This guest post is from Todd Tresidder who retired at age 35… 13 years ago. He wrote a book teaching you when to retire and publishes the web site FinancialMentor.Com providing various retirement planning tools including articles and calculators.
I retired at age 35 (I’m now 48) and learned a few lessons along the way. Hopefully you will benefit from my experience because I did many things right and a few things wrong that I would like to share with you.
The first thing I did right was actually an accident because I had no clue what I was doing or why. I stumbled upon the first step to retiring early — commitment to the goal — without knowing what commitment was or the reasons why it was the make or break step early retirement.
It happened while I was a student at U.C.L.A. walking in Santa Monica Park along the Pacific ocean. Most of my college friends had already graduated and were spending their days in office cubicles with stressful jobs in pursuit of a BMW: I was finishing off my last few classes and enjoying a beautiful day in the park. Frankly, I preferred the latter.
I can still remember looking at the many street people lounging away on that sunny day and realizing I would sooner be a bum on the street spending my days in the park or library reading books than be a hamster on the wheel of the corporate machine in pursuit of needless lifestyle. This was a bizarre thought for a college kid majoring in Economics, but that’s what went through my head. I wanted experience out of life, not money, and I knew the 9-to-5 grind was not my path. This important realization never left me: it became the basis for my commitment from that day forward. I wanted something different.
The second piece of my commitment to early retirement came with the common sense realization that if I had to lead an economic life then it might as well be designed to achieve financial freedom. Nothing less made sense to me. After all, why would anyone design their life for financial mediocrity (or less)?
Just to be clear, I’m not talking about “wanting’ more money or success like most people. Instead, I’m talking about studying the subject of wealth accumulation and making constructive plans so that every aspect of my financial life was directed toward early retirement and financial freedom. I was plotting war against a meaningless life. I wanted the flexibility of freedom. If I had to deal with money then all my money dealings would be designed with financial freedom in mind. Again, nothing less made sense.
These two realizations, while simple on the surface, were critical to cementing my commitment to the path of financial freedom and early retirement. They were a statement of my values, established my priorities, and motivated my actions. They left me no way out with no viable alternative path. I would pursue financial security until I succeeded because there was no better alternative.
Whenever I had a setback on the journey to financial freedom I always remembered these two key realizations and how they left me no real choice but to get back on the horse and try, try again. I was committed, and the commitment gave me the persistence necessary to succeed. That was critical.
Anyways, I share this with you at length because my experience in coaching people is most aren’t lucky enough to have a clear commitment from the outset. They have to develop their commitment. It can’t be something superficial like “tell the boss to take this job and shove it”. That won’t work. It must be a motivation rooted in your deepest values that drives action. It is the critical first step to early retirement that nobody succeeds without first completing.
What I Did Right On The Path To Early Retirement
The first thing I did right will be familiar to many readers – I kept my expenses down so that I could save my earnings. When I was single some might have called me frugal although next to Jacob I would probably be deemed a spendthrift. My formula was simple – keep my expenses at college lifestyle level and bank the difference. As my income grew I banked progressively more.
I never raised my lifestyle and never suffered or experienced sacrifice. I was living in Lake Tahoe running a hedge fund working from before dawn until mid-day making good money. During the afternoons I hung out with the ski bums who were having fun and just getting by thus I never had pressure to spend lavishly or keep up with the Jones’s. We would ski half-days in the afternoon during winter and play volleyball or mountain bike during the summer. Life was good, I saved 50%-70% of what I earned, and never felt any sacrifice whatsoever. I was on track to achieving my goals and having a great time as a single guy living the outdoor recreation lifestyle.
The second thing I did right was learn everything I could about investing and risk management right from the very beginning. My belief was the lifetime compounded value of investment skill was worth far more than any salary could ever amount to. Run the numbers yourself and you will see the truth in that statement. A few percentage points change in ROI compounded over your lifetime can make or break your financial security.
The math is simple: there is a very narrow spread between inflation and passive investment returns. You live on that spread so if you can figure out how to add a few percentage points to your ROI then you can double or triple the spread. The affect is geometric – not arithmetic. It is important stuff to understand if you want to play the early retirement game.
In fact, my clarity on this issue motivated me to reject a high paying career to accept an initially low paying position with a start up hedge fund. The reason I did this was because the low paying position had a large upside if we succeeded (which we did) and my job duties centered around researching and developing active investment strategies with risk management systems. The knowledge I gained from that work has been invaluable, and I remain grateful to this day for that experience. It is the foundation on which my financial freedom was built.
Finally, the last thing I did right was I built a business as an owner (actually, a partner). If you research how wealth is built the most common source is business with most of the remainder coming from real estate. The third asset class – paper assets – is typically a parking place for wealth built in business and real estate rather than being a source of wealth in itself. I was just following a well proven path.
The reason wealth building works this way is simple: business and real estate offer leverage and tax advantages whereas paper assets do not. The leverage and tax advantages are essential to amassing capital rapidly for early retirement.
With that said, I was a bit of a freak because more of my wealth has come from the growth of my investments (paper assets) than from the business I helped build. This is based on my unusual investment skill built on more than a decade of intensive research and is not something most readers can expect to duplicate. Instead, you should go with the proven formula and focus on business and real estate to grow your wealth and use paper assets as a parking place for wealth built elsewhere.
In summary, the things I did right were frugality to create savings, investment knowledge to create compound growth, and business building to create leverage. Fortunately, that was enough to reach early retirement despite making a variety of other mistakes that I will share below…
What I Did Wrong On The Path To Early Retirement
There are a few things I would do differently if I could do it all over again.
The first thing I would do different is buy an apartment building while I was young. I would get as big a property as I could convince the lenders to finance. I would live in the building, manage it, and do whatever maintenance was necessary to enjoy free rent and positive cash flow. Had I walked that talk in my 20’s instead of paying rent or buying my first house then I would own a rental property today that is fully paid for and cash flowing like a big dog.
Think about it – most people in their 20’s are living in apartment style housing anyway so this strategy doesn’t force any reduction in lifestyle. Additionally, if you manage the property and do the maintenance yourself then you gain inside knowledge on how the business works that will serve you for a lifetime. On top of that, by the time you reach my age the property will be paid for providing perpetual income that adjusts for inflation, has virtually no risk of failure, and can never be depleted. That combination of features is a rare and beautiful thing for early retirees – something you would never regret.
Another mistake I made early on was retiring as a single man then promptly getting married and having kids thus multiplying my expenses several times their previous level. Don’t get me wrong: I don’t regret getting married and having kids. In fact, I’m thankful beyond words. However, I completely failed to figure in the impact on my expenses. I know it sounds laughably dumb in hindsight, but I just didn’t think through the various phases of my life and how my expenses would change. I just ignored the whole issue until reality forced me to look it in the eye. That was a mistake I don’t recommend you repeat.
Finally, the last mistake I want to share was switching cold-turkey from a strong business income that provided a fat contribution to savings straight into living off those savings. The culture shock of such a dramatic financial change was not a good thing. It required too many emotional adjustments in my brain over too short a time period. I highly suggest phased retirement as a wiser alternative.
In summary, there are many dimensions to the early retirement game. It isn’t just about frugality or leverage or stocks or internet marketing or any other recipe you may read. You can create your own custom mix based on your unique skills, values and interests. What worked for Jacob or I may not be the right formula for you.
Instead, find your own path while obeying the proven principles that get results. Don’t worry about making mistakes as I’m ample proof you can make lots of mistakes and still reach the goal. The key is to get committed, develop a plan, and put that plan into action. If you persist then the goal will become a question of “when” – not “if”.
Hope that helps.