Wednesday, 18 May 2016

Early Retirement Examined

What more can a poor boy do?

Early retirement is based on the idea that cutting the cost of living decreases the amount of time required to build a source of passive income to fund that cost of living. Saving 50% of your income equates to retirement in 17 years. Five years is a common claim for practitioners. At least, for ones who blog about it. However, early retirement blogs like Mr Money Mustache, Early Retirement Extreme, and Go Curry Cracker ignore the limitations of this practice, particularly for those on low incomes.


I See Red

Let's start with an absurd cost of living scenario: no one can spend zero dollars a year. If they did, they could retire immediately, with a savings rate of zero.

So what is a minimum cost of living? The U.S. Census Bureau in 2014 delimited the poverty line for an individual at the annual pre-tax income of $12,071. Net of Federal tax, that would be $10,975.47 in 2016. I will assume that an individual on the poverty line will use 100% of their income, without saving any. Yes, the figure is arbitrary, and yes, Early Retirement Extreme's Mr. Fisker thrives on $7,000 per year, but I don't think the USCB is being extravagant. Spending as little as the poverty line would challenge anyone. Besides, the Fiskers bought an RV with savings (in itself out of reach for low-income earners), which eliminates their rent.

Spending at $10,957.47, how much income is required to retire, or retire early?
Savings Rate (Percent)Working Years Until RetirementNet income required
566$11,553
1051$12,195
1543$12,912
2037$13,719
2532$14,634
3028$15,679
3525$16,885
4022$18,292
4519$19,955
5017$21,951
5514.5$24,390*
6012.5$27,439
6510.5$31,358
708.5$36,585*
757$43,902
805.5$54,877
854$73,170
903$109,755
952$219,509
1000Null
The '*'s correspond to post-tax estimates of the 2014 median and average wages ($28,851.21 and $44,569.20 respectively).

I hope I never

Someone entering the workforce at 18 years and earning between median and average wage can retire in their early 30s, assuming that they're happy living on the poverty line. Naturally, as in Lake Wobegon, most of us are above-average, but what of those unfortunate enough to find themselves in low-wage employment?

The annualised U.S. Federal minimum wage of $7.25 per hour is $14,500. Were minimum wage earners to spend at the poverty line, they would be able to 'retire' at said poverty line in 28 years. Hardly early, hardly retirement, but quite extreme. Even more unfortunate are those who suffer setbacks to finances and income in their later years.

One step ahead

One facetious solution is to earn more in the past. Indeed, Vox's interviewees recognise that the game is rigged in favour of those who found high paying entry-level employment, without taking on debt to do so. That is, not humanities scholars who may be underemployed for years before landing stable employment, but engineers and financial professionals from middle-class families who subsidised their education.

It is no surprise then that early retirement practitioners are - by nature and training - drawn to assurances that success is self-determined, and closed to the limited applicability of their life hacks outside their immediate circumstances. Nevertheless, they do espouse creativity in dealing with finances, and readers would do well to heed this, because it goes beyond what they talk, to reveal solutions in how they walk.

Message to my girl

Of the blog-roll above, all have long term partners. This raises income much higher than expenses. The USCB's poverty threshold for 2-person households is $15,379, not double a single, enabling a double-minimum-wage-earning couple to retire in 18 years. In this example, cohabiting has saved ten years.

Go Curry Cracker offshored to a country where the cost of living is far cheaper. This bears expanding. We bemoan that 2.1 billion people live on less than $3.10 a day, but never think to ask them how they do it.

Hard act to follow

It is easy to label detractors as 'complainypants' without examining whether the failure was due to circumstances and not the individual. Though theoretically sound, early retirement is not possible for everyone as relative formulae collide with absolute limits. It may not be possible for you, and there's no need to cast blame if it isn't.

However - and in all fairness, the bloggers invariably encourage this - it is always possible to re-approach your life as a puzzle, asking, "Do I really need this?", "How much is this costing me?", and "How could I do this better?" Early retirement may be out of reach, but earlier retirement or a less precarious life may be achievable.

Of course, if you had the time and resources to do so, you may already be in early retirement.

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