How does being rich change your life?

Buying islands aside, how does being rich change your life?

Paul Graham, not depicted in the photo to the left, the founder of Y Combinator [AJC: the incubator for famous internet startups such as Drop Box and AirBnB …. if you have to ask what these are, you are over 30] says this (when asked “how did your life change after FU money?”):

There are some things that change. For example, you learn to distinguish problems that can be solved with money from those that can’t. You can buy your way out of a lot of schleps.

Life doesn’t get an order of magnitude more enjoyable, because you still can’t buy your way out of the most serious types of problems, but a lot of annoyances are removed.

The best part is what I thought would be the best part: not having to worry about money. Before Viaweb I’d been living pretty hand to mouth, doing occasional consulting. It felt like treading water, in the sense that while it wasn’t hard, I knew in the back of my mind that I’d drown if I stopped. Getting rich felt like reaching the shore.

One thing you learn when you get rich, though, is how few of your problems were caused by not being rich. When you can do whatever you want, you get a variant of the terror induced by the proverbial blank page. There are a lot of people who think the thing stopping them from writing that great novel they plan to write is the fact that their job takes up all their time. In fact what’s stopping 99% of them is that writing novels is hard. When the job goes away, they see how hard.

I can relate to this on a number of levels:

Firstly, you can buy yourself out of what Paul calls “schlepps” and what I will simply call “annoyances”.

The pool dirty? Call The Pool Guy.

Something broken around the house? Call the handyman.

Can’t be bothered cooking? Eat out … expensively. In fact, never eat a cheap steak again.

But, you can’t solve personal problems (of the really personal kind) or health problems with money … you, of course, can afford to treat them a little (or a lot) quicker/better than before.

But, what I’ve found is that your major problems become about money: how to stop losing it; how to make it last; how not to be cheated out of it; how to invest it … and, so on.

I’m not not sure if there’s a bigger Number, where even some of these problems go away …

… if there is, I’m guessing it’s well-north of $10m.

I can sympathize with Paul on the book thing: it’s hard to write and publish one. Just ask Debbie, my coauthor [AJC: ours is finally coming out … soon].

But, the question remains: what exactly is FU money?

Well, a LOT more than you think!

Here’s what David S Rose, a well-known ‘super’ angel investor in Silicon Valley, says:

Being a millionaire ain’t what it used to be :-).

In thinking about net worth, it’s helpful to consider everything using a common denominator, such as your potential annual income based on the return that the wealth could theoretically generate. (Because otherwise, if you start spending your principal, you won’t be a millionaire very long.)

So, for example, a million dollars put into the safest CD you could find, might, if you were lucky, generate 1.5% interest each year… which is $15,000!

Even if you had, say, $5 million, and were willing to take a fair bit of risk and put it all in the stock market where it might (with real luck) generate 4% annually, you’d still be making “only” $200,000 a year. Take out taxes (being generous, let’s use the 20% rate at which Obama paid) and you’re at $160k.

That’s enough to rent a nice apartment (or pay the mortgage on, say, a +/-$1m house), take a nice vacation each year, and probably pay private school tuition for one or two kids… but you’re certainly not going to be flying your own Gulfstream with only $5 million.

Next, if we skip over the run-of-the-mill deca-millionaires and jump to someone with $100 million in assets, NOW for the first time are we just getting to the point where you have a good bit of flexibility.

Assume that with this kind of cash you begin to have access to some good hedge and venture funds, so maybe you’ll be able to consistently get 8% on your money. And now that you’re in the privileged class, we’ll figure you can match Mitt Romney’s 13% tax rate. This means you’ll net out to about $7 million disposable income annually.

At this level you can do pretty much anything you’d reasonably want. Pay the mortgage on a $10m mansion as well as a $5m summer place in the Hamptons, put four kids through Ivy League colleges, fly first class anywhere you’d like, make half a dozen angel investments at $250K each, eat out every night at five star restaurants, vacation on the Riviera, and have a full-time cook, butler, nanny and chauffeur. I expect you’d even tithe $1m annually to good causes, which probably gets you named Man of the Year for a big local charity.

All in all, not a bad place to be! But still no Gulfstream, no $35 million penthouse in midtown Manhattan, no building named after you at your alma mater, no mega-yacht docked outside your Riviera estate, no getting Justin Bieber for your daughter’s quinceanera, no 24/7 security detail like the President, no executive-producer credit on Avengers 2, no invitation to the Allen & Co retreat, no mega-trophy-spouse.

