Early retirement and opportunity cost, by Harry Sit

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Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest » Sat May 28, 2016 6:25 pm

I really enjoyed this post by Harry Sit and the discussion that followed.
http://thefinancebuff.com/early-retirem ... -cost.html

Excerpt:
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.


I found the article and discussion that followed thought provoking.
Last edited by Wildebeest on Sat May 28, 2016 6:47 pm, edited 2 times in total.
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Re: Early retirement and opportunity cost by Harry Sit

Post by LadyGeek » Sat May 28, 2016 6:36 pm

FYI - Harry Sit posts here as tfb, his background is in the wiki: The Finance Buff
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Re: Early retirement and opportunity cost by Harry Sit

Post by randomguy » Sat May 28, 2016 6:52 pm

Is having a job also a luxury?:) Yes early retirement is a huge trade off of more money for more time. Thats where OMY syndrome comes in. A few more year of work results in drastically higher spending (i.e. something like 5%+/year when you factor in average market returns and additional savings) later but of course you never get those years back.

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Re: Early retirement and opportunity cost by Harry Sit

Post by Moolala » Sat May 28, 2016 6:59 pm

It can be healthy and important to consider opportunity cost, but those thoughts shouldn't bring on guilt. If I had a BMW it wouldn't mean much more to me than a Prius. Any second or third big cars would sit in storage and depreciate. Not much different than sending them straight to the junkyard.

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Re: Early retirement and opportunity cost by Harry Sit

Post by SimpleGift » Sat May 28, 2016 7:17 pm

What’s missing from Mr. Sit's discussion, I believe, is the concept of “enough.” Once an asset accumulator has saved and invested sufficient assets for a comfortable retirement (say, more than 25 times annual retirement expenses), then the opportunity cost argument no longer applies. There’s only an opportunity cost when one is still short of the retirement goal.

Personally, I know that once we had built up our business to the point where we could sell it in exchange for a comfortable retirement, we never thought further about the trade-off between working longer versus not-working. We then had “enough” — so our decision to pursue other goals in life was not complicated at that point.
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Re: Early retirement and opportunity cost by Harry Sit

Post by NMJack » Sat May 28, 2016 7:18 pm

When we are young, we have a lot more time than money. At some point, most of us cross over into having more money than time. This is the time to retire. :sharebeer

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Re: Early retirement and opportunity cost by Harry Sit

Post by telemark » Sat May 28, 2016 7:20 pm

The opportunity cost of having your cake is not being able to eat it. At some point you have to decide which you want more.

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Re: Early retirement and opportunity cost by Harry Sit

Post by Wildebeest » Sat May 28, 2016 7:21 pm

Moolala wrote:It can be healthy and important to consider opportunity cost, but those thoughts shouldn't bring on guilt. If I had a BMW it wouldn't mean much more to me than a Prius. Any second or third big cars would sit in storage and depreciate. Not much different than sending them straight to the junkyard.
I am not into cars, so I was put off by the BMW example.

I think in the equation goes how much your job takes out of you ( suffering, having to put up with politics/ unfair demands as opposed to feeling useful, competent and succesful) and freedom to decide what you do with your time and how much time you have left to pursue your dreams and aspirations.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by LadyGeek » Sat May 28, 2016 7:37 pm

This thread is now in the Personal Finance (Not Investing) forum (retirement planning). I also modified the thread title (added a comma).
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Re: Early retirement and opportunity cost, by Harry Sit

Post by chx » Sat May 28, 2016 7:49 pm

I agree with the posters here who question Harry Sit's conclusions. I retired early and enjoy every day and the people in my life. Priceless.

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Re: Early retirement and opportunity cost by Harry Sit

Post by TheTimeLord » Sat May 28, 2016 8:06 pm

Simplegift wrote:What’s missing from Mr. Sit's discussion, I believe, is the concept of “enough.” Once an asset accumulator has saved and invested sufficient assets for a comfortable retirement (say, more than 25 times annual retirement expenses), then the opportunity cost argument no longer applies. There’s only an opportunity cost when one is still short of the retirement goal.

