You Too Can Retire at 35--If You Don’t Mind Living Like a Student

Paul Terhorst is probably the youngest member of the American Assn. of Retired People. He lied about his age to get in.

When people hear he cashed out at 35, an understanding look appears on their faces. “Real estate, huh?” they say. Or: “Stock market?” Or: “Oil wells?” He denies all. Eventually they get desperate, asking: “What did you do? Rob a bank?”

Not quite. Terhorst was a partner with an accounting firm. It was a job he had been preparing for since he was 7, when he told his parents he wanted a file cabinet for Christmas. He exulted in all the perks that went with the job: first-class travel, expense-account meals, a view of a polluted river, people to bring him coffee, a six-figure income.

It wasn’t enough. The thought of spending another two decades as an accountant made him cringe. He didn’t even want to spend the next 20 years working. His epiphany ran something like this: “In our society it’s considered normal to work during the best years of your life. You work when you’re young, healthy and vital. You work when your mental powers are sharp, your mind inquisitive. You work when you still have a family at home and your kids need you the most. You give the best years of your life to your career and the last few years to yourself. Are we crazy or what?”

But once an accountant, always an accountant. Terhorst, now 39, calculated what he and his wife, Vicki--who was equally enthusiastic about getting out--would need to live on comfortably. The couple, who have no children, decided the figure would be $50 a day. Working backward, that meant a nest egg of about $500,000, the income of which also covered taxes and inflation.

You get that egg by downscaling. “Less house, less taxes and less car,” is Terhorst’s magic formula. The only reasons you shouldn’t sell the house are if you’re in an exploding real estate market or if you have less than $100,000 of equity. Otherwise, dump the monster and put the money in the bank.

No taxes are due if you tell the Internal Revenue Service you are intending to buy another house within two years--which you’ll do if retirement doesn’t pan out. But if things do work out, you must pay the tax (and accumulated interest) at the end of the two years--roughly a third of whatever profit you made.

Cut Housing Costs

You will benefit if meanwhile you have cut your housing costs to the bone. Move into your summer home, buy a motor home or a fixer-upper, move overseas or relocate to a cheaper state like Arkansas, Kentucky, West Virginia or western Pennsylvania. Meanwhile, convert as many other assets as feasible into cash. With the proceeds, buy certificates of deposit from the U.S. government. The actual procedure is more complicated than this, of course, but Terhorst maintains it is within the grasp of millions of middle-class Americans--if they want it.

“It’s not the cost of living that’s expensive, it’s the cost of working,” he says. “Especially if you’re in a high-cost area, jobs are expensive--you have to have a house near your job, reliable transportation, either private schools or an expensive neighborhood that has good schools, and certain prestige objects such as fine clothes and club memberships. And don’t forget taxes. But once you give up working, all of a sudden your cost of living plummets.”

Much of his advice, he acknowledges in “Cashing In on the American Dream: How to Retire at 35” (Bantam), goes against conventional wisdom. “Sage old men say never sell a piece of real estate. I say sell. Business schools say look for a 20% threshold return. I say take CDs at 8% or whatever. Wall Street writers say put between 20% and 50% of your net worth in stocks. I say forget the stock market. Accountants say buy tax shelters. I say reduce your income so you don’t have to worry about taxes.”

Some of this may seem like fantasy. If you’re a librarian, a schoolteacher or a government clerk, chances are you’re not soon going to accumulate $500,000. You probably rent in the first place. (Although even in these cases, Terhorst argues it’s possible to do a bare-bones retirement by living like a student or moving overseas, while searching out moneymaking sidelines ranging from gardening to temp work to painting houses. It all depends how much you want to dump the 9-to-5 routine.)

Getting out, though, is much easier than getting back in. “You may be making an irreversible decision,” says David Gamse, director of the Worker Equity Department for the American Assn. of Retired People. “You leave as an engineer and the only job offered is as a clerk. If you want to be a clerk, terrific. But if you want to go back to being an engineer, you have to plan on being up on the new technology, and even if you’re up on it, age discrimination may shut you out.”

Moreover, Gamse argues that “the best years of your life” are not necessarily between 30 and 50. “That’s age-ist. I don’t think your mind is non-inquisitive when you’re older. Many older persons report that their 50s, 60s and 70s are the best years of their lives. . . .”

After more than six years of boom times, are many people opting out in the manner Terhorst describes?

Looking at the Stats

Government statistics don’t provide a clear answer.

“There has been a steady downtrend in retirement age for as far back as we’ve measured,” says Philip Rones, a senior economist with the U.S. Bureau of Labor Statistics. “The number of people who say they’re retired at any age has been increasing.”

Up to age 44, the numbers of those identifying themselves as “retired” in the Current Population Survey are too few to be statistically significant. Not until the 45-to-54 group is there a meaningful number: 85,000. From 55 to 64, the total jumps to at least 2.5 million.

On the other hand, a large number of people in the 25-to-54 age group tell the survey they aren’t working but don’t cite retirement or one of the other usual reasons--home responsibilities, school or health; 600,000 25- to 34-year-olds fit in this category, as do another 600,000 in the 35-to-44 group and 668,000 in the 45-to-54 group.

Who are these 1.9 million folks?

They all have this in common: They’re not holding down a job, and they have no easy explanations why.

There’s a separate question here: How much do they enjoy themselves? The Puritan strain in American culture dictates a nose-to-grindstone philosophy; We’re so accustomed to work that retirement can quickly seem to lose its appeal and sense of purpose.

“You can’t go fishing every day of every year,” says Gamse. “You can’t travel every day of every year. What are you going to do with that block of time each day? In focus groups we conduct, we find newly retired people tend to experience a few months or weeks of euphoria. But soon, they talk about staying in their pj’s every day, and not going out of the house. So they look to volunteer work, part-time jobs, any number of things as a means to add structure.”

Soon some of them have moved back into the same labor force that they spent their whole lives wishing they could get out of.