Early Retirement Extreme: Can You Really Retire in 5 Years?

early retirementHow long do you need to work to retire? Fifty years? Forty? On the contrary, you may actually be able to retire in only five years.

This is the message of Jacob Lund Fisker, who wrote the book, Early Retirement Extreme (ERE). His self-styled movement began back in 2007, and some of its followers are already beginning to retire. It is an interesting concept – but not everyone buys into it. Before you start preparing for your early retirement, it’s important to understand the concept, the pros, and the cons.

Early Retirement Extreme: The Concept

Although Jacob has recently said he regrets using the term “early retirement extreme,” his ideas are truly extreme from the perspective of most people. The idea is that anyone earning virtually any level of income in the developed world can retire in just a few years if they follow three simple concepts:

1. Cut Down on Spending
While many people can be called “frugal,” Jacob is on a different level, living on only $7,000 per year. How? He never eats out at restaurants, lives in a very inexpensive home, and splits the expenses evenly with his wife. Additionally, he grows some of his own food using a home garden, makes some of his own furniture, and is addicted to getting free stuff from sources like Freecycle.

Jacob recommends other ways of cutting down costs, like borrowing books, music, and movies from the library, and learning how to take advantage of “loss leaders” at grocery stores. Of course, there are other ways to cut your spending and still have fun.

None these concepts are very new or Earth-shattering – many college students apply a number of these methods to save money. However, while society expects people to live like this until they graduate and get a job, Jacob suggests extending the student lifestyle a little longer.

2. Save as Much as Possible
How much of your income do you save for retirement? According to Jacob, it’s not enough. In fact, he points out that the more of your income you save for retirement, the faster you can retire. By living cheaply and making as much money as possible, someone can easily retire much faster than they could otherwise, both because they will have more money and because they require less money to sustain their current lifestyle.

Someone who saves 10% of their income needs to work nine years to save enough for one year of expenses. Someone who saves 90% of their income needs to work one year to save enough for nine years of expenses. Clearly, the more one saves, the more time one has. This works both by cutting down spending and by increasing savings.

3. Transform Savings Into Passive Income
To stretch savings, you need to invest and earn some kind of yield on your money. There are many ways to do this: the stock market, bonds, lending money to people, or buying real estate. It doesn’t really matter how you invest your money, as long as you take the time to learn how to invest, invest smart, and average a positive annual return.

you may be able to retire much earlier than you think

The Math

The math behind the concept is very easy. Mainstream experts say that workers should save 15% of their income for retirement. If you earn $50,000 per year straight out of college at 23 and retire at 65, you’ll end up with a little more than a million dollars in your retirement account, assuming you get a 5% annual rate of return.

Jacob pushes the math to its logical conclusion. If it takes saving 15% for the 42 years between graduation and retirement to pay for your post-retirement expenses, you can shorten the amount of time it takes to build that retirement nest egg by cutting expenses and raising your savings rate.

If you earn $50,000 out of college and save 85% of your income instead of the standard 15%, you may end up with a big enough nest egg to retire before 30.

Again, assuming a 5% annual rate of return, the nest egg will be worth about $289,000 in six years. While this isn’t quite a million dollars, it is enough to sustain the your lifestyle as a retiree. Because you’ve lowered expenses to 20% of income ($50,000 multiplied by 0.2 equals $10,000 per year), you need substantially less money to afford retirement, and this nest egg should last for the rest of your life.

This is true for two reasons. Firstly, your expenses are so low that you need to withdraw only 3.5% of your $289,000 nest egg every year – this money will last as long as you earn a real rate of return over 3.5% plus the rate of inflation. While that may be difficult if money is invested in treasury bonds at today’s historically low rates, that rate of return isn’t impossible for people who know how to invest in real estate, stocks, municipal bonds, corporate bonds, and other more risky investments.

It is easy to see how a mixture of aggressive cost-cutting and savings translates into an extremely early retirement.This might just sound like common sense – and it is – but the ERE movement points out that the most disciplined and committed penny-pinchers can apply these three concepts to retire well before the age of 30.

learn to pinch your pennies


The book that Fisker has written has been pretty well received by a niche following (having sold more than 7,500 copies), although it’s unlikely that the lifestyle he advocates will be embraced by many. There are a number of controversies that detractors are quick to point out.

