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The Simple Math Behind Early Retirement

196 points by jrheard 14y ago

r4vik 14y ago
> Assumptions: > - You can earn 5% investment returns after inflation during your saving years
- praptak 14y ago
  Covered here: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/ http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-i... Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk82uEJ:www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/+&cd=4&hl=en&ct=clnk&gl=pl&client=firefox-a http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...
  - jerf 14y ago
    One of my favorite infographics ever: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110... As I say every time I link it, read it carefully; it does not say what most people initially think it is saying when they first see it. In this particular case I bring this up to show that the "standard" 7% over a long term can be optimistic. As it happens that corresponds to the first light green color, and that is not as pervasive as you may have been led to believe. Sub 3% over 20 years is a very realistic possibility. Individual snapshots of that graph can be highly deceptive. The whole is quite interesting and difficult to summarize.
    - praptak 14y ago
      Yeah, it's not that simple and on top of that "historical performance is no guarantee of the future one".
    - jcdavis 14y ago
      That chart takes away inflation. When people say the expect 7%/year they are not including inflation. 7% a year pre inflation and taxes is likely roughtly 3.5-4%, which is grey on that chart.
      - dro77 14y ago
        Yes. This chart goes along perfectly with MMM's math.
    - T-hawk 14y ago
      Yes, great graph. It illustrates the fundamental truth overlooked by most retirement planning schemes: the stock market doesn't just automatically grow in value over time. It grows in emphatically punctuated booms driven by technological advances. The boom of the 1920s owed a lot to the telephone and automobile, linking businesses together in new ways. The boom of the 1960s was mainframe computerization, and the boom of the 1990s was personal computers and Internet connectivity. All these permitted entrepreneurs and established businesses to gain ever larger leveraged multipliers of turning effort into impact and value and wealth. No breakthrough technology means no boom. We won't have another until another such technology arises. The Internet has largely plateaued in terms of business value. We don't have anything obvious on the horizon that will create a 10x productivity multiplier over email or Excel or StackOverflow, in the way that computers replaced adding machines and email replaced snail mail. Judging by the history of industrialized society, something will arise eventually to spark another boom (my best bet is neural-computer integration), but we can't say what or when. The next 20-year quadrupling of the stock market may begin in 2015 or in 2060.
    - sethist 14y ago
      The problem with that graph is that almost no one invests that way. People just don't dump their entire life savings into the market, wait x number of years, and then withdraw it all at once. Dollar cost averaging and changes in investment aggressiveness will likely smooth out those numbers.
  - bryanlarsen 14y ago
    He's using US stock market data for his argument. The US stock market over the last 100 years has been an obvious outlier. In that time the US grew from a small fraction of the world economy to dominating it. If you want to make this argument, you have to use global stock market data. Personally, I use 2% after inflation for my calculations, and consider that to be optimistic. There are lots of examples of stock markets returning less than inflation over long term periods.
- LVB 14y ago
  Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.
  - Ntrails 14y ago
    This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year. The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55? This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg
    - RyanZAG 14y ago
      Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee. If the stock market performs on average or better than average, you lose by using a guaranteed annuity. If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits. If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything. So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
      - Ntrails 14y ago
        First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money. The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital. This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets. The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically). I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.
- pragmatic 14y ago
  Yes, this is quite the assumption. While the US Gov't is doubling down on Keynesian spending (borrowing money, printing it, keeping interest rates near 0), there is no safe/guaranteed investment (CD) that comes close to 5%. I've hedged myself by investing in "foreign" equities. But this is no where near a steady guaranteed 5%. It's super volatile. Life is a risk. You pay your money and you take your chances.
  - martinced 14y ago
    Exactly. I was going to post exactly that, but your post resonates with me... And of course your nickname is "pragmatic". : )
octopus 14y ago
MrMoneyMustache (MMM) has a sound philosophy of life based on his experience and on Stoic literature. After reading his blog (and I mean all his articles from 2011) I've stopped buying myself a new computer every six months or so.
- jere 14y ago
  >I've stopped buying myself a new computer every six months or so. Err.. why would you do that to start with? Even my hardcore gaming friends can make machines last for years.
  - run4yourlives 14y ago
    For the same reason people buy $5 lattes. People are people. That said, I question a life so stoic it has absolutely no frivolousness. Sounds a little boring.
    - stephencanon 14y ago
      In particular, money has no intrinsic value. It only has value when you spend it. Saving money just to prove that you can is silly.
      - marekmroz 14y ago
        On the flip side, making more and more money just to spend it on useless crap that gives instant but short-lasting gratification is also silly. The way I see it, it's a scale, and hitting a balance, not striving for either of the extremes, should be a goal worth pursuing.
    - tonyedgecombe 14y ago
      I'm not sure stoicism is about denying yourself, it's more about appreciating what you have whilst not being too attached to it.
  - octopus 14y ago
    I've always liked to have the latest and most powerful piece of hardware I could afford ... I know it was a stupid thing to do, but this is the way I was.
ColinWright 14y ago
Take home quotation: Mustachians will remain a rare breed, is because this article will never appear in USA Today. (Or if it does, people will be too busy complaining about how it can’t be done, rather than figuring out how to do it)
- octopus 14y ago
  Once you stop complaining about how difficult it is to become financially independent in this economy and look in how you spend your money, the mustachian philosophy is a viable way of life.
brazzy 14y ago
> As soon as you start saving and investing your money, it starts earning money all by itself. No, it doesn't. Money cannot earn money, people do. Saving/investing money only allows people (via an arbitrarily complex system of indirections) to become indebted to you so they'll pay you some of the money they earn. This is vitally important because it means it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive. Otherwise, if everyone started following the advice in that blog to try retiring early, what would happen is that average returns would go down across the board, and that "4% safe withdrawal rate" would become 2% or even 1%, making the whole math work out quite differently. Arguably, that is already happening even without additional early retirees, simply because the increased average life expectancy (and thus the time people spend in retirement). Effectively, everyone is already doing an early retirement, compared to people 50 years ago.
- wazoox 14y ago
  > This is vitally important because it means it's impossible for a significant percentage of people to retire early ... Actually the ugly truth is that this impacts retirement at any age. Whatever way you're preparing retirement, if too many people retire at the same time they'll have to share a smaller pie overall because they'll live on wealth created by those still working, and the purchasing power of their retirement funds will necessarily be re-evaluated (or devalued) to reflect this aspect of reality.
  - brazzy 14y ago
    cf. baby boomers.
- hudibras 14y ago
  >it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive. This is an important point that's often hand-waved away in discussions of retirement, future earnings, and the aging population. However, productivity IS improving and its effects over the long run dwarf all these concerns. I think productivity improvements are difficult to "feel" because we all think about productivity in terms of our personal lives day-to-day, but not in the long term integrated over the entire economy. I certainly don't feel like I'm 16% more productive than I was 10 years ago, but that's because I'm in a different job category with more experience etc. But a hypothetical worker today doing the same job I did ten years ago probably is much more effective than I was. Here's a good overview of productivity improvements: http://www.cepr.net/index.php/blogs/cepr-blog/the-nonsense-about-a-demographic-crisis http://www.cepr.net/index.php/blogs/cepr-blog/the-nonsense-a...
STRML 14y ago
This is a really fantastic, simple way of looking at it. There are of course many other factors that go into it. One that may very well work in your favor is saving while living in a big city, then moving some place small later on. This could cut your living expenses by a percentage big enough to make a very significant difference in the number of years you have to work. Of course, once you involve kids, the whole thing becomes a lot less predictable.
- jrheard 14y ago
  > There are of course many other factors that go into it. One that may very well work in your favor is saving while living in a big city, then moving some place small later on. That's how I've been doing the math (over, and over, and over) ever since I found this article last night - calculate savings based on my tech job in sf, and then calculate expected expenses based on what it'll be like to live basically anywhere else and maintain the same cost of living (sf is 72% more expensive than portland[0] and a whole lot more expensive than living comfortably off of $10k a year in thailand). [0] http://www.bestplaces.net/col/?salary=30000&city1=54159000&city2=50667000 http://www.bestplaces.net/col/?salary=30000&city1=541590...
  - STRML 14y ago
    Christ, many of us on this site could likely get away with retiring now & moving to Thailand, if you really can assume 5-7% long(long!)-term returns on the stock market.
    - brewdad 14y ago
      Just don't insult the king.
- octopus 14y ago
  The author has a kid. Just be careful that by retirement he doesn't mean "stop the work and do nothing". In the author's view retirement means financial independence - the point in life where you don't need to work anymore but you work for your own pleasure (or you work on what you really like to do).
ry0ohki 14y ago
