Author Topic: Early Retirement and Opportunity Cost  (Read 12955 times)

AS

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Early Retirement and Opportunity Cost
« on: April 05, 2016, 09:26:09 AM »
What is the Mustachian take on the article "Early Retirement and Opportunity Cost"  http://thefinancebuff.com/early-retirement-and-opportunity-cost.html

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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.

MrMoogle

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Re: Early Retirement and Opportunity Cost
« Reply #1 on: April 05, 2016, 09:38:35 AM »
Opportunity costs aren't just dollars, it's hours too.  This author sees only the dollars. 

I do see how FIRE is a luxury, but I don't see how it's not frugal.

Posthumane

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Re: Early Retirement and Opportunity Cost
« Reply #2 on: April 05, 2016, 10:15:35 AM »
People obviously have different values, and the author of that article doesn't value freedom and time to do whatever they want as highly as their co-worker. There's a line in there about throwing away the equivalent of a few BMW's every year just so you can do whatever you want, whenever you want. I emphasized the word "just" because it jumped out at me because it indicates that, to the author, having multiple BMWs would be better than having all of your time be free, whereas for many on this board the opposite is the case.

Kind of reminds me of the two philosophers:
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A philosopher named Aristippus, who had quite willingly sucked up to Dionysus and won himself a spot at his court, saw Diogenes cooking lentils for a meal. "If you would only learn to compliment Dionysus, you wouldn't have to live on lentils."

Diogenes replied, "But if you would only learn to live on lentils, you wouldn't have to flatter Dionysus.Ē

forummm

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Re: Early Retirement and Opportunity Cost
« Reply #3 on: April 05, 2016, 10:37:16 AM »
Who needs multiple BMWs when they have only one ass to put in them?

nereo

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Re: Early Retirement and Opportunity Cost
« Reply #4 on: April 05, 2016, 11:09:06 AM »
As others have said, it's about your time.  Without calculating the value of your time in addition to the value of lost revenue it's a meaningless conversation.

The author also makes the mistake of assuming an early retiree will not make any money post FIRE*. From what I've seen, a great number of people who have pulled the plug on their primary career continue to earn money doing other things they do because htey like doing them, and people insist on paying them.

Ultimately, when you have "enough" the value of even more money approaches 0 while the value of time approaches infinity.


*(yes, call the IRP if you must. People still get paid to do things after quitting their jobs and calling themselves 'retired'.)

Cassie

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Re: Early Retirement and Opportunity Cost
« Reply #5 on: April 05, 2016, 02:47:27 PM »
The few comments that were left had them all mentioning that your time is finite and why that is important. YOu can always make more $. Yes, many of us do find ourselves making $ after retiring.

Rife

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Re: Early Retirement and Opportunity Cost
« Reply #6 on: April 05, 2016, 08:16:53 PM »
There is definitely an opportunity cost for whatever you could earn working full time. Most people work until they get too old so their opportunity cost is low. Of course, the more money you have the less value it has to you and eventually time should more valuable. Eventually, it is more do you want BMWs or free time. Free time wins for me.

This comes up at work from time to time. Most people say they would have nothing to do with free time so they would never retire early. I don't understand this. Volunteer and help people, make some artwork, spend time working with kids etc

As others alluded to, part of the problem is people hear retirement and think you can only spend your time fishing or golfing.

MDM

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Re: Early Retirement and Opportunity Cost
« Reply #7 on: April 05, 2016, 09:25:56 PM »
It can be interpreted different ways, but I choose to read the bolded phrases below as the heart of the article.  YMMV.

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At his after-tax income, itís 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 didnít have a good answer, except by saying that early retirement is a luxury lifestyle.

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. Thereís nothing wrong in pursuing a luxury lifestyle. Luxuries are usually more enjoyable. Itís just the polar opposite of being frugal.

slugline

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Re: Early Retirement and Opportunity Cost
« Reply #8 on: April 06, 2016, 10:30:50 AM »
The obvious answer, of course, is that there's an opportunity cost when you continue to work for money you don't really need.

arebelspy

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Re: Early Retirement and Opportunity Cost
« Reply #9 on: April 06, 2016, 11:19:18 AM »
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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.

