That’s the title of the book that Todd Tresidder gave me at Fincon 13. I was so excited to read it that I churned through it on the flight home. Many months later, I am finally putting together the book review. That’s how busy I’ve been with the new baby. Let’s hope my memory is good enough to do the book justice.
At first glance, the book’s size and scope reminded me of Mike Piper’s Can I Retire? Piper’s book is 100 pages, and Tresidder’s is 120 including appendixes and his biography. This book is part of his “60 Minute Financial Solutions” series. I think it takes more than 60 minutes to really digest How Much Money Do I Need to Retire, but I’m a slow thorough reader and I was focusing intently on the details in order to write the review.
How Much Money Do I Need to Retire? is quite different from Piper’s Can I Retire?. While Piper concentrates on investments, Tresidder’s approach is more concept-oriented. In particular, Tresidder seems to advocate an unconventional approach that I’ve written about in my early retirement plan posts. I’ll get into more details in that later.
How Much Money Do I Need to Retire? is divided into three parts or retirement models. However, in reading the book, it felt that there really are two distinct models. These models serve as blueprints for building a successful retirement plan.
The first model is conventional retirement planning. If you are a regular reader of personal finance, you most likely know what this is. The idea is to get a big nest egg of cash and draw from it, typically using the rule of 4%. Tresidder points out a number of problems with this method. The biggest problems center around having to make guesses at things you can’t possibly know. For example, it is really hard to know what your expenses are going to be when you retire. Who knows what the cost of health care will be? As you get closer, it becomes easier, but from a distance, it is very much a crap shoot. The same is true with investment performance. Even if you retire at 65, you might need that money to last another 20 years. What’s the rate of the return of investments going to be over that time? What if you live another 35 years instead of 20?
There are so many variables and any one of them can drastically alter any retirement plan. Even that 4% rule is coming under question. A small difference there makes a big deal in figuring how big of a nest egg you’ll need. Tresidder does a much, much more thorough job of explaining this in the book.
Another alternative model is to use a cash flow model for retirement. Essentially the idea is to have enough money coming in from various sources to pay for your lifestyle. The money could be coming from dividends, interest, annuities, Social Security, income producing real estate, or royalties (for those in such fields). It can even be a business (or hobby business) that you can run somewhat passively or that you truly enjoy. If you have enough of these forms of income, you don’t really need a big nest egg (granted you’ll need a nest egg for dividends and interest, but not the others).
Sometimes it pays to be smarter and not rely so much on the terrible interest rates that banks are giving and put more emphasis on Lending Club where I’m getting closer to 7%. I’m not saying you should put $100,000 in there, but if you were to have similar returns, you could use that to passively earn around $7,000 a year (of which inflation would eat away some). If your bank is paying you close to 1% then you’ll earn $1,000 a year (and inflation would likely put you at a loss). It’s a big difference.
The other half of the coin is matching your lifestyle to fit this cash flow model. Keeping expenses down just a little makes a huge difference in one’s ability to reach financial independence. You don’t have to live his minimalist lifestyle, but if you are able to find happiness in the things money can’t buy, you should be able to keep expenses down.
If your cash flow income passes your expenses… guess what? You can pretty much retire. You want to make sure that you are prepared for emergencies, but for the most part you don’t need to have that big nest egg. You don’t need to worry if the 4% rule will hold up. You don’t need to worry about that burn rate.
Over the years, I’ve gravitated to this cash flow way of thinking about retirement. That isn’t to say that we don’t have 401(k)s and IRAs and we are still building up that nest egg. We are taking a hybrid approach that I will go into more in tomorrow’s post.
Not to sound like the Dos Equis guy, but I don’t recommend a lot of books, when I do I’ll be recommending How Much Money Do I Need to Retire?
We’ve never adhered to the 4% rule. Our plan is to not spend more than what our investments yield. In fact, we have been reinvesting almost everything and just living off of pension. We both have IRAs and haven’t touched them yet. I think one key to knowing how much you need in retirement is knowing how much you spent before retirement. If you can’t make ends meet while working, you sure as heck will never make ends meet in retirement without drastic adjustments.
Kathy,
I think you are right. There’s a lot of talk about the 4% rule not being a rule anymore. Money Magazine this month has an article that makes a case for 3% being better. This of course means that people have to save more.
You also right about knowing expenses. There’s a post coming later this week on that. It’s a particularly hard thing for me to forecast 30 years in the future when I’m 67, but I make an attempt anyway. Some things like having a paid off mortgage goes a long away towards determining a likely range.