This is somewhat misleading, because the primary thing that allows these accelerated numbers is an extremely low spending rate. IE you can retire in 2 years if you save 95% because somehow you are able to live on only 5% of your take home pay (in his 50k example, this would mean you could live on $166 per month). I completely agree with his philosophy of living below your means, but just realize that whatever level you are living at when making these kind of savings is the same level you'll need to live at in retirement given these terms.
- darkarmani 14y ago
  He assumes your current expenses are at steady state. It's a pretty obvious assumption. If you pay off your home, your expenses in debt servicing will be lower when you retire.
simonbarker87 14y ago
MMM has an excellent philosophy, however following his methods and working toward early retirement does require a salary level that is a considerable amount above the minimum basic cost of living for where you are. By minimum cost of living I'm not talking about the average cost of a restaurant meal in one area/country vs another or the average cost of a cable tv package in one country vs another (if you consider those essentials then you should spent some more time reading the MMM blog). I'm talking about the cost of a pint of milk, a loaf of bread, a chicken (dead for eating, not as pet), public transport when you can't cycle, car insurance (if you can't avoid owning a car - some people can't), rent (in the UK this is pretty consistent, except in London), mortgage, TV License (don't even try to tell them you don't have a TV, they won't believe you and you'll be fined), gas and electric bills etc. There is a minimum cost to live in a country and you need to earn a reasonable amount above before you even get to the point of choosing between buying a starbucks or putting that money into savings.
- d4rti 14y ago
  TV licensing have a page for declaring you have no TV. https://www.tvlicensing.co.uk/no-licence-needed/ https://www.tvlicensing.co.uk/no-licence-needed/ I've never had (or needed) a TV license, and I've never been fined.
  - hudibras 14y ago
    I love the juxtaposition of using a computer to declare that you don't have a TV.
  - WickyNilliams 14y ago
    I've not had or needed a TV licence for the last 4 or so years. Initially the tv licencing people were chasing me up constantly, sending letters to which i just had to respond to say "I still don't need a licence", a few visits to the house etc (all this is kind of tantamount to harassment really), but eventually they backed off. As for needing a tv licence at all, I don't see why anybody does in the era of broadband. Streaming videos is allowed without a TV licence, provided the stream is not live, so you can even watch video on BBC iPlayer, legitimately. Combined with every other terrestrial channel's free online offerings and more recently netflix, there is no need to pay a tithe to the BBC. It really is a simple adjustment but it gives decent savings.
bproctor 14y ago
I don't know whose life works in this extremely simple way, but it sure isn't mine. I've gone from making good money to being broke to making good money again and everywhere in between in my 35 years on this planet. These types of things never make any practical sense because they assume I'm going to be working at the same job for the same pay for the next 30 years or so. Maybe that was the norm in the '60s but few people do that anymore. Saving money is good, no doubt, but if you're concerned about retiring early, you're much better off figuring out how to do it by making more money.
- jrheard 14y ago
  If you save a high enough percentage of your take-home income, the article actually argues that you could be done in 7-10 years starting from scratch, which sounds a lot more doable to me than the 30 years you're expecting.
  - smackfu 14y ago
    The problem with the extremes of this logic is that if you scrimp and save and live poor to get to that 75% savings rate... you still have to live poor for the rest of your life on that 25% of your take home.
    - danielweber 14y ago
      You can raise your lifestyle over time. Given the hedonic treadmill, you are more likely to feel happiness from any increase in your standard of living, but you reset to your prior level of happiness. So make your bumps in standard of living as small as possible.
    - gte910h 14y ago
      Nope. 10 years later you can go screw it all, and still have 35k in passive income a year and a huge nest egg. You're also probably think 35k in an expensive place, where he lives in a random suburb of boulder I think.
      - 14y ago
RyanZAG 14y ago
Interestingly, if you look at the break-down of how much you spend, for many people a majority of that spend is simply a function of where they live. If you're living in SF, your food+housing+etc is going to be a far greater multiple than if you live out in the sticks. So I'd say the best way to retire early is probably to get a telecommuting job that pays similarly to your current job, and move to VietNam or Africa. Your expenses should be a fraction of what they were before, and your income should remain similar. Instant years off your working career and no traffic pollution to spoil your day. I think we might be seeing more of this in the future...
- rdl 14y ago
  Particularly if you can combine that with some kind of passive/recurring income (do consulting from Vietnam, and then also build a product/service from that experience with minimal maintenance)
outside1234 14y ago
There is a incorrect assumption - you can't take out 4% if you are only assuming at 5% rate of return. The 4% number comes from an assumption of 8.5% (long term stock market returns) minus inflation minus taxes. So in your 5% assumption, this means you can only take out 0.5% or less. But the article is overall directionally right. The less you spend on shiny, the less you need, and therefore the less you need for retirement.
OGinparadise 14y ago
Nothing new, but every time I put some aside, something happened: I either lost on the market or needed it for unexpected expenses. (On the bright side I have a paid-off home and minimal living expenses.)
hudibras 14y ago
It's always embarrassing to admit that you're a part of a cult, but I'm a huge fan of MMM and his spiritual godfather Jacob (earlyretirementextreme.com) and I'm currently on track to retire in 4 years in my early forties. Few points to remember as you browse the site: 1. Retiring early means that your post-retirement life could very well be 50 years long. Over that timeframe, 5-7% return on investments is a reasonable assumption. 2. Living on your investment income also means drawing down your principal eventually. The "goal" is to draw the last dollar from your retirement account on the day that you die (nobody actually believes that, what with passing money to your heirs, your presumably unknown date of death, and at least a small trickle of social security continuing, but that's the theory.) 3. Some of the lifestyle changes seem drastic, but you have to remember one thing: you are no longer working. Having complete freedom to do what you want each day is the whole point of retiring early.
- brazzy 14y ago
  There are very few really reasonable assumptions over a 50 year timeframe. 5-7% ROI is not one of them, I'd say. On the other hand, you missed an important point: 4. "No longer working" isn't a permanent all-or-nothing decision. You can start working again if it becomes necessary for some reason (probably won't earn quite as much though). Or even keep working, just with fewer hours and/or a job that pays less but which you enjoy more.
  - hudibras 14y ago
    That's true, it's the flexibility to work exactly as much as you want--even if it's zero hours a year. In my own financial calculations, I also assume that I start collecting social security benefits when I turn 67. A lot of people consider that naive ("SS is going bankrupt!"), but I don't. So that'll be either a raise for my retirement income or at least a cushion to soften the losses I may have taken in the market in the preceding 25 years.
    - marvin 14y ago
      I'm a big fan of MMM, but I'm also not from the US. From an external point of view, making any assumptions about United States pensions far in the future seems like a bad idea. The United States can barely pay interest on its foreign debt (debt ceiling/fiscal cliff debate), how do you expect it will be able to honor its national debt obligations without resorting to inflation?
wikwocket 14y ago
I would disagree with his point that "cutting your spending rate is much more powerful than increasing your income." He says this is because it permanently reduces your cost of living, which reduces your required retirement nest egg. But increasing your income has permanent affects too: it increases your net each month, and multiplicatively increases all future earnings. A $3K raise or $10K bump from job-hopping today will bump up all future salaries. And then this trickles into additional retirement savings, and you get more multiplication from investment returns. My point is that, yes, be frugal, but put at least as much time and effort into increasing your income as you do into reducing spending. The other reason is that, you can only reduce spending so much, until you are living on bare essentials. But your potential income is unbounded. :)
- breischl 14y ago
  Greater income only last until you stop working, which may not be very long if you're seriously planning on retiring early. But you can maintain a lower cost-of-living until you stop living, which will hopefully be a much longer time. :)
smackfu 14y ago
This is definitely simple math, because it assumes minimum current living expenses = retirement living expenses. But for people with kids or who live in expensive areas now, current living expenses are much higher than will be required in retirement.
liber8 14y ago
MMM has a philosophy that is mathematically sound, and might even work for some people. Unfortunately, it's proven to fail for just about everyone (the spend less, save more advice has been around since the industrial revolution, and it isn't working to well: the average American has $16k in credit card debt). The reason it fails is because it ignores basic psychology. The key quote in this article is: >>But simply cutting cable TV and a few lattes would instantly boost their savings to 15%, allowing them to retire 8 years earlier!! Are cable TV and Starbucks worth having two income earners each work an extra eight years for???<< Again, mathematically accurate, but not helpful (pick up any financial "advice" in the last 30 years and you will see this exact argument). Americans are busy. When most of them get home from work, they want to relax and be entertained. There's no medium ever invented that does this better than television. Americans are also rushed. They want coffee, and buying one at the starbucks next to work is a lot easier and tastier than brewing it yourself. People firmly believe that these things make their lives appreciably better. That's why they pay for them. Telling them to go without is foolhardy. Yes, they may do it for a bit, but then they slip and get a coffee one morning. Then they're back to their routine. The insidious problem with this is that it sucks up attention and breeds a mentality of failure. You've now got this guy constantly worrying about the $20 a week he spends on coffee. Then, when he inevitably heads to starbucks he thinks he's failed. "Man, I can't even stop paying $4 a day for coffee..." How likely is that guy to focus on things that actually matter, like setting up an automated draw from his checking account into his retirement account? He's not. That's one of reasons the average American nearing retirement has less than $100,000 saved. It’s not for lack of education. People are well aware that cutting expenses and saving more means they can retire earlier. It’s for lack of execution. People think the path to retirement starts with lattes and cable. That’s a much bigger daily sacrifice, so people don’t even start. Finally, this quote is complete nonsense: >>The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect:(1) it increases the amount of money you have left over to save each month, and (2) it permanently decreases the amount you’ll need every month for the rest of your life.<< Giving up lattes, cable, or any other luxury, is not permanent. As millions of Americans can attest to, these spending habits nearly always recur. It’s psychologically no different than the people who make new years resolutions to work out, sign up for a gym membership, go three times, and then continue to get fat the remaining 50 weeks of the year. If you want to retire early, focus on the things that will have the largest impact: automate your finances. Set up a system that automatically deposits a portion of your paycheck into your savings, investment, and retirement accounts. Automate your investment and retirement accounts to purchase the bond/equity ratios that suit your age (or if you’re lazy, just buy lifecycle funds). Once you’ve got this down, you should focus on building skills to earn more money. Your skills, unlike your ability to stay away from lattes, won’t diminish over time if you use them. Or, if you’re lazy, then you can focus on cutting lattes and cable. But good luck with that.