1. Quality of Life Can Be Lowered
The first question that many people ask is: Why would you want to live on $7,000 per year? Jacob answers this question at length in his book, which outlines not only the math behind his retirement strategy, but also the philosophy as to why this is a desirable lifestyle.

Not only does Jacob advocate delaying larger purchases, he suggests rethinking why we need to make larger purchases in the first place. In addition to extreme savings, Jacob recommends that a simpler lifestyle where needs are satisfied in ways besides spending money ultimately creates greater happiness.

Some might disagree with some of Jacob’s cost-cutting philosophy. For example, he recommends learning to live without air conditioning, stating in his book that the body can adapt to extreme temperatures, which many may find ridiculous and not worth the savings. However, it’s difficult to argue with the idea that a lifetime of true financial independence is extremely valuable – perhaps more valuable than having a big house, a fancy car, and a lot of pricey dinners in trendy restaurants in your twenties.

Others have criticized Jacob for misusing the word retirement. To them, living on such a small amount of money is a life of poverty and not retirement. To many, this may ring true, but it doesn’t affect the math: If you want a better lifestyle, a 60% savings rate will require about 13 years of work, or a 50% savings rate will require about 20 years of work.

2. You May Have to Return to Work
Jacob began saving in 2000, and in 2009, he retired. However, at the end of 2011, he reentered the workforce as a professional investor, stating that his early retirement gave him the opportunity to do what he wants, and now what he wants is to work: “Financial independence allows you to do what you want whether that’s travel, raising children, saving the world, or playing golf. That’s what’s important.”

3. Your Return on Investments May Take a Hit
Another concern many have is that it is almost impossible to sustain a rate of return that covers inflation and living expenses for such a long period of time. Someone who retires before 30 might need to make that nest egg last 60 years or more. Critics have pointed out that if you need to withdraw some of your portfolio during a year when your investments have had a negative return, your savings will be devastated.

4. Children Are Not Accounted For
People also point out that children are one of a family’s largest expenses. Jacob suggests keeping the costs of raising a child down by not giving them an allowance, encouraging them to save whatever money they get as gifts, buying children’s clothes at thrift stores, and encouraging them to go to a state school instead of an expensive private university.

5. Health Insurance Costs May Be Out of Reach
When it comes to health insurance, Jacob recommends a high-deductible HSA-compatible plan to cover expensive medical emergencies. He also suggests maxing out contributions to an HSA until the account covers the high deductible on the plan.

These plans are much cheaper than most on the market, since they cover much less, and even Jacob admits this is imperfect, since such plans do not help people in their extreme old age stay alive or cover the needs of people with chronic illnesses, such as diabetes. The health insurance issue lingers as the biggest unresolved flaw in the early retirement extreme movement, and changes to healthcare legislation may change the costs and needs for health insurance in America, making this even harder to account for in an ERE plan.

saving money for early retirement

Final Word

Even for those who don’t follow the ERE philosophy, the movement is a healthy reminder that we trade our time for our money, and we don’t have to trade as much as mainstream society tells us. If you want to retire sooner, you can – as long as you’re willing to make some sacrifices along the way. Since the principal is mathematical in nature, anyone can choose to save 50% of their income, or 90%, or any amount they want while choosing which expenses to cut and maintaining the lifestyle they desire.

Would you consider living on $7,000 per year if you could retire now?

  • John Galt

    Jacob is the man. So many people I’ve suggested it to dismiss it immediately rather than even consider ANY of his suggestions. My guess is that in the next 10-15 years many will be forced into such a lifestyle… which will be much more painful than if they’d chosen it willingly.

  • Publius

    At the current real rate of inflation, which ShadowStats estimates at over 9%, this sort of moongazing is idiotic. $7k is below the current definition of poverty, although I note that he shares his poverty with his employed wife. One can certainly live on that wiith multiple government entitlements, and that may be his point.. .Bringing a child into that sort of environment would be ridiculous, unless he is figuring assistance with that part as well. It would still be horrific for the kid(s), nevertheless.

