How to retire young

How to retire young

How to Retire Young by Edward M. TauberI am both a money nerd and a book nerd. Naturally, I get a little giddy when I find old books about money I've never heard of before.

While browsing Oregon's best used bookstore earlier this year, I stumbled on a 1989 book called How to Retire Young by Edward M. Tauber. Tauber retired at the age of 43 from a tenured full professorship as Professor of Marketing at the University of Southern California. He's written a number of marketing textbooks, but this was his first (and only?) foray into the realm of personal finance.

How to Retire Young is one of the oldest books I've found on the subject of early retirement. It's fun to see how much of the modern financial independence movement is foreshadowed in the book's pages.

It's also fun to see how closely How to Retire Young adheres to my own “get rich slowly” philosophy. “Much [financial advice] is oriented toward the quick buck,” writes Tauber, “taking paths that often have a low probability. In short, you might as well play the lottery.”

Tauber has a different philosophy. He urges readers to “take the high road”. He wants them to follow the path with the greatest odds of success, even if that path might not lead to quick wins. He also cautions that “there's no best way for everyone”, just as I say “do what works for you“. There are certainly best practices and mathematically optimal options, but there aren't any right options.

You Can Retire Young

Tauber's premise is that many people can retire early — if they plan and remain dedicated to the plan. He writes:

“If you want to retire early, there are no magic formulas. It requires hard work to make money and requires smart work to learn how to invest on a pretax basis. If you invested 15 to 20 years in school to learn how to make money, why not spend a little effort to plan how to capitalize on your earning power to be able to enjoy it for a third of your life on your terms in early retirement?”

“Think of life has having three periods: schooling, working, and savoring,” he says. Most folks spend the first 20 to 25 years of life in school, work for 40 to 50 years, then leave what's left for “savoring”. He suggests shifting our perspective. “Why not plan life in three equal installments?” he asks. Spend 25 years in school, work for 25 years, then savor another 25 years — or more.

The issue, as you know, is that there are trade-offs. The opportunity cost of retiring young is the stuff you could have had (and the things you could have done) during your working years. “Early retirement is like anything else that you can purchase,” Tauber writes. You probably won't have as much discretionary income while you're saving or when you retire, but you will have the time to enjoy what you do have.”

Tauber says the reason most people don't retire early is they don't think it's possible. More than that, they're not willing to wait to spend their money. They want to spend it now. They're working hard, earning money, and they feel like they deserve to indulge themselves.

What's more, the average person “cannot visualize the possibility that [work] might slow or stop”. People fall victim to the forever fallacy. As a result, they get trapped in what Tauber calls the work-spend cycle.

When you want everything now, you get it now — but that means exactly what it implies: having it now, not later. “It's a prescription for a lifetime of work and spend,” Tauber warns. It's also a prescription for living on less when you're older. If you want money now and later, you have to plan for it. You have to want it badly or it won't happen. And “if you want to retire early, you have to do it yourself, using the system to your best advantage.”

How to Retire Young

Tauber believes there are four steps to early retirement planning. Each of these requires both action and dreaming. The dreams give you the motivation, and the action makes it happen. You can't retire young without both. (Well, I suppose you can, but without the dreaming aspect, what's the point?)

Tauber's four steps are actually a little confusing. My more organized version looks like this:

  1. Draft a “retirement lifestyle scenario”. Tauber offers an exercise similar to one I use in my workshops: “Assume you will retire next week. You are 55 years old and have 30 years of life expectancy. What will you do? Where will you live? How will you spend your time? Will you work? Will you move?” He urges readers to write a detailed two-page story to flesh out their dreams and desires. Think about what you'll do in a typical day, month, or year during retirement.
  2. Calculate how much you'll need then. When you're finished your retirement lifestyle scenario, set it aside for a few days; after that break, make revisions. Next, figure out how much money you'd need (in today's dollars) to support this lifestyle each year. Take as much time as you need to research this in depth. Come up with a realistic number.
  3. Calculate how much you have now. Your next step is to conduct what Tauber calls a “financial audit”. He wants you to calculate your net worth and do things like check your estimated Social Security benefits. If you were to retire today, how much annual income would you have?
  4. Develop a plan to close the gap between future needs and current means. Finally, figure out how to bridge the gap between what you have now and what you need in the future. Say, for example, that you estimate that your ideal lifestyle would cost $5000 per month but you only have enough saved to support $2000 per month. The gap you need to close is $3000 per month (or $36,000 per year).

