The Simple Math Behind Early Retirement
mrmoneymustache.com
mrmoneymustache.com
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.
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.
But, if that is your big sticking point, you can literally load up on the cans of pork and beans as your retirement fund.
"Savings account" is an abstraction for that, and it's important to realize how abstractions leak and fail, but for most people the abstraction is just fine.
And if everyone doesn't do that, there is a very good chance you can withdraw your money and buy some pork and beans.
Which is the point about leaky abstractions. Unless you believe there is a significant chance your scenario will play out, the distinction isn't very meaningful.
But, they won't. Not everyone is of the same age, for one. So, it's an abstraction that usually works.
Instead of accumulating pork bellies, you can accumulate pork belly futures. This is another abstraction. Not everyone can do this at once, either, but the price of pork belly futures will rise in response, telling people to stop accumulating so much of that good.
It feels like you are saying -- based on my experience talking with other people who think economics is just a sham, so perhaps I'm too sensitive to that and applying their thinking to you, unfairly -- that any savings are just a confidence game. This is what I'm arguing against.
That isn't to say that savings isn't an abstraction for something. Saving money in financial instruments isn't a "savings" game. It's a growth game. By saving, you make available capital. That capital goes towards growing the economy. Ideally, the growth in future production resulting from your capital offsets the share of production you take out in retirement. It's this element of growth that distinguishes financial savings from "savings" in the pork and beans sense.
And this is one of the good things about a capitalist free market, it reaches certain efficiencies and spreads the risk (and rewards) across the whole economy (and all its participants).
>>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<<
...
>>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.<<
Obviously the remaining workforce has become, and continues to become, correspondingly more productive. If you need another example of this, see 2008-2012. We lost millions of workers from employment ranks, and our GDP is currently higher than its ever been. Sure, past performance is no guaranty of future results, but I and many others believe this trend will only increase in the future. Fewer workers will be producing even more.
However, fact is that most people's incomes have stagnated or decreased. The increased productivity is not quite enough to compensate for the increasing number of retirees and/or super rich (the article linked to by hudibras implies it's actually mainly the latter).
Then again, it's also important to bear in mind that most common investments are made in stocks and bonds, not in workers. In this case you're investing in companies and/or government securities, not employees, so falling incomes do not necessarily imply decreased ROI.
To some extent you are right: obviously someone has to do actual work, and not everyone can just make money on investing. That said, it's not a one to one correspondance: if more people are investing, that means there's more capital available for companies to build off of, which means it's easier to get a profitable company off the ground, which leads to more economic growth.
To simplify: if you work 7 hours a day, but save 3 hours worth of income out of those 7 hours and invest it in a company in a developing economy, you could be purchasing 300 hours of economic activity. So by saving, you have actually worked 300 hours that day (without your capital, those 300 hours would not have been done at all), while if you did not save, there is only 7 hours of economic activity.
We stopped the high taxes on the rich, let the minimum wage fall in real terms, and made several other policy decisions which have caused the shift to the rich.
It's not retirees pulling us down (except perhaps arguably in the last week or two or life, drumming up huge medical bills), it's rent seeking.
It's not impossible. Everyone can just become poorer. That doesn't have to be a bad result when you consider just how wasteful most modern lives are.
Whether that's true or not is another issue of course.
edit: An earlier (and I think better) blog on this is http://earlyretirementextreme.com/, which is now discontinued. (The author recommended reading Mr. Money Mustache instead.)
As you say, a significant fraction of the population can't. But you get to choose whether you want to be part of the smaller fraction who retire early, or whether you want to help those who are.
All you need do is not spend your entire paycheck each month. The rest will be taken care of by the (still) significant fraction of the population who do.
Retirement != not working.
It's an interesting question what it will do to the job market. I suppose it means it becomes pretty much impossible to find a joby that is both enjoyable and pays well because the retirees who don't care for the salary will drive that down.
Ideally, yes. In reality, that's rarely the case, which is why wealth distribution has become such an issue and incomes continue to rise for top earners while falling for those in the middle and bottom tiers.
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-a...
"Readers may rightly note than most workers have not see the gains of productivity growth over the last three decades, but this just highlights the importance of intra-generational distribution. The impact of battles over distribution of income within generations will dwarf the impact of battles over distribution between generation."
