Rules Are Made To Be Broken
There are only 2 sets of laws that govern early retirement, and for that matter, life in general. There are many other rules that people just make up. The laws are absolute. The rules are made to be broken.
The first set of laws are the laws of the land where you live. I can’t just make a judgement that another person has too much money and steal from him because that would violate a law. Likewise, I can’t refuse to pay a tax because I don’t agree with it. Breaking a law carries consequences. You may get away with breaking these laws for a while. However, you would always be looking over your shoulder and facing possible punishment, which is the opposite of freedom.
The second are the laws of mathematics. Whether you understand them or not, these are absolute truths that won’t change. 2+2 always = 4, 10% of 100 is always 10. When planning for retirement, there are many assumptions, projections and rules of thumb which can be very helpful. However, they are not laws. The math that results is absolute, and you will have to live with that reality, which requires building in safety margins when calculating and planning.
We can learn how to live within these laws and use them to our maximal advantage. For example, you can make $100,000 next year through earned income from a job, earnings from stock or bond investments, or income from rental properties. You will owe considerably different amounts of taxes with each option. You can do things within each option. If you earn a wage, will you max out tax deferred retirement accounts or pay taxes on your full income now? If investing, will you pay a very favorable rate on long-term capital gains or a much higher rate on income from short-term gains or interest payments? You have to pay certain taxes based on the state in which you live. You do not have to choose to live in any particular state. You have to follow the laws based on which options you choose. However, there is no law that you have to choose any particular option. The choice is yours.
You will frequently read about the 4% rule on this and many other financial planning blogs. We will look at this rule in detail in future posts. Hopefully when we’re done, you will understand that this is not a law. It is actually not even a rule. It is an assumption of what you can safely withdraw from your investments annually based on past market performance and many other assumptions. Any of these assumptions can be wrong, making your estimates too high or too low. The math is absolute. You will have to live with those results. We will be outlining our strategies for dealing with this reality.
We can all learn the laws with some effort and figure out how to use them to our advantage. However, few people do. Instead we typically are too preoccupied with following society’s unwritten rules, and we allow them to dictate how we live our lives. Rule #1 of Early Retirement: There are no rules!
There are many unwritten rules that people choose to follow regarding retirement. You retire at 65 because you can get your Medicare, full pension or social security benefits. You should save 10-20% of your income for retirement savings. You can’t retire early because healthcare costs are too expensive, inflation could kill your savings, it costs a lot to raise a kid. Blah, blah, blah.
Some of these “rules” like saving 10-20% of your income to provide a secure retirement can be found everywhere and are simply accepted by most as gospel truth. This particular rule is true if you start in your 20’s or early 30’s, do it consistently, and work until traditional retirement age. However, very few people ever actually do this. People who start saving that early can easily figure out how to increase their savings rate and cut years and even decades off of their careers. Conversely, people who only start saving in their 50’s and follow this conventional wisdom are going to be very disappointed to find that they won’t have anywhere near enough to fund retirement using conventional investment strategies.
Each of these “rules” have elements of truth. None qualify as unbreakable laws. All are simply self-limiting beliefs that enough people have chosen to accept that they have become conventional wisdom. You can currently qualify for retirement benefits at 65 years old. There is no law that you can’t develop passive income greater than your expenses so that you wouldn’t even need these benefits. There is no law that you can’t buy your own healthcare using a high deductible insurance plan with a HSA ,which can then also be used as a tax deferred investment vehicle. There may be company policies that you work 30 or 40 hours to qualify for health insurance. There is no law prohibiting you from negotiating a mutually beneficial agreement with an employer to pay for your health insurance in pre-tax dollars in exchange for working a casual part-time schedule. There is no law that states that because you retire from your career you can’t continue to make money working part-time, seasonal or casual work. There is no law saying you can’t make money from your hobbies. You could certainly use your new-found free time in retirement to develop new skills in areas of interest. You can then make money with these skills. Essentially, you can do anything that YOU want to do. The only things that would limit any of these options are your own preconceived notions of what retirement is, your individual abilities, and a lack of imagination.
So what rules and laws are you going to follow? Will you work on learning the absolute laws of the government and math, and then use them to live the best life you can imagine? Or, will you simply follow the rules of conventional wisdom because that’s what everyone else is doing? Realize that the choice is yours!
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