Most of How to Retire Young details strategies for closing the gap between future needs and current means. A lot of what Tauber suggests has become outdated in the past thirty years, but some of his advice is still spot-on.

He is a huge proponent, for instance, of managing your career for greater income. He's very blunt in this regard: If you don't earn it, you can't save it. You won't retire young by making minimum wage.

“If you make more income,” he writes, “you can retire that much younger and, therefore, that much more quickly.” He continues:

“Most people make a critical mistake in career planning. They do not try to maximize their lifetime income. They may say that they want to get ahead or make more money, but they don't look at their working life to see how that can happen.”

Tauber says that you should never take a job unless it increases your value and marketability to others. Other points of advice include:

  • Evaluate every job to determine what skills you can learn that will prove useful (valuable and in-demand) in the future.
  • Identify critical needs of employers in your field, the things that they think are important. Become an expert at these things.
  • Assess your personal strengths and weaknesses. Look for a skill that you have that might allow you to do something better than others can.
  • Make sure that what you are learning — in school and on the job — will be in high demand from companies and customers.

In other words, take the long view with your career. Most people only look at the short term. As a result, they might take a position that pays more today but has no future. Tauber wants readers to have a plan for their career, and to pursue that systematically so they can earn as much money as possible.

As you earn money, save it. “The key to early retirement is nothing magical,” Tauber writes. “It involves the three saves: save early, save more, save smart.”

  • Saving early means starting now, if you haven't already. Seriously: Make it a top priority. If you want to retire young, you need to take advantage of the power of compounding. Above all, compounding requires time.
  • Saving more is all about boosting your saving rate, the percentage of your income that you save. How much should you save? Tauber recommends 10% of your take-home, as do many other money pros. I think you should aim higher. Twenty percent is great. More is better. (Take a gander at the shockingly simple math behind early retirement for more on this subject.)
  • Saving smart means investing your money wisely and taking advantage of tax breaks, employer-sponsored retirement accounts, and so on. (Want to learn more? Here's my quick guide on how to invest.)

Tauber formally recommends something that I've done accidentally. He says that many early retirees can benefit from saving two pools of money, one for the short term and one for the long term. The long-term money include tax-advantaged retirement accounts that you don't want to touch until you turn 59-1/2. The short-term accounts contain the money you'll need until then.

I've only recently realized that I inadvertently set myself up with two pools of money. I have my IRAs and my 401(k) that I'll access once I turn sixty. These currently have a balance of about $500,000. For the next ten years, I need to live off my regular taxable investment accounts. These currently contain $300,000. When you consider that I have to pay capital gains taxes whenever I draw from my taxable accounts, that's not really enough to last the next ten years!

The Bottom Line

One of my money nerd specializations is the history of retirement. Sad but true, I read about the topic in my spare time. I'm gradually building a library of books and articles about retirement — especially early retirement. I think a lot about the evolution of retirement, the types of retirement, and even the definition of retirement. (I told you I'm a money nerd!)

What makes How to Retire Young special is that it's one of the oldest books I've been able to find on the subject of early retirement and financial independence. (For those who are new around here, these two terms are essentially the same thing. We often say “financial independence”, though, to keep people from arguing about what retirement is and is not.)

Today, financial independence and early retirement (sometimes abbreviated FI/RE) are the hot topic in the world of personal finance. There are scores of FI/RE blogs. There are FI/RE podcasts. There's even a film about FI/RE scheduled to come out later this year. But in 1989, this was a new topic.

When How to Retire Young was published:

In fact, the only FI/RE book I know of that predates How to Retire Young is Paul Terhorst's 1988 classic, Cashing In on the American Dream [my review].

I wish I could say that How to Retire Young is a great book. Sadly, it's not. It's good (don't get me wrong), but it suffers from being first. Nowadays we have robust theories and systems to support early retirement. In 1989, Tauber was inventing things as he went along. As a result, some of his number-crunching is needlessly convoluted. Worse (to me), the book itself sometimes seems sloppy and poorly edited.

