I recently had the opportunity to sit down to dinner with a group of writers who focus on real estate investing and entrepreneurship. At dinner, I shared that I wrote about early retirement planning and at the time was a few weeks away from my own early retirement at the age of 41.
After talking for a few more minutes, one of the people at the dinner said, “That’s interesting, but I just prefer to go out and earn more money than to have to live on $25,000 per year.” Others nodded in agreement.
I found this statement extremely interesting. My family’s annual spending is about double the $25,000 casually mentioned in conversation. Besides, I never told anyone at the table what my living expenses were. We had just met.
It quickly clicked that the assumption behind the $25,000-a-year budget was a reference to the popular early retirement blogger Mr. Money Mustache. He publicly shares that the annual spending for his family of three is in that range.
Then it hit me. Even at a table of financially literate investors, educators, and generally smart people there were misconceptions about what it takes to achieve financial independence and retire early (FIRE).
The truth is that FIRE does not have to mean extreme frugality. I am an example of someone whose financial situation has changed dramatically, retiring decades earlier than I originally thought possible, by following the solid underlying principles espoused by Mr. Money Mustache and others in the FIRE community but without the same intensity.
Unfortunately, too many people miss these key lessons because they are turned off by the messaging from FIRE “gurus.” They don’t want to ride a bike everywhere, not have a pet or forgo visiting a popular tourist destination. And some simply don’t believe that someone who makes so much spends that little.
Unless you learn by observing the example of others, there is no need to concern yourself with Mr. Money Mustache’s budget or level of frugality. It is not a contest to be most frugal.
But unlike Mr. Money Mustache, very few people pay attention to their own personal spending. This is how the vast majority of Americans, from minimum-wage earners to highly paid professionals, lock themselves into a similar narrative. Most follow the same script of going to a job for 40-plus hours a week until age 60-70. Then they retire.
This is reflected by the average American savings rate fluctuating between 3% and 5%. Before anyone claims that most people simply can’t save, you may find this article from the site Financial Samurai interesting. He analyzed savings rates and opined that even “the top 10% to top 1% of income earners save roughly 12%, which I find surprisingly low. It’s only the top 1% who saves an impressive figure at roughly 38%.”
What you earn doesn’t matter if you continue to spend all or most of what you make. This brings everything back to the importance of the annual budget.
It is not a contest to be most frugal.
If you want to retire early, you need to know what you spend. It is a simple truth, though it is not obvious to most, that you choose how much you spend. It does not need to be tied to what you earn. Many times we spend with little intentionality. By simply tracking our spending, we were able to cut thousands of dollars from our annual budget while improving our lifestyle simply by knowing where our money was going and cutting things that added no value to our lives.
Another simple, but not obvious, truth is that you determine how much money you need to retire by how much you want to spend in retirement. This stands in stark contrast to conventional wisdom that says the income you need in retirement is an arbitrary percentage of the income you had in your working years.
The simple acts of learning to disassociate spending from earning, being intentional with spending decisions, and tracking your spending can allow you to save far more during your working years. Your lower spending then provides the double benefit of needing a far smaller portfolio to be able to retire.
What are your values?
While people eagerly line up to agree or disagree with Mr. Money Mustache, or other “gurus”, I fear they again often miss the more important message. None of us need to worry about the values and opinions of any guru. We don’t have to follow all of their rules.
Instead, we should mimic what they have done by intentionally determining our own values. Then we should build our lives in alignment with our values, including how we spend our time and money.
I originally read FIRE blogs and felt that to find happiness I needed to be ultra-frugal to retire as quickly as possible. In the process I made myself very unhappy and created unnecessary stress in my life by trying to live up to someone else’s standards.
My wife and I ultimately realized that we needed to develop a retirement plan that reflected our needs and wants. This included building an ample security cushion and enabling a life of abundance consistent with our values, allowing access to the activities we love and the people that we want to spend time with. For example, we are avid skiers and we love to travel. Cutting these items from our budget was a non-starter.
Traditional retirement is not working
We already know that many people will struggle to have a comfortable retirement. The National Institute on Retirement Security reports that “62% of working households age 55-64 have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement.”
Compare this to Mr. Money Mustache and the FIRE community in general. Their definition of financial independence is having investments equal to 25 times annual expenses. Mr. Money Mustache and his wife accomplished this by their early 30’s. Instead of nitpicking about whether or not he is really retired or otherwise passing judgment, doesn’t it make sense to try to learn from those with such unconventional results?
Aside from financial concerns, a traditional retirement where you stop work completely can be associated with increased incidence of depression and other health conditions.
The American Psychological Association reports, “Research by psychologists and others has found that working or volunteering during retirement can help stave off depression, as well as dementia and hypertension.” However they also note that “this is not true for everyone as only those people who are truly engaged in their post-retirement activities reap the psychological benefits.”
This reinforces the importance of letting go of our traditional notions of what retirement is or should be. Many people spend their best years slaving away at a job to achieve a secure traditional retirement that never comes. Others are successful financially, only to discover the retirement they have been waiting for is not what they had been expecting.
Mr. Money Mustache models a totally different way of life that focuses on building wealth rapidly and then using financial freedom to pursue whatever it is that you are passionate about for the rest of your life, regardless of whether or not you make money in the process.
Maybe we should stop caring whether he is “really retired” and start caring about how to redefine retirement to build better lives for ourselves.
Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. This is adapted from a post on the blog site Can I Retire Yet?