Early retirement and opportunity cost, by Harry Sit

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qwertyjazz
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Re: Early retirement and opportunity cost, by Harry Sit

Post by qwertyjazz »

This article made me realize I can spend one extra hour while working to having a large number of hours while retired free to do what I want. I can use the money earned to buy free time to avoid or minimize chores. I can shift free time forward. It made me rethink my framework for retirement.
Thank you Harry Sit
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Re: Early retirement and opportunity cost, by Harry Sit

Post by MandyT »

tfb wrote:
MandyT wrote:I think Mr. Sit is saying that, because early retirement is a luxury, there's no sense in pinching pennies for years then retiring early--you might as well either spend more as you go or work a couple of years more. (Maybe that's not what he's saying--I'm not 100% sure.)
I wrote the blog post being discussed. It's definitely not what I was saying. The recognition of the large opportunity cost makes it difficult for my friend to switch from pinching pennies to spending the opportunity cost on a luxury. The presence of a large opportunity cost says nothing about whether it's worth it to incur the opportunity cost. It's not inconsistent with the concept of "enough" or the irreplaceable time or the joy one gets from leisure. There's nothing wrong with pursuing luxury when you have enough and you want more time. You just don't get to call yourself frugal when you pursue luxury. That's all.
Thanks so much for the reply and the clarification!

I consider myself to be generally frugal, but I'm willing to take the plunge and spend a significant amount of money if the situation warrants it. My frugal nature means that (1) by the time I take this step, I have to *really* want it, and (2) by the time I take this step, I can afford to spend the significant amount of money. If I do take that step, I don't think it's cause to revoke my frugal license. :sharebeer

I think early retirement is a larger version of what I just described. I do think I disagree with the assertion that "if you spend money on a luxury, then you're not frugal", but I think it's more a matter of semantics than a real disagreement.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by texasdiver »

Most of us here could probably find a second job. I see employers around here advertising for swing and graveyard shift work. I could probably give up my relaxing evenings with the family and my weekends and squeeze in another 40 hours of work per week. People do it.

So is there an "opportunity cost" if I decide not to work 80-100 hours per week? Gee, if I did I could be throwing away a new BMW every year too!

I'm not sure how this is any different from the opportunity cost of early retirement. Do you work to live or live to work?
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest »

KlangFool wrote: Wildebeest,

This is where I disagree. If a person is working in a highly stressful environment with no job security, being frugal and has the ability to be financially independent is a matter of SURVIVAL. It is not a luxury.

There is a significant degree of difference and stress between those

A) Living from paycheck to paycheck.

versus

B) People with emergency fund and can survive a few years without income.

I could sleep at night when I was unemployed for more than a year. Not many can do that.

KlangFool
Klangfool,

You have a good point,

In my book if you have an emergency fund and can survive for a few years without income and if I understand what you said before correctly, and you are considering early retirement, you are fortunate.

I consider early retirement a luxury. You consider it survival.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by iceport »

tfb wrote:
MandyT wrote:I think Mr. Sit is saying that, because early retirement is a luxury, there's no sense in pinching pennies for years then retiring early--you might as well either spend more as you go or work a couple of years more. (Maybe that's not what he's saying--I'm not 100% sure.)
I wrote the blog post being discussed. It's definitely not what I was saying. The recognition of the large opportunity cost makes it difficult for my friend to switch from pinching pennies to spending the opportunity cost on a luxury. The presence of a large opportunity cost says nothing about whether it's worth it to incur the opportunity cost. It's not inconsistent with the concept of "enough" or the irreplaceable time or the joy one gets from leisure. There's nothing wrong with pursuing luxury when you have enough and you want more time. You just don't get to call yourself frugal when you pursue luxury. That's all.
I very much appreciated your article tfb, and the discussion that followed. It was thought-provoking.

I am in the midst of the "one more year" dilemma, in which I can increase my retirement security by working a couple of more years beyond the earliest early retirement age. But I'm leaning heavily towards the earliest date.

What gives me some pause is seeing what seems like dozens of my older coworkers with twice the pension I will get (due to a far more generous retirement tier) take up full-time work in retirement. This, and with a pension of roughly 70% of base pay! It makes me wonder what I'm missing. And I have to keep reminding myself I'm just different. Apparently, I can comfortably live on a small fraction of what they need. We have totally different frames of reference.

So my boss keeps saying I should be living large, and asking what I plan to spend my savings on. Well, now I have a proper answer: the luxury of leisure!
"Discipline matters more than allocation.” ─William Bernstein
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Re: Early retirement and opportunity cost, by Harry Sit

Post by tfb »

texasdiver wrote:So is there an "opportunity cost" if I decide not to work 80-100 hours per week? Gee, if I did I could be throwing away a new BMW every year too!
There is. Just because there is an opportunity cost doesn't mean you have to swing at every opportunity. Some people actually seek out overtime for time-and-half. They will take the opportunity.

Again, we are talking about "early" retirement here. In the example I gave up thread -- How this couple saved $1 million and retired in their 30s (MSN Money/Forbes) -- before this couple quit in their early 30s with $1 million, they were making over $200k. After factoring taxes and higher living expenses in a more expensive area, let's call it $100k net. They decided to spend this $100k net each year on experience, which is perfectly fine. However, it doesn't negate that (a) there is a large opportunity cost; and (b) choosing to incur the large opportunity cost is a luxury, not unlike other luxury spending.
Harry Sit, taking a break from the forums.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by dodecahedron »

I don't think "throwing away a BMW" is necessarily the right analogy.

Harry is right that leisure can be an expensive luxury if your labor value is high. BMWs are also expensive luxuries.

