Book Review: Early Retirement Extreme

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.

Conclusion

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.

Comments

  1. I also enjoy Jacob’s extreme perspective. It’s a refreshing change from the usual PF blog advice about paying off debt, getting your 401k match, etc that doesn’t really challenge me.

  2. Baughman says:

    Provocative topic. I think that the current US tax code facilitates this type of strategy. You can draw on low incomes in perpetuity without owing a penny in taxes. During the accumulation phase, however, I realize that you still have to face the uphill battle of a 25-35% marginal tax rate.

  3. This feels obvious to me, but if he has a blog with advertisements (including one to his book), doesn’t that mean he’s not retired!

  4. My husband and I are working towards a less-extreme version of this. No cable, cell phones, A/C… we caved on the internet, and also got a magicJack for a “land” line. Right now we’re looking to sell our car to pay down the house more. We’re growing as much of our own food as possible, with plans for an even bigger and better garden next year. I stay at home with the baby (so no daycare costs) and we usually run our errands on foot. It definitely helps to be in a community where walking and biking are easy to do, and it’s safe. If we lived somewhere with big highways and no sidewalks, I’d say we wouldn’t be nearly as good about it!

    If you looked at us without knowing all we’d done the last few years, you might think “oh, well he probably makes a lot, that’s how they can afford that nice house and for her to stay home” – but it was a lot of work to get here!!!

  5. Take note: the 4% safe withdrawal rate rule only applies for retirees beginning withdrawals at age 65. If you are retiring substantially earlier than this, then your chances of not running out of money at a 4% withdrawal rate are much lower than 95%.

  6. @Andrew, good point, and while 4% was used as an example in this article, Jacob actually recommends a 3% withdrawal rate for early retirement calculations.

    @David, this depends a lot on your definition of retirement — and is a constant debate over at his blog. He is free to do whatever he wants, so yes, I consider him retired.

  7. Thanks for the review. I added you to the review list on my front page for reference, you’re number #Q.

    The reason I didn’t add specific investment advice to the book is two-fold.

    First, investment strategies change over the years. If you go back to books from the early 80s, when interest rates were high, lots of books recommended CD ladders because they were safe and the stock market had been tanking for almost 15 years; something that would have been a dealbreaker for someone with a 30 year investment horizon. Of course these books with their CD ladders look rather silly now. Since I expect to keep the ERE book in print, I didn’t want to make a similar mistake. In fact, I was rather adamant about paying attention to the overall market throughout the decades in order to avoid such issues. Index funds may look good now based on the recent 1983-2000 or 1983-2006 secular bull market, but maybe they won’t look so hot in retrospect in 2025.

    Second, I’ve actually tried giving investment advice a few times on my blog. The problem is that my typical readers are not investment rookies and they all have strong opinions on what works for them. Some are in real estate because they like hands on control over tangible values. Some are in index funds for the typical reasons. I and some others are in high yield stocks (widow-style portfolio) which are either value or sector oriented. Some are in dividend-growth stocks. Many like the Permanent Portfolio strategy. We all have our reasons that makes us sleep well at night. I can tell you that since 2007 (when I gave up on funds and started investing on my own), I’ve outperformed the market by 5% annually. However, I also know that if I gave specific advice, some people would not follow it and yet they’d blame me when things went wrong. In contrast, low cost index funds is a good “CYA” suggestion. When it fails, everybody fails together and the blame is shared.

  8. How does one keep they’re annual expenses at $8k when health insurance premiums increase 15% per year? A cheap monthly premium now will mushroom by the time he becomes elligible for medicare.

  9. @Jeff – Health care is already a substantial part of the economy. Since the economy grows at 3% max, the health care segment can’t grow for very many years at 15%—that is, it doubles in size every 5 years—without taking over the entire economy. Since this can never happen, health care inflation will taper off at some point.

    The same argument goes for other bubbles like education and stocks. You simply can not have growth rates exceeding that of the total economy in the long run UNLESS the segments are small to begin with, like it used to be with college educations, stock market investors, and affordable health care.

  10. I wouldn’t know what to do with myself if I retire early. Work gives you a sense of purpose and social contacts. I know this can also be achieved by pursuing hobbies or charity work, but there’s only so much tennis I want to play or flowers I want to plant.

    My goal has never been to retire early, but to save enough money to be semi-independent, such as having the option to walk away from a crappy job and take my time finding a new one and not worry about money. I’d much rather work to afford simple luxuries than retire and live like miser. I know everyone is different, but I finding it a little puzzling when someone chooses to do this.

  11. Early retirement is definitely ONLY for those who DO know what to do with themselves outside of a job setting. Think of early retirement as an occupation for people who want to do things they can’t find in a job environment, like “a career in retirement”. If you think about it like that, it’s clear that not everybody should retire early just as not everybody should become hairdressers or engineers. However, everybody really should pursue financial independence to be able to walk away from a crappy job and generally not worry about money. It’s a very liberating feeling to be financially independent.

  12. @ Early Retirement Extreme – Thanks for giving your perspective. It does make sense when one knows exactly what to do outside of a job environment. Have you thought of finding ways to turn your interests into a career?

    Yes it is liberating to be financially semi-independent. It does give you the license conduct yourself the way you want to such as ability to speak your mind and not worry deathly about losing your job, etc….

  13. Newlyfrugal says:

    It’s an interesting idea, but I can’t live on $10k a year and do not want to do so. I earn six figures now and am frugal enough that I can live on $30k a year. The rest goes to investments at Schwab and Vanguard, CDs, and Rewards Checkings Accounts.