dionidium 14y ago
Are cable TV and Starbucks worth having two income earners each work an extra eight years for??? Well, of course they are, for your values of "cable TV" and "Starbucks". Here's a thought. Move to the Midwest. Get a couple roommates and eat simple foods. Never eat out and don't own a car. And don't buy anything else. You could survive on less than five grand a year with that lifestyle. I'm sure a lot of HNers already have enough money in the bank to live the rest of their lives like this. But what's the point?
- hudibras 14y ago
  Five grand a year is probably too extreme, that's less than $15/day. But $15k/year is definitely doable with a $400K nest egg. 16 million households in the U.S. survive on less than that and most of them have to work to do so.
  - dionidium 14y ago
    That number was based on the prevalence of reasonable apartments in my city that rent for $450/mo or less. With a roommate that's $225/mo or $2700/yr. That leaves $191/mo for food and toothpaste and the like, which is doable for one person. (Clothes are essentially free if you don't care what you look like.) The example was meant to be extreme and you can adjust the dials a bit without missing my point, which is that of course it's easy to retire if you remove the requirement that you might want to buy stuff.
    - hudibras 14y ago
      No problem, I mostly agree with you. The only assumption I didn't like was living with a roommate who pays half the rent (not a spouse) for the next 50 years. That's a little extreme even for me.
cerebrum 14y ago
> - You can earn 5% investment returns after inflation during your saving years Is this a realistic assumption? Just consider how much people have lost in the housing bubble.
- muzz 14y ago
  Are you referring to the housing bubble? The 10-year return on the S&P 500 index (not including dividends, otherwise it would be higher) is slightly over 5%, and that includes the biggest stock market meltdown since the Great Depression.
  - cerebrum 14y ago
    Are you taking inflation into account?
ChuckMcM 14y ago
Sadly MMM and others don't mention the whole "all 5% per year after tax gains get reset by 20 years when the world markets crash" scenario. Also he doesn't take into account if you have kids and want to help them with their college education where that leaves you savings wise. Yeah, I'm annoyed to have been trying to save money through the second depression.
- peteretep 14y ago
  Not only does he, but it's linked to in this discussion. As is his having kids.
- makira 14y ago
  Fully agree on this one. Assuming "You can earn 5% investment returns after inflation during your saving years" is the exact reason why so many retirement funds are having problems. %5 after inflation, although that might have worked great in the past, is optimist at best regarding the future.
  - alsocasey 14y ago
    Be working during the relatively high inflation of the 80s (wages lead inflation), retire during the record low rates of 00s so you're money stretches further/longer is definitely a nicer story then the other way around...
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- alsocasey 14y ago
  Technically, if you didn't liquidate investments during the crash you'd have made what you lost back and more by now... assuming a representative index fund type deal.
nicholassmith 14y ago
Best thing you can do with your finances is do what people are doing to lose weight, track everything. You spend £2, you put it on. Doesn't matter how trivial it is, log it with details so you can track it. At the end of the month have a look to see where it's all gone, it gives you feedback and you can adjust. My take home hasn't changed but how much I'm not spending has, and it's very nice. I probably won't retire early, I like working. Taste of the biscuit, office natter.
petercooper 14y ago
My strategy is a bit different though is ultimately still a case of sacrificing now for an income later. I'm building a company that can keep running (eventually) without my involvement so I can continue to draw a salary for as long as I wish or, if I so wish, sell it to provide the lump sum I need. Slightly risky since I'm not saving for retirement at all but putting all my money into building said business.. ;-)
retube 14y ago
> You can earn 5% investment returns after inflation during your saving years Ha ha. This is _wildly_ optimistic - this means 7% minimum and prob 8% or 9%. If he can guarantee these kinds of returns the world's money managers are going to be calling.
ritchiea 14y ago
The suggestion that I could, living in New York, both live off of half of my take home pay and retire early based on the amount I'd have in the bank after 16 years of doing so, is completely absurd
- brandoncor 14y ago
  Why is it absurd? The former is completely based on a combination of income and lifestyle, so I can't argue with that. However, the latter is just math. According to the article, if you save 50% and maintain your current lifestyle, assuming a 4% withdrawal rate, you'll be financially independent.
minikites 14y ago
>If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart In what universe is saving half your paycheck a reasonable percentage?
- jrheard 14y ago
  In the blog author's. He makes a pretty compelling case for it - I recommend reading through more of the blog.
- methodover 14y ago
  That's what I was thinking... About a year ago, I started making $40k/year. It's just barely enough to get by. Most of my take-home goes to rent, student loans, and other expenses that I can't lower. And I'm fairly frugal as it is -- I try to keep my food expenses down, I don't visit restaurants very often, I don't have cable tv, I don't really even have much furniture. I do my best to take super frugal vacations. I don't have any credit card debt or vehicle debt. Saving 50% of my income is not possible for me without living in an untenable situation.
- simonh 14y ago
  Bear in mind that payments against the principle of a mortgage count as savings. My wife and I have been saving abut half our earnings for some time now, despite having kids. It helps that I have a reasonably well paid Tech job and she's on a starting Nurse's salary (She's Chinese so had to re-educate/qualify from scratch which set her back a bit), but we were saving 1/3 while she was studying Nursing.
- logn 14y ago
  I save 65%. I make $48/hour and don't live in New York, LA, or San Francisco.
eric970 14y ago
Am I the only one that feels like I'd rather be making money and enjoying myself at the same time, rather than stressing out about putting 50% of my income towards retirement?
- jrheard 14y ago
  If you set up automatic 401k deposits and direct deposit a percentage of your paycheck to Vanguard, you won't stress out about it at all. You'll just see a different number on your take-home paycheck, get used it it quickly, and go on enjoying yourself without stressing out. Or at least that's my theory - I'm setting up that direct deposit situation today, and I'm planning on setting the percentage a lot higher than I would have before reading this article.
  - hudibras 14y ago
    This is exactly the right thing to do. It takes a leap of faith, but you really do get used to the lower level of take-home pay quickly. An added bonus is getting the Vanguard statement each month and seeing it grow.
  - dinkumthinkum 14y ago
    I think you missed his point. But I will say the parent is not alone. :)
mephi5t0 14y ago
This all works only if everything is steady in life and it isn't. Today you work and save tomorrow you got a kid and your spendings take off and fly. Sometimes you want to celebrate something so you go to a bar and drink with friends which will kill your "latte-savings" for 2 weeks. Then you wake up and your tooth is killing you. you have to do a root canal and even with insurance it will dig into savings. Graph is too simplified. It will have spikes and drops - depends on each persons life and experiences...
- dmm 14y ago
  The author has a kid.
brads84 14y ago
I'm surprised how many people are agitated by the article suggesting that they can stop working earlier if they save more money. As the article stated: "The only reason Mustachians will remain a rare breed, is because this article will never appear in USA Today. (Or if it does, people will be too busy complaining about how it can’t be done, rather than figuring out how to do it)"
PKop 14y ago
The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. Note to our government, cut spending!
roc 14y ago
