This book could be classified as one of the earliest FIRE books I have seen. Written in 1999 (right before the dot com crash), the author details how he retired from financial journalism in 1981 at the age of 29, with a wife, two kids, and $500K in investments. In his first year, he suffered through a serious market downturn, and then the “flash crash” of 1987. Still he and his family were able to survive and prosper, and then participate in the great investment boom of the 80’s and 90’s. When he wrote the book in 1999, he had managed to triple his investments while living off them.
The first part of the book covers how to determine if you can retire today. He goes through the process of determining your current living standard, tax multipliers, future spending and debt. He provides a chapter on the issues that might pop up with an early retirement (emotional issues, fee based investment advisors, life expectancy, etc.) In the end, he provides a formula for determining whether you can retire now, or how much more you need to save before you can, including suggestions on speeding up the process. It’s a good first start.
The second part of the book assumes you are ready to retire early, and works on how to set up your investments to supply you with the funds you need for the long term. He doesn’t assume a “4% rule” (it may not have been completely accepted in 1999) so his process is more along the lines of:
- You need $60,000/yr. to live, including taxes
- You have $1,000,000 in investments
- You assume a 3% inflation rate
- Thus you need investments that make 9% return historically (6% for your $60,000/yr. plus 3% to offset inflation)
- Design your asset mix to make an average of 9%
This is a key plus for this book versus many other investment manuals. Most information available concentrates on the “accumulation” phase of life, where you are building your wealth. Very few cover what to do once you have achieved financial independence and just want to live off it.
Mr. Edmunds then takes the time to explain each of the asset classes, their strengths and weaknesses, and how they fit in with a retirement portfolio. One of the more interesting points he has in when talking about real estate. For most folks, they think of getting real estate with no money down or with 20% down payment at most – using leverage to maximize gains. What the book points out, though, is that you are now retired and don’t need to increase wealth; you need to generate cash flow. Thus, Mr. Edmunds suggests purchasing real estate with 50% down and 50% leverage, so that the property generates a good 10%+ case flow from day 1 (instead of waiting years). This fly’s in the face of current real estate planning, but it does have merit!
Edmund suggests you figure out the investment return you need, and then create a portfolio of 3-5 different asset classes that don’t move in sync with each other (ex. US Bonds and foreign stocks often vary year to year in returns). He provided what the average returns were for each of these asset classes are, based on the longest studies he had available at that time (1999). He does caution not to use the returns from 1984-1999 as he recognized they were an anomaly.
In the final part of the book, Edmunds helps you design your retirement portfolio. Here is his chart and a corresponding list of Vanguard Index funds and their returns over the last ten years (in case you want to do comparisons). You will note to start that his returns are higher for most items vs the last ten years (especially for bonds):
|No||Description||Book Return||10yr return||Vanguard|
|2||US Small Company||12%||8.01%||VSMAX|
|3||US Large Company||10%||7.30%||VLCAX|
|4||Foreign Company||10%||5.68%||VTIAX||5 year|
|5||US Real Estate||10%||5.00%||VGSLX|
|6||US Oil & Gas||8%||1.26%||VGENX|
|7||Corporate Bond||7%||5.75%||VICSX||As of 3/2010|
|8||Foreign Bond||7%||4.50%||VTIAX||as of 11/2010|
|9||Treasury Bond||6%||6.79%||VLGSX||as of 3/2010|
|10||Municipal Bond||5%||2.59%||VTEAX||as of 8/2015|
Using his format, if you wanted to get a 9% return for the situation above, you could go with:
- 40% Large Company stocks @10% return = 4%
- 35% Foreign Company stocks @10% return = 3.5%
- 25% Treasury Bonds @6% return = 1.5%
- Total of 9% return, on average
I think the process has merit, but I’d like to see more studies post-1999 on long-term returns.
The epilogue of the book is possibly the most useful part for those of us retiring early. In it, Mr. Edmunds details his story and “How to live through a crash without putting a bullet through your head.” He had many ups and downs, made some mistakes, but eventually came out alright (even today, he is doing well, 35 years after retiring at 29). He talks about steps to take when the market is crashing, life planning for after retirement, and what lessons he has learned. If nothing else, look at it for this chapter.
Overall, I think it is an excellent book, though some of the percentages might be dated. Grade 4 stars out of 5
Mr. 39 months