Because of this — and because it was written thirty years ago — I don't recommend How to Retire Young for the average person. (I've done my best to summarize the best bits here so you don't have to track it down.) If you're a money nerd, fine. Read it. It's only going to cost you a couple of bucks, and you'll get a fun glimpse at the early days of early retirement theory.

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Ross Williams
Ross Williams
2 years ago

“Tauber retired at the age of 43 from a tenured full professorship as Professor of Marketing at the University of Southern California.” And his linked in Profile says he has spend the last 38 years as President of Brand Extension Research where “Using proprietary research methodology, we have conducted brand extension studies for many Fortune 500 companies. Our expertise is unmatched, …” In other words, he didn’t retire and it looks like he is now in his 70’s and still working. “The four-percent rule for safe retirement withdrawals hadn’t yet been formalized.” The four percent rule says that there is… Read more »

Barb
Barb
2 years ago
Reply to  J.D. Roth

I wonder if part of the change is views about if working while retired is considered retirement is because of the vast number of retirees that were not able to live off thier savings and needed to get a job. In contrast, in the 1960s and 1970s, may of those retired did get a job but that job was a *fun* job – being a fishing guide, working at a garden center, etc. It was almost like those retirees were getting paid to do their hobby. And often the money they earned was not *needed* for their household but instead… Read more »

Ross Williams
Ross Williams
2 years ago
Reply to  J.D. Roth

@JD –

” yet Tauber would consider himself retired”

I doubt it. He changed careers. He has been running a company for the last 30 years, longer than he was in academia. If asked what he had been doing, I doubt he would say he was retired for the last 30 years.

I think it is important to understand career change and retirement as different things. Its fine to say you are retired military, but if you are working a full time job you aren’t retired.

lmoot
lmoot
2 years ago
Reply to  Ross Williams

+1 @Ross William. I agree. The common story I see in the early retirement crowd is: Person works harder than the average bear, in order to retire sooner and/or with more money than the average bear…only to continue working even when they don’t have to. On the surface, the idea of someone working because they enjoy it, is great. But if they are working because they don’t have to, because they have all of the cash they need, then why accumulate so much cash if you are going to be working for fun anyway? Wny not just continue working for… Read more »

WantNotToWantNot
WantNotToWantNot
2 years ago
Reply to  lmoot

Sounds like you are on course to figure out how to be happy!

Good on you!

This is much more sensible than merely figuring out how to be rich.

Accidental FIRE
Accidental FIRE
2 years ago

Very interesting, never heard of that book! I like the concept of life being divided into three parts, school work and then fun. Although it shouldn’t necessarily have to go in that order, it’s very true that so many people who work until they’re 65 or even longer spend very little time as an adult being able to do whatever they want to do. That’s not going to be my destiny.

Brian at Cognitive Buffer
Brian at Cognitive Buffer
2 years ago

Provocative post – what is old is new again! I find that the tension during the working years pits the opportunity to maximize income against the desire to be present for your childrens’ milestones. For me, moderation wins the day. The destination is important, but don’t forget the journey!

Ben
Ben
2 years ago

J.D. – Thanks for the book review! An idea for a future post: would love to see an interview with Tauber about his retirement experience since writing that book 30 years ago, what has/hasn’t worked, things he would have done differently, etc. I imagine he has had some interesting takeaways.

Jason
Jason
2 years ago
Reply to  Ben

I like Ben’s idea. I’d love to get the author’s current perspective.

Teri Hjelte
Teri Hjelte
2 years ago
Reply to  J.D. Roth

What a great idea. Thank you for this article and your website in general. I have been learning a great deal. Follow-up interviews with these authors sounds interesting!

Joe
Joe
2 years ago

Thanks for the review. It’s neat to see these old books and how life turned out for the authors.
There are a ton of FIRE bloggers/podcast/books now, but a lot of them are only a few years old and haven’t been tested.
We have 2 pools of money too. The long term pool is much bigger and we’ll need to convert that to short term. Can’t you convert some 401k to Roth IRA? You’re probably making too much income.

Anne
Anne
2 years ago

It’s fun finding older books in your field of interest.

My only caveat about Tauber would be: Did he have children? A HUGE divider among those able to retire early.

