Tuesday, May 11, 2010

Early Retirement Perspectives Overview

Early Retirement Perspectives

This article by Philip Greenspun addresses the joys, challenges, and some practical aspects of retiring young. The author retired in 2001, at the age of 37 (same age as Rossini when he retired).

The Depressing Truth

Ask a wage slave what he'd like to accomplish. Chances are the response will be something like "I'd start every day at the gym and work out for two hours until I was as buff as Brad Pitt. Then I'd practice the piano for three hours. I'd become fluent in Mandarin so that I could be prepared to understand the largest transformation of our time. I'd really learn how to handle a polo pony. I'd learn to fly a helicopter. I'd finish the screenplay that I've been writing and direct a production of it in HDTV."

Why hasn't he accomplished all of those things? "Because I'm chained to this desk 50 hours per week at this horrible
[insurance|programming|government|administrative|whatever] job.

So he has no doubt that he would get all these things done if he didn't have to work? "Absolutely none. If I didn't have the job, I would be out there living the dream."

Suppose that the guy cashes in his investments and does retire. What do we find? He is waking up at 9:30 am, surfing the Web, sorting out the cable TV bill, watching DVDs, talking about going to the gym, eating Doritos, and maybe accomplishing one of his stated goals.

Retirement forces you to stop thinking that it is your job that holds you back. For most people the depressing truth is that they aren't that organized, disciplined, or motivated.

Be Happy or You're a Loser

In olden times, the average person didn't expect to be happy. Life could be a struggle for survival with hard work and adversity at every corner. Marriages were arranged by parents and if, after 20 years, the couple hated each other, there was no option to divorce.
This article is written primarily for Americans. We have "pursuit of happiness" written right into our Declaration of Independence. A working person, however, does not expect to be happy all the time. Every job has unpleasant elements and drudgery. The working person imagines that if he didn't have to work, he would be happy 24/7. It would be like going to Disneyland every day.

Suppose that you are retired. At this point, your one job is the pursuit of happiness. If you are not happy, therefore you are a failure at your job and in your life. But how can you be happy 24/7? Perhaps if you moved into a hotel in Orlando and went to Disneyworld every day you would be pretty happy. But if you retain the responsibilities of home- and car-ownership, much of your life will continue to be mundane, boring, or unpleasant.

Will you wear a big smile on your face as you change the lightbulbs in the hall? Will you be delighted paying bills or begging the plumber to come over and fix the shower? Will you be ecstatic when it comes time to get your car inspected?

The idle rich in the old days were truly idle. They had servants, and butlers to supervise those servants. Unless you are retiring today with $50 million or more, however, you probably aren't rich enough to live in a cocoon. You still end up running the same errands that you ran when you were a wage slave, but now they stick out more. The errands aren't keeping you from attending a boring meeting at work; they're keeping you from a fun horse-riding or helicopter-flying lesson.

Interaction with Other Humans

Most jobs come with a social life. You show up to work. You have casual conversations throughout the day with a variety of people, most of whom you know and many of whom you like. If all you do when you go home at night is sit and read or watch TV by yourself, you're still a reasonably social person. When you retire, however, this built-in social life goes away.

If you've got a spouse and kids, you're all set. You'll spend enough of your day talking to other people. If you're single, however, be aware that you will need to create a social life. This can be tough in many parts of the country and with your existing friends. Your friends who have jobs aren't available during the day and, most of the time, will be too tired in the evening to get together.

The author has been personally fortunate in several respects. First, his preretirement apartment is located in near Harvard Square in Cambridge, Massachusetts. This neighborhood is full of interesting people, such as graduate students, with flexible schedules. Second, several years before retiring he adopted a Samoyed puppy. Walking around town and into shops with a Samoyed is a guaranteed way to start a casual conversation. It might be limited to "What kind of dog is he? What's his name? How old?" but it seems to be sufficient to stave off the feeling of solitary confinement. Third, the author took up flying as a hobby and general aviation seems to involve a lot of middle-aged guys goofing off and hanging around.