All that needs to wait until you get your first billion and put it to work.

Here we’ll assume that with enough portfolio diversification you’ll finally hit a Google or LinkedIn, and be able to comfortably plan on >10% annual returns from your professionally-managed holdings. And since you’re now an oligarch, let’s say that your hardworking gnomes will figure out how you can limit your taxes to the same <10% that will likely surface once Mitt releases his older returns.

This means you’ll now have close to $100 million a year after taxes, and FINALLY you can afford all those things you’ve always dreamed of! While you might not be able to pull off in the same year BOTH the $85 million pièd a terre in Manhattan that Russian guy bought for his daughter, AND the $150 million megayacht of the Sultan of Dubai, you’ll be in pretty good shape.

However, those constraints DO make a difference when you’re playing in the big leagues, so figure that you’ll have to step up to the next category, before there really are NO practical limits to what you can do and how you can live.

Once you get above the $10 billion level, all is good, and you can both help change the world (viz. Bill Gates) AND indulge yourself in any way you desire (viz. Larry Ellison and various sultans). From this point on, it’s simply a matter of score-keeping in the great Monopoly Game of Life. You’ll need to decide for yourself how important your place on the Forbes list is, and whether you care about your standing relative to Mark Zuckerberg ($10 billion), Michael Bloomberg ($22 billion), David Koch ($25 billion) or Warren Buffett ($44 billion).

Some of David’s points are spot-on: for example, retiring today with $1m nets you $15k (to $40k, in case you’d rather believe the financial planners who advocate a 4% ‘safe’ withdrawal rate than David) …

… retiring in 20 years with $1m is poverty level (roughly halve whatever number you believed, above, because of the eroding effect of inflation).

And, I can’t talk about anything more than $7m.

But, at that level, I can certainly agree with David that it buys me a (very) nice house and I certainly can afford to “take a nice vacation [or two] each year, and [definitely] pay private school tuition for one or two kids”.

But, is that FU money?

I certainly don’t feel that way …

… I still have ‘money worries’ of the kinds that I listed, above.

But that just may be the syndrome that Spectrum (a Chicago-based consultancy that specializes in understanding the High Net Worth individual and family) found when they surveyed a number of people whose net worth was in the $1m, $5mill, and $25m+ ranges about how much money that they would need in order to feel wealthy.

Almost invariably, the answer was: “about double”.

Hmmm …. 😉



How rich do you need to be before you can buy an island?

Normally, I avoid answering questions outside of my personal experience, so you should be able to surmise that you need more than $7 million before it makes sense to buy your own slice of paradise.

Instead, I feel that a little logic and a minute or two with a calculator will allow us to come up with a reasonable estimate:

First, let’s take a look at how much an island will set you back …

… I’m not talking something that Richard Branson might buy; perhaps something like Blue Heaven Island in Bora Bora, which will ‘only’ set you back a tropical $4,990,000!

But, buying an island is not as simple as having $5m; take it from Mike, who says:

When you are in the middle of the ocean, separated from the nearest stores, schools, and hospitals, the price can reflect that. Also, to get to and from your island requires an expensive boat.

Wise words; maybe ‘Mike’ has bought an island or two, in his time?

So, it seems, to be able to buy a “decent island” you need to have enough net wealth to cover:

1. The cost of the island

2. It’s annual running costs

3. The cost of your own home

4. Your own annual (non-island) living costs

There’s no way to answer these questions accurately without making a whole host of assumptions, but I’ll take a stab, anyway:

i) If an island costs $5m, then the annual running costs should be estimated at between 10% and 20% of the purchase price. This is purely an educated guess. Let’s say $750k p.a.

ii) If you own a $5m island, I’m guessing that your own home/s will cost the same, let’s say another $5m

iii) If you can afford a $5m home and island, I would estimate that your minimum annual living costs will be another $500k – $1m p.a. Let’s say another $750k p.a.

Applying our Rule of 20 (i.e. you can retire when you have about 20 times your required annual living expenses in the bank) you will need ($750k + $750k) x 20 = $30 mill. (PLUS: $10m for the purchase price of your island plus your home/s).

There you have it:

I think you need at least $40m net worth before even considering buying a ‘cheap’ island.

I won’t be buying an island anytime soon, how about you?

The biggest mistake in commercial real-estate …

You might pay too much for commercial real-estate, but it will probably still bring in a reasonable return.

