Posted by Canadian Dream on November 17, 2010
According to some people I’m a little nuts for trying to retire at 45. Apparently these people have never read the blog, Early Retirement Extreme which features the story of how one man saved over 75% of his salary for five years and is now financially independent in his early 30′s.
Granted the author, Jacob Fisker, has a very low cost lifestyle to pull this off, but the story is interesting which is why I was looking forward to reviewing Jacob’s book also called Early Retirement Extreme. The book did delivery as I expected it to as I was sucked into it and barely put it down since I received my review copy.
Now this book is significantly different than most other personal finance books you have ever read since the book is more designed like a textbook and also contains significantly more material than what the blog contained. This means it deals heavily with social theory, some math and other concepts that require the reader to actually use their brain a little bit while reading it. The good news is that this very fact makes it a good book to buy since you can read it more than once and pick up different concepts on each read and challenge you to ask: why do we do things this way(on just about everything)?
Perhaps for me the most interesting thing about the book was to realize how very similar Jacob and myself view the world. I didn’t find much new in the book based on my our research, but what was new was how he took several existing pieces of theory and strung them together to his own particular view of the world. Which by the way sort of goes like this: if you accept the idea that we don’t actually ‘need’ the vast majority of crap we buy in life it is then possible to redirect a considerable amount of your income into savings rather than spending. This then allows you the freedom to retire early. The higher the post tax savings rate the early you can leave.
In practical terms the main difference between Jacob and myself is our savings rate. He did a 75%+ savings rate and retired in just five years. I’m doing closer to 50% and chose kids which has strung out my goal by a few more years. Yet in either case it is entirely possible to live well on a faction of the atypically spending levels of our peers.
What the book has done for me is to help me questions some of my assumptions like should I consider a downsized house sooner than I previously planned. Up until now I’ve been reluctant to suggest that concept to my wife since our house is ideally setup for her daycare business. This results in some additional costs to the house, but she is generating a cash flow from that investment. If we move when we are ready to retire to a smaller home we can reduce our monthly costs on housing and also likely free up some capital that has been tied up in the house. (As an aside my wife is actually ok with this idea but reminded me that we likely would like our youngest son to finish grade 8 at our local school which occurs in about 10 more years).
Overall I’m personally going to buy a copy of this book as I do feel it makes an excellent reference book for things to think about with a retirement plan. You may not use all the ideas since you prefer parts of your more expensive lifestyle, but the concepts are helpful to consider.
So if you have read the book or the blog, would you consider an extreme early retirement? Why?
Posted by Dave on November 16, 2010
This is a guest post by Dave, is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
I have a 23 year-old reletive I have tried to help out with financial planning in the past (it was not unsolicited). For her 21st birthday (as she was graduating college) I gave her a copy of “The Wealthy Barber” and explained that it had changed the way I had looked at money, and hoped that she would read it and get something out of it.
A few months later I asked if she liked the book, and was told that she didn’t think it was possible to do the things described and she got lost about 4 chapters in. I questioned her extensively (we were vacationing together at the time) and found that she really had no interest in personal finance and is sort of taking the “it’ll all work out in the end” approach to her money matters. Getting frustrated, but realizing she was losing interest, I gave her the following advice.
Stay out of Debt: To me, this is the most important thing that a new graduate can do. Debt is a shackle that takes away your freedom and flexibility. I told her to pay cash for everything, then she would know that she could afford the things she wanted to buy. She is not the type of person that is checking her bank account every day, so by paying cash there is no credit card debt being racked up that will have to be paid later.
Keep living like a Student: As a student, she was living in cheap, shared accommodation. In order to get her student loan paid off, I told her to keep living like this, and pay off her student loans. I had great success carrying this out, I paid off over $20,000 in student loans and paid cash for a car over an 18-month period with no real change in my lifestyle.
