Early Retirement’s Magic Bullet

Work towards having something to sell besides your time.

That’s it. That’s all there is. If you want to achieve financial independence and/or retire early and/or otherwise get out of corporate America—which: who doesn’t?—that’s all you need to know.

But there’s a lot of information packed into that one sentence, so let’s break it down.

A) Work Towards…

First and foremost, learn.

The strategies and tactics you’ll read about in this blog require hard work. Research, reflection, and discipline are key, and you need to lean pretty heavily on the research. Straight up: if you can’t muster the commitment to learn the strategies and skills necessary to become financially independent and retire early, there’s no way you’ll to be able to muster up the commitment to make the years of work and sacrifice it’ll take you to get there. So unless your Aunt Maude leaves you millions, you may as well stop reading now.

Next, apply your energy and creativity at least as much to your own benefit as to your employer’s.

Working hard at your job may not go unrewarded, but it ALWAYS goes under-rewarded. To put it bluntly, and this is something you already know, your employer expects to make more off your work than he/she/it is paying you for it. You need to capture that margin for yourself, and the only way to accomplish that is by working for yourself first. To do so, use the same active and passive strategies  relied on by the pros.

B) Having Something…

As you learn more you’ll discover that there exists a strong movement of people who are fanatical about achieving the financial independence/early retirement (FI/ER) dream. To do so, they tend lean heavily on four strategies: two active and two passive.

The best way to enable the passive strategies is to start with the active ones.

Active strategy #1: Live below your means.

Living below your means, or LBYM, is simple: it’s the fine art of pushing down on your expenses at the same time you’re pushing up on your income. The size of whatever it is you’re selling obviously has to be directly proportional to your needs, which means it’s extremely helpful to manage those needs down. Spending less and saving more allows you to retire earlier and stay that way longer.

Active strategy #2: Use the principle of “avoided cost.”

We’ve all heard the story of the two parents with a small child who realize one of them is essentially working for free–or even losing money–because daycare is so expensive. So one of them elects to stay home and care for the kid. That’s your classic avoided cost example, and there are many such opportunities to push down on expenses.

Here’s my most recent one. My daughter needed better educational opportunities, so we moved from our cabin way out in the sticks to a much better school district in one of our city’s up-and-coming neighborhoods. While our cabin was on the market, I was hooking our trailer up to my truck every couple of weeks and loading the riding mower into it and driving the ninety minutes to the cabin so I could cut the grass…a job that took three hours.

Didn’t take me long to realize that at two bucks a gallon at fourteen MPG for a hundred-mile round trip, three hours of wear-and-tear on the mower, five or six hours of my time, and sometimes a stop for fast food on the way home, I was much better off paying a kid in that town $50 plus his gas cost to take cut our grass with his own equipment.

There are all kinds of little plays like that one out there. Start noticing them and using them–I bet you’ll be surprised.

C) To Sell…

The commonly-used “passive” strategies work from the bottom up. Some call this the “accumulation phase. Both are to a degree “active” in that what you’re doing is essentially setting up vending machines, but having them once set up, they should only require minor tweaks to keep running—and by “minor tweaks”, I mean “much less effort than showing up to a job every morning.”

Passive strategy #1: Build an investment pool sizable enough for a “safe” (meaning indefinitely sustainable) annual withdrawal rate to cover your living expenses.

Your research will lead you to a number of “how much money?” resources; foremost among them the “retirement calculators” like FIREcalc. Most of these calculators have share an approach: they compare a person’s annual income requirement to long-term stock market returns to demonstrate how much, in a historical context, that person would’ve needed to retire “sustainably” without running out of money.

And this gives rise to two rules of thumb. First, that a withdrawal rate of 4% is generally considered “safe” in perpetuity. Alternately, to have a safe withdrawal rate someone should have at least twenty times his or her annual income requirement, and twenty-five would be even better..

Take a look at retirement calculators; they’re powerful and quick-to-use tools. I have many articles about them in my queue.

Passive strategy #2: amass physical, intellectual, and/or virtual property you can rent for enough, after deducting operating expenses, to meet your monthly nut.

Commonly used passive income streams include rental real estate, royalty income from e-books and photography, peer-to-peer lending, automated car washes, strings of vending machines, etc. You might also think of credit card churning as a passive income stream, albeit one that blurs the line between active and passive.

Each of these methods requires setup work, of course, but remember that you’re trading some time up front for an income stream that could theoretically last forever.

Again, you’ll be seeing articles about passive income streams in further posts on this blog.

D) Besides your time.

The math is simple: you show up and exchange 2,080 hours a year for a package of benefits, including salary. This is the tradeoff you want to break out of, yes?

I recently read an article about a CEO who decided that instead of Christmas bonuses, he’d pay his employees with “the gift of time”…by which he meant a few extra days off around the holidays.

Lord, did I go on a rant about that.

