goinandoutoffashionandrequirefrequentreplacement.

Whenitcomestojewelryandaccessories,havingafewitemsyoutreasure–andactuallywear–isbetterthanhavingloadsofthemclutteringupyourjewelryboxesanddrawers.Forsimplicity’ssakealone,keepingthesepurchasestoaminimummakessense.

Entertainment:

ProvingGroundforDelayedGratificationDelayedgratificationis

theabilitytowaittoobtainsomethingyoureallywant.Ofcoursethebiggestformofdelayedgratificationisretirementitself,whereyouworkhardforaperiodofyearsinordertobuytimelateronwithouthavingto

work.Thissameprincipalappliestomanysmallerthingsinlife.Forinstance,ifyoucanbringyourselftowaittoseeamoviethathasjustbeenreleased,youcanseeitonDVDorstreamingvideoinjustafewmonths’timeatafractionoftheprice.

We’renotsayingyoushouldalwaysdelaygratification.Sometimesyouwanttoseesomethingonthebigscreen,andthat’sthat.

Butyoushouldpickandchoosecarefullywhenyouknowyou’respendingmoreonsomethingjustforthepleasureofseeingitnow.Thequalityofthemoviecertainlyisn’tgoingtodeteriorateinthemeantime.

Consideralmostanyelectronicdevicecurrentlyonthemarket.Waitsixmonthsandthere’sagoodchanceitwillhavecomedowninprice,sometimes

dramatically.Somethingnewerandbetterwillhavecomealongtoreplaceit.Butwhyshouldyoubuythelatestversionthathasafewextrabellsandwhistleswhen,justafewmonthsago,youwouldhavebeenperfectlyhappywiththepreviousversionwhichisnowonsaleformuchless?Advertiserswilltrytosellyouontheideathatthenewestversionisthemostamazingthingsincesliced

bread,butyoushouldmakeyourowndecision.

Beonthelookoutforlessexpensivewaystodothesamething.Considerbuyingpaperbackbooksatausedbookstoreinsteadofbuyingthemnewinhardcover.Visitthelibraryandcheckoutbooks,audiobooks,DVDs,CDs,andmagazinesforfree.Readclassicsinthepublicdomainatnocostonelectronicdevices.Project

Gutenberg(gutenberg.org)offersmorethan36,000freeeBooksthatcanbedownloadedontoanyportabledeviceorPC.

Keepingyourselfentertainedcanbesurprisinglyaffordablethesedays.WithonelaptoporiPhoneyoucancarryweeks’ormonths’worthofentertainmentwithyou.Thetruthis,somuchfreeentertainmentisavailable

online,youcouldprobablyentertainyourselfforalifetimewithasimpleinternetconnectionandnotmuchelse.Youcanalsoeducateyourselfonlineonjustaboutanysubjectunderthesunatnocostwhatsoever.

RecurringExpenses:TheLittleThingsAddUpWe’vesuggestedliving

belowyourmeansrequiresanewmindsetthatinvolvesaskingyourselfonaregularbasisifyou’regettinggoodvalueforyourmoney.Itmeansbeingcognizantofthefactthatalotofseeminglylittleexpensescanadduptoalotovertheyears.Thisisespeciallytruewhenitcomestorecurringexpenses,whichbytheirverydefinitionarepaidmonthinandmonthout.

Withthisinmind,we

recommendyoutakeasecondlookatyourphone,internet,cable,andotherrecurringmonthlybillsandconsiderifthereareanywaysyoumightreducespendingwithoutcausingyourselftoomuchgrief.Ifyou’repayingforservicesyourarelyuse,orforduplicativeservices(e.g.,landlinesandmobileservices),thinkaboutwhethertheremightbealessexpensivewaytogo.

Ifyourarelyuseyourcellphone,forexample,youmightconsideraprepaidcellphoneorano-contract“payasyougo”phoneinsteadofpayingamonthlyrate.Wefoundwecouldsavemoneybyhavingnolandlineandonlycarryingasinglecellphonewithusmostofthetime.Robinalsokeepsabackupcellphone(TracFone)foremergenciesandoccasionaluse.Itoffers

nationwidecoveragewithnobills,nocontracts,andnodailyormonthlyfees.Instead,wepayapproximately$100peryearforthelowestnumberofminutesavailableatthemostaffordableprice.

AnotheroptionwhenitcomestophoneserviceisSkype,whichletsyoumakecallsfromyourcomputertootherpeople’sphonesallaroundtheworldforaslittle

astwocentsperminute.WeuseSkypeheavilywhentravelingoverseas.We’vealsocometouseitoccasionallyathome.Ifweknowwe’regettingclosetousingupourfree“anytime”minutesforagivenmonthonourVerizoncellphone,weswitchtousingSkypewhenmakinglengthycallsduringpeakperiods.

Insteadofpayingrightoffthebatforthehighest-priced

premiuminternetconnection,whynottryoutthebasicoptionfirst,thenupgradeifyoufindit’stooslowforyourneeds?Thisisabetterapproachthanalwaysassumingyouneedthemostexpensiveserviceonofferandspringingforitwithouteventryingthelower-costoption.

Ifyou’repayingforextendedcableserviceandyetrarelyventurebeyondthe

majornetworks,you’renotgettinggoodvalueforyourmoney.Considerbasiccable,whichcancostaslittleas$20permonthandmaystillgiveyoumostofthechannelsyouwatch.Ifthere’sasportingeventyoureallywanttoseethatisn’tavailableonthebasicchannels,considergoingtoyourlocalsportsbarandwatchingitforthepriceofabeer.Anothergoodoptionisanindoordigital

antennaliketheLeafHDTVAntenna–whichmightjustallowyoutogetridofcableandsatellitebillsaltogether.

We’renotsuggestingyoueliminateordownsizeservicesyougenuinelyuse,onlytheonesyoudon’tuseenoughtojustifythecost.WepayamonthlyfeeforNetflix,forexample,andconsideritmoneywellspentsincewereallydouseit.Whenwe’reawayonvacationoverseas,

wetemporarilyputaholdonourNetflixmembershipsowe’renotpayingforaservicewecan’tuseduringthatperiodoftime.

Thegoodnewsis,moreandmoreoptionsfordifferentkindsofservicesarebecomingavailableeveryday.Youdon’thavetogowithcableanymoresimplybecausethere’snootherchoice.Takeadvantageofthebountyofoptionsoutthere,

customizingyourchoicestoyourlifestyletogetthemostbangforyourbuck.

Chapter14.KeepHomeandCarExpensesLow

DuringmyearlyworkingyearsIwouldsometimes

daydreamaboutretiringearlyandlivingonayachtintheCaribbean.Nowassoonasyachtsareinvolvedinyourdreamsofthefuture,youknowyou’reintrouble,butinmymind’seyeIcouldseeuslivinghalftheyearintheCaribbeanandtheotherhalfintheRockies.I’mreluctanttoadmitIevenhaveajournalentrywhereIlistmydreamgoalsasfollows:1)toownaloghomeintheRockies,2)to

ownanislandhomeintheCaribbean,3)toownanRVfortoolingaroundNorthAmerica,and4)toownasmallyachtfortoolingaroundtheCaribbean.

You’llnotetheself-restraintinvolvedinonlyrequiringasmallyachttogoalongwithourislandhome–oneoftwohomes,mindyou.IsuspecteventhenIknewIwasbeingatadunrealistic.Icanstillenvisionowningor

rentingeachofthesethingsoneatatime,butcertainlynotallatonce.

Fortunately,overtimewecametosimplifyourdreamsalongwithourlives,orotherwisewewouldhavebeenworkingwellintoouroldage.Wecametorealizethatsimplifyingyourlifegoespartandparcelwithretiringearlyonless.Andabigpartofkeepinglifesimpleiskeepingtwoofyourbiggestexpenses

inlife–homeandvehicles–aslowasreasonablypossible.Makingwisedecisionsinthesetwoareasalonecanmakeabigdifferenceinwhetherornotyoureachyourearlyretirementgoals.

KeepingYourMortgageAffordable

Yourhomecanbecomeoneofyourbestinvestmentsoranalbatrossaroundyourneck,dependingonwhetheryoustaywithinyourmeansorgetintoodeep.Here’ssomehelpinhowtotellthedifference.

The28/36Rule:WhatConventionalWisdomSaysConventionalwisdom

saysyourmortgagepaymentcanbeupto28%ofyourgrossincome,aslongasyourtotaldebtpaymentsdon'texceed36%ofyourincome.Thisissometimescalledthe28/36rule,andit’swhatmortgagelenderstypically

useasaruleofthumbindecidingwhetherornotyouqualifyforaloan.

Supposeyouandyourspousemake$80,000grossperyear.Accordingtothe28/36rule,yourmortgagepaymentshouldnotexceed$1,867permonth($80,000x28%=$22,400÷12=$1,867),andyourmortgagepaymentplusanyotherdebts(creditcards,carpayments,collegeloans,etc.)shouldnot

exceed$2,400permonth($80,000x36%=$28,800÷12=$2,400).Keepinmindthesearenottoexceedamounts.Inessence,theyarethemaximumsmortgagelenderswanttoseeinorderforyoutoqualifyforaloan.

The20/28Rule:AMoreConservativeApproachWerecommendyoukeep

yourhousingcostsconsiderablylowerthanthe28/36ruleallows.Conventionalwisdomassumesyourgoalistolivewithinyourmeans,butsinceyourgoalistolivesubstantiallybelowyourmeans,conventionalwisdomdoesn’tnecessarilyapply.

Werecommend20%ofyourmonthlygrossincomegotowardhousingcostsinsteadof28%.Foracouple

making$80,000peryear,thatwouldworkouttobe$1,333permonthinmortgagepayments.Ideallyyouwouldbedebt-freebeforebuyingyourhome,butifthat’snotfeasible,wewouldsuggestyouuse28%insteadof36%asaguideforthetotalamountofdebtyoushouldcarry.Thatwouldbe$1,867permonthforourhypotheticalcouple.

Thismoreconservative

20/28rulegivesyoumoreofacushionforinvestingforyourfuture.Thelastthingyouwantistobehousepoorifyou’retryingtosaveforearlyretirement.

TheDownsideofStretchingTooFarNow,somewouldargue

youshouldstretchasfarasconceivablypossibletopayforthebiggest,nicesthome

youcanafford.Theysuggestyoursalarywillonlygrowinthefuturesothehousepaymentsthatseemsocumbersometodaywillbecomemoreaffordablelateron.

Whilethereisacertainlogictothis,itputsalotofyoureggsinonebasketandmakesyourhomeaconsiderablepartofyouroverallfinancialportfolio.Asweallknowfromrecent

experience,thereisnoguaranteehousingpriceswillalwaysgoup.Webelieveitstillmakessensetoownyourprimaryhome,butmakingittoobigapartofyouroverallfinancialpicturemeansyoumaynothavesufficientfundsleftovertodootherkindsofinvesting.

Anotherriskofthebuy-the-biggest-home-you-canphilosophyisthatitleavesyounobufferifthingsdon’t

goexactlyasplanned.Itassumesyoursalarieswillalwaysgoup,butwhatifoneofyouisletgofromwork,orstopsworkingtoraiseachild,orhastotakeanextendedleaveofabsenceforhealthreasons?Youdon’twanttostruggletomakeyourmonthlypaymentsbecauseyouboughtmorehousethanyoucouldcomfortablyafford.Sooursuggestionis,buyahomebutbuyanaffordable

onethatiswithinyourmeanstodayandnotsomedistanttimeinthefuture.

Ofcourserealitydon’talwaysmatchupwithwhatwemightallagreeonpaperistheideal.Ourownfirsthomepurchaseisagoodexample.Atthetimewewereearninglessthan$40,000combined.Ourinitialmortgagepaymentwas$936permonth,whichwasrightattheouterlimitofthe28/36rule($40,000x

28%=$11,200÷12=$933).Sowestretchedfinanciallyjustasfaraswecouldinbuyingourownhome.

Butweessentiallydidthingsbackwards–buyingourhomefirst,theninvestinginourselvessoourjobsimprovedandthemonthlymortgagepaymentsbecamelessonerous.Itwouldhavebeenpreferabletohavethebetterjobsfirst,sincemorerobustsalariesmake

everythingaboutowningahomeandinvestingforretirementeasier.

AFineTimetoBuyaHomeMortgageinterestrates

arecurrentlyathistoricallylowvaluations:below3%APRfora15-yearfixed-ratemortgage,andbelow3.5%APRfora30-yearfixed-ratemortgageasofthefirst

quarterof2013.Homeprices,meanwhile,

remainquiteaffordable.Whiletheyhaverecoveredsomewhatsincetherealestatebubbleburstin2007,valuationsarestillattractivecomparedtowhattheywerebefore.Thecombinationofreasonablehomepricesandhistoricallylowmortgageinterestratesmakesitagreattimetoconsiderbuyingahome.

We’renotsuggestingyouspeculateonhomesperse,butifyou’reinthemarketforyourprimaryhomeanywayandhappentofindtheoneofyourdreams,youshouldbeabletobuyitmoreaffordablythanyoucouldhavepriorto2007.

SavingUpforaDownpayment

Somanyfinancialobligationsseemtohitallatoncewhenyou’reyoungandjuststartingout.Youwanttobuyyourfirsthome,educateyourselfforabetterfuture,payoffyourdebts,andstartinvestingearly,butit’shardtodoallofthatatthesametime.Howdoyoudecide

whatcomesfirst?Intermsofprioritizingwe

wouldadviseyouto:1)investinyourselvesfirstsoyoucangetdecent-payingjobsrightfromthestart,2)payoffyourdebts,3)saveforadownpaymentonanaffordablehome,and4)startlivinginyourhomeatthesametimeyoustartinvestinginearnestforretirement.

20%vs.10%

DownpaymentsHowmuchshouldyou

saveupforadownpayment?Theidealis20%–that’swhatlenderswouldprefertosee.But20%ofa$250,000homeis$50,000,andthat’safairchunkofchange.Ifyoucanafforda20%downpayment,thenyougetthebestmortgagetermswiththelowestinterestrate,sothat’sthepercentagewe

wouldrecommend.Ifthat’snotfeasible,see

ifyoucanarrangea10%downpaymentwithyourbank.Thatamountislessdauntingandwillgetyouintoyourhomeinashorterperiodoftime.A10%downpaymentmaybeenoughtoqualifyyouforaloan,assumingyou’redebt-freeotherwiseandhavesolidcreditscores.Keepinmindthatifyoustartwitha10%downpaymentanda

highinterestrate,youcanalwaysrefinancetoalower-ratemortgageonceyourequityreaches20%.

PrivateMortgageInsuranceWithdownpaymentsof

lessthan20%,you’rerequiredtopayformandatorysupplementalinsuranceknownasprivatemortgageinsurance.PMIprotectsyour

lenderagainstnon-paymentshouldyoudefaultonyourloan.Ittypicallyamountsto0.5%oftheloanamount,sofora$250,000mortgagethatwouldamounttoslightlyover$100extrapermonth.Whileit’snofunhavingtopayPMI,it’sarelativelysmallpricetopayforgettingintoyourhomesooner.PMIispayableuntilyoureach20%equityinyourmortgage,thenyoucannotifyyourlendertocancel

it.

LeveragingYourInitialInvestment

Thehugebenefitofhomeownershipisthatyoubuildequityinyourhomewhilegettingtoliveinit.Ifyou’relucky,you’llseethemarketvalueofyourhomeincreaseovertime,whichmeansyourequitywillalsoincrease.