Personally, I know that once we had built up our business to the point where we could sell it in exchange for a comfortable retirement, we never thought further about the trade-off between working longer versus not-working. We then had “enough” — so our decision to pursue other goals in life was not complicated at that point.
It will be interesting if you get there early to see if the possibility of a lifestyle you never considered reachable will cross your mind. I know I wrestle with the possibility of moving to my dream house in my dream community for 2 more years of work. Is it worth it, haven't decided but 10 years ago I wouldn't have considered it a possibility.
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Re: Early retirement and opportunity cost by Harry Sit

Post by randomguy » Sat May 28, 2016 8:21 pm

Wildebeest wrote:
Moolala wrote:It can be healthy and important to consider opportunity cost, but those thoughts shouldn't bring on guilt. If I had a BMW it wouldn't mean much more to me than a Prius. Any second or third big cars would sit in storage and depreciate. Not much different than sending them straight to the junkyard.
I am not into cars, so I was put off by the BMW example.

I think in the equation goes how much your job takes out of you ( suffering, having to put up with politics/ unfair demands as opposed to feeling useful, competent and succesful) and freedom to decide what you do with your time and how much time you have left to pursue your dreams and aspirations.
Use anything else you want. Your early retirement is the same as taking 4 trips to europe or enough money to prevent 1000 kids from starving to death in africa.


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. After all there is that in your face luxury good consumption. But the second person is choosing to spend the same amount of money. They are just spending it on time instead of a material good. It is up to you to decide what is more valuable to you. Is this a useful way to think about life? Thats up to you. People have different goals in life. If you feel you are deprived (a lot of people here seem obsessed with what their neighbors drive) by not buying the BMW, you need to figure out if it is worth working x years to drive one. Same thing for any other good/thing you want.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest » Sat May 28, 2016 8:43 pm

Simplegift wrote:What’s missing from Mr. Sit's discussion, I believe, is the concept of “enough.” Once an asset accumulator has saved and invested sufficient assets for a comfortable retirement (say, more than 25 times annual retirement expenses), then the opportunity cost argument no longer applies. There’s only an opportunity cost when one is still short of the retirement goal.

Personally, I know that once we had built up our business to the point where we could sell it in exchange for a comfortable retirement, we never thought further about the trade-off between working longer versus not-working. We then had “enough” — so our decision to pursue other goals in life was not complicated at that point.
Excellent point. "Enough" is a great concept. It may not work for a lot of us.

Harry Sit AKA TFB had a follow up blog in which he covers comparative advantages, which I found insightful.

http://thefinancebuff.com/early-retirem ... ntage.html

Comparative advantage is “widely regarded as one of the most powerful yet counter-intuitive insights in economics” (Wikipedia). It’s the principle behind specialization and trade.

If person A does job X more efficiently than person B, person A is said to have an absolute advantage in job X over person B. If person B in turn has an absolute advantage in job Y, then person A should do job X and personal B should do job Y. They are both better off when they specialize and trade.

A comparative advantage happens when person A has an absolute advantage in both jobs X and Y over person B. You would think then person A should do both jobs and person B should do nothing. However, if person A’s advantage in job X is greater than his or her advantage in job Y, person A should still only do job X and let person B do job Y. Even though person B does it less well than person A on a absolute basis, Person A’s time is better spent on a job where he or she has the greatest advantage comparatively. This is the basis for why our economy is built on people having different occupations and not each person doing everything on their own.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by rai » Sat May 28, 2016 8:48 pm

I'm not frugal but I am a high earner and can save a lot more than typical people. However, since I'm not frugal, I know how easy it is to spend money so I can not predict exactly what I will need. But I am also a person who always over packs on vacation. I bring way more clothes than I can possible need and all types in case I need to get dressed fancy or if the weather is colder than expected. On top of that I might even bring laundry detergent in case I didn't bring enough. So to me with saving, I always plan on over saving just to prevent being short. Plus not being frugal I don't want to skimp when I retire (not be able to live the way I do now) like if my wife wants Starbucks coffee, I don't want to be saying "but our budget..."

So while I do appreciate that time is limited, I probably will work longer than necessary but still plan to retire at 60-62, it's just that I don't plan/want to retire crazy early like 52 (I'm 50 now) but I want to work those extra several years to both have less years without SS and drawing down my savings and also have more years to accumulate.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by qwertyjazz » Sat May 28, 2016 9:02 pm

It is not only about what we value and what we hate. I can work another few months and never clean a toilet etc. it is about how we value our time. We can save 10 dollars on something by going to 12 stores and spending 30 hours on the Internet comparing prices. But that would value my time at less then minimum wage which I could have made by shifting the time i worked
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Re: Early retirement and opportunity cost, by Harry Sit

Post by boomer » Sat May 28, 2016 10:00 pm

I think you have to play it by ear. Save like mad but be flexible, because you don't know how you are going to feel in another year.

