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Comment by JoshTriplett | Hacker News Reader

Almost all of this is excellent advice, except for one point: "save 20% of your money". That's a bare minimum, which will let you retire after about 37 years of working. Bump it to 35% and you'll retire after 25 years. Bump it to 50% and retire in 17. Bump it to two-thirds and retire in 10 years.

That's one of the most important factors in your personal finances: not how much you make off your investments, not whether you max your 401k, but how much of your income you save and how much you spend. The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".

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>Bump it to two-thirds and retire in 10 years.

Expand it by 100 and you would be already retired before you would were even born!

I guess the point of the advice is to be realistic.

>The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".

Well, lots of people have started companies or saved themselves from starvation by maxing a credit card.

The idea that >20% savings rates are not "realistic" is a serious mindset problem. Almost anyone on Hacker News with a paying job (i.e. not an early-stage no-funding startup) should easily be able to save much more than that. Sure, saving two-thirds of your income might be out of reach, and even the 20% advice is better than most sites that often say 5-10%, but consider carefully whether you can increase it and retire years earlier (or become effectively retired, in the sense that you no longer depend on having an income).

EDIT: "Almost anyone on Hacker News". Yes, 20% would be significantly harder on minimum wage.

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.

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.

"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...

<i>A 4% rate of return from an index fund is long-term average behavior.</i>

Average return for S&P 500 from 1928 to 2012 is 11.3% [ source : http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... ]

Inflation rate averages about 3.2% [ source : http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_... ]

11.26 - 3.2 = 8.1 % real return.

Long term investment in a diversified set of equities is a very good investment and is very likely to secure your future finances.

You missed the point: "Average return" != "real return in any arbitrarily chosen 10-year period"

It's scary how many of you don't seem to know this. Did you all read the same book on investing and skip everything after the preface, or something?

When you're talking about being retired for fifty years, it's the average that matters.

"When you're talking about being retired for fifty years"

Yeah. We aren't. This whole thread spawned because the claim was that you can retire in 10 years if you save 66% of your income.

>Yeah. We aren't. This whole thread spawned because the claim was that you can retire in 10 years if you save 66% of your income.

I don't understand. Retiring after 10 years means you'll be retired for around 50 years, doesn't it?

If you lose your nest egg in year 10 because the market takes a dump, guess what? You're not retired anymore.

It's why real-life retired people don't put their entire savings in the stock market. Retirement funds tend to have most of your money in fixed-rate securities by the time you actually quit working.

'lose'

If you had enough money to live off for fifty years, the market taking a dump isn't going to wipe it out. Especially if you invested part of it before the market got high, and your total without accounting for dumps would have lasted seventy years.

I started retirement investing in 1993. I did an APY analysis where I pretended I invested every one of my retirement contributions into the S&P-500, on the day that I invested it. From then until today, that APY would have been 6.77% . That's a far cry from 11.26% .

Did you include dividends when calculating that percentage? I have not done the math, but my intuition tells me that 6.77% is a little low. 11.26% is also high for that time period--I think that figure includes the post-WWII figure (and also includes dividends).

Yes, definitely - this is all based on the "adjusted close" values from yahoo's historical data feed.

This is interesting - I've shared this multiple times in other discussions like this, and a comment like yours is always the first response, that it seems low, questioning if I included dividends. If anything it might just underscore how our collective "societal" intuition might be a bit off in terms of long term retirement performance.

I think part of it is that people tend to contribute more to retirement when times are good, since they have the extra money, and contribute less when times are bad since they're just getting by. The problem is that the market tends to be high when times are good, and low when times are bad. So this will naturally depress performance for everyone. It's impossible to contribute a consistent amount every week/month without having a cash buffer (which would depress performance anyway).

I agree that his definition of "king" is pushing it, but it's equally silly to ignore the possibility of retiring in any of the cities in the US that are cheaper than San Francisco, i.e., in any of the cities in the US that are not San Francisco and NYC. Honestly, in a middle-of-the-road city like Houston and with full ownership of a car and home, $25k net per year would actually give you a pretty comfortable life--remember that you wouldn't have to save any of that for retirement, because you're already retired. The main hitch is health insurance and/or kids.

Also, Firecalc is a good tool for running withdrawal strategies over historical data: http://www.firecalc.com/

It gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years. Obviously, though, there is no 60 year period starting in 1999 for which the data is fully known, so it has its limits and can be prone to overfitting. It does take inflation into account, by the way (by increasing your withdrawal correspondingly each year).

I don't disregard the possibility of retiring in cities other than San Francisco -- I just dispute the notion that a $25k/year "retirement" is anything but silly dreaming by 20-somethings who don't understand what choices life is going to bring their way. Want to have a family? Want to send your kid to college? Want to be ready for the day when you're old and paying for medical problems? You're not living "like a king" on $25k anymore.