Takeourownsituation.Weboughtourhomein1991forjustover$100,000andsolditin2007forjustunder$300,000.Notonlydidwegettoliveinthehomefor16years,butattheendofthatperiodweownedthehomeoutrightbecausewehadrefinancedfroma30-yeartoa15-yearmortgageandthencompletelypaidthemortgageoff.Wewereabletoleverageasmallinitialinvestment

(i.e.,ourdownpayment)intoasignificantgain.

SmallDownpayment,BigRewardsAleveragedinvestmentis

anyinvestmentmadewiththeuseofborrowedmoney,allowingyoutoincreasethepotentialreturnoftheinvestment.Byfarthemostcommonformofleveragingistheuseofamortgageto

purchaseahome.Let’ssayyouhavea

$100,000condoandyourdownpaymentis20%.That’s5:1leverage(since$20,000isonefifthof$100,000).Ifyourcondoappreciates5%overthecourseoftheyear,thenyou’vejustearned$5,000onyourinitial$20,000investment–a25%return.

Bycomparison,let’ssayyourdownpaymentis10%insteadof20%.That’s10:1

leverage(since$10,000isone-tenthof$100,000).Ifyourcondoappreciatestheexactsame5%,you’vejustearned$5,000onaninitial$10,000investment–a50%return.

That’sleveragingatwork.Justlikeusingaphysicallever,you’vemanagedtoliftupsomethingheavywithlesseffort.Youbenefitfromtheappreciationonthefullvalueofthecondoeventhough

mostofthemoneyusedtobuyitwasnotyoursbutthelender’s.

WhyLeveragingYourHomeMakesSenseWebelieveprimaryhome

ownershipistheoneformofleveragedinvestmentthatreallymakessensefortheaverageinvestor.Leveragingmagnifiesbothgainsand

losses,soyouneedtobecarefulusingitifyoudon’twanttogetburned–forexample,bybuyingonmargininthestockmarket.

However,whenwe’retalkingaboutyourprimaryhome,yourrisksarelowerbecauseyou’relivinginthehomepresumablyforthelongtermandhaveahighstakeinmakingcertainthemonthlypaymentsaremade.Yourrisksarelower,too,ifyou

buyahomewithinyourfinancialcomfortzonetobeginwith.

Owningvs.Renting

Ourhometurnedouttobeoneofourbestinvestments,soperhapswe’reabitbiased,butwethinkhomeownershipmakesgreatsenseforthemajorityofpeoplesavingforearlyretirement.Yourmonthlymortgagepaymentremainsfixed,whichgivesyousomethingyoucanrely

onduringyourinvestingyears,andyourhomeactuallybecomespartofyouroverallinvestmentplan.

Homeownershipisaforcedsavingsplanofsortsthatallowsyoutogrowyourwealthasthepriceofthepropertyappreciates.Intheendyoucansellthehome,downsizetosomethingsmaller,andusetheremainingequitytohelpfundyourretirement.

Theonecautionwehaveisthis:ifyouthinkyoumaymovelocationsovertheshortterm–forjobreasons,say–youmightenduphavingtosellyourhomeinadownmarket.Forthisreasonyoumaywanttowaituntilyou’rereasonablysecureinyourjobbeforebuyingyourhome.

TheProsofRentingRentinggivesyou

increasedflexibilitywithno

long-termcommitments.Youhavelittleornoresponsibilityorexpenseformaintenance,homeimprovements,oryardwork.Youroverallcostscouldconceivablybelowerthanowningahomeifyoumanagetorentcheaplyenough.Andontopofallthat,youavoidtheneedforadownpaymentandamortgagealtogether,thusallowingyoutostartinvestingsooner.

Wecertainlybelieveitis

possibletorentratherthanownandstillretireearly.Ifyoukeeprentalcostsreasonablylowandinvestevenmoremoneythanyouwouldhaveotherwiseinthemarketstomakeupfortheequityyouwon’thavefromowningahome,youcankeepyourlifeultra-simpleandstillretireearly.Dependingonyourlifestyleandwhereyoulive,rentingcouldbetherightanswerforyou.

TheConsofRentingPerhapsthemost

significantdownsideofrentingisthatyoucan’tcontroltherentalprice,whichtendstogoupwithtime.Yourlandlorddetermineswhattocharge,andsometimestheyearlyincreasescanbedramatic.Thesameone-bedroomapartmentwerentedfor$500permonthin1991nowrents

for$1,200permonth–morethandouble.ApartmentsinplaceslikeNewYorkCityandSanFranciscohaveprobablyseengrowthfactorsmuchhigherthandoubleoverthatsamespanofyears.

Bycomparison,thecostsofhomeownershipremainessentiallysteadywithafixed-ratemortgage.Theymaygoupslightlyduetosmallincreasesininsuranceandpropertytaxes,butthe

underlyingmortgagerateitselfremainsfixedthroughout.Thisstabilityisacomfort–somethingyoucancountonduringyourinvestingyears.

Anotherdownsideofrentingisthatintheendyouhavenothingtangibletoshowforalltherentalpaymentsyou’vemadeovertheyears.It’sasifallthatmoneysimplyevaporatedintothinair.Comparethistohome

ownership,whereyoubuildequityasyougoandcantakethatequitywithyouonceyousellyourhome.Whenwesoldourhomein2007,wewereabletoput$200,000intoabondfundandusetheother$100,000tobuyasmallcondo.Downsizingallowedustoincreaseourliquidinvestments,whichwasjustwhatweneededasearlyretireesrelyingonanincomestreamfromthose

investments.Athirddownsideof

rentingisthatyoucan’tmodifyarentalpropertyasyoucanahome.Withrentals,whatyouseeistypicallywhatyouget,frompaintcolorstoappliancestoflooring.Butwithhomesyoucanmakechangesbothtothehomeitselfandtothelanditsitson,whichinturncanincreasethehome’sfinalvalue.

DeductingMortgageInterestAfinaldownsideof

rentingisreallymoreofanupsidetoowning:withahomeyougettodeductmortgageinterestpaymentsfromyouritemizedtaxes,whichyoucan’tdowitharental.It’snowonderthishasbecomethefavoritetaxdeductionformillionsofU.S.homeowners.Ahomeowner

whospends$12,000ininterestpaymentsand$3,000inpropertytaxescandeductall$15,000fromhisincometaxesfortheyear.

Themortgagedeductionbenefitismostnoticeableduringtheearlyyearsofyourloanwhenyou’repayingthemostininterest.Sinceinterestlowerseachyearonanamortizationschedule,onedayyouwillreachacrossoverpointwherethe

standarddeduction($12,200in2013foramarriedcouplefilingjointly)isworthmorethanthemortgageinterestdeduction.

15-Yearvs.30-YearMortgages

Werecommend15-yearmortgagesasaparticularlygoodfitforthosewhohopetoretireearly.You'llsavealotoninterest,andthe15yearsmatchesupnicelywithanearlyretirementgoal.Wethinkit’simportanttohaveyourhomecompletelypaidoffbeforeyouretire,anda

15-yearmortgageletsyouaccomplishthat.

Let’stakealookattwodifferentscenarios,oneinvolvinga15-yearandtheothera30-yearfixed-ratemortgage,togetasenseofthedifferenceincostbetweenthetwo.We’llassumea20%downpaymentona$250,000home,leavingaloanamountof$200,000.(Bytheway,weusedmortgagecalculator.orgtocalculatethefollowingtwo

scenarios.Youmaywanttouseacalculatorlikethistorunyourownscenarios.)

Notethatwehaveassumeda5%fixedinterestrateforbothloans.However,interestratesaretypicallylowerfora15-yearmortgagethantheyarefora30-yearmortgagebecauseoftheshorterloanduration.Thedifferencesbetweenthetwoexampleswouldbeevenmoredramaticifwehadtakenthatintoaccount,butitalsowouldhavemadeit

hardertocompareapplestoapples.

ComparingMonthlyPaymentAmountsLet’slookfirstatthe

monthlypaymentamount.Fora30-yearmortgageyourmonthlypaymentwouldbeabout$1,300,andforthe15-yearmortgageitwouldbeabout$1,800.Foradifferenceofabout$500per

monthyoucancut15yearsoffyourmortgage.

Here’safairquestion:Whatifthedifferencebetweenthetwopaymentsisenoughtoputyououtsidetheidealrangeofthe20/28rulewerecommendedearlier?We’llgiveyouapartialanswerhere,butbesuretoalsoreadthefollowingsectionon“unofficial”15-yearmortgagesforwhatmightbeabetteralternative.

Webelievethebenefitsofdoinga15-yearmortgagearesogreatcomparedtoa30-yearmortgagethatwewouldmakeanexceptionandrecommendyoustretchforthe15-yearmortgageaslongasyourmonthlypaymentsremainedwithinthe28%maximumrequiredbythetraditional28/36rule.Thatstillputsyouwithintheboundsofwhatmortgagelendersacceptasthe

qualifyingrangeforaloan,andintheenditwillgetyoutoyourretirementgoalfaster.

ComparingTotalInterestPaidAsnotedabove,interest

ratesaretypicallylowerfora15-yearmortgagethantheyarefora30-yearmortgage.However,evenwhenyouassumethesame5%rateofinterestforbothmortgages,

notethehugedifferenceintheamountoftotalinterestpaid:approximately$187,000versus$85,000.That’sadifferenceofover$100,000youdon’thavetopayifyougowitha15-yearmortgage.

Forthefirstseveralyearsofa30-yearmortgage,almostallyou’repayingisinterest;you’rehardlymakingadentintheprincipal.Butwitha15-yearmortgageyoumakeanoticeabledentinthe

principalrightfromthebeginning.Thatmeansyourequitygrowsfaster,andyourhomeismoreyourownandlessthebank’s.

Ifyoushouldneedtosellyourhomeearlierthanexpected,yourequitystakewillbegreaterwiththe15-yearmortgage.Youcanusethathigherstaketoputagreaterdownpaymentonyournexthome,keepingyourborrowingcostslower.

ComparingTotalPropertyTaxPaidThetotalpropertytax

paidfora15-yearmortgageishalfwhatitisfora30-yearmortgage,butthisisabitmisleading.Youwouldhavetocontinuepayingpropertytaxesonyourhomeevenafteryoupaidoffthe15-yearmortgage,assumingyoucontinuedtoliveinitafterwards.

Undereitherscenario,ifyouendedupstayinginthehomefor30years,thetotalpropertytaxpaidwouldbethesame.However,ifyousoldthehomeafter15yearsanddownsizedtoasmallerproperty,yourpropertytaxesfromthatpointforwardwouldbecomparablyless.Wepayalotlessinpropertytaxesonour400-square-footcondothanwedidonour1,800square-foothome.

ComparingPMIPaidTheabovecomparison

doesnotincludeprivatemortgageinsurance,butifitdid(i.e.,becauseyourdownpaymentwaslessthan20%,inwhichcasePMIisrequired),thenthetotalPMIpaidfora15-yearloanwouldgenerallybelessthanhalfwhatitisfora30-yearloan.Thereasonisthatyoureach

20%equityinyourmortgagemuchfasterwiththehighermonthlyprincipalpaymentsyou’remakingona15-yearloan,andthusyoucancancelthePMIsooner.

ComparingTotalAmountPaidWhenallissaidanddone,

thetotalamountpaidintheabovecomparisonisabout$480,000fora30-year

mortgageversus$332,000fora15-yearmortgage.That’sadifferenceofnearly$150,000.Wethinkit’sworthanextra$500permonthinmortgagepaymentstosavenearly$150,000,don’tyou?

MatchingYourMortgagetoYourRetirementDateIfyouknowtheexact

retirementdateyou’re

shootingfor,youcanmatchthelengthofyourhomemortgagetothatdate.Forexample,ifyouplantoretirein20years,youcouldconsiderdoinga20-yearmortgage.

Thatsaid,anequallyattractivealternativeistostickwiththe15-yearmortgageevenifyouknowyou’regoingtoretirein20years.Thatwaythelastfiveyearsbeforeyourretirement

arecompletelymortgage-free,allowingyoutosaveupevenmoremoneyduringthoseyears–orspendalittlemorefreelyontravelandfunasyoueasetowardsretirement.

Refinancingtoa15-YearMortgageIfa15-yearmortgageis

notfinanciallyfeasibleforyouatfirst,youcanalwaysrefinancetooneafteryou’ve

livedinyourhomeforaperiodoftime.However,beawarerefinancingcaninvolvesteepfinancecharges.It’snotunusualtopay3%ormoreofyouroutstandingprincipalinrefinancingfees.Thusrefinancingoftendoesn’tmakesenseunlessyou’repayingamuchhigherinterestratethanyouwouldotherwisehavetopay.

Refinancingmadesenseforusbecausewewere

payinganexceptionallyhighinterestrateonourfirstloan,a30-yearFHAmortgagewith10%down.Werefinancedtoa15-yearmortgageonceourequityreachedthe20%mark.Atthatpointwecouldqualifyforaconventionalloanwithbetterinterestrates.WewereabletodropthePMIsincewenowhad20%equity,andwewereabletogetanextra-lowinterestratebecausewewereswitchingtoashorter-

durationmortgage.Intheendwesavednearly$125,000ininterestchargesbyrefinancingtoa15-yearmortgage,andourmonthlypaymentswereonlyslightlyhigherthantheywerebefore.Itwouldhavebeencleanerandcheapertohavestartedwithaconventionalmortgageinthefirstplace,butsometimesyoudowhatyouhavetodotomakeabeginning.

“Unofficial”15-YearMortgages

Iftheinterestrateonyour30-yearmortgageisalreadyacceptablylow,youcanavoidrefinancingchargesbystickingwithyour30-yearmortgagebutunofficiallyturningitintoa15-yearmortgagebypayingdowntheprincipalfaster.

MakingExtraPrincipalPaymentsIfyoumakeextra

paymentstowardstheprincipaleachmonth(oronabiweeklybasis),thatwillhavetheeffectofloweringyouroverallinterestpaymentsandreducingthetermoftheloan.

Forinstance,ifyoupayanextra$100permonthtowardstheprincipalona

$180,000loanat5%interest,your30-yearfixed-ratemortgagebecomesineffecta25-yearmortgage.Anextra$200permonthmakesittheequivalentofa20-yearmortgage.Anextra$450permonthgetsyoutheequivalentofa15-yearmortgagewithouteverhavingtodotheofficialpaperworktomakeitone.

Anaddedbenefitofthisapproachisthatyou’renot

lockedintotheextrapayments.Ifyoushouldfindyourselftemporarilyunemployed,youcouldbackoffonmakingtheextrapaymentsforaperiodoftimeuntilyouwerere-employed.Youthushavelessriskofdefaultingonyourloan.

Theonlydownsideofthisapproachishumannature.Itrequiresagooddealofself-disciplinetokeepmakingthevoluntarypaymentsthrough

thickandthin,yearafteryear.Thatsaid,ifyouaresufficientlymotivatedtoretireearlyandhavethedisciplineittakes,thiscanbeagreatsolution.

Inourowncase,weswitchedtoan“official”15-yearmortgagebecauseofthebetterinterestrateswecouldobtain,butwealsomadeextrapaymentstowardstheprincipalof$100permonth,turningour15-yearmortgage

intosomethingclosertoa13-yearmortgage.Thisletusretireafewyearsearlierthanwecouldhaveotherwisebecauseourmortgagewaspaidoffsooner.

PrepaymentCalculatorsMortgageamortization

calculatorsliketheoneatHSH.comletyourundifferentprincipal

prepaymentscenarios.Justplugdifferentamountsintothe“MonthlyAdditionalPrincipalPrepaymentAmount”boxandhit“Calculate.”Youcanquicklyseetheresultsofmakingdifferentprepayments,includingthetotalinterestyouwillpayandthepayoffdate.Thisallowsyoutotailoryourprepaymentstrategytomatchyourneeds.

