10 ms·

First Retire... Then Get Rich

90 points by wavephorm 14y ago

typicalrunt 14y ago
Over time, this $20,000 stream accumulates and compounds at 5% after inflation, and raises their combined net worth by an additional $1.329 million over the next 30 years. It wasn't mentioned, but I guess the money is being reinvested in equities. 5% is a stretch goal seeing as the savings rate in the US is around 1% (or less). Inflation there is running at about 2-3%. I see no talk of capital gains taxes or broker fees in there, so I'm a bit skeptical when people throw around instant, magical compounding calculations that net a million dollars. Oh, it's 5% after inflation which means the money is compounding at approx. 8% or so. That's a very lofty goal!
- ProCynic 14y ago
  5% after inflation is a rule of thumb he has for a long term investment portfolio. He talks about it more here: http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/ http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-s... . I'm not sure what the US saving rate has to do with anything.
  - typicalrunt 14y ago
    I should have explained myself better. I'm assuming he's in the US. The savings rate comes into play when you consider that it is determined by looking at the prime lending rate between banks, which is currently at or near 0% in the US.0 But it's all about risk. If you want 0 risk to your principal, you are going to get 0% interest rate. If you put your money in the bank where it is (hopefully) FDIC insured, you get a bit of risk but not a lot, so you get a bit of interest. Since risk and reward (your interest) are correlated, the higher your return (8% compounded before inflation) the higher risk bracket you are in. If US interest rates go up, the bank savings rate will go up as well, making it easier to get to 8% annual compounding rate with little risk. That means any other type of investing (equities, etc) will become less risky at the 8% level (but not without some risk).
    - ProCynic 14y ago
      you can spend an infinite amount of time talking about investing, but yeah it's stocks, counting on diversity for risk management. And it's more about dividends than stock price http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-dividend-aristocrats/ http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-... . The goal is to get a steady stream of cash now, not have assets that you plan on selling when you get to 70.
  - rondon1 14y ago
    From the article: - buying a conservative dividend-paying stock index fund – go to Vanguard.com and start an account to buy some units of the VFINX fund, or if you have a brokerage account you can buy SPY shares. - last resort: just putting the money into a cash account that pays the highest level of interest you can find – Vanguard’s Prime Money Market fund or ING Direct’s Orange Savings Account. VFINX is a -0.76% for 5 years ING Orange is currently at 0.80% How can you assume 5% after inflation? That is no different that assuming that home prices will go up by 2-3% a year. It sounds reasonable but there is no way of knowing exactly how that will play out.
    - liber8 14y ago
      Because historically, that's what you've been able to get. You can't look at a 5 year timeline (and, obviously, cherry-picking the 5 year time period where stocks dropped by half isn't exactly fair). You should be looking at a 30 or more year timeline. Even on a 30 year timeline, you can find runs where the average return is less than 8% (just as you can find periods where the return is greater). That doesn't mean it's not a reasonable forecast of what you can expect.
      - rondon1 14y ago
        "Historically" home prices went up in the US until 2006 for well over 30 years. It is interesting that you bring up cherry picking because that is exactly how mutual fund companies work. They have a lot of funds, the funds that do well stay around and the funds that do not do well are canceled. This fund that I mentioned is only 8 years old. Knowing which mutual funds are going to produce over 30 years is like knowing what stocks are going to produce over 30 years. You can 'cherry pick' examples for 8% or -8%, but it is crazy to assume that the fund you pick is going to get 5% over inflation over 30 years.
        liber8 14y ago
        ...and home prices will continue to go up for another 30 years (and the 30 years after that). Of course there will be recessions (and likely even depressions) during those times. What's your point? I think you're missing something here. Nobody is talking about picking actively managed mutual funds (which you're right, are a total gamble/ripoff). The Vanguard fund mentioned above is an index fund. It's not at all crazy to assume that by picking the world's biggest index fund, you are going to get 5% over inflation over 30 years.
- loumf 14y ago
  I think that the lesson is -- if you can get your expenses down to $20,000 (which is really hard), you have a chance. In real life, you'll have to make up the difference somehow 1. Work a little 2. Get expenses even lower 3. Find ways to get the 8% return you need (rental property?) Even the site's writer admits in comments that he's not there. My biggest gripe is healthcare -- in the US, you need to factor in health insurance costs.
  - grecy 14y ago
    I spent 2 years driving from Alaska to Argentina, having the time of my life, and only spent $27k for EVERYTHING. (K13.5/yr) [1] I think living on less than $20k is easy. [1] http://theroadchoseme.com/the-price-of-adventure http://theroadchoseme.com/the-price-of-adventure
    - vbtemp 14y ago
      So how do you pay for medical bills when you or a spouse gets cancer and needs chemotherapy, or even something as basic as a root canal causing horrendous pain? Will all that fit in a 27k budget?
      - grecy 14y ago
        It's a good point. My countr(ies) of permanent residence have health care for all. Also, checkout what happened when I took a foreigner into the ER in a Third World country (Ecuador) [1] When I made the journey, I got a bunch of immunizations (free in Canada) and the doctor had lived and worked in Central and South America for many years. His advice was not to bother with Travel Insurance, because outside America, it would be cheaper to just pay for whatever I needed than pay the premiums, then deductibles, the deal with the hassle. Health-care is only unimaginably expensive in America. In other countries it's priced reasonably and I'm certain something like a root canal or even a broken bone would not have made a significant impact to my budget. [1]http://theroadchoseme.com/heath-care-in-a-third-world-country http://theroadchoseme.com/heath-care-in-a-third-world-countr...
