With a name like early retirement (extreme) I get a lot of inquires about how many millions one needs to become financially independent. A brief search in the personal finance blogging world reveals several bloggers that are aiming for the millions. Not this guy.
The idea that you need to be a millionaire is predicated on having enough investments to draw a retirement income of $40,000-$80,000. Studies based on long term market behavior show that one can draw down 4% of the principal and expect it to last 30-40 years if heavily invested in stocks. 3% would last a lot longer. Divide $40,000 with 0.04 are you get 1 million. $80,000 a year requires 2 million and there you have it.
However, I think time can be spent much better than working 15-25 years to accumulate millions of dollars. If you do like I do you can enjoy a $40,000 lifestyle for $11,000 instead. How is this possible? The answer is VERY SIMPLE.
Instead of buying everything as soon as I want it e.g. red peppers at $1.75, I wait and instead cook other dishes that don’t require red peppers. At some point the peppers will be on sale for $0.50 and then I cook dishes with red peppers with gusto . That’s 71% off or the difference between $40,000 a year and $11,000 a year.
Here’s another example. We recently got a fax/answering machine/telephone for $25. It took three weeks to find it, but if we had gone down to office max or ordered it on amazon, one of similar quality would have cost more than $100. So that’s 75% off for the same thing. Of course sometimes it’s less easy. We have been looking for a queen sized bed for under $200 for quite a while now. We got our present California king for $150 and sold the head board for $75 later for a net outlay of $75. What did you pay for your bed?
One may argue that it is not true financial independence to have to research one’s purchases, engage in comparative shopping, and then wait around for weeks. This takes time and effort. One has to be careful with the money and this is not what true financial independence is about, right? However, my counterpoint would be that if one has to spend 25 of the best years to save $2,000,000 just to avoid having to learn about quality/durability, bargain hunting, and how to be patient, then that is not exactly independence either.
Originally posted 2008-02-18 07:22:01.