StayingPutinYourHome

Manypeopletradeupfromtheirfirsthome,usingitasasteppingstonetoabiggerhome,thentradingupyetagaintoanevenbiggerone.Why,exactly?Whenyouthinkoftheenergyandexpenseinvolvedinpackingandunpacking,remodelingandrefurnishing,repainting

andredecorating,andbuyingthenbuyingagaintosuittheneedsanddimensionsofeachbiggerhome,itmakesyouwonderwhatit’sallfor.

Wesuggestinsteadyoustayputinyourfirsthome.Keepyourlifesimplerandyourneedssmallerbystayinginoneplace.Increaseyourexistinghome’svaluebymakingimprovementstoitinsideandout.Ifyouhavenootherchoicebuttomove

becauseofyourjoborsomeothernecessity,thentrymovingsidewaysandbuyingahomethat’scomparabletotheoneyoualreadyhaveinsteadofupsizing.

Tradingupformoreandmorehomeiscounterproductiveifyou’reseekingearlyretirement.Yourgoalistominimizeyourexpenseswhilemaximizingyoursavings.Keepingyourhousingexpensesaslowas

reasonablypossiblewillletyouachievethatgoalwithmuchlessdifficulty.

Ifyouhavekidsorplanonhavingthem,trytobuyafirsthomebigenoughtoaccommodatethemrightfromthebeginningsoyoudon’thavetomovetoabiggerhomelateron.Ofcoursenoonehasacrystalballandallyoucandoisyourbest.Sometimesparentshavenootherchoicebuttobuya

biggerhomeiftheyenduphavingmorekidsthanexpected.

Ifyoubuyahomethatendsupbeingtoobigforyourneeds,youcanalwaysconsidercreativewaystousethatextraspacetoyourownadvantage.Forexample,whenweboughtourhome,weboughtitwiththeintentionofhavingchildren.Wepurchasedan1,800squarefootbi-levelhome

withthreebedroomsandtwobathsandaschooljustdownthestreet.Butwhenitturnedoutwecouldn’thavekids,wefoundourselveswithalotmorehomethanweneeded.Thebottomfloorofthehomewasjustsittingempty,sowedecidedtoputittogooduseandrentitout.Intheendthatextraspaceturnedouttobeafinancialhelptousaswesavedforearlyretirement.

IsaRenterRightforYou?

Wewereabletorentoutthebottomhalfofourhomefor$550permonth.Thatextra$550eachmonthhelpedoffsetourmortgagecostsduringatimewhenmoneywastightandeverydollarcounted.Infact,itcutourmonthlymortgagepaymentsroughlyinhalf,evenafter

factoringinthetaxesowedontherentalincome.

Ifyou’rewillingtoentertainthepossibilityofhavingarenter,thenconsiderfirsthowyourhomeisconfigured.Doesitallowforafairamountofprivacyforyouandyourrenter?Doesitofferaseparateentrance?Arethereseparatebathroomswithshowers?Canyousetupamini-kitcheninthepartofthehomeyou’llberentingout?

Themoreyoucanminimizetheneedtosharespacewithyourrenter,theeasieritwillbeforallparties.

Ourbi-levelhomeofferedagooddealofprivacybothforusandourrenter,sotheinconveniencewasminorcomparedtothefinancialbenefitsofreceivingamonthlyrentalcheck.Ofcoursewewerediligentaboutqualifyingourrenterbeforeacceptinghimintoourhome

(hewasanolderretiredgentleman),andovertheyearsheendedupbecomingnotjustarenterbutafriend.Weevenbenefitedfromtherelationshipunexpectedlywhenheofferedtowatchourdogforuswhenwewentawayontrips.

Weknowmanypeoplefeelstronglyaboutnotwantingtosharetheirhomewithanyoneelse,andwerecognizethismayormay

notbearightoptionforyou.Ifyou’reuncomfortablewiththethoughtofhavingarenter,perhapsyoucangivesomethoughttootherwaysyoucoulduseanyextraspaceinyourhomethat’sjustsittingempty.Maybeyoucansetupasmallhomebusinessofsomesort,forexample.Letyourcreativejuicesflowwhenconsideringdifferentwaysofbringinginalittleadditionalincomeontopof

yourregularsalaries.Evenalittleextraincomecangoalongwaywhenyou’restrivingmightilytolivebelowyourmeans.

DownsizingWhenYouRetire

Youmaywanttoconsidersellingyourbiggerhomeanddownsizingtoasmallerhomeorcondoonceyouretire.Aswetouchedonearlier,thisallowsyoutotakeaportionoftheequitybuiltupinyourhomeandinvestitinamore

liquidassetsuchasabondfund.

Liquidassetsaremoreusableassetsforearlyretirees.Youcantake$10,000outofabondfundanduseitforlivingexpensesonceyouretire,butyoucan’ttake$10,000outofyourhomeinthesameeasymanner.You’deitherhavetotakeoutahomeequityloan(whichmeansgoingbackintodebt)orrentoutallorapart

ofyourhome(whichcanbeinconvenient)togainaccesstothesame$10,000.Butifyoudownsizeafteryouretire,youcantakewhateverremainsandinvestitinamutualfundofferingbothliquidityandanincomestream.

Oneofthegreatbenefitsofhomeownershipundercurrentlawisthatwhenitcomestimetosellyourprimaryhome,youoweno

taxeswhatsoeveronthefirst$250,000ofcapitalgains(or$500,000forcouples).Thiscanbeagodsendifyou’relookingforsomeextramoneywithwhichtocushionyournesteggonceyouretire.

Ofcourseanotheroptionistobuyasmallerhomeorcondorightfromthestartandstayinitevenafteryouretire.Ifyoudecidetomovetoadifferentlocation,youcouldalwaystradesideways,

buyinganotherhomeorcondoforaboutthesameprice.Thebenefitsofthisapproachare,itkeepsyourhomemortgagetoaminimum(i.e.,youneverboughtmorehomethanyouneeded),yourpropertytaxesarelower,andyourutilitycostsarelowersinceyoursquarefootageisless.

Ifyougothecondoroute,besuretotakeintoconsiderationmonthlyHOA

fees.You’llwanttomakesurethey’reaslowasreasonablypossiblesincetheyaretheequivalentofpayingrenteachmonth.Aterrificdealonacondocanseemlessterrificonceyoufactorinthesefees.

KeepingCarExpensesLow

Untilweretiredin2006,wedrovethesametwocarsfortheentireperiodoftimeduringwhichwesavedforearlyretirement.Tousitjustdidn’tmakesensetopouralotofmoneyintocarswhenweknewtheirvaluewouldonlygodowninsteadofupastheygotolder.Wesawthem

asawaytogetaroundandnotmuchmore.Thatkindofthinkinghelpedusgettoourgoalmorequicklythanwewouldhaveotherwise.

TheRealCostofaNewCarTheaveragepricefora

newcarthesedaysisover$30,000.Ifinsteadofanewcarfor$30,000,youweretobuyausedonefor$10,000,

theremaining$20,000couldfundawholeyear’sworthofinvestingforretirement.Ifyou’reacoupleandeachofyoudecidestobuyausedcarfor$10,000insteadofanewonefor$30,000,that’s$40,000extrathatcouldbeputtowardsretirementsavings.

Nowlet’ssupposeyouhavea20-yearretirementplanandyourgoalistoputaway$20,000peryearon

average.That’s$400,000totalyouneedtoinvest,withtherestofyourportfolio’sgrowthcomingfromcompounding.The$40,000youcouldhavesavedbybuyingtwousedcarsinsteadoftwonewonesrepresentsone-tenthofyourtotalinvestmentamount.

That’stherealcostofanewcar.Youcouldbetradinginthechancetoretireseveralyearsearlier.

Self-FinancingIfyou’rebuyingaused

carfor$10,000insteadofanewonefor$30,000,thepossibilityofself-financingbecomesmuchmorefeasible.Youcouldstartacarfundandsaveupthewholeamountaheadoftime,payingforthecarincashandtherebyavoidingtheneedtopayinterestonacarloan.

Evenifyouonlymanage

tosaveuphalftheamount,aloanof$5,000islessintimidatingtopayback(andpaybackquickly)thanaloanof$10,000ormore.Thelessdebtyouhavehangingoveryouthebetter.

SharingOneCarorGoingCarlessFormostofourworking

yearsweeachhadacarsinceourjobstookusindifferent

directionsandweoftenworkeddifferenthours.Butonceweretired,wesoldthetwocarsandboughtasingleusedonefor$11,000thatwenowshare.Wefindonecarissufficientforourneedsnow.Havingjustonemeansmaintenanceandrepairexpenses,licensingandregistrationfees,andautoinsurancefeesarealllessthantheywouldbeotherwise.

Formanypeopleacarisa

necessityduringtheirworkingyears,butifyoucangetbywithoutoneandrelyonpublictransportinstead,somuchthebetter.WhenIworkedinDenverforanumberofyears,Itookanexpressbusintothecityeachdaynotonlytolowermyexpensesbutalsotoavoidtheheadachesofcitydriving.

Anyonelivinginamajorcitywithasubwaysystemshouldconsiderdoing

withoutacarsimplytoavoidthehighexpenseofparking.Ifyouonlyventureoutofthecityonrareoccasions,considerrentingacarjustwhenyouneedone.Itwouldalmostcertainlybecheaperthanowning.

Ifyou’reacoupleandoneofyouisluckyenoughtobewithinbikingdistanceofwork,thenyoumaybeabletogetbywithonecarinsteadoftwo.Notonlywillyour

costsgodown,butyou’llgetsomegoodexerciseeachday.

BuyingaUsedCarBuyingausedcarisnot

particularlyriskyifyoudoyourhomeworkfirst.Armedwithknowledgeyoucanbecomeaninformedbuyer.WesuggestyoustartwithKellyBlueBook(kbb.com)orEdmunds(edmunds.com),whichcansupplyyouwiththeestimatedpricerangefor

thecaryou’reinterestedinbuying.

Carfax(carfax.com)letsyoucheckonausedcar’svehiclehistory.SimplyentertheVINorthestateandlicenseplatenumbertopulluptherecord.Thecurrentcostis$35foronecar,$45foruptofive,and$50forunlimitedreportswithin30days.

Avehicleinspectionfromalocalmechanicisfrequently

offeredatalowcostasanincentiveforfuturebusiness.It’ssmarttohaveamechaniclookatausedcarfirstbeforeyoubuyit.

UsingCraigslisttoBuyorSellaCarConsiderbuyingor

sellingyourcaronCraigslist(craigslist.com).Thewebsite’sfreeclassifiedsofferaheavilyusedforumfor

buyingandsellingusedcarsandjustabouteverythingelseunderthesun.Wesoldourtwocarsinlessthanaweekafterpostingadsonthesiteandwereabletogetthepricewewanted.WealsofoundourcurrentusedcarviaapostingonCraigslist.Ifyou’reasinglewoman,wewouldrecommendbringingsomeonewithyouwhenbuyingorsellingforsafetyreasons.

Besuretopostqualityphotoswithyourad–itmakesabigdifferenceintermsofyoursuccessrate.Youcanrepostyouradevery48hourstomoveittothetopofthequeue,whichisworthdoingsinceitincreasesyourvisibilitytoprospectivebuyers.

Asasidenote,wealsosoldmostofourfurnitureandbelongingsthroughCraigslistwhenwesoldourhome.

Postingaphonenumberinyouradworksbest;ifyoupostanemailaddressyougetafairamountofspammixedin,butallthephonecallswereceivedweregenuineandfromlocalresidents.

Buyingvs.LeasingWedonotrecommend

leasingacarinsteadofbuyingone.Thelong-termcostofleasingisvirtuallyalwaysmorethanthecostof

buying.Itstandstoreasonwhenyouthinkaboutit.Ifyoupurchaseasinglecaranddriveitforadecadeormore,you’regoingtodobettercost-wisethanifyouleaseseveralcarsoverthatsameperiodoftime.

Mostpeopleweknowwholeasetheircarsturnthemineverytwoorthreeyearssothey’realwaysdrivingwhatamountstoaneworclose-to-newcar.Butthere’sapriceto

bepaidforthatprivilege.Yourarelygetsomethingfornothinginthisworld.

Whatconfusesmanypeople,andunderstandablyso,isthatmonthlyleasepaymentsaretypically30%to60%lessthanregularcarloanpayments.Thisseemslikeagreatdealatfirstglance,butit’sdeceptivebecausemonthlyleasepaymentsneverendaslongasyouareleasingthecar.

Onceyoupayoffaregularcarloan,youownthecaroutright.Otherthanmaintenanceandrepaircosts,youcandrivethecarpayment-freeforyearstocomeforaslongasitremainsroad-worthy.Yourloancostsareeffectivelyspreadoutovertheentireownershipperiodofthevehicle.Thus,eventhougharegularloanpaymentmayseemhigherwhencomparedtoamonthly

leasepayment,it’sactuallymuchlowerwhenyoutakethisintoaccount.

PayingforCarRepairsConsiderrepaircosts

carefullybeforedecidingtotradeinyouroldercarforanewerone.It’struethatrepaircostsarehigherforoldercars,buteveryextrayearyoucansqueezeoutof

yourexistingcarisonemoreyearwithoutmonthlyloanpaymentsorabigcapitalexpendituretobuyanewerone.

Payingahighcarrepairbillcanbepainfulbecauseithitsallatonceandoftenoutoftheblue,butitislesspainfulifyoumentallyspreadthecostoutoveralltheextramonthsyou’llgettodrivethecaronceit’sfixed.

Ofcourse,atsomepoint

thetransmissionmaybloworsomeotherrepaircostmaybesohighthatitnolongermakessensetopourmoremoneyintoacarthathaslittleornovaluelefttoit.Atthatpointit’ssensibletoputitouttopastureandlookforareplacement.KellyBlueBook(kbb.com)canhelpyoudetermineyourcar’scurrentvalueandwhetherornotyoushouldspringforexpensiverepairs.

Chapter15.KeepYourLifePortfolioBalanced

Likeyourinvestmentportfolio,yourlifeportfolioshouldbebalanced.Whetheryourmixoflivingfortoday

andlivingfortomorrowisbalanced50/50,or60/40,or70/30isuptoyou,butahighlyunbalancedportfolioisariskyportfolio.Ifyouonlylivefortodayyou’llbebroketomorrow,andifyouonlylivefortomorrowyou’llbemiserabletoday.Aswithmostthingsinlife,themiddlewayisthebestway.

Sincemostofuscan’tsprintallthewaytoearlyretirement,wehavetopace

ourselvesforthelongrun.Wehavetotakedeepbreathsalongtheway(vacations)andremembertohydrate(havefun).Ifwetrytoruntoofastweriskexhaustingourselvesandgivingup.Slowandsteadywinstherace–andletsusenjoythesceneryalongtheway.

SplurgeonWhatYouEnjoyMost

Ouradviceis,figureoutwhatyoucareaboutmostinlifeandspendmorefreelyinthatarea.Forusthatmeansspendingmoreontravelandlessonmaterialpossessions(otherthancampingequipment).Ifyoufeelyou'redeprivingyourselfofsomethingyoureallylove,

you'llneverbeabletosticktoyourplanoverthelongrun.

Whateveryourpassionis,youshouldn’thavetogiveitupinordertoretireearly.Wechoosetospendourextramoneyontravel,butperhapsthat’snotyourpassion.Ifyoufeelabouttheater,orfoodandwine,orfixingupantiqueautomobilesthewaywedoabouttravel,thenperhapsthatisyour“splurgearea”inlife.Besuretomakealittleextra

roominyourbudgetforit.Youshouldspendmoney

onthethingsthatmattermosttoyou,butyoushouldalsospendlessintheareasthatdon’t.Ifyou’relivingabalancedlife,thenyoushouldbeabletohavefuntodayandsavefortomorrow.It’snotaneither/orproposition.