You might forget to look into the taxes and take an extra few years for the ratchet clauses in your leases to catch up.

You might find that the tin roof leaks, but it should only cost you $’000’s to fix and time and tax deductions (and rental increases) will help to catch up on that.

No. The biggest mistake in commercial real-estate is the one that Tyler is about to make:

I’ve been thinking quite a bit about commercial real estate lately, but have been so discouraged with all of the vacant properties in my area (and I am a bit skittish about looking outside my area, as I don’t like buying something I’ve never seen in person). My residential properties, though, have been consistently producing income in both good times and bad.

With the vacancies, compressing cap rates, and the headaches of financing, maybe it’s just not the right time to jump into the commercial space.

Where’s the mistake?

After all, Tyler has identified a cyclical low point in the market … the sort of market that Warren Buffett salivates over:

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

But, Warren is talking about public markets.

These are the kind of markets that are driven by short-term investor sentiment i.e. the stock market.

When the market is ‘down’, it usually corrects to a long-term mean of an 11% pre-tax return [AJC: it remains to be seen what will happen with the current down market, but it’s only a matter of time – who knows how long – before it corrects].

So, then the market is fearful – and, stock prices drop – Warren jumps in, knowing full-well that (sooner or later) things will correct themselves and he’ll be sitting on windfall gains.

That accounts for 30% or 40% (my estimate) of his $40b fortune …

…. it’s the other part – the major part – of his fortune that holds the real lesson for Tyler:

You see, what most people don’t realize is that Warren Buffett is actually a business owner.

The main purpose of Berkshire Hathaway (Warren Buffett’s company) is to buy operating businesses. Here, he doesn’t look for short-term, contrarianism …. he simply looks for solid businesses that have been around for a long time already, and will be around for another 100 years.

And, he buys them, if he can get a discount to what he believes is fair market value. The bigger the discount, the more likely he is to buy.

[AJC: contrary to popular belief, Warren doesn’t just buy bargains … he creates them! For example, he bought Sees Candy for $30m when he thought it was only worth $25m at most. However, it was Warren and his team who turned it into a multi-billion dollar business, making it a bargain at any original purchase price]

And, Tyler, if residential real-estate is like speculating in stock (it is), then commercial real-estate is exactly like buying a business …

… and, what’s the biggest risk if you own a business?

It’s simply that you will lose customers!

No customers, no sales. No sales, no revenue. No revenue, no profit. No profit, and you go broke 🙁

It’s much the same with commercial real-estate:

Your biggest risk is the risk of vacancy.

It can take a long time to find a tenant in commercial real-estate: businesses simply do not expand, contract, or move as often as a family looking to, say, upsize their home.

And, that’s also the attraction: once you have a commercial tenant, they tend to stick around.

So, Tyler, even though bargains no doubt abound in your area, it looks like you, too, may struggle to find a tenant.

Either look farther afield, or stick to residential R/E until you see signs of improvement in vacancy rates for the specific type/s of commercial R/E that you are interested in.

Alternatively, find a tenant first (make friends with the rental realtors in your area) then buy a building to suit. Or, knock on the doors of all the businesses in your area and see who wants to upsize and find/buy the building for them.

Another strategy, when talking to the business owners in your area, is to find the ones who own their own buildings and see who wants to “sell and lease back” to free up some additional cash for their business.

Any way you look at it, for success in commercial real-estate, the tenant is king.

An interview with AJC …

I’ve created a new Facebook Group called 7million7years

Feel free to join! It’s where all of us can ask and answer questions about personal finance … ask anything you like, and see who responds; sometimes, I’ll weigh in, as well!


Here’s an interview that I did a while back for the nice folks at Spectrem Group (a research company specializing in the ultra high net worth market). It was quite ironic that they asked me to do this interview, because I called their book the most dangerous idea in retirement planning that I have ever read!

Still, for new readers, this interview is a great overview of who I am and why I write this blog (as well as what you can expect, if you choose to stick with me):


What is your financial goal? Adrian J. Cartwood (a nom de plume) had one: $5 million in five years. He didn’t quite make it. But he did make $7 million in seven years and he writes about it in his blog of the same name. His is the sort of self-directed, out-of-debt story that makes for lively posts. Cartwood lives in Australia and he communicated via email with Millionaire Corner about his hard-earned success. What inspired you to start your blog?