A couple of years ago my plan was to retire at the end of this year at age 61. After two surgeries last year, in January the thought of working one more year was very unpalatable. I've struggled through til now, despite the fact that my work is banal yet stressful. I don't even earn enough to buy two BMWs. More like two Hondas. :wink: I'm planning to give notice soon, though, and that thought fills me with an incredible lightness. I've saved up enough and have a paid off house and a couple of paid off rentals. I'll have to buy private insurance for a while, but at this point, I'm thinking "whatever." :happy

I don't feel physically the same as I did five years ago, who knows what I will feel like in five more years? I feel the hot breath of old age on the back of my neck. I meet and talk with people who are 70, and they seem so much older than me. Does aging accelerate once you turn sixty? When I got married, my parents were 60. I remember visiting them two years later and thinking how much older they looked.

If you must continue working to survive, or if you love your work and feel it contributes to the world, by all means work til you are seventy. Otherwise, better take the chance to enjoy life while you can, I think. I feel like that is my opportunity, and time waits for no one.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by jabberwockOG » Sat May 28, 2016 10:30 pm

I just retired at 60 which is when I hit my minimum number that would allow us to retire and live relatively frugally but worry free. I was at peak earning capacity but was bored and tired of my 35+ year career.

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.

People think they own their "stuff" (cars, boats, houses, clothes, etc) but in truth their "stuff" owns and controls them. Once a person has achieved what they consider financial independence, having less material goods generally equates to having more freedom and choice. Spending more years working to accumulate more wealth than enough to live comfortably seems to me to be a really bad plan.

I do know a person who is 62 that is earning so much money every year (over $1 mil/year) that I don't think he will ever stop. He says he loves the excitement of being so successful. I think that is great for him - just not for me.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by jabberwockOG » Sat May 28, 2016 10:37 pm

jabberwock wrote:I just retired at 60 which is when I hit my minimum number that would allow us to retire and live relatively frugally but worry free. I was at peak earning capacity but was bored and tired of my 35+ year career.

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.

People think they own their "stuff" (cars, boats, houses, clothes, etc) but in truth their "stuff" owns and controls them. Once a person has achieved what they consider financial independence, having less material goods generally equates to having more freedom and more choice. Spending more years working to accumulate more wealth than enough to live comfortably seems to me to be a really bad plan.

I do know a person who is 62 that is earning so much money every year (over $1 mil/year) that I don't think he will ever stop. He says he loves the excitement of being so successful. I think that is great for him - just not for me.

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Re: Early retirement and opportunity cost by Harry Sit

Post by tfb » Sun May 29, 2016 12:39 am

randomguy wrote:Use anything else you want. Your early retirement is the same as taking 4 trips to europe or enough money to prevent 1000 kids from starving to death in africa.


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. After all there is that in your face luxury good consumption. But the second person is choosing to spend the same amount of money. They are just spending it on time instead of a material good. It is up to you to decide what is more valuable to you. Is this a useful way to think about life? Thats up to you. People have different goals in life. If you feel you are deprived (a lot of people here seem obsessed with what their neighbors drive) by not buying the BMW, you need to figure out if it is worth working x years to drive one. Same thing for any other good/thing you want.
Exactly. Pointing out the opportunity cost does not lead to the conclusion you must work forever. Of course not thinking about the opportunity cost makes it easier to justify incurring it and stay true to one's self-image of frugality while pursuing a luxury lifestyle, perhaps a few levels more so than the other guy driving the BMW.

Remember the title of the post was "early retirement." In my book any age after 59-1/2 isn't "early." In popular press "early" has come down to 20's and 30's. Just today I read How this couple saved $1 million and retired in their 30s and Retirement comes early for these 20-something RV-travelers. That's early.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Stormbringer » Sun May 29, 2016 12:44 am

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

Post by Raybo » Sun May 29, 2016 1:29 am

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

Post by The Wizard » Sun May 29, 2016 5:57 am

In your thirties, two problems.
You may not know what sort of lifestyle and spending level you want each year. Extended European travel? A good sized Airstream travel trailer?
Plus the person/couple may not be financially astute enough to figure how many millions in their nest egg are needed, thus having to return to work at 45 or 50.