    If you can live on $10k comfortably, then more power to you. But I simply cannot see myself living below poverty level. I worked hard for my graduate and professional education and in the course of over 20 years, became accustomed to certain things that are small luxuries. I choose to use the AC because I would melt in my suits in Florida weather; I choose to drive a car because my occupation requires me to drive to courthouses at the judge’s whim. These two “luxuries” alone put me over $10k in expenses per year and I don’t mind paying for them.

  14. Newlyfrugal sounds like they want to be frugal but because of the money spent on edu. etc need too portray this image of success. It does not appear comfort is within, it has to be “LOOK AT ME” and that is the success they want.

  15. @ERE – Thanks for writing your book, and coming by to respond to comments!

  16. I enjoy your website and have picked up many valuable tips and money saving opportunities.
    I retired at 52 and what I find somewhat self-limiting about your approach is that it is so US oriented.
    It costs $1.25 to see a top specialist in a hospital in China, a MRI cost $22. Bumrungrad Hospital in Bangkok offers similar amazing quality at a reasonable price. You can live a $75,000 lifestyle on $25K-$35K in Laos, Thailand, China and Malaysia. If you under 56 you can apply for immigration to New Zealand which beyond being beautiful, has a reasonable cost of living, is English speaking and has universal healthcare.
    My point is, if you stay focused on exchange rates and cost of living there are many safer, more attractive and certainly more economically viable options then trying to get by in a bankrupt, super violent country that is spinning apart at the seams.

  17. Bill, are u sure about bumrungrad? its a private hospital and my wife used to get treatment there. it wasnt very cheap. but of course nowhere close to US health care

  18. Well….Bumrungrad is definitely more expensive then China. My last visit there was 2009, I saw their Rheumatologist for a tennis elbow kind of thing and it was $35 for the visit. China is 1/35 of that. Chiang Mai Hospitals are good to very good and less expensive then Bumrungrad.

    But you know my point is, that as you move into retirement you have to take a good hard look at what is economically viable and clearly alternatives outside the US seem to have much to offer though healthcare is just element of the retirement process. Investing in countries and currencies like Australia, New Zealand, China, Brazil and others offer the opportunity to make 5%-6% on 3-5 year Time Deposits with minimal to no risk, which once again, is significantly better then you can do with a strictly US-centric focus.

  19. Rodrigo Says: says:

    TAKE THE BLUE PILL!! DRIVE A FULLY LOADED CAR AND EAT AT RUTHS CHRIS 3X A WEEK. DO NOT SHAVE WITH A RUSTY KNIFE AND RECYCLE YOUR CLEANEXS. TAKE THE BLUE PILL!!

  20. Rodrigo….I didn’t even know you could buy Tuenals anymore

  21. I agree with Newlyfrugal. I want to max out my 401k and IRA, save for a rainy day, etc. However, life is short and I have worked very hard to get to where I am today. I want to have some fun and just a bit of luxury. I like Jacob’s blog and it is one of the few personal finance blogs that I follow. I think that I can take a little bit from each of the personal finance blogs that I follow and combine it with my own ideas to create the retirement plan that is right for me. Remember, no two people are the same. There are some people that will be able to live in a bare bones fashion like Jacob but some (actually, most people) need a little bit more. I think craving a little fun and luxury every now and then, does not necessarily make you maternalistic.

  22. Purchasing Real Estate in America is the biggest blunder one can ever do to themselves….

  23. Would rather live in the US than China, Brazil, etc. Thank you. Exception may be New Zealand. Extremely happy here in Texas (albeit, rural area). I don’t know, the more I travel, the more I’m glad to be an American.

  24. Wish I could retire at 33. That would be fantastic! But would I want to live on $10K per year. That would be rough! The only people who can do this are single hermits. :-)

  25. Jenna, Adaptu Community Manager says:

    Thanks for the review. Can’t wait to read it soon!

  26. I am living a form of that philosophy, although I needed some time for it to grow on my. I needed to de-Americanize myself.

    I did this by moving to Asia. I had a job that also paid for my housing and the free time to find other work, as much as I wanted. Also, there was not much to do. You certainly didn’t need a car, as buses go everywhere and then some here. So do the trains.

    So I worked and I lived in my cheap little apartment, for free. Because everyone else was poor too, I didn’t feel so bad. Plus, the goods that I needed were cheap – they were junk that required care, but they were cheap.

    I started making pretty decent money and not spending it. I got used to my schedule. I took on other work, any that I could get – mainly tutoring. I thought, “Hey, I could save a lot of money doing this.” I had no bills; food was cheap when I needed it. My students’ parents would always feed me. I devolved away from having to have ‘the next big thing’. I had no debt, never.

    That was 11 years ago. I am still here though I now own my own place. I don’t work quite as much as before but I also work smarter. My freedom let me start a little business, and my network brought customers to me. I also married a lovely woman from here — she is a gift from the almighty for me, and I try to be one for her too.

    Our net worth recently crossed seven figures and is climbing by five figures every month. We celebrated becoming millionaires …with a bowl of noodles. :)

    It can be done.

  27. The following claim is not correct:

    “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. ”

    The problem is the phrase “will last a lifetime.” Those studies actually assume a 30 year withdrawal period (say age 65 to age 95). Once you realize that, you have to realize that a 4% withdrawal rate cannot be safely applied to the paradigm of early retirement.

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