The Finance Buff has responded to the Opportunity Cost of Early Retirement Post

[PhysicianOnFIRE]

In a new post, Opportunity Cost and The Concept of Enough, Harry responds to the criticisms of an earlier post that was discussed here, Early Retirement and Opportunity Cost.

Another discussion that should generate some provocative responses from the community.

Best,
-PoF

[MrGreen]

I commented on the article but I'll paste the comment here because I think it's worth considering.

"It must be noted that 25x expenses already includes a standard deviation in it because it’s historically based on worst case scenario. The majority of the time, someone calling it quits with 25x expenses is able to spend more over the coming years because the portfolio has grown as a rate that outpaces your expenditures. I think many people have difficulty trusting this, which is is why they plan to save more. This, in effect, isn’t just doubling up on the safety margin. It’s SQUARING it because now the doubled up portfolio will outpace one’s expenses in the majority of scenarios where one withdraws 4% of the initial portfolio value, leading to an even larger runaway portfolio balance over time. Saving beyond 25x then represents one of three things, either a belief that the future will be worse than anything in the past, a lack of understanding that someone spending 4% is most likely inevitably able to spend more, or being so risk intolerant of not being able to flex higher with future expenses that, even though it would occur in only the worst case scenarios, it is too great an opportunity cost to stop working. Perhaps there’s a middle ground where the fear of 4% not being enough, and the math that it is, and the realization that the effect of overshooting is squared, not doubled, might allow someone to trim how far they want to overshoot."

[PhysicianOnFIRE]

Very well said. My reasoning has a little bit of each of those three things. I'd much rather overshoot than undershoot, and I have dreams of being known for philanthropy someday.

Safety squared.

And congratulations on your upcoming retirement. Four More Days!

Best,
-PoF

[FireLane]

Very well said. My reasoning has a little bit of each of those three things. I'd much rather overshoot than undershoot, and I have dreams of being known for philanthropy someday.

Safety squared.

I agree with this 100%. I know the 4% SWR is already a worst-case scenario, but I'm aiming for a stash that'll give me a withdrawal rate closer to 3%.

Thanks to the math of compounding, building up that extra cushion shouldn't add more than a year to my career anyway. It gives me extra protection if my spending rises in retirement, like if I have some big unexpected medical bills or if I decide to move to a bigger house. And in the worst case, I'll just be richer than I expected to be in my old age, and I'll have the opportunity to be a philanthropist. I share your dream of being known for that one day!

[EnjoyIt]

Very well said. My reasoning has a little bit of each of those three things. I'd much rather overshoot than undershoot, and I have dreams of being known for philanthropy someday.

Safety squared.

I agree with this 100%. I know the 4% SWR is already a worst-case scenario, but I'm aiming for a stash that'll give me a withdrawal rate closer to 3%.

Thanks to the math of compounding, building up that extra cushion shouldn't add more than a year to my career anyway. It gives me extra protection if my spending rises in retirement, like if I have some big unexpected medical bills or if I decide to move to a bigger house. And in the worst case, I'll just be richer than I expected to be in my old age, and I'll have the opportunity to be a philanthropist. I share your dream of being known for that one day!

Kinda similar but on the other side of things.  I am looking for a bit more luxuries in retirement and when times are tough (such as a recession or depression) I can easily cut out a few of those luxuries without running out of money.  This is what most people do anyway so I doubt I will be different.  If in retirement I plan on 8 trips a year, I would only do 5 or 6 to protect my stash.

Would be nice to also be able to donate large sums to charities I am interested in. Something I can also decrease when times are tough. 

[arebelspy]

I'm going to need to go to an optometrist to check my eyestrain from rolling my eyes so much at this author.

This article was even worse than the first one.  By a large margin.



I'm not even going to take the time to write a response, cause it'd take an hour or two to pull apart all the problems.  Suffice it to say, anyone looking at this thread wondering if you should read the article: don't bother.

I wouldn't even be bumping this, but just wanted to say: stop linking to this guy.  :P

[teen persuasion]

This part had me scratching my head:

Suppose at age 50 you don’t have “enough” but you can only find minimum wage jobs. Do you continue with minimum wage jobs until you have “enough” or do you settle with a lower living standard? I would settle with a lower living standard. Suppose at age 50 you have “enough” but now if you work the next year you will double what you came up with in the last 25 years. Do you say no or do you seize it to expand your possibilities from age 51 onward? I would work that one year and ignore the Internet Enough Police.

