by Brett Arends
provided by The Wall Street Journal
How much money do you actually need to take this job and shove it?
Go on, admit it: You've thought about it. Maybe you've imagined quitting your job and easing into early or semi-retirement -- or starting your own business.
It's a perennial topic, but it's especially timely now. Millions are either unemployed or working part-time. Millions more fear their job could be next.
Obviously there are a legion of complicating factors involved in anyone's decision. Sherrill St. Germain, a financial planner in Hollis, N.H. with a lot experience in the field, says the big issue for many clients is losing group health insurance. "That's the thing that keeps them stuck," she says. "That's the deal-breaker." Say what you will about healthcare reform: The present system is a huge drag on economic mobility and entrepreneurship.
But even if you can surmount all the other complications involved in escaping your current situation, how much money would you need to have saved up to make it a viable idea?
Most financial planners have advice on the subject, but Troy Thompson's is as good a place to start as any, because it comes from experience. He left his job as a lawyer at a large firm in San Francisco to start out on his own as an independent financial planner in Portland, Ore.
"What's the cash in your pocket that you need to check out of the rat race?" Mr. Thompson asks. "I decided I had to have two years' worth of (living) costs...in very liquid, easily accessible assets." He figured he had to cover a lot of transition costs. That included moving expenses, legacy costs (like the remainder of his lease in his old home), and enough money to support his expenses while he changed careers and ramped up his new business. Saving up to two years' worth of costs may sound daunting. But here's the good news: If you are making this kind of move, you are probably moving from a high-cost part of the country, like San Francisco or New York, to one of the cheaper ones. And your money will go a lot further there.
A dollar may go twice as far in Austin, Texas or Portland as in Manhattan. Those wondering where they can live for nearly nothing should take a look at Bankrate.com's cost of living calculator (It's based on the widely-followed Accra Cost of Living Index data). Obviously everyone's numbers are different. Here are some other questions to consider:
What kind of escape are you planning (or dreaming about)? Are you just going to change jobs or are you planning to change careers? Or are you really wondering if you can check out– take early retirement, or maybe semi-retirement? The money you'll need is going to be completely different for each one. Ms. St. Germain gives clients some scenarios: A mid-level military man happy to live on his pension while searching for a new job may not need anything. A highly-paid executive who wants to downshift to a lower-paid job may need a lot to help supplement her transition and future income. Net result: Your "escape fund," as Ms. St. Germain calls it, can be anywhere from zero to a large pile of cash to supplement your income indefinitely.
How far will your savings get you over the long term? Someone investing their savings conservatively should certainly be able to earn about 3% a year over inflation. If you want to withdraw $10,000 a year and make it last for, say, thirty years, you will probably need to have about $200,000, or twenty times as much, saved up now. Anyone giving serious thought to the idea of escaping is going to need to take a hard look at their expenses. "It's all a game of cash flow, in or out," says Mitchell Reiner, a financial planner in Atlanta. One of his clients, a senior executive in Atlanta, recently managed his escape: He and his wife threw in their expensive lifestyle and took early retirement to the mountains. But they axed their monthly expenses in half, from $7,000 to $3,500.
The biggest saving was simply on real estate: Mortgage, property taxes, insurance and other expenses. They sold their expensive home and moved somewhere cheap.
What can you live without? It's a truism but worth repeating: Most middle-class household budgets can be cut. The most common advice is to look at your current expenditures and see where you can pare back. But if you really want to escape, the more radical idea is zero-based accounting: Start with a blank piece of paper, and see what you would need to spend to be comfortable.
"The problem with people nowadays is that a 'necessity' is any luxury your neighbor happens to have," jokes Ernie Zelinski, a frugal living guru and author of "The Joy of Not Working and How To Retire Happy Wild and Free." He adds, "We can all live on less than you think."
You might not want to go as far as Mr. Zelinski–"I don't own a cellphone, I drive a '95 Camry, and for two years I lived without a sofa," he says–but the principles he espouses aren't crazy. "You're financially independent if you have $15,000 coming in and $14,900 going out," he says.
How much do you need to be free? Maybe you should ask instead: How much do you really want to be free?