9 ms·

Even if you're a "rich" software engineer, the advice is overstated. You need to make a lot of money (or be really lucky in the stock market) to have a 66% sa

by timr 13y ago

Even if you're a "rich" software engineer, the advice is overstated. You need to make a lot of money (or be really lucky in the stock market) to have a 66% savings rate lead to any sort of real retirement in 10 years. Say I make $100k gross per year. That's a very nice salary for a new grad engineer -- the kind of person who might take this ten-year-retirement advice to heart. Roughly 1/3 of that income goes to taxes, so I'm actually taking home $66k per year. If I save 66% of that, I'm saving ~$44k per year. These numbers can shift a little depending on where you live, how you save, etc., but they're not going to change by a huge amount. Multiply that $44k by 10 years, and you're not even at half a million dollars. That's not retirement money (unless perhaps your "retirement" is to continue to live off of $20k/year indefinitely and die young from eating too much ramen). The other half of the equation is finding investments that return a reasonable yield without betting the farm on timeframes <= 10 years. In this market, that's nearly impossible. Your choices are stocks and bonds (which are fine, but are risky on anything less than a ten-year window), or investments that don't yield anything.

Afforess 13y ago
a 4% rate of return, on average from the S&P 500 index is reasonable. With 1 million, you could live off of $25000/yr, which is more than enough to live like a king if you do not have other debt payments. You could rent a $1000/month apartment, pay for a $400/month car, eat $300/month in groceries, and still have thousands and thousands left over.
- timr 13y ago
  "a 4% rate of return, on average from the S&P 500 index is reasonable." Not if you're depending on using that money in the next ten years. Or if you believe in inflation. A 4% rate of return from an index fund is long-term average behavior, not instantaneous yield. Historically, depending on when you entered the market, a ten-year outlook could have led to anything from a huge gain to a huge loss. If you're the unlucky investor who started saving 66% of your income in the stock market in 1999, you'd still be putting off your retirement today. Also, your definition of "king" is pretty context-dependent. I can assure you that 25k will not allow you to live like royalty in San Francisco. Or, say, if you have children. It's a difficult concept to grasp when you're in your 20s, but most people do tend to reproducing by the time they're in their 30s. Oops. There goes that 25k retirement...
  - Afforess 13y ago
    4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years. RETIRING in San Francisco would be a massive mistake. If you are retired why the hell are you living in a uber-expensive city. Location matters less when you don't have a job. Move up to Oregon. Also if you decide to have children, that is a conscious decision you made to dump your millions down the toilet. I guess some people like kids enough to work an extra 30 years. I sure don't.
    - timr 13y ago
      "4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years." It's only "conservative" if you don't understand variance. The risk isn't in the value of the average. The risk is in the variation around that average. Like I said: if you invested 66% of your net income in the stock market in 1999, you'd be a long way from retirement today. And if you're tempted to keep arguing this point, you might want to take a moment to consider how I know this. (Hint: the reality of a great many investors trumps your theories of how the stock market works.)
      - Dylan16807 13y ago
        S&P 500 is higher now than it was then. Sure variance can hurt, but investment made from 1994 through 2004 would be doing fine right now.
      - Afforess 13y ago
        You'd still be plenty wealthy due to dividends. Raw price indexes hide the true wealth.
        dragonwriter 13y ago
        > You'd still be plenty wealthy due to dividends. Not all stocks offer dividends, and not all investors choose stocks with dividends (there are tax disadvantages to returning value via dividends rather than via appreciation of stock value.) Dividends offer a lower risk component of return, but typically in a diversified portfolio you can put some share of the portfolio in a lower-risk investment to have that lower-risk component. So, for growth focused investors that aren't risk sensitive, dividends can be a negative feature, and for investors that are risk sensitive, they aren't essential as there are other ways to tune a portfolio around risk. This makes, at best, only a weakly positive net incentive, and more likely a negative net incentive, for firms to offer dividends.
- chad_oliver 13y ago
  Don't forget to account for inflation. You're more likely to end up with a 1-2% return in real dollars.

by timr 13y ago

Afforess 13y ago

a 4% rate of return, on average from the S&P 500 index is reasonable. With 1 million, you could live off of $25000/yr, which is more than enough to live like a king if you do not have other debt payments. You could rent a $1000/month apartment, pay for a $400/month car, eat $300/month in groceries, and still have thousands and thousands left over.

timr 13y ago
"a 4% rate of return, on average from the S&P 500 index is reasonable." Not if you're depending on using that money in the next ten years. Or if you believe in inflation. A 4% rate of return from an index fund is long-term average behavior, not instantaneous yield. Historically, depending on when you entered the market, a ten-year outlook could have led to anything from a huge gain to a huge loss. If you're the unlucky investor who started saving 66% of your income in the stock market in 1999, you'd still be putting off your retirement today. Also, your definition of "king" is pretty context-dependent. I can assure you that 25k will not allow you to live like royalty in San Francisco. Or, say, if you have children. It's a difficult concept to grasp when you're in your 20s, but most people do tend to reproducing by the time they're in their 30s. Oops. There goes that 25k retirement...
- Afforess 13y ago
  4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years. RETIRING in San Francisco would be a massive mistake. If you are retired why the hell are you living in a uber-expensive city. Location matters less when you don't have a job. Move up to Oregon. Also if you decide to have children, that is a conscious decision you made to dump your millions down the toilet. I guess some people like kids enough to work an extra 30 years. I sure don't.
  - timr 13y ago
    "4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years." It's only "conservative" if you don't understand variance. The risk isn't in the value of the average. The risk is in the variation around that average. Like I said: if you invested 66% of your net income in the stock market in 1999, you'd be a long way from retirement today. And if you're tempted to keep arguing this point, you might want to take a moment to consider how I know this. (Hint: the reality of a great many investors trumps your theories of how the stock market works.)
    - Dylan16807 13y ago
      S&P 500 is higher now than it was then. Sure variance can hurt, but investment made from 1994 through 2004 would be doing fine right now.
    - Afforess 13y ago
      You'd still be plenty wealthy due to dividends. Raw price indexes hide the true wealth.
      - dragonwriter 13y ago
        > You'd still be plenty wealthy due to dividends. Not all stocks offer dividends, and not all investors choose stocks with dividends (there are tax disadvantages to returning value via dividends rather than via appreciation of stock value.) Dividends offer a lower risk component of return, but typically in a diversified portfolio you can put some share of the portfolio in a lower-risk investment to have that lower-risk component. So, for growth focused investors that aren't risk sensitive, dividends can be a negative feature, and for investors that are risk sensitive, they aren't essential as there are other ways to tune a portfolio around risk. This makes, at best, only a weakly positive net incentive, and more likely a negative net incentive, for firms to offer dividends.
chad_oliver 13y ago
Don't forget to account for inflation. You're more likely to end up with a 1-2% return in real dollars.