In a recent article on ESI Money, the author shares the greatest lessons he took away from reading You Can Retire Sooner Than You Think by Wes Moss.
Here is an excerpt from ESI Money.
As we end our coverage of the book You Can Retire Sooner Than You Think, there are about a gazillion more pieces of wisdom I could share from it.
We’ve already covered so much (and there’s much more left in the book) but what follows are eight pieces of learning that didn’t fit well into my other posts. And yet I had to share them, so here we are.
And in addition to sharing, I have to leave my comments as well. I can’t let something slip by without adding my two cents. Ha!
With that said, here we go…
Five Action Steps Toward an Early Retirement
The book lists five action steps to an early retirement as follows:
1. Keep your primary mortgage payments (as a percentage of your income) well below the conventional “25 to 30 percent of your monthly income.”
2. Pay off your mortgage early.
3. Live on one of two incomes.
4. Forget about saving 10 percent a year. (save at least 20 percent of your annual income)
5. Start thinking about your future income.
- To me, the vital step in paying off your mortgage early is to buy a house you can afford. This means not stretching until it’s an unreasonably large portion of your income. If you can keep it easily manageable — and 25-30% seems like an amount most should be able to handle — it can be accomplished far easier than most people think. Of course if you can spend less than 25%, that’s even better.
- We talked about paying off mortgages when we covered secret 3. Is there anything else left to say? 😉
- Living off one income is good advice — if you have two incomes. We did, but only for a handful of years (and before we knew what we were doing money-wise.) This is why we focused on growing my income — it’s the only one we had. We also had a few side hustles over the years like freelance writing, refereeing https://esimoney.com/how-to-make-money-as-a-soccer-referee/, and blogging, but those came along later.
- I like saving 20%. 10% seems like it just won’t get you there any more. If you can save more, that’s even better. We saved over 36% of our gross income throughout my working career.
- The sooner you begin thinking about and planning for retirement, the better IMO. As we’ve learned in this book, it doesn’t take much time or effort to move you from being an unhappy retiree to a happy retiree when it comes to planning. All you need is to spend five hours or more a year on it. Surely something as important as your financial future in retirement is worth at least five hours a year, right?
Learn from Those Who Have Done It
I love, love, love this comment:
They say it’s never a good idea to compare yourself to others, but I disagree. If you see someone standing where you want to be standing, study that person! Figure out how he or she got there and what you need to do or change to arrive at the same place.
This is the heart of much of this site:
- When I wrote What Makes ESI Money Different three and a half years ago I talked about this concept. I knew people didn’t want “just another personal finance blog” so I wanted to spell out how ESI Money is different. One difference is that it’s written by someone who actually became wealthy using the principles he talks about, not a person in the process of figuring out how to become wealthy. I wanted the site to be about a real, personal, successful experience that I could share with others.
- And, of course, I’m not the sole source of financial wisdom, so we added the Millionaire Interviews. Through this series others who have become wealthy share their knowledge and everyone learns from their experiences as well. Every story/journey is unique and adds to the base of practical knowledge we’re accumulating on this site.
- More recently, we’ve added Retirement Interviews so people who have actually retired can tell us what they did and how it went. Again, we’re learning from people who have already done it.
- One other area where this principle works well is in growing your career. You can always follow my seven tips to growing a career. But you can supplement these efforts by finding someone in your field who has had good career growth and learn from her. Take her to lunch, learn what she did to earn more, and copy that.
As I said, I love, love, love this!
Biggest Retirement Pitfalls
What are the biggest reasons people can’t retire? Here’s what the book says:
The biggest pitfall of retirement planning is hands down the failure to save money.
Suffering under a big mortgage is another common pitfall.
So you can overcome the pitfalls of not learning secrets 1, 3, 4, 5, early on in life. But not having saved enough money (secret #2) is a deep one that’s hard to climb out of.
Saving is an issue that many struggle with, especially early on. Even millionaires often mention they had trouble saving when they first started out. That said, they usually corrected the issue relatively early so they weren’t killed by it.
I’ll let the mortgage issue pass without comment — I think we’ve discussed that enough.