So even if he didn't have enough, minimum wage wasn't worth working for to get you to "enough".  But if someone already had enough, 2 x enough is better, worth chasing by continuing to work.

The issue seems to be how much one is paid.  Don't insult me by paying peanuts - I'll lower my desired  standard of living and risk running out of money, rather than make minimum.  But if you shower me with cash, sure I'll spend my time working just to make the already-full glass overflow.

[dandarc]

I agree with this 100%. I know the 4% SWR is already a worst-case scenario, but I'm aiming for a stash that'll give me a withdrawal rate closer to 3%.

Thanks to the math of compounding, building up that extra cushion shouldn't add more than a year to my career anyway. It gives me extra protection if my spending rises in retirement, like if I have some big unexpected medical bills or if I decide to move to a bigger house. And in the worst case, I'll just be richer than I expected to be in my old age, and I'll have the opportunity to be a philanthropist. I share your dream of being known for that one day!

Going from 25X to 33X takes you 1 year?  If we figure 10% expected return, that means you're adding 5.5X from your salary in that last year, yes?  85% savings rate.  Good on you!

[nereo]

I am glad when authors respond to criticisms, but this follow up article just shows how poorly he understands the concept of 'enough'.
from the article:

Some readers brought up the concept of “enough” as in “If you have enough, you stop working for money.” It sounds good except “enough” is in such a large gray zone it’s not that useful....
If “enough” is defined as “supporting withdrawals for the living standard you want” it’s still not that useful, because “the living standard you want” itself is not set in stone....
What goes into the decision? The opportunity cost! “Enough” can be moved up or down depending on the size of the opportunity cost relative to your wealth, age, hours and stress, and many other factors

WHile he plays lip-service to the concept of "enough," he obviously doesn't truly understand it.  Mr Sit is still clinging to the idea that, if the reward is large enough more money will always equate to more happiness. People who truly have and understand the concept of "enough" will approach each job opportunity as if it paid nothing at all.  As a silly analogy, imagine you lived in a California home with numerous large orange trees that produced more oranges than you could ever need, and one day you applied for a job at Orange-Juice Inc.  As part of a job offer, Orange-Juice Inc. touted how every employee gets a free box of oranges each week, but to land you as an employee they want to give you three boxes per week. Should you take the job?  Maybe, but the oranges aren't an incentive for you, because you already have "enough" oranges.

[EnjoyIt]

This part had me scratching my head:

Suppose at age 50 you don’t have “enough” but you can only find minimum wage jobs. Do you continue with minimum wage jobs until you have “enough” or do you settle with a lower living standard? I would settle with a lower living standard. Suppose at age 50 you have “enough” but now if you work the next year you will double what you came up with in the last 25 years. Do you say no or do you seize it to expand your possibilities from age 51 onward? I would work that one year and ignore the Internet Enough Police.

So even if he didn't have enough, minimum wage wasn't worth working for to get you to "enough".  But if someone already had enough, 2 x enough is better, worth chasing by continuing to work.

The issue seems to be how much one is paid.  Don't insult me by paying peanuts - I'll lower my desired  standard of living and risk running out of money, rather than make minimum.  But if you shower me with cash, sure I'll spend my time working just to make the already-full glass overflow.

May I give you an example?
Let's say you busted your butt, got a degree and just landed a job for $200k/yr. You are looking to retire early and over the next bunch of years have been able to pay off all your debt and save up $1million thanks to good market returns. You live on $40k a year and about to retire but got offered a promotion for $300k a year.  Do you take the job for another year or two and give yourself a safety net, the opportunity to travel more, or to donate more to the charity of your choice? Or, do you just call it quits?

I think this is tough decision when you really make that kind of money. The opportunity cost is just so high and all it costs is maybe an extra year or two when you are still young.

I belive Mr. Sits is in a similar dilemma having a hard time making his own decision.

[nereo]

May I give you an example?
Let's say you busted your butt, got a degree and just landed a job for $200k/yr. You are looking to retire early and over the next bunch of years have been able to pay off all your debt and save up $1million thanks to good market returns. You live on $40k a year and about to retire but got offered a promotion for $300k a year.  Do you take the job for another year or two and give yourself a safety net, the opportunity to travel more, or to donate more to the charity of your choice? Or, do you just call it quits?