Person A who thoughtfully uses their time enjoyably in early retirement is not doing the equivalent of buying a BMW and throwing it away.

On the other hand, Person B who mindlessly uses their time in early retirement and squanders it IS doing the equivalent of buying a BMW and throwing it away.

By contrast, Person A is doing the equivalent of buying a BMW and joyfully using it.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by iceport »

dodecahedron wrote:I don't think "throwing away a BMW" is necessarily the right analogy.

Harry is right that leisure can be an expensive luxury if your labor value is high. BMWs are also expensive luxuries.

Person A who thoughtfully uses their time enjoyably in early retirement is not doing the equivalent of buying a BMW and throwing it away.

On the other hand, Person B who mindlessly uses their time in early retirement and squanders it IS doing the equivalent of buying a BMW and throwing it away.

By contrast, Person A is doing the equivalent of buying a BMW and joyfully using it.
Excellent points, dodecahedron! I agree completely.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Vilgan »

Going by a definition of luxury "something that is expensive and not necessary" I strongly disagree. What could be more necessary than the freedom to choose how to spend one's time?

I had a similar opportunity cost dilemma when I went off on my own and billing hourly. It was almost hard to take a vacation because that was time that I could be making more money. Not working for a week? Not only did I spend money on the vacation itself but I was also throwing away the money that I could have been making if I was working. Once you add the real cost and the opportunity cost together it made it seem absurd to pass up that opportunity.

That wasn't healthy and I'm in a much better place now. I feel comfortable that I'll cross X amount at which point working will be optional but I'm enjoying life so there's no reason to rush to hit X ASAP. I'll get there very early and have the option to "retire" in my early 40s and will hopefully continue to enjoy the process of getting there.

I think a standard goal in life is to maximize happiness. By that definition a BMW is a luxury because most happiness books I've read suggest that buying the BMW doesn't actually improve happiness long term. Measuring by happiness the freedom to spend our remaining time how we choose whether that be hiking, hobbies, less profitable but more satisfying work seems like the ultimate purchase.

As for the comparative advantage, I don't see life as a min maxing equation where we try to use our time the most efficiently. Should I spend an extra hour typing into my computer to not have to weed my own garden? Theoretically sure, but weeding the garden is also an experience. Although I don't relish it, spending a nice day outside weeding is satisfying and I feel content when done. If I hated it, the answer imo is to not have a garden rather than to pay someone else to do it. Humans aren't specialized robots, we are extremely adaptable creatures that can do a variety of things and typing code into a computer so I can experience a WALL-E style "do nothing else for myself" experience doesn't sound like a satisfying life.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by rob »

randomguy wrote:
KlangFool wrote:
I do not believe my story is unusual. It is common among my peers when they are in their 40s and 50s.

KlangFool
Your situation is very unusual. You don't realize it because your peers (same industry and geographic locations) are in the same boat.<snip>
I don't know how common across the population, but I thought I was reading my own post for a second - Klang might well be working next to me because I see the exact same thing occurring over the last decade.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Kevin M »

When reading Harry's statement that the decision to retire early was hard for his friend because he was both frugal and a high earner, I thought to myself that I also have always considered myself frugal, and was earning a very nice salary at age 55 when I decided to retire, but the decision was very easy for me. What was the difference between Harry's friend and me? Did I just not think clearly about the opportunity cost of retiring early?

In the discussion in the comments to the blog, it was observed that an important factor in the decision is the marginal utility of an additional year of income; i.e., what percentage of your accumulated wealth is one year's salary? That clicked for me, as I quickly calculated that one year's salary was probably 3%-4% of my accumulated wealth, so even though it seemed like a fairly large salary to me in absolute terms, not so much in relative terms.

I do remember thinking, with some angst, about the higher subsidy I would receive for medical insurance by working one additional year (opportunity cost), but receiving a generous severance package being offered as an inducement to get people to retire early, plus the value of not having to work one more year at a job that was becoming much less enjoyable, seemed like more than fair compensation for that opportunity cost.

I have no problem with Harry characterizing retiring early as a luxury expense, at least in my case, since it's certainly true that there are many, many other people who could not afford to retire early as I did, and who would have jumped at the opportunity to have my job at the salary I gave up at age 55. I don't remember ever thinking about it in those terms though, and I still have a strong frugal streak, but I manage to overcome it now and then on luxury purchases other than just my time.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by mak1277 »

Stormbringer wrote:
jabberwock wrote:Trading away more years of your life to work for more wealth in order to purchase and consume more material goods is a terrible idea.
The trick is to find meaningful work you enjoy. I love what I do, and while I envision slowing down a bit and taking more vacation, the thought of having to give up my work entirely is a bit frightening.
I'm the opposite. I can't even imagine a job (any job) that would be better than being retired and doing exactly what I want, whenever I want to.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

texasdiver wrote:Most of us here could probably find a second job. I see employers around here advertising for swing and graveyard shift work. I could probably give up my relaxing evenings with the family and my weekends and squeeze in another 40 hours of work per week. People do it.

So is there an "opportunity cost" if I decide not to work 80-100 hours per week? Gee, if I did I could be throwing away a new BMW every year too!

I'm not sure how this is any different from the opportunity cost of early retirement. Do you work to live or live to work?
Do the people planning for early retirement not get vacation and weekends off? I would think if you haven't maxed those opportunities out and a huge chunk more of free time isn't going to really add that much beyond extra time to lie around.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

Vilgan wrote:I had a similar opportunity cost dilemma when I went off on my own and billing hourly. It was almost hard to take a vacation because that was time that I could be making more money. Not working for a week? Not only did I spend money on the vacation itself but I was also throwing away the money that I could have been making if I was working. Once you add the real cost and the opportunity cost together it made it seem absurd to pass up that opportunity.

