When it comes to saving for retirement, saving early is one of the most effective strategies. Due to the power of compounding, when you are able to get a head start at an early age, you can make time work wonders. I’m sure you all have seen a variation of the chart where Person A saves for 10 years and then stops while Person B waits but saves for 30 years and Person B still can’t catch up to Person A.
That’s all good and settled if having the largest sum for retirement is the goal. During my recent trekking trip in Bolivia, I learned there’s a different way. I call it Experience Early.
Experience Early means you prioritize some experiences early in your life. If that makes you not able to retire as early or not have as much money when you do retire, so be it. Because you already had your experience early, you are not yearning to finally do what you always wanted to do after you retire.
I learned this from other travelers I met on the trip. Some of them were literally half my age. They were practicing Experience Early.
Alex, 27, took a one-year unpaid leave from his job in Canada. He started his travel in Ushuaia, at the southernmost tip of Argentina. He worked his way up north, staying in a place for however long necessary to satisfy his interest before moving on to the next place. By the time I met him in Bolivia, he already went through Argentina and Chile. Peru and Ecuador would be next.
Because he was young, Alex was able to save costs by taking buses between places and staying at inexpensive hostels. His expenses while traveling was actually way less than his living expenses in Canada if he didn’t travel. He wouldn’t earn a salary during this one year but there wouldn’t be taxes either. Combined with lower expenses, his net cost for one year of travel was very low.
Michael just graduated from college in Maine. He didn’t have a job offer that was satisfactory to him. Before continuing to look for the right career opportunity, he decided to travel for a few months first. His opportunity cost for traveling was also very low.
They’re not alone in practicing Experience Early. A former colleague visited 130 countries already before he was 35. He took semesters off during college. It took him longer to graduate but he thought the experience also helped him get into the MBA program at MIT.
By prioritizing experiences early they are entering the workforce later or taking a break in their career and therefore giving up income and delaying saving for their retirement. All else being equal they’ll retire later or retire with less money than otherwise. Some of them will be part of the statistics for the younger generation not owning homes or having low retirement savings. The great experiences they enjoyed early in their life don’t show up on their personal balance sheets but those experiences contribute to their happiness nonetheless. You may also have heard of the joke about an American banker and a Mexican fisherman. The American banker wanted the Mexican fisherman to work on expanding his fishing business so that one day he’ll be able to retire early and finally do what the fisherman is already doing today.
Prioritizing early experience over earning an income and saving for retirement is both more optimistic and riskier. When they forego earning an income and saving for retirement now, they believe their future will make up for it. When you’re not so sure about the future, you try to hang on to what little you have now. If when Alex comes back from his one year of travel his employer no longer has a job for him, he’ll have to find a new one, but he’s willing to take that risk. Maybe he’ll find an even better job than he had before. Michael is confident that he’ll be able to find the right job opportunity after he gets back. If those plans don’t work out, they may find themselves unemployed or having to compromise on their careers.
What makes some people more optimistic and more willing to take risks than others? Genes and upbringing must play a big role. Privilege probably has something to do with it too. Privilege reduces the cost of failures. It gives you a second, third, and fourth chance if the risks you took didn’t pan out as expected. One of those chances may very well pay off. So how do you decide whether you should go with Experience Early or Save Early? If you have privilege, use it to your advantage. Whatever you wish to do after you retire, do it before. It’s both less expensive and more enjoyable. If you don’t have privilege, you have smaller margins for failure. Then save early and shore up your margins before you take those risks.
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Bob Joyce says
Prioritizing early experience over earning an income and saving for retirement reduces the risk that you won’t be able to enjoy the experience later due to illness or injury. You have to balance the financial risks of postponing income and investment accrual against the risks of missing out forever on experiences you can enjoy now.
Experience Early also maximizes the range of possible experiences and the lifespan of the memories. Partying to the early morning with Japanese hostel mates in Barcelona has an age limit.
Having said that, you can’t ignore the effect on lifetime earnings. It’s not just a year of interning, you lose out on. You’re going to intern anyway. It’s more likely a peak earning year that you’ll have one less of.
So my advice is not to take a gap year but to make the most of breaks and vacation days. It’s tempting to get a summer job and hang out with old friends or to spend vacation days catching up on The Office.
There is sometimes a way to do some of both by taking advantages of low cost, high impact experiences closer to home. My wife and I spent ten years hiking to every waterfall in our state. Many of these were brutal bush whacks across extreme terrain. A handful were life threatening, so these were high on the experience scale. But those 120 waterfall adventures cost less than one trip to Japan and provided us years of excitement.
Harry, you bring up a great point about privilege. I had the motivation and money to take a year off after graduation but my immigration process made it impossible. By the time it all sorted out, I was settled in with a relationship, paid off place and FI on the horizon. There are no regrets. Last 10 years in workforce have put me in a secure position. I am thankful for my health. I look forward to making the most of the opportunities in front of me.
Hey Harry, I love your work and get what you’re saying but I’d like to offer a counterpoint. From my twenties to mid-thirties I prioritised living in the now over my long-term financial future. I think I got that balance wrong. I’ve needed to safe / invest like mad ever since to make up for the late start. Over a decade later, I’m much happier now, knowing we are more financially secure, and most of those twenty-something life experiences have faded from memory.
The road to financial security has come at the cost of a very high savings rate and my one real regret is that I didn’t start sooner.
Obviously this is not a binary decision, it’s a trade-off, and much depends on personal mindset, but I think there’s a tendency to over-rate certain ‘experiences’.
For example, a trip to Machu Picchu can be every bit as meaningless as owning a BMW if it’s about putting a tick in a ‘lifestyle’ box rather than genuinely furthering your happiness. I’m not arguing against personal discovery, and we probably all have to make a lot of mistakes to find out who we are, but the mountain can be as metaphorical as real.
Each has its place. If you are coming from a privileged position (having a safety net of any sort – parental, your own savings, inheritance/trust etc) then for sure! If you are not coming from such a position then save and then when you do have some disposable income – invest in making memories! That could be visiting all state and national parks in USA (does not have to be exotic). I would also recommend using your vacations to full extent – rather than leaving them on table. In some professions, your vacations are not your own – then you plan accordingly and discuss with your supervisor. e.g. if you can only take 5 days off – decide what you will do so that anticipation alone can help tide over any humdrum.