One strategy that might be effective is to spend every Sunday night planning activities for the week. As your friends get older, it becomes more difficult to arrange dinner parties and other get-togethers. They just don't have the energy or inclination to hang out like they did in college or just after.

Travel: No to the Beach; Yes to the Organized Tour

One of the great things about retirement is the freedom to travel and explore new parts of the world. Should you take the trips that you dreamed of when you were working? Maybe not. When you worked 50 weeks per year, the idea of sitting on a beach by yourself with a stack of novels might have seemed an appealing escape from the crush of interaction that afflicted you on every working day. In retirement, however, you're free to sit in your living room by yourself every day and read novels. Nobody is going to disturb you. Why go to the trouble of getting on an airplane if that is all you want to do?

An ideal retirement trip might be one in which you learn some new skills and have built-in interaction with people. The author enjoyed a 10-day trip to Panama, for example, in which he took helicopter lessons on most of the days. There was some sightseeing, of course, but not the same old "Where else have you been in Central America" sorts of conversations that pure tourists have. The organized tour that appalled you during your working life might be just right now that you're retired. You'll be sightseeing but also getting to know some potentially interesting new people.

Remember that travel can be hard work, especially if you're doing the planning yourself. Some experienced travelers plan a day or two each week in which they "take a day off" from traveling. They don't move to a new city. They don't sightsee. They might do laundry or other errands.

Non-profits are NOT the Answer

You were probably able to retire young because you are vastly more able than the average person. Now should be an ideal time to find a non-profit organization whose goals you share. You would expect them to be delighted at your offer to pitch in as a volunteer, bringing the skills that enabled you to start and grow a profitable enterprise.

Let's start with a story. Back in ancient times, I worked at an open-source enterprise software company. We had about $20 million per year in revenue and, even after paying out $3 million in year-end bonuses to the programmers, we had at least $3 million left over in pure taxable profit. So we looked for opportunities to do some non-profit work. One of our customers was the MIT Sloan business school. They wanted an information system to coordinate all student-teacher and student-student interaction in their classes.

Basically the system, dubbed "Sloan Space", covered all the IT needs of the school except for accounting. Sloan Space kept track of who was in a class, who was teaching a class, what the assignments were and when they were due, the submission and grading of assignments, private discussion forums for each class, and everything else that the Sloan staff decided that an online community of MBA students needed.

Sloan wasn't paying our company as much as other clients but we found the contract worthwhile partly because many of our employees had been MIT students and had a sentimental attachment to the place, but mostly because we thought that we could reuse the software and get other universities to adopt it. Our software was free and open-source but the richer organizations that used it would generally pay for support and extensions. Universities don't pay taxes and they sometimes cry "poor", but after years of claiming to lose money on every student they somehow end up with substantial assets. (Harvard, for example, has about $30 billion in its checking account; enough to buy at least five aircraft carriers, complete with fighter jets.)

Just as Sloan was preparing to launch their system to students we heard about a new tuition-free engineering college. They were about a year from taking in their first students. We liked what they were doing and contacted the president of the new school.

 We explained our contract with MIT Sloan and the fact that all of the software we'd built for Sloan was free and open-source and could be reused at their school. We offered to assign two full-time programmers, each with an MIT degree in computer science, to the project indefinitely. These two programmers would extend the MIT Sloan software to meet any requirements that the new school set forth. Basically we would handle all of their IT needs at no charge. All of our software was open-source and if we disappeared after a year they could hire the programmer of their choice to maintain and extend it. The president seemed delighted with this idea and turned us over to his head of IT to work out the details. That's where the project stopped. The head of IT already had a plan to hire programmers and build a big system from scratch, working in various Microsoft products (most of which were subsequently rewritten or discontinued).

