5 ms·

I have argued this point with my old married former union-employee relatives that see themselves as "poor". Combined they have a $6000/month pension. When I exp

I have argued this point with my old married former union-employee relatives that see themselves as "poor". Combined they have a $6000/month pension. When I explain I will need to save $2M+ to achieve that income they suggest that I am just greedy/out-of-touch millionaire who should be giving more money away.

Applejinx 5y ago
This math seems wrong. In particular, I can't tell whether your $6000/mo is meant to be interest: in which case you expect to be paid forever and die without ever touching the principal. If you earn no interest and expect to spend $6000 a month forever without ever gaining any passive money accumulation on your principal, you'd go for 27 years before you'd spent your two million. There are also many things you can do with your life if you have $2M (or indeed $1M) that aren't available to pensioners. I'll grant you, they've got some pretty sweet pensions: that seems unusual, but hey, collective bargaining gets better terms for workers and that certainly qualifies. They're not poor unless they're catastrophically bad at money management, but you are indeed a little out of touch: the idea of living off the interest on your wealth is pretty insane and unattainable to any remotely normal person.
- fma 5y ago
  It's called safe withdrawal rate...and usually 4% is what people use. $2 million safe withdrawal rate = $6666 per month. Not sure why you are seem to be offended and saying they are out of touch, or insane and unattainable when this is the goal for many people who wish to, and are, living financially independently. Also I'm not sure why you say someone with $2M can achieve something that someone with $6000 pension a month can't...you can definitely borrow against your pension and grab a large lump sump...
  - ixacto 5y ago
    This is the clashing of two different life paths ideologies' e.g. the union/public service employee. Of course people will have opinions on this, because they will be somewhat resentful of those on the other side. The elephant in the room is that say you have $2MM in the bank and are living off that interest, or are a retired union/public service worker and then you look at how long it took at how long it took to achieve your financial success. If you save 1/2 of salary in VTI (say 100k-150k range) coming out of a bachelors degree and work for 10-15 years at one of the large tech companies you will have 1.5-2MM USD, which is easily enough to retire on. And you'll be like 32-37years old and still be able to climb Mt. Everest, hike the PCT or AT and probably still have your health. However if you are a teacher starting out in California, that would be a 44-50k year range https://www.cde.ca.gov/fg/fr/sa/cefavgsalaries.asp https://www.cde.ca.gov/fg/fr/sa/cefavgsalaries.asp which yes is really low. Then you work for 40 years and hopefully are able to make enough pension contributions to be able to retire at age 62 and have a decent pension of that 5-6k/mo. By this time lots of people are starting to have health issues and will not be able to go on the adventures that a 32-37y/o would be able to. Also you kinda have to work an extra 30 years. TL;DR: Incentive structure for being a teacher is not really there, also benefits are not really there. Maybe Scandinavian countries have a better compensation and work life balance? Incentive to work in tech industry or similar high-paying jobs is there, as financial independence is readily obtainable within 10-15 years.
    - nly 5y ago
      It still quite hard to achieve FI early, even on a tech salary. I can't speak for San Fran, but I'm on a pretty good (by UK standards) tech salary in London. The cost of living (rents mostly) still make putting a high % of salary away every month a challenge. If you have kids as well, it's almost a non-starter. The marginal tax rate means the only mechanism to do this efficiently are via pension contributions (similar to a US 401k), and these are locked until age 55 (60 by the time i get there). Financial independence in your 30s is an enormous privilege.
      - brianwawok 5y ago