"[Firecalc] gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years."

Well, again, you're not likely to accumulate a $1M portfolio in a decade on a $100k salary without a nice helping of luck. And not for nothing: that 60-year period encompasses the largest bull market(s) in US stock history. Past performance definitely does not extrapolate in this case.

>Want to have a family? Want to send your kid to college?

Marry someone with their own $25k/year and you'll be able to pay for plenty of college.

>Want to be ready for the day when you're old and paying for medical problems?

Insurance?

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.

"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.)

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.

You'd still be plenty wealthy due to dividends. Raw price indexes hide the true wealth.

> 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.

"I guess some people like kids enough to work an extra 30 years. I sure don't."

http://www.youtube.com/watch?v=icmRCixQrx8

Don't forget to account for inflation. You're more likely to end up with a 1-2% return in real dollars.

The idea that your retirement years are a better time to live than your 20s and 30s is a serious mindset problem.

It's not about assuming that your 60's are better than your 20's. It's assuming that having 7 dollars inflation adjusted tomorrow is worth not having 1 dollar today. Clearly, the higher your savings rate the sooner you can retire but the lower that multiple becomes.

More importantly when something bad happens you both have a cushion and a cheap lifestyle so it can last.

I'm sure we all agree that saving is both prudent and desirable. My comment is in response to the idea that you should be saving most of your money.

A good-sized retirement isn't just for fun. It's to work against inflation and maintain financial security / independence, it's to prepare for potential catastrophes, and it's also to prepare for your declining years.

Actuarial tables show if you make it to age 40 you have a very high likelihood of making it to 80 or 90. Statistics show that the last decade of your life - thanks to health care needs or assisted living necessities - is often more expensive than any other decade of your life.

That's absolutely important to plan for in your 20's and 30's when you have the time (and energy) to make a difference.

And at the same time, saving nothing in your 20s and 30s. Having all the fun in the world, and then expecting the government to take care of you when you are old is also a very serious mindset problem.

Luckily, I didn't suggest that.

Yes, >20% is viable for Software Devs. Ask someone making minimum wage with no benefits to save more than 20% of their income and they will laugh at you.

>The idea that >20% savings rates are not "realistic" is a serious mindset problem. Almost anyone on Hacker News with a paying job (i.e. not an early-stage no-funding startup) should easily be able to save much more than that.

You know that 50% or so of HN readers are not in the US, right? Some have to do with $300-$1000 a month (or less), with the same costs for food and costlier computers, clothes etc -- oh, and 3x the price of gas. And renting some small-ish appartment.

You dont have a family with kids I take it.

The savings part sounds like advice from Mr. Money Mustache, there was discussion about his advice here before.

"Never borrow money" would include never having a mortgage, which would be a huge lost opportunity for many. Not to mention borrowing money to invest in oneself, start a business, etc.

A mortgage is one of the few exceptions, and even then you should carefully consider whether renting or buying makes more sense. A car, notably, is not a good exception.

Education depends heavily on return on investment; you'd want to carefully analyze how much more you'll make with that education, how long it'll take you to pay off the debt, etc. It can certainly make sense when attempting to bootstrap yourself if your alternative is no higher education at all, but if you're in a financial position where you have to borrow for tuition, you may well qualify for better options such as scholarships. If you're reasonably well off and borrowing to go to a higher-end school, that makes much less sense.

And yes, the savings -> years to retirement table came from a Mr. Money Mustache article: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... .

The chart is also unrealistic since it relies on overly optimistic long term percentage averages.

>would include never having a mortgage, which would be a huge lost opportunity for many

A lost opportunity? If you can afford a house easily buy one, if you cannot afford it a mortage is anything but a huge opportunity.

http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to...

http://www.jamesaltucher.com/2011/05/why-i-would-rather-shoo...

This advice seems to completely gloss over one key fact:

You have to live somewhere.

Seriously- if you didn't, buying a house would be a terrible investment! But you do, so the cost of owning a house needs to be compared to the cost of renting, instead of being discussed as a normal investment.

>the cost of owning a house needs to be compared to the cost of renting

Emm, the linked articles get into exactly this.

Not sure why this is being downvoted. If you don't get mortgage, the presumption is that you aren't going to buy a house outright, either. You're going to rent, which isn't exactly an ideal situation in the long term.

Haha yes, if you can buy a house outright, definitely do that.

Unless, of course, you can land an incredibly low interest rate on your mortgage and have something interesting to do with your capitol, like fund your business.

Opportunity cost.

$250,000 invested now could be substantially more by retirement than the cost of the mortgage over its lifetime.

The best darn mortgage v. rent calculator I've ever seen:

http://www.nytimes.com/interactive/business/buy-rent-calcula...

It all depends on your circumstances.