So sandbagging your work career too early isn't always a good idea...
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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest » Sun May 29, 2016 6:29 am

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.
What I took from the article is, that it is a luxury not to have to work for a living. Being paid for work makes one a wage slave.

If you are fortunate enough to be employable, it is your decision how much you are willing to work. The trade off is you need to "frugal" to retire early and live a life of luxurious indulgence of not having to go to work.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by carolinaman » Sun May 29, 2016 6:37 am

I retired at age 66 and could have retired years earlier. I chose to continue working because a) I enjoyed my work, b) the added years enhanced my retirement substantially, and c) the added years provided a cushion in case something cataclysmic happened (bad market/sequence of returns, health issues, etc.). IMO, people should give themselves some margin of error with their retirement income by working a little longer, if that is possible.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by basspond » Sun May 29, 2016 6:59 am

I want to have the opportunity to enjoy the fruits of my labor. The trick to retiring early is to have that goal and plan when you start your career. I know or should I say knew too many people who died before or within a couple of years of retiring. If I knew when the grim reaper was coming for me then my decision ... But I wouldn't want to know that either.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by JW-Retired » Sun May 29, 2016 7:06 am

Retired at 69. That was several years later than we needed for a quite comfortable retirement but I liked the work a lot, and there was a long term project I wanted to see through. That project finally got to the point where it could get along perfectly well without me so that's when I left.

I still like my timing.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by vitaflo » Sun May 29, 2016 10:16 am

I like the premise of the article but I view the "high earner and frugal" a little differently. Harry says it's a problem for these people to retire since the opportunity costs are so big. But in reality, those costs have been drastically diminishing over time, we just don't realize it.

$1 20 years ago is worth a lot more than $1 today, and for someone who is frugal and invests that dollar it's worth even more than that. The frugal person's opportunity cost is much higher when they are young, even if adjusted for inflation because of the opportunity cost of investing rather than spending. Thus overtime their opportunity cost goes down more than the average person.

Then take the concept above of "enough". Like taxes, where an extra dollar earned is worth less than the first dollar earned, at a certain point if you have "enough" the extra time worked to make an extra dollar is worth less than it was previously, even if the same inflation-adjusted dollars are being earned.

So in many ways I think the "high earner and frugal" types are in a better position to retire early than their peers (and not just financially speaking). The problem (if there is one) for these types is understanding the true opportunity cost of investing early and what an extra dollar gives you (or not) when you already have enough.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by littlebird » Sun May 29, 2016 10:29 am

carolinaman wrote:I retired at age 66 and could have retired years earlier. I chose to continue working because a) I enjoyed my work, b) the added years enhanced my retirement substantially, and c) the added years provided a cushion in case something cataclysmic happened (bad market/sequence of returns, health issues, etc.). IMO, people should give themselves some margin of error with their retirement income by working a little longer, if that is possible.
But you did do a trade-off. That extra security didn't come free. You traded it off for the possibility that you would not make it to retirement, or that you would have only a year or two of retirement. Had you lost that gamble, we would not be hearing about it unless we happened to know you or your grieving survivors personally.

Coming to the end of our joint 29 year retirement (although I will probably have at least a few years alone), we are both extremely glad to have had those wonderful adventures that we would not have been able to have in our 60's and 70's. And then all the luxurious years after, enjoying what 60 and 70 somethings are able to do.

And -- no one could be more surprised than we are that the financial security we willingly took our chances with has materialized also. Because - and I am convinced of this - not having to work is such a luxury that we didn't even think of wanting the expensive things we would have continued to want had we continued to work..

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Re: Early retirement and opportunity cost, by Harry Sit

Post by bradshaw1965 » Sun May 29, 2016 10:34 am

My takeaway was to treat early retirement as a luxury good. The reasoning seemed sound to me.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by Youngblood » Sun May 29, 2016 10:55 am

boomer wrote:I think you have to play it by ear. Save like mad but be flexible, because you don't know how you are going to feel in another year.