Uh, no.  Your time is free, for yourself.  I get his opportunity cost idea, but you DON'T have to pay that price.

You have to pay what your expenses are.

If my time is valued by others at 200k/yr, but I spend 25k/yr, I need to cover 25k/yr to buy my freedom..I don't have to pay the same price that others do, for my time, if I want to spend it on something else.

You are giving up what others value your time at, but you don't have to pay it.
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Guesl982374

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Re: Early Retirement and Opportunity Cost
« Reply #10 on: April 06, 2016, 12:33:53 PM »
While I agree that there is the opportunity cost of lost income when a person quits, it seems the author misses the point of ENOUGH. What's the personal value of the next dollar earned if you have enough to live the life you want? Its a very personal question that all of us need to address. For some, they will want more luxury/hobbies, for others it may be to donate money to charity from their cash-fire hose job, and for others the answer will be "no value" because they wouldn't use the extra money.

On a side note, the image of 3-4 new BMWs ending up in a landfill was so wasteful from an environmental standpoint that it hurt my head a little.

runningthroughFIRE

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Re: Early Retirement and Opportunity Cost
« Reply #11 on: April 06, 2016, 12:47:30 PM »
While I agree that there is the opportunity cost of lost income when a person quits, it seems the author misses the point of ENOUGH.
You beat me to the punch.  The author also implies that if I called up a friend who happens to make a little less than me and we both goof'd off all day instead of working, then my day is somehow a greater luxury just because I would have made more money if we had spent the day working.  My day probably would be more fun, but it'd be because I kicked his ass in mario kart, not because some stranger wanted to throw money at me.

AS

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Re: Early Retirement and Opportunity Cost
« Reply #12 on: May 03, 2016, 01:34:20 PM »
There is now a follow-up article: "Early Retirement and Comparative Advantage" that seems to address some of the issues:
http://thefinancebuff.com/early-retirement-and-comparative-advantage.html

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... even if you do absolutely a better job in painting the walls of your home than a painter, you should still do your regular job and let the painters paint, because you do your own profession even better than you paint. Retiring a little later will take care of all the DIY jobs youíd have to do after you retire.

forummm

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Re: Early Retirement and Opportunity Cost
« Reply #13 on: May 03, 2016, 01:50:56 PM »
There is now a follow-up article: "Early Retirement and Comparative Advantage" that seems to address some of the issues:
http://thefinancebuff.com/early-retirement-and-comparative-advantage.html

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... even if you do absolutely a better job in painting the walls of your home than a painter, you should still do your regular job and let the painters paint, because you do your own profession even better than you paint. Retiring a little later will take care of all the DIY jobs you’d have to do after you retire.

But you might prefer to do those DIY jobs instead of the spending the extra amount of time working to pay for someone else to do them. I would prefer to cook my meals at home then to work long enough to pay for someone else to come prepare my food. Same with pretty much everything else. I won't make my own car or house or grow my own oats and beans. So I am working long enough to be able to pay for someone else to produce those for me.

PhysicianOnFIRE

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Re: Early Retirement and Opportunity Cost
« Reply #14 on: May 03, 2016, 02:37:15 PM »
There is now a follow-up article: "Early Retirement and Comparative Advantage" that seems to address some of the issues:
http://thefinancebuff.com/early-retirement-and-comparative-advantage.html

An interesting follow-up today. I left a comment there which I'll reproduce here.

"It would seem that if you apply these principles to decision-making throughout your life, you could be really, really good at something and not good at much of anything else. I understand the economistsí point of view, but in reality, I think thereís nothing wrong with undertaking projects where you are at a comparative disadvantage. Thatís how we learn and become more well rounded individuals. Youíll have a lot more to talk about at parties if youíve done some plumbing, some landscaping, built a treehouse, etcÖ youíll also be more useful to your neighbors, which could be good or bad. :)

As for the retirement aspect, I hit the FI / 25x number last year, and Iím planning to reach double that before leaving a lucrative career behind. That will be more than Enough, and Iíll be able to choose whether or not I want to put myself to work or hire someone to do the less pleasant tasks in life."