The return on capital obviously does depend on the supply -- more supply should mean lower interest rates, exactly as you're describing, which is exactly what you want in order to keep the level of capital investment at a useful level, neither too high nor too low.
But when your dominant interest rates are chosen by committee and defended by central bank open market actions, all that price signalling doesn't happen. Investors of all kinds get false signals about the availability of capital throughout the economy, and you get clusters of malinvestment.
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.
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.
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.
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)As is his having kids.
The only crash that was nearly that drastic was the Great Depression, but it still recovered and grew from there.
But even considering that the stock market is volatile, there are always other decent investments to be made.
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.
I've never had (or needed) a TV license, and I've never been fined.
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.
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.
I probably won't retire early, I like working. Taste of the biscuit, office natter.
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.
Err.. why would you do that to start with? Even my hardcore gaming friends can make machines last for years.
That said, I question a life so stoic it has absolutely no frivolousness. Sounds a little boring.
If I was a moustachian I would probably say something like:
"Looking back on that, you realise that was an absolutely insane way of spending money. What expenses do you still have which you might look back on as insane a year from now?"
If it's your hobby though......
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)"
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.
The frugal lifestyle BS most likely does more harm than good for the average person. People shouldn't be sacrificing quality of life because they're worried about nickels and dimes, especially not in retirement.
I don't think this is quite so easy for say, an educator, or a firefighter, or a plethora of other occupations.
Swizec posted the name of the guy who wrote the article I was thinking of, Ramit Sethi. Here's one where he talks a little about the issues with frugality: http://www.iwillteachyoutoberich.com/blog/save-on-coffee/
For most people, their biggest expenditure every month is housing, then followed by transportation.
If one wants to cut spending at all, the huge savings are made here. I.e. don't "consume" more housing than you need-- rent out extra bedrooms or get roommates if you have an apartment, don't drive an expensive auto when a cheaper one will suffice. The savings that can be made here-- hundreds in the case of transportation, possibly thousand+ in the case of housing-- far overshadow the amounts that can be saved by cutting back on coffee, etc.
For my family, in order (note, not CA): Health insurance, Mortgage, Food, Taxes, Day care. Transportation misses by a long shot, maybe a factor of 4 from taxes, and 2 from day care.
If I had to cut something, Day care is the easiest chunk, as it's not strictly necessary, but it's a sanity thing.
(This isn't quite accurate, since I haven't added in the company contribution to taxes, but I have to health insurance. Anyway. )
Most likely, your spending will just increase by 30% along with it. Instead of the latte, maybe it's a new computer, car, or vacation now.
Ever read about athletes and celebrities and entertainers who make 10s of millions and end up broke? Without some form of discipline, our capacity to squander wealth is astounding.
2 years later I had a ton of savings, quit my job and left to travel the world for a while.
What about economics, it assumes that you have a return of 5% over inflation on your investment. Is this really a good assumption?
According to this link(http://home.earthlink.net/~intelligentbear/com-dj-infl.htm) the annual Dow Jones return adjusted for inflation and after taxes is more like 1.1%.
In short, the chart is dishonest. (I am also surprised that is lands to far away from most other people's analysis, but I can't comment on this).
The short version is that it's a "misconception that buying things makes you happier, and not buying things makes your life suck."
Like I mentioned, it's a cult, what can I say?
I think the problem is people try to cold turkey everything at once, last a couple of days, then say "screw this". Keep TV, cut out lattes, then later you can downsize your TV (switch to netflix and OTA maybe?), etc. Track your savings and get competitive with it (make a game out of it).
Above and beyond current savings, our consumption is out of control. There's a decent chance that the average person's consumption level, if unchanged, will become increasingly expensive as there's more competition for the resources required to feed it (China, India, etc.). I'm not trying to be alarmist about it or anything, but I think it's safe to assume we're at least dealing with a moderate increase in resource prices compared to salaries (which are stagnant) year after year until we retire. It follows that consuming less (and getting used to consuming less) will have increasing returns. So working on consuming and spending less seems like a worthwhile goal, just don't go all hardcore off the bat.
Now let me tell you about my couponing...
(The couponing mention was a joke, by the way.)
If better tasting drinks really did make you happy--something I don't believe--the rational thing would to be to brew your own coffee or tea. This has the added bonus of being a learning experience. The $5 latte drinker, at most income levels, is someone who hasn't evaluated his incentives rationally.