      - sevenstar 14y ago
- cjlars 14y ago
  He's also taking out $20k per year, a whopping four percent. Standard in the financial planning industry is that long term retirees need to keep their annual draw down to about 2% to keep their portfolio steady or growing. So 4% to spend, 5% in real growth, 2% inflation -- 11% nominal gains per year. That's achievable, but he's going to need to be a damn good investor.
  - Drbble 14y ago
    Why would a retiree need to keep their portfolio growing?
  - dragons 14y ago
    Any discussion on early retirement is incomplete without a mention of John Greaney's safe withdrawal rate study: http://www.retireearlyhomepage.com/safesum.html http://www.retireearlyhomepage.com/safesum.html I highly recommend his site.
citricsquid 14y ago
Having enough money to live if you stop spending money isn't rich, rich is having enough money that you can spend and you don't have any long term concerns. $500,000 (or even a million) for the rest of your life is not rich, it's being secure. If you can't buy a new sports car on a whim you're not rich. The plan (save and then live off of the returns) is sound and if you're a careful spender it's great, but to say you're rich is a big stretch. Pitching this as something that will make you rich creates terrible expectations of what the plan actually is.
- highfreq 14y ago
  I somewhat disagree. Rich is always relative. Having substantially more money than you need to live the lifestyle you want to live is rich by my standards.
  - citricsquid 14y ago
    Yes, rich is relative and $1,000,000 is rich to some and pocket change to others, but my problem with calling this situation being rich is: > Having substantially more money than you need They DO need the money, they do not have $500,000 cash they have $20,000 per year. If they are in a terrible car accident and they have to spend $200k on medical bills their entire life falls apart because having only $300k does not support their needed returns, replace that with any scenario that can cause unexpected costs. That to me isn't rich.
    - mahyarm 14y ago
      That's what high limit medical insurance is for. Unless these insurers commit effective fraud and not provide their service after the fact.
      - asmosoinio 14y ago
        Or living in a country with good public health care?
ww520 14y ago
Does the 4% withdraw rate account for inflation? If not, 20K will worth very little in 30 years.
- fennecfoxen 14y ago
  4% is a commonly used estimate for the average annualized real return on the stock market - so yes, a real return adjusted for inflation.
rflrob 14y ago
For those of us who don't follow this site, is there a suggestion as to where the initial half million dollars comes from? That's not always an attainable goal for someone under about 40...
- ProCynic 14y ago
  It comes from a 50%-90% savings rate. The focus of the site is on how to live a nice middle class life on very little money. Here's how he did it: http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/ http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of... . Or if you want to get extreme: http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html http://earlyretirementextreme.com/how-i-live-on-7000-per-yea...
  - mattmanser 14y ago
    It's also worth noting he's not actually retired, he's actually a self-employed handyman and also says in the article his wife works too and plans on working more when their boy is older.
    - ProCynic 14y ago
      How do you define retired? His passive income from investments exceeds his total expenses + inflation so he doesn't need the part time income. Maybe you want to call it financially independent, but I'd say I was retired if I didn't have to work.
      - jacalata 14y ago
        Actually I think calling it 'financial independence' would head off a bunch of knee-jerk reactions and make it a lot easier to have a real discussion about.
        mattmanser 14y ago
        It's not a knee-jerk, he's just using a very well known term that has a specific meaning. It means to cease all work. All. He hasn't. He even admits it in the linked article but justifies it because it's doing what he wants. Retired means not working. He works. If you're working for money you're not retired. There's even a whole spiel in the link above about how they tried to become property developers which failed when the market collapsed, which is actually a lot of work. I'd buy semi-retired. Or he works part-time. But retired has a very specific meaning that he is ignoring. He just seems to be confusing 'I enjoy my new job' with 'I don't work' just because he didn't like working 9-5 as a programmer or whatever it was he did.
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lanstein 14y ago
I'm pretty sure nobody in this story lives in San Francisco.
- gghootch 14y ago
  Actually, MMM lives in the SF Bay Area. See http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html http://earlyretirementextreme.com/how-i-live-on-7000-per-yea... as also seen in @ProCynic's post. Edit: ok, fail.
  - ProCynic 14y ago
    That's Jacob Fisker. MMM lives in Colorado.
- fivethirty 14y ago
  I have found it quite possible to spend ~$20k annually living in San Francisco and (currently) Palo Alto. Of course, I don't own a car, don't have kids, and live with six housemates, but the lifestyle suits me just fine for now.
Aftershock21 14y ago
If the goal of retirement is beach-sitting I don't want it. Money is energy of your experiments in life and if you spend bare minimum you are missing a lot in life. I would rather work on what I love for the entire life and create more possibilities to get rich. Spending $20,000/year sounds like going on hibernation mode for the rest of your life. Its a plan for people who are chronically lazy.
- Zimahl 14y ago