    That much said, while my husband and I earn far more than the above model currently, we have already cut our expenses to the minimum. We never eat out anymore, and I buy a good bit of the few things I need at thrift shops now. Most of our household purchases are done at Costco, with the few remaining done at Whole Foods. On those rare occasions when we take a brief vacation, we try to find a friend who will accept us. We have one kid left in school, out of four (from two marriages). We live in the DC area, and are among the top 2% in income, and have no debt. Property and income taxes are killing us, as well as retirement savings, and inflation. And that is with 40-plus years of heavy retirement savings.

    • greg

      “Bringing a child into that sort of environment would be ridiculous, unless he is figuring assistance with that part as well. It would still be horrific for the kid(s), nevertheless.”

      What about time spent with kids? Two stay-at-home parents can do wonders for a kid. I would suggest that’s more important than taking the kid out for mexican food all the time. I would personally spend much more than Jacob would, but I think focusing on freedom and letting parents spend more time with kids is very important. Clearly we’re all different. Most people in the US choose to have a job, drive a car and eat out to spending time with their children.

      • Joker

        that’s not true, but it sound good in you statement

      • yay

        Exactly. Two stay at home parents CAN do wonders. Kids don’t cost much AT ALL, (aside from health insurance haha).
        Thrift stores are a gold mine. I can get a bag full of clothes for $3. Cut ’em up and sew ’em into stuffed toys, new clothes, socks, blankies, etc. The list goes on.
        As for food, learn how to cook! Using the rawest food items possible.

        Processed food is a costly disgrace.
        Eating out = food poisoning.
        Someone else handling my food like that…I don’t know, I’ve never been much for eating out. Too gross.

    • Tamara Roberson

      @Publius wrote: “At the current real rate of inflation, which ShadowStats estimates at over 9%, this sort of moongazing is idiotic.”

      Now, this may be true — is ERE sustainable? Early Retirement doesn’t mean never working for money ever again, certainly side hustles can beat inflation and get you cash for whatever wishlist item you have in mind. You don’t have to make stocks and bonds your *only* source of income.

      Anyway, lifestyle inflation is *far* more damaging financially than monetary inflation. People can make six figures and *still* be massively in debt and even go bankrupt because they suffer from lifestyle inflation.


      @Publius wrote: “$7k is below the current definition of poverty”

      And? It’s still much more than most of the world makes. American poverty isn’t very impoverished. You use ShadowStats because you don’t trust the current government definition of inflation but you trust the current government definition of “poverty?” My standards of living are my own, I don’t have to abide by the government’s definitions.


      @Publius wrote: “although I note that he shares his poverty with his employed wife. One can certainly live on that wiith multiple government entitlements, and that may be his point.”

      I don’t think Jacob has admitted to receiving any government assistance nor do I know if he would be qualified to receive them. But it’s not about him and his own personal situation, it’s about lifestyle choice — choosing time over stuff. We trade our time and energy for money and we spend that money on stuff. Some of us would rather have time and energy to pursue what we want to pursue in life rather than the latest iPad. How many years do you want to spend working so you can have a fancy contract smartphone with unlimited LTE data? That may seem important to you when you’re 25, it seems less important when you’re 65. Less stuff means less of a wasted life.

      You can argue about Jacob’s particular situation or about the definition of “retirement” but Financial independence / Early Retirement, whatever you want to call it, is not about living off of government assistance so you can watch TV all day. It’s about breaking out of the 9-5 (or 8-6+, in reality) so you can pursue your own dreams instead of working for someone else so they can live off of you while they watch TV all day.

      In fact, none of the frugality bloggers in general that I know of admit to living off of food stamps or other forms of government assistance or charity. I don’t fault people who end up receiving charity or assistance because they’re in a bad situation and their independent ideals take a backseat to keeping body and soul together until they can find another job but I don’t know of anyone who seriously advocates intentionally living off of the government as a means of achieving financial independence (in fact, that would be contrary to the very ideal of financial independence). In fact, the financial planning / frugality bloggers that I’ve read donate heavily to food banks and other charities (in fact, some extreme couponers simply donate the vast majority of their hauls as their way of playing Robin Hood).


      @Publius wrote: “Bringing a child into that sort of environment would be ridiculous, unless he is figuring assistance with that part as well. It would still be horrific for the kid(s), nevertheless.”