Iain
Iain
2 years ago

People keep telling me because I’m only 27 that I still have YEARS left of working life, and not to get too caught up in overthinking things when it comes to earning, saving, investing etc… but I don’t want to have to work for most of my adult life. I want to be able to be smart and retire as young as possible so that I can enjoy the remainder of my life. I firmly believe it’s not always what you earn, but what you keep that is important. I’ve known plenty of people who earn much more than me,… Read more »

Mr. Pop
Mr. Pop
2 years ago

Neat review. It’s really interesting that the math (4% rule) that backs FIRE is so new. It also spread almost completely over the internet…which is only 20 or so years old itself.

I thought that YMOYL was the first “modern” FIRE book (even though the first version relied on bond returns that are no longer possible.)

If you follow the homesteading/frugality vein of FIRE you can probably go back to Amy Dacyczyn and the Tightwad Gazette, or even Borsodi.

Mike
Mike
2 years ago

I enjoy how you share your knowledge about past frugality and FIRE. It’s really cool to see the perspective of those way back then. Paul Terr…, Vicki Robin et al.

Shanna Simmons
Shanna Simmons
2 years ago

I remember reading a magazine cover article around 1994, probably in Mother Earth News, titled something like “Retire on $200,000 and a paid for house” that I have looked for many times since. It profiled a few people, one I remember was in central Oregon (maybe Sweet Home?). Please find the article and comment on it if you can!

Mike
Mike
2 years ago

People keep telling me because I’m only 23 that I still have YEARS left of working life, but I don’t want to have to work for most of my adult life. What I really need is a plan for living your life.

S.G.
S.G.
2 years ago
Reply to  Mike

I agree with People. At 23 you should be focused on what you want out of life and making solid financial decisions, not specifically retirement. A well articulated goal is one that leaves you (and hopefully the world) better off whether you achieve it or not. Focusing on a single goal like “early retirement” at the cost of other opportunities isnt the best. Instead I would recommend a more rounded goal of what you can save currently that will leave you better off financially today, tomorrow, and into the future. If that future is retirement doesnt really matter today. Second,… Read more »

WantNotToWantNot
WantNotToWantNot
2 years ago
Reply to  S.G.

S.G.—great response. One of the disheartening things about the FIRE movement is how some take RE as their only, over-arching life goal. Really? If you are on earth only to amass enough money so that passive investing meets your needs, then you are a pretty shallow person. If your only life-mission is FIRE, that makes you pretty selfish. You need to get out of yourself and get a real life and find a job that is meaningful and that contributes something to the world. J.D. has great posts on thinking about your personal mission—and that goes far beyond merely amassing… Read more »

S.G.
S.G.
2 years ago

I don’t know about shallow or selfish, but definitely misguided. I read something recently abiut articulating goals and the author was talking about how poor goals can hurt you. His examples included a promotion that made a person miserable. I see the same thing in FI. There is an unhealthy cycle of focusing of FIRE and making yourself increasingly miserable, which fulfills the prophesy of a miserable job that must be escaped. If one sets a different goal one can have a far better outcome. When work got miserable for me I set a goal for a better situation, not… Read more »

WantNotToWantNot
WantNotToWantNot
2 years ago
Reply to  S.G.

+1 “There is an unhealthy cycle of focusing of FIRE and making yourself increasingly miserable, which fulfills the prophesy of a miserable job that must be escaped.”

Well said! Not all jobs are miserable, and in addition to seizing control of one’s finances, one should make it a goal to find a meaningful job that brings joy (and earns a living). Yes, that is indeed possible.

Jonathan
Jonathan
2 years ago

I’m familiar with the work and spend type of life. It took me some time to figure out that I was trapped in the rat race as many, many others currently are. Started thinking differently and acting in a new way and now I’m happy to say I am on my way to early-er retirement.

I wonder how hard it was for Tauber to write this considering it was one of the first of its kind. And yes, it will be fun to read it even if it was written about 30 years ago.

GreenDollarBills
GreenDollarBills
2 years ago

In terms of the savings rate it’s hard to know where to start. I always recommend starting at 15% of net income and then following each pay rise the total after tax pay rise gets added to your automated savings thereby increasing the savings rate over time in an affordable way

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