Work Less, Live More The New Way to Retire Early by Bob Clyatt always up to date The law changes, but Nolo is always on top of it! We offer several ways to make sure you and your Nolo products are always up to date: Nolo’s Legal Updater We’ll send you an email whenever a new edition of your book is published! Sign up at www.nolo.com/legalupdater Updates @ Nolo.com Check www.nolo.com/updates to find recent changes in the law that affect the current edition of your book Nolo Customer Service To make sure that this edition of the book is the most recent one, call us at 800-728-3555 and ask one of our friendly customer service representatives Or find out at www.nolo.com NOLO please note We believe accurate and current legal information should help you solve many of your own legal problems on a cost-efficient basis But this text is not a substitute for personalized advice from a knowledgeable lawyer If you want the help of a trained professional, consult an attorney licensed to practice in your state NOLO Work Less, Live More The New Way to Retire Early by Bob Clyatt FIRST EDITION OCTOBER 2005 Editor BARBARA KATE REPA Cover & Book Design SUSAN PUTNEY Index SONGBIRD INDEXING SERVICES Proofreading ROBERT WELLS Printing DELTA PRINTING SOLUTIONS, INC Clyatt, Bob Work less, live more : the new way to retire early / by Bob Clyatt ; edited by Barbara Kate Repa 1st ed p cm ISBN 1-4133-0200-9 (alk paper) Finance, Personal Retirement income Retirees Finance, Personal I Repa, Barbara Kate II Title HG179.C6518 2005 332.024'014 dc22 2005047250 Copyright © 2005 by Nolo ALL RIGHTS RESERVED PRINTED IN THE USA No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission Reproduction prohibitions not apply to the forms contained in this product when reproduced for personal use Quantity sales: For information on bulk purchases or corporate premium sales, please contact the Special Sales Department For academic sales or textbook adoptions, ask for Academic Sales Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, CA 94710 Dedication To our Teachers Acknowledgments My thanks to the many early retirees who shared their stories and their insights so that others might follow a little more confidently Particular thanks to the gang at www.early-retirement.org who are always ready to help, 24/7 Keith Marbach of Zunna.com generously ran study after study to help refine, test, and update the Safe Withdrawal Method and programmed the needed enhancements to model The 95% Rule in Chapter Keith also wrote the code for the WATS Simulator, which has been used for his own published research as well as for academic researchers, foundations, and retirees Paul Fendler, my longtime accountant and friend, graciously provided instant feedback on all manner of tax questions and strategies throughout the writing of this book Paul’s guidance, clarifications, and the many hypothetical tax returns he produced for illustrations can be seen wherever tax matters arise in the book, notably in Chapter Tom Orecchio, of Greenbaum & Orecchio in Old Tappan, New Jersey, an advisor with Dimensional Fund Advisors (DFA), helped refine and test my early ideas about the Rational Investing Portfolio and turn it into something worth sharing Tom graciously and regularly ran scenarios and portfolios through his software getting me updated and historical statistics that provided the meat of Chapter 3’s data We are all indebted to a small number of independent thinkers who pioneered the research, created the products, and stood up against the ridicule of Wall Street to make the Rational Investing Method viable for the little guy First among them is John Bogle, the founder of Vanguard and developer of the first low-cost index funds William Bernstein’s research and pragmatic explanations provided me and many others with the “Aha” moments And Eugene Fama and the folks at DFA have given all serious asset allocators the building blocks we need to understand and implement Rational Investing 318 Index • WORK LESS, LIVE MORE for expatriates, 129 for financial information, 73 indexing and asset allocation, 173 innkeeping, 245 personal finance, 299 rational investing, 160 rehabbing real estate, 243 self-employment, 237 small business tax breaks, 211 smaller homes, 117 for transition stage, 63 travel guides, 113 work/life issues, 307–8 See also Internet resources Responsibility, freedom and, 50 RMDs (required minimum distributions) of IRAs, 101–3, 213 Rocks, fitting into a jar, 61–62 Roth IRAs, 101–3, 213–15 Rule 1: Figure Out Why You Want To Do This See Independence, personal Rule 2: Live Below Your Means See Independence, financial Rule 3: Put Your Investing on Autopilot See Rational Investing Portfolio Rule 4: Take 4% Forever See 4% Forever Rule 5: Stop Worrying About Taxes See Tax benefits and strategies Rule 6: Do Anything You Want, But Do Something See Work Rule 7: Don’t Blow It See Challenges of early retirement Rule 8: Make Your Life Matter, 279–83 Rural America, retiring to, 132–33 Rydex SPHINX fund of hedge funds, 292 S S&P 500 index fund, 149–50, 157, 167–68, 188 S&P Hedge Fund Index, 292 Sabbatical from work, 230 Safe annual withdrawal rate, 92–93, 104 See also 4% Forever Safe Withdrawal Method deciding what to sell, 199–201, 209 overview, 184–88 testing a specific 30-year period, 189–92 testing historical data, 192–99 Salaries versus costs, statistics on, 39 Sales tax as deduction, 213 Sanctuaries (Kelly and Kelly), 256 Sandwich Portfolio, 162–63 Savings attitude about, 40 direct deposit tip, 72 inflation considerations, 89–90 net value of, 75, 91 total adjusted value, 91–92 total adjusted value of, 92 tracking your