A Miserable Debt-Free Life
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Because a) good luck finding an investment that'll give you 10% consistently for decades, and b) even with that magic risk-free return, his plan takes 20 years (or 22 if you somehow don't have $10K stashed up as a youngster) and then c) leaves you on the edge of your expenses (as he defines them) and reliant on that consistent 10% return continuing forever.
"Hey, if you find a magic investment, you can retire at 47 and then live in constant fear of penury!"
This is like "How to have an easy life":
1. Find a way to have plenty of money. 2. ...
Shouldn't be a problem for a large portion of HN's readership. Those who aren't in school or building a company are likely to have a tech job that pays beaucoup bucks.
you have to login to view this link, it's just filtering jobs by REMOTE + $125k+ = 255 startups.
Disclaimer: I'm a sysadmin/devops/infrastructure guy.
This isn't talking about being wealthy - it's about considering alternatives and making good choices - if you can make more than $20k a year.
That's like saying win the lottery. Sure, it could work, but it's a lot of risk and does not scale.
Kids are a choice - but even with kids one can still live frugally or prepared. For example, choosing to not have a child until you've accumulated enough savings to cover all of the extra surprise costs that can occur that most people don't plan for when having a child.
My father worked two jobs to barely make ends meet for 8 years because his financial planning revolved around a family plan that he didn't actually plan for. My family plans are actually planned and revolve around my financial plans. One problem I see people make is that their financial plans revolve around their family plans (or lack thereof).
No surprise child at 18 years of age. No poorly-planned "I think I'm ready but I'm not actually ready" child at 21-23 either. I've seen very, very, very few parents under the age of 25 that a) planned for their child and more importantly b) properly planned for their child.
Lack of planning - or having a poorly crafted plan is what is "risky" or "doesn't scale".
In fact in TFA he says he has a kid.
fixed that for you :)
it's a lot of risk
If something happens then finding a good job when your older and have not worked for a while is hard. So, IMO your better off trying to get a significantly larger nest egg than you think you need. That way compound interst works for you and you don't risk poverty while your old.
That $15k figure includes healthcare paid for and its very possible for a family to raise children on less than $30k combined. Choosing your partner wisely? That's important.
I don't understand your incredulity. People have lived and self-actualized on less than the $15k/yr equivalent forever - when did it become impossible? And why do you think so?
Dave Ramsey says, "Live like no one else, so you can live like no one else." He means, save aggressively and retire comfortably. I was already living like no one else: no car, no concerts, rarely seeing movies or eating out, no fancy clothes, avoiding doctors, less than $15 cell phone plan. And my expenses still exceeded my income. It is not so simple and easy for everyone to have savings.
However, for most of the members of this forum saving half your after-tax income is perfectly reasonable. I would wager that 90% of the people on this forum makes at least 2x the median income for their location (unless you're based in SF).
So for most people on Hacker News, saving half your post-tax income means just means living an average lifestyle at worst.
A lot of people would just prefer to spend that money living in a nice place, and enjoying certain luxuries, but it can definitely be done on the kind of income a lot of HN readers are earning.
Already that's looking far less true if you look at the past decade or two, but it's still the received wisdom because it's what people enjoyed in the past.
The FTSE 100 hasn't peaked much higher than it peaked in 99/00, and in real terms still hasn't closed as high as it did back then.
Since you were careful to talk about nomimal return, this is then further reduced by the effects of inflation. A 5% nominal return might well be easy in an environment with a high inflation rate.
I'm not suggesting that people shouldn't invest, people clearly should invest as part of a mixed portfolio, and because cash returns are typically even slower, but the original article here is unrealistic as a goal.
Edit: Dividends help too of course, they aren't tracked into the index whereas it is possible to reinvest them back in if you don't take them as income.
I'm not denying that some people can get lucky with market timings and it works out well for them, and in fact there's the whole boomer generation it mostly worked out very well for, but it does no good to the next generation to account it all towards their actions and not account for any kind of good fortune in timing.
The other thing that the frugality and savings über alles crowd neglects to mention is that different people have different preferences (and that's okay!). Including preferences dealing with intertemporal discounting. It's one thing when you are trying to develop pithy messaging aimed at the general public and quite another to make un-nuanced arguments in forums that allow for them.