I think this is tough decision when you really make that kind of money. The opportunity cost is just so high and all it costs is maybe an extra year or two when you are still young.

I belive Mr. Sits is in a similar dilemma having a hard time making his own decision.

I'll take a stab.  In the example you are describing an extra year would give you (after taxes) another ~2x in savings. Your resulting 'failure rate' a-la firecalc has gone from 5% to 1% if you keep spending the same, or (as you suggest) you could increase it by 9% to $43,200. The opportunity cost is a year of your remaining life, which is most likely >>2% of whatever remains.

Are you happier with what amounts to an extra $61/week? Especially considering you had already decided and been accustomed to living on slightly less?
What about the added 'safety margin'? - 19 times out of 20 it won't matter when you have $1MM.  That extra year of your life just divides that 1/20 segment into ever smaller increments. In other words, it's the law of diminishing returns if you are doing for 'extra safety'.

Regarding having more money - you can always spend more money, be it an extra $61/week or $610/week.  If you believe that more is always better, you will never have enough.  That's the very essence of "enough".

So let's consider your final example,wanting to donate more.  I'd say that's a fine reason for working more, but here the reason has shifted from being about you to being about other people. Is trading your life for ever-increasing amounts to give to other people worth it to you?  that's a personal call, but again you have to decide when to say it's "enough."  If you are 45 do you work until you are 50? ...60? ...80? If serving others is truly your calling why are you spending so much on yourself when you could cut that in half or in thirds and double or even triple your annual giving?

I'm not trying to be dick here, but just to highlight the point that we've become so hardwired to want more that even when people have given great thought into how much will be 'enough' for them, there's still a strong tendency to seek out more.

[Seradoc]

So let's consider your final example,wanting to donate more.  I'd say that's a fine reason for working more, but here the reason has shifted from being about you to being about other people. Is trading your life for ever-increasing amounts to give to other people worth it to you?  that's a personal call, but again you have to decide when to say it's "enough."  If you are 45 do you work until you are 50? ...60? ...80? If serving others is truly your calling why are you spending so much on yourself when you could cut that in half or in thirds and double or even triple your annual giving?

According to the latest MMM, http://www.mrmoneymustache.com/2016/06/08/happiness-is-the-only-logical-pursuit/, the last needs one might fulfill for their own happiness and Self Actualization is Serving Others.

Maybe we should all consider overshooting our goals a bit and give back if we truly want to be happy.

Sometimes I perceive my own pursuit of FIRE to be selfish.  However, I have often envisioned myself trying to be more engaged in my local community and giving back once I achieve my goal.  There may be a question of whether that community needs my money, or my time and attention.

[teen persuasion]

Suppose at age 50 you don’t have “enough” but you can only find minimum wage jobs. Do you continue with minimum wage jobs until you have “enough” or do you settle with a lower living standard? I would settle with a lower living standard. Suppose at age 50 you have “enough” but now if you work the next year you will double what you came up with in the last 25 years. Do you say no or do you seize it to expand your possibilities from age 51 onward? I would work that one year and ignore the Internet Enough Police.

I'm having trouble with the logic of his argument as stated, especially the choice to stop working for minimum wage when you do not have enough.

Reading between the lines, the important stated criteria seem to be:

• age 50
• have enough or not enough
• reward for OMY: minimum wage or "enough", where accumulating enough previously took 25 years

If your goal is RE at age 50, then the size of your stash is irrelevant (although one would hopefully save aggressively in an attempt to be comfortable in retirement).

If your goal is a stash = "enough", then age is irrelevant; you may save slow and steady to reach your retirement goal at a normal retirement age, or save aggressively to RE.  All that matters is reaching enough.

In the example  given, neither goal seems primary.  If 50 were the goal, you would not do OMY.  If possessing "enough" were the goal, you would not stop working if you did not have enough, regardless of the pay scale.

The choice as presented hinges on the reward for that OMY: minimum wage (NO), or 25 years accumulation (YES).

 

[undercover]

I skimmed through...both articles are completely asinine and contradict themselves throughout in so many ways that neither are even worth anyone's conscious effort to try to comprehend.

The author assumes that if the opportunity cost for not working is greater than working, that the early-retiree will succumb and go back to work for the higher pay. What he doesn't understand is that most people who are early-retired don't put a price on their early-retirement. There isn't an opportunity cost because there is no amount of money that they would accept to go back to work.