That wasn't healthy
Have had the same dilemma the past few years, but I am coming up on a number that I hope will allow me mentally to start taking more long weekends. Just can't picture what I would do after about a month if I totally quit work. Perfection would be somewhere in the 24-32 hour a week range.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Meg77 »

iceport wrote:I am in the midst of the "one more year" dilemma, in which I can increase my retirement security by working a couple of more years beyond the earliest early retirement age. But I'm leaning heavily towards the earliest date.

What gives me some pause is seeing what seems like dozens of my older coworkers with twice the pension I will get (due to a far more generous retirement tier) take up full-time work in retirement. This, and with a pension of roughly 70% of base pay! It makes me wonder what I'm missing. And I have to keep reminding myself I'm just different. Apparently, I can comfortably live on a small fraction of what they need. We have totally different frames of reference.

So my boss keeps saying I should be living large, and asking what I plan to spend my savings on. Well, now I have a proper answer: the luxury of leisure!
I don't think your colleagues return to work because they need the money. I have noticed this trend, and it gives me pause as well. I know many colleagues personally who have millions of dollars saved, large pensions, and/or who have substantial family wealth and yet continue to work into their 50s and 60s. I also know several women who retired and then after only a year or so started businesses or got part time jobs. None of these people say money is at issue. Rather, I hear about how they don't have enough to do each day, get anxious and even depressed without some structure, miss feeling productive, etc. Why does Bill Gates still work, or Mark Zuckerberg, or Oprah, or any wealthy celebrity or person? Clearly money isn't the only factor at play.

A life of leisure sounds great, and I moan and groan about the grind of work and deadlines and meetings as much as anyone. But I was not even 2 days into the Memorial Day holiday weekend before I was restless and agitated, feeling like I was wasting time and had nothing else to do besides waste more hours away on social media and television. This after many hours of exercise, socializing, gardening, cooking, reading, rest, and other healthy activities. Work can bring many pleasures beyond just a paycheck - a sense of purpose, accomplishment, productivity, social interaction, cooperation, structure, milestones, challenges, etc. Human beings have evolved to crave and appreciate these things - to work, in other words - and it can be hard for all but the most self-motivated and diligent among us to scratch all those itches outside of the workplace.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by an_asker »

tfb:

In the excerpt that OP posted, your point of view is very confusing to me. Before I let myself wade into this discussion, clarify please ...
A co-worker takes pride in being frugal and saving money. He brown-bags for lunch every day. He stays at Motel 6 when he travels. When we talked about early retirement the other day, because he’s interested in some leisure activities, I said the largest cost of early retirement isn’t housing or health care. It’s the opportunity cost — the income he’ll give up if he retires early.

At his after-tax income, it’s like buying a few new BMWs each year and sending them to junk yard without even bothering to trade them in, just so he can spend his time the way he likes. When he asked me what was the point in penny-pinching and turning around throwing away money like that, I didn’t have a good answer, except by saying that early retirement is a luxury lifestyle.
ing frugal.

When your time is valued highly by others for doing things you do well, you will have to pay the same high price (after taxes) if you want to spend your time on something else. There’s nothing wrong in pursuing a luxury lifestyle. Luxuries are usually more enjoyable. It’s just the polar opposite of being frugal.
Your co-worker is the frugal person. Your co-worker is wanting to retire early. Then why is he asking you this: "When he asked me what was the point in penny-pinching and turning around throwing away money like that, I didn’t have a good answer, except by saying that early retirement is a luxury lifestyle." And why, then, do you have to answer? Should he not be the one answering, given that he is the one that is contemplating throwing away the few BMWs? What am I missing?

PS: My contribution to this thread - I learned only yesterday that Wildebeest is also known as Gnu. And Gnu is an animal I had known about from childhood (had a box with A-Z animal names that for some reason used G for Gnu instead of Giraffe), though truth be said, I didn't remember what a Gnu is supposed to look like.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by hulburt1 »

I saved for 35 years. Paid cash for everything. At 55 I got hurt on the job. Could not prove it. Had to retire with a pension. My first check was more then I was taking home because I had so much put in a IRA and 401k. I would never give back the time I did not work.
At 63 I am starting to feel old, Even had a medical issue that really scared me. I was going to wait until 70 for SS and IRA. At 70 I just might be dead. I can triple my income right now and that's my plan.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by hulburt1 »

I saved for 35 years. Paid cash for everything. At 55 I got hurt on the job. Could not prove it. Had to retire with a pension. My first check was more then I was taking home because I had so much put in a IRA and 401k. I would never give back the time I did not work.
At 63 I am starting to feel old, Even had a medical issue that really scared me. I was going to wait until 70 for SS and IRA. At 70 I just might be dead. I can triple my income right now and that's my plan.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by mak1277 »

TheTimeLord wrote:
texasdiver wrote:Most of us here could probably find a second job. I see employers around here advertising for swing and graveyard shift work. I could probably give up my relaxing evenings with the family and my weekends and squeeze in another 40 hours of work per week. People do it.

So is there an "opportunity cost" if I decide not to work 80-100 hours per week? Gee, if I did I could be throwing away a new BMW every year too!

