2952: How to Retire Early with 0% Investment Returns by Steven Keys of Trip of A Lifestyle on Financial Independence

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[00:00:30] [SPEAKER_01]: Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep. So press play on Good Sleep tonight, because a good sleep will be a good night's sleep.

[00:01:00] [SPEAKER_01]: Good tomorrow starts with a good night's sleep. Just search for good sleep in your podcast app, and be sure to pick the one from Optimal Living Daily. This is Optimal Finance Daily. How to retire early with 0% investment returns by Stephen Keyes of Tripofalifestyle.com.

[00:01:21] [SPEAKER_01]: Retiring early is normally pretty simple. Just spend less money than you earn, invest the difference in index funds, and follow the 4% rule.

[00:01:30] [SPEAKER_01]: The 4% rule says that once you have at least 25 times your annual expenses invested,

[00:01:36] [SPEAKER_01]: you can withdraw enough money to pay for your lifestyle each year, and likely never run out as long as you live.

[00:01:43] [SPEAKER_01]: That's because your investment growth should outpace your withdrawals, based on historical data.

[00:01:49] [SPEAKER_01]: Recently, though, someone raised an interesting objection to this plan.

[00:01:53] [SPEAKER_01]: Yeah, but what if everyone did that?

[00:01:55] [SPEAKER_01]: If everyone spent less than they earned and retired early like you, the economy would collapse,

[00:02:01] [SPEAKER_01]: and your investments would stop growing. Back to work.

[00:02:04] [SPEAKER_01]: Now, I'm not sure I agree that the economy would collapse, but this person does have a point.

[00:02:10] [SPEAKER_01]: If everyone became good savers, corporate profits might slow down, depressing future stock market returns.

[00:02:18] [SPEAKER_01]: If everyone stopped demanding debt to buy giant houses and expensive cars,

[00:02:23] [SPEAKER_01]: then interest rates on bonds and savings accounts may permanently fall.

[00:02:27] [SPEAKER_01]: The 4% rule could stop working, and not just for these reasons either.

[00:02:33] [SPEAKER_01]: Plenty of other circumstances could lead to sluggish long-term economic growth.

[00:02:37] [SPEAKER_01]: Fortunately, early retirement would still be possible in a world without the investment returns of years past.

[00:02:44] [SPEAKER_01]: In fact, you don't actually need any investment returns to retire early.

[00:02:49] [SPEAKER_01]: What early retirement looks like with normal investment returns?

[00:02:54] [SPEAKER_01]: In our lower-earning years right out of college,

[00:02:57] [SPEAKER_01]: we were able to save something like 60-70% of our after-tax income

[00:03:01] [SPEAKER_01]: by strategically minimizing our household expenses.

[00:03:05] [SPEAKER_01]: According to the 4% rule, a savings rate of 60% would allow you to retire after a career of just 12 years.

[00:03:13] [SPEAKER_01]: Starting at age 23, you could be done with work forever by 35.

[00:03:18] [SPEAKER_01]: For us, it was sooner, because in our late 20s,

[00:03:21] [SPEAKER_01]: we were saving north of 80% of our net income from higher-paying jobs.

[00:03:25] [SPEAKER_01]: But the math assumes a real investment return of 6% during the aggressive accumulation phase,

[00:03:31] [SPEAKER_01]: and at least 4% during retirement to live on.

[00:03:35] [SPEAKER_01]: So what if that return were 0% instead?

[00:03:38] [SPEAKER_01]: The slightly less simple math behind early retirement without investments.

[00:03:44] [SPEAKER_01]: With 0% real investment returns,

[00:03:47] [SPEAKER_01]: you'd accumulate money slower to start,

[00:03:49] [SPEAKER_01]: and you'd have to eat away at the principle of your nest egg to pay the bills during retirement.

[00:03:54] [SPEAKER_01]: Instead of living off of passive income forever,

[00:03:58] [SPEAKER_01]: your net worth would steadily decline until you died.

[00:04:01] [SPEAKER_01]: But here's the thing,

[00:04:03] [SPEAKER_01]: you are going to die.

[00:04:04] [SPEAKER_01]: So instead of insisting that your money last forever,

[00:04:08] [SPEAKER_01]: you just need to make sure you've saved enough to last until,

[00:04:11] [SPEAKER_01]: you know.

[00:04:12] [SPEAKER_01]: An average 23-year-old American in 2023 is expected to live to age 78.

[00:04:19] [SPEAKER_01]: Let's build in a margin of safety and suppose that they want their money to last until at least

[00:04:24] [SPEAKER_01]: age 85, with a real investment return of 0%.

[00:04:27] [SPEAKER_01]: How long will they have to work?

[00:04:30] [SPEAKER_01]: Well, if they're able to save 60% of their after-tax income,

[00:04:34] [SPEAKER_01]: then one year of living expenses is equal to the remaining 40% of their annual income.