Best,
-PoF

CanuckExpat

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Re: Early Retirement and Opportunity Cost
« Reply #15 on: May 03, 2016, 05:11:11 PM »
I thought these were a well written and thoughtful pair of articles, especially the second one about comparative advantage. A bit of "contrarian" thinking, and nicely constructed analyses.

It's food for thought, I don't wholly disagree with anything, and I don't think the author was being negative, rather he was raising other points that one should consider, from a certain point of view.

Thanks for sharing.
« Last Edit: May 03, 2016, 09:35:53 PM by CanuckExpat »

Prairie Stash

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Re: Early Retirement and Opportunity Cost
« Reply #16 on: May 03, 2016, 08:05:25 PM »
Its cold hearted. Basically if you make lots of money you should work forever, if your wages are low its okay to retire...Essentially the market owns your time, welcome to wage slavery.

The second article was also misguided. Its making the leap that I'll suddenly have a lot of activities to do in retirement that I currently don't do. Teaching my kids? I'll do that pre/post retirement so how is that linked? The other tasks he mentioned I'll also maintain the status quo, why would I stop doing all the other stuff I enjoy just because I'm not the best at it? By that logic I shouldn't do anything physical since I'm not an Olympian, someone else can do it better.

If everything is a "job" to you including raising your kids then I'll concede he's right. If you account for the emotional satisfaction, the math quickly falls apart.

tooqk4u22

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Re: Early Retirement and Opportunity Cost
« Reply #17 on: May 04, 2016, 12:23:03 PM »
From the ER and Comparative article....

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When your job isnít scalable by the hour ó after a full week of work, putting in another 3 hours doesnít earn you any extra ó doing some of the household work such as painting the walls of your home yourself can make sense, because you canít earn a higher pay rate on those 3 hours anyway. Substituting your own labor for hired labor saves money. The money saved contributes to your retirement pot, which helps you retire sooner.

Itís different when you retire early. If your retirement budget still requires a lot of your own labor in maintaining and remodeling your home, taking care of your yard, teaching your kids, fixing your car, and so on, you are basically giving up your job early in order to take up the job of a handyman/handywoman, a gardener, an after-school teacher, a car mechanic, etc. Unless you actually enjoy doing those work (teaching your kids can count as enjoyable), chances are you have an absolute disadvantage over the professionals in those jobs, and definitely a comparative disadvantage.

I think these points are overlooked in some of the comments, it makes sense to me. While working/accumulating at the end of the day it makes sense to DIY if you have the capabilities or desire to learn (there is a cost to learning), especially if you are unable to make more dollars otherwise.

He also provided the caveat of enjoyment of doing those things.  If you enjoy, or in a more liberal sense get satisfaction from, doing those things and you are capable of doing those things then no need to pay someone. However, if the opposite is the case then I wouldn't FIRE until I had enough money to cover those things. 

-What if you can't physically maintain your lawn, wouldn't it then make sense to be able to pay someone.
-I am sure I can teach my kids, but up to a point - pretty sure quantum physics may be beyond me.   

Some of it also comes down to how you want to live in FIRE, I mean if you loathe anything of the sort and to pay for someone else to do it, then you just have to save up enough to cover it.

As an example, I have two large dead trees that need to come down - I can't do it, or more accurately I am not will to risk catastrophic damage to my house or injury or death to me - so I will let the pros handle it, and it will probably be $2-3k but no big deal as part of my budget I have $3.5k for home and maintenance (some years will be higher/some lower).



Separately, I also like Arebelspy's comment:

You are giving up what others value your time at, but you don't have to pay it.

TheContinentalOp

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Re: Early Retirement and Opportunity Cost
« Reply #18 on: May 05, 2016, 12:26:09 PM »
He ignores the issue of taxes.

Sure the painter has a comparative advantage, but not only do you have to earn the extra money to pay the painter, you need to earn even more extra money to pay the taxes on the money you earned to pay the painter.

Your home production is untaxed.