Maybe I missed it, but did the Shockingly Simple Math completely neglect that wages and thus lifestyle typically increase over a career? And that plausible-savings-rates go up as wages increase, as many lifestyle costs are regressive? [1] Calling out young professionals for $4 coffees is not only an act devoid of human understanding, it seems to be ignoring that many young professionals can only maintain their higher pay/higher stress jobs because small treats keep them energized and sane. And maintaining those careers, even with such expenditures, makes higher total savings possible. [2] Similarly the article gives short-shrift to retirement lifestyle. It concedes, in passing, that lifestyle at retirement is fixed based on prior working wages. (By admitting that you need to maintain the lifestyle inherent in your savings rate even after you retire). But it doesn't spend any time talking about the human implications of that. Most people would look at a $10/hr-and-saving-nearly-every-penny lifestyle and say "this is not retirement. even if i can maintain this lifestyle after only 10 years of work". They see it as scrimping and saving and deferring joy so that they can ... continue scrimping and saving? [3] Facing such a situation most would opt to continue working, earning promotions, adding to their nest egg and disposable income level, rendering that "achievement" of early retirement as academic-at-best but utterly irrelevant to their actual life. This is all why sensible retirement planning starts from defining the desired retirement lifestyle and working backwards from there -- accounting for likely wage increases, the declining impact of necessary spending as wages increase, allowing for reasonable levels of luxury spending [4] and accounting for planned life changes, like a house, spouse and children. Even in the "early retirement" fantasy that hinges on the notion that after retirement you would simply 'work for yourself' or pursue some creative or personal dreams, the costs implicit in pursuing said endeavors need to be calculated into retirement lifestyle to determine an actual retirement age and thus savings rate. This is particularly necessary when you're pitching the idea of pursuing those things only at retirement, by deferring any and all possible costs in the pursuit of some maximal savings rate. [5] Most people typically say something like "I'd like to retire and travel and paint". They'll then do things as crazy as including costs related to preparing for years of travel and learning to paint during their working years so they'll actually be ready for their 'retirement' (also: so that they'll actually know whether or not they'd actually enjoy traveling and painting). At which point the "live more frugally and retire earlier" approach is, again, revealed to be irrelevant for most, as those preparatory and exploratory costs push down feasible savings rates. The curves in the article allow for this sort of thing, of course, and one can argue "individuals can simply adjust their savings rate downward to allow for their desired lifestyle". But it still neglects that retirement lifestyle is the fundamental consideration. Further, once the exercise is done and the curves adjusted, the whole notion of retiring all-that-much-earlier is, for most people, exposed as infeasible or unattainable. Lastly, the math above completely ignores that time is not fungible. That is: skipping luxuries in your 20s is not necessarily equivalent to additional years of hypothetical leisure in your 60s. There are things that can only realistically be pursued at a younger age and their costs can make the high savings rates required for such 'early retirement' dreams largely unattainable. Which is all to say: Yes, one can attain academic early retirement with a very high savings rate. But the lifestyle before and after aren't going to look like something the majority of people can find happiness in. And once you adjust those to allow for likely attainment of happiness, 'early' retirement generally isn't all that 'early'. [1] A $4 coffee habit has a bigger hit on savings rate at $10/hr than it does at $25/hr. Ergo many more people can more feasibly attain high savings rates at $25/hr, or more generally, later in their career when their salaries are higher. Pushing for a high savings rate early is silly-to-self-defeating (as it sets easy-to-trip 'failure' conditions that are emotionally demoralizing, particularly to those already demoralized by trying to press their lifestyle expenditures to a minimum). [2] Earnings from higher stress jobs >>> the $4 coffee habit and $100 bar nights necessary to tolerate said job. [3] Philosophically: if the pursuit of happiness is largely a function of disposable income and we're reducing disposable income to a point that allows 'early' retirement, then we're necessarily reducing the capacity to pursue happiness in our working life to achieve that goal. But said early retirement is contingent upon maintaining that lifestyle of reduced disposable income, raising the question of when exactly does one get to pursue happiness? Let alone pursue the happiness that was deferred? Talk about your pyrrhic victories. [4] Budgeting 101: You budget for things like the $4 coffee, $50 dinner out and $100 yoga classes. Because asking people to give them up in the name of maximizing savings just makes most people miserable until all they give up is the budget. Which is far more dangerous to savings than having budgeted for things like this in the first place. [5] One doesn't retire early by living on $1000/mo and then suddenly have the money to buy the cameras/mics/etc required to pursue a dream of making documentaries. At retirement you still have to live on $1000/mo. Sure, savings are generating that $1000, but if there was no room in such a budget for gear before there'll be no room after. It's necessarily the same budget. And taking money from your savings to buy said gear breaks the math that sustains the retirement lifestyle in the first place. Even if you take from an unexpected windfall -- you need those to cover over unexpected losses.
geoka9 14y ago
Assumptions: - You can earn 5% investment returns after inflation during your saving years That's a mighty assumptious assumption to make. The rest of this article is a no-brainer, I think :)
jeffdavis 14y ago
Cutting a spending habit without losing any quality of life is like an annuity and it increases your freedom. Getting a pay raise keeps paying you for a while, but has disadvantages like: * By definition, you have to keep working to keep getting it * Taxes go up * It may come with some implicit strings that require you to work more or carry more stress * arguably reduces your freedom In our field, getting a pay raise might be the easiest way to improve your savings rate, but we should just keep in mind that reducing consumption has some important advantages. And it's a good idea to practice reducing consumption now. If your income goes down or surprise expenses come up for any reason (not just retirement), it will help you get through it comfortably. It's a lot harder to increase your income in a pinch than reduce your consumption.
- enraged_camel 14y ago
  Cutting spending without losing quality of life is difficult. In the vast majority of cases, you'll be cutting from social spending (going out less), convenience, or leisure. In every single case, getting an after-tax $10,000 raise is going to be overwhelmingly preferable to cutting your spending by $10,000.
  - jeffdavis 14y ago
    "Cutting spending without losing quality of life is difficult." But it's easier to cut habitual spending, and replace it with discretionary spending and maintain or increase quality of life. You may choose to spend your limited money on a large house, a new car, and a boat; but with limited money for extras; or you can get a smaller house, a late-model used car, and have lots of extra money for social occasions and travel. The former has a high level of habitual spending and you are locked in. If times are tight, even temporarily, you have to sell those things, often at a heavy loss. You are also very strongly attached to your current salary, which reduces your freedom to try a career shift of some kind. The latter could also be a high quality of life, because you leave your smaller house to go on vacation twice a year, and you can enjoy spending on social events or conveniences. But you have much more freedom and flexibility in your life. "In the vast majority of cases, you'll be cutting from social spending (going out less), convenience, or leisure." What about getting a smaller house, or driving a late-model used car rather than a new one, or not buying that boat/plane? "In every single case, getting an after-tax $10,000 raise is going to be overwhelmingly preferable to cutting your spending by $10,000." That's true in the sense that more money is better. And cutting total spending (rather than replacing habitual spending with discretionary spending) can often reduce quality of life. However, there are a lot of dangers in only focusing on getting raises. For one thing, a raise is not necessarily permanent, so it doesn't necessarily translate into more money. And it can lead you to increase your habitual spending, which is much harder to cut later than discretionary spending. So, I think I would change my point slightly to be: keep habitual spending small, and grow it slowly in response to increases in income. To maintain a high quality of life, spend money in discretionary ways (e.g. "pay for it once") like vacations, conveniences, social outings. Oh, and renting does not necessarily count as discretionary, but it can.
kablamo 14y ago
My side project is based on this article. I was intrigued by the graph in this post and so I created an interactive chart to explore it. The calculator will tell you how quickly you can retire and what your savings rate needs to be. http://networthify.com/calculator/earlyretirement http://networthify.com/calculator/earlyretirement
- jrheard 14y ago
  I've been playing around with this page constantly for the past 12 hours and gave you you my email address via the signup box this morning :) great stuff!
nlawalker 14y ago
These two posts should be required reading before digesting anything else on MMM: 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... http://www.mrmoneymustache.com/2012/06/01/raising-a-family-on-under-2000-per-year/ http://www.mrmoneymustache.com/2012/06/01/raising-a-family-o... His advice is solid, I won't deny it. But his goals aren't everyone's goals, and the lifestyle that his advice results in isn't what everyone wants from life and certainly does not represent the only way to be happy. MMM's primary goal was to stop working a full time job as quickly as possible, and he was willing to do a lot to reach it. The goal of his advice is to help you do the same.
campnic 14y ago
I admit to some naivety on the issue, but it seems like these retirement plans have a some exposure when it comes to inflation. Looking at the world economy and the unprecedented measures that were/are being taken to avoid inflation (fed. resv lending, IMF / Eurobank bailouts for Spain/Greece, etc.) it seems like I would be worried about the future value of my money. I want to retire. I would worry that if I lived very frugally and planned to retire at 35-40, I could get depressed if outside of my control my future expenses doubled because of inflation while others who are focused on maximizing their earnings would be able to benefit from (possible) inflation through higher wages. I guess thats the same sort of snow globing that gets people in trouble when they make investments. Who knows what inflation will do.
tunesmith 14y ago
I left a comment over at the site. In short, I also think the 5% assumption is ridiculous. I have perfect data of the date and amount of every retirement contribution I've made since I started in 1993. I used historical data to look up what my APY would be if I had bought an S&P-500 index fund for each of those dates/amounts. I also compared it with historical inflation records. As of today, it wouldn't be 5% after inflation - it would be 0.9% . And this is a good period - for the vast majority of that time, it would have been a negative APY, and that's over the last twenty years. That number will be different for different dates/amounts from different people, but I can tell you that I have saved pretty consistently and aggressively over the last twenty years, and there's nothing out of the ordinary with my savings schedule - no huge gluts just before a crash or anything like that.
- tunesmith 14y ago
  Not sure anyone is reading this thread anymore, but I have to partially retract. In my case, when doing the historical analysis, I thought I had taken dividends into account but I hadn't. So in my case my historical APY would have been about 2.75% (factoring in inflation), not 0.9% . That still shows that 5% isn't close to a safe assumption, but it's not as overwhelming as it was before.