LiveaLittle!Ifyoudon’talreadyhave

abucketlistofthingsyou’dliketoseeanddobeforeyoudie,wesuggestyoustartone.Pulloutamapandbeginthinkingaboutwhereyou’dliketogo.Addtoitcreativepursuitsyou’dliketotry,experiencesyou’dliketohave,andthingsyou’dliketoaccomplish.Thengetstarted

checkingoffafewofthoseboxeswhileyou’restillfullyemployed.Wesuggestyougivespecialprioritytoactivitiesthatareclosetohome(sinceyoucandothemmoreeasilywhilestillatwork)andadventuresthatarephysicallydemanding.Someofthemostamazingexperiencesinlife–bungeejumping,mountaintreks,walkingsafaris,whitewaterrafting,skydiving,andso

forth–aremosteasilyaccomplishedwhileyou’restillyoungandfit(nottomentionfearless).

Ofcourse,themorefunyouhavealongtheway,themorefityouwillremainandtheyoungeratheartyouwillbe.Westillhopetobehavingadventureseveninourgoldenyears,albeitofamoresubduednature.ThinkrivercruisinginEurope,extendedRVtripsinNorthAmerica,

islandlivingintheSouthPacific,andhousesittinginafewofourfavoriteforeigncountrieslikeItalyandNewZealand.

Nowhere’saquestion:Ifyouweretowaituntilyouwere65–“normal”retirementage–togetstartedonyourbucketlist,howmuchofitdoyourealisticallythinkyou’dgetdone?Probablynotasmuchasyou’dlike,andmaybeonlya

fractionofwhatyouhavelisted.Butifyougetstartednow,youcanmakerealinroadswhileyou’restillatwork,thenkeeprightonacceleratingintoearlyretirementandhaveadecentchanceofdoingratherthanjustdreamingaboutallthewonderfulthingsonyourlist.

Enjoyinglifetothefullestisnotcontradictorywithsavingforthefuture.It’spossibletodobothifyou

balanceworkwithplayandmixinplentyoffunalongtheway.It’snotnecessarytosacrificefunonthealtarofthefuture:it’ssimplynecessarytobalancefunwithfunding.

HaveFaithinYourOwnFuture

It’sundeniablesavingforthefuturetakesfaith.Youhavetohavefaithyou’llstillbealiveand“stillyou”15to20yearsfromnow.Thatlifewillstillbeworthlivingandyou’llstillhaveyourhealth.Thatyourretirementplanwill

actuallyworkasplanned.Thatsavingsmallamountsofmoneyeachmonthreallycanadduptobigrewardslateron.Andthatthemarketswillperformasexpectedoverthelongtermtogetyoutoyourgoal.

That’salotoffaith!It’ssafetosayyouhavetobeanoptimisttoplanadecadeortwoinadvanceforearlyretirement.

Nevertheless,oneofthe

reasonsweliketalkingaboutretirementin15to20yearsisthat,yes,it’salongwayoff,butatleastit’simaginableandworththinkingabout.Talkingaboutsomething15yearsdowntheroadisn’tquitesoelusiveastalkingaboutsomething40yearsdowntheroad.(“Areyoukiddingme?Icouldbedeadin40years!”)Atleasta30-year-oldcanmeasure15yearsasbeingtwohalvesof

hisownlifethusfarandpicturehimselfasnotbeingtooradicallydifferentbythetimehereaches45.Butasktheaverage20-somethingtopicturehimselfatage65andhe’llsimplyshakehishead.Itdoesn’tbearthinkingabout.

Weencourageyoutohaveatleastamustardseedoffaithinyourownfuture.Retiringearlyisnotanimpossibledreambyanymeans.Itisachievableby

normaleverydaypeople,asweourselvescanattest.Ifanyonetriestotellyouyou’remissingoutonlifeandwastingyourtimesavingupforearlyretirement,tellthemtothinkagain.They’remissingoutonlifeiftheydon’tsaveuptomaketheirdreamscometrue.

Chapter16.HealthCareinRetirement

WhatshouldIdoabouthealthcare?ThisisthequestioneveryAmericanwhohaseverthoughtaboutretiringearlywantsananswerto,andupuntilnowithas

beenoneofthehardestanswerstoprovide.Wesayupuntilnowbecausethingsarechangingfast.Newrulesarecomingintoeffectthataremuchmorefavorabletoearlyretirees.Infactthenewregulationsopendoorstohealthcarethatareclosedtothosecurrentlycoveredbyemployeehealthplans.

ByJanuary1,2014,mostprovisionsofthePatientProtectionandAffordable

CareActwillbeinfulleffect,andatthatpointthehealthcareoutlookforearlyretireesonabudgetwillhaveimproveddramatically.Affordablehealthcarewillnolongerbetiedinextricablytoholdingdownafull-timejobwithbenefits.Whatthatmeansforthosestillworkingismoreflexibilityindecidingwhentoretire.Forthosealreadyretired,itmeansamuchbetterdealwhenit

comestopayingpremiumsandreceivingaffordablehealthcarebenefitsinreturn.

Overthepastsixyearsofearlyretirement,weestimatewe’vepaid$23,000inhealthcarepremiumswhilereceivingnomeaningfulhealthcarebenefitsinreturn.Ourexistingcatastrophicpolicy’shighdeductiblelimitsmeanthatineffectwe’vehadtopaythefullcostofeveryofficevisittoevery

doctor,dentist,oroptometrist,everytestorscreeningreceived,everyfillingfilledandtoothcrowned,andeveryprescriptiondrugpurchased.Ourinsuranceprovidesuswithfinancialprotectionmorethantruehealthcare,butsinceoneseriousillnesscouldwipeoutourentiresavings,we’vefeltwehadlittlechoicebuttocoverourselveswithsomekindof

policy,nomatterhowrudimentary.

Needlesstosay,we’vetriedtokeepourhealthcarevisitstoaminimum.It’svirtuallyimpossibletowalkintoadoctor’sordentist’sofficewithoutwalkingoutwithabillfor$300ormore.Weestimatewe’vespent$6,000overthepastsixyearsonmedicalanddentalservices,andofcoursethatnumbercouldhavebeen

dramaticallyhigherifwehadn’tbeeninreasonablygoodhealth.

Butstartingnextyear,forthefirsttimeinsixyears,weexpecttoreceiveactualbenefitsinreturnforthehealthcarepremiumswepay.Perhapsequallyimportantly,wecancountonourpremiumsstayingrelativelystableovertheyearstocome.Ourpremiumswon’tbemuchlowerthantheyarenow,but

ourdeductibleswillbesignificantlylower,andwe’llonlyhavetopayaco-payinsteadoftheentirebillifwemakeavisittothedoctor.We’llalsohavetopaylessoutofpocketifweshouldeverfaceaseriousillness.Inshort,ourhealthcarecoveragewillfeelalotmorelikeitdidbackinthedayswhenwewerecoveredunderouroldemployeehealthcareplansatwork.That’sno

coincidence,sincethenewlegislationisessentiallydesignedtomimicthelevelsofcoverageprovidedundermostemployeehealthcareplans.

KeyAspectsoftheAffordableCareAct

WithoutquestiontheAffordableCareActisagamechangerforearlyretireesonabudget.Practicallyspeaking,itmeansoneofthemainroadblockstoearlyretirement–thelackofaffordablehealthcare–has

finallybeenclearedaway.Here’sasummaryofsomeofthekeybenefitsoftheact:–Guaranteedissue:youcannotbedeniedcoveragebecauseofapreexistingconditionorchargedhigherratesifyouhaveamedicalcondition.–Subsidizedpremiums:monthlypremiumsstayreasonableasyouage(assumingannualincome

fallswithincertainlimits,asdiscussedbelow).–Subsidizedout-of-pocketexpenses:annualexpensesfordeductiblesandcoinsurancestaymanageable(assumingincomefallswithincertainlimits).–Freepreventivehealthservices:freeservicesareofferedforregularbloodpressureandcholesterol

checks,screeningsforcoloncanceranddiabetes,wellwomanexams,andmanyotherpreventivetests.–Healthcareexchanges:asingleonlinemarketplaceforeachstatemakesiteasiertocompareplancostsandbenefits.Theactrequiresinsurers

tospendbetween80%and85%ofeverypremiumdollar

onmedicalcare(asopposedtoadministration,advertising,etc.).Ifinsurersexceedthisthreshold,theyhavetorebateanyexcesstotheircustomers.Thisaspectofthenewlawisalreadyineffect,andthenation'shealthinsurancecompanieshavealreadyrefundedover$1billiontotheircustomers.

Theinformationinthissectionisbasedprimarilyondataprovidedonthe

government’shealthcarewebsite,HealthCare.gov,andtheKaiserFamilyFoundation’sSummaryofNewHealthReformLaw.We’vemadeeveryefforttobeasaccurateaspossibleinourdescriptionofhowthenewregulationsaffectearlyretirees,butanyerrorsarewhollyourownandwecanonlysaywedidourbesttoexplaininastraightforwardfashionarathercomplicated

pieceoflegislation.

GuaranteedIssueUndertheAffordable

CareActalldiscriminationagainstpre-existingconditionsisprohibited.Youcannotbedeniedaffordablecoverageduetoyourhealth,andyourinsurancewillactuallyhavetocoveryoushouldamedicalneedarise,withoutconcernthatsomepaperworkerrormightresult

inacancellationofcoverage.Mostwouldagreethisisasignificantimprovementoverthepreviousstateofaffairs.

AccordingtotheKaiserFamilyFoundation,overone-fifthofpeoplewhoappliedforhealthinsuranceontheirowninthepastgotturneddown,orwerechargedahigherprice,orwereofferedaplanthatexcludedcoveragefortheirpre-existingcondition.Butthedaysof

cherry-pickingonlythehealthiestcustomersarepast.Insurancecompaniescannolongerputannuallimitsonessentialhealthbenefitssuchashospitalstays,norcantheyputalifetimecapontheamountofcaretheyarewillingtocover.

Differencesinpremiumsbasedongenderarealsoprohibited.Genderdiscrimination,somethingthatwasonlyproscribedby

lawinone-fifthofthestates,isnowbannedinallfiftystates.Thatmeanswomenwillnolongerhavetopaypremiumsthatweresometimes50%to100%higherthanmen’s.

FreePreventiveCareAllnewplansmustcover

certainpreventiveserviceswithoutchargingadeductible,co-pay,orcoinsurance.Theseservices

includescreeningsforbloodpressure,cholesterol,diabetes,andHIVaswellasroutinevaccinations,fluandpneumoniashots,mammograms,papsmears,andcolonoscopies.TheofficialgovernmentwebsiteatHealthCare.govprovidesafulllistofpreventivecareservices.

TheactmakesitpossibleforallAmericanstoavailthemselvesofproven

preventivemeasureswithouthavingtothinktwiceaboutwhethertheycanaffordit.Womeninparticulararebeneficiariesofthenewlaw,sinceprivatehealthplansmustnowprovidefreewell-womanvisits,newbabycare,breastfeedingsupplies,contraception,andmanytypesofscreeningsatnocharge.Somespecificsarestillbeingworkedout,buttheoverallintentisclear:to

makeiteasierforwomentogetthebasichealthcareservicestheyneedirrespectiveoftheirfinancialsituation.

RequiredHealthInsuranceVirtuallyallcitizenswill

berequiredtohavebasichealthinsurancebeginningin2014orelsepayafederaltaxpenalty.Theprovisionis

intendedtodrivedownhealthcarecostsbyspreadingtheexpenseofhealthcareoveralargerpoolofpeople,includingyoungerandhealthieradultswhomightotherwisedeclinepurchasinginsurance.Ofcourse,youngeradultswillturnolderthemselvessomedayandwilllikelyrequiremoremedicalcareinthefuture,sowhiletheymightunderstandablygrumbleaboutthenewlaw

overtheshortterm,theystandareasonablechanceofbenefitingfromitoverthelongterm.

Thosewhorefusecoveragewillhavetopayataxpenaltyof$95perindividual,$285perfamily,or1%ofincome(whicheverisgreater)in2014.Thosepenaltyamountsincreaseto$695perindividual,$2,085perfamily,or2.5%ofincome(whicheverisgreater)by

2016.After2016thepenaltyincreasesannuallybasedoncost-of-livingadjustments.Exclusionsapplyforindividualswhomaketoolittlemoneytofileafederaltaxreturn,orwhowouldhavetospendmorethan8%oftheirhouseholdincomeonthecheapestqualifyingplan.

Americanslivingabroadareexemptfromhavingtopurchasehealthinsuranceorpayanyassociatedpenalties.

However,thedefinitionoflivingabroadappearstobefairlystrict.Youmustbeabonafideresidentofaforeigncountryinordertooptout.Therulesseemtosuggestyoumustbe“anindividualwhosetaxhomeisinaforeigncountry,”andyoumustresideinaforeigncountryorcountriesforatleast330fulldaysoutoftheyearinordertobeexempt.Clarificationsmayeventuallypointtoaless

restrictiveinterpretation,butfornowitappearsthatsimplytravelinginforeigncountriesforextendedperiodsoftime(i.e.,sixmonthsormore)isnotenoughinandofitselftoexemptyoufromhavingtoeitherpayforbasichealthinsuranceorelsepayapenalty.

HowPremiumsandOut-of-PocketLimitsAreDetermined

Nowwegetintothenitty-grittyofhowyourhealthcarepremiumsandout-of-pocketmaximumsaredeterminedunderthenewlaw.It’sworthnotingupfrontthatyoudon’t

havetowaituntilyousubmityourtaxestoclaimyourpremiumsubsidiesundertheAffordableCareAct.Rather,subsidiesare“advanceable,”whichmeanstheyarebuiltrightintothereducedpremiumsyoupayonamonthlybasisonceyouenrollinaqualifiedhealthcareplan.Thetaxcreditissentdirectlytoyourinsurancecompanyandappliedtoyourpremium,soyouimmediately

paylessoutofpocket.

SubsidiesandtheFederalPovertyLevelTounderstandhowthe

AffordableCareActappliestoyouasanearlyretiree,youhavetobegin,strangelyenough,withthefederalpovertylevel.That’sbecausesubsidiesformonthlyhealthcarepremiums(andannual

out-of-pocketlimits)aretiedtothefederalpovertylevel.

Summarizedintheshadedboxesbelowarethe2013federalpovertyguidelinesforhouseholdsofonetofourpeopleforthe48contiguousstates.Startwithyourhouseholdsize,thennotetheannualincomelimitsspecifiedunderthebaseline100%column.

Asthe100%columnshows,theofficialpovertylevelforresidentsofthe

continentalU.S.is$11,490forasingleindividualand$15,510foracouple(asof2013).TheseamountsaretypicallyadjustedeachyearbytheDepartmentofHealthandHumanServicestoaccountforinflation.

Nowreadacrosstherowthatappliestothenumberofpeopleinyourhousehold.Aslongasyourincomefallswithin400%ofthefederalpovertylevel,yourhealth

carepremiumsarecappedonaslidingscalethatgoesnohigherthan9.5%ofyourannualhouseholdincome.(Technicallytheslidingscaleisbasedon“modifiedadjustedgrossincome,”butthisisthesameasgrossincomeforthemajorityofhouseholds).Annualout-of-pocketlimitsarealsosubsidizedaslongasyourincomefallsbelowthe400%mark.

Whatthismeansforyouasanearlyretireeisthatyoumaywanttomanageyourincomeleveltokeepitbelow400%ofthepovertyline–inotherwords,$45,960foronepersonor$62,040foracoupleasof2013–inordertobeeligibleforpremiumassistance.Assoonasyoucrossthe400%threshold,thesubsidyimmediatelydropstozero.Thusitiscrucialtostaybelowthismarkifatall

possibleifyouwanttoqualifyforasubsidizedpremiumandloweryourmaximumout-of-pocketexpensesaswell.