I'm not sure how this is any different from the opportunity cost of early retirement. Do you work to live or live to work?
Do the people planning for early retirement not get vacation and weekends off? I would think if you haven't maxed those opportunities out and a huge chunk more of free time isn't going to really add that much beyond extra time to lie around.
I'm planning to retire early. I get weekends and vacations and I absolutely max them out whenever I can. Over the past year, I've even started doing more chores (groceries, haircuts, home projects) after work on weekdays so that I don't have to do them on weekends.

It's that whole concept that makes me want to retire early...I want never ending weekends to do what I want, when I want to. For me, it's spending time outside, and you wouldn't believe how many times there are beautiful days during the work week when I'm trapped inside and then it rains all weekend.

It irks me when people assume that wannabe early retirees aren't living life to the fullest already and we're somehow just waiting to retire to do the things we want to do.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

mak1277 wrote:
TheTimeLord wrote:
texasdiver wrote:Most of us here could probably find a second job. I see employers around here advertising for swing and graveyard shift work. I could probably give up my relaxing evenings with the family and my weekends and squeeze in another 40 hours of work per week. People do it.

So is there an "opportunity cost" if I decide not to work 80-100 hours per week? Gee, if I did I could be throwing away a new BMW every year too!

I'm not sure how this is any different from the opportunity cost of early retirement. Do you work to live or live to work?
Do the people planning for early retirement not get vacation and weekends off? I would think if you haven't maxed those opportunities out and a huge chunk more of free time isn't going to really add that much beyond extra time to lie around.
I'm planning to retire early. I get weekends and vacations and I absolutely max them out whenever I can. Over the past year, I've even started doing more chores (groceries, haircuts, home projects) after work on weekdays so that I don't have to do them on weekends.

It's that whole concept that makes me want to retire early...I want never ending weekends to do what I want, when I want to. For me, it's spending time outside, and you wouldn't believe how many times there are beautiful days during the work week when I'm trapped inside and then it rains all weekend.

It irks me when people assume that wannabe early retirees aren't living life to the fullest already and we're somehow just waiting to retire to do the things we want to do.
I think some do and some don't. My real point which doesn't come across is I think it is critical to have something to be retiring to, instead of just retiring from something. But, if it makes someone as happy to sitting on a porch swing and watching kids little ague games as someone else is exploring the world then great. It is their life, go for what you want. Sometimes I feel there is a lot of pressure here to agree that early retirement is the answer for everyone, and of course there is no one answer.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by tfb »

an_asker wrote:tfb:

In the excerpt that OP posted, your point of view is very confusing to me. Before I let myself wade into this discussion, clarify please ...
The full post is linked in the OP, with more comments from me and other readers. I also clarified a few times in this thread.
viewtopic.php?p=2921948#p2921948
viewtopic.php?p=2922739#p2922739
viewtopic.php?p=2923187#p2923187
Harry Sit, taking a break from the forums.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by grettman »

I think I understand the concept but I keep having a problem with applying a cost to freedom. We aren't just talking about time, which does have a cost, but when an early retiree wakes up and has the freedom to choose, the thought of comparing that to an alternative at a cost level just hurts my head. I'll take freedom and time if I have the means to do so. I can't buy either in a store ...
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Artsdoctor »

Geez. There's more to life than money.

"Opportunity cost" doesn't have to refer to dollars alone.

One may very well be making a very high salary and alienate family in the process. If your job is not allowing you to spend enough time with your family and loved ones, you might want to take a look at priorities. Or, if you insist on putting the focus on money: It does you no good to pull in the big bucks if you've pushed yourself into divorce because you're never present. THAT will cost you far money than retiring a few years earlier.

If I can make several hundred thousand dollars a year working 80 hours a week, the financial opportunity cost of working less is high. But I may well spend a lot more by paying people to do everything for me since I'm never available--and I can pretty much guarantee that my spouse is going to be stressed because I am as well. If I work 40 hours a week and make half, but maintain a stable and happy marriage because I'm more involved, I have every right to call myself frugal if I want. Not only might I be happier, but I could've averted a collapse of a relationship and a family.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

grettman wrote:I think I understand the concept but I keep having a problem with applying a cost to freedom. We aren't just talking about time, which does have a cost, but when an early retiree wakes up and has the freedom to choose, the thought of comparing that to an alternative at a cost level just hurts my head. I'll take freedom and time if I have the means to do so. I can't buy either in a store ...
Free to do what they can afford, I guess. Two things I have experienced, some great vacations that definitely weren't free and a 10 month trial retirement which where I discover I was only free to do things with myself since all my friends were at work. So just me personally I would rather work a few more years until my friends and family are available and do fantastic things with them than knock around the house waiting for them to get off work.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by EnjoyIt »

TheTimeLord wrote:
Do the people planning for early retirement not get vacation and weekends off? I would think if you haven't maxed those opportunities out and a huge chunk more of free time isn't going to really add that much beyond extra time to lie around.
I have lots of free time off and still looking for an early retirement. When I was young and had a negative net worth, my time was cheap. As I get older and see my family getting older I realize that my time is more precious than anything else. The older I get the more I am willing to pay for my time. I would definitely rather live in a studio apartment than be forced to work 8 hours a day 5 days a week well past my prime.
TheTimeLord wrote: Free to do what they can afford, I guess. Two things I have experienced, some great vacations that definitely weren't free and a 10 month trial retirement which where I discover I was only free to do things with myself since all my friends were at work. So just me personally I would rather work a few more years until my friends and family are available and do fantastic things with them than knock around the house waiting for them to get off work.
I do get that. I would be so bored if I had nothing to do. Currently my work is very random. I wok 3 days and then get 4 days off. Work 2 days and get 3 days off. Work 6 days in a week and get a week off. It is very random. I find that I am off very often when others are working. It doesn't bother me one bit and actually love the time to myself. On days off I sleep in, eat healthy, exercise, do stuff around the yard or house, and get some fine reading in. Don't get me wrong, I love spending time with friends, but I don't need or don't want to do it every day.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by fsrph »

Raybo wrote:Clearly, the point of the article is to show that by retiring early, someone is losing money to get more time and that working longer is doing just the opposite. But, I see this as a fallacious comparison. Time and money are fundamentally different things. There is a quality to time that money doesn't have, namely experience.

