I wrote a bunch of philosophical garbage and threw it all out. I hope you’ll read between the lines and come to the same conclusions without me boring you to death.
How to (hopefully) retire before you die
What is retirement? Retirement is when you have enough, you can just be done. Like, you just do whatever, I guess? Idk.
There’s an important distinction: Many of us have had enough, but we can’t retire. You have to have enough to retire. But how do you do that?
Collecting rainwater with a leaky bucket
I don’t know why anyone would do it, but you can collect rainwater with a leaky bucket.
Trying to retire is being forced to live this absurd hypothetical. I promised a picture:
Linear and non-linear relationships
If I pull on a spring with one unit of force, and it increases one unit in length, I’d expect that if I pulled on the same spring with two units of force, the spring would increase two units in length. A lot of stuff works this way and things that work this way are linear.
Non-linear relationships work very differently. If I pull a non-linear spring twice as hard, I might get 5 times the deflection. If I pull ten times as hard, the spring breaks. That’s really non-linear, I guess.
Something interesting to consider is that the rate a bucket will leak is linear with how much the bucket holds. An empty, leaky bucket won’t leak, a somewhat-full, leaky bucket will leak a bit, and a really-full, leaky bucket will leak a lot.
In the metaphor of retirement, this linearity represents the tendency of people to spend more (leak more) as their earnings increase. In a different metaphor, it’s like turning up the speed on a treadmill and expecting to get somewhere else faster.
Investing more is linear
If I get a raise, I can invest more. Because the investment will grow at some interest rate, the investment will grow with time. Let’s say that we have a nice, stable investment that delivers 4% return when held for a decade. If I invest for ten years, the last year’s worth will not have grown at all, but the first year’s worth will have increased substantially, earning interest each year that entire decade.
Let’s use this strategy and consider its results over a decade. If we invest one unit of capital annually in this investment that gives 4% each year, after a decade, we’ll have invested 10 units of money total, but the investment will have grown to 12 units of money.
But if I worked twice as hard and saved two units of money, well, the outcome is investing 20 units of money and my investment will be worth 24. That’s not bad, but look, double the effort, double the outcome.
Could we work smarter, not harder? Is there something non-linear where twice the effort could give us four times the pay-off?
Learning to live with less is non-linear
If I spend a portion of my free time learning to grow vegetables and leveling-up in the kitchen, I can cut my annual costs by some percent. If every year for the rest of my life I can find a way to patch my leaky bucket and reduce the leak by 1%… what might happen?
That equates to needing less to live. Needing less to live is like living more efficiently.
The average person saves around 20% of their income. Let’s say retirement becomes an option when you could stop making an income and live the rest of your life solely off your investments.
Let’s put some real numbers to it. We have three folks we’ll monitor in this hypothetical. One invests twice as much as the others but enjoys a 1% increase in their annual spending every year. This person invests at twice the rate of their peers, so a 1% increase in their spending year after year isn’t bad at all. Get the promotion, put a down payment on a car… treat yourself right?
The other two folks we consider are saving at the average rate. One is content with what they earn, and they spend the same amount every year. The other tries to cut their annual spending by 1% each year.
After 30 years, our aggressive investor who had a 1% “lifestyle inflation” doesn’t even have enough to retire for 8 years. Our average, content investor who spent the same amount every year had enough to retire for 11 years. And the frugal but average investor? What happened as they got increasingly frugal and efficient with their money each year? They now have over 16 years of retirement funds stashed away.
But I’ve told you that learning to live with less is non-linear and I haven’t demonstrated it quite yet: Let’s say that our frugal investor doubled their efforts. They cut their annual costs by 98% every year instead of 99%. If they could do this, then they would have 26 years’ worth of retirement funds stashed away in only 30 years!
I’m 25
If I invest according to the above strategy and find ways to enjoy life more and more each year at 98% the cost of the previous year, then by the time I’m 55 I’ll have enough money stashed away to never work again assuming I don’t live past 80.
Time is money? Teehee.