SubsidizedHealthCarePremiumsLet’stakeacloserlookat

howhealthcarepremiumsworkundertheAffordableCareAct.We’llstartwithanexample.Let’ssayyouarea

marriedcouple50yearsofageandyourannualincomeis$62,000peryear.Thatmeansyou’rebumpingrightupagainstthe400%limitasshownintheprevioustable,soyourannualhealthcarepremiumsarecappedat9.5%ofyourincome.That’s$62,000x9.5%=$5,890peryear,or$491permonth.

Butifyouearnjust$1,000moreandhaveanannualincomeof$63,000,

thesubsidyimmediatelydropstozero.Suddenlyyouneedtopaythefullcostofthemonthlypremium,andthepremiumwithoutsubsidiesforacoupleyourageislikelytorunabout$15,420peryear,or$1,285permonth(basedonnationalestimatesbytheCongressionalBudgetOffice).That’sadifferenceofnearly$10,000peryearor$800permonth.Soyoucanseehowimportantitisto

keepyourannualincomewithinthe400%limitifyouareanywhereclosetothatlimittobeginwith.

Here’sthegoodnews,though.Ifyouareanearlyretireelivingonabudget,thenwhetheryouareage44or54or64,yourpremiumsarealwayscappedbasedonyourincomelevelaslongasyoustaywithin400%ofthepovertylevel.Thatmeansyourpremiumswon’t

skyrocketasyougetolder.Insteadyourpremiumcostswillstayroughlythesame,otherthanrisingwithoverallincreasesinhealthcarecostsandinflation.Asyouage,moreandmoreofthepremiumamountwillbesubsidized.Thatmeansyouwillcontinuetoreceiveaffordablehealthcareevenbetweentheagesof55and64whenpremiumstendtobeattheirhighest.Onceyouhit

age65,ofcourse,youqualifyforMedicare.

Thinkabouthowimportantthisisforearlyretireesonabudget:itmeanstheynolongerhavetoworryaboutskyrocketingpremiumsastheygrowolder.Speakingforourselves,weweredreadingthesuper-highpremiumsweknewwerecomingjustaroundthebend.InfactwehadbeenconsideringdroppingU.S.

healthcoveragealtogetherduringthoseyearsandrelyinginsteadsolelyonmedicalcareoverseas.ButaslongastheAffordableCareActremainslaw,thedaysofexorbitantpremiumsformostAmericansage55to64areathingofthepast.

Ageandthe3:1RatioTheAffordableCareAct

stipulatesthatthemostexpensivepoliciesforolderindividualscanbenomorethanthreetimesthepriceofpoliciesforyoungeradults.Thusa64-year-oldwouldhavetopaynomorethanthreetimeswhata20-year-oldwouldpayforthesamecoverage.

The3:1ruleiseasiesttounderstandifyouconsidertwoindividuals,aged20and64,bothwithincomeshigher

than400%ofthepovertylimitandthereforeunabletoqualifyforpremiumsubsidies.Ifthe20-year-oldpaysapremiumof,say,$200permonth,thenbylawinsurancecompaniescannotchargethe64-year-oldmorethan$600permonth.Theendresultofthe3:1ruleisthatyoungerparticipantswillpaymoreforhealthinsurancethantheywouldhaveotherwise,whileolder

participantswillpayless.Inessence,theburdensofhigherhealthcarecoststhatcomewithgrowingolderhavebeenspreadoutmoreevenlyacrosstheentirepoolofinsured.

Keepinmindthe3:1ratioappliesprimarilytounsubsidizedpolicies.Onceyoureachacapforyourincomelevel,youcan’tgohigherthanthat,period.Forexample,ifacoupleintheir

twentiesandacoupleintheirsixtiesbothhaveincomesof$60,000(meaningtheybothfalljustwithinthe400%limit),theywouldbothpaythesamepremiumamountof$475permonth($60,000x9.5%incomecap=$5,700÷12=$475).Thedifferenceisthatthecoupleintheirtwentieswouldreceivepremiumsubsidyassistanceofabout$40permonth,whilethecoupleintheir

sixtieswouldreceivepremiumsubsidyassistanceofabout$1,040permonth.Whilethelevelofassistancediffersdramaticallybehindthescenes,thetwocouplespaythesamemonthlypremiumsupfront.

TheSlidingScaleSofarwe’vediscussed

howpremiumsworkforpeoplebumpingrightupagainstthe400%levelofthe

povertylimit.Butwhatifyourincomefallssomewherelowerinthespectrum,say,atthe250%mark?Thesimpleansweristhatyouwouldpaylessbasedonaslidingscale.Premiumcapsbeginatjust2%ofincomeifyourannualincomeislessthan133%ofthepovertylevel,andtheyclimbsteadilyfromthereuptothemaximum9.5%cap.Thefollowingtableshowsthepremiumcappercentages

thatapplyasyourannualincomeincreases.

Thetableillustrates,forexample,thatamarriedcouplewithincomeof$40,000peryearwouldfallbetween250%and300%ofthepovertylimit,andthustheirpremiumwouldbecappedonaslidingscalebetween8.05%and9.5%oftheirannualincome.Asshownintheright-handcolumn,theirmaximumannualpremiumwould

thereforefallbetween$3,121and$4,420peryear,orbetween$260and$368permonth.

Togetanevenmoreexactidea,youcanmultiplyyourspecificannualincome(e.g.,$40,000)by8.05%thenby9.5%toascertaintherangeofyourmaximumannualpremium(e.g.,$3,220to$3,800peryear,or$268to$317permonth).

Out-of-PocketMaximumsUnlikemonthlyhealth

carepremiumsthatmustbepaidregardlessofhowmuchorhowlittleoneusesthehealthcaresystem,out-of-pocketexpensesaretiedtoactualvisitstodoctorsandhospitalsandsuch.Ifyoumakenosuchvisitsandpurchasenoprescriptiondrugs,thenyourannualout-

of-pocketcostsmaywellbezeroorclosetozero.Butifyoumakefrequentvisitstothedoctororfaceasuddenmedicalemergency,yourout-of-pocketexpensesmaybesignificantlyhigher.

Fortunately,theseexpensesarecappedonanannualbasisunderthelaw.MaximumsundertheAffordableCareActarebasedonout-of-pocketlimitsalreadyestablishedbythe

IRSeachyearforHealthSavingsAccounts(tax-advantagedaccountsassociatedwithhigh-deductiblehealthcareplans).Out-of-pocketHSAlimitsfor2013,forexample,are$6,250foranindividualand$12,500forafamily.

ThesesamelimitshavebeenadoptedforhealthcareplansundertheAffordableCareAct.Thesearetheunsubsidizedmaximumsany

personorfamilyenrolledinaqualifiedhealthcareplanshouldhavetopayoutofpocketinanygivenyear,nomatterwhattheirincomelevel.Oncethemaximumisreached,yourplanpaysforallcoveredexpensesbeyondthatpoint.

Justlikehealthcarepremiums,out-of-pocketlimitsaresubsidizedundertheAffordableCareActbasedonincomelevel.

Subsidiesapplyaslongasyourincomefallswithin400%ofthefederalpovertylevel.Beyond400%thesubsidyimmediatelydropstozero.Asshowninthefollowingtable,yourmaximumout-of-pocketexpensesmaybeone-third,one-half,ortwo-thirdsofthecurrent-yearHSAlimit,dependingonwhereyourhouseholdincomefallsinrelationtothefederalpoverty

level.

HealthCareCalculators

Theinformationintheprevioussectiongivesyouabehind-the-sceneslookathowyourhealthcarepremiumsandout-of-pocketmaximumsaredetermined,butitwillallbemuchsimpleronce2014rollsaround.Then,whenyouconsideraparticularinsuranceplan

online,itwillletyouknowyourestimatedpremiumandannualout-of-pocketmaximumonceyouhavepluggedinbasicinformationaboutyourself.

Infact,healthcarecalculatorsarealreadyavailablethatwilldomostoftheworkforyou.TheonewelikebestistheNationalHealthCareCalculatorprovidedbyUCBerkeleyLaborCenter

(laborcenter.berkeley.edu/healthpolicy/calculator).Yousimplypluginyourhouseholdsize,annualincome,andageanditinstantlyestimatesyourmonthlypremium.Theexampleonthefollowingpageisbasedonourowninputtedinformation.

Thecalculatorshowsthatwefallat258%ofthepovertylevelandthatourtotalestimatedhealthcarepremiumwithoutsubsidywouldbe$1,436permonthfora“Silver-level”plan(discussedinthenextsection).Sinceactualpremiumsaren’tknownyet,thesearebasedonnationalestimatesfromtheCongressionalBudgetOffice.

Thecalculatorindicatesthatthemostweshouldhavetospendonhealthcarepremiumsis8.3%ofourannualincome,or$276permonth.(Themanualcalculationwouldbe$40,000x8.3%=$3,320÷12=$276.)

Thedifferencebetweenthepremiumwithoutsubsidy($1,436)andthepremiumwithsubsidy($276)is$1,160permonth.Thusthefederal

premiumsubsidyamountstoanestimated$13,920peryear.

Partoftheutilityofcalculatorsliketheseisbeingabletoplugindifferentvaluestoseehowtheyaffect(ordon’taffect)yourpremium.Forinstance,changingtheageintheexampleabovefrom49toeither19or64(thelowestandhighestagesyoucanenter)hasnoeffect

whatsoeveronthepremium.Instead,whatchangesdramaticallyistheamountofthesubsidy.It’salsoeducationaltopluginamountsslightlyhigherthanthe400%limitandseehowthemonthlypremiuminstantlyshootsupwardsoncethesubsidiesdisappear.

Bronze,Silver,Gold,andPlatinumPlans

Beginningin2014,healthcareplanswillbeofferedatfourdifferentcoveragelevels:Bronze,Silver,Gold,andPlatinum.Platinumplanshavethehighestpremiumsbutthelowestout-of-pocketcosts.Gold,Silver,and

Bronzeplanseachinturnhavelowermonthlypremiumsbutcostincreasinglymoreoutofpocket.Thecolorcodinghelpsyouquicklyidentifythetypeofhealthcareplanthatbestsuitsyourneeds.

Thelowest-costplanmaynotalwaysbethebestplanforyou.Forinstance,Bronze-levelplanshavethelowestmonthlypremiums,butout-of-pocketexpensesare

unsubsidizednomatterwhatyourincomelevel.Instead,out-of-pocketlimitssimplymatchwhateverthecurrentHSAlimitis(e.g.,$6,250forindividualsand$12,500forfamiliesin2013).SowhileBronze-levelplansmayhavethelowestpremiumcost,theymaynotalwaysrepresentthebestvalue.

Intheend,ofcourse,bestvaluedependsonthedetailsofyourownpersonal

situation–yourhealth,yourincomelevel,yourlikelyfrequencyofmedicalcarevisits,andsoforth.Forpeoplewithongoingmedicalconditions,theGoldorPlatinumplansmightrepresentbestvalueevenafterfactoringinthehigherpremiumcosts.Then,too,noneofusknowswhenanunexpectedmedicalemergencymightoccur,andthatmightbereasonenough

toconsidergoingwithaslightlymoreexpensiveplan.

Thesecond-lowest-levelSilverplansareespeciallyworthconsideringifyouareanearlyretireeonabudget.TheseplansaretypicallyusedasbaselinemodelsinillustrationsabouttheAffordableCareActbecausetheyrepresentagoodbalancebetweencoverageandcost.Formanypeopletheymayrepresentthebestvalue.

UnderSilver-levelplans,bothhealthcarepremiumsandout-of-pocketmaximumsaresubsidized(assumingyourincomefallswithin400%ofthefederalpovertylimit).YourlevelofcostsharingisalsolesswithaSilverplanthanitiswithaBronzeplan,asdiscussedbelow.

CostSharingUnderDifferentColorTiers

Eachcolortier–Bronze,Silver,Gold,Platinum–hasbeendesignedwithadifferentpercentageofcostsharinginmind.Costsharinghastodowithhowmuchyouspendoutofpocketversushowmuchyourplancovers.Deductibles,coinsurance,co-pays,andanyotherpoint-of-servicechargesallgointothecostsharingequation.Bydesign,eachcolortierhasitsown“actuarialvalue,”which

isanestimateoftheoverallfinancialprotectionprovidedbyahealthplanacrossastandardpopulationofbothhealthyandsickconsumers.Herearetheactuarialvaluesthateachcolortierisdesignedtomeet:–Bronze:60%–Silver:70%–Gold:80%–Platinum:90%Becausewe’retalking

averageshere,thepercentagelistedforeachcolortierdoesnotnecessarilyrepresenttheexactamountyourplanwillpayyouasanindividualenrollee.Rather,itrepresentswhatpercentagetheplanislikelytopayonaverageacrossalargegroupofpeople,bothhealthyandsick.

Ingeneral,though,it’ssafetosaythatthehigherthepercentage,themoreyourout-of-pocketmedical

expenseswillbecoveredoverthecourseofayear.Everythingfromdeductiblestoco-paystocoinsurancepercentageswillbeless.Ontheotherhand,you’llhavetopayupfrontforthosebenefitswithhighermonthlypremiums.

Ifyourincomefallswithin400%ofthefederalpovertylevel,youmaywanttoconsideroneofthehigher-levelplans(Silver,Gold,or

Platinum)becausetheymayrepresentabettervalueforyou.Theresultofallthosesubsidiesandcost-sharingreductionsisthatyougainaccesstoahigher-qualityplanthanyoumightotherwisebeabletoafford.

Asanextremeexample,ifyourincomefallswithin150%ofthepovertylevel,youcantakeadvantageofaPlatinumplanwithanactuarialvalueof94%once

allcostsharingmeasuresandsubsidieshavebeenfactoredin.Whatthatmeans,essentially,isthatyouhavetospendverylittlemoneytogetquitealotofcoverage.

NotethatplanswithineachcolortierwillnotbeexactlyidenticaltoeachotherbecausethereismorethanonewayforaSilverplan,say,toreachanactuarialvalueof70%.Oneplanmayofferahigherdeductiblebut

withlowercoinsurance,whileanothermighthavealowerdeductiblebuthighercoinsurance.Eachachievesthesameactuarialvalueindifferentways.Thisisactuallyagoodthingforconsumers,becauseitgivesthemmorechoiceinfindingtheplanthatbestfitstheirneeds.

HealthInsuranceExchanges

ByJanuary1,2014,eachstateisrequiredtohaveaHealthInsuranceExchangesetupthatwillallowyoutoeasilycomparehealthcarecoveragefromcompetingplansandselecttheonethatbestfitsyourneeds.Each

planwillprovidea“SummaryofBenefitsandCoverage”thatquicklyallowsyoutoseewhateachplanoffers.Onthefollowingpageisagenericexampleofthetypeofinformationthatwillbeprovidedonthefirstfewpagesoftheseplans.(Source:www.dol.gov/ebsa/pdf/SBCSampleCompleted.pdf.)

Withtheseoverviewsyoucanquicklyassessyourdeductibleandout-of-pocket

limitsandtellwhatavisittothedoctorwillcost,whatadiagnosticorimagingtestwillrun,whatgenericdrugswillcostascomparedtobrand-namedrugs,andwhatyourcoinsurancewillbeforoutpatientandhospitalstays.Theonlythingnotspecificallylistedisthemonthlypremium,andthatwillbeprovidedattheHealthInsuranceExchange’stoplevelbeforeyoureachthis

moredetailedinformation.

