Every now and then, I crave a good biography or autobiography. The books I've read about people like Harry Truman, Katharine Graham, Julia Child, and Warren Buffett often inspire me. From them, I've drawn courage, insight, and a better appreciation of what people can accomplish if they put their minds to it.
So it may not be surprising that when I read my monthly issue of our Rule Your Retirement newsletter, one of my favorite parts is editor Robert Brokamp's profiles of successful retirees. Better still, they're often early retirees -- ones who share how they pulled it off. I like these stories (and recommend them to you) because it's often surprising -- and inspiring -- to see what's achievable in the wonderful world of retirement.
Meet Dave Neal
Allow me to share one successful retiree's story. Dave Neal and his wife retired in their late 40s. (Ah, to be so lucky.) A main contributor to their success is that Dave has always kept close tabs on their cash flow, knowing where their dollars come from and, more importantly, where they go. It didn't hurt that he and his wife enjoyed above-average salaries working in the telecom industry, pre-retirement. And while you may not be able to duplicate that, you can learn a lot from their story.
Here's some no-nonsense insight from Dave: "You can't know how much you really need until you know how much you spend. I continue to be amused by the retirement industry and its focus on pre-retirement income as a guide to post-retirement needs. [When people say] 'You will need 80% of pre-retirement income in retirement,' that's nonsense. What you need is 100% of your post-retirement expenses, plus enough to cover inflation each year."
How right you are, Dave. This applies to all of us. Retirement expenses may be very different from those in your pre-retirement stages -- especially if you're living in a different state, with a very different lifestyle. You may eat out more. You may travel more. It's important to estimate what your needs will really be. As Robert Brokamp demonstrates in his introduction to budgeting, a little expense tracking may give you some eye-opening insight.
Map it out
If you want to better monitor your money (much like Dave does), check out Intuit's Quicken software. It's a one-stop shop to help you map your spending habits. Dave breaks his expenses into five groups:
- Housing
- Income taxes
- Special expenses (cars, home improvements)
- Vacation
- Other (dining out, recreation)
As you determine exactly where your money goes now, start thinking of how much you'll need (or want) to spend in each category once you reach retirement. This will help you determine how much annually you'll need to live comfortably-- and that will help you figure out how much you need to save and invest right now.
One popular route for saving for retirement is the IRA -- traditional or Roth. Robert Brokamp cautions, "The longer you put off making withdrawals from your traditional IRA, the more you'll be required to withdraw at age 70 1/2. Since such withdrawals are taxed as ordinary income, big withdrawals can push you into a high tax bracket, and all income -- from pension checks to Social Security benefits -- will be taxed at a higher rate." So while Dave Neal is now in a lower tax bracket, he has been systematically converting his traditional IRA assets into Roth IRA assets. Translation: He'll pay taxes on the converted amounts now, but the assets will subsequently grow tax-free. This has estate-planning benefits (although this isn't an issue for the Neals because they don't have kids). You can learn much more about IRAs in our IRA Center.
Finally, to be successful in your retirement planning, it's critical to save and invest as much as possible, taking full advantage of tax-deferred accounts. Dave and his wife socked $5,100 into their 401(k) accounts in 1983 when they began their quest for early retirement. Their retirement savings topped out at $28,645 in 1997. Between 1983 and 1999 (they officially retired in 1999), they saved an average of almost $17,000 a year in their retirement accounts, investing it mostly in stocks. Sure, they had to weather the market troubles of the early millennium right as they retired, but they managed -- they had planned well.
Picking stocks
I asked Dave to detail some of his investments. His best long-term gains include InBev/AmBev (NYSE:ABV), up more than 200% for him since he bought in 2004, and an exchange-traded fund (ETF), iSharesMSCI Brazil Index (AMEX:EWZ). His most "mediocre" investment has been Intel (NASDAQ:INTC), on which he's roughly broken even. He's recently had nearly 40% of his money in large-cap American stocks and 20% in emerging markets.
With many pundits suggesting that the reign of small caps over large caps is coming to an end, and with even more arguing that U.S. investors should start socking away sizable chunks of their portfolios in overseas companies (Wharton professor Jeremy Siegel suggests as much as 40%), that diversification is sound. It doesn't have to cost you much, either -- Dave's Brazil-focused index ETF charges 0.74%, for instance. Vanguard's Emerging Markets Stock Index (FUND:VEIEX) mutual fund charges 0.45%, while the matching ETF, Vanguard Emerging Markets Stock VIPERs (AMEX:VWO), costs you just 0.3% (plus any brokerage trading costs). For large caps, a low-cost way to play the game is via the Vanguard S&P 500 (FUND:VFINX) fund, a stalwart with a 0.18% expense ratio.
Be a success story
Start planning and saving today, and you might be able to retire early -- and comfortably.
If you'd like some sensible advice to help get you started, I strongly recommend a free 30-day trial of Robert's Rule Your Retirement newsletter service. A trial gives you full access to every back issue -- and the coverage is broad. The February 2006 issue, for instance, tackled investing luminary Joel Greenblatt's "magic formula" for investing, which focuses on return on capital and earnings yields and has impressive back-tested results. And in the January 2006 issue, Robert addressed asset allocation and explained how we can "avoid Uncle Sam's grabby hands." Click here to learn more.
Grab some inspiration from folks like Dave -- stop thinking and start planning for an early retirement!
Selena Maranjian owns shares of the Vanguard Emerging Markets fund and an S&P 500 index fund. For more about Selena, viewher bio and her profile. Intel and Intuit are Motley Fool Inside Value recommendations. The Motley Fool isFools writing for Fools.