Metric Mouse

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Re: Early Retirement and Opportunity Cost
« Reply #19 on: May 06, 2016, 06:38:11 AM »
I love when issues are re-framed like this. A great thought exercise.  Hard to argue with the findings; there's obviously an opportunity cost to not working.  Quitting work is clearly giving up returns of after-tax dollars that would be earned. I'll gladly pay though.

BlueMR2

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Re: Early Retirement and Opportunity Cost
« Reply #20 on: May 07, 2016, 03:59:52 PM »
Who needs multiple BMWs when they have only one ass to put in them?

Well, based on my friends that own BMWs and how much time they spend at the shop (or on jackstands at home), I'd have to say anyone that owns one should have a couple more as spares.  :-)

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Re: Early Retirement and Opportunity Cost
« Reply #21 on: May 07, 2016, 05:06:55 PM »
He ignores the issue of taxes.

Sure the painter has a comparative advantage, but not only do you have to earn the extra money to pay the painter, you need to earn even more extra money to pay the taxes on the money you earned to pay the painter.

Your home production is untaxed.
Very true.  I can spend 10 hours changing my own timing belt to save a $500 mechanic's bill.  That's an after-tax hourly rate of $50.  Add payroll (7.5%), FICA(7.5%), federal income tax (at least 10%), and state income tax (5%), and you're looking at close to $70/hour before taxes.

Guesl982374

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Re: Early Retirement and Opportunity Cost
« Reply #22 on: May 10, 2016, 12:56:57 PM »
I do not think his second article was well written as he misses the mark on what point he was trying to make. I believe the point he was trying to make was in favor of OYM syndrome: Work an extra year or two so you can hire out all of those "painting" type tasks for the rest of your life. The time it takes to paint the house, mow the lawn, etc, etc will be greater (again over the rest of your life) than spending an extra 2,000 or 4,000 hours sitting at a high paying desk job.


If everything is a "job" to you including raising your kids then I'll concede he's right. If you account for the emotional satisfaction, the math quickly falls apart.


Prairie Stash said it best, it neglects to take into account happiness and enjoyment of doing certain "jobs".

MrMoogle

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Re: Early Retirement and Opportunity Cost
« Reply #23 on: May 10, 2016, 01:05:46 PM »
I do not think his second article was well written as he misses the mark on what point he was trying to make. I believe the point he was trying to make was in favor of OYM syndrome: Work an extra year or two so you can hire out all of those "painting" type tasks for the rest of your life. The time it takes to paint the house, mow the lawn, etc, etc will be greater (again over the rest of your life) than spending an extra 2,000 or 4,000 hours sitting at a high paying desk job.


If everything is a "job" to you including raising your kids then I'll concede he's right. If you account for the emotional satisfaction, the math quickly falls apart.


Prairie Stash said it best, it neglects to take into account happiness and enjoyment of doing certain "jobs".
And doing a variety of jobs.  Doing the same thing over and over is boring.  I don't mind painting every now and then, it doesn't seem like work if it's done every 5 years or more.  Now I'd pay for lawn mowing, but I do that by renting.

RosieTR

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Re: Early Retirement and Opportunity Cost
« Reply #24 on: May 12, 2016, 01:07:00 PM »
I was struck by how classical economic theories so completely fail to take human emotions into account, which is probably why his arguments don't really resonate that much (and why few people purchase multiple BMWs each year only to scrap them!).

As far as comparative advantage, no one here has yet commented on the idea that what if you don't need a job to be done as well as a professional would do it? Or, you don't like how normal professionals do said job? Example: yard work. We keep bees, and therefore I'm extremely careful if I ever use any chemicals, which are occasionally necessary. I seriously doubt I could get a professional to come at dusk to paint the bindweed with Roundup, but that's what *I* do. This isn't as effective as blasting the weeds with spray all the time, but OTOH I don't care if my yard is completely weed-free. I would not say that I absolutely love weeding or using chemicals (which are used infrequently) but I care more about my yard than a professional would, given the different uses for the yard (bees, dogs, edible fruit and herbs, etc). This is similar for other tasks like painting or cleaning the house. I could pay someone to clean the house, or I could do it less frequently and less thoroughly. So I retire earlier and probably find cleaning to be a lot less unpleasant than working for someone else, and less unpleasant than it was when it was juggled among a large number of other "have-to" tasks that are squeezed around a full time job. But unpleasantness can't be quantified according to standard economic theory, and purposely being less efficient than theoretically possible has no place in economics.