Thinking rationally about money is a muscle. Negotiating a $5000 salary increase then buying $5 lattes is the equivalent of going to the gym, then driving a ten minute walk home.
Or I could spend $1 or less on my morning coffe that doesn't taste as good, and not wake up in the same, refreshing way, and be overall less productive.
Oh, and I still manage to save 20-30% of my overall income (depending on the month). Lattes don't matter. Overall spending habits and and fiscal approach do.
For instance, saving 50 euro on airline travel ... not worth it if you can afford the extra 50 euro.
I could understand someone that tells me his 5$ coffee tastes "better". But if you drink your 5$ coffee just because you are feeling stylish ...
If something makes a person happier, it makes them happier.
But you have to be perceptive enough to see you are "buying" a retirement, not "denying" a Latte.
> Again, mathematically accurate, but not helpful
Is extremely helpful to those that have the willpower and motivation for early retirement. I personally think about this kind of tradeoff/decision every single day of my life, and as a result, I'm saving an enormous amount of my paycheck and will "retire" before I'm 35.
Of course, it's not helpful advice for lazy, unmotivated people who are stuck in a rut, but what advice is?
> Then, when he inevitably heads to starbucks he thinks he's failed.
I personally approach the whole thing like I approach my gym routine and healthy eating. When I have a "bad" or cheat day, I don't focus on that. I like McDonald's. I just look ahead to tomorrow and say that's OK, I can get back on track. It's not about focusing on what you did wrong, focus on trying to do a little better tomorrow.
> Finally, this quote is complete nonsense:
>> 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.<<
Actually, I think that's the best piece of advice I've ever received in my entire life. When you open a retirement plan at a bank, the adviser won't even blink when they say "The average person needs 70% of their pre retirement income when they are retired." Let's think about that for a second - by very definition that's saying the more I earn the more I'll need to spend - FOREVER. That's saying that when I have my Ford Focus paid off, I will buy a BMW, then a Mercedes, Then a Porsche, then....
In my last job I wasn't even earning 70% of what I am now, was still saving tons, and yet people plan my retirement saying I'm going to need that much when I'm retired?!?!?!!? It's any wonder my "planned" retirement was at 65 years old.
I absolutely promise you from the bottom of my heart, you absolutely can train yourself to be extremely happy while spending less money, and the more years you do it for, the better you will get. I will never have a TV, cell phone or new car for the rest of my life, I'm extremely happy about that, and it means I can have 50 years of my life to do exactly what I want every day.
I see a lot of <35-year-olds who say this, but no >35-year-olds who say "I retired at 35 by saving a lot and things are working out great!"
(And yes, it will be free as in beer, because I won't be going to work, or paying taxes.)
In Australia the government pays students a wage, called Youth Allowance[1], that is something between $268 to $400 every two weeks, depending on circumstances. Combined with a roughly ~10 hour per week part time job, I had no trouble at all putting myself through 5 years of Engineering without any debt. I'm confident my future kids can do the same thing, so I won't need to support them in the same way my parents didn't need to support me (once I went to University at 18)
[1] http://www.humanservices.gov.au/customer/enablers/centrelink...
I'm a Software Engineer, and I save towards 70% of my paycheck. I still bought a new laptop, DSLR, rifle and other toys all in the last 6 months. I don't earn tons for a SE, if that's what you're thinking.
It lets me do things like Drive from Alaska to Argentina for two years, simply because I wanted to[1]
[1] theroadchoseme.com
I live on the other side of the world from my home country, I drove from Alaska to Argentina for fun, and I don't want to go to work for the rest of my life so I an buy stuff.
As for retiring at 35, absolutely. I'll travel the world on around $15-20k per year for a long time, then see what happens. (before you tell me it can't be done, I've already done it for two years)
Interesting you think I'm living "very minimally" because I said I have no cell phone or TV and an old car, but in the same sentence I said I bought a new laptop, DSLR and rifle in the last 6 months. You are very confused about what "very minimally" actually means.
> Anyway, the main point is this wouldn't work for most people.
Like MMM said in the article, you can start making this work for you, or you can complain about how it's not going to work for you or the majority. Which one are you doing?
I bought a brand new MBA ($1300), Canon 60D+Lens (Right on $2k) and a Remington 700 30/.06 ($1200), so I'm not without stuff, I just pick and choose the stuff I want and don't want. We're all free to do that, and I think a lot of people forget that.