Adrian J. Cartwood: I inherited a failing family business, and I was $30K in debt. During this time, in 1998, I found what I like to call my “Life’s Purpose,” or “Life after Work”. Others call this retirement, but who wants to wait until they’re 65 to start living their passion? So, I calculated my “number,” that is how much I would need in the bank to stop working in five years instead of 20 or 40. That number was a very scary $5 million.


Five million dollars in five years seems like an impossible target, especially when you’re starting $30k behind the 8-ball, so I started reading every single personal finance book that I could get my hands on. What I quickly realized is that they are mostly written by people who became rich because they wrote a book about how to get rich. Needless to say they were mostly full of rubbish. So, I found another one of my passions! It was, and remains, to be the first true multi-millionaire to write about personal finance, hence the blog.


MC: When did you launch your blog? How many visitors does it get?

AC: Three years ago. I don’t do any advertising, marketing, or promotion for my blog at all. I’m not even sure how you found me! Yet, in the time that I’ve been writing it, I’ve somehow built a dedicated audience in the thousands who seem to read it every day. I hope to never disappoint them.


MC: For whom is your blog intended?

AC: This is an excellent question because I often get comments from new readers who say “Well, my 401k is company matched, so it’s a great investment.” Sure it is, but it won’t make them rich. So my blog is specifically targeted to people like me who want to stop full-time work to pursue their passion, be it writing a novel, traveling, researching great wines, volunteering, whatever. The kicker is, when they calculate their own “number”- how much they will need in passive investments to support them, it’s inevitably something like $2 million in 6 years. If you run their starting position (say $100,000) through any simple online compound growth rate calculator, as I encourage my readers to do, they quickly see that they need to achieve a 65% compound growth on their investments. Given that their 401k can’t achieve more than 8% over 40 years, it’s clear that they need somebody to teach them how to become rich. That narrows down my readership to those who have done the same kind of self-reflection that I did seven years ago and realize that they actually need to become rich.


MC: What do most hope your readers get out of it?

AC: I hope that my new readers realize that they should evaluate their lives and see if what they are currently doing is going to truly satisfy them. If so, don’t change anything. But, for those who need more out of life, I hope that they walk away with the tools to evaluate what they truly want to do with their lives, how much money they will need (and by when), and the real personal financial steps that they need to take to bridge the gap … quickly. It’s not about getting rich quick. But it is about getting richer, quicker.


MC: For those unfamiliar with your blog, what are some representative posts?


I like this one, because it encourages you to start thinking externally rather than internally, which is the first step to financial freedom:

This one shows that where you invest your money is more important than how much you put aside each week or month:


MC:  Did you grow up in a financially literate household? Did your parents discuss money matters with you?

AC: I grew up in a poor household. The rest of my family grew up in a rich one. The trouble was it was the same house! You see, my father lived beyond his means, but I was the only other male in the family, so he only confided his true financial situation in me. Therefore I grew up paying for all of my own clothes, cars, and so on. The rest of my family still lives on handouts from richer relatives.


That knowledge taught me financial responsibility, but it didn’t teach me how to make money. That came from my $7 million/7 year journey. Naturally, I taught my own children about money. My son is a natural entrepreneur, my daughter is more social, but both know how to save and how to spend responsibly.


MC: What books or financial pundits, if any, influenced you/

AC: Rich Dad, Poor Dad by Robert Kiyosaki and The E-Myth Revisited by Michael Gerber. The first is about money and the second about business.


MC: How did you get started in investing?

AC: My very first investment was an apartment that I bought soon after college because a friend of mine was buying one in the same block. I knew nothing other than to copy him. I sold it a couple of years later to pay for a trip overseas. It’s safe to say that was not the start of my financial journey. When my financial wake-up call arrived seven years ago, I made my first real real-estate investment. Like most people, I knew that I wanted to invest in real-estate but I had no idea how.


One day I was driving around my neighborhood and saw a ‘For Sale’ sign on a condo in an older block of 12. There was an auction just about to start.  I figured that not many people would know about it because the sign was by an out-of-town agent, so I stopped to check it out.


My next problem was that I had literally no idea of how much to pay. But, I saw a young guy in a tradesman’s outfit measuring doors and windows and so on. I guessed that he was planning to buy it for himself, fix it up and flip it. I decided to bid against him and pay $1 more. I figured that if he was looking to take a quick profit that he would be operating on a tight budget, and that I could then afford to pay just that little bit more to buy and hold.


