How to apply Early Retirement
Greetings and welcome to the second blog post of: My Experience. In this blog series I give insight into how I apply knowledge gained. For more information about this series click here. In this blog post I will shed some light on the aspects of the Early Retirement Extreme (ERE) philosophy. The ones I think add sufficient value to be adopted. Furthermore, how I have done this. This will answer the central question: How to apply Early Retirement.
In the fifth edition of Podcast of the Week, I explored the key principles behind Early Retirement Extreme. It is the philosophy behind the popular FIRE movement. I discovered it because of the podcast episode by Mad Fientist, he interviewed the founder of ERE; Jacob Lund Fisker. This sparked my interest, so I read the ERE book (Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence, released in 2007).
The Early Retirement Extreme book
Before I describe the aspects, I would like to summarize the book shortly. This way you can look up the aspects yourself, in the book or on the ERE website. As the title of the book suggests. It is a guide that can be used to design your life. It uses system theory, which approaches life as an integral system consisting of building blocks. To learn more about the fundamentals of ERE, read my earlier post.
How to apply Early Retirement – The why
The book first introduces the concept, then it starts off with the why. This is done by describing the functioning of the economy. It explains the lock-in, which basically means a person being completely dependent on a monthly job income. The exchange of time (and skills) for money. After earning money; external factors, like cultural expectations, advertisements and convenience. Incentivise people to spend this money on products and services. This is how capitalism functions, wealth flows to products/services that create value for the consumer.
For a lot of people this means a large portion of the monthly income is spend on consuming. This translates to a low saving rate. By example, the 60 year savings rate has varied between 7-15% in the US [Source]. The Early Retirement Extreme philosophy questions this system. Is it really necessary to spend a large portion of your income? is it worth it to continuously exchange time for money, to then spend it on stuff you don’t really need?. The philosophy proposes to save and invest a large portion of your income to become financially independent. The theory gives guidelines on lifestyle design, to adjust your lifestyle in such a way that higher savings rates are possible. In this blog post I will share my perspective, I will tell you my reasons to explore this philosophy. Furthermore, the aspects that I adopted. Alongside this, I do have points of criticism. These will be covered in the reasons and aspects below.
How to apply Early Retirement – My reasons
Since the beginning of 2020 I have started to seriously invest. After working full-time for half a year, I discovered that there was no short term goal for a large portion of my income. For me this was and is a luxurious situation. Since all the way through my educational life, the only income I had was from working side jobs. So I read the following investment books to learn more:
- The Intelligent Investor
- The Bogleheads Guide to the Three-Fund Portfolio
- Investing for a Lifetime
- From Here to Financial Happiness: Enrich your Life in Just 77 days
These books give the tools to design your own portfolio, and learn the basics of investing. I ended up with a portfolio that consists of individual stocks, in combination with low expense index funds (ETFs). This portfolio is set-up for the long term (at least 5 years), I contribute on a monthly basis (Dollar Cost Average) to spread risk. At this stage my savings rate was 25%, way higher than the average 7-15% . My main goal; to become less dependent on my job. Then I discovered ERE and the next realization set in: It is possible to become financially independent by investing a large portion of my income. The savings rate determines the early retirement date. I do like my work, but I value independence and freedom over stuff.
1. Sustainability & consumerism
Consumerism in modern society has major negative side effects, in particular:
- Causes more pollution.
- A major contributor to resource depletion.
- Leads companies to develop low quality products.
- Promotes poor labor standards and pay for workers.
- Does not necessarily lead to increased happiness beyond a certain point. [Source]
In it’s current form, consumerism is unsustainable. I see this as a shared responsibility, to reduce the carbon foot print by consuming less. In order to avoid climate disaster. This is one of the reasons to explore ERE, because it offers a perspective opposed to consumerism.
2. More freedom
I work as an IT Consultant. I do enjoy my work, foremost the combination of required skills. Technical & people skills. Both are needed to add optimal value for a customer. Innovation within IT creates constant change, which I see as a challenge. This keeps me hooked to the field. My job provides me flexibility and a relative high income. I call myself lucky that my interests align with skills that are in high demand (I have respect for people in the art sector). This makes growing the gap (increasing savings rate) easier. But, I am dependent on my job to live. It is my primary source of income. I would like to broaden my horizon, to not be completely dependent on this one source. Another reason to explore Early Retirement Extreme.
How to apply Early Retirement – Adopted aspects
The aspects of Early Retirement Extreme that I have adopted to some degree. For each aspect I will give a short description, followed by my application.
1. Renaissance man
The renaissance man ideal suggests it is better to be broadly skilled opposed to being a specialist. This will make it possible to do more things yourself. It enables you to use your own skill-set instead of purchasing a product/service to fix the problem. Which will help you increase your savings rate. Examples of ERE skills are: Cooking, investing, gardening, carpentry. I have adopted this aspect by trying to broaden my skills, this blog is an example. By publishing blog posts I hope to improve my writing skills. My criticism on ERE is that being purely a renaissance man, without specialised skills won’t get you a high income in current society. Which will make it easier to increase your savings rate and therefore reach FI.
This leads to the following aspect, which has to do with contingency goal setting.
2. A web of goals
In my opinion one of the strongest points of the ERE philosophy. It approaches life as a system which consists of modules. The modules can be arranged/organised to contribute to your goals. The web of goals aim is to solve problems proactively by creating solutions, that could be part of a wider strategy in the future. The negative side-effects are eliminated as far as possible and goals are chosen to have mutually reinforcing positive side effects.
I know, it sounds difficult but is actually quite easy to understand. It helps to create this web of goals visually. To illustrate, I have made a web of goals myself:
3. Increased savings rate
The fact is that an increased savings rate not only gives you more money. It also means you require less money to live on. Which in turn means that you don’t need to save as much or for as long to accumulate the money needed to retire. I have cut unnecessary spending from my life. This helped me to increase my savings rate from 25% to 50%. In the coming months I will try to increase it further.
What are your experiences with early retirement? Let me know in the comments.
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