[00:04:39] [SPEAKER_01]: Since they're saving 60%,

[00:04:42] [SPEAKER_01]: that means they're banking 1.5 years of living expenses for every year they work.

[00:04:47] [SPEAKER_01]: After 25 years,

[00:04:49] [SPEAKER_01]: they'll have a little over 37 years of living expenses saved.

[00:04:53] [SPEAKER_01]: They'll also be 48 years old by then,

[00:04:56] [SPEAKER_01]: meaning that they have enough money to get them to age 85 without ever working again.

[00:05:02] [SPEAKER_01]: As a result,

[00:05:03] [SPEAKER_01]: they can retire at age 48 at the end of a 25-year career.

[00:05:07] [SPEAKER_01]: That may be less exciting than retiring at age 35 with the help of investments,

[00:05:12] [SPEAKER_01]: but it's still quite an early retirement compared to the Social Security Administration's official

[00:05:18] [SPEAKER_01]: retirement age of 67.

[00:05:20] [SPEAKER_01]: And just to be clear,

[00:05:22] [SPEAKER_01]: we're putting some ridiculous requirements on our hypothetical retiree here.

[00:05:27] [SPEAKER_01]: Not only have we insisted on 0% real investment returns,

[00:05:32] [SPEAKER_01]: but we've also neglected the fact that most early retirees make more than $0 after quitting their full-time jobs.

[00:05:39] [SPEAKER_01]: Many end up working part-time,

[00:05:42] [SPEAKER_01]: starting businesses,

[00:05:43] [SPEAKER_01]: or reducing their own expenses by doing more DIY stuff,

[00:05:46] [SPEAKER_01]: like mowing their own lawn.

[00:05:48] [SPEAKER_01]: On top of that,

[00:05:50] [SPEAKER_01]: we've pretended that our hypothetical retiree never takes their Social Security payments.

[00:05:54] [SPEAKER_01]: This is truly a retirement from hell,

[00:05:57] [SPEAKER_01]: and it still works.

[00:06:00] [SPEAKER_01]: That's the power of living far below your means.

[00:06:03] [SPEAKER_01]: Can everyone retire early, though?

[00:06:06] [SPEAKER_01]: When most people hear about FIRE,

[00:06:08] [SPEAKER_01]: financial independents retire early,

[00:06:11] [SPEAKER_01]: they fixate on the investing component above all else.

[00:06:14] [SPEAKER_01]: It seems like the magic that makes early retirement work.

[00:06:17] [SPEAKER_01]: And that scares a lot of people off,

[00:06:20] [SPEAKER_01]: because most people don't know much about investing,

[00:06:22] [SPEAKER_01]: other than the fact that it comes with some risk and uncertainty.

[00:06:27] [SPEAKER_01]: Fundamentally, though,

[00:06:28] [SPEAKER_01]: FIRE has never been about investing.

[00:06:31] [SPEAKER_01]: It's based on something much simpler,

[00:06:34] [SPEAKER_01]: consuming less than you produce,

[00:06:36] [SPEAKER_01]: which reduces your need to work later on.

[00:06:38] [SPEAKER_01]: It's common sense.

[00:06:40] [SPEAKER_01]: If you pick two apples today and eat one,

[00:06:43] [SPEAKER_01]: then you can eat another apple tomorrow without having to pick any at all.

[00:06:48] [SPEAKER_01]: The fancy investing part is just a nice accelerant on top of that.

[00:06:52] [SPEAKER_01]: And if everyone consumes less,

[00:06:55] [SPEAKER_01]: then total production, and thus total labor,

[00:06:58] [SPEAKER_01]: can be decreased proportionally.

[00:07:01] [SPEAKER_01]: Now, for wealthy people in countries like the U.S.,

[00:07:04] [SPEAKER_01]: saving more is a simple matter of choosing to spend less.

[00:07:07] [SPEAKER_01]: But what about people at the lower end of the income spectrum?

[00:07:11] [SPEAKER_01]: Fortunately, for the FIRE movement,

[00:07:13] [SPEAKER_01]: and human civilization in general,

[00:07:15] [SPEAKER_01]: the output of each hour of human labor

[00:07:18] [SPEAKER_01]: is increasing all the time.

[00:07:20] [SPEAKER_01]: Instead of reaping grain by hand with a sickle,

[00:07:24] [SPEAKER_01]: modern farmers can harvest 100 times more

[00:07:27] [SPEAKER_01]: in the same amount of time with a mechanical reaper.

[00:07:31] [SPEAKER_01]: Computers let engineers perform thousands of calculations

[00:07:34] [SPEAKER_01]: in a fraction of a second

[00:07:35] [SPEAKER_01]: that used to be done one by one with a slide rule.

[00:07:39] [SPEAKER_01]: And artificial intelligence

[00:07:41] [SPEAKER_01]: is automating tons more human labor right now.

[00:07:44] [SPEAKER_01]: I actually used it to source those last two examples.

