How long do you need to work to retire? Fifty years? Forty? On the contrary, you may actually be able to retire in only five years.
This is the message of Jacob Lund Fisker, who wrote the book, Early Retirement Extreme (ERE). His self-styled movement began back in 2007, and some of its followers are already beginning to retire. It is an interesting concept – but not everyone buys into it. Before you start preparing for your early retirement, it’s important to understand the concept, the pros, and the cons.
Early Retirement Extreme: The Concept
Although Jacob has recently said he regrets using the term “early retirement extreme,” his ideas are truly extreme from the perspective of most people. The idea is that anyone earning virtually any level of income in the developed world can retire in just a few years if they follow three simple concepts:
1. Cut Down on Spending
While many people can be called “frugal,” Jacob is on a different level, living on only $7,000 per year. How? He never eats out at restaurants, lives in a very inexpensive home, and splits the expenses evenly with his wife. Additionally, he grows some of his own food using a home garden, makes some of his own furniture, and is addicted to getting free stuff from sources like Freecycle.
Jacob recommends other ways of cutting down costs, like borrowing books, music, and movies from the library, and learning how to take advantage of “loss leaders” at grocery stores. Of course, there are other ways to cut your spending and still have fun.
None these concepts are very new or Earth-shattering – many college students apply a number of these methods to save money. However, while society expects people to live like this until they graduate and get a job, Jacob suggests extending the student lifestyle a little longer.
2. Save as Much as Possible
How much of your income do you save for retirement? According to Jacob, it’s not enough. In fact, he points out that the more of your income you save for retirement, the faster you can retire. By living cheaply and making as much money as possible, someone can easily retire much faster than they could otherwise, both because they will have more money and because they require less money to sustain their current lifestyle.
Someone who saves 10% of their income needs to work nine years to save enough for one year of expenses. Someone who saves 90% of their income needs to work one year to save enough for nine years of expenses. Clearly, the more one saves, the more time one has. This works both by cutting down spending and by increasing savings.
3. Transform Savings Into Passive Income
To stretch savings, you need to invest and earn some kind of yield on your money. There are many ways to do this: the stock market, bonds, lending money to people, or buying real estate. It doesn’t really matter how you invest your money, as long as you take the time to learn how to invest, invest smart, and average a positive annual return.