And, that’s what happened. I found myself as the winning bidder for a property that I had never been in before. I had to call my wife (who was not pleased) to rush over with my checkbook. We still own that condo today and it has been a star performer.
MC: What are some of the defining lessons you learned when you first started out?

AC: You can’t save your way to wealth. Running some simple numbers through that online calculator quickly showed me that my 401(k) would never be able to fund my retirement even if I waited until 65. Investment returns from mutual funds are simply too low and fees are too high, not to mention inflation eats up half of everything every 20 years. I realized that I would need to create my own perpetual money machine by taking as much income as I could put aside and invest it in assets that I could borrow against (so that I could buy more), but still had enough income to cover the costs of owning those assets. Real-estate (and, to a lesser extent a small portfolio of hand-picked stocks) could fit the bill. I also learned that starting a business is the best way to increase income. More income means more investments and more investments means more real wealth.


MC: What are some of the most common mistakes investors make?

AC: The most common and costly mistake is confusing good and bad debt with cheap and expensive debt. Because so many people have trapped themselves into bad credit card debt, which they should pay off as quickly as possible because it’s just so expensive, they have been lead to believe by so many financial pundits that they should pay off all of their debt, including their mortgages. For most people, this is actually a mistake.


Instead they should pay off expensive debt (such as credit cards, and auto loans) as quickly as possible. But, as soon as their remaining loans are at a lower rate than the cost of an investment loan (such as you might get to buy an investment property), why pay it off just to take out a bigger, more expensive investment loan?


The second mistake is thinking that your house is an investment: it’s not. The chances are that you will never be able to sell that house, even when you retire. Retirees plan on selling their big houses but they rarely move into a small, two bedroom condo. They realize that they either don’t want to move, or they want to stay close to their children, or move into an expensive retirement community. That and the moving costs (plus, are you going to move old furniture into a nice, new condo?) mean that they pocket a lot less than they thought. Suddenly, there’s a huge hole in their retirement budget.


MC: What is the most common question you are asked?

AC: Mostly, people ask me how I became rich. I tell them on my blog because it’s something that anybody can do.


That’s the interview! What did you think?

When to buy residential real-estate …

Prior to 2008 in the USA, and still in many other countries (including Australia), residential real-estate, along with managed funds, had become one of the most favored forms of personal investment …

… one could say the opiate of the masses, as evidenced by the huge rise and fall of residential real estate (and stock market) values across the USA in 2008 and beyond.

Jackie L, cleverly likens investing in real-estate to doing leveraged buyouts in the world of business:

Housing is generally a poor asset class. Housing’s like a leveraged buyout. You put in a little equity up front and fund the rest of the purchase with debt. The real value from housing comes when you sell the property or refinance because you’ve increased your proportion of equity ownership through mortgage payments.

The idea of creating leverage (by borrowing) in residential real-estate investments, though, isn’t so that you can pay it down (which would merely de-leverage yourself, so why do it?), it’s so that you can grab a larger chunk of upside.

You see, the promise of residential real-estate is alluring: You buy a $100k condo with $70k of the bank’s money and $30k of yours. In 10 years, the property doubles in value and you sell it for $200k, giving the bank back its $70k and pocketing $130k for yourself.

You haven’t just doubled your money in 10 years (still a healthy 7.2% compounded return), you’ve actually grown your $30k investment into $130k (in just 10 years), which is an astounding 16% compounded annual return.

If you could keep this up for another 20 years, you would have built up a $2.3m fortune.

No wonder so many people see the allure in investing in residential real-estate … which, of course, lead to the boom leading up to 2008.

The reality is a little different:

On closer examination, you begin to realize that most residential real-estate investments aren’t cash-flow positive for many years, so you have to keep pumping cash in, and there are ongoing costs: mortgage payments, vacancies, taxes, repairs and maintenance, and so on, that your rents simply can’t cover – at least not for many years.

Even so, if residential real-estate doubles in value every 10 years, it’s probably still a great long-term investment.

But, and here is the second catch, in the current market most real-estate has dropped in value. And, in most ‘normal’ markets (i.e. over the history of recorded real-estate transactions in the USA), real-estate only tends to grow with inflation … which means it doubles every 20 years rather than 10.

So, this means that you need to find residential real-estate that will grow at about twice the rate of the average piece of US real-estate, which has been doable (at least until recently) for many, many years, and will most likely be doable again in the future.

In fact, now may be a great time to find those long-term ‘bargains’.