notarealdoctor

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Re: Early Retirement and Opportunity Cost
« Reply #25 on: May 13, 2016, 08:16:58 PM »
I was struck by how classical economic theories so completely fail to take human emotions into account, which is probably why his arguments don't really resonate that much

But unpleasantness can't be quantified according to standard economic theory, and purposely being less efficient than theoretically possible has no place in economics.

Yeah, I was reading through to see what people thought of the economic angle of these posts, because that's what really struck me too.

I think part of why these arguments don't resonate (at least with me) is that, while economic theory does a great job telling us how value is produced and can be maximized, the author seems to think that it is THE word on how we should live our lives. It seems like this author assumes that we should all be acting like the standard rational economic agents that make up economic models of human behavior.

On the other hand, MMM's writings have at times emphasized a stoic self-mastery and the comments here emphasize values like freedom, neither of which are grounded in economic reasons. It seems like we're a more philosophically and politically motivated bunch than this author's assumed audience.

SeaEhm

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Re: Early Retirement and Opportunity Cost
« Reply #26 on: May 21, 2016, 10:23:46 AM »
Who needs multiple BMWs when they have only one ass to put in them?

That's the same thing I say about underwear!

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Re: Early Retirement and Opportunity Cost
« Reply #27 on: May 24, 2016, 03:22:42 PM »
I'm reasonable certain the author "gets it" but he just doesn't agree with the austerity, or frugality, that we see as abundance. He states quite clearly that "early retirement is a luxury lifestyle" and then goes on to state how hard it is to make the decision to FIRE. Making the decision to FIRE and following through is exceptionally hard. Frau Handlebar and I have been off and on the MMM wagon. We are in great financial shape compared to most Americans but "recent past us" made some decisions around employment, childcare and a few other things that set us back a little on the journey to FIRE. "Present us" are now more focused on making sure "future us" has more freedom.

The author's statement, "People with a higher income tend to have this choice. (FIRE) The higher opportunity cost makes the choice more difficult. People who are more frugal tend to have this choice. The contrast between the frugal habits and the high opportunity cost also makes the choice more difficult." rings true to me. I work in software and have an income most would consider high. Not CEO high, but high. This enables FIRE. Choosing to forego that income, even when frugal, is difficult. Some of the personality quirks that make me frugal also make it hard for me to consider leaving my high income job. I'm not going to be one of those people who has their resignation drafted and quits to moment their net worth crosses some threshold. I am the kind of person that is going to check the math three times a day for a year after I could FIRE and then, nervously, will start working part time.

I whole heartedly agree with the author's statement, quoted earlier, "early retirement is a luxury lifestyle." I think we lose sight of that at our peril. 

EDIT: I see now that last paragraph that clarifies the post was added later than some of you likely read the article. As per the author, ďI added a new paragraph at the end to make it clear Iím not saying that retiring early isnít worth it. My co-worker has a difficult decision because of the high opportunity cost of his time and his frugal habits. It would be much easier if he earns less or if he isnít as frugal.Ē

« Last Edit: May 24, 2016, 03:27:17 PM by Herr Handlebar »

The Happy Philosopher

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Re: Early Retirement and Opportunity Cost
« Reply #28 on: June 05, 2016, 08:49:19 AM »
There is a very interesting interplay between luxury, time and frugality. There is a huge opportunity cost in absolute dollars with early retirement, but understanding the marginal utility of additional money and how this related to happiness and fulfillment make this a quite complex calculation. Ultimately it becomes an emotional one.

I get what he is saying, although at some point additional money is of no utility. There is no reason to keep trading time for money after a point. This is at the heart of the MMM philosophy. If people don't understand this concept early retirement will not make sense to them.