Early Retirement Extreme - The rest of the story

The personal finance blogoshere is filled with amazing writing talent, tremendously smart people that dedicate their time and energy to provide something of value to others. Of them all however, today’s guest post writer has challenged my thinking about efficiency, frugality and money management more than others. His extreme approach is not for everyone, but everyone can learn valuable lessons from Jacob; owner and writer of Early Retirement Extreme. It is an honor to share part II of Jacobs story.

There are several ways to measure financial independence. One of them is the 4% rule which is known to any retirement planner. Another is actually numbers. In my case, I became financially independent in the 4% sense when I was 30 years old, that is, close to exactly 5 years after I started saving (or the equivalent of a 25 year emergency fund). Becoming financially independent is like turning 18 or 21. Physically you don’t feel it, but you know that something has changed. Your step becomes a little lighter because your freedom just increased tremendously and you can now do things you couldn’t do yesterday. At that point, I knew I did not have to work anymore if I did not want to. Most people don’t cross that point until they are at least 60 years old.

At this point very few knew about it. Only my parents and my girl friend (now my wife) had any idea. GF (now DW) was in grad school and I was a researcher and so we both lived like grad students. I don’t remember ever having felt the pressure to “upgrade” our lifestyle to keep up other than indirectly e.g. by comparing our spending patterns to those of our colleagues. When colleagues discussed salaries and mortgage payments I could only smile sympathetically. It was hard to relate empathetically. In fact, it is still quite hard to relate. Over the years, we have accumulated a bunch of good “stuff”. On the surface, the interior of our home looks like the home of most other overly educated academics I know. Not particularly tastefully decorated, but full of books and papers stacked on top of each other. The main difference is that when we have a problem, the first impulse is not to run out and buy something. Usually it means figuring out another solution that does not involve money. I have gotten pretty good at fixing things or improvising.

Oh yeah, I should probably mention that we live in an 34′ RV, but don’t let that fool you. It is not uncomfortable—people spend a lot of money to go on vacation in these—and it is not deprivation. We pay $475/month in rent or $5700 a year. With a 4% discount rate, that comes to $142,500 which means that buying a house which costs less than, say $80,000, in cash of course, would actually cost less and allow for generous spending on taxes and maintenance (much of which I could do myself). Unfortunately, such houses do not currently exist where we live having arrived late to the housing bubble. We would have to move into a house that we bought in cash and we probably will eventually.

Now, I know that comfort is commonly confused with being surrounded by stuff just as lifestyle is often measured in spending. I have come to realize that neither of these misconceptions are true. Lifestyle is simply a question of what you do, how you do it, and why you do it. For instance, I practice martial arts three times a week, I crew on yacht race out of the Berkeley marina, I fix bikes for a woman’s shelter, I read 3+ books a week, I don’t have an alarm clock, I have this blog of mine, and I don’t work for money. In general, I do what I want, when I want, within reason. Other lifestyles may involve spending 60 hours a week away from home and working to maintain a big house with a lawn, 2 cars and spend money on vacations, services, and stuff. It is like comparing apples and oranges.

In addition, real comfort has more to do with living without stress. Yet, it has almost become a rite of passage to get into stressful situations by signing the mortgage for a 3 bathroom, 5 bedroom house, car payments, cell phone plans, 401k plans, 529 plans, furniture on no money down, and so on, to the point of worrying about becoming unemployed. This cannot be comfortable, and this is a lifestyle I don’t want it. I’d rather have the lifestyle of sitting on a paid off sofa instead of a $1400 sofa set that I have to make payments on for the next five years and consequently pay closer to $2000 for. It is easy to get trapped, because stress creeps up on people, much like a frog in a pot of water, which is slowly heating. Consumers sign up for more and more and since the reference level (water temperature) keeps changing it is hard to realize how bad things have gotten before it is too late. I was lucky enough to escape that trap.

Another trap, which I barely escaped, is the idea of finding a career one is passionate about. I used to be passionate about my work. Being passionate is much like burning the candle brighter and being really passionate means burning it at both ends. You often see people fresh out of school or with no more than a couple of years of (life-)experience boldly claiming that even if they did not get paid they love what they’re doing and they’d happily do it for the rest of their life. It is probably fair to mention that a few are lucky enough to remain in this stage for the rest of the life. I used to be like that and I also used to think I was one of the lucky ones. I used to come in during weekends because I couldn’t wait for Monday.

A common idea is that if you love your work, what’s to keep you from spending, since you’re going to go to work happily ever after? In general, the more passionate you are, the higher the risk of burnout. (Doing your job merely because you are good at it without loving it is a much safer proposition!) Passion typically means working hard because you believe in your work. A burnout is, therefore, the working equivalent of losing faith. One day, or perhaps slowly, the flame just starts dying away. After more than a decade of passionate work, I began to lose my passion. I no longer came in on weekends. I was no longer excited to go to conferences. I no longer spent every waking moment thinking about my work. At that point I knew it was time to start looking for something else. I was lucky to be financially free and having the option to do what I wanted. After much consideration, I retired financially independent at 33. Having spent 100 hours a week like many other young researchers, I did not have the fire any longer. That was one year ago. I was also lucky in that I did not get into debt to pay for my education. In Denmark, all students who get admitted into the university system, far fewer than which get in in the US, get a stipend. (As far as I understand, good students in the US get scholarships as well.)

In all this, I made some mistakes and in retrospect I would have done a few things differently. This is perhaps forgivable given that practically all publicly available advice is directed towards going to college to study whatever, having a career, buying a house and a minivan, investing in index funds, and working for 40 years to live an effective middle class/consumer life. Given my goals I had to create most things from scratch. If I had to do it all over, I could have done some things better. Learning how to be frugal before going cold turkey on myself would have taken the sting out of the first year—after that I never felt like I was missing something.

I think first, I would not have pursued an education which did not have a strongly marketable skill component (unlike accounting, engineering, medicine, etc.). A good sign that your education doesn’t have one is an inability to answer the question: “So what are you going to do when you graduate?”. Fortunately, I made it work, but it would have been much easier to go to a trade school and learn a marketable skill and then consider my education an exercise in personal edification which could have been had with a public library card.

Second, I would have paid more attention to personal finance and in particular investing. The only thing worse than not having an investment plan is to have the wrong investment plan. Before I retired and starting living off of my money, my investment portfolio was not set up for income. Changing it was a big hassle. It is better to set it up right from the start.

Beyond those two mistakes, I did most things right. I never got a mortgage. I never got into debt and so I wasted nothing on interest. I always lived close to work to save on transportation costs. And I never spent money on anything that did not having lasting value and thus when put in perspective my stuff cost me very little. Finally, I happily ignored the common advice consumption smoothing, that is, “fake it until you make it” and avoided going into debt to boost my spending before I had the corresponding savings. I consistently saved 75% and eventually close to 90% as I got a real job before I retired.

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