I was recently interviewed by Greg Daugherty from Next Avenue for an article about what us youngsters (MMM was also interviewed) can teach those of a traditional retirement age.
Since the interview was much longer than ultimately made it into the article, I received permission to publish the full interview so here it is albeit in a slightly different order than the questions were originally asked.
1. Do you think Americans have been ill-served by conventional retirement planning advice and the financial services industry?
I think in general there’s a tendency to “plan for the last war”. It used to be, about two generations ago, that people worked for the same company and looked forward to a defined benefit plan that would pay them once they were too old to work and be “useful to society”. They would then be retired almost in the sense of being put out to pasture.
Then the world changed. The defined benefit plans were replaced with defined contribution plans as corporations found that they couldn’t remain profitable and still pay workers who no longer worked for them. But the idea of working until old age stuck but so financial planners calculated savings rates, typically 10%, based on the old ideas of steady work until old age. Yet whether people could actually retire no longer depended on their age—their useful service-time—but on whether they now had enough money. Whether or not there was enough money now came to depend on savings rates and market rates rather than how much time the person had put in.
I think those who are sufficiently forward-looking have realized that age no longer has anything to do with whether one needs to work anymore. It’s simply a question of whether you have saved enough to not need to work anymore. That number is typically around 25-40 times one’s annual expenses depending on age (how long the portfolio needs to last) and safety. So for example, a person spending $20000/year needs somewhere in the ballpark of $500000—$800000 invested. A person spending twice as much needs to save twice as much. A person spending half as much needs half as much. And so on.
I, therefore, think the idea of retirement in the traditional sense is dead or dying quickly. The future will be divided into two groups of people: those who have saved enough relative to their spending to last the rest of their lives and have the freedom of choice whether to work; and those who haven’t earned that freedom.
So now we are in the strange situation where prudent 30 year olds and even really mature 20-something year olds, who have saved most of their income over a short career are in a position to never have to work again simply because they chose to save instead of to spend. Whereas people who have worked hard all their life but spent equally hard have to keep working well into their golden years and beyond.
In a sense, if you took the “default advice” people have been ill-served insofar they were looking towards a traditional retirement and optimistically hoping the markets would provide the returns. When they didn’t, like in 2009, they found themselves postponing their planned retirement or working part time.
On the other hand, the financial services industry has facilitated both approaches. It has allowed even young people to become financially independent insofar they made the decision to save most of their paycheck instead of spending it on consumer products. This option was not possible traditionally, so in that sense I’m happy that it is in a sense possible to buy one’s freedom with savings.
Another way of putting it is that by laying more responsibility on the individual, it has given the individual the freedom to make wise choices but also the freedom to make unwise choices. This is why there’s a gap appearing. This gap is growing less and less dependent on age.
I answered this question first just so you can see where I’m coming from. I don’t think in terms of “traditional retirement” but more in terms of “financial independence”. I keep regretting “Early Retirement Extreme” name I initially chose. I should have called it “Financial Independence Extreme”. I think “financial independence” will be to the 21st century what “retirement” was to the 20th century.
2. Do you have any sense of how your ideas resonate with people over 50, such as from comments you’ve received? Do you know of people of that age who are practicing aspects of ERE with the idea of retiring earlier than they could have otherwise?
I regularly receive emails from people in the 50s, 60s, and even 70s telling me that they did something similar to me saving up enough money to no longer have to work again by their 30s and 40s many year ago. Since then they’ve lived interesting lives: some have lived and owned houses in different countries; some have sailed for months or years; others have started small businesses for the love of it, not for the money. Finer craftsmanship seems to be a popular second-career for former white collar workers—people who have never created anything with their hands. Conversely, going to college seems to be popular the other way around.
In general, my ideas—which aren’t really mine; I just gave voice to them—seem to resonate more with a certain kind of person than a certain age-group. The oldest regular readers and forum participants are in their early 70s and I believe the youngest is 16. Common factors include a strong sense of independence, a drive towards personal competence, and the sense of thrift that comes from a dislike of waste. We have a lot of engineers and accountants 🙂 An archetype of that ideal is Ben Franklin.
While there is the occasional 50+ person who suddenly realizes that they have saved nothing so far and thus realize it’s time to take extreme measures, a more common scenario is the 50-something person who already has some savings and realize they actually have enough to quit work by making some deliberate spending choices.
3. Obviously people in their 50s and 60s (the likely readers of my article) have missed their chance at an extremely early retirement. But are there things they could still learn and apply from your approach?
(Just as an aside, I was struck by the similarity of your approach to what many older people do anyway, though maybe for different reasons, such as getting rid of stuff, moving to a smaller home, cooking, biking, gardening, etc.)
That’s just the thing. Just like the financial planning industry tells people to save 10% of their paycheck, TV and commercial tell people that spending the other 90% leads to happiness and status. Most people have swallowed this hook, line and sinker. They finance a big house because they think the status of 3000sqft will make them happy. They buy new TVs and smartphones to experience the excitement of owning the latest gadget for a month or two. They eat out because that’s all the extracurricular activities they have time for. And perhaps it actually does make them happy.
However, what they don’t realize is that they’re making a choice. They could instead get rid of stuff or simply not buy the latest replacement for something they already own which works perfectly fine. If they have less stuff lying around because they never use it anyway, they could move into a smaller home. They could cook more and avoid a host of lifestyle diseases that catch up with people who have eaten too many TV dinners. They could bike or walk. Again more healthy and it saves gas. They could garden for better food.
All the money that’s not spend on consumerism can instead be saved. The person would be more healthy and more wealthy. Overall, I think that beats the stress of worrying about bills, worrying about getting fired, having to maintain a huge house or the car breaking down.