196 points by jrheard 14y ago

r4vik 14y ago

> Assumptions: > - You can earn 5% investment returns after inflation during your saving years

praptak 14y ago
Covered here: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/ http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-i... Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk82uEJ:www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/+&cd=4&hl=en&ct=clnk&gl=pl&client=firefox-a http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...
- jerf 14y ago
  One of my favorite infographics ever: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110... As I say every time I link it, read it carefully; it does not say what most people initially think it is saying when they first see it. In this particular case I bring this up to show that the "standard" 7% over a long term can be optimistic. As it happens that corresponds to the first light green color, and that is not as pervasive as you may have been led to believe. Sub 3% over 20 years is a very realistic possibility. Individual snapshots of that graph can be highly deceptive. The whole is quite interesting and difficult to summarize.
  - praptak 14y ago
    Yeah, it's not that simple and on top of that "historical performance is no guarantee of the future one".
  - jcdavis 14y ago
    That chart takes away inflation. When people say the expect 7%/year they are not including inflation. 7% a year pre inflation and taxes is likely roughtly 3.5-4%, which is grey on that chart.
    - dro77 14y ago
      Yes. This chart goes along perfectly with MMM's math.
  - T-hawk 14y ago
    Yes, great graph. It illustrates the fundamental truth overlooked by most retirement planning schemes: the stock market doesn't just automatically grow in value over time. It grows in emphatically punctuated booms driven by technological advances. The boom of the 1920s owed a lot to the telephone and automobile, linking businesses together in new ways. The boom of the 1960s was mainframe computerization, and the boom of the 1990s was personal computers and Internet connectivity. All these permitted entrepreneurs and established businesses to gain ever larger leveraged multipliers of turning effort into impact and value and wealth. No breakthrough technology means no boom. We won't have another until another such technology arises. The Internet has largely plateaued in terms of business value. We don't have anything obvious on the horizon that will create a 10x productivity multiplier over email or Excel or StackOverflow, in the way that computers replaced adding machines and email replaced snail mail. Judging by the history of industrialized society, something will arise eventually to spark another boom (my best bet is neural-computer integration), but we can't say what or when. The next 20-year quadrupling of the stock market may begin in 2015 or in 2060.
  - sethist 14y ago
    The problem with that graph is that almost no one invests that way. People just don't dump their entire life savings into the market, wait x number of years, and then withdraw it all at once. Dollar cost averaging and changes in investment aggressiveness will likely smooth out those numbers.
- bryanlarsen 14y ago
  He's using US stock market data for his argument. The US stock market over the last 100 years has been an obvious outlier. In that time the US grew from a small fraction of the world economy to dominating it. If you want to make this argument, you have to use global stock market data. Personally, I use 2% after inflation for my calculations, and consider that to be optimistic. There are lots of examples of stock markets returning less than inflation over long term periods.
LVB 14y ago
Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.
- Ntrails 14y ago
  This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year. The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55? This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg
  - RyanZAG 14y ago
    Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee. If the stock market performs on average or better than average, you lose by using a guaranteed annuity. If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits. If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything. So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
    - Ntrails 14y ago
      First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money. The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital. This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets. The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically). I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.
pragmatic 14y ago
Yes, this is quite the assumption. While the US Gov't is doubling down on Keynesian spending (borrowing money, printing it, keeping interest rates near 0), there is no safe/guaranteed investment (CD) that comes close to 5%. I've hedged myself by investing in "foreign" equities. But this is no where near a steady guaranteed 5%. It's super volatile. Life is a risk. You pay your money and you take your chances.
- martinced 14y ago
  Exactly. I was going to post exactly that, but your post resonates with me... And of course your nickname is "pragmatic". : )

octopus 14y ago

MrMoneyMustache (MMM) has a sound philosophy of life based on his experience and on Stoic literature. After reading his blog (and I mean all his articles from 2011) I've stopped buying myself a new computer every six months or so.

jere 14y ago
>I've stopped buying myself a new computer every six months or so. Err.. why would you do that to start with? Even my hardcore gaming friends can make machines last for years.
- run4yourlives 14y ago
  For the same reason people buy $5 lattes. People are people. That said, I question a life so stoic it has absolutely no frivolousness. Sounds a little boring.
  - stephencanon 14y ago
    In particular, money has no intrinsic value. It only has value when you spend it. Saving money just to prove that you can is silly.
    - marekmroz 14y ago
      On the flip side, making more and more money just to spend it on useless crap that gives instant but short-lasting gratification is also silly. The way I see it, it's a scale, and hitting a balance, not striving for either of the extremes, should be a goal worth pursuing.
  - tonyedgecombe 14y ago
    I'm not sure stoicism is about denying yourself, it's more about appreciating what you have whilst not being too attached to it.
- octopus 14y ago
  I've always liked to have the latest and most powerful piece of hardware I could afford ... I know it was a stupid thing to do, but this is the way I was.

ColinWright 14y ago

Take home quotation: Mustachians will remain a rare breed, is because this article will never appear in USA Today. (Or if it does, people will be too busy complaining about how it can’t be done, rather than figuring out how to do it)

octopus 14y ago
Once you stop complaining about how difficult it is to become financially independent in this economy and look in how you spend your money, the mustachian philosophy is a viable way of life.

brazzy 14y ago

> As soon as you start saving and investing your money, it starts earning money all by itself. No, it doesn't. Money cannot earn money, people do. Saving/investing money only allows people (via an arbitrarily complex system of indirections) to become indebted to you so they'll pay you some of the money they earn. This is vitally important because it means it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive. Otherwise, if everyone started following the advice in that blog to try retiring early, what would happen is that average returns would go down across the board, and that "4% safe withdrawal rate" would become 2% or even 1%, making the whole math work out quite differently. Arguably, that is already happening even without additional early retirees, simply because the increased average life expectancy (and thus the time people spend in retirement). Effectively, everyone is already doing an early retirement, compared to people 50 years ago.

wazoox 14y ago
> This is vitally important because it means it's impossible for a significant percentage of people to retire early ... Actually the ugly truth is that this impacts retirement at any age. Whatever way you're preparing retirement, if too many people retire at the same time they'll have to share a smaller pie overall because they'll live on wealth created by those still working, and the purchasing power of their retirement funds will necessarily be re-evaluated (or devalued) to reflect this aspect of reality.
- brazzy 14y ago
  cf. baby boomers.
hudibras 14y ago
>it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive. This is an important point that's often hand-waved away in discussions of retirement, future earnings, and the aging population. However, productivity IS improving and its effects over the long run dwarf all these concerns. I think productivity improvements are difficult to "feel" because we all think about productivity in terms of our personal lives day-to-day, but not in the long term integrated over the entire economy. I certainly don't feel like I'm 16% more productive than I was 10 years ago, but that's because I'm in a different job category with more experience etc. But a hypothetical worker today doing the same job I did ten years ago probably is much more effective than I was. Here's a good overview of productivity improvements: http://www.cepr.net/index.php/blogs/cepr-blog/the-nonsense-about-a-demographic-crisis http://www.cepr.net/index.php/blogs/cepr-blog/the-nonsense-a...

STRML 14y ago

This is a really fantastic, simple way of looking at it. There are of course many other factors that go into it. One that may very well work in your favor is saving while living in a big city, then moving some place small later on. This could cut your living expenses by a percentage big enough to make a very significant difference in the number of years you have to work. Of course, once you involve kids, the whole thing becomes a lot less predictable.

jrheard 14y ago
> There are of course many other factors that go into it. One that may very well work in your favor is saving while living in a big city, then moving some place small later on. That's how I've been doing the math (over, and over, and over) ever since I found this article last night - calculate savings based on my tech job in sf, and then calculate expected expenses based on what it'll be like to live basically anywhere else and maintain the same cost of living (sf is 72% more expensive than portland[0] and a whole lot more expensive than living comfortably off of $10k a year in thailand). [0] http://www.bestplaces.net/col/?salary=30000&city1=54159000&city2=50667000 http://www.bestplaces.net/col/?salary=30000&city1=541590...
- STRML 14y ago
  Christ, many of us on this site could likely get away with retiring now & moving to Thailand, if you really can assume 5-7% long(long!)-term returns on the stock market.
  - brewdad 14y ago
    Just don't insult the king.
octopus 14y ago
The author has a kid. Just be careful that by retirement he doesn't mean "stop the work and do nothing". In the author's view retirement means financial independence - the point in life where you don't need to work anymore but you work for your own pleasure (or you work on what you really like to do).

ry0ohki 14y ago

This is somewhat misleading, because the primary thing that allows these accelerated numbers is an extremely low spending rate. IE you can retire in 2 years if you save 95% because somehow you are able to live on only 5% of your take home pay (in his 50k example, this would mean you could live on $166 per month). I completely agree with his philosophy of living below your means, but just realize that whatever level you are living at when making these kind of savings is the same level you'll need to live at in retirement given these terms.

