I sometimes hear that one way to achieve early retirement is by lowering your required budget in retirement. If you can live on $25k a year after you retire, you only need to accumulate half as much as you do when you must have $50k a year. When you don’t require a nest egg as large, you can retire sooner.
I also hear you can squeeze your retirement budget down by counting on doing many things yourself instead of paying someone else. After you retire, now that you have more time, you can do your own home maintenance and remodeling, lawn care, and car maintenance and repairs. If you have school-age kids when you retire early, you can home school instead of spending money on after-school programs. You can drive instead of flying to places you want to visit.
However, this contradicts with the economic principle of comparative advantage.
Comparative advantage is “widely regarded as one of the most powerful yet counter-intuitive insights in economics” (Wikipedia). It’s the principle behind specialization and trade.
If person A does job X more efficiently than person B, person A is said to have an absolute advantage in job X over person B. If person B in turn has an absolute advantage in job Y, then person A should do job X and personal B should do job Y. They are both better off when they specialize and trade.
A comparative advantage happens when person A has an absolute advantage in both jobs X and Y over person B. You would think then person A should do both jobs and person B should do nothing. However, if person A’s advantage in job X is greater than his or her advantage in job Y, person A should still only do job X and let person B do job Y. Even though person B does it less well than person A on a absolute basis, Person A’s time is better spent on a job where he or she has the greatest advantage comparatively. This is the basis for why our economy is built on people having different occupations and not each person doing everything on their own.
When your job isn’t scalable by the hour — after a full week of work, putting in another 3 hours doesn’t earn you any extra — doing some of the household work such as painting the walls of your home yourself can make sense, because you can’t 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.
It’s 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.
The principle of comparative advantage says 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. Unless you care more about scoring or feeding a fantasy, it makes little sense to retire early on a budget that requires you to put in a lot of labor on jobs you aren’t very good at, either absolutely or comparatively.
Along the same line, some say if the 4% withdrawal rate comes up short after you retire early, you can supplement your retirement income by taking up part-time jobs, even retail jobs or flipping burgers. Again, that would be giving up a job you do well early and taking up a job in which you have no advantage later.
From the previous article Early Retirement and Opportunity Cost, we come to the conclusion that early retirement is a luxury but it’s worth it. After paying a high price in buying your time, it doesn’t quite make sense to me to turn around and spend the precious time on activities you don’t enjoy only to save money.
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Keith says
I think one of the key aspects is your comment about if you enjoy doing those things. Some people would prefer to stay at home and do those things themselves in order to retire earlier. I know for myself, there are plenty of things I do enjoy doing, but don’t necessarily have the time to do so I hire them out. However there are also things (painting!) that I don’t enjoy doing and if I can make 5-10x as much doing a few more hours of scalable work in comparison to doing those things I don’t enjoy then I think it is well worth the trade. And because of that I really think that I will transition to working much less rather than what people think of as full retirement when the time comes.
Matt says
I also agree with you about enjoyment. I know that just in general, I enjoy doing 10 activities that take 4 hours rather than one activity that takes 40 hours. If I can later retire from software and do ten different jobs that I have an absolute disadvantage in, it still may well make sense from an enjoyment perspective. Not only am I enjoying the variety, but I’m also building up my portfolio of skills, which is yet another source of joy!
Not only that, but a dollar saved is better than a dollar earned – throwing out random numbers here but if I earn $120/hour contracting to write code and pay $100/hour for a plumber, I’m still probably better off doing the plumbing myself because those $100 I’m saving are after-tax whereas the $120 is before tax.
KD says
Correct me if I am wrong, isn’t comparative advantage a distribution (value) of labor theory? Activities you described that are performed to benefit oneself and one’s family may easily be seen as an economic activity for economic theory. But an individual does not see it so. Say for example, (I always wanted to paint my own house. But my job took away the time I had to do it. So I hired someone to do it for me. Now say I bought my time back by rejecting the income from job. I can do the painting now.) Let us strike a few sentences and read it again, “My job took away the time I had. Now I bought my time back by rejecting the income from job.” Wanting to do chores or painting in my newly bought time is irrelevant to the argument for the individual. Only economist believe that we would do nothing with our time if we didn’t get paid for it or we would do something only if we were professionals in it. Real life is much different.
Harry Sit says
If you _want_ to do it, you see it as learning or practicing a skill, you derive pride and joy from the accomplishment, by all means do it. It’s your time. You spend it however you want. I’m only talking about when you would rather play guitar, take a bike ride, or go to a concert, but your budget requires that you do these jobs.
KD says
OK. Got it. You are right.
Physician on FIRE says
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 economists’ point of view, but in reality, I think there’s nothing wrong with undertaking projects where you are at a comparative disadvantage. That’s how we learn and become more well rounded individuals. You’ll have a lot more to talk about at parties if you’ve done some plumbing, some landscaping, built a treehouse, etc… you’ll 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 I’m planning to reach double that before leaving a lucrative career behind. That will be more than Enough, and I’ll 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
p.s. I like the “click to edit” feature. I haven’t seen that one before, so I just had to try it out. Thanks!
Harry Sit says
Nothing wrong if you are not doing it for pure economic reasons, as advocated by the ERE movement: DIY to make the budget work so that you can retire at the soonest time.
You train years and years to become really, really good at something. It not only helps you financially, but also helps the society. Everybody doing their own plumbing and landscaping doesn’t help the society nearly as much.
