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Early Retirement Extreme

Two issues keep on puzzling me about economics. On the one hand, it undoubtedly is an incredibly important subject. At present, my life pretty much depends on being able to buy certain things from a functioning economy and the same holds for just about everybody else. On the other hand, there seem to be a number of serious problems with deeply rooted beliefs about economics held my many professional economists. (This, then, also is one of the most important reasons why we are in a precarious situation in the first place – if people want “to save the planet”, I like to ask “from what?”. The answer seems to be: “from the consequences of an untenable economic ideology”.)

So, developing a sane perspective on economics and in particular one’s own economic role certainly is an important goal. And no, I do not think management professionals who tell their students in their lectures that spending money on french brand name cosmetics is smarter than spending it on other cosmetics have anything to offer that I’d personally be interested in, thank you.

There are, of course, a number of quite useful perspectives. Fritz Schumacher’s Small Is Beautiful: Economics As If People Mattered certainly contains a number of important ideas one should know about. The same holds for the writings of another “maverick” professional economist — Scott Nearing. Bill Mollison also has a lot to say about economics — but the problem with Mollison in particular is that some of his economic approaches are simultaneously powerful and radical (“Some of the things you are going to do will be charitable, and it would be stupid not to do them through a charity and get the corresponding tax benefits, so for heaven’s sake set up a charity — that will be useful for a thousand other reasons as well”), but difficult to implement without an experienced mentor. All in all, economics is a confusing puzzle, and neither the picture assembled from all the pieces by professional economists, nor the “self-sufficiency” picture assembled by John Seymour seem to be without serious flaws.

Recently, I have come across another puzzle piece which seems to play a fairly important role. It comes in the form of a small book written this year by a clever guy who incidentally happens to be a theoretical physicist (amongst other things). Now, one thing that usually comes with an education in theoretical physics is that one develops the ability to make up one’s own mind about things (rather than having to parrot somebody else’s ideas, which most people do), by studying the underlying structures. Physicists develop the skill to see through illusions.

First, he did not buy the commonly accepted model of how one should behave as a model consumer citizen. Then, he analyzed the rules of the game. Then, he developed a fairly robust and straightforward strategy. Next, he implemented it in his own life. Then, after five years (he now is at the age of 34), he had achieved the level of 100% financial independence and effectively retired — which means that he has time to spend on things that matter to him. Some of these may bring in money, but strictly speaking, he does not depend on that.

So what is the trick then? By and large, people in western societies are financially mostly illiterate. When first confronted with the issue of buying a house on a mortgage and hence paying it off more than twice, some people might have a “hang on a second” moment — but eventually just mimic what is generally considered the socially expected behaviour. Many, however, use money much more widely in similarly inefficient ways by buying all sorts of stuff on credit. Banks of course like that, and even try to seduce customers into borrowing money to finance luxuries such as vacation trips. Conspicuously, schools by and large do not seem to try to educate young people about doing a few simple but extremely revealing financial calculations (the same actually also holds for energetic calculations, for that matter). Cynics might well consider this to be part of a big plot to educate them to become model customers.

So, this theoretical physicist, when starting to save for a small house, started to actually think the whole thing through at a more fundamental level, mostly ignoring culturally established behaviour and asking “what if” — a question which normally no one seems to ask.

Retirement plans usually involve setting aside 10% – 20% of one’s income as savings to be put into a retirement account with some 6% interest or so. A saving rate of 30% generally would be considered as exceptionally high. This physicist pondered the question: “Assuming a realistic interest rate, what would actually happen for saving rates in a range no one ever seems to think about, say e.g., around 75% or so?” Arriving at the answer “one would pretty much invariably end up with total financial independence in well under 10 years”, he set out to implement this plan — and afterwards wrote a book about it[1].

A key insight is that, assuming one starts to work at 20, dies at 100, and invests a certain share of one’s income at a given effective interest rate, then for very high saving rates of more than 70%, one is pretty much bound to become financially independent in well under 10 years as long as the interest rate is anywhere above 4%. For low saving rates of less than 30%, the outcome very strongly depends on the interest rate, but for high saving rates this is a robust result. At a saving rate of 70%, the difference between an investment with a 4% interest rate and a 6% interest rate is that the former will take 9 years till financial independence, while the latter about 2.5 years less. Here, one must note that this analysis does not depend on absolute income – as long as one can maintain a saving rate of above 70% and invest at a seemingly moderate guaranteed effective interest rate, this strategy will work. (For a saving rate of 80%, the figures are just over 5.5 years vs. just over 3 years.)