Using funds with dividends can smooth returns (although not always tax beneficially).
This link says current interest rates are 3.5%. [1]
[1] http://www.infochoice.com.au/banking/savings-account/high-in...
Long term US stock market returns seem to be something like 10% but those definitely have significant risks involved, even for index funds[2].
[2] http://observationsandnotes.blogspot.com/2009/03/average-ann...
That's the line where everything fell apart.
Folks with pretty conservative Vanguard funds seem to disagree:
http://institutional.vanguard.com/iam/pdf/total_return_chart...
How can you get consistent 10% return on your investment?
Assuming a more realistic 6% nominal return - 2% inflation gives us a more realistic 4% real return.
Running the numbers that way ends up with a measly $10,000 in interest after 20 years not a whopping $47,000.
I have a script I like to run that receives as input my retirement-contribution history - amounts and dates. It pretends I simply bought VFINX every time (using adjusted-close history to account for dividends) and tells me the resultant APY. As of today, over a 20-year history, that would be 8% nominal. Factor in inflation over that time and it's below 6%. And if you were to graph that out, probably 90% of those monthly data points are much lower.
People in general aren't going to have the discipline to stay in the S&P-500 since it is so volatile, but any other approach is in effect trying to "beat the market" which doesn't work. I didn't stay in S&P-500 and my personal APY is lower.
The fact of the matter is, people tend to have more money to invest when times are good (and market is high), and less money to invest when times are bad (and market is low). So they're by definition not going to be able to match "historical stock market averages". So any advice from these many articles and blog posts basically come down to "in investment performance, be an outlier." Well, sure.
Median was 4.1% real, then that means a real return at 90% or 95% confidence was even lower.
So in my opinion, the graph confirms the rule of thumb.
10% inflation adjusted I'd think is pretty ridiculous, either it's short-term, not inflation adjusted or he's a one in a million financial miracle worker, but you can't not have any of them. Actually the S&P500 return since inception is about 10%, maybe he's referencing it. But the real return of 1950 to 2010 or so has averaged about 7%. And that uses CPI numbers which may underestimate price increases, particularly in some areas. (e.g. you probably want a better ROI than the national average in hotspots like San Fran considering you need to keep up with things like housing price increases if you're investing in stocks and living off of the returns).
But even there you need a strong stomach as these are just long-term figures in what in reality is a volatile market. It's pretty trivial to talk about a 'the real returns of 12% in the 1980s offset the 0% real returns of the 1970s' and conclude 'oh the average return ended up pretty good around 6%', but it's another thing to actually live through the 1970s, experience ridiculous inflation and stock returns that can't keep up, and sticking with your 'live off of capital' strategy, when nobody promised the 1980s would be different and you have a kid who's going to college by then, a spouse etc.
1. They usually cover about 100 years. If you're starting out your career you've probably got about 40-50 years of saving followed by say 20 years of retirement, i.e. your training data is not much more than the period you're trying to predict.
2. That history is primarily over the period of world history that can be summed up as "cheap oil". Personally I wouldn't use it to predict any other time period.
3. If you look at the returns over time, they're pretty much generational. Some generations get fantastic returns from the stock market, while others at best are keeping up with inflation. If you started investing in say 2000 you probably know which category you're in.
The 10 year US bond is often used as a risk free rate and it's about 2.2% right now if I remember correctly, and it's been as high as 3% in the past five years. And of course you can sell bonds too so it's not like they're illiquid, it's generally known as one of the most liquid markets on the planet.
But there's a bit more risk than than a 3 month bill of course which is also used as a risk free rate indicator quite a lot, and that's really low with inflation being so low right now.
Anyway I wouldn't call 4% incredible but it's definitely good and something many would be quite happy with.
Here's a nice little tool if you want to play with the numbers yourself over particular periods of time: http://www.moneychimp.com/features/market_cagr.htm
Over the 15-year period from 1966 to 1981, the real annualized rate of return in the stock market was -0.4% because of high inflation. You need to look at 20 to 30 year periods to get into the range of 7% real annualized returns across the 20th century. And there is the general issue with using the past as a statistical predictor of the future when the time window's length is a large fraction of the 20th century. Not to mention extreme outlier events whose level of impact isn't represented at all in the historical data.
