FOOL ON THE HILL

Retire at 45

Tom Jacobs flipped out when he talked to an old friend who may retire in his 40s. He isn't rich. He and his wife have five kids. She works hard, inside the home. He doesn't make a lot of money. They lived below their means, paid off their mortgage, saved, had no debt, and have some rental income. That's all it took.

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By Tom Jacobs (TMF Tom9)
October 17, 2002

Ever talk to an old friend and have that moment where you realize one of you is speaking Martian and the other Sanskrit? Where, despite all the common history, there's this area where one of you is from Mars and the other from, well, another century?

I did last weekend, and the subject was money. I just didn't understand how a friend of 30 years could think of retiring at our age -- mid-40s. Yet he couldn't fathom how I would find it so unbelievable.

With some detective work, I figured out what language he was speaking and how retirement could be possible for him.

Steve's scene
Steve (I'll call him) lives where we grew up with his wife and five kids. The oldest is a senior considering colleges, and the youngest is seven. How many people today have five kids? Sure, they are little packages of love, but they cost a lotta dough! Not only is Steve not well-off, but he's thinking of quitting his job. And not getting another one. What gives? 

After college, Steve worked at his father's family business, a small manufacturing operation with a dozen employees. Today, he's a partner; his father comes in often, but he's retired. The company owns its building and rents part to a restaurant. It may sound like Steve is Little Prepster Fauntleroy, and he did have a comfortable upbringing, but his life as an adult is far from that stereotype. Times are different from when his father built the business, and it has never done more than provide Steve and his family a modest living. During a prior recession in his industry, Steve cut his own management hours and sold shoes at the mall at night. His wife has always worked as a homemaker.

With newer technology and overseas competition, the business has been hurting for so long that for several years, the only positive cash flow comes from renting out the rest of the building. Now they've been approached to sell the manufacturing operations to another firm in town. I probed him: Was this the big sale that would set him up for life? (I've been spending too much time in the stock world, obviously.)

Clearly not. Selling beat closing down, because the key benefit was to provide continued jobs for the union workers and free up more space to rent. The rents would provide some income for him and his business partner. He was thinking he actually might not get another job, though he wasn't sure what he would do.

Come again? I kept thinking, five kids? He can support seven people on half the after-tax rental income from a space that's, frankly, not in the most desirable part of town? I ran the numbers, asked him a few probing but not too personal questions, and he just didn't see the problem.

And no, he has neither inheritance nor trust fund. 

The details
In Steve's house, they don't run credit card balances. When you're old enough, you get an after-school job. Private college is not in the cards for the kids, unless there is financial aid. The parents drive used cars. Steve does basic maintenance on them. Something needs to be painted? Well, you paint it. Fixed? You fix it. 

Vacations are inexpensive and local. When our gang rented a house for a five-year reunion, Steve found one on a local lake and brought some of his older kids for a few days. Split a zillion ways, it was a giveaway. 

The kids are bright and caring, and the older ones look after the younger ones. They have had their mother around, and their father is home nights and weekends, except for the night he plays in a band. They're the darned little house on the prairie, for crying out loud, in a suburb of a metropolitan area with 1 million people; with a father who can essentially retire; with a little income from some rental property to pay all that health insurance and food.

Psssst, it's their house. It's all about the house.

How can they live in that house?
Their little four-square home sits on a tiny lot in a first-ring suburb, half a block from a main street and a 15-minute walk to elementary, junior, and senior high schools. It's down the street from the family house of another old friend.

For the longest time, it had three bedrooms and one-and-a-half baths -- kinda tight for two parents and five kids. As the children came along, the two boys and two girls shared rooms. With the fifth, Steve finished off the attic for a parental retreat (the oldest boy had his eye on it, of course, but no way). When the oldest goes to college, another single opens up, and when the next one goes, hey, it's single room heaven for the last three.

I'm telling you, these are small bedrooms. Banish the thought of huge suburban castles with master-bedroom suites and private wings for the kids. The biggest of Steve's bedrooms -- except the attic -- is 10 feet by 12 feet. Think bunk beds.

Instead of trading up and up to bigger houses, pushing their way up the housing mountain, they stuck with what they could afford when Steve first started working. As his income grew modestly, that left them the room for extra mortgage principal payments and then savings. They never refinanced and sucked equity out of their house.

The result? They paid off the mortgage, have some savings, and are only 45 years old.

It's true that in their area, there's a lot of cheap, cheap housing compared to the national average, but like anywhere else, you could still move a mile or so to the expensive suburban castles that have reproduced like rabbits in the last decades -- if you wanted. It's also true that they've paid what most of us would think are confiscatory property taxes, but not too bad when you check out the public schools' class sizes, facilities, and college acceptance rates.  

But this is the key: According to the National Association of Home Builders, the average new house boasted 983 square feet in 1950, 1,500 in 1970, 2,080 in 1990, and 2,285 in 2000. At the same time, have you noticed families getting any larger? Since 1970, the average occupancy of that average house decreased 16%. We need 50% more space for 16% fewer of us.

Think about much more stuff you buy for a larger house and how much more maintenance you must perform. Inside, every extra room requires more furnishings, more floor covering and window treatments. Outside, a larger house has more of a roof to replace, a bigger yard to mow and landscape. You need more painting inside and out. 

Yet everyone wants new construction and more space. Why? Do we need a walk-in pantry, master bedroom suites, nine-foot or higher ceilings, three-car garage? Some wags say we insist on all these features to make us feel more at home, even as we spend less time there making it a home -- the opposite of what makes sense.  

How much more financial freedom would you have with a smaller house and no mortgage?   

Count their blessings
Yes, I know. If one or more of the children had learning disabilities or health issues, or if the parents got divorced, life would be very different.

I'm not saying a parent should stay home; that one-parent families are bad; that five-child families are better --nothing of the sort. I have no children and wouldn't presume to tell anyone else anything about kids, though I've always believed you don't learn much about life if you are born, raised, live, and die in the 'burbs. I was raised there, and boy did I run when I got older.  

But it does give me pause when one of our gang -- who stayed where we grew up, lives in the first house he bought, and chose a modest job over a higher-powered career (where he would've had more earning potential but had less time with his family) -- may retire in his mid-40s by merely living below his means, while the rest of us have sought our fortunes in cities and countries far and wide, often stretched to the hilt.   

OK, this is probably a false dichotomy. There are free spenders where Steve lives, and I know frugal types in our nation's capital. It's not about suburb or city. Whether you choose to live where you grew up or seek your fortune in the cities of bright lights, you can live beyond or below your means. We make trade-offs -- just remember it's a choice, well within your control.   

Agree, or are you fulminating? Let it all hang out about living below your means or retiring early on two of our most active discussion boards! To learn how to make the right choices regarding your retirement, join us this November for our retirement event, Rule Your Retirement. You have more than you think!

Tom Jacobs (TMF Tom9) saves rubber bands and stores them on door knobs for easy access. It's how he was raised. He also saves and invests in his stock holdings, which are listed in his profile, in accordance with The Motley Fool's disclosure policy.