I don't feel physically the same as I did five years ago, who knows what I will feel like in five more years? I feel the hot breath of old age on the back of my neck. I meet and talk with people who are 70, and they seem so much older than me. Does aging accelerate once you turn sixty? When I got married, my parents were 60. I remember visiting them two years later and thinking how much older they looked.
Hey Boomer, another boomer here and in answer to your question, yes aging does accelerate particularly after sixty-five. Your sixties, seventies and eighties totally different for most of us.

Watching other people age, change and die I retired early and also took SS early. Glad I did.

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

Post by Trader/Investor » Sun May 29, 2016 11:52 am

Youngblood wrote:
boomer wrote:I think you have to play it by ear. Save like mad but be flexible, because you don't know how you are going to feel in another year.

I don't feel physically the same as I did five years ago, who knows what I will feel like in five more years? I feel the hot breath of old age on the back of my neck. I meet and talk with people who are 70, and they seem so much older than me. Does aging accelerate once you turn sixty? When I got married, my parents were 60. I remember visiting them two years later and thinking how much older they looked.
Hey Boomer, another boomer here and in answer to your question, yes aging does accelerate particularly after sixty-five. Your sixties, seventies and eighties totally different for most of us.

Watching other people age, change and die I retired early and also took SS early. Glad I did.

YB
So spot-on YB about aging accelerating after age 65. And you also notice an acceleration of obituaries of your former high school and collage classmates. I am 69 and *extremely* active hiking 5 to 10 strenuous miles on an almost daily basis. But it wasn't until my mid 60s where I could actually look back and say to myself "you are slowing up a bit" I even gave up 35 years of running to better preserve my knees when I was 67. On the bright side, some of my summer hiking companions in North Carolina are in their early 80s and still going strong. Some great role models for me as I age.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by Youngblood » Sun May 29, 2016 11:59 am

Trader/Investor wrote:
Youngblood wrote:
boomer wrote:I think you have to play it by ear. Save like mad but be flexible, because you don't know how you are going to feel in another year.

I don't feel physically the same as I did five years ago, who knows what I will feel like in five more years? I feel the hot breath of old age on the back of my neck. I meet and talk with people who are 70, and they seem so much older than me. Does aging accelerate once you turn sixty? When I got married, my parents were 60. I remember visiting them two years later and thinking how much older they looked.
Hey Boomer, another boomer here and in answer to your question, yes aging does accelerate particularly after sixty-five. Your sixties, seventies and eighties totally different for most of us.

Watching other people age, change and die I retired early and also took SS early. Glad I did.

YB
So spot-on YB about aging accelerating after age 65. And you also notice an acceleration of obituaries of your former high school and collage classmates. I am 69 and *extremely* active hiking 5 to 10 strenuous miles on an almost daily basis. But it wasn't until my mid 60s where I could actually look back and say to myself "you are slowing up a bit" I even gave up 35 years of running to better preserve my knees when I was 67. On the bright side, some of my summer hiking companions in North Carolina are in their early 80s and still going strong. Some great role models for me as I age.
Sounds like you are my older brother by one year. I do the same.

It is great enjoying the fruits of our labor and savings still,at this age and as long as possible.

:sharebeer
"I made my money by selling too soon." | Bernard M. Baruch

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Re: Early retirement and opportunity cost, by Harry Sit

Post by randomguy » Sun May 29, 2016 12:46 pm

Trader/Investor wrote:
So spot-on YB about aging accelerating after age 65. And you also notice an acceleration of obituaries of your former high school and collage classmates. I am 69 and *extremely* active hiking 5 to 10 strenuous miles on an almost daily basis. But it wasn't until my mid 60s where I could actually look back and say to myself "you are slowing up a bit" I even gave up 35 years of running to better preserve my knees when I was 67. On the bright side, some of my summer hiking companions in North Carolina are in their early 80s and still going strong. Some great role models for me as I age.
Is that an argument for retiring early or late?:) Is it better to pass up numerous opportunities (trips to europe, golf vacation with friends, whatever hobby you love,....) to live when you are young so that you can retire 10 years earlier? The opportunity cost of choices is different (not spending 10k on that white water vacation when you are 30 might give you 80k when you are 70, but you probably don't want to take that white water rafting vacation at 70) and you have to decide what works for you. Most people end up doing some balance. Yes they could save like made and retire at 50. But working til 62 lets them live a life that brings them more happiness along the way. Figuring out where the balance point is going to be a very personal choice and it can vary over time.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by Trader/Investor » Sun May 29, 2016 12:51 pm