It seems like you'd much rather complain about how this isn't going to work for you than start working towards making it work for you.
Of course my way doesn't work for everyone, but I'll bet there is a way that works for others (that likely doesn't work for me).
I'm not saying everyone should do it my way, I'm saying everyone (including you!) should work hard to find the way that works for them (and it might be a way that nobody else has done yet...)
I have a flexible work arrangement now where I take every second Friday off, and I'm probably going to take a month or two of extra leave this year (unpaid).
When I travel, I outright quit and just live on my savings
After work, I either go snowshoeing, cross country skiing, out walking for photos or mountain biking. On the weekends I am always out of town hiking/camping/hunting/canoeing/snowboarding/fishing/etc.
Besides cooking, eating and sleeping, I spent less than an hour a week at my rented house, so the fact that it's cheap works very well for me. It also has a grass backyard, so I sit out there and read books when the weather permits.
I have wifi at home, work, friends' places, and a lot of businesses, so I'm only really offline when I'm driving and maybe the grocery store.
But I agree - if you can't fit cut into your routine - stressing about it worse than not saving extra few percents.
And yeah - negotiating $5k increase is first thing you need to tackle, and only once it is done - proceed with the rest probably :)
While I'm not trying to argue that saving is a bad thing (clearly it's important to have some savings!), it's also fair to say that spending is good for the economy as well.
This is a poor argument promoted by the media in the last 50 or 60 years.
There is no way in which everyone will stop spending money tomorrow.
If something like this will ever happen (people spending less) it will happen gradually and the economy will have time to change.
Nobody is suggesting that everyone will stop spending tomorrow. However if an article discusses that people should save instead of spend, then the next logical discussion would be what happens if everyone takes that advice.
Hacking your life(style) is way more important than hacking anything else.
I agree, it is psychology, and your family (if you have one) is going to make a huge difference. If your partner can't resist new purses or can't live without the newest smart TV, you're screwed. End of story.
However, if you find someone with your similar mindset, it's amazing what you can achieve.
One of the best quotes I have seen about finances is this:
Poor people spend what they have and invest the rest.
Rich people invest what they have and spend the rest.
Most people think I'm insane when I say that kind of thing, but it happens and it works. It takes experience, research, and time. It takes dedication and will. Strength of character and determination. Those are the characteristics that are lacking in our population right now and unfortunately those things aren't being taught. Those are the things needed to launch a startup, build wealth, and pay off credit card debt. They are also what is needed to give up coffee at Starbucks, so start with the coffee and you'll build better people for the long run -- that's what's important.
> There's no medium ever invented that does this better than television.
> They want coffee, and buying one at the starbucks next
> to work is a lot easier and tastier than brewing it
> yourself.
> automate your finances
> purchase the bond/equity ratios that suit your age
All these concepts can and are being learned by people all over the world. It just takes time. You have to crawl before you walk. Crawling out of the hole of debt is the first move. If you keep spending at starbucks and paying 20% interest while you're trying to get 6% on bonds (if you're lucky) then you're still losing money. The secret to building wealth is first and foremost to stop losing money.
That dude is not a pessimist, he just looks that way to you because you're ridiculously optimistic.
500/mo * 12 mo = $6000 a year. At $5000 investment that's a return of 120%, as another commenter pointed out.
Why invest in anything at less than 120% return?
Either a) you've discovered some capital allocation inefficiency, i.e. trillions of $$$ are being foolishly allocated into places like stocks and bonds when higher returns obviously exist or b) you don't fully appreciate the risks that come with the 120% annual return
(I guess there is another option, that the scenario doesn't exist, but I'll take your post at face value and assume that it does.)
These types of returns are certainly possible. I bought my share of $10k to $50k townhouses with $800 to $1500 / mo rent. With sub $100k houses, typically it will be difficult to get conventional financing, so most people buy these properties with cash or money from a HELOC or something along those lines.
There is certainly money to be made when you are purchasing property for less than its construction costs. However, you have to ask yourself what the tenant profile is of someone who can not afford $5k to buy a house.
The government program the commenter is referring to is usually called Section 8. People in financial straits can get on a waiting list to get accepted into the Section 8 program. Participants end up living in better neighborhoods than they could otherwise, and give landlords typically higher than market rate rents. The typical Section 8 profile is single mother with 2-3 kids and on welfare.