  Spending $20,000/year seems impossible in the US. Unless you have a trust fund or came into money early, just saving $50,000 a year for the last 10 years was pretty tough. You'd need to go without health insurance and probably already own a home. Be in a high-pay, low schooling job. No kids, no un-employed spouse, no pets. No health problems. No job or startup failures. NO MISTAKES. The people who have accomplished this exist but are few and far between. They are the extreme exception, definitely not even a corollary to the rule.
  - mahyarm 14y ago
    That $20'000 figure is when you've already bought your furniture, appliances, house, car, etc. And you live in an area where costs are significantly more reasonable, such as a small town in Colorado where the author lives vs. the bay area, one of the most expensive places in the USA to live.
  - grecy 14y ago
    > Spending $20,000/year seems impossible in the US. It's not impossible at all. Get rid of all your high reoccurring monthly expenses. Cell phone. Cable. Gym. etc. You absolutely don't need any of that junk. It's just keeping you at work. It can be inconvenient not to have a cell phone, but a lot less inconvenient than spending 38/hrs a week at work. Also, it's important to keep reminding yourself you live in the consumption capital of the world. The entire US is geared towards spending money, and you will be encouraged to do so many times per day. Your friends, family, colleagues, dentist and the guy at the gym are all going to encourage you to spend money - it's just how the society works. You will have to develop a think skin, and remind yourself to resist spending money at every opportunity. I'm in Canada, and I feel the pull to spend money here daily. ("Come grab a coffee with us". "checkout this new canoe you should buy". "I found a good deal on...". ""pfft. I get unlimited free texts for only $50/mo." ... etc. etc. etc. At the end of the day, it's your choice if you want to keep spending money and going to work, or cut out the spending to limit the amount of time you need to go to work. NOTE: I'm from Australia, lived and worked in the US for a year, now have lived and worked in Canada for 6 years and my family live and work in NYC, so I have some perspective on "consumerism"
bstewartnyc 14y ago
Dumb.
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sevenstar 14y ago
Does Mr Mustache not know how to make paragraph breaks? His plan sounds like the austerity plan they are giving Greece.↓
- ProCynic 14y ago
  Paragraph breaks was a wordpress bug. http://www.mrmoneymustache.com/2012/05/14/first-retire-then-get-rich/#comment-34211 http://www.mrmoneymustache.com/2012/05/14/first-retire-then-...
  - sevenstar 14y ago
    Okay, great.
stephen 14y ago
I would not call this "Financial Freedom through Badassity" (his site's tagline), it's more like "Financial Freedom through Being Frugal". Not that there's anything wrong with that.
- ChuckMcM 14y ago
  Agreed, and while I would love to reliably get a 5% return above the inflation rate, its not always so straight forward.
gfodor 14y ago
This certainly doesn't sound like very much fun. You slave away for 15 years to get your $500k stash. And then, once you've gotten there, you retire, and end up cutting back on expenses by driving a shitty car, quitting your gym, etc. Now, you just "sit back" and wait 30 years for your $1m to roll in. Then you're 65 and practically dead. (Oh and don't forget, inflation is ignored here and has probably eaten well into your real returns.) Better to save up enough money to live on semi-comfortably for a year or two (say, $200k) and make a leap out of the ratrace. Start a business that has the potential to generate a large amount of income quickly with low startup costs and be sold as equity for a high price after some time. Fail, and repeat for the next two years. Hopefully at some point you will get cash flow positive and will not be forced back into the rat race. If you've played your cards right your incoming cash flows will largely be passive, leaving you the freedom to expand into new areas in the quest for high growth. One can imagine that after 5 years of being out of the rat race, you will end up stumbling upon a high growth business that can start bringing in serious cash. After 5 years of effort you will hopefully have $1-5m. You almost certainly will have more than the $250k you started with. Provided you have been smart and not increased your standard of living as you earn this money plug it into safe, income generating investments like bonds, CEFs, and dividend value stocks. Congratulations, you can now kill off any income streams you may have had that were taking up time (and were not passive) and can decide if you want to live on the interest or continue searching for more growth, to get you to that $10m point where the interest starts being "I think I will buy a new car today" levels. You're also probably in your late 30s early 40s and can actually still enjoy life.
- grecy 14y ago
  You're missing the point of being "frugal". It's not about "giving up" the "good life" and punishing yourself to go without. It's about coming to the realization all that crap isn't making you happier anyway, so better not to go to work to earn money to buy it. I drive a $450 car, have no TV or cell phone and have never been happier in my life. > Now, you just "sit back" and wait 30 years for your $1m to roll in. When you say "Sit back" what you really mean is "do whatever you want with your time". It's important to note that doesn't mean doing nothing - it means exploring your passions and dreams, which could be anything from volunteering at the homeless shelter to contributing to open source projects to building that deck on your house to actually raising your own kids instead of sending them off to expensive childcare. I sure as hell don't sit around and do nothing when I'm not at work. > Then you're 65 and practically dead. That's the whole reason you need to get out of work NOW! At this rate, you'll (everyone) will be sitting at a desk until they are "practically dead". At least if you get out of work now, you can enjoy the years between now and 65 doing whatever the hell you want to every day. And, of course, all the years that come after 65 too. >"I think I will buy a new car today" I actually have never bought a new car, and have no interest in doing so. If you actually want to buy a new car today, then you have linked happiness with money, and it will be very hard for you to live the frugal life which lets you go to work less.