randomguy wrote:
Trader/Investor wrote:
So spot-on YB about aging accelerating after age 65. And you also notice an acceleration of obituaries of your former high school and college classmates. I am 69 and *extremely* active hiking 5 to 10 strenuous miles on an almost daily basis. But it wasn't until my mid 60s where I could actually look back and say to myself "you are slowing up a bit" I even gave up 35 years of running to better preserve my knees when I was 67. On the bright side, some of my summer hiking companions in North Carolina are in their early 80s and still going strong. Some great role models for me as I age.
Is that an argument for retiring early or late?:) Is it better to pass up numerous opportunities (trips to europe, golf vacation with friends, whatever hobby you love,....) to live when you are young so that you can retire 10 years earlier? The opportunity cost of choices is different (not spending 10k on that white water vacation when you are 30 might give you 80k when you are 70, but you probably don't want to take that white water rafting vacation at 70) and you have to decide what works for you. Most people end up doing some balance. Yes they could save like made and retire at 50. But working til 62 lets them live a life that brings them more happiness along the way. Figuring out where the balance point is going to be a very personal choice and it can vary over time.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by heyyou » Sun May 29, 2016 1:48 pm

Because - and I am convinced of this - not having to work is such a luxury that we didn't even think of wanting the expensive things we would have continued to want had we continued to work.
Well said. That describes our early retirement. We feel grateful for what we do have, not pinched by what we don't have. A sense of enough is liberating, not just a milestone that you pass by and then keep working to get more of the filthy lucre.

Somewhere along the way, we failed to acquire a taste for the finer things in life, and early retirement suits us better than spending more income from continuing to work at jobs. We know what suits us, the rest of you are on your own.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by KlangFool » Sun May 29, 2016 2:03 pm

OP and Others,

1) My salary had stayed about the same level since 10+ years ago.

2) Over the last 10+ years, I have to survive annual and quarterly laid off.

3) And, whenever I did not survive the laid off, it took me more than a year to find a job.

4) Every single employer that I worked for (including current one) has annual laid off.

5) This is independent of whether I am doing a great job.

So, you tell me why I would not look forward to an early retirement whenever I reached my number?

In one of my former job, the employer had quarterly 5% to 10% laid off. 80% of my co-workers were laid off before my number were called. This is after 5 1/2 years. It was so bad that I felt relief and happy when I was laid off.

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

KlangFool

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Re: Early retirement and opportunity cost by Harry Sit

Post by Tyler9000 » Sun May 29, 2016 2:07 pm

Simplegift wrote:What’s missing from Mr. Sit's discussion, I believe, is the concept of “enough.” Once an asset accumulator has saved and invested sufficient assets for a comfortable retirement (say, more than 25 times annual retirement expenses), then the opportunity cost argument no longer applies. There’s only an opportunity cost when one is still short of the retirement goal.
Well said.

Another thing missing from the article is an honest accounting for the opportunity cost of continuing to work for more money you really don't need. One who retires early can enjoy more time with family, less stress, better health, fun hobbies, and even rewarding new career paths that weren't practical options before simply because they weren't particularly profitable (art, music, etc).

Yes, everything has a tradeoff. IMHO, financial independence is about reaching the point where the money tradeoff can finally be shelved so that other long-neglected but just as important parts of life can finally get the attention they deserve.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest » Sun May 29, 2016 2:52 pm

KlangFool wrote:OP and Others,

So, you tell me why I would not look forward to an early retirement whenever I reached my number?

In one of my former job, the employer had quarterly 5% to 10% laid off. 80% of my co-workers were laid off before my number were called. This is after 5 1/2 years. It was so bad that I felt relief and happy when I was laid off.

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

KlangFool
KlangFool

Ofcourse you should look forward to early retirement when you reach your number. I hope it will come soon.

What I took from the Harry Sit's blog is that it is reframing being frugal ( so you can retire early) is a luxury and I enjoyed how he compared it to driving BMW's off a cliff ( he did not mention the cliff but I like the visual) as the opportunity cost of retiring early.

I never got the idea Harry Sit suggested that this reframing should make one desire not to retire.

