I didn’t expect my previous post on early retirement and opportunity cost to be controversial. I thought it was just a matter of fact. There is an opportunity cost in everything; early retirement is no exception. Pointing out the opportunity cost is not the same as saying you shouldn’t do it. You can choose to accept the opportunity cost and carry on.
I declined a job offer that required a one-hour commute even though the job itself was very promising. If I were renting I would just move closer to the job and move back if the job doesn’t pan out. Because I own my home I’m not going to sell my home or endure the long commute for a job one-hour away. If someone says this is an opportunity cost of owning my home, I would agree. Absolutely. I don’t have to list all the benefits to justify owning my home.
Or you can say I declined the job offer because it was not promising enough to overcome the hassle and cost of selling and buying or the one-hour commute. If they offered a $1 million signing bonus I may very well have taken it. The decision depends on how large the opportunity cost is.
The Alternative Narrative
Opportunity costs cut both ways. It’s just the nature of opportunity costs. The opportunity cost of doing A (stay put in my current home with a short commute) is not doing B (accept the job offer an hour away). The opportunity cost of doing B (accept the job offer an hour away) is not doing A (stay put in my current home with a short commute). The two statements describe the same problem. Saying one automatically implies the other.
For some reason people still want to describe the early retirement versus high income from working the other way — the opportunity cost of working for a high income is not having as much free time as retiring early — even though it’s really the same as saying the opportunity cost of retiring early is not making the high income from working.
Here’s an alternative version of my conversion with my co-worker:
My frugal co-worker and I talked about his recent promotion and new stock grants. I said to him the opportunity cost of making this high income is that he wouldn’t have as much free time than if he just retires early now.
Although his after-tax income will enhance his life experiences in the future, during the years he’s working, he won’t be able get up late, take his long bicycle rides, learn a foreign language, go to the gym in the middle of the day when it’s not crowded, travel to Guatemala for weeks on end, or however he feels like spending his time.
Does either this alternative version or the original version say anything about whether my co-worker should retire now or continue working? I’m afraid not. It’s just two sides of the same coin. Between two appealing but mutually exclusive options, one is the opportunity cost of the other.
The Concept of Enough
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 you have $10 million at age 60, by the standard of most people that’s probably enough. If you have $500k at age 30, by the standard of most people that’s probably not enough to retire on, although some people actually push the boundary and retire with that. Anywhere in between, which is probably the case for most people interested enough to read to this point, is in a huge gray zone.
Pick any number between $500k and $10 million. Can you make it work? Absolutely. Just make your budget according to the withdrawals that number can support. Tons of real people actually live on that much or less. You can do it too. Is that the living standard you want? That’s the big question.
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. It’s not as clean cut as
Not Enough ==> Keep working
Enough ==> Stop working
Suppose at this time you don’t have “enough” but you can only find minimum wage jobs due to outsourcing. 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 this time 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 the following year onward? I would work that one year and ignore the Internet Enough Police.
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.
We are back to our original problem: high earners face a large opportunity cost if they retire early; working for a high income incurs an opportunity cost in free time. Which way you go depends on the opportunity cost.