MedicalandDentalTourism

Thecostsofhealthanddentalcarecanberadicallyloweroverseas–somuchsothatevenafterfactoringintheexpenseoftransportationthereandback,itcanstillcostsignificantlylesstohaveaprocedureperformedabroadthanitwouldbetohavethesameprocedureperformedin

theU.S.Manywhohavereceived

medicaltreatmentabroadwriteglowingreportsabouttheirexperiencesandsaytheywishedtheyhaddiscoveredsuchoptionssooner.Whattheyfindmoreoftenthannotisn’tsomepoorcousinofAmericanhealthcare,butrathertop-notchmedicalfacilities,superblytrainedphysicianswithimpeccablecredentials,andstaffwho

speakclearEnglishandprovidealevelofpersonalserviceandcarethatwouldbehardtoduplicateintheU.S.duetostarkdifferencesincosts.

Ifyouliketheideaofworldtravelasmuchaswedo,thenreceivingatleastsomeofyourmedicalordentalcareabroadisanappealingoption.Forexample,we’vetakenadvantageofdentalcare

servicesandprescriptiondrugbargainsinAlgodones,Mexico(justacrosstheborderfromYuma,Arizona)andhaveonlygoodthingstosayabouttheexperience.Inthissectionwe’llsharesomeofourownexperiencesandpointyoutowardssomeofthebestcountriesintheworldwhenitcomestomedicaltourism.

MedicalTourism

andtheAffordableCareActEvenwiththeadventof

theAffordableCareAct,webelievemedicaltourismwillcontinuetothrivebyofferingdealsthataresimplytoogoodtopassup.Forexample,certainelectivesurgeriesatThailand’sBumrungradHospitalcostonlyone-tenthofwhattheydointheU.S.,andakneeorhipreplacement

inIndiamaystillrunyoulessthantheamountofyourannualout-of-pocketmaximumintheU.S.Aslongasthesekindsofdramaticcostdifferentialsexist,medicaltourismwillcontinuetoflourish.

The“MedicalTourism”website(medicaltourism.com)offersusefulcomparisoncostsforthesameproceduresindifferentcountries.While

costsareapproximate,theyarestillquiteaneye-opener,especiallywhenyourealizetheyalreadybuildintheestimatedexpenseofairfarefortwo.AnotherusefulwebsitewithdozensofhelpfullinksaboutmedicaltourismistheRetireEarlyLifestylewebsiterunbyearlyretireesBillyandAkaishaKaderli(retireearlylifestyle.com/medical_tourism).

Admittedly,mandatory

coverageundertheAffordableCareActdoesputsomethingofadamperonmedicaltourism,sinceU.S.citizensarealreadyinvestedtoacertainextentinthehealthcaresysteminthiscountry.Afterall,notonlyareyoupayingamonthlypremium,butyoumayalsohaveasubsidizedout-of-pocketlimitthateliminatesannualhealthcareexpensesbeyondacertainpoint.

Forexample,evenifaheartbypasssurgerycosts$15,000inThailandcomparedto$150,000intheU.S.–awholeorderofmagnitude’sdifference–U.S.citizensmightthinktwicebeforepayingthe$15,000inThailandsincetheirsubsidizedannualout-of-pocketlimitmightonlybe$7,500,say,intheU.S.Theyknowtheirinsurancewillcovertherestoftheamount,

sothereisnoincentiveforthemtoseektreatmentoverseassincetheirpersonalcostswouldactuallybehigher.

MedicaltouristsfromtheU.S.maythereforeendupmigratingtowardselectivesurgeriesandspecializedtreatmentsthataren’tcoveredbytheirinsuranceathome–thingslikecosmeticsurgery,dentalimplants,Lasiksurgery,in-depthwellness

exams,groundbreakingstemcelltherapies,andinnovativecancertreatmentsthataren’tyetcoveredbyU.S.insurance.

Wherevergapsincoverageexist,orwheneverprocedurescanbeperformedforlessthanout-of-pocketmaximums,medicaltourismwillcontinuetoofferaviablealternative.Anysurgerythatinvolvesalongwaitingperiodforwhateverreason

mightalsoofferstrongincentiveformedicaltourismtoplaceslikeIndia,Thailand,orMalaysiawherethesurgerycouldbeperformedalmostimmediately.

Earlyretireeslivingbeyondthe400%federalpovertylimitremainparticularlygoodcandidatesforcontinuedmedicalcareabroad.TheAffordableCareActdoesn’thelpthemasmuchasitdoestheirless

affluentbrethren.Theydon’treceivesubsidies,forexample,thatreducetheirannualout-of-pocketlimits.Thatmeanstheirout-of-pocketcostscouldbeashighas$6,250forindividualsor$12,500forfamilies,basedoncurrent-yearlimits.

Ifwell-offretireescanreceiveamedicalprocedureoverseasforsubstantiallylessthantheselimits,thentheyarelikelytoconsiderit.The

onlydownsideisthatthey’repayingamonthlypremiumforservicestheyaren’treallyutilizing,andthedollarsthatwouldhavegonetowardsmeetingtheirout-of-pocketlimitsfortheyearhavegonesomewhereelseinstead.

WhatAboutSimplyPayingthePenaltyTax?Someearlyretireesmay

bewonderingwhetheritmakessensetosimplypaythepenaltytaxandnothavehealthcareinAmerica,relyinginsteadsolelyonoverseascare.Whileworthpondering,it’snotasteptobetakenlightly.Speakingforourselves,wewouldbemorethanalittlenervousaboutlivingintheU.S.forasmanymonthsaswedowithnoupperlimitonourhealthcareexpenses.Whatifasudden

emergencyshouldhitandwecouldn’tgetoverseastoaddressit?Thenourhealthcarecostscouldquicklyskyrocket.

Toourminds,theonlywaysuchastepmightbeworthconsideringisifwealreadyspentthevastmajorityofourtimeoverseas.Otherwisetheapproachseemstoofraughtwithrisks.Abetteroptionmightbetopurchasethecheapest

Bronze-levelplanavailableandbalancethatwithoverseasmedicaltreatmentwhenappropriate.Alternatively,youcouldconsidertakingthenecessarystepstoestablishresidencyabroadinordertoavoidtheneedforU.S.healthcarealtogether.

WhichCountriesAreBest?

Somecountriesconsistentlymakethetoptenlistswhenitcomestomedicalanddentaltourism.HereisaquickrundownofthebestofthebestbasedonourrecentreviewoftoptenlistspostedbyInternationalLiving,Forbes,HealthyTimesBlog,BusinessPundit,MedicalTravelQualityAlliance,andmore:–Thailandisatornear

thetopofmostlists.BumrungradHospitaljustwestofBangkokhasbeencalledthecrownjewelofmedicaltourism.BangkokHospitalisanother.YoucanrecuperateafteryourprocedureononeofThailand’smanylovelybeaches.–Malaysiaisparticularlyfamousforits“wellman”and“wellwoman”

preventivecarepackagesthatincludeextensivephysicalsandabatteryoftestsatafractionofwesterncosts.Malaysiaalsohasitsshareofpristinebeaches.–SingaporeisathirdpowerhouseinSoutheastAsia,offeringsomeofthebesttreatmentcentersintheworld(e.g.,GleneaglesHospital)forseriousissues

rangingfromcardiologytooncologytostemcelltherapy.–Indiaisknownforhigh-qualitycardiacandorthopedicproceduresatlowcost.Medicalanddentaltourismarebothgrowingrapidlyhere.Bangalore’sFortisHospitalisrankedasoneofthebestsurgicalcentersintheworldformedical

travelers.–Mexicoistheultimateclose-to-homedestinationforAmericans.Convenienceandreasonablepricescombineforagreatsolutionwhenitcomestodental,vision,andprescriptiondrugservices,aswellasroutinephysicalsandtestsandcertainoperationssuchaskneeandhipreplacements.

–CostaRicaisanotherpopulardestinationforAmericans,withaparticularemphasisondentalcareandcosmeticsurgery.Itoffers“medicalspas”inasafe,convenient,English-speaking,andecologicallybeautifulcountry.–HungaryisaprimeEuropeandestinationespeciallywhenitcomes

todentaltourism.Germanshavebeencrossingtheborderforyearsforqualitydentalandmedicalcare.Dentalprocedurescancosthalfwhattheydoinmostwesterncountries.–Turkeymakesmosttop-tenlistsbecauseofitshighnumberofaccreditedmedicalfacilities,lowcost,andwestern-traineddoctorsfluentinEnglish.

TurkeyisespeciallyknownforeyetreatmentslikeLasiksurgeryandfordentalvacations.Theaboveeightcountries

makemosttop-tenlistsonaconsistentbasis,butthelasttwocountriestendtovaryquiteabit.SouthKoreaisonmanylistsasyetanotherSoutheastAsiancountryofferingstate-of-the-artmedicalservices,aswellas

thePhilippines.PanamafrequentlymakesthecutfordestinationsclosetotheU.S.,andGuatemalaisanup-and-comer.Braziliswellregardedforplasticsurgeryatalowprice,asisEgypt.AnothergoodoptionisSouthAfrica,whichofferstemptingmedicalsafaris.Israelmakessomelistsforitslow-costcancertreatmentcenters.OtherpopularEuropeandestinationsformedical

tourismincludePoland,theCzechRepublic,Lithuania,andSpain.

Asyoucansee,thelistofcountriesisextensive,andthesearefarfromtheonlyqualityoptionswhenitcomestoaffordablemedicalanddentalcareabroad.Usethislistasastartingpoint,butaquickweb-basedsearchwillrevealmanyotherfineoptions.

Ifyouliketheideaof

medicaltourismbutdon’tactuallywanttogoabroad,here’sonefinaloption:theSurgeryCenterofOklahoma.Thisstate-of-the-artmulti-specialtyfacilityoffersup-frontandbundled(all-inclusive)pricingpostedonlineforalltosee(surgerycenterok.com).Itintentionallyworksoutsidetheconfinesofthebighospital/insuranceenvironmentandstrivesfor

pricetransparencyandaffordability.Thosewithhighdeductiblesorhighout-of-pocketlimitsmayfindthisaviablealternativeandonemoregoodoptionworthconsidering.

DentalTourismTheextentofdental

coverageundertheAffordableCareActisstillsomethingofamystery.Ifitturnsoutsuchcoverageis

minimalornonexistentundermanyplans,thenaffordableoptionsabroadwillofferanimportantalternativeforearlyretirees.

Wheredentaltourismshinesmostbrightlyiswhenitcomestocostlyproceduressuchasrootcanals,crowns,implants,veneers,andbleaching.WecanspeaktothisissuepersonallysinceRobinrecentlyreceivedarootcanal,postandcore,and

porcelain-and-metalcrowninAlgodones,Mexicoforatotalpriceof$530.ThiscomparesquitewelltothetwoquoteswereceivedfromdentistsintheU.S.for$1,400and$1,850forthesameworkandmaterials.

Robin’sexperiencewassuchapositiveonethatIplantoreturntoherdentistinthenearfutureforanimplantandcrown.Thisprocedurewouldgenerallycost$3,000ormore

intheU.S.,whereaswereceivedaquoteof$1,200totalfromherdentistinAlgodones(withsomequotesbeinglowerthan$1,000).Nowofcourse,ifthequalityofserviceisn’thigh,thennoamountofcostsavingsisgoingtomakeupforit–butifyoucancombinehighqualitywithreasonablecost,thenyouhavesomethingworththinkingabout,andsuchisthecasehere.

AlgodonesisMexico’snorthernmosttown,anditcatersprimarilytoAmericanslookingforheavilydiscountedmedicalanddentalcareaswellasprescriptionsandeyeglasses.It’ssaidthatwithinafour-blockradiustherearemorepharmacies,doctors,dentists,andopticiansthananywhereelseintheworld.Whetherthat’strueornotwedon’tknow,butitcertainlyisa

happeninglittleplace,anditfeelsquitesafe.

Theoralsurgeon/endodontistwhoperformedRobin’srootcanal–Dr.GasparatSimplyDental–has32yearsofexperience,andRobinfeltthecareshereceivedwasbothprofessionalandattentive.Infactitwasoneoftheleastpainfulproceduresshehaseverexperienced.HerdentistspokebasicEnglish,buthis

nephewwhoisalsoanoralsurgeonspokeflawlessEnglish,andhewasonhandtoansweranyquestionsshemighthave.Thevisitincludedafreeexamandconsultwithfreedigitalx-rays.

LikemostdentalofficesinAlgodones,thewaitingareawassmall.InfactitwassomethingofashocktoourAmericansensibilitieswhenwefirstwalkedinthedoor

andsawhowsimpleandunpresumingitwas.Thatsaid,itdidhaveaKeurigcoffeemaker,bottledwater,andwifi,andthedentalequipmentitselfwasstate-of-the-art.Oursensewasthatnoextramoneywasbeingspentonimpressingus.Rather,asthename“SimplyDental”implied,thefocuswasonthequalityofthedentistryitself.

Robinsetupherappointmentatnocost

throughthewebsiteDentalDepartures(dentaldepartures.com).Thewebsitelistsdentistsfromcountriesallaroundtheworldandoffershelpfulpatientreviewsandpricelistsforeach.Robinchoseherdentistafterreadingastringofglowingfive-starreviews.ThepersonsheworkedwithatDentalDeparturesrespondedquicklytoheremailsandevenarrangedfor

hertospeakdirectlytoherdentistwhenshehadsomespecificquestions.

Ratherthandriveacrosstheborder(whichisopenfrom6amto10pmdaily),weparkedinahugeparkinglotontheU.S.sidefor$5perdayandsimplywalkedacross,whichiswhatmostpeopledo.(Formappingprograms,usethebordercrossingaddressof235AndradeRoad,Winterhaven,

CA92283.)Wehadplentyofcompanyduringourshortwalk.LiterallyhundredsofAmericans,mostofthemseniorsfromthesouthwesternU.S.,walkacrossthisborderpointeverydayforlow-costmedicalanddentalcare.

ThewalkacrosstheborderintoMexicoisacinch:wejuststrolledrightacross.However,thereisoftenawaittogetbackthroughU.S.Customs.Itcantakeanhour

ormoreduringthebusiesttimesofday(usually1-3pm),butwewentinthemorningandcamebackbeforenoonsotherewasonlyashortwait.Wesawsomepeopletakingbicyclerickshawsinordertoavoidthepedestrianline.OfcourseyoushouldalwaysbesuretohaveavalidU.S.passportwithyou.

VisionTourismand

PrescriptionDrugsRobinneededsome

antibioticsrelatedtoherdentistrywork,sowemadeaquickstopatThePurplePharmacyinAlgodones.Visitorshavetheirpickoffriendlyandefficientpharmaciestheycanvisitinthefour-blockarea.Staffareeagertoassistyou,andchalkboardsandhandwrittensignsprominentlydisplay

prescriptiondrugprices,makingiteasytocomparisonshop.

It’slegaltobringa90-daysupplyofmostantibioticsandotherprescriptiondrugsintotheU.S.,andCustomswillcheckyourpurchasesasyourecrosstheborder.It’shelpfultoknowthegenericnameofthemedicationandthedosageyouneedbeforearrivinginAlgodones.

Wehaven’tyetavailed

ourselvesofthevisionservicesofferedinAlgodones,butreportsfromothertravelerssuggestatypicaleyeexamrunsabout$10.Glassesstartat$100fortwopairsofsingle-visionglasseswithframes,andgoupfromthereto$100-$150perpairformoreexpensiveprogressivelenses.IfvisioncoverageturnsouttobeminimalornonexistentundertheAffordableCareAct,then

thisbecomesanothercompellinggapareainwhichearlyretireesmightwanttoseekcareabroad.