A good book to read is Siegel's Stocks for the Long Run.
Granted, the 1950's had great returns, but the trend has been lower returns / year over time and both the 1970's and 2000's had negative real returns.
First, let's cover the tank in 10mm of it, which will give us all the protection we need. Freeing up that much room gives us more space to put a bigger gun on it. After vastly reducing the weight, even more so because we don't need to carry as much fuel, we don't need tracks, because an 8 wheel variant gives sufficient traction.
Oh, and since our new highly mobile and effective vehicle now costs a tenth as much, all the other expensive and slow vehicles taking on other roles in the army can be deprecated.
In fact, let's design a variant that carries fuel. In this way, instead of having 50 tanks advancing 100km per day, we can have 500 of our new vehicles advancing 500km per day, with the same firepower and effective armor, completely overwhelming any opposition. Why has nobody figured this out before?
OK, so, after we've taken the base assumption and followed the chain to its logical conclusion without error... we have nonsense. After realizing our mistake, and factoring in the real value for armor, our design and plans for reworking the army are absurd.
"Waiting longer" at 6% means 82 years to achieve the same returns as 50 years at 10%. But if we include 2% inflation as well, 6% takes 97 years to match 50 years at 10%. One of those is planning for your retirement if you're young... the other is planning for that of your grandchildren.
It also just so happened to quintuple his returns. Not exactly comparing apples to oranges when you have a 4% (realistic) v. 10% (unrealistic) return built into the model.
EDIT: I'm not sure why I'm getting downvoted here, he's talking about investing over a 20 year period - it's not unheard of to value an S&P index fund at 10% over that period!
The average annual inflation rate from 1970 is over 4%.
The annulaised return of the S&P 500 was 10.82% from 1970 to 1990. Which is grand but doesn't take into account inflation.
Adjust for inflation and the annualised return was 4.33%
So I am rolling to disbelieve that median 20 year return is 10%
It's also not unheard of for shares to double in value over a short period, but you don't know in advance which ones.
Quite simply, you are very unlikely to average at least 10% p.a. above inflation on investments over a long period.
The point is that eventually a quantitative difference becomes a qualitative difference. Few people can make a 10% annual return and many, many fewer still can make a 50% annual return. But if you just buy index funds, it's fairly straightforward for just about anyone to make a 4% annual (real) return.
Given the gigantic difference in how these curves grow over time, it's entirely fair to point this out.
It's like this popular meme:
http://i0.kym-cdn.com/photos/images/original/000/572/078/d6d...
Yes the beginning looks easy, yes I like where you got in the end, but you seem to have left out some important details on how you got there...
I actually believe the 10% reference. But I also believe that he isn't being honest about where it is from. I smell a spendthrift trust or investment property that his is milking (ie taking rents but not paying the mortgage.)
If this sounds like a rant, it is. I'm spending all day doing RSA submissions. I do this to chase business/clients/pad my resume. It's yet more time spent chasing work rather than actually doing the work. Welcome to the gig economy.
You don't need much when you have a social safety net, freely given to anyone who needs it.
Other than perhaps older parents are dependents a choice for most to take as dependents? If so - a non-financially-productive dependent is like a second mortgage - but it was a chosen one.
I have no dependants and that was a choice by me. But I have had many clients for whom having children wasn't much of a choice. Even if it were, circumstances change and they cannot be cut away like an underwater mortgage.
Good choice for now - at least financially.
As to "not much of a choice" that may be - but it was a result of forseeable consequences that were known before.
Most people can not quadruple their income, but it is technically possible to live on way, way less than most people think. The guy in the post claims his expenses are 40k/year for a 2.5 person household. That is 16k/year per person, which is low. But it can be lower than this. Check out Jacob from http://earlyretirementextreme.com/how-i-live-on-7000-per-yea..., he lives off 7k per year in California and retired in his early 30s.
Another key point is to stop thinking that there is good debt (i.e car loan at 2%) and to stop the 'keeping up with the Joneses' mentality. If you need a loan to buy something besides a house, you probably can't afford it. Being debt free can give you a mental and emotional peace that is hard to find elsewhere.
The hard part isn't knowing that you should save. The hard part is figuring out how to save, and figuring out where to put your savings. The article doesn't help at all in this respect.