sparknlaunch12 14y ago
The fictional example forgets to factor in unexpected health costs, emotional distress from no close family and living in a shack in a war torn village. Okay, slight over exaggeration but anyone could retire early. However it takes sacrifice. It usually involves living away from your family and living in a second/third world country. It assumes you have no unplanned costs (health, weather...). Not terrible but worth considering before quitting your job.
- ProCynic 14y ago
  Where do you get living in a third world country? The numbers are reasonable ballpark figures taken from real people living in America. With spouses and kids and health insurance that covers medical disasters.
  - dgabriel 14y ago
    Health insurance for my family of 5 is about 7 grand a year, and food is about 6 grand, and utilities are about 3 grand (Internet/water/electric/gas). That's 15 grand before transportation, rent, or any luxuries. I frankly have no idea how a family with children can live on 15-30 grand a year without being in constant stress.
    - grecy 14y ago
      You just added up to 15k for the very basics. Let's throw in another 12k for rent, 5k for transport, and 5k for "fun". So you're at 37k in expenses. Assuming you have two adults here with an "income"* of 20k each, you've still got 3k spare. I'll bet after a few years of that you'll get better at it and can reduce your spending even more. Keep in mind you've been conditioned into thinking you need to spend money to have a good time, i.e. Disneyland, movie theater etc. This is not true. *NOTE: "income" could be anything you want it to be, it doesn't have to come from going to work.
chives 14y ago
This is the strategy of weak people. If it is actually used, in the way prescribed, by an average middle class American it will inevitably lead to financial ruin. The only people who can realistically live off of this strategy are investors who know what their doing and can easily make orders of magnitude more than this using their own methods. Though if you think this is the strategy for you, then more power to you. Can I just get you to sign a waiver that bars you from whining to the government or big business when it doesn't work out for you?
- ProCynic 14y ago
  I'm not sure what point you're trying to make. The core idea is that you can live a decent life in America for much less than most people do. By doing so you free up enough money that even simple, fairly conservative investments can generate enough passive income to cover your reduced living expenses in short order. After that you can do whatever you want: sit on a beach, learn metalworking, pile up a huge mountain of redundant cash, anything. That's all he's really saying, and he's got numbers to back it up.
- grecy 14y ago
  > This is the strategy of weak people. If it is actually used, in the way prescribed, by an average middle class American it will inevitably lead to financial ruin. It's worth pointing out you've been conditioned to think this is the strategy of weak people. Who are you to call someone else "weak" for choosing to spend less time at a job? This person is not going to have a big screen TV like you, not going to drive a fancy car like you and has a few thousand square feet less than you to live in. These are all choices we are free to make, and calling someone "weak" for that is unproductive and pointless. You've been manipulated into thinking you must work full-time until a few years before your life expectancy is up, and anything else is "weak". This is a lie. It's also interesting you think it will lead to financial ruin. If everyone did this, it would undoubtedly lead to lower growth than we have now, and, as sad as it sounds, many corporations would not be making billion dollar profits year over year. Of course, millions and millions of people would have more time to enjoy with their families and to pursue their dreams.
kamaal 14y ago
This reminds of a conversation I had with a Uncle of mine some weeks back. He is sort of Semi Retired. So I asked him how can one retire at 40. There came the answer, he asked me to define retirement. After some answers and counter questions he asked me to look at it this way. Retirement is not doing 'nothing ever after'. Retirement is basically having enough money to not fear getting fired, to not worry about bills, expenses, food, clothes, fuel, health care and kids education. Then when you are this free, go and work on what you always wanted to work on. May be that is music, may be that is apple farming or whatever. But when you go down this route, you never stop working. Except that you now work on things you enjoy. But if your definition of retirement is doing 'nothing ever after'. Then you sure need lots and lots of cash, real estate, good insurance and kids who can take care of you in old age. That is difficult to achieve, assuming you don't win the start up lottery. After total analysis(I'm 27 currently), this is what I believe can make you rich. a. Never have credit card,loans or any kind of debt. Interest is a dangerous thing and often eats most of your earnings. b. Understand how much you need to save and invest. Get a good savings and investment plan *now*. c. Productivity is extremely important because you are working against time. d. Have side projects, that can be monetized. Do not work for your company for more than what they pay you. e. Use every savings and investment opportunity, even if it means saving and investing little. With a little hard work, clever savings, investments and avoiding debts and interests any person go far. Also I don't get blind consumerism to keep buying stuff you just don't need at all. With all this and monetizable side projects any person can be financially stable by 40-45ish to have money to relax and take life as it is supposed to be taken.
simonbarker87 14y ago
This isn't really a millions miles away from what Tim Ferris is suggesting in 4 Hour Work Week (which everyone seems to universally hold up as the best self help book ever ... I disagree) but going about it in a different way. I think all ideas like this have merit in certain circumstances, the trick is to realise that it won't all apply to your situation and that you should take the basic principles and see if it fits for what you want in life.