But, the problem remains: residential real-estate is not an investment.

You are gambling short-term losses on long-term price appreciation, therefore, purchasing residential real-estate (other than to live in) is speculation.

[AJC: Commercial real-estate is another matter entirely, as its current value is determined by its current and future ability to earn an income, as I explained in this post]

Yet, I own residential real-estate, quite a lot of it … why?

Well, there are two compelling reasons why I own – and why you should own – residential real-estate:

1. To live in

I like security of tenure; that means that nobody can throw me out of my house. My house is even paid off, so I don’t have to worry about what the market does to its value, but this is a luxury that you can’t afford: you should have no more than 20% of your net worth tied up in the value of your house.

Once you have reached your Number, go ahead and pay off your house. Enjoy!

But, the real reason why you should own your own home is that, for most people, it will be the only way that you ever get off the batter’s plate when it comes to investing.

2. To protect yourself

A down-market, like now, is a great time to buy residential real-estate. When you are retired – and, can pay cash – is another time.

The reason is simple: once you realize that you are NOT going to speculate … you are NOT going to buy in the hope of a future increase in value … you are NOT going to sell, ever …

… then, you buy for one reason and one reason only:

For protected rents.

What do I mean by ‘protected rents’?

Well, residential real-estate tends not to produce the same returns as other classes of investments; that means $100k invested, for example, in commercial real-estate will produce a better rent, with fewer outgoings (costs), hence better overall returns.

However, in a ‘down market’ – worse still, depression – businesses go under leaving commercial offices, warehouses, factories, and shops vacant. And, the stock market tanks.

But, people still need somewhere to live …

So, good residential real-estate will always deliver some income. Not always great, but always some. That’s why a good chunk (but, not all) of my net worth sits in residential real-estate and, as you get closer to ‘retirement’, so should yours.

And, because residential real-estate tends to increase in value at least in line with inflation (given a reasonable time horizon), your capital is largely ‘inflation protected’, so your children should be equally happy 😉

How to retire in 7 years …

For our new readers, let me ask:

How would you like not one, but two ways to retire in just 7 years?

But, I warn you, retiring in 7 years is not easy … or, everybody would be doing it. However, I promise you that it can be done, either my way or Jacob’s way [AJC: Jacob is the author of the controversial book Early Retirement Extreme and the blog of the same name].

I would suggest that Jacob is an outlier in the Personal Finance community because of the aptly named ‘extreme’ portion of his book’s/blog’s title. On the other hand, my method to early retirement is just as extreme … just the other extreme.

In fact, I’ve said before that Jacob and I pretty much book-end the spectrum of personal finance advice.

So, let’s take a look the two methods and find out why each method, in its own unique way, is so extreme:

Method 1 – Early Retirement Extreme

In his excellent review of Jacob’s book, Invest It Wisely summarizes Jacob’s reasoning for retiring early: so that you can explore “renaissance man” aspects of your life.

That is, ‘retire early’ so that you can become less job-specialized and explore wider, more varied options than you would if you were still tied to earning an income full-time.

In order to do that, Jacob advises taking drastic cost-cutting measures e.g. downsizing your home; lowering the thermostat in the winter and raising it in the summer; taking cold showers; downscaling to 1 car or even no car at all, and so on.

Now, that’s extreme!

There has to be a reason and a benefit to this … and, there is:

The reason for the extreme (there’s that word again) austerity plan is so that you can … Save at least 75% of your income.

The benefit of saving that super-sized chunk of your pay packet is that you may be able to effectively retire in just 7 years if you do. Here’s how it works:

Let’s say that you currently earn $50,000 after tax and want to retire in 7 years. Jacob suggests that you should save 75% of your income, this means in the first year you live off just $12,500 and save the rest.

Now, if your salary increases with inflation (let’s say 3% p.a.), and you can invest the money that you save (starting with $37,500 in the first year and increasing each year with inflation) at an 8% after-tax return (by no means easy in the current market), then you should be able to replace your then-current salary after just 7 years with your passive income from your $300k nest-egg’s investments.

There are two catches:

1. Your salary in the 7th year (hence, your starting retirement salary) will be just $14,700 a year (representing a 5% withdrawal rate on your $300k of savings). Given that you started by living on just $12,500 and can retire in 7 years, you should be able to live like a king (or queen) on nearly $15,000 p.a. And, if you find that you can’t survive on $15k a year, well, you’re probably still young enough to enjoy your extended holiday, go back to work, and start again!