      The vast majority of the world lives on less than this. Are you one of those who thinks that the world would be better off if poor people just stopped having kids? Billions of people have been having kids for thousands and thousands of years without the wasteful luxuries of 21st century middle- and upper-class America. Your statement is the one that is ridiculous. I think that kids growing up believing that food comes in boxes from the grocery store and that the purpose of life is to have ever bigger and better toys is horrific.


    Just buy stock in who ever Obama Pardons when he looses before he goes to China for his new Great Wall Library they are going to build on the great wall with the ATM MACHINE.

  • http://www.facebook.com/mary.spencer.96 Mary Spencer

    He stayed in the US but there are many places overseas that you can go to that would allow you to live extremely well on $7000 a year. Maybe even less.

  • http://www.facebook.com/nesserday Denise Day

    Along with growing my own healthy, organic vegetables, I went on a diet as well as resuming coupon clipping. I stopped going to the doctor as much as I once did and started walking every day. I drug out my sewing machine and worked on my clothes instead of buying new. “Out of desperation comes innovation.” I don’t know about you, but if I can figure out how to cover my healthcare costs, I’m retiring at 62. I’m tired of working for minimum wages.

  • Guest

    For less “extreme” early retirement, see Mr. Money Mustache (www.mrmoneymustache.com)

  • Bill

    This is so stupid on so many levels. Its like choosing to be on the survival TV show without every getting off the island. No thanks!

  • http://goldiraprimer.com/ Bob

    These days, it’s probably much easier to reduce spending in order to increase savings, especially when you consider the spending is with after-tax dollars. However, on the savings side of the equation, with Mr. Bernanke’s effective 0% ( or less) real interest rate, finding secure investments with a reasonable ROI is difficult.

    I do agree with some of the other posters that we may be forced into a frugal lifestyle by the upcoming financial meltdown which seems inevitable after years of quantitative easing.

  • Tamara Roberson

    It’s absolutely possible to live on $7000/yr, especially if you don’t pay rent / have a mortgage. It’s pretty much called being poor. The only real difference between what poor people do every day and ERE is that ERE folk make $50k+ a year instead of $15k and sock away the difference.

    Even people like me who only make $10/hr and $15k/yr (net 2013: about $13k, including tax returns) aren’t really poor, not if you consider global poverty. I’m sitting here on a computer that I own in a decent house, I don’t run the risk of starving to death (in fact, I have so much food sometimes it goes bad before I get around to eating it), I have a stove, running water and decent clothing, a fair-sized library, way too many movies, and I even own a luxury car (paid in cash). Yes, if I had children (especially if I was a single mother of two or more children) I might be in a worse situation and have to rely on charity or government assistance but I can look around my room and see how much excess I have.

    So I would hope that if I made $60k/yr instead of $15k, I could live like I do now instead of blowing the other $45k on even more junk I don’t need. I could just live simply and every year would provide four years’ worth of expenses. So if I could save for 10 years, I would not have to worry about needing to work the rest of my life (and that’s not counting investment returns, just cash under the mattress). What would I do with the rest of my life? Creative pursuits — some for-profit, some not-for-profit. Some people say they’d like to travel the world but I’d rather spend the time building my own house and developing a homestead (I’m just a homebody).

    So it’s fairly easy to live on $7000/yr, many people do it and they’re not all living in shanty towns or the projects. It’s about lowering your ideas about what is necessary and what is excessive but you can live a fairly comfortable life. I’m not sure that ERE can be achieved by low-income folk like myself but I certainly wouldn’t mind giving it a shot! People can live paycheck-to-paycheck (and drown in debt) while making more than $50k/yr if they don’t get their finances straight and people can live in relative luxury debt-free and socking away money while making $15k/yr if they have things in order.

  • Marion Rose

    Thanks for inspiration! Although I live in Europe, where people rely on public systems for their pensions and they don’t save for retirement, they retire at age 67 with new legislations. It’s great to have freedom to do whatever you desire and not to run in the ratrace.

  • Ryan Miller

    I’m a teacher, I’ll get to 50k per year after at least 10 years in the work force. How sweet it’d be to get 50k right out of college, but there’s slim to no chance of that in my profession. I’ve been working for 5 years, I make 38k a year, plus student loans to pay for my masters degree which is required in NYS in order to be a teacher, and make 38k a year.