90 points by wavephorm 14y ago

Over time, this $20,000 stream accumulates and compounds at 5% after inflation, and raises their combined net worth by an additional $1.329 million over the next 30 years. It wasn't mentioned, but I guess the money is being reinvested in equities. 5% is a stretch goal seeing as the savings rate in the US is around 1% (or less). Inflation there is running at about 2-3%. I see no talk of capital gains taxes or broker fees in there, so I'm a bit skeptical when people throw around instant, magical compounding calculations that net a million dollars. Oh, it's 5% after inflation which means the money is compounding at approx. 8% or so. That's a very lofty goal!

ProCynic 14y ago
5% after inflation is a rule of thumb he has for a long term investment portfolio. He talks about it more here: http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/ http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-s... . I'm not sure what the US saving rate has to do with anything.
- typicalrunt 14y ago
  I should have explained myself better. I'm assuming he's in the US. The savings rate comes into play when you consider that it is determined by looking at the prime lending rate between banks, which is currently at or near 0% in the US.0 But it's all about risk. If you want 0 risk to your principal, you are going to get 0% interest rate. If you put your money in the bank where it is (hopefully) FDIC insured, you get a bit of risk but not a lot, so you get a bit of interest. Since risk and reward (your interest) are correlated, the higher your return (8% compounded before inflation) the higher risk bracket you are in. If US interest rates go up, the bank savings rate will go up as well, making it easier to get to 8% annual compounding rate with little risk. That means any other type of investing (equities, etc) will become less risky at the 8% level (but not without some risk).
  - ProCynic 14y ago
    you can spend an infinite amount of time talking about investing, but yeah it's stocks, counting on diversity for risk management. And it's more about dividends than stock price http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-dividend-aristocrats/ http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-... . The goal is to get a steady stream of cash now, not have assets that you plan on selling when you get to 70.
- rondon1 14y ago
  From the article: - buying a conservative dividend-paying stock index fund – go to Vanguard.com and start an account to buy some units of the VFINX fund, or if you have a brokerage account you can buy SPY shares. - last resort: just putting the money into a cash account that pays the highest level of interest you can find – Vanguard’s Prime Money Market fund or ING Direct’s Orange Savings Account. VFINX is a -0.76% for 5 years ING Orange is currently at 0.80% How can you assume 5% after inflation? That is no different that assuming that home prices will go up by 2-3% a year. It sounds reasonable but there is no way of knowing exactly how that will play out.
  - liber8 14y ago
    Because historically, that's what you've been able to get. You can't look at a 5 year timeline (and, obviously, cherry-picking the 5 year time period where stocks dropped by half isn't exactly fair). You should be looking at a 30 or more year timeline. Even on a 30 year timeline, you can find runs where the average return is less than 8% (just as you can find periods where the return is greater). That doesn't mean it's not a reasonable forecast of what you can expect.
    - rondon1 14y ago
      "Historically" home prices went up in the US until 2006 for well over 30 years. It is interesting that you bring up cherry picking because that is exactly how mutual fund companies work. They have a lot of funds, the funds that do well stay around and the funds that do not do well are canceled. This fund that I mentioned is only 8 years old. Knowing which mutual funds are going to produce over 30 years is like knowing what stocks are going to produce over 30 years. You can 'cherry pick' examples for 8% or -8%, but it is crazy to assume that the fund you pick is going to get 5% over inflation over 30 years.
      - liber8 14y ago
        ...and home prices will continue to go up for another 30 years (and the 30 years after that). Of course there will be recessions (and likely even depressions) during those times. What's your point? I think you're missing something here. Nobody is talking about picking actively managed mutual funds (which you're right, are a total gamble/ripoff). The Vanguard fund mentioned above is an index fund. It's not at all crazy to assume that by picking the world's biggest index fund, you are going to get 5% over inflation over 30 years.
loumf 14y ago
I think that the lesson is -- if you can get your expenses down to $20,000 (which is really hard), you have a chance. In real life, you'll have to make up the difference somehow 1. Work a little 2. Get expenses even lower 3. Find ways to get the 8% return you need (rental property?) Even the site's writer admits in comments that he's not there. My biggest gripe is healthcare -- in the US, you need to factor in health insurance costs.
- grecy 14y ago
  I spent 2 years driving from Alaska to Argentina, having the time of my life, and only spent $27k for EVERYTHING. (K13.5/yr) [1] I think living on less than $20k is easy. [1] http://theroadchoseme.com/the-price-of-adventure http://theroadchoseme.com/the-price-of-adventure
  - vbtemp 14y ago
    So how do you pay for medical bills when you or a spouse gets cancer and needs chemotherapy, or even something as basic as a root canal causing horrendous pain? Will all that fit in a 27k budget?
    - grecy 14y ago
      It's a good point. My countr(ies) of permanent residence have health care for all. Also, checkout what happened when I took a foreigner into the ER in a Third World country (Ecuador) [1] When I made the journey, I got a bunch of immunizations (free in Canada) and the doctor had lived and worked in Central and South America for many years. His advice was not to bother with Travel Insurance, because outside America, it would be cheaper to just pay for whatever I needed than pay the premiums, then deductibles, the deal with the hassle. Health-care is only unimaginably expensive in America. In other countries it's priced reasonably and I'm certain something like a root canal or even a broken bone would not have made a significant impact to my budget. [1]http://theroadchoseme.com/heath-care-in-a-third-world-country http://theroadchoseme.com/heath-care-in-a-third-world-countr...
    - sevenstar 14y ago
cjlars 14y ago
He's also taking out $20k per year, a whopping four percent. Standard in the financial planning industry is that long term retirees need to keep their annual draw down to about 2% to keep their portfolio steady or growing. So 4% to spend, 5% in real growth, 2% inflation -- 11% nominal gains per year. That's achievable, but he's going to need to be a damn good investor.
- Drbble 14y ago
  Why would a retiree need to keep their portfolio growing?
- dragons 14y ago
  Any discussion on early retirement is incomplete without a mention of John Greaney's safe withdrawal rate study: http://www.retireearlyhomepage.com/safesum.html http://www.retireearlyhomepage.com/safesum.html I highly recommend his site.

