26 November 2019

Look at Lit: Cashing in on the American Dream

Appearing in this world around the same time that I did, Cashing in on the American Dream by Paul Terhorst was possibly the first book published here in these United States about FIRE. An accountant by education, Terhorst got a good job out of school and quickly rose up the ranks. By his early 30s, he had all the important things that one thinks an accountant should have: House, wife, secretaries, flights around the world at a moment's notice. Then one day in an airport, he saw a group of younger gentlemen who were traveling for something besides business and he realized he wanted to do that. From then on, his tune slowly changed from one of rise rise rise to one of let me get out ahead.

Despite its age, the book is chuck full of stuff that is still relevant to this day. One of his main points was what he called the $50-a-Day rule: Make sure your expenses don't exceed that amount. Now since the book was published in 1988, inflation has been at work eroding our savings. As a result, $50/day then translates into a bit over $100/day today. However, there are still plenty of people living on $18,000 a year (or way less!) and doing so comfortably.

Perhaps the biggest takeaway from the book is that early retirement CAN work over the long term! There is no shortage of doubt and worry concerning retirement for people who are approaching normal retirement age (i.e. 67) and there continue to be stories in the news about how seniors are unable to afford to retire. Yet, Paul and his wife Vicki have been retired for 35 years and I don't think either has any plans of going back to work anytime soon. (However, he apparently does still earn some money from occasionally writing content online.)

Nor should they need to. His assets have grown since he retired in the early 1980s, having approximately doubled within the more than 30 years of retirement. That in itself is a testament as that means they survived market crash of 1987, "no new taxes," the fall of the Soviet Union, the tech boom of the 90s then subsequent bust and recession of early 2000s, 9/11, the mid-decade housing boom, and most recently the Great Recession.

That also brings the "four percent rule" that is otren touted in financial planning circles into focus. The gist of it is that one needs to save about 25 times their intended annual salary in retirement to be able to retire, then that amount would be drawn down in retirement at the rate of approximately four percent of the total sum per year. However, I see two flaws with that. First, it is based on the assumption that the principal would be distributed over that time period and as we have seen from not just Paul, but many others as well, they do not really have to touch the principal at all.

But it also assumes that retirement is going to be 25+ years (taking inflation and other things into account, the money should actually last 33 years). Based on modern life expectancy averages, someone waiting until full retirement age is already too old to be able to live out a full 25 years in retirement. Thus it is possible that some people who are working hard because they are currently say 61 and "only" have 21 times their desired salary saved up could conceivably at least cut back a bit. No point in overworking to "have enough" in retirement only to then cut that time short due to health concerns related to overwork.

In summary, Mr. Terhorst has pioneered FIRE for an entire generation and has now lived at least half of his life in retirement. Though many people perhaps do not have the opportunity to live internationally like he and his wife have and the investment direction provided in the book is definitely out-of-date in modern times, he nevertheless provides a vision and a blueprint for a way of life that would be immensely beneficial to follow, even for those who want to keep working! Living off of investments benefits not just those who are retired, but everyone who is able. The more people who get exposed to that truth, which is the true American dream (as opposed to the white picket fence vision), the better society as a whole would be.

Disclaimer: I am not a financial planner, please make sure you seek one out before making any financial decisions.

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