Build up savings: I explained to her, that at this point she probably has no financial goals (which was correct), but at some point she would. If she continued to live below her means for an extended period of time and stayed out of debt, there should be some significant savings built up. I told her not to worry about where to put the money, just keep accumulating it. At some point there will be something large she will want to buy – a car, a house, maybe pay for a large wedding where a savings account full of money will come in handy.
Boiled down, my advice was don’t get stuck – don’t put yourself in a financial situation where you are forced to work. Keep your expenses down and have a pile of money saved so that if you don’t like the job you have, you’ll have the cash to either go back to school or start over in another career. This is how I run my finances and it certainly helps me sleep at night, knowing that I am not “stuck”
After two years, this relative has forgotten or disregarded most of what I told her. She is “stuck” working a job that she detests and doesn’t really have a lot of options other than to keep doing it because she can’t afford to quit. I feel bad for her, as when she was out of school she had a blank slate to work with – making changes now will be harder (due to lifestyle inflation) and take longer to make (due to debt).
What would you suggest for a young person just entering the workforce?
Posted by Robert on November 15, 2010
This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
Last week, we discussed the story of a couple who gave away almost all of their $11 million lottery winnings. It raises the question of why the couple bought lottery tickets in the first place. I’ve participated before in an office pool, but I haven’t ever bought a lottery ticket for myself. Mathematically, I don’t understand the attraction. But I heard an explanation that, for me, explained a lot: some people buy lottery tickets as a license to dream.
What would you do if you won the lottery? Let’s suppose that the prize is $11 million. How would that money change your life? Many people say that they would quit their job, travel, spend more time with family and probably eat out more often with friends. What strikes me about this type of fantasy is that it sounds suspiciously like retirement. Fortunately, retirement for most people won’t take $11 million. But aside from that, most people will quit their job, spend more time with family, travel and relax with friends.
My first conclusion is that there’s no need to buy a lottery ticket to dream. Planning for retirement provides an opportunity to dream the same dream. Granted, retirement planning is more expensive. Instead of costing $2 or $5 a week, it might take $50 or $200 a week. The dream is the same, but the odds of success improve significantly from 1 in 1,000,000 to 1 in 2 (taking into account that life is full of surprises).
The dreams that a person has for either lottery winnings or for retirement reveal something about that person. The things they would do, if there were no constraints in their life, are probably the things that make their life meaningful. And so it would be unfortunate to wait for either a lottery win or even retirement before creating meaning in your life. Which leads to my last question: why not start now to try and do some of the things you dream about?
I know from experience that it’s not so simple. Most of us have a bigger imagination than we can afford to indulge. And many of our constraints are unavoidable, such as children or time commitments or other responsibilities. Let’s look at a couple examples of how this might work. Travel can be both expensive and time consuming. I know a family who decided that they would have a long, exotic vacation every two (or more) years, while spending their other holidays much closer to home. This allowed them to save up, but also to travel to places they dreamed of without waiting to be old. Spending more time with family requires taking time from other responsibilities like work. Some people choose to take additional holidays, take a sabbatical or even reduce their work week to achieve this goal. This may reduce their income, but it allows them to enjoy their children while they are young, instead of waiting until the entire family is old.
When I worked for a summer in Switzerland, I met a man who took the Concorde as frequently as he could over to San Francisco. He chose the Concorde because of the speed, which allowed him to miss less work. I asked him, if he didn’t mind sharing, how he could afford it. He responded that he loved spending time in San Francisco and that it was a question of priorities. His priority was traveling (quickly) to the west coast of the U.S. My priority, right now, is financial independence, so that’s where my money goes. And if a person looks hard at where they spend their time and money, it will either reveal what their priorities are. (As an aside, it may also explain why they feel out-of-sync if their resources not committed to their priorities.)
Dreaming allows us to be honest about where our priorities should lie. Rearranging our time and money resources to support our true priorities develops a sense of meaning in our life. People whose priorities don’t align with their job may look to retire early, where those whose priorities do align with their job may never want to retire. Where do you spend your time and money, that’s meaningful to you? If you were to make a change, where would you prefer to spend more time and money, with the expectation that it would make you more content?