darkarmani 14y ago
He assumes your current expenses are at steady state. It's a pretty obvious assumption. If you pay off your home, your expenses in debt servicing will be lower when you retire.

simonbarker87 14y ago

MMM has an excellent philosophy, however following his methods and working toward early retirement does require a salary level that is a considerable amount above the minimum basic cost of living for where you are. By minimum cost of living I'm not talking about the average cost of a restaurant meal in one area/country vs another or the average cost of a cable tv package in one country vs another (if you consider those essentials then you should spent some more time reading the MMM blog). I'm talking about the cost of a pint of milk, a loaf of bread, a chicken (dead for eating, not as pet), public transport when you can't cycle, car insurance (if you can't avoid owning a car - some people can't), rent (in the UK this is pretty consistent, except in London), mortgage, TV License (don't even try to tell them you don't have a TV, they won't believe you and you'll be fined), gas and electric bills etc. There is a minimum cost to live in a country and you need to earn a reasonable amount above before you even get to the point of choosing between buying a starbucks or putting that money into savings.

d4rti 14y ago
TV licensing have a page for declaring you have no TV. https://www.tvlicensing.co.uk/no-licence-needed/ https://www.tvlicensing.co.uk/no-licence-needed/ I've never had (or needed) a TV license, and I've never been fined.
- hudibras 14y ago
  I love the juxtaposition of using a computer to declare that you don't have a TV.
- WickyNilliams 14y ago
  I've not had or needed a TV licence for the last 4 or so years. Initially the tv licencing people were chasing me up constantly, sending letters to which i just had to respond to say "I still don't need a licence", a few visits to the house etc (all this is kind of tantamount to harassment really), but eventually they backed off. As for needing a tv licence at all, I don't see why anybody does in the era of broadband. Streaming videos is allowed without a TV licence, provided the stream is not live, so you can even watch video on BBC iPlayer, legitimately. Combined with every other terrestrial channel's free online offerings and more recently netflix, there is no need to pay a tithe to the BBC. It really is a simple adjustment but it gives decent savings.

bproctor 14y ago

I don't know whose life works in this extremely simple way, but it sure isn't mine. I've gone from making good money to being broke to making good money again and everywhere in between in my 35 years on this planet. These types of things never make any practical sense because they assume I'm going to be working at the same job for the same pay for the next 30 years or so. Maybe that was the norm in the '60s but few people do that anymore. Saving money is good, no doubt, but if you're concerned about retiring early, you're much better off figuring out how to do it by making more money.

jrheard 14y ago
If you save a high enough percentage of your take-home income, the article actually argues that you could be done in 7-10 years starting from scratch, which sounds a lot more doable to me than the 30 years you're expecting.
- smackfu 14y ago
  The problem with the extremes of this logic is that if you scrimp and save and live poor to get to that 75% savings rate... you still have to live poor for the rest of your life on that 25% of your take home.
  - danielweber 14y ago
    You can raise your lifestyle over time. Given the hedonic treadmill, you are more likely to feel happiness from any increase in your standard of living, but you reset to your prior level of happiness. So make your bumps in standard of living as small as possible.
  - gte910h 14y ago
    Nope. 10 years later you can go screw it all, and still have 35k in passive income a year and a huge nest egg. You're also probably think 35k in an expensive place, where he lives in a random suburb of boulder I think.
    - 14y ago

RyanZAG 14y ago

Interestingly, if you look at the break-down of how much you spend, for many people a majority of that spend is simply a function of where they live. If you're living in SF, your food+housing+etc is going to be a far greater multiple than if you live out in the sticks. So I'd say the best way to retire early is probably to get a telecommuting job that pays similarly to your current job, and move to VietNam or Africa. Your expenses should be a fraction of what they were before, and your income should remain similar. Instant years off your working career and no traffic pollution to spoil your day. I think we might be seeing more of this in the future...

rdl 14y ago
Particularly if you can combine that with some kind of passive/recurring income (do consulting from Vietnam, and then also build a product/service from that experience with minimal maintenance)

outside1234 14y ago

There is a incorrect assumption - you can't take out 4% if you are only assuming at 5% rate of return. The 4% number comes from an assumption of 8.5% (long term stock market returns) minus inflation minus taxes. So in your 5% assumption, this means you can only take out 0.5% or less. But the article is overall directionally right. The less you spend on shiny, the less you need, and therefore the less you need for retirement.

OGinparadise 14y ago

Nothing new, but every time I put some aside, something happened: I either lost on the market or needed it for unexpected expenses. (On the bright side I have a paid-off home and minimal living expenses.)

hudibras 14y ago

It's always embarrassing to admit that you're a part of a cult, but I'm a huge fan of MMM and his spiritual godfather Jacob (earlyretirementextreme.com) and I'm currently on track to retire in 4 years in my early forties. Few points to remember as you browse the site: 1. Retiring early means that your post-retirement life could very well be 50 years long. Over that timeframe, 5-7% return on investments is a reasonable assumption. 2. Living on your investment income also means drawing down your principal eventually. The "goal" is to draw the last dollar from your retirement account on the day that you die (nobody actually believes that, what with passing money to your heirs, your presumably unknown date of death, and at least a small trickle of social security continuing, but that's the theory.) 3. Some of the lifestyle changes seem drastic, but you have to remember one thing: you are no longer working. Having complete freedom to do what you want each day is the whole point of retiring early.

brazzy 14y ago
There are very few really reasonable assumptions over a 50 year timeframe. 5-7% ROI is not one of them, I'd say. On the other hand, you missed an important point: 4. "No longer working" isn't a permanent all-or-nothing decision. You can start working again if it becomes necessary for some reason (probably won't earn quite as much though). Or even keep working, just with fewer hours and/or a job that pays less but which you enjoy more.
- hudibras 14y ago
  That's true, it's the flexibility to work exactly as much as you want--even if it's zero hours a year. In my own financial calculations, I also assume that I start collecting social security benefits when I turn 67. A lot of people consider that naive ("SS is going bankrupt!"), but I don't. So that'll be either a raise for my retirement income or at least a cushion to soften the losses I may have taken in the market in the preceding 25 years.
  - marvin 14y ago
    I'm a big fan of MMM, but I'm also not from the US. From an external point of view, making any assumptions about United States pensions far in the future seems like a bad idea. The United States can barely pay interest on its foreign debt (debt ceiling/fiscal cliff debate), how do you expect it will be able to honor its national debt obligations without resorting to inflation?

wikwocket 14y ago

I would disagree with his point that "cutting your spending rate is much more powerful than increasing your income." He says this is because it permanently reduces your cost of living, which reduces your required retirement nest egg. But increasing your income has permanent affects too: it increases your net each month, and multiplicatively increases all future earnings. A $3K raise or $10K bump from job-hopping today will bump up all future salaries. And then this trickles into additional retirement savings, and you get more multiplication from investment returns. My point is that, yes, be frugal, but put at least as much time and effort into increasing your income as you do into reducing spending. The other reason is that, you can only reduce spending so much, until you are living on bare essentials. But your potential income is unbounded. :)

breischl 14y ago
Greater income only last until you stop working, which may not be very long if you're seriously planning on retiring early. But you can maintain a lower cost-of-living until you stop living, which will hopefully be a much longer time. :)

smackfu 14y ago

This is definitely simple math, because it assumes minimum current living expenses = retirement living expenses. But for people with kids or who live in expensive areas now, current living expenses are much higher than will be required in retirement.

liber8 14y ago

MMM has a philosophy that is mathematically sound, and might even work for some people. Unfortunately, it's proven to fail for just about everyone (the spend less, save more advice has been around since the industrial revolution, and it isn't working to well: the average American has $16k in credit card debt). The reason it fails is because it ignores basic psychology. The key quote in this article is: >>But simply cutting cable TV and a few lattes would instantly boost their savings to 15%, allowing them to retire 8 years earlier!! Are cable TV and Starbucks worth having two income earners each work an extra eight years for???<< Again, mathematically accurate, but not helpful (pick up any financial "advice" in the last 30 years and you will see this exact argument). Americans are busy. When most of them get home from work, they want to relax and be entertained. There's no medium ever invented that does this better than television. Americans are also rushed. They want coffee, and buying one at the starbucks next to work is a lot easier and tastier than brewing it yourself. People firmly believe that these things make their lives appreciably better. That's why they pay for them. Telling them to go without is foolhardy. Yes, they may do it for a bit, but then they slip and get a coffee one morning. Then they're back to their routine. The insidious problem with this is that it sucks up attention and breeds a mentality of failure. You've now got this guy constantly worrying about the $20 a week he spends on coffee. Then, when he inevitably heads to starbucks he thinks he's failed. "Man, I can't even stop paying $4 a day for coffee..." How likely is that guy to focus on things that actually matter, like setting up an automated draw from his checking account into his retirement account? He's not. That's one of reasons the average American nearing retirement has less than $100,000 saved. It’s not for lack of education. People are well aware that cutting expenses and saving more means they can retire earlier. It’s for lack of execution. People think the path to retirement starts with lattes and cable. That’s a much bigger daily sacrifice, so people don’t even start. Finally, this quote is complete nonsense: >>The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect:(1) it increases the amount of money you have left over to save each month, and (2) it permanently decreases the amount you’ll need every month for the rest of your life.<< Giving up lattes, cable, or any other luxury, is not permanent. As millions of Americans can attest to, these spending habits nearly always recur. It’s psychologically no different than the people who make new years resolutions to work out, sign up for a gym membership, go three times, and then continue to get fat the remaining 50 weeks of the year. If you want to retire early, focus on the things that will have the largest impact: automate your finances. Set up a system that automatically deposits a portion of your paycheck into your savings, investment, and retirement accounts. Automate your investment and retirement accounts to purchase the bond/equity ratios that suit your age (or if you’re lazy, just buy lifecycle funds). Once you’ve got this down, you should focus on building skills to earn more money. Your skills, unlike your ability to stay away from lattes, won’t diminish over time if you use them. Or, if you’re lazy, then you can focus on cutting lattes and cable. But good luck with that.

