Earn more, or spend less. That’s what you have to do in achieve financially independence. My own philosophy has been to try and earn more than average, perhaps look about average to casual observers, and spend below average. Now, what if instead you earned about average, but spent way, way below average?
Various studies have shown that with a portfolio of about 60% stocks/40% bonds, you can withdraw 3-4% of your portfolio value each year (inflation-adjusted) and have a 95%+ chance that your money will last a lifetime. Using a 4% rate, that means to retire, you’ll need to save up 25 times your expenses. So if you spend $40,000 a year, you need $1,000,000. By that same math, if you only spend $8,000 a year, you only need $200,000 to retire.
Impossible, you say? Not to Jacob Lund Fisker, author of the book Early Retirement Extreme, who says he lives on about $10k a year and retired by 33. Extreme is a good word for it, though. In the US, the poverty line for a single person is $10,890; for a family of four is $22,350. But that’s how he can make the following claim about his book:
It’s possible to retire and live on invested savings after just five years of full-time work.
Five years?! No, I don’t think he’s crazy. I think it’s awesome that he presents such a different perspective, even if few others can achieve it. He observes that as humans we are more productive than ever, yet we work just as hard or harder than before. The opportunity for early retirement is definitely within grasp in this country.
So how do you manage to lower your expenses to such a level? You’ll likely need to alter your entire philosophy. Living a low-cost, self-sufficient lifestyle must be the end goal, not just a means to an end. If being financially free means driving fancy cars and eating at a new restaurant every night, this will not work for you.
Being Fisker’s ideal “Renaissance man” means going back to when people were mostly generalists (proficient at many things) instead of specialists (exceptional at one thing and outsourcing everything else). It means buying stuff that last forever (high-quality shoes), and learning to fix stuff that doesn’t (darning your own socks). It means not using air conditioning and accepting that sweating also cools you off. It means being willing to bike/run/walk 5 miles to the store instead of jumping in a car. It means living in smaller, more efficient housing that should cost no more than $200-$350 per month per person. It means not paying $100,000 for a college education, but going to a trade school or apprenticeship instead.
Going back to the 4% withdrawal rate. Let’s say your cable bill is $40 a month. That means you would need to save up $12,000 solely to pay for your ongoing cable bill. Is cable TV worth $12,000? Maybe, maybe not. Now do this for all your expenses.
Investing philosophy. Fisker does not like “Buy and Hold” or even low-cost index funds as an investment strategy. However, he does not offer up a satisfying alternative. There are some vague references about how if you devote some time to learning about investments, you’ll be able to earn much better returns. After gathering up clues from the book and his blog, I can only guess that he focuses high dividend stocks that have a very small market cap and thus avoid Wall Street analyst attention (a less efficient market). He doesn’t share actual holdings, so we are unable to follow along or track returns.
Jacob is a Physics PhD and this book is written like a scientific paper or textbook. The text is small, the information is densely packed in, there are lots of footnotes, and it was even written with LaTeX. Much of the same material is available from Jacob’s blog at EarlyRetirementExtreme.com. I recommend reading the archives chronologically from the beginning, especially now because there are few new articles (most are simply randomized re-posts of his old ones and it can get confusing).
In the end, I enjoyed reading this book primarily because it is so “extreme” and thus different from any other book on my nightstand. Even if you don’t adopt his philosophy entirely, it will hopefully make you question some of your current choices. I feel that we need more insight on this side of the spectrum, as opposed to all the attention on the “I sold my company to Google and made a bajillion dollars that’s how I retired early” folks.