Patrick says
“Everybody doing their own plumbing and landscaping doesn’t help the society nearly as much”
That depends on what you consider helping society. Is having a company drive an old truck from many miles away hauling a trailer with tons of pollutant spewing small motors really helping society because you pass on a few dollars? I’d argue that is harmful to society and if you pulled out your own push-type unpowered mower you’d be helping society by reducing long term healthcare costs from lower local pollutants. I guess we have to decide for ourselves what we deem as “helping society”.
Harry Sit says
I meant more broadly. It helps the society much more when a teacher directs his or her energy on teaching kids, a nurse on helping patients, a policeman/woman on public safety, an engineer on designing products rather than having all of them do their own plumbing and landscaping.
Freedom35 says
I enjoyed this post and the previous one on opportunity cost. I think you nailed it on the head as being conscious choices about luxuries and activities enjoy.
Thanks for some food for thought.
Steve says
I haven’t had a luck hiring out work I don’t want to do. Every time I do, I see the astronomical bill and think about the time I spent finding and hiring the professional, and I wish I had done it myself. But every time I do something myself, I think about all the time I spent on it and wish I had hired it out.
Sam Seattle says
Thanks for writing about this, Harry. Great post.
gmshedd says
Regarding the definitions of absolute and comparative advantage: I’m reminded of a couple of stints I’ve done at work, doing something I didn’t really enjoy, while thinking “Just because I’m good at it, doesn’t mean I should have to do it.” Those who are broadly skilled, rather than uniquely-specialized, often end up being used where they have absolute advantage, perhaps confirming the counter-intuitive nature of comparative advantage. On the other hand, the broadly skilled also have more options when there is “downsizing” to be done. And in life in general, it’s better to have a bit of MacGyver available, than to be totally dependent upon specialists.
Eric says
I think it depends on your measuring stick. It seems like you are measuring by “what’s best for society”. That’s fine on a macro level, but as an individual my goal isn’t to min/max my effectiveness for the human race, my goal is to lead a happy and satisfying life. While focusing on economic advantage makes sense while working our way up Maslow’s hierarchy, after a certain point its a lot less important. What is going to make more satisfied when I go to bed at night, typing code into a computer for an extra 20 minutes and paying someone else to weed my garden or weed the garden myself? In many cases, I’ve found the answer to be (somewhat surprisingly), the latter.
nicoleandmaggie says
I was just thinking about this yesterday after reading Mr. Money Moustache’s new post. Comparative advantage FTW! (Not to mention absolute advantage.)
Not just better for society, but better for my own utility function.
Funny about Money says
What an interesting post and series of reflections!
One thing that might be factored into this rumination: the effect of advancing age as you move forward through retirement. At the outset, you can easily do many of the tasks that someone else might do more efficiently, simply because you have the physical strength to do them and the mental acuity to learn new skills. This makes early retirement look affordable form the vantage point of, say, age 45 or 50.
But as we age, that physical strength slowly fades — or abruptly, when we fall prey to the inevitable ills of age. At that point one doesn’t have much choice but to hire out a lot of jobs: house-cleaning, yard care, pool care, dog care, car maintenance, tree-trimming, painting…lots of things you had no trouble doing at the outset of your retirement.
I think that in planning for early retirement, one might want to consider this shift, which occurs over time and causes your cost of living to rise — often at the same time that your medical costs rise.
Tiny Montgomery says
Every individual is at a comparative disadvantage in trying to obtain services that are (1) reliable, (2) expert or at least competent and (3) honest, whether the market is competitive or not (it frequently is not as a matter of fact, even if “true” in theory). This applies as much to home repairs and home maintenance as to any other kinds of services. It’s a jungle out there, and rip-offs or work done by completely incompetent “contractors” are very common. Since one spends a great deal of time in one’s home whether one is actively employed or retired, it matters a great deal. The circumstances of perfect or even barely adequate information and competitive markets, that prevail in the small but real worlds most people inhabit, make the ability to one’s own repairs, maintenance, and improvements extremely attractive.
Many a doctor, lawyer, or finance person would have benefited from real education in these areas during their schooling, rather than having it wasted on post-modern Shakespeare and other mindcrap. But colleges, outside of the engineering and medical schools, still find work with the phsyical world to be icky and disreputable, and, most importantly, a sign of low status. The universities should be involved in their fourth or fifth wave of creative destruction by now, instead of being propped up at vast taxpayer expense to prevent the first wave from ever happening.
Patrick says
I was just about to buy a new guitar. Thankfully, I came across this article and realized that I can easily find someone on youtube far more skilled than myself playing a guitar. Instead of wasting my money and time getting my own guitar to play music, I should just find the appropriate song on youtube due to the comparative advantage they will have over me and even better, it didn’t cost me any money. Thanks for saving me Harry!
planedoc says
Harry, good article. A point missed is, that if you *enjoy* the task, it makes sense to do it. If you *hate* it, and can “make the money” easily in another way, it makes sense to hire it out.
I’m personally not a fan of yard work. I can make enough in a day at my “paid job” to cover the expense of hiring it done for a month. Good trade-off for me. My neighbor, who *loves* yard work, could easily afford to pay for it…but prefers to do it himself.
As mentioned above, on some things it makes sense to DIY, simply because of taxes on income….
Choices….we all have to make ’em.