Avoid High Fees
Here’s one that readers of this blog will love:
Another pitfall you should put on your radar is the potential of being charged fees for your investment decisions. Avoid costs that can ding your bottom line.
Most investors pay fees on fees, which can end up taking away 5 to 30 percent of their return per year. It’s a slow, extremely leaky bucket phenomenon. Don’t let it happen to you.
I think as index fund investors many of us are completely aware of fees, especially since there doesn’t seem to be any correlation between higher fees and better advice/performance.
It’s amazing these days that people are still paying some of the fees that they are…
Divorce is a Killer
Here’s the book’s take on divorce:
Another pitfall is divorce. Barring unequal circumstances, staying married will definitely save you money.
The economics of divorce are pretty simple. You divide your assets in half each time you go through it. So if you get divorced four times, even if you started with $20 million, you’re going to be down to $1.25 million by the end.
Divorce economics—getting your net worth cut in half—is brutal. There’s a reason more millionaires in The Millionaire Next Door are still married and have never been divorced. It’s also reflected in my happiness study: simply put, it’s easier to be a happy retiree if you are married. The numbers don’t lie.
I said the same thing in The Cost of Divorce commenting, “50% of 50% of 50% of 50% of 50% is not much.”
Of course people can’t always help if they get divorced or not, but for those on the bubble, economics says you might want to try to make your marriage work.
That said, you might be married to a spendthrift who is an anchor on your finances. If that’s the case and your net worth is relatively low, then divorce could be a financial windfall.
Illiquidity is a Killer
Here’s one that reminds me of some ideas the financial planners we met with proposed:
Another big mistake a lot of investors make is having investments that, by nature of the product that they are sold by an insurance salesperson, stockholder, or financial planner, don’t allow them access to their money in the event that they need it.
I’ve seen people really get burned in investments where there’s a lack of liquidity. An illiquid investment can be a recipe for disaster. I’ll be frank: it’s one of the reason I’m not a big fan of annuities.
This is something I dislike as well — not being able to get to my money. Anyone else have this issue?
Problems with Annuities
The author continues the point above and lists several reasons he dislikes annuities. Here are the highlights:
Annuities often come with brutal fees and commissions—the annual expenses average 3 to 3.5 percent. Sales commissions from the original sale the annuity can range from 4 to 8 percent: a significant incentive for those selling annuities.
Be wary of annuities that promise things like “guaranteed 5 percent income.”
Annuities with long surrender periods and/or high annual fees lock up your money and then slowly pay it back to you.
I have never been a fan of annuities (because of the costs and the fact that you turn over a big chunk of your money). I suppose I think I can manage the money better than an insurance company, so why should I turn it over?
That said, surely there are people who need lots of help and a source of stable income. Even with high fees, are annuities right for them? I suspect for some the answer is “yes.”
Anyone out there like/use annuities?
The Poor State of Retirement Preparation
We’re going to end with a hobby of mine — collecting sad facts about the state of retirement preparedness in America.
Here’s what the book shares:
More than one-third of the county isn’t saving. Thirty-five percent of Americans don’t contribute to retirement accounts.
The ones who have saved haven’t saved enough. Fifty-seven percent of workers report that they and/or their spouse have less than $25,000 in total saving and investments (excluding their home and defined benefit plans). And 28 percent have less than $1,000 (up from 20 percent in 2009).
Many seniors are poor. One out of every six elderly Americans is already living below the federal poverty line.
Men and women are working longer. A record 33 percent of Americans now plan on working past the age of 70–which makes sense, when you consider they don’t have money saved to retire.
The cost of healthcare is formidable. Fifty-one percent of Americans doubt they can pay for medical expenses in retirement.
Ugh. I’m constantly disappointed but never surprised by numbers like these. Years of reading and writing about finances has left me jaded about stuff like this.
It’s an interesting issue to solve though. Americans are fiercely independent and “don’t want to be told what to do” (we have our freedom after all!)
And yet unless someone tells them what to do, they generally make a mess of their finances.
It’s a tough situation to resolve…
Click here to read the full article.
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