Three approaches to early retirement

If you didn’t have to work, what would you do?

Get-rich-quick schemes are an American staple, going back to Horatio Alger.

But the idea of earning a relatively pedestrian income, then retiring at 30 or 35, is a fairly recent innovation that’s blossomed in the last decade and a half.

Some call it lifestyle design; some call it early retirement. The three main approaches tend to attract different styles of people; all require out-of-the-box planning and careful execution.

(1) Cut your spending.

The granddaddy of this camp is Joe Dominguez’s 1993 how-to bestseller Your Money or Your Life, describing how he put away $70,000 in 1969 — over $400,000 inflation-adjusted — and retired.

Today’s cut-your-spending types advocate many of the same tactics. “The meat of anyone’s financial independence is learning to spend your money efficiently,” they say, and proceed to ruthlessly prune.

Second cars, large houses, and cable TV go out the window; smartphones are put on $10 and $20/month plans.

The math: to retire early, you need to save from 15x to 25x your annual spending. These guys figure out how to save two-thirds or three-quarters of post-tax income. For them, every year of working creates two or three years of cushion — not vice versa.

After eight or ten years, they can do…whatever they want.

(2) Invest, especially in real estate; start a company

Robert Kiyosaki (Rich Dad Poor Dad) calls this being in the Investor and Business Owner Quadrants.

Why real estate? High leverage and tax breaks. 20% down gives you $5 of skin in the game for every $1 you put in; 10% down gives you $10 for $1. Plus, you can write off 4% of your building’s value annually as depreciation.

Ultimately, winning here involves buying at a low price-to-rent ratio. Areas with low ratios are concentrated in Ohio, Michigan, Oklahoma, and Florida, but dotted throughout the country.

The Holy Grail is buying property for zero-down, with positive cash flow; like the Grail, no one can agree on whether it exists.

The more conventional path followed by many Group 1 members is to dump their savings in index funds and forget about it.

(3) Outsource, arbitrage; drop-ship

Tim Ferriss’s Four Hour Work Week is the seminal work here. This is a more modern path, built on the trends of the 21st century, and tacking towards the technically inclined and adventurous. Ferriss lists four main components:

move to working remotely — and yes, he gives steps to help persuade your boss after (1), outsource parts of your job to India and China, freeing up time after (1), travel the world, especially to Asia/Latin America, creating awesome experiences on the cheap — essentially a cost-of-living arbitrage. concurrent with (1), set up a “muse” online business — profitable and time-free. The key is drop-shipping (selling products held in inventory by other people) and outsourcing the customer service.

The money quote: “Fun things happen when you earn dollars, live on pesos, and compensate in rupees.”

Ferriss’s mindset has a lot to offer, even for your normal stateside professional office worker. For example, outsourcing my job search cost me $500 while netting an additional $20k income.

And for the more adventurous — there’s a growing community of mid-20s expats running software businesses from Thailand and Vietnam who count Tim Ferriss as a primary inspiration.

Putting it all together

Each group shares the glee of life hacking; yet, constantly encountering pushback from those living more traditional 9-5 lives,each must recast its journey as not just a way to live, but The Way to Live.

“Is it convenient? Would I enjoy it? That’s the wrong question,” writes Mr. Money Moustache of his life of saving.

“It’s a strange feeling having people work for you while you sleep. Strange, but great,” says AJ Jacobs of Tim Ferriss’s plan.

And so to those who embark: the price of admission is changing the way you see the world. Don’t expect to be normal again.