Last week, I gave an overview about how our lives aren't all they appear to be online and how we have deliberately chosen to go without a few modern conveniences and luxuries in order to save money. To retire earlier requires us to live below our means and for most of us that means doing anything necessary (as well as legal/safe) reduce how much money we spend. However, there is a second benefit that living as frugally as possible can help you in retirement, whether you retire early or not. It gives you options when times are tough.
Our goal here is not only for you to be able to retire, but to retire early and wealthy. I like the word 'wealthy' because its meaning has very little to do with actual monetary value or net worth. It is a subjective word that can only be defined by the person experiencing the wealth. I posted about how living on a sailboat is not a glamorous as one may think, but we feel it enhances our wealth. Because we get to spend so much time so close together that it makes us a stronger family. That our two kids have amazing balancing skills and are not clumsy because they learned to walk on a moving, rolling platform for all of their lives. They are actually quite attune to their environment because of living on the boat and have become very adaptable, as much as toddlers can be.
The experiences you will gain from living way below your income level will prepare you for retirement in ways you never imagined. For example, once we retire 100% and my wife is no longer earning 'wage' income, we know that if our investments were decimated in a stock crash or something and it ever came down to it, we wouldn't have to sell it all just to live. We already know what it's like to live in a tiny, cramped, electrical/water-rationed place and it would be no problem to do the same in any part of the world we happen to find ourselves in. We would simply adjust our lives down back to that lifestyle and there would be no problem doing so. We already know what it will be like and how stressful it will be.
Here is the big problem when you retire early: your money has to last a REAAALLLLYYY long time. If you follow US government guidelines, you retire in your mid-60's or early 70's. Umm, that's not too long before the average mortality age. So your talking two or three decades the money has to last. Not too difficult if you are a diligent saver and work for 40 years at it. But to retire early? I am 34, so that means (if I live the average male age) I need my nest egg to last 40 to 50 years, maybe more if I'm lucky. So I need that money to not only last, but grow at a healthy pace to keep up with inflation. The lame (and bad) advice doled out by the retirement investment industry would have me in the poor-house in a flash!
As an aside, if you plan to travel extensively you will learn very quickly that there are places that are not like the developed countries you and I grew up in. There are places where utilities are inconsistent or even, sometimes, non-existent. If you purposefully live without some of these thing whether by choice or by accident now, you will appreciate and be able to adapt for them when you travel. And it will also not make you look like an arrogant, first-world prick to the locals. We see a lot of those traveling around. They expect to show up in some jungle in Central America and find their environment is nothing like Florida was and man do they get angry! Jokes on us really because that is the way that most of the world sees Americans. It takes a lot of friendly gestures with the locals to let them know that our family is not like that and we intend to experience their way of life, not for them to experience ours.
Back on to the finances...Living way below your means gives you the option of a built-in cushion in tough financial times. It is our recommendation as part of retiring early that you be able to live on about 4 to 5 percent of your total investments/savings in a year. So if you have a million dollars saved up, you need to be able to live on $40-50,000 per year. Doing that and having the majority of your portfolio in stocks will give you really good odds of having more money than you started with when you die (lucky kids!). But seeing how you are so invested in stocks, there will be times that your portfolio tanks. That's ok. If there is a correction (20% loss in the market) then that means that your account might be down to $800k; which just tackled your annual budget down a notch or so to $32-40,000.
That is a quite manageable drop to handle if you have experience 'living low' like we are now. Which is why we have no shame telling readers they should be saving at least 50% of their income if not up to 80% or more. Because we know for a fact that if they live as low as they can while saving, then if it ever comes down to it in the future, they can do it again and not be afraid. Why would they be afraid? Because that's what people do when the stock market drops and they see a large chunk of their money disappear. But if they adjust their lifestyle instead of adjusting their stocks (PLEASE don't sell when the market drops!!!) then eventually those stocks will go up as they always do and they can go back to their 'normal' lifestyle. Usually pretty quickly if history is any indicator as stocks have ALWAYS gone back up!
So while it may appear that living frugally, or in selective poverty as I like to call it, is either a PR stunt or a really aggressive move to save more of the money we make, we view it more as an important lesson that early retirees MUST master in order to ensure they never run out of money. The last thing we want is to retire in our 30's or 40's and then hit 80 and have no marketable skills after 40 years of not having a job. Not good. So we must be able to easily and willingly adjust our lifestyles at will when tough times call for it. So we do suffer from time to time. Our future selves and our finances are all the healthier for it.
Do you think you could lower your lifestyle expectations in retirement without having done it before? Is 'living low' even worth it to you? Let us know in the comments below.