Buying properties through tax lien certificates or auction has its own set of problems because you are buying 'as is'. Let's just say you need to do a bunch of research before you go into it, and mistakes can be costly. One of my friends found out he had a leaking underground oil tank in one of the properties, which costed $85k to clean up.
Landlording is a very bimodal process. If you have very clean, responsible tenants, anyone can manage that property. The real issue is when you get one of these trouble tenants. One that knows all the ins and outs of the law and knows how to string out the eviction process (depending on your state laws) for years. You significantly increase your chance of encountering trouble tenants when your properties are in lower income, lower rental areas or dealing with tenants with government subsidized programs.
The commenter linked to Tulsa, OK which has cheaper properties. This is great if you live close by, or have someone trusted to watch your properties. Property managers can be viable, but you really need to vet them throughly.
I am currently out of the property game, but if I were to start over again, I would not touch slums. I'd buy in the cheapest neighborhood that I would feel safe living in. One with a lot of blue collar immigrants where there are signs of gentrification. Look for the type of cars, people caring about their landscaping and house, new construction, new retail / service stores opening. Buying in the right neighborhood drastically limits my exposure to trouble tenants, and buying in cheaper neighborhoods increases the upside opportunity. The reason you might want to value appreciation more than cashflow is because appreciation can be tax deferred. If I were to buy a property now, it would probably be a 4-plex, and renting or airbnb'ing the other spots. This optimizes for acceptable returns with low/no maintenance.
Of course it isn't that simple, sometimes the houses need a lot of work to get rent-ready and if you don't live near them you need a property manager. It's complicated and a lot of hard work but the dividends are incredible. You can also lose your shirt if you aren't careful.
I'll email you.
EDIT: Strike the email, here's a post to a blog with results from a Tax Sale in Tulsa County Oklahoma last year:
http://www.gavelhound.com/blog/Final+Results+for+the+2012+Tu...
Some of what you read in these comments below is true. Skepticism is warranted. It's hard. It's dirty. The houses do need a lot of work. The tenants don't pay sometimes, but the US Govt always does. Property managers take 10% or more of the rent to manage the properties. It's a BIG risk but BIG returns can be had as well. Plus, it does take time and emotional stamina. Imagine buying a house that was a meth lab. It happens. Imagine removing the person who lives in it and they burn it down. It happens.
Also not as easy as implied.
1) it was a typo for $50k which is a reasonable number. The house down the street from me just sold for $55K and reasonable rent for it is $650 in the neighborhood. My house was a bit more (housing boom) but I will easily be able to get $900/mo in rent for it (nicer inside), and I am only paying $530 on it. Just need to find another house to upgrade to.
2) the 5000 purchase means closing costs/fees/etc on a house with a 100% mortgage, and in a lot of places the rent can easily be $500 more than a mortgage.
The best places to find things like this are college towns, because there are always lots of renters. The example of my neighborhood is based on the fact that there are a pile of grad students living here.
Some of that stuff you see on infomercials really does work, but it's really hard and takes time, smarts, and dedication and most people fail en route to success simply by giving up or making bad purchasing decisions.
The unmentioned parts are that (1) fixing these places up costs money on top and you probably can't afford to hire contractors, so this is basically a second job and (2) the renters you get at the low end are terrible, and also require a lot of time and effort. It's not just invest and forget here.
and where there are many bidders, there are likely people who do this for a living and know exactly how much the house is worth, how much it will cost them to fix it, how much they can rent it for etc. AND they have the professional network in place for all of that-- relationships with contractors, etc
as another poster pointed out, it essentially becomes a job. and you will be competing with people who do this as their full-time job, who will likely have more experience and better connections than you.
I wouldn't want to deal with tenants that are more likely to be flaky on paying rent, maybe trashing the place, or something even worse.
Sounds like a full time job in itself.
Sounds like a line from an infomercial, but you've definitely piqued my interest.
Can you point me to any resources where I can read up on this?
That doesn't mean extreme frugality is the first thing people should focus on though. People have limited willpower. Using it to cut out $20/week worth of lattes or $100/month worth of cable just isn't the best use of it, unless you've already covered the more important things. As I've tried to illustrate above, focusing on the wrong things (and failing), can be very counter-productive. Personally, I think your limited willpower is almost always better spent adding to or honing the skills that will allow you to produce more.