Judgingfromthenumberofvisitorstothislittletown,wearen’ttheonlyoneswhoenjoyfindingqualityhealthcareataffordableprices.EvenourcelebratorylunchoffishandshrimptacosafterRobin’sdentistappointmentwasaffordableanddelicious.Whichremindsus:don’t

forgetthe“tourism”partofmedicaltourism.Besuretomixinalittlefunalongtheway.Sure,therearepracticalaspectstoyourvisitabroad,butrememberthatoneofthemainbenefitsofmedicaltourismisgettingtodosomesightseeinginaplacethatperhapsyou’veneverbeentobefore.

Chapter17.ExtendedTravelinRetirementWeretiredearlyforone

mainreason:totravelmoreextensivelyandseetheworld.Oneofourgreatestjoyssince

retiringhasbeenhavingnotimelimitonhowlongwecanspendinanothercountryseeingthesightsandgettingtoknowadifferentculturefromtheinsideout.Weprefertravelingslowlyandonfootasmuchaspossible,stayinginacountryforweeksormonthsatatimewhenwecan,andthatsimplyisn’tfeasiblewithafull-timejob.Welovetohike,somostofourtripsincludehikingor

trekkinginoneformoranother,andweusuallychoosenaturalsceneryandsmalltownsoverbigcities.Ourpersonalwebsite,wherewebe.com,givesyouagoodideaofthekindoftravelweenjoythemost.

Overthepastsixyearswe’velearnedafairamountaboutlong-termtravelandhowitdiffersfromshort-termvacations.Extendedtravelrequiresadifferentmindset

thanyourtypicalweek-longgetaway.Inthisfinalchapterwe’dliketoshareafewsuggestionsabouthowyoucantravelmoreeconomicallyoverlongerperiodsoftimeshouldyouwishtodosoonceyouretire.

PickingAffordableDestinations

Choosingalow-costdestinationisthesinglemostimportantthingyoucandotokeepanextendedtripaffordable.Everything(otherthanairfare)becomeslessexpensiveifthedestinationisinexpensivetostartwith.

Lodging,diningout,groceries,transportation,guidedtours,entryfees,activityfees,incidentals–allofitismuchmorereasonableincountrieswhereyourdollargoesfurthertostartwith.

Ifyoupickyourdestinationwithcare,youcaneasilyliveonless–sometimessignificantlyless–thanyoucanintheU.S.InEcuador,forexample,wecouldbuyapplesandbananas

forfivecentseach,anhour-longbusridesetuseachbackadollar,andadoubleroomwithprivatebathranus$15to$20pernight.Lodgingsrentedbythemonthwerecheaperstill.Withpriceslikethese,youcanseewhyretireeswhocomeforavisitsometimesendupstayingforgood.

AnevenmoredramaticexampleisIndiaandNepal,wherewecouldliveverywell

indeedonverylittlemoney.Duringaone-monthhikeoftheAnnapurnaCircuitinNepal,westayedinteahousesforjust$4pernightforaprivateroomwithbath.Admittedlytheroomswererustic,but$4pernight?EvenwhenwestayedinKathmandu,thecapitalcity,astylishandconvenientlylocatedmidrangehotelwithalltheWesterncomfortsofhomeonlyranus$15per

night.FoodinbothIndiaandNepalwasalsoinexpensive,delicious,andplentiful.Wecouldessentiallyorderwhateverwewantedwithoutregardtoprice.

That’snottosaytherearen’tluxuryaccommodationsandexpensiverestaurantsintheseandotherlow-costcountries,becauseofcoursethereare.Youcanspendalotofmoneyeveninaninexpensive

countryifyoutryhardenough,butittakeslittleeffortonyourparttoliveandeatwellonlowsumsofmoneyindestinationssuchasthese.

Manytimeswhatyouremembermostabouttravelaretheadventuresandexperiencesyouhavealongtheway,andyoucanhavemoreofthemandatalowerpricewhenyouvisitalow-costdestination.Tocitejust

threeexamples,wewereabletorideandbatheelephantsinNepalfor$5,sailSuperman-styleonaziplineacrossalushcanyoninEcuadorfor$12,andraftdowntheYulongRiverinChinaonabambooraftfor$5whilesurroundedbyspectacularviewsoflimestonemountains.ConsiderwhatexperiencessimilartothesemighthavecostintheU.S.–thendoublethatagainto

determinewhattheymighthavecostinanexpensiveEuropeancountry.

Oftentheonlynoteworthyexpenseinvolvedinvisitingalow-costdestinationistheairfaretogetthereandback.That’sonereasonweliketostayforawhileoncewereachadistantdestination:itallowsustoamortizetheexpenseoftheairfareovermultiplemonths.(Italsojustifiesalltheefforttogetthere.)Once

you’vearrived,thelivingisactuallycheaperthanitisbackhome,sothere’snoparticularrush:youmightaswellsitback,relax,andenjoyyourselfforawhile.

Livingabroadisfranklymorefunwhenyoudon’tfeelcrimpedformoneyallthetime.WewouldencourageyoutolookbeyondtheobviousWesternEuropeancountriesandbroadenyourfocustoincludeplaceslike

SoutheastAsia,Mexico,CentralandSouthAmerica,andEasternEuropewhereyourdollarwillstretchfurtherandbuyyoumore.

SurvivingExpensiveDestinations

Themostobviousstrategyyoucanemploywhenvisitingexpensiveforeigncountriesissimplytostayforshorterperiodsoftime.Saveyourextendedtripsforcountrieswhereyourdollargoesfurther.Planshorter,more

intensivesightseeingtripstocountrieswherethedollarisworkingagainstyou.

Whenwevisitexpensivedestinations,wedothingsalittledifferentlythanwewouldotherwiseinordertokeepcostsdown.Weeatmoresimply,sleepmoresimply,andchooseouractivitieswithmorecare.Insomecasesweresearchandpre-booklodgingsaheadoftimesoweknowwhatwe’re

payingupfront.Webuygroceriesandcookourownmealsin,orelserelyonsimpletakeoutoptions.Andwestrategizeaheadoftimeabouthowtokeepourtransportationcostsdown.Forexample,inSwitzerlandwepurchasedhalf-farecardsgoodforamonthoftraintravelin-country,andinNewZealandweactuallyboughtausedcarthensolditbackagainfourmonthslater.

Wetrynottoskimponexperiences,however,becauseafterall,what’sthepointofvisitingaplaceifyouaren’treallygoingtoseeit?Amulti-dayvaporettopassisessential,forexample,ifyouwanttofreelyexplorethecanalsofVenice.Similarly,aone-weekcruiseoftheGalapagosIslandsaboardasmallyachtcanbeanintegralpartoftheexperienceofseeingthoseislandswell.

Bookingthetriplast-minuteandathalf-pricekeptcostsasreasonableaspossible,butthefinalpricetagwasstillunavoidablyhigh(andwortheverypennyinouropinion).

Youcan’talwayscutcornersanddoaplacejustice.ItwouldbeapitytomissoutondiningalfrescoinFranceorItaly,forinstance,wherefoodandwinearesuchanintegralpartofthepleasureofbeingthere.Likewiseit

wouldbeunfortunatetomissoutonathrillingadventurelikebungeejumpingorskydivinginaplacelikeQueenstown,NewZealand(“adrenalinecapitaloftheworld”)solelybecauseofprice.Thememoriesfromtheseexperienceslastalifetime,andyouonlyhavetopayforthemonce.

Sofarwe’vemanagedtostaywithinouryearlybudgetof$40,000evenwhenour

travelhastakenustoexpensivedestinationslikeSwitzerlandandtheGalapagos.Sometimesthathasmeantlivingmorefrugallytherestoftheyear,butweconsiderthatasmallpricetopayfortheprivilegeofgettingtovisitsuchunforgettableplaces.Thatsaid,thenexttimewevisitSwitzerland,wemaynotstayforquitesolong!

StayinginPlacevs.MovingAround

Oneimportantquestionyou’llhavetoanswerforyourselfisthis:doyouprefertobaseyourselfinoneplaceormovearoundalot?Ourowntripsoflatehavetypicallyinvolvedmovingeverythreeorfourdaysfrom

onetowntothenextaswecrisscrossacountryinordertoseeitwell.

Butnear-constantmovementhasitsprice.Ourexpensesarehigherthantheywouldbeotherwisebecausewe’repayingnotonlyfortransportationbutalsoforlodgingonaper-nightbasis.Ontheotherhand,wegettoseemoreofacountrythatway,andsometimesthatoutweighsthecostissuesfor

us.Withoutquestion,staying

inoneplaceforamonthatatimeorlongercanbemorecost-effective.WerentedaroominPuertoVaras,Chile,forexample,forlessthan$250forthemonth–andPuertoVarasisarelativelyexpensivetouristtownbyChileanstandards.

Togetalowmonthlyrate,it’sbestnottobookaheadoftimefromtheU.S.

Instead,simplyshowupinthetownorcityofyourchoosingandstayatahostelforafewdayswhilescopingoutlonger-termrentalpossibilities.Manyrentalsonlyadvertiselocallywithasigninthewindoworanoticeonabulletinboard.That’swhywesuggestyouwaituntilyouarriveintownbeforemakinglong-termarrangements.Thatwayyoucanseearentalwithyour

owneyesbeforedecidingifit’srightforyou.

Negotiatinginpersoncanalsoincreaseyourbargainingpower.Manyownerswillagreetoadiscountforstaysofamonthorlonger,especiallyifyouoffercashupfront.Iftheroomisobviouslysittingemptyandyou’restandingrightthereinfrontofthemwithcashinhand,they’remorelikelytoacceptalowerprice.

Stayingputoffersamorerelaxingwayoftravelingforanextendedperiodoftime.DuringourstayinPuertoVaras,forexample,wewentonexcursionstosurroundingtownsandthenearbyislandofChiloe.WetookSpanishlessonsatatinyschoolacrossthestreet,andwetradedinformalEnglish-for-Spanishlessonswithlocalfriendswemadeintown.Makingfriendsiseasierwhenyoustayput

forawhile,andtakinglanguagelessonsorcookingclassesorlessonsinanysortofregionalspecialtycanbeagreatwaytogettoknowthelocalsandfellowtravelersalike.

DiscoveringYourOwnApproachtoTravel

Knowingwhatmakesyougenuinelyhappyhelpsyoudetermineyourownapproachtotravel.Ifwhatyoureallyloveisstayinginluxuryhotels,there’snopointin

kiddingyourselfandpretendingyoulikehostels.Iffive-starresortswithbeachsideservice,spatreatments,andgolfaremoreyourspeed,you’llsimplyhavetofactorinthehighercostsofstayinginsuchplaces.Perhapsyou’lldecidetotravelforshorterperiodsoftimebutreallypamperyourselfwhenyoudogo.

Ontheotherhand,ifyou’recomfortablestayingin

simplerdigsandliketowalkaroundandexploreonyourown,thenyoucanaffordtostaymuchlongerinthecountryofyourchoosing.Perhapsyou’llimmerseyourselfinthelocalcultureandbeginpickingupthelanguage.Orperhapsyou’llfocusonseeingeverysightyoucanwhileyou’rein-country,aswetendtodo.Ormaybeyou’lljustkickbackandrelaxandsoakitallin.

Afterall,it’syourtrip:youcanbeasbusyoraslaid-backasyoulike.

Therearesomanyvariablestotravelthatit'shardtogeneralize,butifthequestionis,canyoutraveloverseasaffordably,theanswerisdefinitelyyes.Pickingyourdestinationwithcareisthenumberonethingyoucandotoloweryourcosts,andthesecondmostimportantthingistochoose

yourlodgingswithcare,whichiswhatwe’lldiscussnext.

StayinginHostels

Whenitcomestolodgingsonaper-nightbasis,wethinkhostelsofferthebestvalueforyourmoney.Hostelscatertoallagesthesedays.Youngertravelerstendtobetheirprimarymarket,butaslongasyou’reyoungatheartyou’llfitrightin.Theaccommodationsareusually

(butnotalways)onthebasicside,sohostelsarenotforeveryone,butifyoudreamofseeingtheworldonabudgetwhilemeetingfriendlypeopleandstayingintheoppositeofcookie-cutteraccommodations,hostelsjustmightbearightanswerforyou.

Sharedkitchensmakehostelsagreatoptionifyou’retryingtokeepcostsdown,andfreewifiaccessis

almostagiventhesedays.Wealwayslookforhostelsofferingdoublerooms(preferablywithprivatebath)andnotjustdormrooms.Weprefertheprivacyandsecurityofhavingourownroom.

Youcanpickupusefultraveltipsfromfellowtravelersathostels,andeachplaceyoustaywillbedifferentfromthenext.Togetanideaofjusthow

memorablesomehostelstayscanbe,checkoutthewebsitesforHopewellBackpackersinMarlboroughSound,NewZealand(hopewell.co.nz)andPalafitoHostelinChiloe,Chile(palafitohostel.com).

Websiteslikehostelworld.comandbbh.co.nz(specifictoNewZealand)assignapercentagerankingtoeachhostelbasedonthereviewsofpeoplewho

havestayedthere,soyoucanquicklyidentifythebesthostelsinaparticulararea.Pricesarelistedforeachtypeofroom.Thesewebsitesallowyoutomakeanonlinebookingafewdaysinadvance,whichcanbeawiseideaifyou’retravelinginhighseason.

TravelingIndependently

Thelongerthetripyou’replanning,themoreimportantitbecomestotravelindependently–thatis,withoutaguideoraspartofatourgroup.Beingonyourownsignificantlyreducesthecostofthetrip,butperhapsequallyimportantly,itchangesthewholetenorof

theexperience.Travelbecomesmoreof

anadventureandlessofasetpiecewhenyoumakeyourowndecisionsaboutlodging,food,andactivities.Yougettodetermineyourownpaceanditineraryratherthanturningthosedecisionsovertoanother.You’realsomorelikelytohavegenuineencounterswithlocalresidentsifyoutravelindependently.You’llstrike

upconversationsonbusesandtrains,orwhenyou’reeatingatsmallcafesnotfrequentedbytourgroups,orwhenyou’restayingatlodgingsnotspecificallyaimedat(andpricedfor)foreigners.

Independenttravelcanbecomeaddictiveonceyougetusedtoit.Itcanbehardtogobacktohavingsomeonetellyouwhattodo,whattosee,howlongtoseeitfor,

andwhattimeofdaytogo(oftenatmidday,itseems,whencrowdsareattheirworst).

Admittedlyguidedtripsmakesenseundercertaincircumstances.Ifyou’reafemaletravelingalone,forexample,oriflogisticalorlanguageissuesmakeplanningaparticulartripmoreintimidatingthanusual,thenaguidedexcursionmightbetherightanswer.

Butwewouldencourageyoutoweanyourselffromonlytravelinginsuchafashion,asitcandramaticallyincreaseyourcostswhilediminishingyourfreedomtoexplore.

ResearchingYourTrip

Travelingindependentlymeansdoingyourownresearchbeforehandorasyougoalong.Ithelpstohaveatleastaroughideaaheadoftimeofwhereyouwanttogoandwhatyou’dliketosee.

Togetaninitialsenseofacountry,weenjoyFrommer’sfreeonlinetravelguides,

whichcoverjustabouteverydestinationunderthesun.Theirintroductorylistsoffavoriteexperiencesandtheirreviewsofkeysightsarehighlyreadable.However,theirlodginganddininginformationtendstobefocusedonthepricierendofthespectrum.

WeusuallyendupbuyingaLonelyPlanetguidebookforeachcountrywevisit,inpartfortheattentionthey

givetoeconomicallodginganddiningoptions,butmoreimportantlyfortheirexceptionalregionalandcitymaps.Wecutoutonlythepagesweneedandstaplethemtogetherforaparticularcityorregionsowecanbringjustthosepagesalongwithusonanyparticulardayofexploring.