I hope Harry Sit will weigh in.

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

Post by randomguy » Sun May 29, 2016 2:59 pm

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. I am not saying that isn't your experience. But your projection of that over the whole US workforce isn't overly accurate. You can look up various BLS stats on layoffs and the time to find a new job and you will see you are way off in the tail end of bad outcomes. As an actionable item, you need to think about who you are. A 45 year teacher with 20 years of seniority has a pretty darn secure job. Same things if you are a doctor at an established system or a federal government work. At the other end if you are in a boom/bust industry (say oil/natural gas or housing), you should plan on getting laid off on a regular basis.

Now the problem with getting laid off past 60 or so is that it is fatal. Your odds of getting rehired anywhere close to your past position is very unlikely. Again how to balance that risk is very personal

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Re: Early retirement and opportunity cost, by Harry Sit

Post by KlangFool » Sun May 29, 2016 3:07 pm

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. I am not saying that isn't your experience. But your projection of that over the whole US workforce isn't overly accurate. You can look up various BLS stats on layoffs and the time to find a new job and you will see you are way off in the tail end of bad outcomes.
randomguy,

<<But your projection of that over the whole US workforce isn't overly accurate. >>

We are in a personal finance forum. We are not a statistic. So, if my situation is RELEVANT to you, aka not many of your peers in the 40s and 50s are fully employed, you should take that into your own personal finance consideration. If not, adjust your own expectation accordingly.

Now, as the BLS stats and so on. It is IRRELEVANT to an individual. An individual cannot be 6% unemployed. It is only relevant to an economist.

No, I do not imply my situation applies to ALL people. But, it is relevant to many people.

KlangFool
Last edited by KlangFool on Sun May 29, 2016 3:57 pm, edited 1 time in total.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by KlangFool » Sun May 29, 2016 3:13 pm

Wildebeest wrote:
KlangFool wrote:OP and Others,

So, you tell me why I would not look forward to an early retirement whenever I reached my number?

In one of my former job, the employer had quarterly 5% to 10% laid off. 80% of my co-workers were laid off before my number were called. This is after 5 1/2 years. It was so bad that I felt relief and happy when I was laid off.

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

KlangFool
KlangFool

Ofcourse you should look forward to early retirement when you reach your number. I hope it will come soon.

What I took from the Harry Sit's blog is that it is reframing being frugal ( so you can retire early) is a luxury and I enjoyed how he compared it to driving BMW's off a cliff ( he did not mention the cliff but I like the visual) as the opportunity cost of retiring early.

I never got the idea Harry Sit suggested that this reframing should make one desire not to retire.

I hope Harry Sit will weigh in.

Wildebeest
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

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Re: Early retirement and opportunity cost, by Harry Sit

Post by EnjoyIt » Sun May 29, 2016 3:56 pm

I think the big issue is how much do you value your time. Since I know I can not purchase extra time when I get older, I might as well purchase extra time when I am younger, while I can still make good use of it. So how much is this extra time worth? When you are young and broke your time is pretty cheap. But the older you get and the closer you get to "enough" the more valuable your time becomes. At some point your time becomes more valuable than any reasonable compensation (yes, everyone has their price.)

Most of us believe there is some standard of living that we need to achieve today and sustain in retirement. In reality we become slaves to a consumeristic lifestyle. I am a culprit of this as well. I know that if I downsized my lifestyle I can retire today. But somehow I just can't bring myself to do it. Luckily my job is awesome and instead plan to work part time within the next 3 years with the intended goal of continuing doing it well into my 60s or 70s if possible. Ideally 6-8 days a month.

I had an interesting discussion several months back on this forum of how this guy loves to drive his German car to work. His commute is 1 hour each way. He stated he would never give up his car because of the long commute and he can easily afford it. I just now realized that the luxury car becomes much less enjoyable when you don't waste 2 hours of every day, 10 hours of every week commuting. When retired that same car spends most of its life in the garage and provides less pleasurable hours per dollar spent.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by randomguy » Sun May 29, 2016 5:34 pm

KlangFool wrote:
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.


No, I do not imply my situation applies to ALL people. But, it is relevant to many people.