One hour is not worth the same amount of dollars. An hour spent riding a bicycle through a beautiful place is not worth the same as an hour spent in riding a bike through urban traffic going to work. How is one to measure being too old to ever ride a bicycle through a beautiful place? Sure, I could call that opportunity cost, smile, and say "that's my point."

But, what is the cost of never being able to do something? It is true that not being able to afford something can be a problem, though, money can be borrowed. This is not true for time. People can die owing money, but not with more time.
I read the original article and I don't agree with it or maybe don't understand it. I agree with Raybo's line of thinking. Opportunity cost is a two sided coin. If you value life experiences more than additional money why should you keep working? If you never complete these life experiences due to health or whatever what good does a larger pile of money do for you? Which is more important to you, time or more money? Opportunity cost applies just as much to life experiences as money.

Francis
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Re: Early retirement and opportunity cost, by Harry Sit

Post by trueblueky »

When you have enough (to be able to retire) ...
When you've had enough (that you don't think you can stand any more) ...
it's time.

The summer our youngest finished college, we said goodbye to work and winter. We volunteer, see family and friends, and spend most of each day together. I am blessed. YMMV.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by mak1277 »

TheTimeLord wrote:
grettman wrote:I think I understand the concept but I keep having a problem with applying a cost to freedom. We aren't just talking about time, which does have a cost, but when an early retiree wakes up and has the freedom to choose, the thought of comparing that to an alternative at a cost level just hurts my head. I'll take freedom and time if I have the means to do so. I can't buy either in a store ...
Free to do what they can afford, I guess. Two things I have experienced, some great vacations that definitely weren't free and a 10 month trial retirement which where I discover I was only free to do things with myself since all my friends were at work. So just me personally I would rather work a few more years until my friends and family are available and do fantastic things with them than knock around the house waiting for them to get off work.
That's a fair point. I consider myself lucky that my hobbies are typically solo activities, or only shared with my wife. I can't imagine needing or wanting to wait for other people to do fun things...my solo time is some of my favorite time.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by an_asker »

dodecahedron wrote:I don't think "throwing away a BMW" is necessarily the right analogy.

Harry is right that leisure can be an expensive luxury if your labor value is high. BMWs are also expensive luxuries.

Person A who thoughtfully uses their time enjoyably in early retirement is not doing the equivalent of buying a BMW and throwing it away.

On the other hand, Person B who mindlessly uses their time in early retirement and squanders it IS doing the equivalent of buying a BMW and throwing it away.

By contrast, Person A is doing the equivalent of buying a BMW and joyfully using it.
Yes, monetarily and economically speaking, I agree that leisure is an expensive luxury if the labor value is high. However, from the human standpoint, I think that an hour is an hour. You are not going to get it back whatever you pay for it. So, if a person who already has 'enough' spends his/her time working when he/she could've just relaxed (or taken a vacation), he/she has got the extra money but is not going to get the time back - ever. The opportunity cost of time is undefined, whether you are a laborer making $10/hour or a superduper surgeon making $1000/hour. However much each of them works, they won't get back an hour lost.

Let's say A, B and C are identical throughout their life (career, kids, grandkids, spending, etc - you get the point) until A and B retire (together). C continues to work at the same high labor value (let's say earning the equivalent of the typical BMW every month). A and B do different things over the course of the next year - needless to say, they end up using part of their nest eggs.

So now, C has 12 BMWs (or the wherewithal to buy that many) - plus some more - in addition to what A and B have. But C will never be in the same age in life to do what A and B did over the last year. The kid (or grandkid) - assuming A, B and C exactly equal - who was 9 years old last year and loved going to Disney with dad (mom, grandma or granddad) is now 10 and might no longer like to do so.

But I still don't understand why you are saying that Person B is throwing away a BMW (or 12). How do you determine that A "thoughtfully uses his/her time enjoyably" and B does not? Why should you (or anyone other than the actors) be the judge of what constitutes enjoyable use of time vs. squandering it? I might get joy out of spending three hours watching a tennis match but not spending that time in a movie theater - you might be exactly opposite. If you were to judge my time in the stadium as squandering time, so would I of your time in the movie theater.

My point is that: once a person has accumulated enough where he/she thinks it is sufficient to retire, how can others judge how he/she uses the remainder of his/her time. Yes, there is an opportunity cost to whatever we do and however we do it. Each person should be the judge of what makes the most sense to him/her. There is no universal rule of what is the best way to spend time, which would then imply that anything else is the proverbial throwing away of money/BMW/vacation/spectator sport/movie watching opportunities.

PS: I read all of tfb's responses and still don't understand where he stands. I'll put it down to my lack of reading comprehension skills. So, I don't know if I am agreeing with him or not. Be that as it may, this is my opinion :-)
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Re: Early retirement and opportunity cost, by Harry Sit

Post by an_asker »

grettman wrote:I think I understand the concept but I keep having a problem with applying a cost to freedom. We aren't just talking about time, which does have a cost, but when an early retiree wakes up and has the freedom to choose, the thought of comparing that to an alternative at a cost level just hurts my head. I'll take freedom and time if I have the means to do so. I can't buy either in a store ...
+1!
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Re: Early retirement and opportunity cost, by Harry Sit

Post by rai »

I'm not sure this is particularly the point, but if someone has enough money to retire but they have to be on a budget. I'm not even saying a strict budget but just that they'll have to watch their spending somewhat.

