What Early Retirement Means To Me

My first viral post on Millennial Moola was How to “Retire” in Your 20s. It got well over 1000 views and it was one of my first posts. I had to go back and add the “” marks because users from various financial forums like Bogleheads and to a lesser extent MrMoneyMustache lit me up for daring to use the word retired. “This guy isn’t retired,” said one. “He merely has a little bit of savings he will burn through in no time and is in no way 100% financially independent, therefore he’s using the term erroneously and should not be looked at as legitimate. Also his grammar sucks and he didn’t use monthly compounding for his investment portfolio growth and break down specific cash inflows and outflows. This website will not be getting a second more of my time.” It was my first experience being attacked by the internet retirement police. While I’m not financially independent by the traditional definition of being able to meet my living expenses off spending 4% of my portfolio each year (read this link if you don’t know what that rule is), I’m about 60% of the way there. I have my own definition of retirement that I think will help many people out there take chances, start a business, go on a round the world trip, or take a job at a nonprofit with uncertain income prospects all because of thinking about early retirement in a new way.

Early Retirement Means Never Using the Phrase “I’m Just Paying the Mortgage”

Bernie Sanders recently decried the fact that half of Americans have less than $10,000 saved in their bank accounts and retirement plans. If that’s true, then no wonder the most common explanation in the world for working at a job you don’t like is “gotta pay the mortgage.”

The truth is most people under the age of 50 have very little in financial assets. Many people don’t even invest in the stock market at all, and those who do often only make meager 4% contributions to their 401ks. Retirement plans in America are often loaded with high fee actively managed funds that will not do a very good job of building wealth. The best case scenario for the average American worker is saving a mid five figure sum by retirement that might be able to add a few hundred extra dollars a month to whatever Social Security income they get once the 401k is annuitized.

So if you have as little as $10,000 in a savings account, who holds the negotiating power when your employer wants an impossible project completed by Monday morning that will require you to sacrifice your weekend? In a tight economy, when that same employer doesn’t give you a raise or treats you like crap, can you just walk away and take some time off until you find a different job? Or are you stuck? Clearly having little to no savings puts you at a massive disadvantage in the business world, leaving you with little to no choice but to keep working for the man lest collectors put you and your borrowed belongings out on the street, and then proceed to reclaim those said belongings.

But if you set a goal to retire before your 40th birthday, by your mid to late 20s you will have many savings that will flip the traditional power imbalance between employer and employee on its head. You will hold decision making power as to whether or not you want to work for your boss each and every day.

Early Retirement Means Flexibility in Your Spending and Employment Decisions

If you consider yourself to be an early retiree, you can comfortably modulate your expenses and increase your income at will. If you’re a 70 year old electrician, you probably don’t have much income earning potential left. However, if you’re a 28 year old publishing agent, the ball’s in your court for what ends up on your tax forms at the end of the year.

I realized after attempting to do tutoring on the side while working that I could easily grow it into a 15 hour a week, $30-$40 an hour gig. I could pay for my rent, groceries, and car insurance with the side gig alone. If I really focused on it, I might even be able to charge a higher hourly rate and increase my hours. All I had to do was put out an ad on Craigslist, and I had more requests than I wanted to fulfill. Early retirement means having the power to turn on the income spigot if you fall short in a way that you enjoy, as financially needed. For me, tutoring is a passion, and I wouldn’t have minded tutoring for another 10 hours per week. This is the key: it really doesn’t feel like work so I don’t consider it work.

If you think about your skill set, I would almost guarantee you have an interest that could be turned into side income if you tried. That could include website design, working outdoors, babysitting, dog walking, or something else that you like. Early retirement is having the option of meeting a deficit in your investment income and expenses with a side gig you like.

Also, if you are retiring early, you should be able to control where you live, what you drive, how much you drive, what clubs and memberships you join, and all sorts of other cash outflows that working people don’t always control. That means YOU are in charge of what exits your bank account each month. With this power comes the ability to save less to support your spending. When you no longer have a standard 9-5 job, the only person forcing you to spend money is you. Jacob Fisker of Early Retirement Extreme lives on $7,000 a year. That’s probably the baseline of what any human could spend in a year and not be homeless. You get to control how high that number is. When you have the power to control it by being free from debt, free from a fixed location, and free from consumerism as your default setting, you can create your own freedom.