dionidium 14y ago

Are cable TV and Starbucks worth having two income earners each work an extra eight years for??? Well, of course they are, for your values of "cable TV" and "Starbucks". Here's a thought. Move to the Midwest. Get a couple roommates and eat simple foods. Never eat out and don't own a car. And don't buy anything else. You could survive on less than five grand a year with that lifestyle. I'm sure a lot of HNers already have enough money in the bank to live the rest of their lives like this. But what's the point?

hudibras 14y ago
Five grand a year is probably too extreme, that's less than $15/day. But $15k/year is definitely doable with a $400K nest egg. 16 million households in the U.S. survive on less than that and most of them have to work to do so.
- dionidium 14y ago
  That number was based on the prevalence of reasonable apartments in my city that rent for $450/mo or less. With a roommate that's $225/mo or $2700/yr. That leaves $191/mo for food and toothpaste and the like, which is doable for one person. (Clothes are essentially free if you don't care what you look like.) The example was meant to be extreme and you can adjust the dials a bit without missing my point, which is that of course it's easy to retire if you remove the requirement that you might want to buy stuff.
  - hudibras 14y ago
    No problem, I mostly agree with you. The only assumption I didn't like was living with a roommate who pays half the rent (not a spouse) for the next 50 years. That's a little extreme even for me.

cerebrum 14y ago

> - You can earn 5% investment returns after inflation during your saving years Is this a realistic assumption? Just consider how much people have lost in the housing bubble.

muzz 14y ago
Are you referring to the housing bubble? The 10-year return on the S&P 500 index (not including dividends, otherwise it would be higher) is slightly over 5%, and that includes the biggest stock market meltdown since the Great Depression.
- cerebrum 14y ago
  Are you taking inflation into account?

ChuckMcM 14y ago

Sadly MMM and others don't mention the whole "all 5% per year after tax gains get reset by 20 years when the world markets crash" scenario. Also he doesn't take into account if you have kids and want to help them with their college education where that leaves you savings wise. Yeah, I'm annoyed to have been trying to save money through the second depression.

peteretep 14y ago
Not only does he, but it's linked to in this discussion. As is his having kids.
makira 14y ago
Fully agree on this one. Assuming "You can earn 5% investment returns after inflation during your saving years" is the exact reason why so many retirement funds are having problems. %5 after inflation, although that might have worked great in the past, is optimist at best regarding the future.
- alsocasey 14y ago
  Be working during the relatively high inflation of the 80s (wages lead inflation), retire during the record low rates of 00s so you're money stretches further/longer is definitely a nicer story then the other way around...
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alsocasey 14y ago
Technically, if you didn't liquidate investments during the crash you'd have made what you lost back and more by now... assuming a representative index fund type deal.

nicholassmith 14y ago

Best thing you can do with your finances is do what people are doing to lose weight, track everything. You spend £2, you put it on. Doesn't matter how trivial it is, log it with details so you can track it. At the end of the month have a look to see where it's all gone, it gives you feedback and you can adjust. My take home hasn't changed but how much I'm not spending has, and it's very nice. I probably won't retire early, I like working. Taste of the biscuit, office natter.

petercooper 14y ago

My strategy is a bit different though is ultimately still a case of sacrificing now for an income later. I'm building a company that can keep running (eventually) without my involvement so I can continue to draw a salary for as long as I wish or, if I so wish, sell it to provide the lump sum I need. Slightly risky since I'm not saving for retirement at all but putting all my money into building said business.. ;-)

retube 14y ago

> You can earn 5% investment returns after inflation during your saving years Ha ha. This is _wildly_ optimistic - this means 7% minimum and prob 8% or 9%. If he can guarantee these kinds of returns the world's money managers are going to be calling.

ritchiea 14y ago

The suggestion that I could, living in New York, both live off of half of my take home pay and retire early based on the amount I'd have in the bank after 16 years of doing so, is completely absurd

brandoncor 14y ago
Why is it absurd? The former is completely based on a combination of income and lifestyle, so I can't argue with that. However, the latter is just math. According to the article, if you save 50% and maintain your current lifestyle, assuming a 4% withdrawal rate, you'll be financially independent.

minikites 14y ago

>If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart In what universe is saving half your paycheck a reasonable percentage?

jrheard 14y ago
In the blog author's. He makes a pretty compelling case for it - I recommend reading through more of the blog.
methodover 14y ago
That's what I was thinking... About a year ago, I started making $40k/year. It's just barely enough to get by. Most of my take-home goes to rent, student loans, and other expenses that I can't lower. And I'm fairly frugal as it is -- I try to keep my food expenses down, I don't visit restaurants very often, I don't have cable tv, I don't really even have much furniture. I do my best to take super frugal vacations. I don't have any credit card debt or vehicle debt. Saving 50% of my income is not possible for me without living in an untenable situation.
simonh 14y ago
Bear in mind that payments against the principle of a mortgage count as savings. My wife and I have been saving abut half our earnings for some time now, despite having kids. It helps that I have a reasonably well paid Tech job and she's on a starting Nurse's salary (She's Chinese so had to re-educate/qualify from scratch which set her back a bit), but we were saving 1/3 while she was studying Nursing.
logn 14y ago
I save 65%. I make $48/hour and don't live in New York, LA, or San Francisco.

eric970 14y ago

Am I the only one that feels like I'd rather be making money and enjoying myself at the same time, rather than stressing out about putting 50% of my income towards retirement?

jrheard 14y ago
If you set up automatic 401k deposits and direct deposit a percentage of your paycheck to Vanguard, you won't stress out about it at all. You'll just see a different number on your take-home paycheck, get used it it quickly, and go on enjoying yourself without stressing out. Or at least that's my theory - I'm setting up that direct deposit situation today, and I'm planning on setting the percentage a lot higher than I would have before reading this article.
- hudibras 14y ago
  This is exactly the right thing to do. It takes a leap of faith, but you really do get used to the lower level of take-home pay quickly. An added bonus is getting the Vanguard statement each month and seeing it grow.
- dinkumthinkum 14y ago
  I think you missed his point. But I will say the parent is not alone. :)

mephi5t0 14y ago

This all works only if everything is steady in life and it isn't. Today you work and save tomorrow you got a kid and your spendings take off and fly. Sometimes you want to celebrate something so you go to a bar and drink with friends which will kill your "latte-savings" for 2 weeks. Then you wake up and your tooth is killing you. you have to do a root canal and even with insurance it will dig into savings. Graph is too simplified. It will have spikes and drops - depends on each persons life and experiences...

dmm 14y ago
The author has a kid.

brads84 14y ago

I'm surprised how many people are agitated by the article suggesting that they can stop working earlier if they save more money. As the article stated: "The only reason Mustachians will remain a rare breed, is because this article will never appear in USA Today. (Or if it does, people will be too busy complaining about how it can’t be done, rather than figuring out how to do it)"

PKop 14y ago

The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. Note to our government, cut spending!