Or keep working and have no worry or even increase spending in later life.

I don't half mind spending money like I pay someone to do the yard work and someone else to do housekeeping and someone else to take care of the pool. Etc.. I figure my work time is MUCH more productive as I probably make 5x whatever I'm paying for others to do those physical/menial jobs for me. Plus I'm getting a fair deal and at the same time I'm helping the economy or the people who work for me in that they'd be worse off if not for all the people like me who don't bother with yard work etc..

On top of that my surplus money can be donated to good charities. So working past longer than financially necessary is not futile or pointless.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

mak1277 wrote:
TheTimeLord wrote:
grettman wrote:I think I understand the concept but I keep having a problem with applying a cost to freedom. We aren't just talking about time, which does have a cost, but when an early retiree wakes up and has the freedom to choose, the thought of comparing that to an alternative at a cost level just hurts my head. I'll take freedom and time if I have the means to do so. I can't buy either in a store ...
Free to do what they can afford, I guess. Two things I have experienced, some great vacations that definitely weren't free and a 10 month trial retirement which where I discover I was only free to do things with myself since all my friends were at work. So just me personally I would rather work a few more years until my friends and family are available and do fantastic things with them than knock around the house waiting for them to get off work.
That's a fair point. I consider myself lucky that my hobbies are typically solo activities, or only shared with my wife. I can't imagine needing or wanting to wait for other people to do fun things...my solo time is some of my favorite time.
I found, and other are likely to vary, that I enjoy solo time more when I am working. During my 10 month trial retirement I had solo time in abundance, it was no longer special or a relief from my normal hectic routine. I definitely agree the hobbies one chooses will have a huge effect in this area. If I was to become serious about my photography again I would burn mountains of solo time, while playing golf for me is more enjoyable with a group of friends.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by an_asker »

TheTimeLord wrote:[...] ... while playing golf for me is more enjoyable with a group of friends.
Come on over!
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Re: Early retirement and opportunity cost, by Harry Sit

Post by randomguy »

fsrph wrote: I read the original article and I don't agree with it or maybe don't understand it. I agree with Raybo's line of thinking. Opportunity cost is a two sided coin. If you value life experiences more than additional money why should you keep working? If you never complete these life experiences due to health or whatever what good does a larger pile of money do for you? Which is more important to you, time or more money? Opportunity cost applies just as much to life experiences as money.

Francis
The article isn't saying don't retire early. It is pointing out a cognitive dissonance issue. Frugal people like to think they don't "waste" money on luxury goods. But retiring early is one of the most expensive luxury goods out there as we are talking millions of dollars (do the math on something like 40k/yr of savings for 10 years and then compound it over another 20 to compare the 50 to 60 year old retiree estate isze) So how do you reconcile the self image of being a frugal person with buying this expensive luxury good? The answer is to recognize that luxury goods are worth it. You just need to pick the ones that make you happy (BMW vs not having to go to work). And obviously this isn't an either or thing. The ~20k I spend on playing adult ice hockey over 15 years means that I am going to have to work another month or two more than I would if I had invested that money. I found that luxury good worth purchasing. Other people might go that was a waste, should have gone hiking for 300 bucks over the same time period. On the other hand I haven't spend 90k on the 911 because it isn't going to bring me enough enjoyment to put off retirement by 5 months.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by michaeljc70 »

There is an opportunity cost in everything you buy and every minute you don't work. Thinking of it that way, you could work hard your whole life, live as a miser, and never spend anything.

I have worked for a long time as a contractor. I don't get paid for any time off. Many contractors I worked with over the years didn't take any vacations or very brief ones. I took 3-18 months off between most projects. I enjoyed the time off and valued that more than the money.

A couple of other things are if you keep working harder and buying better/more, you will probably never be happy. They call it the hedonistic treadmill. People think if only I made $50k...then it is $75k...then it is $100k ...then it is $150k. You think when you reach that next level you won't need more and it will satisfy all your needs and wants. It is just trying to keep up with the Joneses.

Another thing is, as your income rises, so do your taxes. When I was taking time off, I was only losing around 1/2 the money due to taxes I would have been paying and I got 100% of the time.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by fsrph »

randomguy wrote:
fsrph wrote: I read the original article and I don't agree with it or maybe don't understand it. I agree with Raybo's line of thinking. Opportunity cost is a two sided coin. If you value life experiences more than additional money why should you keep working? If you never complete these life experiences due to health or whatever what good does a larger pile of money do for you? Which is more important to you, time or more money? Opportunity cost applies just as much to life experiences as money.

Francis
So how do you reconcile the self image of being a frugal person with buying this expensive luxury good?
Does the article define what age early retirement is? There's a big difference if it's 40 or 55. Everything in life had an opportunity cost. If that was the point of the article I agree with it. I don't deny early retirement involves an opportunity cost. If you can afford it you justify it by not knowing how much time you have left. I don't know if you're young or old. But as I age and see friends and acquaintances come down with serious illnesses or die early it's a big wake up call to do whatever brings you happiness.