Non-profit organizations exist to provide their staff with great jobs and the fun of making decisions and spending money. The folks who work at a non-profit organization are very interested in drawing a salary higher than their skills and working hours would command at a for-profit enterprise subject to competition. They are not especially interested in efficiency or accomplishment. If you've come from the commercial world, in which McDonald's must be ruthlessly efficient for fear of being destroyed by Burger King, working with or in the typical non-profit organization will likely drive you to insanity.

Once word gets around town that you are retired, non-profit orgs will start rattling your cage. Whatever your IQ, education, certifications, and skills might be, the assumption will be that you are past it, a doddering old fool incapable of doing more than writing a check. If you believe in their mission, however, it doesn't make sense to write them a check. Donating money to charity is great for busy people with jobs and the obscenely wealthy who are maintaining their social status with displays of spending surplus cash. As an early retiree, however, your comparative wealth is mostly in the time that you can choose to spare. If the non-profit organization can't come up with a way to use your brains, skills, and time, tell them to get their cash from the time-starved working rich and the multi-billionaires.

Most important, do not retire in the expectation that it will be easy to find rewarding non-profit volunteer work.

Teaching might be the answer

Volunteering as a teacher has proven very rewarding for many early retirees. People like teaching for a variety of reasons. One is that the traditional lecture course provides a venue in which people are forced to listen to the teacher. If ambitious working people no longer care to hear what you have to say, at least students who don't want to fail the class will listen. A more powerful reason is that talking to young people is an activity that matters. If you are talking to someone over the age of 40 about life decisions, chances are that you both are simply wasting breath and killing time. You can talk about how great it would be to live on the other coast or up in Alaska but both of you are so tied down by a web of obligations from friends and family that it will never happen. A young person graduating from college, on the other hand, is almost certain to choose a new career and move to a new city. Input that you provide on these subjects could be critical to their future happiness.

Tattoo Your Net Worth on Your Forehead...

... otherwise folks will greatly overestimate your wealth. If someone at a party asks you what you do and you answer "retired", if you appear to be under the age of 50, almost always they will greatly overestimate your wealth. Americans cannot imagine stopping work before they've either (1) purchased everything that they could conceivably want, or (2) collapsed from physical exhaustion. The magazine Elite Traveler, distributed free to airport general aviation lounges where corporate looters alight, depicts the lifestyle to which Americans aspire. A watch costs $30,000, a survey of hotel accommodations in Mexico or New Orleans shows suites ranging in price from $3,000 to $20,000, getting from point A to point B costs $5,000 per hour in a private jet, partying for a week involves chartering a yacht for $200,000. These costs are no problems for the readers of Elite Traveler because (a) most of them are borne by the shareholders of the public companies for which they work, and (b) the median annual income of an Elite Traveler reader is over $1 million (see their media kit online). When you say "I'm retired" the other person at the party hears "Even without working anymore, I can afford to live the Elite Traveler lifestyle."

Suppose that you say, for example, that you can't make firm travel plans because your little airplane doesn't have a turbine engine and deicing equipment and therefore you're very dependent on the weather. Folks will ask "Why don't you get a Gulfstream and blast through the clouds at 4,000 feet-per-minute with the same engines that power a Boeing 737?" It becomes a little awkward to admit that you're approximately $50 million short of the $50 million required to join Jack Welch in the flight levels (of course Mr. Welch, despite being retired, doesn't pay for his use of a GE business jet, the fuel, or the pilots; the public shareholders of GE do).

An answer that brings the conversation back down to earth is to remind your interlocutor of all the older folks he or she might know who are retired. They aren't rich, are they? They have enough money, one hopes, to live in a comfortable house and do the things that they most enjoy, not enough money to gratify every conceivable material desire.

Giving Money to Children (While Still Alive)

What's a good way to give money to kids without spoiling them? My idea: For every dollar they earn, give them $N. That way they have to work, but they don't have to work a repulsive yuppie job to enjoy a comfortable lifestyle. The main objection to this approach is that it is tax-inefficient. If the kid earns $50,000 per year doing something he finds rewarding and you give him $150,000 that year, you have to pay a big gift tax. Some sort of trust fund and/or life insurance policy that the kid can claim after you die would be more efficient.