We’vecometorelymoreandmoreonsiteslikeTripAdvisorforideasonthebest

thingstodoandthebestplacestostayinaparticularlocation.Thereviewsofhundredsofindividualtravelers,takenasawholeandthenranked,seemtoprovidemoreconsistentlysatisfyingandup-to-dateresultsforactivities,lodging,anddiningthananysingleguidebookcan.Individualreviewersarealsomoreapttocommentonthenegativeaspectsofaparticularoption,

givingyouamorecompletepicturethanyoumightgetotherwisefromaterselywordedguidebookdescription.

ManagingYourFinancesOverseas

Animportantpracticalconsiderationbeforeyourfirstextendedtripishowtomanageyourfinanceswhileoverseas.Fortunatelythishasbecomemucheasiernowthatelectronicbillpayingissocommonplace.Wepaymost

ofourbillsautomaticallythroughourcreditcard,andtherestarepaidthroughautomaticdeductionsfromourcheckingaccount.It’seasytosettheseupbyvisitingthewebsiteforeachofyourserviceprovidersandupdatingyouraccountinformationtoallowforautomaticmonthlypayments.Werecommendyoudothisafewmonthsinadvanceofyourtripsoyoucanmake

sureeverythingisworkingproperlybeforeyouleave.

Yourbank’sonlinebillpayservicecanalsobeausefulfeatureincaseyouhavetomakeanunexpectedpaymentfromtheothersideoftheworld.

UsingATMsOverseasWhenoverseaswerely

primarilyonATMsforcash.

Wepayabankfeeeachtimewewithdrawmoney(typically$5),whichcanbeannoying,butit’scheaperthanmostotheroptions.WeusuallywithdrawthemaximumamounttheATMwillallowinordertominimizethesecharges.Insomecountriesthemaximumamountssetbybankscanbefrustratinglylow,soweendupsearchingaroundforATMswithahigherlimitthat

alsohappentobecompatiblewiththePLUSsystemourcardutilizes.

MakesureyourATMwithdrawallimitsaresetsufficientlyhighbyyourownbank.ThisisespeciallyimportantifyouarevisitingacountrywherethelocalcurrencyisstrongerthantheU.S.dollar.Ifyou’remarried,itmakessensetocarryasecondcardinyourspouse’snamesoyoucandouble-dip

fromthesameaccountwhenneeded.

ATMstypicallyprovideyouwithlocalcurrency,soyoudon’thavetoworryaboutcurrencyexchange,butyoumightneedtovisitalocalbanknowandagaintoobtainsmallerbills.

UsingCreditCardsOverseasInfirst-worldcountries

weoftenrelyonourcreditcardinsteadofcashwhenmakingpurchases.Wepaya1%feeforeachinternationalpurchase,whichisn’ttoobad.Checkwithyourcreditcardcompanytoseewhatrateyouhavetopayforinternationalpurchases.Somecardshaveratesashighas3%,whichistoohighinouropinionifyou’replanningonstayingoverseasforanextendedperiodoftime.Ifyour

percentageistoohigh,considerapplyingforacreditcardwithnointernationalpurchasefeeandusingitspecificallyfortravelsabroad.

It'sagoodideatocarryabackupcreditcardfromacompletelydifferentfinancialinstitutionincasethefirstonegetslost,stolen,orinvalidated.Morethanonceourcreditcardhasbeencanceledwhilewewere

travelingoverseasduetoacompromisedbatchofcreditcardnumbershavingbeenstolenfromonestoreoranotherbackintheStates.AnothercardwasimmediatelyreissuedandmailedtoourhomeaddressintheU.S.,butthatdiduslittlegoodsincewewerestillabroad.Nowwe’velearnedourlessonandalwayscarryabackupcard.

DownsizingforLifeontheRoad

Whenyou’replanningforamobilelifeontheroad,youwanttodoallyoucantodownsizeyourelectronicsandotherpossessionssoyoucanpackaslightlyaspossible.Ifyouplantotravelwithalaptopcomputer,besuretogetalightweightandcompactone.Apocketsize

CanonPowerShotcamerawithachargerandextrabatterygivesusallweneedfortakingqualityphotos.WealsobringiPodShufflesformusicandatinyhandheldmicrophoneandearbudsforSkyping.WerelyprimarilyonemailandSkypetostayintouchwithfamilyandfriendswhentraveling.

AsmallPacSafemesh-linedbagletsuslockuppassportsandothersensitive

documentswhilewe’reawayfromourroom,andasimplelockingcablehelpskeepourlaptopsafe.

Asmalldaypackholdsallourelectronicsandincidentalsandfitsinsideourlargerbagwhenwewalkfrompointtopoint.Whenwegettothebusortaxi,wecanpulloutthedaypackfilledwiththeelectronics,passports,andotherthingswereallycareaboutandkeepit

closeathand,whileallowingourbiggerbagsfilledwithclothestobestoredworry-freeinthevehicle’soutercompartmentortrunk.

WeuseRickStevesconvertiblecarry-onbagsthatconvertintobackpacksfornearlyallofourtrips,andweswearbythem.Ifyoucancomfortablyfitallyourbelongingsintooneofthesebags,thenyou’redoingquitewellpacking-wise.Ifthebag

isburstingattheseams,thenyou’reprobablybringingtoomuchandshouldtrytolightenupabit.

Everyexperiencedtravelerwilltellyouthesamething:lessismore.You’llenjoyyourselfmoreifyouaren’tburdeneddownlikeapackanimal.Trydressinginlayers,andlimityourbulkyouterlayersasmuchaspossible.Youcanalwaysbuyanextrasweaterontheroad

ifneeded.Qualityraingearthat

packsintoitsownpocketisalwaysworthhaving.Thatplusalightweightfleecejacketgoesalongwaytowardskeepingyouwarmininclementweather.

ForwardingPhysicalMail

Asfarasphysicalmailgoes,we’vefoundthemaximumtimepermittedforholdingmailatthelocalpostofficeisthirtydays.Thatusuallyisn’tenoughtimeforus,soinsteadwetemporarilyforwardourmailtoarelative’saddress.Youcansetthisuponlineatusps.com,

specifyingthetemporaryaddressandthestartandenddates.Themaximuminitiallengthoftimefortemporaryforwardingissixmonths,butyoucanrenewforanothersixmonthsifneeded.Notethatyou’llhavetoenteracreditcardnumberforverificationpurposeswhenyouusethisonlineservice,andthereisa$1chargetoyourcard.Savetheconfirmationemailsenttoyousoyoucanextendor

canceltheforwardingorderasneeded.

UsingSeasonalDisconnects

Weuseaseasonaldisconnectserviceforbothcableandinternettoreducecostswhenwe’reawayforanextendedperiodoftime.ForourservicewithComcast,thedisconnecthastobebetween3and6monthsinduration,andyoustillmustpay$11perservicepermontheven

thoughyouaren’tusingit.Atpresentyouhavetomakeaphonecalltosetuptheseasonaldisconnect;thereisnoonlineoption.

Yourservicerestartsautomaticallyonthedateyouset,orelseyoucancallifyougetbacksoonerthanexpectedtostartitupagain.Thereisnofeetodisconnectorreconnecttheservice.

BecomingaPerpetualTraveler

IfyouplantobeaperpetualtraveleroranRVerwithoutapermanenthomeaddress,considermakingastatewithnoincometaxyourofficialresidence.Youmustcallsomewherehome,soyoumightaswellpickastatethat

doesn’ttaxyoufortheprivilegeofnotbeingthere.

Wetriedthisapproachourselvesforaperiodoftwoyears.AftersellingourhomeinColorado,weheadedoffonaneight-monthroadtripthroughtheU.S.,travelinginaconversionvanwithabedintheback.WealsotraveledoverseasforextendedperiodsoftimetoplaceslikeArgentinaandChile.Duringthesetwoyearswelisted

SouthDakotaasourhomeaddress.SouthDakotahasnostateincometax,nordoesitrequireyearlyvehicleinspectionsoremissionstests.

MyDakotaAddress(mydakotaaddress.com)isaparticularlyusefulserviceforperpetualtravelers.TheycanhelpyouregisteryourvehicleandgetyousetupasaresidentofSouthDakota.You’llneedtotakeaneyeexaminpersontoobtaina

SouthDakotadriver’slicense,butnotmuchelseisrequired.

MyDakotaAddressforwardsyourphysicalmailonaweeklyormonthlybasisforareasonablefee,providesyouwithaphysicaladdressthatdoesn’tappearasaP.O.box(usefulwhenfillingoutforms),andgenerallymakesyourperpetualtravelinglifeeasier.Ifweeverdecidetosellourcondoandrecommit

tothenomadiclifestyle,we’llprobablymakeSouthDakotaourhomeaddressonceagainandusethissameservice.

Forthoseofourreaderswhohavemadeitthisfar,wewanttowishyoueverysuccessduringyourownjourney.Achievingearlyretirementisinmanywaysonlythebeginning:fromtherethedoorsopenwideandtheworldisyourstoexplore.Here’shopingourpathsmay

crossonedayinsomefar-offcorneroftheworld!

AppendixA.DetailedSalaryandInvestmentInformation

AppendixB.CreatingYourOwnInvestmentSpreadsheetIfyouwouldpreferto

createyourowninvestment

spreadsheetfromscratchratherthandownloadingthetemplateonourwebpage(wherewebe.com),weprovidedetailedinstructionshere.Theseinstructionsmayalsobeusefulforthoseofyouwhodownloadedthespreadsheetbutaren’tfamiliarwithaprogramlikeExcelandneedabitmorehelp.

Whencreatingyourownspreadsheetfromscratch,be

suretouseaspreadsheetprogramlikeMicrosoftExcelthatcanautomaticallyaddcolumnsofdata,applysimpleformulastocalculateannualratesofreturn,andaddtogetherresultsfromonecolumntothenext.Thatwillallowyoutotweakthespreadsheettoplaywithdifferentinvestmentscenarios.Youcanmakechangesandinstantlyseetheresultstothebottomline.

AsampleinvestmentspreadsheetisprovidedinChapter10.Youmaywanttohavealookatthatfirsttogetanoverviewofwhatthespreadsheetlookslikeintermsofcolumnsizesandlayout.Wechosetousealandscaped11”x17”papersizetogiveourselvesplentyofroomtoworkwith,butthespreadsheetcanalsofitonalandscaped8½”x11”sheetofpaper.

Nowlet’shavealookateachcolumninthespreadsheetandseewhat’sinvolvedinreproducingit.Forcellsthatcontainformulas,we’veuseditalicstoidentifythespecificExcelformulathatneedstobeaddedtoeachcellinthecolumn.Noneoftheformulasareparticularlycomplicated.

TaxableColumnsColumnA–Year:

Manuallyentertheyearsasnecessary.Toeditthem,simplyclickonthecell,typeinthecorrectinformation,andhitenter.Youcandeleterowsatthebottomofthespreadsheettocreatea15-yearplan.(Besuretoselecttheentirerowbyclickingontherownumbertotheleftthenhittingdelete.)Ifyouwanta25-yearplan,youcancopyandpasteexistingrowstoaddmoreyears(again,be

suretoselecttheentirerows).ColumnB–Amount

Invested:Manuallyentertheamountyouplantoinvestperyearinyourtaxableaccount(i.e.,anymoneyyou’resettingasideforusebeforeyouturnage59½).Youcantryoutalternatesavingsscenariosbyenteringdifferentnumbersandseeinghowthetotalschange.

ColumnC–PlusPrev.YearTotal:Thiscolumn

automaticallyaddsthe“TotalTaxable”(ColumnE)amountfromlastyeartothe“AmountInvested”(ColumnB)thisyear.TheformulaincellC6forexample(whichshows$2,000inthesamplespreadsheet)is:=E5+B6.

ColumnD–Annual%Return:ThiscolumnautomaticallycalculatestheannualreturngeneratedfromtheamountinColumnC.Youcanchangethe

percentagebyenteringthecell(double-clickonit)andchangingthenumber–forexample,fromthedefault0.09(for9%)to0.08(for8%)or0.1(for10%)oranyotherpercentageyouwishtoexperimentwith.Youcanthencopyandpastethiscelltoallotherapplicablecellsbelowit.TheformulaincellD6forexample(whichshows$180inthesamplespreadsheet)is:=C6*0.09.

ColumnE–TotalTaxable:ThiscolumnautomaticallyaddstheamountsinColumnsCandDtogiveyourtotaltaxableamountfortheyear.TheformulaincellE6forexample(whichshows$2,180inthesamplespreadsheet)is:=C6+D6.

ColumnFisablankcolumnforspacing.

401(k)Columns

ColumnG–AmountInvested:Manuallyentertheamountyouplantoinvestperyearinyour401(k).Youcantryoutvariousscenariosbyenteringdifferentnumbersandseeingtheresults.

ColumnH–Match:Automaticallycalculatesa401(k)matchforyou.Thedefaultissetto50%oftheamountinColumnG.Thepercentagecanbechangedtobringitinlinewiththe

particularsofyour401(k)plan.Double-clickonthefirstcellyouwouldliketoupdateandchangethepercentage–forexample,from“0.5”(50%)to“1.0”(100%).Youcanthencopyandpastethiscelltoallotherapplicablecellsbelowit.TheformulaincellH6forexample(whichshows$2,000inthesamplespreadsheet)is:=G6*0.5.

ColumnI–PlusPrev.YearTotal:Automatically

addsthe“Total401(k)”(ColumnK)amountfromlastyeartothe“AmountInvested”(ColumnG)and“Match”(ColumnH)forthisyear.TheformulaincellI6forexample(whichshows$6,000inthesamplespreadsheet)is:=K5+G6+H6.

ColumnJ–Annual%Return:Automaticallycalculatestheannualreturngeneratedfromtheamountin

ColumnI.(SeeColumnDinstructionsforchangingthepercentagerate.)TheformulaincellJ6forexample(whichshows$540inthesamplespreadsheet)is:=I6*0.09.

ColumnK–Total401(k):AutomaticallyaddstheamountsinColumnsIandJtogiveyouyourtotal401(k)amountfortheyear.TheformulaincellK6forexample(whichshows$6,540inthesamplespreadsheet)is:

=I6+J6.ColumnLisablank

columnforspacing.

RothIRAColumnsColumnM–Amount

Invested:ManuallyentertheamountyouplantoinvestperyearinyourRothIRA.Aswiththeothershadedcolumnsinthespreadsheet,youcantryoutdifferentscenariosbyenteringdifferentnumbersandseeing

theresults.ColumnN–PlusPrev.

YearTotal:Automaticallyaddsthe“TotalRothIRA”(ColumnP)amountfromlastyeartothe“AmountInvested”(ColumnM)forthisyear.TheformulaincellN6forexample(whichshows$4,000inthesamplespreadsheet)is:=P5+M6.

ColumnO–Annual%Return:Automaticallycalculatestheannualreturn

generatedfromtheamountinColumnN.(SeeColumnDaboveforinstructionsonchangingthepercentagerate.)TheformulaincellO6forexample(whichshows$360inthesamplespreadsheet)is:=N6*0.09.

ColumnP–TotalRothIRA:AutomaticallyaddstheamountsinColumnsNandOtogiveyouyourtotalRothIRAamountfortheyear.TheformulaincellP6for

example(whichshows$4,360inthesamplespreadsheet)is:=N6+O6.

ColumnQisablankcolumnforspacing.

GrandTotalColumnColumnR–Grand

Total:AutomaticallyaddstheamountsinColumnsE,K,andP(i.e.,thetotalsfortaxable,401(k),andRothIRA)togiveyouthegrandtotalfortheyear.Theformula

incellR6forexample(whichshows$13,080inthesamplespreadsheet)is:=E6+K6+P6.