So, regardless of any motivation with respect to how one should invest these savings (earth repair, anyone?), this makes a clear statement about very tangible immense rewards of eliminating inefficiencies and costly bad habits. A saving rate of over 70% is possible, but requires a lot of discipline and essentially a design approach. (Perhaps he did it because physicists tend to like “impossible” challenges?) How about interest rates with a potentially major (peak energy related) economic crash around the corner? Apart from the fact that whoever managed to reduce one’s need to earn money to a level that allows a 70% saving rate will be in a strategically very strong position in comparison to others, it can be expected that, as some part of the economy that was based on untenable beliefs tanks (perhaps quite a large one), that part that was based on more appropriate beliefs may be expected to do fairly well. Nature abhors a vacuum, and when businesses that provided inappropriate solutions fail, other businesses with more appropriate ideas will grow to occupy the void. (Bicycle ambulances, anyone?) Being aware of the relevant issues that actually drive the economic reconfiguration should then be a major advantage.

Having systematically reduced his expenses to a minimum, he writes:

Figuratively speaking it is quite possible to match up the relative sizes of the cash flows between two people. For example, I spend about as much on my total living expenses as an upper-middle-class family spends on their mortgage interest alone. Effectively speaking, I’ve lent them my money so they can have a house with five bedrooms, three bathrooms, a vaulted foyer, and a two-car garage. In return, they pay all my expenses. Hopefully, we both consider this a good deal; I know I do.

Personally, I find it brilliant if someone who grew up in western culture mastered the art of reducing personal expenses to such a degree, but of course there are more appealing investment strategies in terms of redistribution of surplus than letting somebody else live a wasteful lifestyle.

Even if one has no own plans to do something similarly extreme, his book offers a number of very useful insights. In particular, it offers a perspective on the true price of things that seems to be missed by many. Quantitatively speaking, for example, if we assume a mere 3% rate of return, then kicking a habit that costs $1/month amounts to reducing the size of the fund that is needed to reach financial independence by about $400. (So, $20/month means $8000 in funds.) Given that the vast majority of people have a strong tendency to spend money on bad habits, rather than trying to develop discipline and a strong character, and that there actually is a trend towards not educating people about possible ways to cultivate personal self-discipline (as much of the economy depends on the misidentification of wants as needs), there is considerable potential for most people to go much further on the road to a high degree of financial independence than they ever contemplated.

The book itself to some readers might seem a bit too abstract; it deliberately is not a recipe book for frugality, but instead discusses fundamental principles. As the author says, there is little point in giving someone a list of directions if they would do much better with a map — but in order to use a map, one needs some navigation skills. It tries to be an eye-opener by pointing out a few fairly simple relations which actually are overlooked by most and help the reader to develop navigation skills.

Permaculture is a lot about increasing resilience. This particular book has a lot to offer in terms of personal economic resilience and certainly is relevant not only to people with a plan to retire extremely early, but just as well to people who intend to set up their own company (say), or just want more time for those things that really matter to them. Personally, I was amazed to discover that many of the things I already had implemented in my own life — such as not owning a car and building a productive asset base that provides separate income streams (based on actually useful products) straightaway, rather than being locked away until retirement age — are also considered as crucial strategies by this author, even though we arrived at these conclusions for almost completely independent reasons.

While the book is not directly about Permaculture and in particular considers debt-backed fiat money as the given rules of the (present) game (still with a strong emphasis on the importance of alternative arrangements such as barter systems), it occasionally refers to probable scenarios in relation to resource scarcity and pollution problems and discusses ways in which our economies will necessarily have to change (essentially, by changing from a producer-consumer system to a more complete system including decomposers that do the recycling and upcycling of resources). The strategy presented uses the present rules of the game in a creative and quite unconventional way, but it is pretty clear that even if there were a major change in the way money works that is unexpected to the author, he would be in a much better strategic position than most others, due to systematically having worked on becoming conscious of and eliminating his costly bad habits. This book hence seems to be especially relevant as it means that combining such financial strategies with value-increasing earth repair strategies should make a very powerful combination. Above everything else, it very clearly shows the power of systematically reducing one’s recurrent expenses, in permaculture more widely known as the “need to earn”.