In other words, maybe the 'limited' part is artificial and can be changed. And maybe strengthening our willpower would benefit us beyond just denying ourselves arbitrary comforts. Such as, willpower to pursue adding to or honing skills, maybe even ones that don't reap immediate material benefit.
So, cutting out lattes may make you better able to improve as an entrepreneur, or programmer, or whatever.
Relaxation: I work better during the week if I've had a relaxed weekend. Working better leads to a greater likelihood of promotion and thus more income. Also I'm more likely to job hunt if I feel confident about myself. That positive psyche comes from positive environment and often that means having relaxation time at home.
Consumerism: The very reason I got my first job was because I wanted to buy a Dreamcast. When I wanted a house, I changed to a better paid job. Then I wanted nicer things for my house and a car, so I asked for a pay rise. Sometimes greed can be a positive force (if channelled appropriately).
http://www.tnr.com/article/environment-energy/89377/poverty-...
But cutting in half the number of times per month you eat out, and not ordering any alcohol at restaurants, can easily save most households several hundred dollars a month. Eating out is very expensive.
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?
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.
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.
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=541590...
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).
Because I share the sentiment- I don't want to have to sacrifice a lot of time with my children for my "career" (the one that makes most of my money) at all. Even though I have little interest in retiring early, the same strategies can be used to save up to be able to work part time from home on less lucrative (but still skill-building/maintaining) projects when I have children. Maybe work for a non-profit like I started out at.
> - You can earn 5% investment returns after inflation during your saving years
Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...
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.
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.
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.
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.
And of course your nickname is "pragmatic".
: )
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
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.
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.
No insurance company should assume that for their entire retirement portfolio they can produce inflation beating returns without risking significant capital loss and subsequent penury.
The reason I can flip the argument is because, ultimately, the value of your investment is irrelevant. If you are investing $10 billion and earn 10%, or you invest $1 mil and earn 10% - you are still earning 10% in both events.
It's just scare-mongering - you're saying to offload your risk and reward to someone else because they're so much better than you at it. However, there is very little proof that they really are better at it than just investing 50% in bonds and 50% in index funds. And, unfortunately, while you truly are offloading all of your reward, you are only offloading limited risk - and you are paying for the privilege.
The financial industry as a whole does a wonderful job preying on fears for their own profit, and yes, I've worked in the financial industry.
The insurance company are not attempting to make RPI + 4% - which is what the article recommends you must chase to live on. They are not attempting to retain the capital. The article is claiming that he can consistently make those returns ad infinitum - ignoring completely the risk of ruin. The insurance company simply assumes that overall their returns + the capital will cover the cost of the annuity over an average lifespan. They calculate this with a very low risk portfolio - because the capital costs of reserving against risky assets outweigh the benefits of chasing the returns.
Of course you pay them for the privilege, I am not contending that. However - for you to claim that it is equally risky is complete rubbish, and once again you fail to understand that they are offering a very different prospect with different risks and far higher levels of surety.
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...
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.
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.
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.
You're also probably think 35k in an expensive place, where he lives in a random suburb of boulder I think.
In what universe is saving half your paycheck a reasonable percentage?
Saving 50% of my income is not possible for me without living in an untenable situation.
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.
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.
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.
* 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
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.
In every single case, getting an after-tax $10,000 raise is going to be overwhelmingly preferable to cutting your spending by $10,000.
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.
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.
I actually AM a filmmaker. I spent years making very low-budget films - some of which were quite successful.
But I've now spent a couple of years developing a parallel career to fund my filmmaking - because attempting to make films without any cash, frankly, sucks.
It's a very similar situation to bootstrapping a long-time-to-launch startup: you'll often find that having SOME income through consulting makes running the actual startup either a) much easier or b) possible at all.
Perhaps. On the other hand, if one assumes that real (inflation-adjusted) wages are stable, then adjusts the rate of return to 3% and the withdrawal rate to 2.5% in real terms, the numbers work out in a similar way, and the general results that follow are the same.
How many careers does that describe, over a period of 15-20 years?
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. :)
http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of...
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.
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.
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.
An added bonus is getting the Vanguard statement each month and seeing it grow.
Is this a realistic assumption? Just consider how much people have lost in 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.
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.. ;-)
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.
That's a mighty assumptious assumption to make. The rest of this article is a no-brainer, I think :)
Note to our government, cut spending!
(On the bright side I have a paid-off home and minimal living expenses.)