        US vs UK tech pay is an entirely different game though. I’m pretty sure there is a reason most of the FI early retire guys live in the US (heck mr money mustache moved here from Canada)
        deleted 5y ago
        [deleted]
      - ixacto 5y ago
        It’s [fire in 30s] doable in the United States in any major city if you follow relatively restrictive schedule and don’t have any kids, not exactly privilege just takes a good amount of discipline. Also salary’s are much higher and taxes are a bit lower than uk/eu. Housing is not too expensive if you rent a room for a couple years, but this is different between a 22/yo and 35/yo.
- dboreham 5y ago
  I suspect your math didn't account for inflation.
- gunapologist99 5y ago
  If you have $1M and have it invested in a no-load S&P tracking fund (historically approx 9%, and hope you don't have a down year), then you'd have $90k/year income on the interest alone. After taxes (long-term capital gains, let's assume the 15% or 20% bracket, unless Biden gets his wish to increase that), most likely around $13,500 (@ 15%) per year, that would be reduced to $76,500/year, which is $6,375/month. On the other hand, if you have a "safe withdrawal rate", as fma suggested, (and which seems to be very wise to protect against down years which could permanently reduce your nest egg) then that income would be halved, requiring approximately double the initial investment to result in a $6k post-tax income. And as far as it being "the idea of living off the interest on your wealth is pretty insane and unattainable", this is just categorically untrue; many mid- to upper-class families in the U.S. with two incomes make in the $300k to $1M range, so even if they only put away 4% to 10% in their 401(k) or other retirement plans for 30 years, they'd easily make that number.
  - mlyle 5y ago
    Safe withdrawal rate accounts for inflation and taxation related effects, too. If you have $1M returning 9% per year, and withdraw $90k/year, you're either going to be spending less in real money in each year -- as inflation reduces the value of $90k and the amount of tax increases each year-- or you're going to be withdrawing more each year and depleting the principal.
  - deleted 5y ago
    [deleted]
  - Applejinx 5y ago
    "to any remotely normal person'. How normal is this in the grand scheme of things? Roll a million-sided dice and select a random person: let's say, somewhere in the USA to steelman the argument. How often will you get a person in a two-income family where the incomes combine to the $300k and up range? I'm not at all sure $300k will get you to that 'living on your interest' point in all places in the USA, either, and that makes it tougher on the argument. There are plenty of places where $300k will not let you put away a blessed thing in any retirement plan, and those are the places where people earn these 'insane' sums.
- nly 5y ago
  > the idea of living off the interest on your wealth is pretty insane and unattainable to any remotely normal person. I'm not sure why you say that when this is now the dominant form of pension/retirement planning in countries like the US and the UK. People generally buy annuities with their pot, or keep it invested and go in to 'drawdown', living off the returns. The couple with $6000/mo pension are probably guaranteed that income for life. It may even be inflation adjusted annually. Someone aged around 60 who wants a inflation adjusted lifetime annuity here in the UK is going to start on around 2%/yr these days[0]. This isn't unreasonable given a 3% inflation expectation, 30 years of life expectancy, and 30 year UK gov gilts yielding just 1.2%[1]. So $6000/mo on equivalent terms could require a $3.6M pot You can invest your lump sum more aggressively of course, but if you're not disciplined enough to keep withdrawals below a safe rate (widely believed to be 3-4% for a stock portfolio), and suffer a bad run of variance, you'll risk running out of money and dying in poverty. [0] https://www.hl.co.uk/retirement/annuities/best-buy-rates https://www.hl.co.uk/retirement/annuities/best-buy-rates [1] https://www.marketwatch.com/investing/Bond/TMBMKGB-30Y?countryCode=BX https://www.marketwatch.com/investing/Bond/TMBMKGB-30Y?count...