  1. I was in the grocery store just yesterday remarking about how many economic booby traps sit immediately adjacent to much better deals, but that most people can’t do basic math to comprehend any of them. I know I’ve heard of statistics about this, but I can’t find them now. And don’t get me started on the “rent-to-own” morons who pay the equivalent of 400% annual interest for the privilege of having brand-name big screen TVs – paid for with welfare checks. A strong argument that some people are born to be poor.

    I would like to know more about how this guy managed to save 75% of his income. The two biggest impediments to this, I reckon, must be taxation and building codes that make non-mortgaged housing so very difficult. Taxes alone vaporize about 50% of your income in America.

  2. JBOB,a lot of people I have met are rent to own people,they have mostly been from developing countries,we also have a lot of people in Australia who use this service,young people and poor families .It’s really a trap for them,the television is a fantastic release from a reality that is usually pretty grim,the possibility of owning a major appliance and the associated kudos resulting from that is pretty powerful.People do it for more practicable reasons such as buying a child a computer with the hope that that child will develop his education with that tool.In turn, that childs efforts and education lift the whole family out of poverty.The word “moron” is very strong and probably a clear example of the worst type of attitude in Permaculture or any movement.Thats the attitude “its us against them”.Thanks to Thomas for his interesting post.
    Best Wishes Fernando Pessoa

  3. Personally speaking, I’ve had more than one “ah – I forgot – some people actually do have cell phones. And even spend money on them. Oh right, some people even watch TV” moment when reading his web pages.

    I’ve never had financial self-sufficiency in mind when making the conscious decisions not to get myself involved in that sort of stuff – it actually was just about conscious management of my ability to focus. Funny enough, I know a number of professors in theoretical physics who never would get a cell phone or a TV for precisely the same reason.

    The one thing Jacob really excels at is self-discipline. That can be learned, too, but in many ways, his lifestyle (being consequent about regular physical exercise etc.) is one which even quite a number of monks would admire, I think. But isn’t life a lot about consciously managing personal growth – and dealing with insidious distractions that try to keep us from doing so? The crazy thing is that a large part of the economy these days is about the destructive production of such distractions.

    What I like about Jacob is that his approach is very practical and hands-on. He doesn’t start from some fuzzy “I think I should in some way cut back on my wasteful lifestyle to protect the environment” philosophy, but he instead is very clear about what he wants, and why. It just so happens that what he does makes a lot of sense in many ways. That’s why it may be accessible to many people. He demonstrated the viability of a fairly uncommon model – but one that works very well.

  4. An interest rate of 6% or so is only possible in a growing economy. Now that we are sliding down Hubbert’s peak 0% interest will become the norm.

    And it’s a good thing. The people who claim interest on their capital are the rentier class – the parasites of our society.

    “Retirement” is a concept that will become extinct in this century.

  5. Cyrus,

    yes and no. There still will be companies making a profit. It’s just that pretty much everything will be eliminated that is based on untenable ideas about energy availability – and that is a *big* chunk of the economy. That will very likely implode, I’d say, and it certainly won’t be nice.

    Generally, it’s very dangerous to confuse interest rates with growth rates. Also, a question is of course if we would not be better off with very different rules of the game that prevent money to become an end in itself. Historically, interest rates in pre-industrial China (say) have been very very high, say 30% p.a.,
    and their economy certainly didn’t grow by some 30% back then.


    The recent funeral had cost the father $100 and the wedding of
    the two sons $50 each, while the remodeling of the houseboat to
    meet the needs of the new family relations cost still another
    $100. To meet these expenses it had been necessary to borrow the
    full amount, $300. On $100 the father was paying 20 per cent
    interest; on $50 he was compelled to pay 50 per cent interest.

    Rates of interest are very high in China, especially on small
    sums where securities are not the best. Mr. Evans informs me that
    two per cent per month is low and thirty per cent per annum is
    very commonly collected.

    In his book, Jacob gives an example from medieval times, pig-lending, with interest rates as high as 100%.

    My view is that one key strategy to cope with economic turmoil is to reduce your “need to earn” to a minimum – as a priority. Whatever recurrent expenses you have – energy, water, food, debt – review these and check if you can reduce them. So, even if you are sitting on a pile of economically valuable stuff (some professional economists keep on recommending to buy gold), that will be of little uses, as your recurrent expenses will keep on forcing you to sell some of that and you may have to accept very unfavourable conditions – until it is all used up.

    Now, Jacob already did all this, and he did an excellent job at it.

    The second key strategy is to become a producer/supplier in some areas that will always be important. Here, it is important to think in terms of services rather than products. If you economically define yourself as “I sell bikes”, that’s a less flexible position than “I provide society with transport”.