The essence of my rant was: IT’S MY TIME, NUMBNUTS! Part of a business transaction! You may want to buy my time from me, and I may want to sell it to you.

But only for as long as I have to, and not an instant longer.

So the decision you’re faced with is this.

Clearly…clearly!…it requires work and sacrifice to enact the strategies necessary to achieve financial independence and early retirement. But you have to decide which you want more: the benefits of continuing in your career, or the benefits of going your own way. (Naturally if you’re one of the lucky people who enjoys what you do, you get both.)

But no matter which approach you choose to structure your life around, there’s no shame in it. Obviously there’s honor in work.

What would be a shame, I think, is failing to make a choice at all…failing to consciously control your life’s direction because you never truly understood your options, and therefore defaulting to the traditional “trade your time for money” career-type approach to making your way through life.

Well…I made my choice a long time ago.

Birth, school, work, death?

No thanks.

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18 thoughts

  1. This paragraph I believe to be in error:

    “And this gives rise to two rules of thumb. First, that a withdrawal rate of 4% is generally considered “safe” in perpetuity. Alternately, to have a safe withdrawal rate someone should have twenty times his or her annual income requirement.”

    Shouldn’t that be TWENTY FIVE times his or her annual income retirement?

    1. Thanks for the comment. Great point. I’ve seen ranges from 20-25, but I think since 25 is a more conservative estimate, I think it deserves mention. I’ll edit the post. Thanks again!

      1. 20 would correspond to a 5% withdrawal rate (i.e. 1 / 5%).
        25 would correspond to a 4% withdrawal rate (i.e. 1 / 4%).

        Saying 4% SWR and 20 times annual expenses are saying two different things. 25 isn’t more conservative than 4%, it is the 4% SWR.

        1. Meaning 25x is more conservative than 20x, not more conservative than 4%. Weird how you see both the 4% rule and the 20x rule thrown around a lot.

      2. I had to re-read the “income requirement” sentence to understand what you meant. I think you mean 20-25 times his or her required expenses… Putting a focus on expenses makes it more clear.

  2. i believe, and welcome correction, that the 4% rule is predicated upon a mixed portfolio of stocks and bonds. when dividend/coupon rates are less than 4%, one must sell assets to make up the difference. this makes the scheme vulnerable to an unfavorable sequence of returns. given that today’s dividend rate of VTSAX is 1.86%, a balance of 53 x living expenses makes a 100% stock allocation “safe.” Since 53x is a daunting amount, frugality, side hustles and rental real estate figure significantly in my own planning.

    1. You’re right about stocks/bonds. If you go back to the original paper by the original proponent of the 4% rule, William Bengen, you’ll see how he breaks it down. This ought to be required reading for every FI/ER-seeker. Name of the article is: “Determining Withdrawal Rates Using Historical Data” by William P. Bengen. (http://www.retailinvestor.org/pdf/Bengen1.pdf) The Trinity Study confirmed his results.

      Edit: note that Bengen used treasuries in his modeling.

    2. Current dividend yield cannot have anything to do with it, for two reasons:
      1. You could choose a different fund (tracking a different index) with a higher or lower dividend yield. If your numbers change when you change a non-variable, it’s a bad sign.
      2. If dividend yield were X (say 4%), and assets plunged by half, but dividend yield stayed the same, dividend yield (as percentage of original portfolio) would be halved. So your real problem is total returns – which is intuitive, it doesn’t matter if you get money in appreciation, dividends, or bags of coins.

    1. Where I’m at with early retirement is this: if it interests me I’ll check into it. So no other side hustles right now, but this one might last another month or another ten years…but it’s enough to say that it’s fun today.

  3. Per the 20-25xAnnual income, how are you factoring in inflation, or is that baked into the 25x recommendation? Running the numbers on what $50/$70/$80k are in 30-years-from-now-dollars are pretty staggering, makes it almost a necessity to invest solely in equities essentially through death, and managing a somewhat complex IRA vs. taxable cash and/or bond fund to withdraw from pending on what the market does.

    Interested to see how this is/if it is addressed.
    Sources are Simple Wealth Inevitable Wealth plus excel, I’d be happy to send you the document I worked up on it.

    1. Hi there.

      First off, bear in mind that this is about as loose a “rule” as there is. Inflation is baked in. In a bond environment like this, a bond component is damned near useless anyway. Personally I’m carrying high-yield equities.

      Sure thing, I’d like to see your spreadsheet. EarlyRetirementDude@gmail.com

  4. I’m a bit older (55) so my magic bullet was from Warren Buffet.
    “If you don’t find a way to make money while you sleep, you will work until you die.”
    I’ve been retired since 2006.

  5. 4% is definitely not considered indefinitely safe, it’s 95% success for a 30 year horizon, which for many ER people is way too low. 3% (well, depending on your exact numbers and modeling, slightly higher) is the indefinite historical safe withdrawal rate, which of course is still subject to change if the future diverges from the past significantly enough.

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