If the article is merely saying that you can improve your financial situation if you save a lot of money, then it's pointless. If the article is giving more specific advice than that then saying that you can improve your financial situation by specifically getting a great job as an executive and putting your savings into investments that are so good they're effectively magic, which is also pointless.
I'm still working on explaining why a savings account with .75% interest is not a good place to keep money long-term.
1. Buy a car with cash up front.
2. Buy the same car with financing at 2% APR.
Then you should exercise option #2, and take the money you don't immediately spend and invest it aiming to get 4% return on investment (which should be achievable), then pay off your loan and realize a net 2% return.
But in general when people take out loans to buy cars they do so because it is a big purchase for them and human psychology may favor spending more if it comes out of an account in little chunks than all at once. So the "debt is okay" attitude is not good for those who do not know and cannot properly correct for their inherent biases towards spending more in small ways than in one large purchase.
Sometimes the trite saying of "Money makes money" is spot on. For most people though, you're right, that 2% deal would be a steal.
There are lots of pretty safe investments that get you 3-4% real return. Now, are they zero risk? No. But I'm not suggesting that anyone bet their life savings on this, I'm talking about buying a car, something that people will generally do a bunch of times in their life and won't be spending their retirement on. If you can get 2% APR on your car purchase, and you invest the money you save, you should more than cover that APR the strong majority of all times.
I don't know what the schools are like in Adelaide, but in much of the U.S. the impetus for sending kids to private schools is not the quality of education per se, but the quality of the students. In Baltimore, where I live, you can either send your kids to private school, or send your kids to a school where some significant fraction of everyone is in a gang. Or you can move into one of the exorbitantly priced suburbs, increasing your carbon footprint and contributing to the exodus of middle class people that makes schools in the city such a disaster to begin with.
His real secret is he made a decision to walk away from keeping up with The Jones' and stuck with it for many years. If you do the same, you can have similar outcomes by his age, assuming you want that. Some people do. Some people don't.
Is anybody else disturbed by the inclusion of his wife in his list of material posessions?
Sounds like the author was pointing out his own flaws in terms of what he considered success at that point in his life.
For example, a 4% withdrawal rate would have let retire into the teeth of the Great Depression and gone another 30 years without working a day. Adjust for your circumstances a bit, and you can make it last forever. Or get a little bit clever with variable withdrawal rates and you can increase the rate and make it last forever.
Essentially if you save 65% of your after tax income you can retire in ~11 years assuming you do not increase spending in retirement.
This model assumes a safe portfolio withdrawal rate of 4%.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
What a wonderful country.
Year 1: 100% gain Year 2: 50% loss
The arithmetic average here is 50%, which the geometric average is 0%. The CAGR listed is going the correct metric to use but that is not 9% after inflation using the date range you provided. I get 7.42% for 1/1/95 - 12/31/14 after inflation and dividends are factored in. Not bad by any stretch of the imagination, though!
On an inflation-adjusted basis, the S&P 500 has not grown at all for the past 15 years:
http://www.multpl.com/inflation-adjusted-s-p-500
The average rate of return for the past 50 years is pretty small. You can make almost any rate of return look reasonable if you cherry-pick the right timeframe, but the long-term average doesn't look good at all.
SO, while you were claiming the above poster was using bad numbers by using "the last 6 years," you are similarly using biased data by looking at the past 15 years because that's the eve of the dot com bust.
Edit: looks like without inflation, if this calculator is to be believed:
http://dqydj.net/sp-500-return-calculator/
The annualized return for the past 15 years with both dividends and inflation is under 2%.
I know that I'm cherry-picking by using a 15 year period. That was my entire point: that you can cherry-pick to find almost any rate of return.
However, that particular period is still pretty relevant. If your plan is to spend 10% of your savings per year, then a 15-year period of zero (or just small) returns will wipe you out. Even if it bounces back afterwards, you're still screwed.
And its return since the 50s is 7% in real terms. And there were decades at a time (including the 2000-2010 period, where real return was -3.4%) that significantly underperformed that), so it's not even a reliable 7% a year, which you'd need for these calculations to work out.