Is an increased tax liability so bad? Not for the truly rich. These guys intend to give most of their wealth away to non-profit organizations. The federal government funds roads and airports that we all enjoy using. The feds pay for health care for the poor and the old. Our tax dollars pay for intrepid military personnel who go out and kill angry foreigners (in most cases) before they can arrive on U.S. soil and kill Americans here at home. For a non-profit organization of its size, the federal government is surprisingly efficient. Most federal employees work in big box-like office buildings, not in $300 million monuments to an architect's ego. George W. Bush gets paid only $400,000 per year, less than half of what a lot of university presidents earn.

Can we tweak the $N bonus idea at all? What if a kid becomes a repulsive yuppie despite the lack of financial necessity? Won't his siblings become envious when Chad, Jr. gets a $3 million check from Chad, Sr. to supplement his $1 million/year earnings at J.P. Morgan? Perhaps there should be a sliding scale for the bonus where the first $100,000/year is muliplied by 4, the next $100,000 by 3, the next $100,000 by 2, and the rest of the kid's income is not subject to a parental bonus. Or there could be a lifetime cap of $10-20 million per kid (no Gulfstream for Johnny :-( ).

How about tweaking the tax liability? Perhaps the money could go first into an irrevocable trust, but only paid out by the trustee as a multiple of income. I'm not sure if this escapes gift/estate tax.

[Note: I drafted this idea at the request of a late 40s rich, but not retired, friend. He ended up implementing it for his teenage children.]

Time Management

How much work does the average college student get done? Almost none. Yet the same person, injected into a corporate bureaucracy, becomes a reasonably effective worker. Why? Most people have terrible time management skills. This limitation is of no consequence in public school. The school tells you where to sit and what to do and when, at least for six hours per day. This limitation is of no consequence at most jobs. The employer tells the workers where to sit and what to do and when, at least for eight hours per day.

If you're retired, however, nobody tells you how to organize your life. If you have goals that you'd like to accomplish and your time management skills are poor, you might end up disappointed in yourself.

In researching this article, I ordered all of the popular books on time management from Amazon.com, but didn't like any of them well enough to recommend. Here are some reasonably good ideas from the books and from my friends:
  • make lists of the things that you want to accomplish and subtasks toward those goals; keep these lists in prominent and convenient places (most of the books)
  • schedule lots of lessons and other things in advance so that your days have some structure (my own; I tend to schedule flying and horse riding lessons during the summer, for example)
  • come up with a rigid scheduling spreadsheet for your days as though you had a job, setting aside time for writing, reading, answering email, going to the gym, etc. (my own, I drafted a spreadsheet once but never tried living it because I was instantly ridiculed for my efforts by a girlfriend)
  • publish a public Web diary of what you do every day, thus discouraging you from wasting time because you'll be ashamed to admit that all you accomplished yesterday was a 15-minute oil change and a trip to Target (my own, but never implemented)
  • don't read the newspaper or email in the morning because it will scramble your brain with lots of disconnected ideas and you won't be able to accomplish any serious work for the rest of the day (very productive friend who has just completed his fourth book).
TIME Magazine Happiness Issue

As mentioned above, pursuit of happiness is the main goal of the early retiree. TIME magazine's January 17, 2005 issue contains a special section entitled "The Science of Happiness". At least 50 percent of happiness is genetic, so don't expect a huge change from how you felt when working.
Some good news for early retirees:
  • important sources of happiness are often those that require some free time to pursue, such as spending time with children and friends
  • "your degree of control over your life and destiny" was an important factor as was "the things you do in your leisure time"
  • older people are happier and less subject to depression than young people
  • reported happiness is positively correlated with income (88 percent of people earning over $100k/year say that they are happy "most or all of the time" compared to just 68 percent of people earning less than $35,000 per year), though some other studies show that this is not a large factor once above the median income.
Potential bad news: "engagement and meaning are much more important [than pleasure]". If you don't have a job or kids, you might not be very engaged and what you do might not have any meaning or purpose. "Cerebral virtues--curiosity, love of learning--are less strongly tied to happiness than interpersonal virtues like kindness, gratitude, and the capacity for love."

