Retirement on the installment plan

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Among the fraction of the population who manage to put money aside, many view their investments through the lens of retirement.  They've got a number in mind--call it $X--enough that they never need to work again.  Until they've got that, they're stuck working away at the daily grind.  There's another way to do it, though.  Make your goal to live live on your own terms for the whole length of it, not just for a little while at the end.

This is really the story of Sam, a guy I knew back when I lived in Florida, right after I graduated from college.  I had very little student loan debt (generous parents), but I had more than none, which meant that I had no choice but to get a job and start earning some money.  Sam, though, had a little capital.

A little capital

For the past 30 years, most Americans have started their lives in debt, thanks to the way we've decided to fund college education--everyone but the wealthy ends up with student loans.  Before that--and even today, if you can put together low-priced colleges with generous parents--people tended to start out flat broke.  A few people though, even people who don't come from wealth, start out with a little capital, or accumulate a bit on their own. 

My friend Sam had a little, around $5000.  This was the early 1980s, so today's equivalent would be $10,000, maybe $11,000.

He'd gotten it mostly as gifts.  His uncle had given him some railroad stock when he was 14.  A crappy gift, he'd thought at the time.  He didn't even get pretty stock certificates, just a receipt that showed the shares had been transfered into a brokerage account in his name.  Once he had a brokerage account, though, other relatives had taken the opportunity to dump their odd-lot holdings on Sam.  (Back then, the commission on selling less than 100 shares could easily eat up all your profits, even if the stock had done well.)

In those days, brokerage accounts came with brokers.  Sam's broker was pretty good--collected the dividends, sold the crappy shares, held onto the good stuff and bought more.  Sam didn't pay much attention then, and didn't pay much attention later, when he went through a rough patch at an age that most people would be going to college.  By the time I knew him, he was over that, and none the worse for it, except that he hadn't gone to college.

It was the early 1980s, though, and you could get jobs in software without a degree, and that's what Sam did.  He did contract work as a computer programmer.  He made pretty good money, but it was irregular.  The contracts he got ran for a few months at a time, and he could never be sure there'd be a next contract.

For a young guy living in south Florida, with no debt and a little capital, it seemed to me like a nearly perfect life.

He lived pretty frugally.  He had a roommate, which was important because rents were high.  His roommate was a student, which meant that his income was low but stable.  Sam's was higher, but irregular.  When he had a job, he'd put some money aside--in particular, he'd pay himself back for any of his capital that he'd had to spend when he was between jobs.  He might get a few months ahead on the rent and the cable bill.

When he didn't have job, he'd work on his MGB, hang out at the beach, maybe travel down to the Keys, and generally do exactly what he wanted.  It was like taking his retirement a month or two at a time, right along the way.

There are two big downsides to this:  it's expensive, and it's risky.

Expensive

Think of your long-term investments as buying your future retirement income:  each one-time payment today will provide a certain income starting when you're 65 and going on for the rest of your life.  A $1000-a-year stream of retirement income might cost as little as $1000 when you're in your twenties.  It'll cost twice as much if you buy it when you're in your thirties.  It'll cost you almost five times as much, if you don't buy it until you're in your forties.

If you keep spending your savings when you're in your twenties, you miss out on the chance to buy your retirement income at a huge discount.  On the other hand, lots of twenty-somethings do that without managing spending a few months in early retirement along the way.

Risky

 I never knew enough about Sam's finances to know things like whether or not he had health insurance.  Doing without was a risk then, even for a twenty-something, and it's a bigger risk now.

The other big risk was the risk that he wouldn't find another job as good as the one he left.  That's a paralyzing fear for a lot of people.  Even a pretty crappy job, if it pays the bills with enough left over to save for retirement, can seem worth hanging on to.

An option worth considering

You can't do it if you have debts.  If you've got monthly payments to make, it doesn't matter how frugally you live, you've still got to come up with cash, and that generally means that you need to have a job.

Even for someone with no debt, it's not a practical way to live without some capital.  To get by with an irregular income, it's essential to have some savings.  It's also nice if someone else in your household has an income as well.

Some people do well in the daily grind.  If you're not one of them--if you're the sort of person who spends his days checking his stock portfolio, dreaming of the day he'll have enough to retire, this is an option worth considering.