Foolish Four Portfolio
Falling Into Early Retirement
Down a rabbit hole
By
WOODSTOCK, NY (Oct. 19, 1999) -- One of the magical traits of the Internet is that you can click away at links in articles and find yourself in a world of information you never knew existed. It's fun becoming a modern day Alice in Internetland, as you succumb to the appeal of links crying "Eat me," only to get lost in a maze of unprecedented volumes of information.
Such was my destiny when I read Ann Coleman's Friday column and fell smack into the Retire Early message board. I opened my eyes in the midst of a "rent vs. own" debate, where Fools were examining the benefits or drawbacks of each as a means toward early retirement.
Since I love my Foolish job, I have no interest in retiring early. Still, there's no harm in having all the mechanics in place, so that when the day comes that my well of column ideas runs drier than America during prohibition, I can retire without financial considerations. (By the way, if you harbor a secret desire to become a professional Fool, check out our Foolish job openings.)
While munching on the wealth of information this message board offered, I learned the pros of renting: low monthly living expenses, no responsibility for maintaining a home, and ease of moving to another location.
I also learned the pros of ownership: interest expense deductibility, a fixed-rate mortgage that's immune to inflation, potential appreciation of a home's value.
A Fool named Intercst, who retired at 38, adamantly believes that renting paved the way for his early retirement. He points to figures from James O'Shaughessy's book, How to Retire Rich, which states that over the last 30 years, the typical one-family house in the USA compounded at 5.71% per year, while the S&P 500 compounded at the rate of 13.67% per year.
Assume you invested $10,000 in a $50,000 house 30 years ago. The total value of the house grows at 5.31% per year. After 30 years, the house is paid off and is worth $236,000. You have leveraged your $10,000 investment very nicely, you think. But a $10,000 investment in the S&P500 would have grown to $467,000 at 13.65% per year. Of course, there are other considerations such as renting for 30 years vs. paying off that fixed-rate mortgage, but in terms of bottom-line dollars, putting the original $10,000 in the market would have been the superior investment.
I also learned from early retiree Galeno that "money isn't everything when you retire early." Come to think of it, money isn't everything, period!
Since Fools agree that money isn't everything, it's necessary to look beyond the numbers for advantages. Phantomdiver writes, "Owning a house isn't all about making money on the investment. For me, owning our house means nobody can ever kick us out for having 'too many' children or dogs. I can paint the place any color I want, or not paint at all. I can remodel if I want." (If so moved, she could also paint the children AND the dogs -- although she might have to answer to authorities for latex abuse.)
The truth is that there is no absolute right way. Each situation is different, and choices must be made to suit your individual needs. Plus, we all bring different backgrounds, risk tolerances, skills, and habits to each situation. When we choose an alternative lifestyle like early retirement, all these things must be taken into account.
As Foolmeonce writes, "There are many paths to early retirement and it's a fool's errand to attempt to conclusively establish which one is best." Choices will always be available. It's our duty, as Fools, to determine which path, from the multitudes we'll encounter, will best enable us to fulfill our dreams.
If we happen to fall down a tunnel to an eye-opening world of early retirement, white mice, or outlandish Red Queens, we need to absorb all information available and integrate it into a personal plan that we can happily follow. We must keep learning our Foolish lessons until we establish a dream lifestyle. Remember what the Gryphon said: "That's the reason they're called lessons, because they lessen from day to day."