2. Our numbers are quite bullish: there’s no investment that you should put your money into for only 7 years that will return 8% after tax. In fact, you would be extremely lucky to return more than 2% after tax, and really should be just keeping your money in CD’s or bonds which currently return just ~1% before tax.

Also, a 5% withdrawal rate is hardly safe; you have to make this money last much longer than normal retirees, since you are retiring so early. A Monte Carlo analysis shows that withdrawing just 3% of your now-required $600,000 nest-egg is probably already stretching it. The good/bad news is that you can still retire in a still-not-too-shabby 11 years, on just under $20,000 per year …

… but (because of inflation), that’s only worth $14k a year in today’s dollars when you retire.

Method 2 – Early Retirement Super-Extreme

Super-extreme early retirement means, to me, retiring in 7 years with $7 million. This means retiring on $350k a year.

Why $350k?

Is it really needed, especially since Jacob has shown that it’s possible for a couple to live on $12,500 a year?!

Strictly speaking, no.

But, since you can retire with $350,000 a year to spend (because I did), I say … why not?!

With $350,000 a year, you can definitely live the relaxed, varied lifestyle that Jacob suggests we should aspire to … just at a slightly different level to his suggested $12,500 / year lifestyle.

Cars? Have 2 …. heck, have 3 and make them imported (with at least one exotic).

Vacations? Twice a year … travel business class and make at least one of them international 5-Star.

Upsize your home? Sure … and, pay off the mortgage with cash.

Raise the thermostat in the winter and lower it in the summer? Sure (as long as your ‘green conscience’ can stand it).

Take loooong hot showers? Absolutely [WARNING: see ‘green conscience’, above]!

… and, so on.

So, how does one do this?

Well, the key is this ‘specialization’ thing that Jacob says that we need to avoid long-term:

I agree, but for the next 7 years you absolutely must specialize in increasing your income, and increasing your savings appropriately. However, unlike the ‘extreme savers’, you never reduce your lifestyle … instead, you just don’t increase it as much as your income increases:

– Save 10% of your income starting right now (or, build up to it over the next few months, if you have started by saving less)

– Save 50% of all future salary increases; all additional income (from businesses, second jobs); and even more for unexpected windfalls (e.g. lottery winning, inheritances, tax refunds, etc.).

Instead of cutting costs – and, saving – which are inherently limited (even Jacob can’t save more than 75% of his income) – concentrate on increasing your income because the sky’s the limit: start a second job; start a part-time business; start an online, part-time business (call it Facebook and the rest is easy).

Most of all, start investing … actively, aggressively, wisely.

Simply follow my patented two-step wealth generation system (it used to be 4-steps, but I cut it in half … so, now you have no excuses) … voila!

$7 million in 7 years.

There you have it: two methods of retiring young.

Choose the one method that appeals to you the most and, from today forwards, read the creator’s writings carefully, and ignore anything that you read that contradicts their advice …

… because every other method will have you enslaved for the next 20 to 40 years, with absolutely no guarantee as to what your retirement years may bring.

And, don’t let anybody tell you otherwise 🙂

Living to 100 …

First of all, let me tell you that living to 100 is not a blessing.

My grandmother just passed away. She made it to 12 days past 100 years.

In fact, the 100 was like the finishing line to a marathon for her; in Australia, you get a letter from the Queen.

She also got a letter from the Prime Minister, the Governor General, and her local member of parliament …

… and, a little party at the old people’s home where she resided, complete with party hats and balloons. Hurrah!

My Grandmother lead almost the whole family unscathed through the holocaust (she ‘only’ lost one brother, where most others lost their entire families) and emmigrated to Australia almost penniless where she (and, my grandfather … but, mainly she) did what most immigrants do: work hard, invest wisely, and slowly rebuild their fortunes.

She may not have made $7 million in 7 years, but she certainly made that much in 30 or 40 years, starting with nothing. I can’t see why anybody would settle for $1 million after a lifetime of work?

So, what have I learned from my grandmother’s experiences?

1. Living to 100 is not all it’s cracked up to be.

My grandmother’s brain was amazing, right up to the end.

When she got her letters, she immediately recalled our Prime Minister’s name as being Julia Gillard.  And, just a few weeks before her 100th, she was still doing mental arithmetic (“if you were only 85, how much longer to 100? I asked. Within a couple of seconds, my grannie answered “15 years”).