Francis
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Re: Early retirement and opportunity cost, by Harry Sit

Post by tfb »

grettman wrote:I think I understand the concept but I keep having a problem with applying a cost to freedom. We aren't just talking about time, which does have a cost, but when an early retiree wakes up and has the freedom to choose, the thought of comparing that to an alternative at a cost level just hurts my head. I'll take freedom and time if I have the means to do so. I can't buy either in a store ...
The highlighted part gave it away. You are already applying a cost to freedom. Suppose you think you don't have the means to retire yet, and suppose that's the only reason you are still working. Suppose having the means translates to a supporting a living standard of X dollars a year adjusted for inflation using your favorite withdrawal method. Suppose your current savings will only give you 0.9X dollars a year. There, you gave the cost to freedom as 0.1X dollars a year for the rest of your life. You are willing to work a number of years in order to raise your living standard for the rest of your life by 11%.

Now comes another person, who faces the same prospect: work another number of years for a living standard 11% higher. Should he/she do it? Some will and some won't. It's a personal decision depending on one's age, income (which affects the number of years required), wealth (which affects the diminishing return on that extra 11%), working conditions, and maybe some other factors.

I didn't expect this to be controversial. There's an opportunity cost, which has to be considered, because it can be much larger than the "hard" costs of housing and health care. A large opportunity cost does not automatically mean working forever. Desiring freedom also does not automatically mean quitting tomorrow.

I brought up an example earlier in the thread. A couple retired in early 30s with $1 million when they were making $200k+ before that. If you were in the same situation, would you work one more year and permanently lift your living standard for the next 50 years by 10%? Two more years to lift it by 20%? They said no. I suspect some may say yes. There's no right or wrong. That couple decided to make that luxury purchase. To them it's worth it. Some others may see it as a waste, just like other luxury purchases (BMWs, private schools, adult ice hockey, ...).
Harry Sit, taking a break from the forums.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by an_asker »

tfb wrote:[...]I brought up an example earlier in the thread. A couple retired in early 30s with $1 million when they were making $200k+ before that. If you were in the same situation, would you work one more year and permanently lift your living standard for the next 50 years by 10%? Two more years to lift it by 20%? They said no. I suspect some may say yes. There's no right or wrong. That couple decided to make that luxury purchase. To them it's worth it. Some others may see it as a waste, just like other luxury purchases (BMWs, private schools, adult ice hockey, ...).
Aaha! I think I've figured out where we diverge. To you, the freedom is a 'luxury' - to me, something is a luxury if you can have a cheaper/frugal/value version of it at a lesser cost. In case of freedom, there is no lesser cost it can be had at. In other words, a doctor making $500/hour cannot get an extra hour of freedom by forsaking $10/hour, which the hamburger flipper who is making $10/hour can.

Comparing Person A's per hour rate vs. Person B's per hour rate does not really make sense - but that is what we are all trying to do in this thread and that is invalid in that specific scenario. Freedom is not a 'luxury' it is just a good - take it (if you want it badly) or leave it! Everyone's rate is different, but it does not make it more luxurious to someone making more than to someone making less.
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Re: Early retirement and opportunity cost by Harry Sit

Post by HomerJ »

randomguy wrote:The point is who is living a more luxurious life. The guy who drives a BMW for 40 years but works to 60. Or the guy that drives a honda accord and retires at 50. A lot of people would say the BMW guy.
Good way of putting it. I'd take 10 years of retirement over the BMW any day.
It is up to you to decide what is more valuable to you
Yep.

The trick is to understand the law of diminishing returns.

Owning just a motorcycle would be cheaper than a Honda Accord, but a Honda Accord gives me trunk space for shopping/traveling, room for 3 others, and is more comfortable in bad weather. It's a pretty big return going from a $8000 motorcycle to a $18,000 car.

Now going more upscale to a BMW gives me far less value. It has almost all the same features as the Honda Accord, except maybe it's more comfortable, and drives better. It's not twice as nice even though it costs twice as much (or more).

Same with a house, same with vacations.

Zero vacations for 20 years so you can retire early is bad. 2-3 vacations a year is a huge jump up from zero vacations. 4-6 vacations a year, even though twice as many, is not as big a difference in your life than going from zero to 2.

It's about knowing how much is enough. Moderation is key.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by HomerJ »

This.

Image
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

HomerJ wrote:This.

Image
When you are dead does either one really matter?
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Re: Early retirement and opportunity cost, by Harry Sit

Post by curmudgeon »

I wouldn't tend to think of early retirement as a luxury good, though I agree that there is definitely an opportunity cost. The key is that opportunity cost may be very different for different people. I've known employers that allowed workers to "sell back" unused vacation time at the end of the year. Some folks would always have vacation to sell, because they didn't really enjoy taking vacations. Some even lose vacation to employer "max accrual" limits. For myself, I always had a plan for all my vacation days and more. If I had the easy option, I would choose to buy another week or three, and I have occasionally taken unpaid leave to make that happen. Desiring *more* vacation is not necessarily the same as wanting *all* vacation as well. Even those of us who would always like a little more time off don't necessarily want to fully lose the psychological satisfaction that can come from work.

In one sense, you could argue that any retirement before you are forced out of work by physical/mental/contractual limitations is "early retirement". If you *can* work longer, then there is usually a financial cost to not doing so.

One key to understanding your own "opportunity cost" for early retirement is to look at what the additional savings would buy you. For some, it is a higher level of security, a form of insurance. For others, it may be lifestyle luxuries, travel, etc. For still others, it may be legacy wishes. Pretty much none of these come with exact calculable values, though.

