Early retirement. It’s something I thought and dreamt about for years, long before I even believed it was actually possible for a normal working couple. There were several self-limiting beliefs:
- I assumed early retirement required extreme wealth.
- I thought people who retired in their 30’s and 40’s did it by taking major risks, inheriting wealth, or making it big in business, sports, or Hollywood.
- I envisioned early retirees as masterful investors who had some magical knowledge or access to advisors I did not, and could not, possess.
Then, I got serious about figuring out how to retire early. I began reading and listening to everything on the subject I was able to get my hands on. I found that nearly all my assumptions were wrong.
There is no single path to financial independence and early retirement. However, I have observed consistent themes and patterns among the early retirees whom I’ve studied. There are several choices they consistently make that most others do not. These choices are what set them apart.
1. Early Retirees Focus on Having “Enough”
Building wealth quickly is a component to achieving early retirement. However, early retirees approach wealth-building differently than others. In mainstream thinking, more is better. Early retirees make a conscious decision to develop a lifestyle they desire. They then focus on how to have “enough” to maintain that lifestyle.
There is a misconception that early retirement requires great wealth. In reality, there is only a very loose correlation between having the excess funds to retire early and actually making the decision to retire early.
There are many well-known examples of people with massive wealth who don’t want to retire yet. Take the story of Warren Buffett, for example. He is one of the wealthiest people in the world and is in his 80’s. He still goes to the office every day to study financial reports. He has made $244.7 million dollars in his career.
Contrast that example to the story of Jacob Lund Fisker, author of the book and blog “Early Retirement Extreme.” He writes of living well in the San Francisco area on a budget of less than $10,000/year. He has focused on maximizing efficiency in order to live a low-cost lifestyle. This allowed him to retire as quickly as possible.
Mr. Money Mustache, who reports living on about $25,000/year, is the most well-known early retirement blogger. However, he actually writes little about personal finance. Instead, he has been described as “the Henry David Thoreau of our time.” Much of his popularity and success can be attributed to his focus on a return to a simpler way of life: the idea of having “enough.”
Author and financial coach, Todd Tresidder, of the website Financial Mentor, writes about this topic, which he describes as “The Zen of Wealthy.” He points out that having more material wealth often means more expense and responsibility to simply care for your possessions. This can lead to less actual happiness.
Chad Carson, who blogs about achieving financial independence with real estate investing, echoes this sentiment in this Bigger Pockets podcast interview. His system for real estate investing was quite successful. Reflexively, he started buying more properties. He soon realized that this was pushing him away from the lifestyle he originally desired when deciding to become a real estate investor. More properties required more time, effort, and complexity to manage them. He quickly changed his approach, allowing him to live with more freedom.
Examples are everywhere. Early retirees choose to reject societal norms of valuing more material wealth, prestige, and public acclaim that can come with career success. Instead, they focus on having enough to live a different lifestyle. This allows them to pursue interests that they value more than their careers.
2. Early Retirees Use Math Rather Than Emotion to Make Financial Decisions
When I started reading financial independence and early retirement blogs, it seemed everyone was a risk-taker. Jeremy Jacobson, of the blog Go Curry Cracker, wrote about eliminating bonds from a portfolio and favoring an asset allocation of 100% stocks. Mr. Money Mustache wrote about not keeping much of a cash emergency fund. Instead, he described the concept of “springy debt,” the use of credit cards or a home equity line of credit to cover unexpected expenses. Carson wrote about smartly using debt to leverage his real estate investments.
These ideas went against nearly everything seen in mainstream financial advice: Your percentage of bonds should equal your age. You should have at least 6 months of cash as an emergency fund. Debt is dumb.
Then, a light bulb clicked when I read Tresidder describe the concept of mathematical expectation. He proposes the concept as a function of two variables:
- The probability that your bet will be a winner or loser.
- The payoff of a winning bet contrasted with the amount lost for losing bets.
Mathematical expectation is what separates professional poker players from gamblers in a casino. The gambler walks in hoping to have some fun. A professional stacks positive expectancy bets to rig the game in his favor. He will lose some hands. More often than not, he wins, and he rarely loses when the stakes are high. What seems risky is actually boring and predictable. The professional is simply going to work and doing math.
Understanding this concept allowed me to see risk in a different light. All of the examples given above relate to positive expectancy decisions. Over time, in the right context, and with proper execution, each of these decisions will be more profitable than the conventional decisions.
Bonds feel safe. They decrease volatility of a portfolio and provide stability. However, over time, they have been shown to consistently under-perform stocks.
Cash emergency funds feel safe. However, at current interest rates of 1% or less on savings accounts, they are highly unlikely to keep pace with inflation and guaranteed to not support retirement spending. Most months, there will be no emergency and your money will be sitting around losing spending power.
Avoiding debt feels safe. However, not utilizing leveraged real estate guarantees that most people will never become real estate investors. It is choosing to not partake in a positive expectancy activity.
Early retirees consistently make positive expectancy decisions. They minimize negative expectancy decisions and limit the downside when they do. This allows them to build wealth more quickly. It also gives the confidence to make seemingly risky decisions, which are actually well-thought out bets they are likely to win. This includes the eventual decision to retire early.
3. Early Retirees Live Far Below Their Means
I have already written about the importance of having a high savings rate to build wealth quickly. The importance of living below your means, though, can not be overstated. Regardless of income, the choice to live below your means is mandatory to build wealth and become financially independent. The higher the savings rate, the faster financial independence becomes reality.
Saving a large percentage of your income offers the two key components that allow early retirement. First, the savings are applied to investments which compound over time and will eventually support lifestyle. Second, the lower spending required to develop the high savings rate also provides a lower cost lifestyle that is sustainable in retirement.
4. Early Retirees Define Retirement On Their Own Terms
The financial industry has done a great job at selling a vision of retirement. Retirement is a time when you don’t work. Often there are images of beaches and golf courses included. Early retirees realize this is mostly marketing nonsense.
The primary driving force for most early retirees is achieving financial freedom. Retirement can then be defined in any way you like. Without the need to make money, early retirees can utilize their time and energy to pursue whatever interests and drives them. As they pursue things they are passionate about, they often end up providing value to others and, as a result, continue to make money.
Some make more money than when they were working at their careers. This was true of Mr. Money Mustache. His retired lifestyle includes writing a very successful blog, managing rental houses, and owning and working in his home construction business. This has spurred considerable criticism from those that say that he’s not really retired. He has labeled these people the “internet retirement police.”
In reality, Mr. Money Mustache represents the norm for early retirees in that they typically continue to live very productive, interesting, and useful lives. Some become entrepreneurs. Some focus on passion projects like writing a book or serving their community, while others choose semi-retirement or embrace the idea of mini-retirements. Regardless, they are retiring on their terms rather than what anyone else tells them retirement should be.
The Ultimate Choice
Choosing to retire early and live life on their own terms is the ultimate choice that early retirees get to make. Many people find this idea appealing. Few actually take the actions required to achieve financial independence and retire at an early age.
Pursing early retirement is a far more realistic goal than most realize. Many people openly share the path to financial independence and early retirement. Simply make similar choices to what they have made, and you will find yourself able to achieve the same goals.