The opportunity cost of early retirement

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Adolescents have a sense of die-hard immortality that comes from having given no thought to their future. I realized that I wasn’t immortal when I was 21-22. This implied the full realization that my life span was finite although I hadn’t yet reached the sense of time that I have not that “old” people frequently demonstrate when they talk of children with the statement that “they grow up so fast!”.

Being an intellectual (MBTI type NT – rational) I measure growth in terms of how much I know or how competent I am. It was around that age that I found out that I was starting to forget things that I have learned as my brain was making room for new things and cutting away “excess useless knowledge”. I prefer to liken this to the growth of an ecosystem or a society where weeds (suburbs) are replaced by bushes (suburbs with shops) and finally trees. Weeds are like information. Bushes are like knowledge and trees are the wisdom that remains of what went before.

Having lived a good part of my life already, I can start mapping out choices or what-ifs. For instance, the opportunity to excusably engage in idiotic behavior while being drunk is long gone (I’m told that after the age of 25 one is not so easily forgiven). The opportunity to compete in sports on a regional level is also going soon. Were I to start now, I would not have been able to put in the time until I was maybe 45 at which point I would be too old for most sports.

Early retirement provides both opportunity and opportunity costs, but of course so does a career. For instance, quitting a career that for many people were chosen by the 18 year old selves allows a reinvention of who they are — if people indeed are defined by what they get paid for as seems to be the case in our modern world. On the other hand it also prevents them from becoming what they could have become. For instance, my 18 year old self wanted to become a professor in order to discover amazing new things and teach them to enthusiastic students. Needless to say, my 32 year old self has fewer illusions about the whole deal. Still there are some [illusions] left and it is such hope that would cause a lot of what-if doubts were I to retire now. However, since I have possibly irreversibly polluted my mind with thoughts about what else I could be doing, I entertain an equivalent number of what-if doubts were I not to retire now. This would not be a problem if I were held down by a children, mortgage, debt, and other liabilities. In some sense such restrictions would be welcomed because they would remove the uncertainty and the need to make decisions. Perhaps this is why so many people choose them.

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The opportunity cost of early retirement

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Are we qualitatively different?

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If there is anything this country enjoys, it’s measuring things by numbers and then comparing numbers. We divide people into percentile according to net worth, credit score, GPA, GDP, IQ, etc. with the implicit assumption that it is possible to understand the entire scale simply by multiplying by a number. For instance, someone spending twice as much must live twice as well or someone with twice the IQ must be twice as smart.

However, all of these numbers are a function of something that is very complex and nonlinear. Therefore it makes no sense to compare two numbers which are very different. While it is possible to compare the expense level of persons A and B, say $40,000 and $39,000, respectively, and conclude that person B is slightly better with money than person A, it is impossible to compare A and B to person C who only spends $20,000. Here person C would live qualitatively different and make qualitatively different choices. For instance, A and B might have two cars each and here B would be driving a slightly more fuel efficient model, whereas C would not be driving a crappy car. More likely, he won’t be driving a car at all relying on other means of transportation. Hence it is impossible to make any conclusions merely based on comparing numbers.

So how do we compare?

When two things are scaled different, one usually builds ratios. Nobody but an absolute rookie would consider a stock priced at $30 to be twice as expensive as a stock priced at $15, say. No, the ticker price must be scaled by some value. Earnings per share is a very popular scaling factor. Suppose that the higher price stock has an EPS of $4, while the lower priced stock has an EPS of $1. Then the P/E ratios are 30/4=7.5 and 15/1=15 respectively. All other things being equal, the former is the least expensive. Stocks with high P/E values are called growth stocks and stocks with low P/E values are called value stocks.

If we go back to the car example, there are various ways to build a ratio (making up ratios seems to be a primary occupation of stock analysts by the way). We could divide by the number of cars. This would mean that person C would have a ratio of infinity. We could divide by the distance travelled giving some indications of mileage costs or we could divide by the time spent on transport. One or more of those ratios would show a substantial difference.

This is interesting, when one is comparing budgets like frugal vs frugal or when comparing food expenses. It is very likely possible to establish several classes of lifestyles. Comparisons should then be done within a class. For example, it does not require a genius to establish that all value stocks by definition are less expensive than growth stocks. But what about frugal lifestyles? Do some people exhibit a qualitatively different form of frugality. My answer is yes. I have a hard time using frugal tips and suggestions from most personal finance blogs, because they are out of my league. I simply can’t afford to follow their advice

In a future post I will hopefully have been able to develop some ways of classifying the different personal finance setups. Until then any suggestion is welcome.

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Personal Finance, compare, comparison, measure, net worth, personal finance, philosophy, qualitatively different, scale