When Is The Optimal Time To Retire Early?

Most financial advisers tell you that the optimal time to retire is some time after 65 depending on how much money you have saved for retirement. To me, the optimal time to retire is way before that. So when should you retire?

The short answer is as soon as possible. Of course it depends on a lot of things including your family situation, future obligations, health, and how comfortable you are with the unknown. There are a lot of variables and what works for one person obviously does not work for everyone. That doesn’t mean you can’t take a specific case and tweak it to work for you. I’m going to use the example of my situation because that is the example I know best.

Let’s make some assumptions:

I am a single male with no kids therefore I don’t really care if I have any money left when I die to leave to any relatives.

Assume a life expectancy of 75 years old.

Assume you will not receive any Social Security.

Assume no debilitating health bills.

To compensate for unseen contingencies, we will assume that the money you have when you retire will equal your yearly expenses times the years until you are 75. In other words, if you retire at 45 and your living expenses that year are $25,000, then you need 30 x $25,000 = $750,000 to retire. I am not including the growth in your investments or the increase in your living expenses due to inflation.  In reality, if you have $750,000 today and only assume a 4% growth rate in your investments, while assuming a 3% yearly growth rate in your living expenses, you will still have about $350,000 at the end of 30 years.

First let’s see what a typical worker’s lifetime of work, retirement and savings looks like if they follow the path of pretty much spending what they make and probably only saving in a 401K account:

The Typical Worker’s Retirement And Savings Rate.

As you can see, they probably have about 5 years of living expenses by the time they retire at 65. They might get a small pension and Social Security and this covers a 10 year retirement. For some people this is fine.

 

Now let’s see the different retirement scenarios for people who start saving, investing early, and actively live below their means:

This Is A Person That Saves And Invests But Never Retires.
This Is A Person That Saves And Invests But Never Retires.

This is not a bad outcome if you love your job or career so much that you couldn’t imagine doing anything else with your time. The bad part is that you saved way too much money so you died with a fortune. It’s kind of like how all the money goes back to the bank when you finish playing Monopoly. Thanks for playing.

 

This Is A Person That Saves And Invests And Retires At 65.
This Is A Person That Saves And Invests And Retires At 65.

This person has about 10 years of retirement just like the person in the first graph who didn’t save much, yet also retired at 65. The only difference is that this person dies with way too much money left.

 

 

This Is A Person That Saves And Invests And Retires At 45.
This Is A Person That Saves And Invests And Retires At 45.

This person retires at 45 and still has a lot of good years left to do the things they want to do without being too old or tired to try if they were much older. They will die broke or almost broke but who cares?

 

These are obviously very simplified examples, but the point is that you really can retire early if you are serious about it and plan for it. There is nothing noble about ending up with a lot of money when you die, especially if it comes at the cost of working many extra years unnecessarily.

I have been guilty of this myself. I wanted to quit my job years earlier, but my cautious nature always kicked in and said to me “Every year you stay at work, you’re saving about two years of living expenses.”. The truth is that I never made the decision to leave, they made it for me. I think they did me a huge favor.

 

 

 

 

 

 

Brexit vs. Bremain: The Danger Of Following What Everyone “Knows” To Be True

It is a few minutes past midnight on Friday June 24, 2016. The news all over the internet and the T.V. is that the vote on whether the UK should leave EU is now confirmed, and the “Leave” has won over the “Remain”. Is this a big deal? Well if the reaction in the financial markets is any indication, the yes, it is a really big deal. But I don’t live in the UK, so why does it matter to me in the US? Well for one thing, the S&P 500 futures were down about 100 points, or about 600 points down on the Dow. The British Pound against the US Dollar is lower than it has been since 1985 they are saying on CNBC. Asian and European markets are all down heavily. Gold is up about 6%. Okay, so I just gave you the run down at this instance in time of some of the global markets, so what does that prove?