For additional information: www.firecalc.com
The easiest way to save is to keep spending like a student even when you start earning real money. That means avoiding the trap of wanting a bigger house, getting used to expensive food and restaurants, spending money in big brands and all the luxuries people start getting addicted as their salary go up. This goes with the second rule of thumb, never take on debt on depreciating assets. A mortgage for a house is fine, a loan for a TV is not.
It's much easier not changing your lifestyle as income increase than suddenly trying to cut expenses. Of course this advice doesn't really work for people who are paid a low salary but for software developers who earn a multiple of the median income, saving like this is easy.
It did similarly well in 2013. Are you picking stocks or something? Because you should settle down and just get some Index Funds from Vanguard.
The Median 15 year annualized return on the S&P 500 since inception is 12%, back out 2% inflation and you're right at 10% returns.
10% returns are not unreasonable. Sure it's not going to be a flat 10% every year like the article, but annualized returns of 10% over 15-20 years is doable for everyone.
lol, that's a ridiculous representation of things. A median 15 year return...
Imagine there's a fund with a 50 year history. Three 10 year periods had a return of 15%, and the other two periods had a return of -50%. Would you invest? Hell no. Yet they have an 10 year annualized median return of 15%. Who cares.
Beyond that, the 2% also isn't quite right.
In reality the return has been about 10% annualized since inception and the 100 year inflation rate has been 3.2%, but even that overstates some amazing returns a long time ago like in the 50s that won't return anytime soon.
If you want to talk about 15 year returns, talk about the most recent 15 years... Between 2000 and 2015 the return's have been 37% in total, or 2% per year, "back out 2% inflation" and I hope you enjoy your 0% returns.
Obviously we can cherry pick things all day like I just did, we can talk pre 2007 and post 2009, but 10% returns are definitely not reasonable for an average person for an average year, and that's what we're talking about here, that's what is reasonable, and that's not 10%. It's closer to 6% inflation adjusted I'd guess. And that's a huge difference, compounded over say 20 years on $100k it's a difference of $300k.
An average of 10% over a long period is doable; Berkshire Hathaway has averaged +15% for 40 years. Just because fund don't guarantee something doesn't mean it isn't doable.
When people give investment advice based on the 10% average return (which they do) then it should be a pretty safe thing and easy to achieve for everybody. Otherwise it will be bad advice for a lot of people.
To do so he:
- Home schooled his kids
- Had the benefit of free public healthcare
- His kids (who most have now got university degrees) used government interest-free loans to pay for uni
- He did take his family on a year long overseas trip back to his native country which cost about 40k
- He didn't live in a house, but in a sailing boat!
Perhaps it would be easier to earn a decent return on investments if your government doesn't subsidize borrowing so much that you earn less than a dollar a year in interest on your bank deposits. Maybe Australia doesn't do that and its banks pay a decent interest rate as a result?
In reality I bet it's about as easy no matter what country you live in and what tax rates or social programs you have access to. Simply live a somewhat frugal life, save lots of money, and let the magic of compounding work over a decade or two.
Rather than looking for excuses it's probably better to just get started.
I'm very frugal. My last car lasted 15 years.
Perhaps you'd be better off responding to what someone says instead of inventing imaginary motives.
The whole point of a society is to NOT act as an individual.
Some would say the point of having a society is to have rules that allow us to peacefully co-exist and trade with other. Its not to allow some to take advantage of others.
So many greedy people feel attacked by this kind of thing, and react to the implicit allegation that they're being wasteful with condescension, muttering about the selfishness or oddness of not having kids, or then again about how much of a difference having to support a family makes and how unrealistic idealists are.
As I heard it said once, Lawful evil: "I did it for my family".
I think I found out why.
Real life lottery winners prove that winning the lottery is achievable. That doesn't make playing the lottery good financial advice.
The lottery example you provide is one in which even the winners can't give good advice on how to win.
I thought everybody already knew that it was possible in theory to retire early and spend a big chunk of your life not working. The hard part is figuring out how. The article's implicit advice of "get a highly paid job as an executive at a big company, and find investments which reliably return 10%" is useless for that.
The input in this case matters a lot.
you mean the fact he says he's doing it... which is worthless
That'd be awesome! We all would like that! But it's not something that ever really happens. Maybe if we discover strong AI or something.
Go read http://mrmoneymustache.com