Is an extreme budget really necessary for early retirement? Photo: TaxCredits.net via Flickr.
Joanna and Johnny are a married couple who run a personal finance blog on budgeting called Our Freaking Budget. Last week, they wrote a piece on early retirement titled "The Early Retirement Fantasy: Why the Reality's Not Worth It."
The basic thesis for their article: The only path to early retirement is through extreme budgeting. Over time, extreme budgeting will wear you down and make your life miserable. It's not worth it.
At least their intentions were good.
As you'll see, there are a couple of huge problems with some of the authors' most basic assumptions. Those thinking about early retirement should consider these assumptions carefully before moving forward.
Extreme budgeting: the wrong approach to early retirement
As the couple wrote in their article:
One of the pitfalls of extreme budgeting is burnout. ... With extreme budgeting, there is no room for anything but the bare necessities. ... What will you be living for in your day-to-day life? ... Inflicting [extreme budgeting] on yourself is like taking your quality of life, crumpling it into a little ball, and throwing it in the nearest garbage can.
The way that Joanna and Johnny wrote it, extreme budgeting requires a degree of self-denial that would make a monk look positively decadent. By this definition, I actually agree with them: Extreme budgeting is no good. It makes you focus on all that you're sacrificing, and over the long run, the emotional and intellectual toll can be monumental.
The problem here is in the approach.
You don't need an extreme budget to reach early retirement. What you do need is a healthy dose of mindfulness. As I wrote in an earlier piece, "We are bombarded by messages every day that make it difficult to discern between what others are telling us we need to be happy, and what we really believe to be necessary for our own happiness."
People tend to think of budgeting as a process of subtraction -- i.e., "What can we cut out of our budget?" Instead, we need to think of it as addition -- "Starting with nothing, what do I really need to be happy?".
Meditation can help you focus on what you really need to be happy. Photo: Flickr user Hartwig HKD.
That simple shift is monumental, and in the end, it will almost assuredly lead to lower levels of spending.
As Joshua Fields Millburn and Ryan Nicodemus write in their popular blog, The Minimalists:
It is possible to be content with nothing or with a room full of stuff. We'd posit to you, however, that it's much easier to see what's important when you get the excess stuff out of the way. A sunset is far more beautiful when you remove the blinders.
An extreme budget is only necessary when we don't have a grasp of what adds value to our lives and what doesn't. It's a symptom of not having done the really hard internal work of figuring out where your "Enough" level is.
Not getting as rich as you could
Speaking of finding your "Enough," that's the key behind debunking Joanna and Johnny's second major misconception, which is that by retiring early, you won't be nearly as rich as you could have been.
They write: "The retirement nest egg you've built didn't have the extra decades to benefit from compound growth that the accounts of those retiring in their 60s enjoyed."
Actually, there's nothing to debunk here -- you will have missed out on those extra decades of compounding growth. Their mistake is simply assuming that it should matter at all!
Think about it: If you know what you need to be happy, and you've done the math to make sure you won't be taking out more than 4% of your nest egg in your first year of retirement, why in the world would you put off retirement in order to have more? To delay your happy retirement in order to amass unneeded wealth is a prime example of the hedonic treadmill -- that is, our tendency to let our expectations rise along with our wealth, preventing us from being happy with what we have.
Is this just semantics?
Maybe the real problem here is that we don't have a working definition of what "early retirement" really means. If you retire "early," does that mean at age 45? Age 55? What about 60?
And what, exactly, constitutes "retirement"? Does it mean never doing physical labor again? Never getting paid again? I would argue that what most people are after in "early retirement" is not a cessation of all labor, but rather a sense of financial independence -- the freedom to choose when, where, how, and why you will work on something.
After posting the story, Joanna and Johnny admitted that they don't really have any strong feelings about early retirement; they just wanted to stir the pot. The real irony here is that these two reportedly save about 40% of their income each year, so according to my own calculations, they should easily be able to retire early.
They did it with extreme budgeting. With the right approach, you don't have to.