For myself and my wife, there is limited utility to more money for retirement. We don't have the desire to own more houses, stay in fancier hotels, go to more exotic locales, drive fancier cars. If we had twice as much as we do now, about the only difference would be that we would fly business class routinely, and we might spend more money on expensive vacations with our kids/grandkids. But we don't fly (or want to fly) all that much, and we can have just as much fun on a cheap camping trip with the kids as we can doing Disneyworld or Cancun with them. For now, it's still the stimulation that comes from my work that keeps me going, though the balance has started swinging towards the exit.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest »

rai wrote: On top of that my surplus money can be donated to good charities. So working past longer than financially necessary is not futile or pointless.
I agree with rai's point. I very much liked Harry Sit's article, which I take as a thought experiment.

I find it interesting to see the comments. It must hit some nerve in a lot of other people as well. Often a different nerve then in me.

I am prone to Harry Sit's mindset of opportunity cost and I make decisions as to how much to work as to how I value my return. E.g. when I am on vacation ( I do the calculations as in not generating income while on vacation but have a whole lot of overhead and then in addition spend money on flights, dinners, hotels and scuba diving etc). I do figure when vacationing that the empty house (except for the dog and cat sitter) which cost us $ 2000 for starters. We could rent out our house while on vacation, but that does not feel right.

So instead of going on vacation, live in smaller house etc and we could give it to charity. Have not done it yet (as we still go on a lot of vacations).

I am impressed with Peter Singer's book "The Most Good You Can Do" about effective altruism: a philosophy and socical movement, which applies evidence and reason to working out the most effective wasy to improve the world and I thought the book is about opportunity cost. This makes me wonder even more as to what matters most.

https://en.wikipedia.org/wiki/The_Most_Good_You_Can_Do
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Rodc »

I do figure when vacationing that the empty house (except for the dog and cat sitter) which cost us $ 2000 for starters
See: sunk cost fallacy

I can't imagine ruining a vacation by worrying about such things as mentioned just above. That would really eat into the cost benefit analysis!
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Rodc »

At his after-tax income, it’s like buying a few new BMWs each year and sending them to junk yard without even bothering to trade them in, just so he can spend his time the way he likes.
This is absolutely false unless the early retiree chooses to do nothing of interest with their newly freed time - that is they take their time and send that time to the junk yard without even bothering to use it.

If you use money to buy time and use it wisely that is entirely different.

Sure, every year you do not work but you could work you do not make money you could have. We all think about that, that is not news. But every day at work is a day you are not doing something else. Exact same trade. You just decide which has more value to you.

I am not sure there is any real value in trying to make it any more complicated than that.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest »

Rodc wrote:
I do figure when vacationing that the empty house (except for the dog and cat sitter) which cost us $ 2000 for starters
See: sunk cost fallacy

I can't imagine ruining a vacation by worrying about such things as mentioned just above. That would really eat into the cost benefit analysis!
Such an interesting comment.

I do not worry about "the sunk cost" of an empy house. I see it as an opportunity cost. A luxury opportunity cost.

Does it keep me me from enjoying vacations? I do not think so.

Does it make me think as to how spending money could make me happier? I think so.

I take Harry Sit's article to being "frugal" into perspective and he did it in a thought provoking way as the responses in the thread might point out.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Artsdoctor »

I think I may have figured why this thread has created such a lively discussion. It's a Rorschach test.

We've been using phrases like "opportunity cost" and "frugal." However, if you take a look at any dictionary, you're going to find several different ways of defining these terms.

"Opportunity cost" can be defined as "the money or other benefits lost when pursuing a particular course of action instead of a mutually-exclusive alternative." In other words, you can certainly imagine someone who is working a lot to earn a living and at the same time missing all of the family events that build strong relationships. He's "lost" the "benefit" of knowing his family while pursuing a career.

"Frugal" can be defined as "not wasteful." If you chose to retire early and try to re-build relationships which may have been put on hold (or suffered) during full-time work, that's certainly "not wasteful."

Finally, "luxury" can be defined as "a foolish or worthless form of self-indulgence."

So we probably have too many variables--too many ways of defining terms. I would think that we can all agree that anyone who works long and hard, and in the process loses his family and friends, has led a very sad life indeed.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Rodc »

Wildebeest wrote:
Rodc wrote:
I do figure when vacationing that the empty house (except for the dog and cat sitter) which cost us $ 2000 for starters
See: sunk cost fallacy

I can't imagine ruining a vacation by worrying about such things as mentioned just above. That would really eat into the cost benefit analysis!
Such an interesting comment.

I do not worry about "the sunk cost" of an empy house. I see it as an opportunity cost. A luxury opportunity cost.

Does it keep me me from enjoying vacations? I do not think so.

Does it make me think as to how spending money could make me happier? I think so.

I take Harry Sit's article to being "frugal" into perspective and he did it in a thought provoking way as the responses in the thread might point out.
It sounded like if you took a two week vacation you considered the $1000 in housing cost you were already committed to as part of the equation. That is a sunk cost fallacy. If you meant something else then perhaps not.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Dutch »

I apologize if the point has already been made, but:

Once you have enough to retire, the whole concept of opportunity cost does not apply anymore. We are talking time vs. time.

Your lifetime is finite. Working longer does not net your more time.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by TheTimeLord »

Dutch wrote:I apologize if the point has already been made, but:

Once you have enough to retire, the whole concept of opportunity cost does not apply anymore. We are talking time vs. time.

Your lifetime is finite. Working longer does not net your more time.
Interesting instead of time vs. time I see the discussion as quality vs. quantity. Enough is only a concept versus a certain level not an absolute. At 50 you can reach the point where you have enough for the retirement you planned but then decide if I work 5 more years instead of having a timeshare on the beach I can have a house or instead visiting the beach in Destin you could do Tahiti or Hawaii.
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