This is a guest post from retired@33, who got in contact with me last week offering to write a post about his story. (He’s new to blogging, so be nice!) It’s hard to estimate how many extreme early retirees there are since not everybody has a book or a website, but I bet there are more than you think; only 1 in maybe 2000 write books. You can contact him at retired33 dot 9 at gmail dot com or comment below.
Over five years ago, I retired at age 33 from my tenure-track job teaching political science at a university. I’d worked full time for only six years, and due to a costly divorce had no net assets until just 3 1/2 years before I actually retired. I’d never liked the idea of doing one activity for most of my life. Around the time I finished my Ph.D. and started teaching full time I found my passion for politics was waning as I became interested in meditation and spirituality. Then I got divorced, which wiped out the few assets I’d been able to accumulate while married to a spendthrift. I resolved to become financially independent as quickly as possible so that I could quit work if I wanted to. I did this be cutting my expenditures down to about $12,000 per year. I didn’t make any elaborate budget to accomplish this I just measured my expenditures by keeping track of money withdrawn from my bank account and credit card charges and then cutting back as far as I could without generating a feeling of deprivation. I found this a nice organic way of painlessly reducing my expenditures. Sort of like losing weight just by weighing yourself frequently so that you’re aware of the consequences of your overeating. I measured my expenditures so as to generate awareness of the consequences of my consumptive habits. I moved into a very cheap efficiency apartment, with which I’m still very happy. I stopped eating out unless there was a good reason to do so. I very rarely buy anything beyond food and household necessities. It was surprising how effortless it was to reduce my spending. My only significant non-annual expenditure is a car, so I include an estimated annual payment toward replacing my car in my expenditure measure ($600 per year). I invested the remainder of my income in index funds initially, but I’ve since switched to buying individual stocks because my annual trading fees are less than the annual fund expenses that eat into investment returns. Buying individual stocks also allows me to manage my tax liability more easily by giving me lots of options for loss-taking/profit-harvesting when I need to sell some of my holdings.
Like an index fund, I don’t try to pick winners with my stock investments. I buy stocks in varied sectors of the economy so that my portfolio performance roughly mirrors the performance of the total U.S. stock market. And I try to minimize my trading costs. I also tend to avoid dividend earning stocks because my dividend returns are often taxed at a higher rate than long-term capital gains. I don’t buy foreign stocks because there are often adverse tax consequences and I have less confidence in the long term prospects for private capital in countries where there is more cultural/political hostility to it. The other major reason I was able to retire so quickly is that I borrow cheap money wherever I can and invest it. Borrowing on margin from the broker and borrowing cheap money from credit cards has massively improved my return on my net assets. I have to maintain 30% equity in my margin account. So I can effectively borrow $2 for every $1 I own or borrow from elsewhere. My broker is currently charging 1 1/2% interest which means I can expect to make 5.5% in real earnings on every dollar borrowed. So $100 in assets lets me expect to make ($7+$5.50+$5.50) $18 in real return per year. You can easily see from this example how leverage can dramatically reduce the amount you need to retire. Indeed if you can borrow enough money at 1 1/2% you can retire without any net assets. I currently have about $700,000 invested, but net assets of only $100,000. Of course, if it was all invested in the stock market my expected earnings would allow far more spending than I actually do and be far riskier than necessary. So most of the $700,000 is currently invested in “junk” bond or long corporate bond ETFs. This balances the goal of growing my assets over time with the goal of avoiding unnecessary risk so that my portfolio can survive stock market volatility like that which happened in 2008. I monitor the optimum balance between stocks and bonds frequently using measures such as the Required Percentage Stock Market Return necessary to maintain the real value of my assets after expenses (this goes down as I move from bonds to stocks) and the Maximum Percentage Stock Market Loss that I can tolerate and still have a viable retirement (this goes up when I move from stocks to bonds). I realize that this approach is risky as I might have to work again if the stock market performs poorly. But a risk-free portfolio would push the retirement horizon back very significantly. When I retired at 33, with $110,000 in net assets, I felt that my retirement had a 60% chance of being successful in terms of me not needing to work again. My net assets have varied from $140,000 to -$20,000 since I’ve been retired, but because of the availability of cheap money to borrow the viability of my retirement has always looked better than 50%. I’d guess it’s currently 75% likely to succeed. One of my investment strategy rules is to front-load risk & return so that my assets should accumulate over time ahead of inflation so that the risk of needing to work again will decline over time as I move into safer investments. This rule also means that if the retirement fails it is more likely to do so soon rather than in the future. This is a good thing because I’d prefer to look for work in my forties than my seventies if I do need to work again.
In a sense we’re earning our freedom from work by bearing financial risk and forgoing consumption. The more risk we’re willing to bear and the more consumption we’re willing to forgo the quicker we can retire. There’s a lot to be said for realizing goals quickly so that we can learn whether the goals were worth pursuing in the first place. There’s a big risk that if we put off being work-free for twenty years to be more financially secure that we’ll have conditioned ourselves to defer our satisfaction into the future, and won’t know how to be satisfied when we retire. We should also be clear about what “financial risk” means. All I’m risking by retiring on a risk bearing portfolio is having to work again. But if I put off retirement twenty years so that I can retire on a safe portfolio, I’ve already suffered the burden of work that I’m trying to avoid with my safe portfolio.
I’ve never regretted my decision to retire. It removed the main source of stress in my life and has allowed my attention to explore life much more freely. I’ve found myself playing tennis daily and eating better food. I have more time to be with the people I love, I’ve also been able to explore my spiritual path in a more comprehensive way.
Recently I’ve started to do a form of spiritual teaching, called nondual dialogue, with individuals and groups. I love doing this and it could become a significant source of income in the future, but it’s great to feel absolutely no pressure to make that happen.
Originally posted 2010-11-29 11:09:29.