KlangFool
For some definition of many.:) I think your many is <10% (pretty rare for people to get laid off in there 40s and not be able to find professional jobs in their field) is pretty unusual. Now if you are in that number, there isn't any comfort in being one of a few. You need to decide if the opportunity cost of planning for being laid off in your 40s is worth it or not to you.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by Wildebeest » Sun May 29, 2016 6:37 pm

I copied the one but last comment ( last comment was by sscritic) on The Finance Buff's website:

gmshedd says

May 9, 2016 at 9:23 pm

For the quantitative among us, the original post (on April 5th) was 528 words long. During the ensuing month, there have been 31 replies (not including this one), 9 from Harry, and 22 from 12 other contributors, totaling about 2900 words. This seems to be an indication of stronger than usual interest, mostly borne of differing perspectives on how we feel about working vs. doing other things that matter to us, and about buying things now vs. saving for retirement (so that we can buy things later, when we aren’t working). As many have said, these choices involve evaluating the tradeoffs. Harry’s original post framed the tradeoffs within the economic concept of opportunity cost, which, from the responses, isn’t how most of us have considered them. That’s why we read Harry. Anything that pushes us to consider things we haven’t, or to reconsider things we thought we already knew, is valuable. Thank you, Harry! Please add this to your list of things to incorporate into your book–The Thinking Person’s Guide to Preparing for Retirement.


I enjoyed most of the comments on MrMoneyMustache on Harry Sit's article as well.
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Re: Early retirement and opportunity cost, by Harry Sit

Post by MandyT » Sun May 29, 2016 6:58 pm

If I understand Mr. Sit's main point, I think I disagree with it.

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.)

Let's say that Pat, who makes $80,000 a year, decides to retire a year early. With taxes taken into account, perhaps this costs Pat $50,000, round numbers. You could think of this as Pat's buying a luxury car and junking it, or you could think of it as Pat's purchasing something that is precious and irreplaceable: the opportunity for Pat to do anything that Pat wants for that year of Pat's life. There is no substitute for that!

Of course, this sort of human capital should not be squandered lightly, and I think you could argue that it's a luxury, but I disagree with the conclusion that there's no sense pinching pennies. If Pat (like heyyou and myself) never acquired a taste for the finer things, it's likely that Pat made it to "enough" sooner, both from having pinched pennies AND from not minding sometimes doing things on the cheap. Just as delaying retirement can pay off two ways for those intending to take SS as soon as they retire, being frugal can pay off two ways (save more now, don't need to spend as much later).

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Re: Early retirement and opportunity cost, by Harry Sit

Post by KlangFool » Sun May 29, 2016 7:45 pm

randomguy wrote:
KlangFool wrote:
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.


No, I do not imply my situation applies to ALL people. But, it is relevant to many people.

KlangFool
For some definition of many.:) I think your many is <10% (pretty rare for people to get laid off in there 40s and not be able to find professional jobs in their field) is pretty unusual. Now if you are in that number, there isn't any comfort in being one of a few. You need to decide if the opportunity cost of planning for being laid off in your 40s is worth it or not to you.
randomguy,

I do not know what the real figure is. But, I do not have faith in the BLS's numbers.

1) People that are unemployed for more than 6 months are considered unemployable. They are not included in the official unemployment figure.

2) People could be underemployed and it will not show up in the BLS's number. They might be working 40 hours per week but not in their area and earning a lower pay.

KlangFool

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Re: Early retirement and opportunity cost, by Harry Sit

Post by tfb » Sun May 29, 2016 7:47 pm

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.
Harry Sit, taking a break from the forums.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by KlangFool » Sun May 29, 2016 7:58 pm

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.
tfb,

1) I agree with you.

2) I do not like the word: "frugal" anyhow. I prefer the words: "value conscious" to describe my value system.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by avalpert » Sun May 29, 2016 8:02 pm

KlangFool wrote:
1) People that are unemployed for more than 6 months are considered unemployable. They are not included in the official unemployment figure.
This quickly veers from appropriate topics on here - but this is untrue. Anyone who is actively looking for work and doesn't have are in the BLS unemployment numbers.

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Re: Early retirement and opportunity cost, by Harry Sit

Post by avalpert » Sun May 29, 2016 8:05 pm

tfb wrote: You just don't get to call yourself frugal when you pursue luxury.
If the luxury you are pursuing is time, I'm not sure why a low cost lifestyle wouldn't still meet the dictionary definition of frugal.

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