    The third key strategy is to develop multiple income streams and diversify – but one can easily overdo it here.

    The fourth strategy is to become aware of your attachments and emotions. They will occasionally influence your judgment in negative ways, and if that is about to happen, you should at least be aware of the issue and be able to ask yourself whether you allow this to happen in that specific case or not.

    Judging from what he writes, I think Jacob would agree with me on all the above points, even though – as I said – we mostly arrived at these conclusions via very different paths.

  6. I finally got to the part where he recommended investing in bonds and stocks. Yikes. A lot of people don’t realize that stock markets can remain bearish for decades. And now is not the time I would want to invest in anyone’s debt (bonds). I think finding a safe place to put your money is going get increasingly more difficult, and the traditional advice of “stocks and bonds” probably isn’t going to cut it.

  7. JBob,

    Yes, I’d agree on that. There may be a few exceptions, but one should take a very close look at how specific companies are doing business.

    Finding a safe place for money is mostly about finding a place that set up shop rooted in sound principles. One that isn’t is: “The value of energy can be read off of its current market price.”

    Oh hey – I think I know a website that’s a lot about economics based on sound principles. Hmmm…

  8. Thomas: “Historically, interest rates in pre-industrial China (say) have been very very high, say 30% p.a.,
    and their economy certainly didn’t grow by some 30% back then.”

    This is only possible under a hard money (e.g. gold backed money) standard with no FRB (Fractional Reserve Banking) – and of course loan sharking (with kneecappers in case you don’t pay your debts).

    Under our current fiat paper-money system this is not likely. Of course we might have hyperinflation and then go back to a hard money system but I think that’s many years off.

    I certainly hope you are not suggesting that we become loan sharks to fund our retirement? :)

  9. Cyrus,

    when Franklin Hiram King went to China ~1910, the currency in use was the yuan, introduced 1889. I don’t have data on this, but judging on the history of chinese currencies, I’d be surprised if it had been backed by metal. (Or maybe rather backed by stupidity for that matter – metal simply does not have any magical powers that make it more powerful than other commodities when it comes to basing a currency system on it.) But the point is that such high interest rates seem to have been culturally the norm back then and there.

    Certainly, that’s neither an enviable situation nor one we should strive to re-create. But the point is that one can have high interest rates widely in use regardless of the growth rate. A big problem arises in such a situation if capitalists hold on to money and make it artificially scarce rather than spending it. Then, you need growth to keep the show running.

    Having said that, I’m fairly sure that even today, systematically reducing one’s personal expenses and investing in truly productive assets (water tanks? aquaculture anybody?) can make you financially independent early on in life.

  10. Thomas i enjoyed your interpretations of concepts presented in this book through a permaculturist’s lens. Thank you for this post.

    We would do well as individuals to adapt and apply permacultural design principles towards rethinking, and redesigning our personal finances [which would, en masse, lead to broader systemic changes].

    May i recommend you add Tim Jackson’s ‘Prosperity Without Growth’ to your reading list …i think you would enjoy his ideas. Imagine, a permaculturist in economist’s clothing!

    chk out his talk here:

  11. “Having said that, I’m fairly sure that even today, systematically reducing one’s personal expenses and investing in truly productive assets (water tanks? aquaculture anybody?) can make you financially independent early on in life.”

    Totally agree. Investing in productive capacity using equity (not debt) is the most ethical and responsible use of capital.

    I am not a Muslim but I do admire the Islamic banking system. Usury is banned and investments are made using equity. For example, a small business man does not borrow money for his business – he finds people to invest in his business and claim part of the ownership. The difference between debt and equity is critical. If the businessman is profitable then both he and his investors win. But if the businessman’s income decreases then both he and the investors lose. Under a debt system a person might lose part of their income but their debt remains the same (and they become a debt-slave).

    But, I think you’re being a bit harsh on gold. For over 6000 years of human history people have experimented with all types of monetary systems – paper, feathers, sea shells, sticks etc – but gold alone has stood the test of time. Gold truly is “nature’s money”. It does not corrode, it’s infinitely divisible and malleable, it’s scarce and it cannot be created out of thin air. I suspect that our current paper money system will not exist in the coming decades and gold will again take it’s place as the monetary reserve currency.

  12. Cyrus,

    I see perfectly no reason that would make gold special in any way. Some centuries ago, the Spanish flooded the market with gold they imported (stole) from America. The effect? Its value dropped – people just became less interested in it.