progress, 87–88 withdrawals from, 85, 92 worksheet for income, expenses and, 91–93 Scholarships, 121–23 Schor, Juliet, 44 Securities, selling, 201 Securities houses, purpose of, 142 Self-denial, difficulty of, 49 Self-employment, benefits of, 210–11, 216–17, 248 Self-employment taxes, 218 WORK LESS, LIVE MORE • Index Self-examination, 270–71, 283 “Sell Me Rule,” 107 Semi-retired family versus working family budget samples, 78–82 Semi-retirement See Early semi-retirement Shopaholism, 116 Short-Term Bonds, 288 “Sleep is optional,” 46 Slesnick, Twila, 102 Social Security as income, 94, 97, 127 Social Security taxes, 207–8 Soda cracker portfolio, 161–62 Software calculating long-run finances, 95–96 modeling Safe Withdrawal Rate conditions, 192 tracking spending in, 71 Special expenses, 78 Spending plans considering decreased car value, 111 creating your, 71–73 determining annual spending, 73–77 and home maintenance costs, 118 and income taxes, 119 samples of, 78–82 Spending reduction techniques car costs, 109–11 home improvements, 114–15 overview, 104–5 property taxes, 116–18 small expenses, 105–8 vacations, 111–14 See also Expenses Spirituality, 256, 279 Spouses See Couples Stability of early retirees, statistics on, 280 Standard deviation of volatility distribution, 157, 164, 166 Stanley, Thomas, 48 Statistics costs versus salaries, 39 credit card debt, 40 leisure time, 37, 46 on stability of early retirees, 280 stress-related illnesses, 42 Stock gurus, accommodating, 161 Stocks asset class descriptions, 287–88 common versus preferred, 239 experimenting with small amounts of, 161 foreign, 151–52, 156 growth, 149 international, 288 NASDAQ, 294 small stock tilt, 156, 287–88 value, 145, 149 Stop Worrying About Taxes (Rule 5) See Tax benefits and strategies Stress in America, overview, 40–43 detox stage for shedding, 64–65, 223–25, 230–31 effectiveness without, 254–55 reduction techniques, 41 statistics on early retirees, 280 Sustainable withdrawal rate See 4% Forever T Take Back Your Time Day, 47 Take Back Your Time (de Graaf ), 39 Take 4% Forever (Rule 4) See 4% Forever Target allocation, 174–75 Tax-advantaged retirement accounts See IRAs 319 320 Index • WORK LESS, LIVE MORE Tax benefits and strategies, 203–20 decrease in salary income, 206, 207–8 low tax brackets, 212 owning rental property, 244 self-employment, 210–11 working couple compared to early semiretired couple, 216–20 Taxes Alternative Minimum Tax, 212 on capital gains, 74, 208, 209, 212 on dividends, 209, 218 on IRA withdrawals, 101–3 Medicare, 207–8 on property, 116–18 sales tax as a deduction, 213 for self-employment, 218 for Social Security, 207–8 See also Income taxes Teaching or tutoring, 248–49 Temporary services for job placement, 234–35 “$10 Rule,” 107 Theory of the Leisure Class, The (Veblen), 45 Three-Factor Model, 287 Tightwad shortcuts, 107 Tilt toward value, 145, 156, 287–88 TIPS (Treasury Inflation-Protected Securities), 208, 289 Total adjusted value of savings, 91–92 Traditional IRAs, 101–3 Travel, enjoying, 255–57 Travel guides, 113 Treasury Inflation-Protected Securities (TIPS), 208, 289 Type As, slowing down for, 268 U Unrealized capital gains, 209 U.S Treasury Bonds, 193, 208, 289 V Vacations Americans’ idea of, 37 financially-feasible style, 111–14 as learning opportunities for children, 122, 124–25 retreat centers or mini-retreats, 256 travel as learning opportunity, 255–56 Value funds, 158 Value stocks or bonds, 145, 149 Value tilt, 145, 156, 287–88 Vanguard Group, The High Yield Bonds fund, 290 index funds, 159 list of funds, 169–72 and long-term investing, 143 low-fee mutual funds, 119–20 packaged blends of index funds, 161–62 for Sandwich Portfolio, 163 Vanguard Energy Fund, 291 Vanguard High Yield fund, 158 Variances in spending plans, interpreting, 79 Veblen, Thorstein, 45 Vehicle cost considerations, 76, 109–11, 211 Venture capital funds, 294 Volatility of portfolio, 157 Volunteering, 249–53, 279 WORK LESS, LIVE MORE • Index W Wall Street Journal Guide to Planning Your Financial Future (Morris), 205 Wall Street Week (PBS), 40 Wann, David, 38 Wellington Fund, 162 WellPoint health plans, 99 Western Europe, leisure lifestyle in, 45–46 Work, 221–59 activities in lieu of, 255–59 aim high, 253 avocation versus, 225–26, 233–34, 253 evolving attitude toward, 224–31 expenses related to, 75–76 income related to, 83–84, 206, 207–8, 219–20 joys of semi-retired working, 254–55 post-rat race detox, 223–25, 230 resources on work/life issues, 307–8 teaching children about, 125 volunteering, 249–53, 279 Work alternatives, 231–53 angel investing, 239–40 consulting, 235, 236–37 day trading, 241 exploring your creative passion, 245–46 filler jobs, 232 freelancing, 236–37 hobbies, 247–48 innkeeping, 245 loving what you do, 233–34 real estate investments, 242–44 teaching or tutoring, 248–49 temporary jobs, 234–35 utilizing business development skills parttime, 237–38 volunteering, 249–53, 279 Work ethic, historic, 43–47 Y Yoga, 281–82 ■ 321 m o r e f r o m N O L O Law for All Quicken WillMaker Plus 2006 Windows CD-ROM Software WQP6 $79.99 Handle many routine legal matters with Quicken WillMaker Plus! 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We offer several ways to make sure you and... want the help of a trained professional, consult an attorney licensed to practice in your state NOLO Work Less, Live More The New Way to Retire Early by Bob Clyatt FIRST EDITION OCTOBER 2005 Editor... These early retirees tend to stay in the same homes and communities they lived in while they were working, and if they have children, they keep them in the same schools, perhaps planning to move