Someone that lives happily on $20k a year without working would have zero incentive to go back to work for $1M a year.

[nereo]

So let's consider your final example,wanting to donate more.  I'd say that's a fine reason for working more, but here the reason has shifted from being about you to being about other people. Is trading your life for ever-increasing amounts to give to other people worth it to you?  that's a personal call, but again you have to decide when to say it's "enough."  If you are 45 do you work until you are 50? ...60? ...80? If serving others is truly your calling why are you spending so much on yourself when you could cut that in half or in thirds and double or even triple your annual giving?

According to the latest MMM, http://www.mrmoneymustache.com/2016/06/08/happiness-is-the-only-logical-pursuit/, the last needs one might fulfill for their own happiness and Self Actualization is Serving Others.

Maybe we should all consider overshooting our goals a bit and give back if we truly want to be happy.

Sometimes I perceive my own pursuit of FIRE to be selfish.  However, I have often envisioned myself trying to be more engaged in my local community and giving back once I achieve my goal.  There may be a question of whether that community needs my money, or my time and attention.

Planning on overshooting your financial needs some in order to have money to give to charity is a fine goal, but it's already factored into someone's "FI number". 
Rarely is a high-paying job the best way to give back to society, and FI/RE gives a person much better opportunities to give back.

[EnjoyIt]

Mr Sits article describes me. I can retire right now but not at the lifestyle I want. I an 40 years old and still continue to work because I still like what I do, but I also want to save to have that more comfortable lifestyle, have a little asset protection incase the future is not similar enough to the fast regarding investment growth, I want to make sure my kids have no debt out of college, as well as have more opportunity for funding charities of my choice.

Although I can FIRE today, my opportunity cost is too great at this time. Give me 3-5 years and I will likely be singing a completely different tune. At that point I should have more than enough. Maybe the correct answer is defining what enough is. Maybe for me enough is all the items I mentioned above as aposed to a more conservative retirment.

[Slee_stack]

So let's consider your final example,wanting to donate more.  I'd say that's a fine reason for working more, but here the reason has shifted from being about you to being about other people. Is trading your life for ever-increasing amounts to give to other people worth it to you?  that's a personal call, but again you have to decide when to say it's "enough."  If you are 45 do you work until you are 50? ...60? ...80? If serving others is truly your calling why are you spending so much on yourself when you could cut that in half or in thirds and double or even triple your annual giving?

According to the latest MMM, http://www.mrmoneymustache.com/2016/06/08/happiness-is-the-only-logical-pursuit/, the last needs one might fulfill for their own happiness and Self Actualization is Serving Others.

Maybe we should all consider overshooting our goals a bit and give back if we truly want to be happy.

Sometimes I perceive my own pursuit of FIRE to be selfish.  However, I have often envisioned myself trying to be more engaged in my local community and giving back once I achieve my goal.  There may be a question of whether that community needs my money, or my time and attention.

Planning on overshooting your financial needs some in order to have money to give to charity is a fine goal, but it's already factored into someone's "FI number". 
Rarely is a high-paying job the best way to give back to society, and FI/RE gives a person much better opportunities to give back.

Why is the FI # goal set in stone and why is there only one target?

Would you feel better if folks decided ahead of time:

FI (personal goal only) $1MM, age 50
FI+ (personal goal + help Mom/Dad/whomever out) $1.1MM, age 51
FI+2 (personal goal + help Mom, plus donate $500K to SavetheSquirrels) $1.6MM, age 52

I get the 'enough' challenge, but why can't folks have multiple 'FI+' goals and have a trigger mechanism to decide which one they are going to hit?

With the above example I posited, someone might decide that they can't hit #3 by 52 due to their salary/income not going as high up as expected, so they are going to RE at 51 instead.

I hate the suggestion that there can only ever be ONE RIGHT answer or result.  There are always options and alternative scenarios.

MORE money does not equate to more Happiness, but it most certainly does equate to MORE choices.  Some of those choices could bring about more happiness.  Others will not.  Its up to the individual to figure that out.

[nereo]

Why is the FI # goal set in stone and why is there only one target?