    There isn’t any convincing reason why gold would be special in any way. And I don’t think recent history (6000 years)
    can teach us anything here, as the rules of the game with mankind on a shrinking energy base to run its economic activities are markedly different from what we have had before. Essentially, buying gold amounts to making a bet that there are sufficiently many people out there at least as stupid as oneself who would attribute it major value even in a period where people find out the hard way what actually is really valuable and what’s not.

    I can see both a good reason as well as a way to implement an energy-backed currency. This would much more naturally stay in sync with the size of the economy.

  13. > I can see both a good reason as well as a way to implement an energy-backed currency. This would much more naturally stay in sync with the size of the economy.

    An energy based currency is tricky. It’s kinda hard to carry around barrels of oil – and if you’re carrying their paper proxies then you’re relying on a central issuing authority which may or may not be corrupt and will issue more paper than the underlying real asset.

    One of the benefits of gold (not paper-backed gold) is that it doesn’t have any counter-party risk. Gold coins are physical and tangible and very hard to counterfeit.

    But by all means – I’m not advocating only a single monetary system. Actually, on a shrinking energy base it is likely that power will shift from the center to local communities – and each community could have its own local currency.

    Monetary systems are like plants in your garden or people in your community or (dare I say it :) ) political opinions. Diversity is a good thing.

  14. Cyrus,

    I am thinking more along these lines rather than oil-backed currency:

    Incidentally, that article first appeared in a book which has become very difficult to obtain but Bill Mollison keeps on referring back to it. In my opinion, Tagari would do the world a great service if they became a library that does electronic lending of out-of-print books as Australian libraries can according to Australian law, a la, and Bill made some of his more difficult to obtain books available that way.

  15. I’m the author of the book and I’m most impressed by this overview/review of it. I got a few comments …

    We’re not coming from completely different sides. I have actually looked into Permaculture (there’s a Permaculture reference in the book’s bibliography and I’ve read a few more than that… sadly my own attempts at gardening are.. well, sad) before and maybe it would be fair to say that I have focused more on the socioeconomic aspect of the total ecosystem than the natural/technical. I have a background in peak oil but after a while I realized that it was possible to reach more people if they were first in a position to do something about changing the world. A lot of people realize the predicaments we’re in so they sit and lament about them in chat rooms and forums; but next day they have to go back to work to pay their bills. A transition has to start from the beginning; where people are. That was the idea.

    I’m fairly agnostic when it comes to interest. There’s no particular dichotomy between equity and debt. In the financial world it’s a sliding scale from common equity, preferred equity, senior and junior debt, and so on. It’s just a question of how much risk you’re willing to take. More risk (equity) gets more reward. Bond owners still take risk, because the company can declare bankruptcy. If you outlaw certain financial transactions, people are just going to find a way around it. When usury laws existed in the Middle ages (prohibiting interest), the church decided you could make loans and demand payback in a less depreciating foreign currency thus effectively charging interest.

    The extreme early retiree vs the mortgaged homeowner was just a way of comparing scale (and penetrating some thick skulls :-) ). A typical nest egg could also represent all the equity of a small restaurant, or two book stores, or a coin laundry. However, fewer people have an idea of what kind of capital is required to start a small business. Most know about their mortgage.

    Ideally I would like to move from stock market equity (where I have most of my money) and into hands-on equity such as the above. It’s not hard to see the difference in convenience though. The stock market is a secondary market so it makes it easy to get out of an investment. Try selling a local business instead. I hope in time we’ll see something similar to person to person lending for equity. Right now convenience is restricted to big faraway corporations (mostly).

    Another goal is to become even more economically independent. I think there’s a Pareto law for this though, e.g. one can become 80% self-sufficient with 20% of the effort, but the last 20% requires 80% of the effort—try building a radio out of kitchen utensils (it can be done, but it’s easier to buy one for 5 bucks).

  16. I should add that when reading the book, it actually is much clearer that the retiree-vs-mortgage-man comparison really was just intended to give an idea about relative magnitudes of expenditures. I must admit to maybe have hijacked this quite striking passage a bit when writing the article.

    Still, it is quite tantalizing to see that all this can probably be taken even much further. But in order to do that, one has to know very well how to properly use the tools provided by the legal system. (That’s something I’m still trying to get my head round, actually.) I do realize now there are quite amazing things one can do by setting up a charitable trust as well as an unit discretionary trust at the same time.

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