Concrete steps toward more happiness:
  • keep a gratitude journal, once a week, in which you write down three to five things for which you are current thankful
  • practice acts of kindness to make yourself feel generous and capable
  • thank a mentor--in detail and, if possible, in person
  • write letters of forgiveness to people who have hurt or wronged you
  • invest time and energy in friends and family
  • sleep and exercise
  • spend more time with other people ("almost every person feels happier when they're with other people," says one expert quoted in the issue--note that this makes computer programming a particularly poor career choice)
  • laugh more (watch Zoolander instead of a serious subtitled French movie)
  • move to a country, city, or neighborhood where you are substantially wealthier than average (being exposed to lots of richer people will make you envious and less satisfied with whatever you have)
  • move to a country where people around you are happy (East Asia bad; Latin America good; U.S. quite good as well)
  • get a dog: studies show that dog owners were happier and less subject to depression, people were able to do difficult or unpleasant tasks more easily and with lower blood pressure when accompanied by a dog; dog owners get more exercise and find it more enjoyable
  • (tough to fake) become a sports fan and cheer like an idiot
  • (even tougher to fake) become religious, ideally Buddhist -- those who have a lot of religious faith tend to be happier and find meaning in life; among mainstream U.S. religions, Protestantism is good for happiness and Judaism is bad
The TIME issue is negative on marriage as a means for increasing happiness. Married people are happier, of course, but mostly because they were happier and better adjusted to begin with. TIME ignores the fact that they previously talked about how children and grandchildren were critical to happiness. For most people, it is not practical to have children outside of marriage, so it seems that people would be happier if they stayed married at least long enough to have some kids.

Prepare to Die

Retiring young has benefits and risks to life expectancy. You're not sitting at a desk all day every day anymore, so you'll probably lose 10 lbs. simply by being more active. You won't be going on business trips and gorging yourself with expense-account meals. On the other hand, you now have time to ski, snowboard, skydive, whitewater raft, fly light aircraft, travel to Africa, and engage in other risky activities. Best to plan for your ultimate demise.

Unless you think the government is doing such a great job building a new and better Iraq that you want to pitch in even more, you may wish to consider ways of avoiding estate tax. Only the first $2 million of an estate is currently exempt from taxes, scheduled to rise to $3.5 million 2009, be unlimited in 2010, and come back down to $1 million in 2011. Some states collect their own estate taxes
(see http://www.retirementliving.com/RLtaxes.html for a list). The total tax burden on an estate can be more than 50 percent.

The standard tools that rich families use to preserve their wealth down through the centuries include the following:
  • give money to a grandchild instead of a child; by skipping a generation, the government gets only half as many opportunities to collect estate tax (reduce estate tax by 50 percent)
  • take money that you were going to give to someone upon your death and, instead, buy a huge life insurance policy with it; when you die they collect the proceeds of the insurance policy tax-free (reduce estate taxes by 100 percent)
  • various trusts to hold insurance proceeds and other money so that young and/or irresponsible inheritors don't burn through the money too fast (doesn't really save tax, but lets you control people from beyond the grave)
  • charitable foundations and organizations that are supposed to work for the public benefit, but in fact provide jobs and luxurious vacations ("board meetings") for members of your family for decades to come; the Enron executives were into these. Supposedly it is illegal and the family foundation ought to recruit employees on the open market, but in practice people are able to say "the only person we could find to review grant applications at our family foundation was our cousin Margaret at $100,000 per year" (reduce estate taxes by 100 percent)
 A good lawyer can put together a package with a Will, a single trust, and maybe an insurance policy, for about $2,000. Even at big firms, some of the more honest lawyers will do this work for a fixed fee.


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