[00:07:48] [SPEAKER_01]: With labor getting more and more efficient,

[00:07:50] [SPEAKER_01]: the FIRE tenant of producing more than you consume

[00:07:53] [SPEAKER_01]: is becoming easier and easier.

[00:07:56] [SPEAKER_01]: If we can produce more output with less work,

[00:07:59] [SPEAKER_01]: then we can all work less,

[00:08:01] [SPEAKER_01]: as long as we don't blow that excess wealth

[00:08:04] [SPEAKER_01]: on stuff we don't need.

[00:08:05] [SPEAKER_01]: Early retirement comes into reach

[00:08:07] [SPEAKER_01]: for more people every decade

[00:08:09] [SPEAKER_01]: because, in short,

[00:08:10] [SPEAKER_01]: the world is getting richer.

[00:08:12] [SPEAKER_01]: So yeah, in the long run,

[00:08:14] [SPEAKER_01]: I think everyone can retire early,

[00:08:16] [SPEAKER_01]: even without any help from the stock market.

[00:08:22] [SPEAKER_01]: You just listened to the post titled

[00:08:24] [SPEAKER_01]: How to Retire Early with 0% Investment Returns

[00:08:28] [SPEAKER_01]: by Stephen Keyes of atripofalifestyle.com.

[00:08:31] [SPEAKER_01]: And I'll be right back with my commentary.

[00:08:35] [SPEAKER_01]: This article reminded me of a conversation

[00:08:37] [SPEAKER_01]: I had last week with another FIRE enthusiast.

[00:08:40] [SPEAKER_01]: They were asking me about my thoughts

[00:08:43] [SPEAKER_01]: around spreading the word about FIRE

[00:08:45] [SPEAKER_01]: and how to attract more people to the movement.

[00:08:48] [SPEAKER_01]: I responded that I see no reason to do that.

[00:08:51] [SPEAKER_01]: This isn't a religion,

[00:08:52] [SPEAKER_01]: and I feel no need to convince anyone

[00:08:55] [SPEAKER_01]: to reorient their lives around the concept of FIRE.

[00:08:59] [SPEAKER_01]: As Annie Lamont once said,

[00:09:02] [SPEAKER_01]: Lighthouses don't go running all over an island

[00:09:05] [SPEAKER_01]: looking for boats to save.

[00:09:07] [SPEAKER_01]: They just stand there shining.

[00:09:09] [SPEAKER_01]: End quote.

[00:09:11] [SPEAKER_01]: I've come to realize that FIRE is a pretty obscure concept

[00:09:14] [SPEAKER_01]: that is wildly unappealing to most people.

[00:09:17] [SPEAKER_01]: When you have trouble saving 5% of your income,

[00:09:20] [SPEAKER_01]: like most Americans,

[00:09:21] [SPEAKER_01]: the concept of saving 50% or more

[00:09:24] [SPEAKER_01]: is not inspiring.

[00:09:25] [SPEAKER_01]: It's agitating.

[00:09:26] [SPEAKER_01]: I think most people need basic financial literacy.

[00:09:31] [SPEAKER_01]: They need to be inspired

[00:09:32] [SPEAKER_01]: to question their unchecked consumerism.

[00:09:35] [SPEAKER_01]: And they should aspire to have financial security,

[00:09:38] [SPEAKER_01]: which is way more accessible and useful

[00:09:42] [SPEAKER_01]: than financial independence.

[00:09:44] [SPEAKER_01]: And for those that are interested in FIRE,

[00:09:46] [SPEAKER_01]: you are a unicorn and you are in great company.

[00:09:50] [SPEAKER_01]: But this is an interest

[00:09:51] [SPEAKER_01]: that is best come upon organically,

[00:09:54] [SPEAKER_01]: not because someone convinced you

[00:09:55] [SPEAKER_01]: to become interested against your will.

[00:09:58] [SPEAKER_01]: I read one article from Mr. Money Mustache

[00:10:00] [SPEAKER_01]: in the fall of 2015,

[00:10:02] [SPEAKER_01]: and it completely changed my life.

[00:10:04] [SPEAKER_01]: But I recognize that many other people

[00:10:07] [SPEAKER_01]: could have read that same article,

[00:10:09] [SPEAKER_01]: shrugged their shoulders,

[00:10:10] [SPEAKER_01]: and moved on with their day.

[00:10:12] [SPEAKER_01]: The point is,

[00:10:13] [SPEAKER_01]: most people aren't going to retire early

[00:10:15] [SPEAKER_01]: and ruin the economy.

[00:10:16] [SPEAKER_01]: So I think we can put that fear to rest.

[00:10:19] [SPEAKER_01]: And that'll do it for another edition

[00:10:21] [SPEAKER_01]: of Optimal Finance Daily.

[00:10:23] [SPEAKER_01]: Thank you so much for subscribing

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[00:10:27] [SPEAKER_01]: Have a great rest of your day,

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[00:10:30] [SPEAKER_01]: where your optimal life awaits.