roc 14y ago

Maybe I missed it, but did the Shockingly Simple Math completely neglect that wages and thus lifestyle typically increase over a career? And that plausible-savings-rates go up as wages increase, as many lifestyle costs are regressive? [1] Calling out young professionals for $4 coffees is not only an act devoid of human understanding, it seems to be ignoring that many young professionals can only maintain their higher pay/higher stress jobs because small treats keep them energized and sane. And maintaining those careers, even with such expenditures, makes higher total savings possible. [2] Similarly the article gives short-shrift to retirement lifestyle. It concedes, in passing, that lifestyle at retirement is fixed based on prior working wages. (By admitting that you need to maintain the lifestyle inherent in your savings rate even after you retire). But it doesn't spend any time talking about the human implications of that. Most people would look at a $10/hr-and-saving-nearly-every-penny lifestyle and say "this is not retirement. even if i can maintain this lifestyle after only 10 years of work". They see it as scrimping and saving and deferring joy so that they can ... continue scrimping and saving? [3] Facing such a situation most would opt to continue working, earning promotions, adding to their nest egg and disposable income level, rendering that "achievement" of early retirement as academic-at-best but utterly irrelevant to their actual life. This is all why sensible retirement planning starts from defining the desired retirement lifestyle and working backwards from there -- accounting for likely wage increases, the declining impact of necessary spending as wages increase, allowing for reasonable levels of luxury spending [4] and accounting for planned life changes, like a house, spouse and children. Even in the "early retirement" fantasy that hinges on the notion that after retirement you would simply 'work for yourself' or pursue some creative or personal dreams, the costs implicit in pursuing said endeavors need to be calculated into retirement lifestyle to determine an actual retirement age and thus savings rate. This is particularly necessary when you're pitching the idea of pursuing those things only at retirement, by deferring any and all possible costs in the pursuit of some maximal savings rate. [5] Most people typically say something like "I'd like to retire and travel and paint". They'll then do things as crazy as including costs related to preparing for years of travel and learning to paint during their working years so they'll actually be ready for their 'retirement' (also: so that they'll actually know whether or not they'd actually enjoy traveling and painting). At which point the "live more frugally and retire earlier" approach is, again, revealed to be irrelevant for most, as those preparatory and exploratory costs push down feasible savings rates. The curves in the article allow for this sort of thing, of course, and one can argue "individuals can simply adjust their savings rate downward to allow for their desired lifestyle". But it still neglects that retirement lifestyle is the fundamental consideration. Further, once the exercise is done and the curves adjusted, the whole notion of retiring all-that-much-earlier is, for most people, exposed as infeasible or unattainable. Lastly, the math above completely ignores that time is not fungible. That is: skipping luxuries in your 20s is not necessarily equivalent to additional years of hypothetical leisure in your 60s. There are things that can only realistically be pursued at a younger age and their costs can make the high savings rates required for such 'early retirement' dreams largely unattainable. Which is all to say: Yes, one can attain academic early retirement with a very high savings rate. But the lifestyle before and after aren't going to look like something the majority of people can find happiness in. And once you adjust those to allow for likely attainment of happiness, 'early' retirement generally isn't all that 'early'. [1] A $4 coffee habit has a bigger hit on savings rate at $10/hr than it does at $25/hr. Ergo many more people can more feasibly attain high savings rates at $25/hr, or more generally, later in their career when their salaries are higher. Pushing for a high savings rate early is silly-to-self-defeating (as it sets easy-to-trip 'failure' conditions that are emotionally demoralizing, particularly to those already demoralized by trying to press their lifestyle expenditures to a minimum). [2] Earnings from higher stress jobs >>> the $4 coffee habit and $100 bar nights necessary to tolerate said job. [3] Philosophically: if the pursuit of happiness is largely a function of disposable income and we're reducing disposable income to a point that allows 'early' retirement, then we're necessarily reducing the capacity to pursue happiness in our working life to achieve that goal. But said early retirement is contingent upon maintaining that lifestyle of reduced disposable income, raising the question of when exactly does one get to pursue happiness? Let alone pursue the happiness that was deferred? Talk about your pyrrhic victories. [4] Budgeting 101: You budget for things like the $4 coffee, $50 dinner out and $100 yoga classes. Because asking people to give them up in the name of maximizing savings just makes most people miserable until all they give up is the budget. Which is far more dangerous to savings than having budgeted for things like this in the first place. [5] One doesn't retire early by living on $1000/mo and then suddenly have the money to buy the cameras/mics/etc required to pursue a dream of making documentaries. At retirement you still have to live on $1000/mo. Sure, savings are generating that $1000, but if there was no room in such a budget for gear before there'll be no room after. It's necessarily the same budget. And taking money from your savings to buy said gear breaks the math that sustains the retirement lifestyle in the first place. Even if you take from an unexpected windfall -- you need those to cover over unexpected losses.

geoka9 14y ago

Assumptions: - You can earn 5% investment returns after inflation during your saving years That's a mighty assumptious assumption to make. The rest of this article is a no-brainer, I think :)

jeffdavis 14y ago

Cutting a spending habit without losing any quality of life is like an annuity and it increases your freedom. Getting a pay raise keeps paying you for a while, but has disadvantages like: * By definition, you have to keep working to keep getting it * Taxes go up * It may come with some implicit strings that require you to work more or carry more stress * arguably reduces your freedom In our field, getting a pay raise might be the easiest way to improve your savings rate, but we should just keep in mind that reducing consumption has some important advantages. And it's a good idea to practice reducing consumption now. If your income goes down or surprise expenses come up for any reason (not just retirement), it will help you get through it comfortably. It's a lot harder to increase your income in a pinch than reduce your consumption.

enraged_camel 14y ago
Cutting spending without losing quality of life is difficult. In the vast majority of cases, you'll be cutting from social spending (going out less), convenience, or leisure. In every single case, getting an after-tax $10,000 raise is going to be overwhelmingly preferable to cutting your spending by $10,000.
- jeffdavis 14y ago
  "Cutting spending without losing quality of life is difficult." But it's easier to cut habitual spending, and replace it with discretionary spending and maintain or increase quality of life. You may choose to spend your limited money on a large house, a new car, and a boat; but with limited money for extras; or you can get a smaller house, a late-model used car, and have lots of extra money for social occasions and travel. The former has a high level of habitual spending and you are locked in. If times are tight, even temporarily, you have to sell those things, often at a heavy loss. You are also very strongly attached to your current salary, which reduces your freedom to try a career shift of some kind. The latter could also be a high quality of life, because you leave your smaller house to go on vacation twice a year, and you can enjoy spending on social events or conveniences. But you have much more freedom and flexibility in your life. "In the vast majority of cases, you'll be cutting from social spending (going out less), convenience, or leisure." What about getting a smaller house, or driving a late-model used car rather than a new one, or not buying that boat/plane? "In every single case, getting an after-tax $10,000 raise is going to be overwhelmingly preferable to cutting your spending by $10,000." That's true in the sense that more money is better. And cutting total spending (rather than replacing habitual spending with discretionary spending) can often reduce quality of life. However, there are a lot of dangers in only focusing on getting raises. For one thing, a raise is not necessarily permanent, so it doesn't necessarily translate into more money. And it can lead you to increase your habitual spending, which is much harder to cut later than discretionary spending. So, I think I would change my point slightly to be: keep habitual spending small, and grow it slowly in response to increases in income. To maintain a high quality of life, spend money in discretionary ways (e.g. "pay for it once") like vacations, conveniences, social outings. Oh, and renting does not necessarily count as discretionary, but it can.

kablamo 14y ago

My side project is based on this article. I was intrigued by the graph in this post and so I created an interactive chart to explore it. The calculator will tell you how quickly you can retire and what your savings rate needs to be. http://networthify.com/calculator/earlyretirement http://networthify.com/calculator/earlyretirement

jrheard 14y ago
I've been playing around with this page constantly for the past 12 hours and gave you you my email address via the signup box this morning :) great stuff!

nlawalker 14y ago

These two posts should be required reading before digesting anything else on MMM: 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... http://www.mrmoneymustache.com/2012/06/01/raising-a-family-on-under-2000-per-year/ http://www.mrmoneymustache.com/2012/06/01/raising-a-family-o... His advice is solid, I won't deny it. But his goals aren't everyone's goals, and the lifestyle that his advice results in isn't what everyone wants from life and certainly does not represent the only way to be happy. MMM's primary goal was to stop working a full time job as quickly as possible, and he was willing to do a lot to reach it. The goal of his advice is to help you do the same.

campnic 14y ago

I admit to some naivety on the issue, but it seems like these retirement plans have a some exposure when it comes to inflation. Looking at the world economy and the unprecedented measures that were/are being taken to avoid inflation (fed. resv lending, IMF / Eurobank bailouts for Spain/Greece, etc.) it seems like I would be worried about the future value of my money. I want to retire. I would worry that if I lived very frugally and planned to retire at 35-40, I could get depressed if outside of my control my future expenses doubled because of inflation while others who are focused on maximizing their earnings would be able to benefit from (possible) inflation through higher wages. I guess thats the same sort of snow globing that gets people in trouble when they make investments. Who knows what inflation will do.

tunesmith 14y ago

I left a comment over at the site. In short, I also think the 5% assumption is ridiculous. I have perfect data of the date and amount of every retirement contribution I've made since I started in 1993. I used historical data to look up what my APY would be if I had bought an S&P-500 index fund for each of those dates/amounts. I also compared it with historical inflation records. As of today, it wouldn't be 5% after inflation - it would be 0.9% . And this is a good period - for the vast majority of that time, it would have been a negative APY, and that's over the last twenty years. That number will be different for different dates/amounts from different people, but I can tell you that I have saved pretty consistently and aggressively over the last twenty years, and there's nothing out of the ordinary with my savings schedule - no huge gluts just before a crash or anything like that.

tunesmith 14y ago
Not sure anyone is reading this thread anymore, but I have to partially retract. In my case, when doing the historical analysis, I thought I had taken dividends into account but I hadn't. So in my case my historical APY would have been about 2.75% (factoring in inflation), not 0.9% . That still shows that 5% isn't close to a safe assumption, but it's not as overwhelming as it was before.