Applejinx 5y ago

This math seems wrong. In particular, I can't tell whether your $6000/mo is meant to be interest: in which case you expect to be paid forever and die without ever touching the principal. If you earn no interest and expect to spend $6000 a month forever without ever gaining any passive money accumulation on your principal, you'd go for 27 years before you'd spent your two million. There are also many things you can do with your life if you have $2M (or indeed $1M) that aren't available to pensioners. I'll grant you, they've got some pretty sweet pensions: that seems unusual, but hey, collective bargaining gets better terms for workers and that certainly qualifies. They're not poor unless they're catastrophically bad at money management, but you are indeed a little out of touch: the idea of living off the interest on your wealth is pretty insane and unattainable to any remotely normal person.

fma 5y ago
It's called safe withdrawal rate...and usually 4% is what people use. $2 million safe withdrawal rate = $6666 per month. Not sure why you are seem to be offended and saying they are out of touch, or insane and unattainable when this is the goal for many people who wish to, and are, living financially independently. Also I'm not sure why you say someone with $2M can achieve something that someone with $6000 pension a month can't...you can definitely borrow against your pension and grab a large lump sump...
- ixacto 5y ago
  This is the clashing of two different life paths ideologies' e.g. the union/public service employee. Of course people will have opinions on this, because they will be somewhat resentful of those on the other side. The elephant in the room is that say you have $2MM in the bank and are living off that interest, or are a retired union/public service worker and then you look at how long it took at how long it took to achieve your financial success. If you save 1/2 of salary in VTI (say 100k-150k range) coming out of a bachelors degree and work for 10-15 years at one of the large tech companies you will have 1.5-2MM USD, which is easily enough to retire on. And you'll be like 32-37years old and still be able to climb Mt. Everest, hike the PCT or AT and probably still have your health. However if you are a teacher starting out in California, that would be a 44-50k year range https://www.cde.ca.gov/fg/fr/sa/cefavgsalaries.asp https://www.cde.ca.gov/fg/fr/sa/cefavgsalaries.asp which yes is really low. Then you work for 40 years and hopefully are able to make enough pension contributions to be able to retire at age 62 and have a decent pension of that 5-6k/mo. By this time lots of people are starting to have health issues and will not be able to go on the adventures that a 32-37y/o would be able to. Also you kinda have to work an extra 30 years. TL;DR: Incentive structure for being a teacher is not really there, also benefits are not really there. Maybe Scandinavian countries have a better compensation and work life balance? Incentive to work in tech industry or similar high-paying jobs is there, as financial independence is readily obtainable within 10-15 years.
  - nly 5y ago
    It still quite hard to achieve FI early, even on a tech salary. I can't speak for San Fran, but I'm on a pretty good (by UK standards) tech salary in London. The cost of living (rents mostly) still make putting a high % of salary away every month a challenge. If you have kids as well, it's almost a non-starter. The marginal tax rate means the only mechanism to do this efficiently are via pension contributions (similar to a US 401k), and these are locked until age 55 (60 by the time i get there). Financial independence in your 30s is an enormous privilege.
    - brianwawok 5y ago
      US vs UK tech pay is an entirely different game though. I’m pretty sure there is a reason most of the FI early retire guys live in the US (heck mr money mustache moved here from Canada)
      - deleted 5y ago
        [deleted]
    - ixacto 5y ago
      It’s [fire in 30s] doable in the United States in any major city if you follow relatively restrictive schedule and don’t have any kids, not exactly privilege just takes a good amount of discipline. Also salary’s are much higher and taxes are a bit lower than uk/eu. Housing is not too expensive if you rent a room for a couple years, but this is different between a 22/yo and 35/yo.
dboreham 5y ago
I suspect your math didn't account for inflation.
gunapologist99 5y ago
If you have $1M and have it invested in a no-load S&P tracking fund (historically approx 9%, and hope you don't have a down year), then you'd have $90k/year income on the interest alone. After taxes (long-term capital gains, let's assume the 15% or 20% bracket, unless Biden gets his wish to increase that), most likely around $13,500 (@ 15%) per year, that would be reduced to $76,500/year, which is $6,375/month. On the other hand, if you have a "safe withdrawal rate", as fma suggested, (and which seems to be very wise to protect against down years which could permanently reduce your nest egg) then that income would be halved, requiring approximately double the initial investment to result in a $6k post-tax income. And as far as it being "the idea of living off the interest on your wealth is pretty insane and unattainable", this is just categorically untrue; many mid- to upper-class families in the U.S. with two incomes make in the $300k to $1M range, so even if they only put away 4% to 10% in their 401(k) or other retirement plans for 30 years, they'd easily make that number.
- mlyle 5y ago
  Safe withdrawal rate accounts for inflation and taxation related effects, too. If you have $1M returning 9% per year, and withdraw $90k/year, you're either going to be spending less in real money in each year -- as inflation reduces the value of $90k and the amount of tax increases each year-- or you're going to be withdrawing more each year and depleting the principal.
- deleted 5y ago
  [deleted]
- Applejinx 5y ago
  "to any remotely normal person'. How normal is this in the grand scheme of things? Roll a million-sided dice and select a random person: let's say, somewhere in the USA to steelman the argument. How often will you get a person in a two-income family where the incomes combine to the $300k and up range? I'm not at all sure $300k will get you to that 'living on your interest' point in all places in the USA, either, and that makes it tougher on the argument. There are plenty of places where $300k will not let you put away a blessed thing in any retirement plan, and those are the places where people earn these 'insane' sums.
nly 5y ago
> the idea of living off the interest on your wealth is pretty insane and unattainable to any remotely normal person. I'm not sure why you say that when this is now the dominant form of pension/retirement planning in countries like the US and the UK. People generally buy annuities with their pot, or keep it invested and go in to 'drawdown', living off the returns. The couple with $6000/mo pension are probably guaranteed that income for life. It may even be inflation adjusted annually. Someone aged around 60 who wants a inflation adjusted lifetime annuity here in the UK is going to start on around 2%/yr these days[0]. This isn't unreasonable given a 3% inflation expectation, 30 years of life expectancy, and 30 year UK gov gilts yielding just 1.2%[1]. So $6000/mo on equivalent terms could require a $3.6M pot You can invest your lump sum more aggressively of course, but if you're not disciplined enough to keep withdrawals below a safe rate (widely believed to be 3-4% for a stock portfolio), and suffer a bad run of variance, you'll risk running out of money and dying in poverty. [0] https://www.hl.co.uk/retirement/annuities/best-buy-rates https://www.hl.co.uk/retirement/annuities/best-buy-rates [1] https://www.marketwatch.com/investing/Bond/TMBMKGB-30Y?countryCode=BX https://www.marketwatch.com/investing/Bond/TMBMKGB-30Y?count...