citricsquid 14y ago

Having enough money to live if you stop spending money isn't rich, rich is having enough money that you can spend and you don't have any long term concerns. $500,000 (or even a million) for the rest of your life is not rich, it's being secure. If you can't buy a new sports car on a whim you're not rich. The plan (save and then live off of the returns) is sound and if you're a careful spender it's great, but to say you're rich is a big stretch. Pitching this as something that will make you rich creates terrible expectations of what the plan actually is.

highfreq 14y ago
I somewhat disagree. Rich is always relative. Having substantially more money than you need to live the lifestyle you want to live is rich by my standards.
- citricsquid 14y ago
  Yes, rich is relative and $1,000,000 is rich to some and pocket change to others, but my problem with calling this situation being rich is: > Having substantially more money than you need They DO need the money, they do not have $500,000 cash they have $20,000 per year. If they are in a terrible car accident and they have to spend $200k on medical bills their entire life falls apart because having only $300k does not support their needed returns, replace that with any scenario that can cause unexpected costs. That to me isn't rich.
  - mahyarm 14y ago
    That's what high limit medical insurance is for. Unless these insurers commit effective fraud and not provide their service after the fact.
    - asmosoinio 14y ago
      Or living in a country with good public health care?

ww520 14y ago

Does the 4% withdraw rate account for inflation? If not, 20K will worth very little in 30 years.

fennecfoxen 14y ago
4% is a commonly used estimate for the average annualized real return on the stock market - so yes, a real return adjusted for inflation.

rflrob 14y ago

For those of us who don't follow this site, is there a suggestion as to where the initial half million dollars comes from? That's not always an attainable goal for someone under about 40...

ProCynic 14y ago
It comes from a 50%-90% savings rate. The focus of the site is on how to live a nice middle class life on very little money. Here's how he did it: http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/ http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of... . Or if you want to get extreme: http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html http://earlyretirementextreme.com/how-i-live-on-7000-per-yea...
- mattmanser 14y ago
  It's also worth noting he's not actually retired, he's actually a self-employed handyman and also says in the article his wife works too and plans on working more when their boy is older.
  - ProCynic 14y ago
    How do you define retired? His passive income from investments exceeds his total expenses + inflation so he doesn't need the part time income. Maybe you want to call it financially independent, but I'd say I was retired if I didn't have to work.
    - jacalata 14y ago
      Actually I think calling it 'financial independence' would head off a bunch of knee-jerk reactions and make it a lot easier to have a real discussion about.
      - mattmanser 14y ago
        It's not a knee-jerk, he's just using a very well known term that has a specific meaning. It means to cease all work. All. He hasn't. He even admits it in the linked article but justifies it because it's doing what he wants. Retired means not working. He works. If you're working for money you're not retired. There's even a whole spiel in the link above about how they tried to become property developers which failed when the market collapsed, which is actually a lot of work. I'd buy semi-retired. Or he works part-time. But retired has a very specific meaning that he is ignoring. He just seems to be confusing 'I enjoy my new job' with 'I don't work' just because he didn't like working 9-5 as a programmer or whatever it was he did.

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lanstein 14y ago

I'm pretty sure nobody in this story lives in San Francisco.

gghootch 14y ago
Actually, MMM lives in the SF Bay Area. See http://earlyretirementextreme.com/how-i-live-on-7000-per-year.html http://earlyretirementextreme.com/how-i-live-on-7000-per-yea... as also seen in @ProCynic's post. Edit: ok, fail.
- ProCynic 14y ago
  That's Jacob Fisker. MMM lives in Colorado.
fivethirty 14y ago
I have found it quite possible to spend ~$20k annually living in San Francisco and (currently) Palo Alto. Of course, I don't own a car, don't have kids, and live with six housemates, but the lifestyle suits me just fine for now.

Aftershock21 14y ago

If the goal of retirement is beach-sitting I don't want it. Money is energy of your experiments in life and if you spend bare minimum you are missing a lot in life. I would rather work on what I love for the entire life and create more possibilities to get rich. Spending $20,000/year sounds like going on hibernation mode for the rest of your life. Its a plan for people who are chronically lazy.

