The following generic question is a very common when it comes to early retirement. It goes something like this (you can adjust the numbers slightly):

“I am thirty-something years old and I have managed to save a few hundred thousands (or more). Is it possible for me to retire already?”

The answer is yes. Although extreme early retirement is still quite rare there are more people out there that retired in their late twenties and thirties (I do not consider forties extremely early, that is “just” early) than the few famous examples would suggest. Hence early retirement is a realistic proposition for those who desire it.

To retire early by becoming financially independent, you must solve the following problem

your annual expenses < 3% of your invested savings

This equation is much more important than absolute numbers.

For instance, if you have $500,000 saved but this is due to having flipped a house for a $200,000 profit and having earned a salary of $150,000 while spending $120,000 for the past ten years, the equation does not hold, because 3% of $500,000 is only $15,000 which is far from $120,000. With these numbers, you are rich, but you are not wealthy; primarily, because with an annual expense level of $120,000 chances are very good that you do not possess the knowledge and attitude to live well on $15,000 a year.

Now, you can solve that equation either by reducing your expenses or by working longer to save more money. The most common problem in solving this equation is to spending most of one’s income like in the example above. This means that expenses are high relative to the income and that savings are low relative to their expenses, at least until you’re at least 50 years old. In general, most people’s expenses match to their income regardless of how much they make. To retire early, you have to avoid this. This means living on much less than you earn.

Living on much less is entirely possible. This is not done by a few cost cutting measures; or even a great many cost cutting measures. Cost cutting, especially when it is done to something close to your heart, like, say, your lawn, or your patio furniture will hurt.

Instead of downgrading, choose to live differently. Do not accept a second-rate lawn or a second-rate car. Dump the lawn and a car entirely, and live on cruising sail boat or in an RV. Or rent a single room, or get a bigger place but live with others, perhaps your family. Travel the world by visiting your international friends instead of resort hotel staffs, though I’m sure they’re nice people too. Develop an inexpensive but sophisticated taste. Here, you must be creative and creativity stands in direct relation to your quality of life. Creative retires do lots of stuff. Some hang out on their sailboat in the Caribbean, some buy a house in Argentina, some compete semi-professionally in their favorite sport, some travel around, others tend to their garden, or read all the classics.

If you can not be creative or feel you must live a “normal life” characterized by driving, shopping, and paying bills, extremely early retirement, which can hardly be considered normal, can only be achieved by either winning the lottery or by downgrading your “standard-of-living”, shopping with coupons, buying cheap things you don’t really like, putting an egg-timer next to your shower, and that is no way to live.

Extreme early retirement also means taking a different attitude to things. Some people, typically the busy ones, generally want everything to work and if it stops working they will pay for someone else to fix it for them. This is because they themselves either have no skills or lack the time to fix it themselves. Others take pride in being able to fix a broken pipe, a broken engine, put in a new floor, and so on, and consider it a hobby. In turn, they do not pay other people to work for them and so they do not have to work themselves. Early retires are generally fairly competent people who can do a lot of things on their own. It is also often the case that if they can’t they know someone who can. They have a wide network of people from many different backgrounds unlike specialized workers who mostly know other specialized workers in the same field.

Obviously, it also depends on your attitude towards work. Perhaps writing reports and finding ways for your company to market a new product made overseas to consumers is a fulfilling and appealing way to spend your life. Perhaps it is not. Perhaps you find it motivating to spend your life striving for that corner office, or maybe the office with a window, or a 5% annual raise. Or maybe you have other ways to feel accomplished? Maybe you use your work as a social outlet? It is certainly a lot easier to find young people at their job between 9-5 (and outside of those hours they are usually tired), but there is a significant number of people not working all week. Not as many, but they are there. And no offense, but they are generally more interesting people than the workaholics who only know their work and the current top five shows on TV.

The main question you should ask yourself is thus not whether you have enough money, but rather whether you can envision yourself living an unconventional life outside the boxes that most others live in. If this is the case, the money to do so can be earned fairly quickly. The challenge is mostly in the mind, and so this is the real question you should be asking yourself. Can you be happy without doing what everybody else is doing?

Originally posted 2009-08-16 00:06:22.