Early Retirement Means Not Needing to Work For the Man Ever Again

If you have hundreds of thousands of dollars of debt, you have no choice but to get a high paying job. If you buy a really big house, car, boat, wedding, TV, etc. you need to get money to pay for those things and will be forced into employment arrangements that emphasize you making money over you having job/life satisfaction.

When I started out, I wanted a corporate job that’d pay me a solid salary. I wanted to get savings and a solid investment portfolio, and at the time I believed that I wanted a great corporate career. Once the BS and politics started, I got tired of it real quick. I needed that corporate job to build my savings because I wasn’t confident enough in my ability to found a successful start up or find a better employer at the time. Now that I have a six figure portfolio, that desperation to keep at it for the money just isn’t there for me anymore. I can get a low paying job at a nonprofit if I wanted to, and if that job wasn’t fulfilling, I have the option of switching to another one. My employment is now not based on me wanting or needing money because I have a big enough pot of savings for it not to be based on that. For those of you who are never motivated by money, more power to you. You are probably seeking out a job that is totally based on your passions, which basically puts you in the same category as an early retiree. By obtaining a solid amount of financial assets, you will have the freedom to move jobs if you’re ever in a less-than-ideal employment situation.

Early Retirement Means Having a Substantial Amount of Investments to Give You Outside Income

Early retirees aren’t like the millions of Americans that get their income from Social Security once they’re not in a traditional employment arrangement. We have dividend and capital gain income that provides us with means outside of a paycheck to survive. How do I define “substantial”? Having at least several years worth of expenses in a portfolio. That’s enough money to give you freedom to explore side hobbies that might provide income and set you up for your “retirement career.”

You may be a free spirit seeking out a meaningful life, but without a solid portfolio, you may find yourself doing menial side jobs or putting yourself in unreliable travel situations like hitchhiking or couchsurfing that may not be ideal. You have gained some power by rejecting the white picket fence house and the new car that society says you are supposed to drive, but if you got sick, needed to emergently fly home to see a relative, or stand as a groomsman for your friend at his wedding, you couldn’t do that. That’s why you need at least some money to give you power over decision making. Even today, I had a decision to make about taking the lift down the mountain that I climbed. I would have preferred to hike it down but there was a sleet storm that came out of nowhere (I guess that happens in the Alps) and I would have had to let my gear and me get soaked by walking down and taking the free option. Since I have enough savings and wanted to preserve my gear, I took the lift down.

You Can Say You Are an Early Retiree When You Have Enough Freedom from Your Investments To Make Your Own Life Decisions

The internet retirement police are screaming at me right now. “THAT’s NOT TRUE! You need to have 25 times your annual spending or you’re NOT financially independent. You are NOT an early retiree!” If we consider that view to be accurate, consider someone who spends $40,000 a year, and thus needs a $1,000,000 portfolio to retire based on the 4% rule (remember to read the article above if you don’t know what that is). What happens if this financially independent early retiree who is almost universally agreed upon in the FIRE (Financially Independent Retired Early) community retired in 1929? What about at the beginning of the 1970s? How about 2007? They suddenly would’ve had their portfolios drop by half and might have had to abandon their plans.

What if that same person got a disability, or needed to help out a family member, or had an unexpected expense from a special needs child brought into the family? That person would also suddenly lose their financially independent status by the traditional definition.

If you look at the leaders of the early retirement movement like Jacob Fisker, Mr. Money Mustache, and others, they saved too much. They could’ve started their blogs a couple of years earlier, and their income from side hobbies would have eventually made up for having only 15 to 20 times their annual expenses in an income generating portfolio instead of the standard 25 times.

You also don’t know how the stock market is going to perform. A 5% annual withdrawal rate could be ok, or a 3% rate could be necessary. These two different scenarios would require you to have either saved 20 times OR 33 times your annual expenses respectively. The investment uncertainty that exists in the market make this arbitrary definition of a portfolio with 25 times your expenses a prerequisite for using the terms “early retiree” and “financially independent” nonsensical.

You clearly need to save a lot. It can’t be just a couple years’ worth of expenses in the bank. However, if you have substantial assets (at least a six figure portfolio),  don’t need to work for the man to meet some financial constraint like debt, find the phrase “just paying the mortgage” ludicrous, and are completely flexible with your expenses and ability to turn on the spigot of side income, you can consider yourself an early retiree from the rat race of “more, more, more,” where the finish line is playing golf in Florida ten hours a day in your 70s.  Early retirement is having the freedom to work where you want, when you want, however you want. That’s what early retirement means to me.