Zimahl 14y ago
Spending $20,000/year seems impossible in the US. Unless you have a trust fund or came into money early, just saving $50,000 a year for the last 10 years was pretty tough. You'd need to go without health insurance and probably already own a home. Be in a high-pay, low schooling job. No kids, no un-employed spouse, no pets. No health problems. No job or startup failures. NO MISTAKES. The people who have accomplished this exist but are few and far between. They are the extreme exception, definitely not even a corollary to the rule.
- mahyarm 14y ago
  That $20'000 figure is when you've already bought your furniture, appliances, house, car, etc. And you live in an area where costs are significantly more reasonable, such as a small town in Colorado where the author lives vs. the bay area, one of the most expensive places in the USA to live.
- grecy 14y ago
  > Spending $20,000/year seems impossible in the US. It's not impossible at all. Get rid of all your high reoccurring monthly expenses. Cell phone. Cable. Gym. etc. You absolutely don't need any of that junk. It's just keeping you at work. It can be inconvenient not to have a cell phone, but a lot less inconvenient than spending 38/hrs a week at work. Also, it's important to keep reminding yourself you live in the consumption capital of the world. The entire US is geared towards spending money, and you will be encouraged to do so many times per day. Your friends, family, colleagues, dentist and the guy at the gym are all going to encourage you to spend money - it's just how the society works. You will have to develop a think skin, and remind yourself to resist spending money at every opportunity. I'm in Canada, and I feel the pull to spend money here daily. ("Come grab a coffee with us". "checkout this new canoe you should buy". "I found a good deal on...". ""pfft. I get unlimited free texts for only $50/mo." ... etc. etc. etc. At the end of the day, it's your choice if you want to keep spending money and going to work, or cut out the spending to limit the amount of time you need to go to work. NOTE: I'm from Australia, lived and worked in the US for a year, now have lived and worked in Canada for 6 years and my family live and work in NYC, so I have some perspective on "consumerism"

bstewartnyc 14y ago

Dumb.

deleted 14y ago

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sevenstar 14y ago

Does Mr Mustache not know how to make paragraph breaks? His plan sounds like the austerity plan they are giving Greece.↓

ProCynic 14y ago
Paragraph breaks was a wordpress bug. http://www.mrmoneymustache.com/2012/05/14/first-retire-then-get-rich/#comment-34211 http://www.mrmoneymustache.com/2012/05/14/first-retire-then-...
- sevenstar 14y ago
  Okay, great.

stephen 14y ago

I would not call this "Financial Freedom through Badassity" (his site's tagline), it's more like "Financial Freedom through Being Frugal". Not that there's anything wrong with that.

ChuckMcM 14y ago
Agreed, and while I would love to reliably get a 5% return above the inflation rate, its not always so straight forward.

gfodor 14y ago

This certainly doesn't sound like very much fun. You slave away for 15 years to get your $500k stash. And then, once you've gotten there, you retire, and end up cutting back on expenses by driving a shitty car, quitting your gym, etc. Now, you just "sit back" and wait 30 years for your $1m to roll in. Then you're 65 and practically dead. (Oh and don't forget, inflation is ignored here and has probably eaten well into your real returns.) Better to save up enough money to live on semi-comfortably for a year or two (say, $200k) and make a leap out of the ratrace. Start a business that has the potential to generate a large amount of income quickly with low startup costs and be sold as equity for a high price after some time. Fail, and repeat for the next two years. Hopefully at some point you will get cash flow positive and will not be forced back into the rat race. If you've played your cards right your incoming cash flows will largely be passive, leaving you the freedom to expand into new areas in the quest for high growth. One can imagine that after 5 years of being out of the rat race, you will end up stumbling upon a high growth business that can start bringing in serious cash. After 5 years of effort you will hopefully have $1-5m. You almost certainly will have more than the $250k you started with. Provided you have been smart and not increased your standard of living as you earn this money plug it into safe, income generating investments like bonds, CEFs, and dividend value stocks. Congratulations, you can now kill off any income streams you may have had that were taking up time (and were not passive) and can decide if you want to live on the interest or continue searching for more growth, to get you to that $10m point where the interest starts being "I think I will buy a new car today" levels. You're also probably in your late 30s early 40s and can actually still enjoy life.

grecy 14y ago
You're missing the point of being "frugal". It's not about "giving up" the "good life" and punishing yourself to go without. It's about coming to the realization all that crap isn't making you happier anyway, so better not to go to work to earn money to buy it. I drive a $450 car, have no TV or cell phone and have never been happier in my life. > Now, you just "sit back" and wait 30 years for your $1m to roll in. When you say "Sit back" what you really mean is "do whatever you want with your time". It's important to note that doesn't mean doing nothing - it means exploring your passions and dreams, which could be anything from volunteering at the homeless shelter to contributing to open source projects to building that deck on your house to actually raising your own kids instead of sending them off to expensive childcare. I sure as hell don't sit around and do nothing when I'm not at work. > Then you're 65 and practically dead. That's the whole reason you need to get out of work NOW! At this rate, you'll (everyone) will be sitting at a desk until they are "practically dead". At least if you get out of work now, you can enjoy the years between now and 65 doing whatever the hell you want to every day. And, of course, all the years that come after 65 too. >"I think I will buy a new car today" I actually have never bought a new car, and have no interest in doing so. If you actually want to buy a new car today, then you have linked happiness with money, and it will be very hard for you to live the frugal life which lets you go to work less.

sparknlaunch12 14y ago

The fictional example forgets to factor in unexpected health costs, emotional distress from no close family and living in a shack in a war torn village. Okay, slight over exaggeration but anyone could retire early. However it takes sacrifice. It usually involves living away from your family and living in a second/third world country. It assumes you have no unplanned costs (health, weather...). Not terrible but worth considering before quitting your job.