I think some eventually learn this lesson as they grow wiser. Those who learn it at age 20 are far ahead of those who learn it at age 50. But those who learn it at 50 are still far ahead of those who never learn it.
4. To what extent does your approach depend on a person being able to return to full-time work if necessary (which, of course, many people could find difficult after a certain age)?
Most people, including me, strive towards never needing to return to work ever again. This typically means investing about 25–40 times one’s annual cost of living. It is extremely likely that this money will never run out.
That said, I do recommend people retain some contact to the working world if nothing else because most other people still spend most of their day and life working. It gives you something to talk to your still-working friends about. Furthermore, it gives you something to do should it catch your fancy.
Just because you’re “retired” (read: have enough money to not have to work) it doesn’t mean that you’re only allowed to play golf and volunteer. It means you can do what you want. I know an accountant who quit her career. Took a few years off volunteering and doing photography and then decided to become a journalist. In fact, quitting a boring job, not working for a few years, and then stumbling over an excellent opportunity you can’t refuse seems to be a lot more common than never working again. That’s what happened to me.
Working a job can actually be great if the negotiation power is on your side. Lots of people are not able to say no because they fear getting fired. Thus they get funneled into job assignments they hate. If you have the option to tell your boss that you’re not interested in a particular kind of work (e.g. meetings) and that you’ll simply walk out if he won’t let you work under your conditions, bosses suddenly become a lot more flexible.
And should you for any reason decide that you no longer want to work. E.g. you want to go on a safari or help your neighbor build a house, you can just give your boss your notice, because you already got enough money. It’s hard to convey the feeling of this freedom to those who haven’t experienced it, but it’s awesome!
In addition, I know many who have negotiated part-time work with full-time benefits simply by threatening to walk out. There are people for whom work is hobby but with a fully stocked laboratory for them to solve interesting problems and, by the way, get paid well for it. Access to a million dollar lab beats tinkering around in the basement. This typically only works for competent people who are good at what they do. Then again, those are the same people who tend to pursue competence and thrift for their own sake.
5. Are you concerned about high inflation coming along someday?
I’m not concerned but I do take it into consideration. Someone on the forum recently made a very useful division of “the four horsemen” of future planning: inflation, deflation, devastation, and confiscation. Inflation is an increase in the price level. Deflation is economic decline and a loss of productivity. Devastation is what follows from things like war and natural disasters. Confiscation are public policies that take your savings, land, or even labor.
Most worker-consumers are quite fragile to all four scenarios. With inflation, they wages aren’t keeping up with the expenses for all the things they need to buy. In deflation, the lose their jobs and thus their wages. They risk devastation because they are tied to their mortgages and jobs and benefits. Confiscation becomes a problem when people are house-rich having all their wealth sitting in their house. It doesn’t take much of a tax hike to cause pain.
Conversely, with ERE, you don’t spend much because you are so much more efficient than the average consumer. Thus a rise in prices is not nearly as critical. Furthermore, over the last four years we have seen an almost 300% inflation of stock prices. A lot of ERE people are three times wealthier than they were three years ago thanks to Bernanke’s policies. ERE is more resilient to devastation due being less tied by mortgages, having to move three tons of personal possessions, and jobs. We can simply move out of the way. Also we tend to be quite self-reliant making a lot of our own things which comes in handy in a catastrophe when people can not longer shop for their needs. Not even confiscation is a major worry. With enough skills one can live a middle-class lifestyle paying less than the poverty level simply by spending the money better than most consumers habitually do. Such skills can’t be confiscated and making poverty level income is easier than making median income.
For most ERE people, the great recession was a non-event and many came out of it better than they went in.
6. What would you say to people who feel they have to accumulate a lot of money in order to leave an inheritance?
That’s their prerogative. If you have make the median income in this country and you learn the skills required to save 80% of your income by taking the simple but highly unusual steps of 1) buying less useless stuff; 2) cooking your own food; 3) living in a smaller home closer to work, and 4) walking and cycling instead of driving—the four line items that most people spend 60-70% of their income on, then you can either be financially independent and never work again from age 30 or you can keep working into old age and end up with an eight figure fortune to leave as an inheritance. Most ERE people fall somewhere between those two extremes.
7. Did you create the term “early retirement extreme”?
I did create that particular phrase/name for my blog name (which later expanded into a book, an active forum, and a wikipedia), but I was not the first to talk of “extreme early retirement”. In retrospect I very much regret this name. There are some very strong prejudices associated with the word “retirement”. Some people will object in very strong terms if you don’t adhere to their personal rules and regulations. Interestingly enough, such prejudices are somewhat age-related. Different generations have different perceptions of what “retirement” properly means. If you ask a 30 year old, a 50 year old, and a 70 year old, I guarantee you won’t get the same answer.
8. How old are you now?
38
9. Do you and your wife still live in an RV in the SF Bay Area?
No, we sold the RV and moved to Chicago. The entire process took 17 days! We have lived in a 1 bedroom apartment the past two years and currently we’re looking to buy a house. Paying cash, of course. Ironically, while some people have maintained that the only way one could retire extremely early was to live in an RV, our cost of living will actually be less by owning a house outright than paying rent to park an RV.
10. Anything you’d like to add?
That extreme early retirement (=financial independence in short order) is a deliberate choice for anyone who can make a median income. You can have either the big mortgaged house and the new financed car or you can have the big investment portfolio with and the financial independence it grants, but you can’t have both. For those who want the latter, my standard recommendation is to
- Use it up, wear it out, make it do or do without. Think before you buy! The more you know, the less you need. Learn!
- Buy (or rent) the smallest home you can afford. Don’t waste money on unused bedrooms and bathrooms. Make sure it’s close enough to work or public transportation.
- Own only one car or none at all. Owning a car suggest you live in the wrong place. Perhaps in the wrong city or state.
- Learn to cook from staples.
