I wonder what percentage of the people who follow #3 are not rich. Even further I wonder what percentage follows #3 to begin with.

I believe the 3% represents the ‘safe withdrawal rate’ for capital. Money has historically lasted forever when invested and withdrawn at that rate. 4% would likely last a normal length retirement. 3% would likely leave an estate no matter when you ‘go’.

The listed class 2 method has been proven to be a disaster in the past, and most certainly in the recent past. I am not against borrowing money if there is a justifiable or positive effect to doing so. However, as a method for lifestyle, borrowing and paying interest is completely unacceptable. Borrowed money must be for the shortest possible time frame and for the least expensive cost, and the cost should be replaced in the very near future by return on some kind of a risk free investment. In other words, the cost to finance short term, must be zeroed out by the returns gained.

The class 1 operation is acceptable, but the person is depending on some source of income to accumulate the needed funds by that of having a job. The pretext I get from this would be a person having to “save up each month” to make a mortgage payment. Or to “save up each month” to pay one’s electric bill. Here, you “save up” by working a month, and using those paycheck “savings” to make your recurring expenses. While better than class 2, it lacks the control of comfort that class 3 provides.

Class 3 is passive income. Your expenses, purchases, etc are provided for within your automatic income. You control your expenses, so you control your cash flow. It’s all about cash flow. He who controls his cash flow, controls his finances.

This post and those similar to it have been so helpful for me. When I first learned (from ERE) to look at my automatic monthly spending in terms of how much it would cost in investments to maintain it……I quickly canceled my monthly massage, hair appointment, nails etc. I know, I know….I am not as savvy as the typical ERE reader, but I am getting there!

Actually you can combine class 2 & 3 if you act like a bank: borrow money cheaply and then lend it out at a higher rate of interest. I dunno, maybe that’s a 4th class?

Very thoughtful with the 3% interest on money (taxes and all…, that’s the after tax rate return!).

I look at things similarily, but from a bottom up approach.

It’s very inspirational, the approach you are taking!

What about being so paranoid that you can’t think of a single good investment? Once bitten and twice shy, etc.

There’s Class 2D which many Americans are in either wittingly or unwittingly. That’s borrow, spend and default.

It seems to me 3 is unsutainable on a population level, e.g. not everyone can be 3, because without 2 and possibly 1 (you usually are counting on someone to help invest your money, whether it’s a broker, fund manager, or computer programmer), 3 couldn’t exist.

As to working for decades and then retiring, it seems to me that’s an improvement from the past. Which was keep working, because if you stop then you don’t have anything, this applies from pre-agricultural society (hunting and gathering) up to and possibly including parts of the industrial revolution. It seems to me this ability to ‘retire’ at all is because we have the technology to produce enough excess to live off it later. While, we certainly have progressed far, and probably everyone doesn’t strictly need to work as long as they do, I don’t think we’re at the point where everyone can work 5-10 years of their lives and expect to maintain our current society and technological capacity.

@csdx – The only difference from the past is that retirement is now worked out from an economic system rather than a social system. Thus you don’t need to have children to ensure being taken of in old age.

Not everybody can live off of their investments, but a large fraction of the population could do it. Of course such a world would look different. You would be working 5-10 years and the rest of your life you would do other things. Investment returns are just a fancy way of saying: “I built a shoe machine and now it is providing me with shoes without me having to make them”. In particular, it will be a shoe factory and you will own a part of it and that part will supply you with a new pair every decade. … or you can use the alpha strategy and simply store 6 pairs of shoes in the closet. Enough for the rest of your life.

@Jacob

Consumption is the whole problem isn’t it? Let’s say I will not buy a new car every five years. Instead I will buy one and drive it for twenty years. I have lowered my new car consumption by 75%. Apply this to any consumption item. However, it is simply not what happens with the majority of people. It is then different if I can afford a new one every five, but just choose not to spend for it. I can then live on much less due to my mindset of lower consumption.
Most people will naturally fit their consumption to their available funds, be they earned, borrowed, or from passive income.
I think I am right on that idea?

@HSpencer – I think so. I would like to make a blanket statement to that effect, but I am sure there are a few who produce more than they consume.

@SIP – Well, this is covered in section 7.3 of the book 🙂 which I finished a couple of weeks ago… In short, it depends on what you grow. If you farm and sow and harvest annually, it is #1. If you plant trees, it is #3.

@jacob “Are you guys taking into a account that consumption would go down radically? … The world has enough assets for this kind of life.”

True, we could all do with much less and still survive, but then, that would actually reduce the total amount of assets in the world. Most assets have little value on their own. They must be tended to, or ‘worked’ if you will to produce something useful.

That shoe factory only spits out shoes if someone is there to work it (and someone to maintain it, and someone to manage it, and someone to deliver…). So if everyone just owned the factory rather than worked at it, it wouldn’t do anything, and as an asset would quickly devalue. A factory may be worth millions, but a rotting husk that was a factory is worse than worthless. I’d argue even trees require work; even if you think they don’t require any care or maintenance, at the very least, they don’t harvest themselves.

@csdx – This is where the 5 years of work comes in. Note that 5 years of work in a lifetime could also be 5 days of work each month, etc. That said, certainly not everybody will do it, but right now … if you look at early retirement blogs and just count early as under 50, there is less than a handful of them in the canonical wisebread list which has 450 blogs total. Most people clearly either want to work all their lives or they have not sufficiently understood the alternatives.

@Maus – I have heard of a few such projects. I am not aware of any around here, so we moved into a mobile home park to get the required square footage. Houses are smaller and so rents are 3-6 times smaller than what the other houses in the neighborhood cost. We have an informal freecycle thing going on in the laundry room corresponding to putting a free sign on something and putting it out on the curb. I lend and borrow tools from friends. There is no minivan arrangement around here, but there is a bus stop right on the other side of the street from the park.

I think it is really tough to build it top down though. What’s from keeping a low cost place of living to turn into a run down place? Around here, the manager run it with an iron hand, but I have seen other places which don’t look as good. In many neighborhoods, prices are raised simply to act as a barrier for the riffraff and are not indicative of what you get. So I think it would be hard to find people. I mean it is even hard to find people on the internet. But I could ask …

@RJ Weiss – Option 3 is investing for a return. If lending money I prefer to lend to corporations or invest in companies which does the lending for me. (P2P lending involves far too much paperwork for my taste.)

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@Jacob – I’m not sure about the title of this article “when enough is enough” – as achieving an invested amount to spin off, for example, $100 / month for utilities, does not seem to account for inflation – am I missing something?

@Maus – I almost LOL’d reading your comment – have you spent time in rural Africa? You can easily find 600 sqft homes and a network of minivans, most land is communal. You’re describing the rural parts of many developing countries.

As a person gets closer to retirement (early or otherwise) they should have their expenses pared down enough to see what they will need to live on in retirement. All debt should be paid off long before retirement. We are retired (forced early retirement for my husband), our house is paid off, but new expenses appeared that we didn’t anticipate: our health insurance premiums went way up. The health insurance premiums almost equal what our mortgage payment was each month. Fortunately, we can handle it because we have a pension + social security that is enough. We’ve learned to live frugally over the years and still have some money for special trips. It really pays to become a black belt in frugality!