Well in the last week or so, it was “common knowledge” that the UK would remain in the EU. This “fact” was so well known that most of the smartest investors have been bidding up the British Pound and the US markets because it was a foregone conclusion. What we are seeing now is that when everyone seems to know something as obvious, it is not always so. Also, when something is obvious there is not much money to be made because everyone is already on board. The bigger risk is in the opposite happening.

Here are some more obvious truths from the past:

1989 The Nikkei in Japan is almost at 40,000 and land in Tokyo is so expensive that a $100 US Dollar bill cannot buy the land that it covers if you laid it down on the ground in Tokyo. What did everyone “know” at this time? Everyone knew that Japan would take over the world and every MBA better learn Japanese and they are not making any new land in Tokyo.

1999 NASDAQ is at 5,000. Everyone “knows” that tech and the internet are the wave of the future and that dividend stocks are worthless because the biggest gains come from growth stocks.

2006 The US National Housing Price Index has never gone down on a national level, so naturally it never will. Everyone “knows”, after talking to a real estate agent, that you should buy more house than you can afford because it will be 20% higher next year. It’s even a better idea to lie about how much you earn and get an adjustable rate mortgage because even if the loan resets higher than you can afford, you can just sell the house and lock in those sweet profits.

2016 The year is not over yet, but what does everyone “know”? They all know that the key to early retirement is to put all your money in a low cost index fund because the stock market always goes up for as far back as I can remember (which is 2010).

The point I’m trying to make is that the so called experts are often wrong. I can be wrong, and you can be wrong so why put all your eggs in one basket? If you owned only a diversified basket of stocks, you would still be down a lot because when markets go down everything becomes highly correlated. If you owned some stocks, some bonds, some real estate, and some gold, you would not be as exposed to being wrong on one idea or asset class. This also goes for where you keep those assets. If everything you own is in one country that is the same as betting all your money on one idea.  Yes, I “know” betting against the US has been a losing proposition, but I also remember when it was common knowledge that US stocks returned 14% over the long term. Now it seems that it’s common knowledge that dumping all your money into an index fund no matter how high the market is will get you 6% over the long term.

Here is a quote from a very good book about manias and bubbles:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay

 

 

Welcome

Welcome to Maximize Freedom

          What is the maximum freedom someone can have? Freedom means different things to different people. It also depends on your age and your situation in life. If you are 10 years old, your idea of maximum freedom may be to stay home from school, play video games and eat ice cream all day, every day. If you are an adult, it may mean not having to work for someone else, or just being able to do what you want, when you want. For someone with kids, it may mean being able to home school them. Some people may consider freedom to be working 60 hour weeks in a job they love. I’m not one of those people.

A little about me

          My name is Nick and I am 45 years old and currently live in the Tampa, FL area. I moved here almost 2 years ago from NJ and was laid off from my job in May 2015. My background is in engineering and finance. I consider myself financially independent, not because I am rich, but because I have been planning for this for a number of years. It also helps that I am single, have no kids, and have learned to enjoy a simple lifestyle. I like to travel and may consider moving abroad in the near future.

So what will I do in this blog?

          I intend to write articles that help people and maybe make them think of things from a different perspective.  I like simplicity, efficiency, minimalism and not wasting time. This blog will differ from the other blogs because I do not follow the belief that anytime is a great time to throw all your money into an index fund and it will all work out great in the long run. I also believe in diversifying not just within your stock portfolio, but with assets physically in other countries.

What I won’t do in this blog

         I will not pretend to have all the answers all the time. There will be no vague low information articles just to get you to buy some overpriced e-book with the “secret information they don’t want you to know”.  You won’t see a cliché article telling you how cutting out Starbucks every day will put you on the road to riches in no time. Also, there will definitely not be a “Top 20 list” article with a 20 page slideshow with a stock photo and one sentence on each page.  In other words, I don’t want people to feel like they wasted their time after reading my articles.

I hope you stick around for my future articles.

Nick