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Sunday, February 24, 2008

Reflections on the Nielsen's Early Retirement

"The trouble with retirement is that you never get a day off."
- Abe Lemons


Over the past few years, I've read many personal stories about early retirement. Unfortunately, in most cases the story details didn't resonate very much with me. Sometimes the person in question retired after a supreme event of good fortune, such as receiving a large inheritance or cashing out of a hugely successful stock option grant at one's place of employment. In other cases, it appears that a career change was redefined as "early retirement". (e.g. "I accumulated almost $100,000 and then retired early. Soon after that, I was bored so I started earning money in a different line of work six days a week, and now with that extra income, I'm really enjoying early retirement more than ever." Huh?)

Other articles describe an "extreme" lifestyle where someone lives on $7,000 a year or some similar number. Still other articles feature someone who does not have a plan but merely "hopes to retire early". And then there are the occasional self-serving articles where the person in question "retired early" by writing a book about how to retire early.

All these articles had some entertainment value for me, but they didn't resonate with me because I could not imagine myself in a similar situation or relate to them in any meaningful way. However, a recent Money magazine article about a military family who retired early really struck a chord with me.

On the surface, the family in the article seems much different than my family. They live in the midwest. We live in the Northeast Corridor. They worked in the military. We have always been civilians. Their primary source of retirement income will be their combined pensions. Our primary source of income retirement income will be stock dividends. They will have lifetime medical benefits provided by the government. We will need to pay for medical expenses. On the other hand, it appears they are starting retirement with many years on their mortgage, while we will probably be mortgage free when we start retirement. We also have a sizable sum earmarked for our kids for college, while this is still a big concern for them. Additionally, we don't share the same family backgrounds, the same occupations, or even the same hobbies.

Yet a closer examination reveals a whole host of financial and lifestyle similarities between our two families:

  • Early retirement was a conscious, but evolving, plan over 15-20 years.

  • The success of the plan mainly depended upon consistent execution.

  • Frugality was important, but was never taken to extreme levels. Consistency in all areas for long periods of time was more important than a few spectacular penny-pinching maneuvers.

  • They adhered to a budget for long periods of time.

  • Their spending level is in the general ballpark of what we are planning.

  • Interestingly enough, upon discussing the possibility of early retirement with friends, we have also experienced the same two negative reactions from many people: (1) You're going to be bored. (2) You're being quite irresponsible.

  • Career success was a reasonably large factor, but their strategy did not require an extensive climb up the ladder.

  • They saved about 35% of their income at first, and even more as retirement approached.

  • They invested mainly in equities.

  • They felt like quitting many times, but ultimately persevered.

In addition to a modest $400K in savings, they can also draw about $60K / year from their military pensions, which are adjusted up for inflation each year. While a pension seems intangible to many people, a pension is just an annuity stream and one can easily calculate its value. Using publicly available annuity quotes from Vanguard, I attempted to put a value on their military pensions. Here are the results:


  • Male; Age 44.5; Missouri resident
    • Annuity income = $36,900

    • Paid monthly ($3,075/month)

    • Adjusted for inflation (yearly to CPI)

    • Value of annuity:
      • $955,982 (Single Life)
      • $1,044,396 (Joint / 50% survivor benefit)
      • $1,132,810 (Joint / 100% survivor benefit)


  • Female; Age 40.5; Missouri resident
    • Annuity income = $36,900

    • Paid monthly ($1,800/month)

    • Adjusted for inflation (yearly to CPI)

    • Value of annuity:
      • $629,494 (Single Life)
      • $646,343 (Joint / 50% survivor benefit)
      • $663,193 (Joint / 100% survivor benefit)
Depending on the survivor benefits chosen, the total value of both annuity streams is worth somewhere between $1.6 to $1.8 million. Again, just as our projected spending level is similar to theirs, our projected necessary wealth accumulation is (perhaps unsurprisingly) also in the same ballpark.

Congratulations to the Nielsens. If all goes well, we hope to be joining them in about 5 years.