Would you feel better if folks decided ahead of time:

FI (personal goal only) $1MM, age 50
FI+ (personal goal + help Mom/Dad/whomever out) $1.1MM, age 51
FI+2 (personal goal + help Mom, plus donate $500K to SavetheSquirrels) $1.6MM, age 52

I get the 'enough' challenge, but why can't folks have multiple 'FI+' goals and have a trigger mechanism to decide which one they are going to hit?

With the above example I posited, someone might decide that they can't hit #3 by 52 due to their salary/income not going as high up as expected, so they are going to RE at 51 instead.

You bring up a good point; FI is a sliding scale, or (as I like to think of it) a series of stages.  Each can define it how he or she prefers.  For example, I put FI-1 as "you earn more than you spend, FI-2 as "earnings>expenses and assets>liabilities" all the way up to FI-5: you have "enough" forever (perhaps financially defined as WR ≤ % you believe will never fail). In between there's a lot of sense in debating the pros & cons of trading time for money.

The author, Mr Sit, is clearly talking about someone who's reached the highest level. At this stage, rapidly diminishing (arguably non-existent) returns on portfolio safety make the choice of working for more money pointless.  That isn't to say you shouldn't work... there are plenty of good reasons to continue (you enjoy your job, you are helping others, you are building a legacy, etc etc).  It's just not about the additional money.

[EmpireOfDirt]

Mr Sits article describes me. I can retire right now but not at the lifestyle I want. I an 40 years old and still continue to work because I still like what I do, but I also want to save to have that more comfortable lifestyle, have a little asset protection incase the future is not similar enough to the fast regarding investment growth, I want to make sure my kids have no debt out of college, as well as have more opportunity for funding charities of my choice.

Although I can FIRE today, my opportunity cost is too great at this time. Give me 3-5 years and I will likely be singing a completely different tune. At that point I should have more than enough. Maybe the correct answer is defining what enough is. Maybe for me enough is all the items I mentioned above as aposed to a more conservative retirment.

Summed it up nicely.

Sometimes what is 'enough' today becomes 'not enough' tomorrow.

[BTDretire]

Someone that lives happily on $20k a year without working would have zero incentive to go back to work for $1M a year.

 Especially when $1,000,000 only nets you about $570,000.
But I'd work a year for that!

[arebelspy]

Someone that lives happily on $20k a year without working would have zero incentive to go back to work for $1M a year.

 Especially when $1,000,000 only nets you about $570,000.
But I'd work a year for that!

I wouldn't*.   But then, I have enough.  :)

*Two exceptions I can think of: 1) If it's work I'd do anyways, regardless of the money.  2) If it was all going to charity.  I wouldn't do it merely to add any money to my stache.

Selling a year of my time, which I don't have enough of (or, at the very least, I have much more money than time) sounds like a terrible trade, to me.

[redbird]

I'll have to go and read the comments on the original article. I don't know why this concept would be controversial. EVERYTHING has an opportunity cost in life. If you decide to walk down Path A, then you will probably never find out what would've happened if you had gone down Path B.

My husband and I FIREd back in September. Here is our opportunity costs:
- gave up large salaries, plus all of the investment grow each each respectively from large percentage fire hosing
- gave up full pensions (we still get pensions, but they will be reduced since we didn't get to retirement age)
- smaller social security checks later on from less working years than we could've had
- smaller 401k equivalent than we could've had because no more employer contribution (and we stopped contributing post-FIRE too)

But we gained:
- the freedom to do what we want, when we want
- the luxury to live wherever we want. No job to tie us near a specific location.
- the freedom to travel where we want, when we want, and for as long as we want without needing to save up vacation time and ask boss permission to take vacation time

For the opportunity costs, #1 didn't really matter that much. We have always lived on the same budget we're living on now, and it feels plenty luxurious. There was nothing to change. We were just getting lots of excess money to throw into investments. If we would've kept working until "regular" retirement age, I honestly don't know how we would've spent our money down. We have no children and plan to stay childfree.  Opportunity costs #2-4 don't matter either. We have plenty enough stash that even any post-retirement income will just be extra.

Therefore, if you look at it that way, FIRE had no opportunity costs. It was only advantageous. It would've changed the calculus if we had liked our jobs, but neither of us did.

[arebelspy]

I don't know why this concept would be controversial. EVERYTHING has an opportunity cost in life.
...
Therefore, if you look at it that way, FIRE had no opportunity costs. It was only advantageous.

...

:)