ProCynic 14y ago
Where do you get living in a third world country? The numbers are reasonable ballpark figures taken from real people living in America. With spouses and kids and health insurance that covers medical disasters.
- dgabriel 14y ago
  Health insurance for my family of 5 is about 7 grand a year, and food is about 6 grand, and utilities are about 3 grand (Internet/water/electric/gas). That's 15 grand before transportation, rent, or any luxuries. I frankly have no idea how a family with children can live on 15-30 grand a year without being in constant stress.
  - grecy 14y ago
    You just added up to 15k for the very basics. Let's throw in another 12k for rent, 5k for transport, and 5k for "fun". So you're at 37k in expenses. Assuming you have two adults here with an "income"* of 20k each, you've still got 3k spare. I'll bet after a few years of that you'll get better at it and can reduce your spending even more. Keep in mind you've been conditioned into thinking you need to spend money to have a good time, i.e. Disneyland, movie theater etc. This is not true. *NOTE: "income" could be anything you want it to be, it doesn't have to come from going to work.

chives 14y ago

This is the strategy of weak people. If it is actually used, in the way prescribed, by an average middle class American it will inevitably lead to financial ruin. The only people who can realistically live off of this strategy are investors who know what their doing and can easily make orders of magnitude more than this using their own methods. Though if you think this is the strategy for you, then more power to you. Can I just get you to sign a waiver that bars you from whining to the government or big business when it doesn't work out for you?

ProCynic 14y ago
I'm not sure what point you're trying to make. The core idea is that you can live a decent life in America for much less than most people do. By doing so you free up enough money that even simple, fairly conservative investments can generate enough passive income to cover your reduced living expenses in short order. After that you can do whatever you want: sit on a beach, learn metalworking, pile up a huge mountain of redundant cash, anything. That's all he's really saying, and he's got numbers to back it up.
grecy 14y ago
> This is the strategy of weak people. If it is actually used, in the way prescribed, by an average middle class American it will inevitably lead to financial ruin. It's worth pointing out you've been conditioned to think this is the strategy of weak people. Who are you to call someone else "weak" for choosing to spend less time at a job? This person is not going to have a big screen TV like you, not going to drive a fancy car like you and has a few thousand square feet less than you to live in. These are all choices we are free to make, and calling someone "weak" for that is unproductive and pointless. You've been manipulated into thinking you must work full-time until a few years before your life expectancy is up, and anything else is "weak". This is a lie. It's also interesting you think it will lead to financial ruin. If everyone did this, it would undoubtedly lead to lower growth than we have now, and, as sad as it sounds, many corporations would not be making billion dollar profits year over year. Of course, millions and millions of people would have more time to enjoy with their families and to pursue their dreams.

kamaal 14y ago

This reminds of a conversation I had with a Uncle of mine some weeks back. He is sort of Semi Retired. So I asked him how can one retire at 40. There came the answer, he asked me to define retirement. After some answers and counter questions he asked me to look at it this way. Retirement is not doing 'nothing ever after'. Retirement is basically having enough money to not fear getting fired, to not worry about bills, expenses, food, clothes, fuel, health care and kids education. Then when you are this free, go and work on what you always wanted to work on. May be that is music, may be that is apple farming or whatever. But when you go down this route, you never stop working. Except that you now work on things you enjoy. But if your definition of retirement is doing 'nothing ever after'. Then you sure need lots and lots of cash, real estate, good insurance and kids who can take care of you in old age. That is difficult to achieve, assuming you don't win the start up lottery. After total analysis(I'm 27 currently), this is what I believe can make you rich. a. Never have credit card,loans or any kind of debt. Interest is a dangerous thing and often eats most of your earnings. b. Understand how much you need to save and invest. Get a good savings and investment plan *now*. c. Productivity is extremely important because you are working against time. d. Have side projects, that can be monetized. Do not work for your company for more than what they pay you. e. Use every savings and investment opportunity, even if it means saving and investing little. With a little hard work, clever savings, investments and avoiding debts and interests any person go far. Also I don't get blind consumerism to keep buying stuff you just don't need at all. With all this and monetizable side projects any person can be financially stable by 40-45ish to have money to relax and take life as it is supposed to be taken.

simonbarker87 14y ago

This isn't really a millions miles away from what Tim Ferris is suggesting in 4 Hour Work Week (which everyone seems to universally hold up as the best self help book ever ... I disagree) but going about it in a different way. I think all ideas like this have merit in certain circumstances, the trick is to realise that it won't all apply to your situation and that you should take the basic principles and see if it fits for what you want in life.