But, her body was not so good: the legs went first, then the teeth, and so on … she often told me that living to 100 is not all that great.

2. If you lose it all, get up and do it all over again.

My grandmother lived like a queen before World War II. He husband (my grandfather) was a banker in the small town in Poland where they lived. They also owned the local movie theater. My granny hadn’t worked a day in her life and had maids and servants. My grandfather never drove a car (he could afford a driver).

The war, and the Nazis, changed all of that. Coming to Australia destitute, my grandmother decided to start a business making neckties. Not only did she not have any money with which to start a business, she had never sewed a necktie in her life.

Instead, she took a job at a tie factory to try and learn how it was done and (after convincing the owner that she could, in fact, sew ties) she convinced a couple of the seamstresses there to make some sample ties for her after hours. Using those samples, my granny went door to door (shop to shop) signing orders for those ties.

3. Don’t ever convince yourself that you can’t ‘cold call’

If my grandmother – who had never worked a day in her life before and was a female at a time when all salesmen were … well … men – managed to do it, then so can me or you!

Once she had enough orders, she paid those same seamstresses a ‘per tie’ rate (it’s called “piece work”) to fill the orders. She then delivered the ties and used the money earned to start the process all over again …

… eventually, she had been through this cycle enough times to open a small factory and hire those “piece workers” away from their other factory job, and they stayed with her until my granny retired (she gave the business to her loyal staff).

4. Invest today so that you can live tomorrow.

Most people would take the money that they are earning from their businesses and start paying themselves a decent salary. My Grandmother wasn’t most people: instead, she would invest the profits from their business into real-estate.

Contrary to popular belief, most business people don’t become rich from their businesses (remember, my granny simply gave hers away); they become rich from the investments that they make using their business’ income.

My grandmother was no exception: she bought real-estate.

Not only did she buy real-estate, she also developed her own down-town property. To give you an idea what that may be worth, when he was 93 – and, living in the old people’s home – my grandmother sold another down-town property on behalf of her 3 other partners who were all as old as her.

The realtor told her that the property was worth $11 million. She said “rubbish” and managed to hold out for a better offer, which eventually came in at $18 million. Not bad for a half-deaf, bed-ridden 93 year old.

The corollary to this is something that I learned from my grandfather (but was relayed to me by my grandmother after he passed away many years ago): at one stage, my grandmother felt that they could finally afford to buy a house. My grandfather said: “You can always buy a house from a business. But, you can never buy a business from a house”.

All in all, the value of the life lessons that I learned from my grandmother were immeasurable … but, the business lessons that I learned from her shaped who I am as an investor, and an entrepreneur.

No doubt, I wouldn’t have made $7 million in 7 years without them, and I can finally share the ultimate source of my inspiration here with you.

The myth of consulting …

My wife is always trying to get me to do some consulting, but I just can’t see the point.

I used to do a bit of consulting, but I saw it as a capital-friendly business development opportunity:

Rather than pay to fly out to talk to people about my regular products or services, I repackaged my bus. dev. [read: sales] activities as a paid consulting gig (at the very least, business-class international travel and accomodation paid for).

It worked quite well and was quite nice while it lasted.

Now, my wife sees consulting as a way to get a paid holiday every now and then …

… but, I see it largely as a waste of time.

I also see it as largely a waste of time for those who aspire to consult as their major source of income:

I feel that the biggest mistake that aspiring consultants make (particularly those setting up as an independent consultant/speaker) is to OVER-ESTIMATE their earning potential.

I once posted about a friend of mine, having sold out of his own business, who decided to become a consultant to his particular industry … his earning expectation is $200k for his second year in the business.

I told him “it won’t happen” …


You have to apply the ‘smell test’ to these sorts of expectations … wouldn’t EVERYBODY leave their $100k a year jobs if you could suddenly earn twice as much as a consultant?

… and, what about ‘lost time’ for marketing yourself, vacations, illness, accounting and business admin.?

Clearly, you have to build up to this (find a unique niche, build a reputation, etc. etc.) and that takes time … a lot of it.

For example, a top sales consultant in Australia recently said that he still spends at least two to three days a week in sales i.e. drumming up new business. Let’s assume that that time includes all of his admin., as well.

That means that he is spending a maximum of 2.5 days per week billing clients for face-to-face time less any unbooked time, travel time, research time, report-writing time, etc., etc.

You may be able to earn $1k+ per day, but I doubt that you can keep that up for 220 working days per year …

You do the math!