4 ms·

> (If anyone doesn't get how this works, I can explain.) would you mind explaining me?

Jach 11y ago
Looks like he put some links elsewhere in this thread, but I'm in a very similar situation with the same goal -- 25, saving up, hoping to "retire" in my early-to-mid 30s at the latest -- so here's how I look at it. The core idea and assumption is: you can get on average at least 5% annual growth by investing your savings instead of stuffing it in a bank account or under your mattress. As long as you can live on less than that per year, you don't have to work. For me I'd be fine living at $20k/yr. This makes my target goal in savings to be around $500k. So if you have $500k invested this January, by next January you should have $525k. As long as you can live on less than 5%, typically at most 4% ($20k) per year, then next January you withdraw your $20k and your total invested savings is $505k. One year later, that grows by 5% again, to $525,250. Take your $20k (which is now less than 4%), repeat until you die or we hit the Singularity. :) I think you need buffer room to handle the core assumption, though, and this is ignoring taxes and other things. For instance, Vanguard hasn't been doing that well for the past 2 years, though it will probably do better and the 10 year average yearly return from 2013 to 2023 will almost certainly be higher than 5%. You can buffer yourself against economic slumps by having more money or living more frugally -- additionally, there's the possibility of entering into the real estate business once you have some initial capital, that may also be a (somewhat risky) way of hedging since you may nominally be $1.5m in debt from your mortgaged properties, but as long as rent exceeding mortgage+repairs keeps coming in and the n-plex doesn't massively depreciate in value you have a steady stream of income that's independent of your savings that you could sell if needed to wipe away your debt.
grenzbegriff 11y ago
Jach's reply explains some of the logic. Basically if you can live on $X per year, then once you have $X * 25 invested, you can most likely live on the interest from that investment for the rest of your life without using it up. Here's an article shows the math: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... In my case I'm saving between 80-85% of my after-tax income, which is how I can "retire" after between 4-5.5 years of work. Two ways to achieve this are to increase your income or to reduce your spending. Ideally both. Reducing spending generally means your life has less impact on the environment, you'll be happier. It's key to realize that money you save and invest earns more money for you, forever. A useful heuristic here is that if you can save $X per month, after 10 years of doing that you'll have $X * 173 in the bank. So suppose I currently buy lunch every work day for average of $10, if I instead pack a lunch that costs me $1, I'll save $200 / month. Over 10 years this adds up to $34000. Once you start thinking this way, it's easier to be excited about cutting your spending. And then you find that you can live and be happy on a much smaller amount of money than you thought. So not only do you build up your savings a lot faster, you actually need a lot less savings to be financially independent.

Jach 11y ago

Looks like he put some links elsewhere in this thread, but I'm in a very similar situation with the same goal -- 25, saving up, hoping to "retire" in my early-to-mid 30s at the latest -- so here's how I look at it. The core idea and assumption is: you can get on average at least 5% annual growth by investing your savings instead of stuffing it in a bank account or under your mattress. As long as you can live on less than that per year, you don't have to work. For me I'd be fine living at $20k/yr. This makes my target goal in savings to be around $500k. So if you have $500k invested this January, by next January you should have $525k. As long as you can live on less than 5%, typically at most 4% ($20k) per year, then next January you withdraw your $20k and your total invested savings is $505k. One year later, that grows by 5% again, to $525,250. Take your $20k (which is now less than 4%), repeat until you die or we hit the Singularity. :) I think you need buffer room to handle the core assumption, though, and this is ignoring taxes and other things. For instance, Vanguard hasn't been doing that well for the past 2 years, though it will probably do better and the 10 year average yearly return from 2013 to 2023 will almost certainly be higher than 5%. You can buffer yourself against economic slumps by having more money or living more frugally -- additionally, there's the possibility of entering into the real estate business once you have some initial capital, that may also be a (somewhat risky) way of hedging since you may nominally be $1.5m in debt from your mortgaged properties, but as long as rent exceeding mortgage+repairs keeps coming in and the n-plex doesn't massively depreciate in value you have a steady stream of income that's independent of your savings that you could sell if needed to wipe away your debt.

grenzbegriff 11y ago

Jach's reply explains some of the logic. Basically if you can live on $X per year, then once you have $X * 25 invested, you can most likely live on the interest from that investment for the rest of your life without using it up. Here's an article shows the math: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... In my case I'm saving between 80-85% of my after-tax income, which is how I can "retire" after between 4-5.5 years of work. Two ways to achieve this are to increase your income or to reduce your spending. Ideally both. Reducing spending generally means your life has less impact on the environment, you'll be happier. It's key to realize that money you save and invest earns more money for you, forever. A useful heuristic here is that if you can save $X per month, after 10 years of doing that you'll have $X * 173 in the bank. So suppose I currently buy lunch every work day for average of $10, if I instead pack a lunch that costs me $1, I'll save $200 / month. Over 10 years this adds up to $34000. Once you start thinking this way, it's easier to be excited about cutting your spending. And then you find that you can live and be happy on a much smaller amount of money than you thought. So not only do you build up your savings a lot faster, you actually need a lot less savings to be financially independent.