This one is actually a little better...

http://michaelbluejay.com/house/rentvsbuy.html

Mr. Money Mustache's advice wasn't to never borrow money. He said the only reason to borrow money was to buy a house.

People frequently get themselves into serious financial trouble by borrowing money to "invest in themselves" or "start a business." On a case-by-case basis, these may actually be sound financial moves, but there are whole industries built on suckering people into making "investments" that aren't financially prudent.

It's not quite that simple. What you need is a savings rate that is far above society's average in order to be ahead by that much. For US, that's relatively easy, but for many cash-heavy economies it is not. If your country propensity to save is 90%, getting to 99% isn't all that groundbreaking.

The other thing missing is to take calculated risks for higher returns. For example, if you see housing starting to recover, picking up a distressed rental is smart. Provided you know what you are doing.

I recall a while back someone posted here about picking up semi-abandoned apps that were generating some cash flow, sprucing them up and letting the revenue drip in. Again, this works if you know what you are doing, but won't work for average Joe.

"Never borrow money" excludes Smart Debt: Debt someone else pays for you, such as Investment Property, or Big Business (not small business. This definition of Big Business is where you have a controlling interest and you can leave for 6 months and business is even better).

It depends on how quickly you wish to generate wealth. Leverage (OPM, OPT) must be used wisely, but significantly speeds up the process.

>> ... Bump it to 35% and you'll retire after 25 years. Bump it to 50% and retire in 17. Bump it to two-thirds and retire in 10 years.

Can you/someone please point to the maths behind this? It sounds to me there are some assumptions about returns on investments and inflation rates.

The math is covered here: http://earlyretirementextreme.com/

Basically the thought is that 20-25 years of living expenses will generate enough income for you to early retire on.

If you make 100k (post tax) with a 20% savings rate, you save 20k, and have living expenses of 80k. Ignoring future compound growth, for each year you work, you save 1/4 a year of living expenses.

If you go the other extreme, and have 66% savings rate, you save 66k, and have living expenses of 33k. With 33k living expenses you need 660k to retire. Each year of working you end up with 2 years of living expenses. Even ignoring the effect of investment growth before you retire, that is only 10 years of working.

Of course 20 years of savings maybe be too optimistic. The book is good and has more details.

I'll have to read the book for more but the math you explain seems incomplete. The earlier I retire, the more would be my expected number of years in retirement (assuming a given life expectancy). If in one scenario my retirement is 40 years away and I need to save for 20 more years, then in he other scenario where I retire in ten years, I need to save for fifty! That's a factor of 2.5 in this example!

Ignoring growth rates and inflation is also a huge simplification. E.g. 3% yearly growth doubles your money in about 24 years. So it may again be a factor bigger than two between the two scenarios above.

I think the idea is that if you have a large pile of money and take out a small portion of it each year to live on, due to growth the money will last indefinitely.

So if you have 25 years of living expenses and each year take out 1 year of living expenses, that is 4% of your money. If you earn ~4% a year then your account balance stays the same.

The 4% number matches the 4% rule: http://www.investopedia.com/terms/f/four-percent-rule.asp

Of course after the great recession now the common wisdom is that the 4% rule can't be trusted: http://online.wsj.com/article/SB1000142412788732416230457830...

Personally I think it would be foolish to plan on retiring with only 20 years of living expenses. However some people also plan on holding a part time job at least in early retirement.

Thanks. This answers my original question too.

This is really interesting and inspiring for someone like me who is in his mid twenties.

Burning question: what to do when you have (education) debt? Do you put every spare dollar in repaying it or still inculcate a habit of saving 20%?

What's the interest rate on the debt, and how much are you making on your investments? To a first approximation, you can treat the debt as an investment with a guaranteed rate of return. If you have debt that's not at such a ludicrously low interest rate that it makes sense to hang onto the money and invest it (rare), then your savings should be going straight into paying off that debt.

The savings rate still applies; it determines how fast you can pay off the debt. If you can reduce your spending and increase your savings rate, you'll pay off the debt that much faster, and the same principle applies once you've paid it off and started investing.

Spot on analysis.

I'd caution that you should still keep a small cash reserve for emergencies, of course. Savings are liquid: student loans are not.

Recent college grad and young working professional here. I graduated with ~$25k in student loan debt 2 years ago and am due to pay it all off by April 2014. I struggled with burning question, as well.

The general advice I got was that if the loan interest rate is less than 6%, you're better off investing the majority of your excess cash into something like an index fund since it theoretically will give you >6% gains.

However, I hate the stress, mental overhead, and risk involved in owing somebody money, so I decided to automatically save 10% of each paycheck (set up direct deposit to funnel 10% to a separate savings/investment account) and essentially contribute as much as possible after that to student loans.

I'm happy where I currently am - almost out of debt and with a non-trivial amount saved up. The key for me was automatically moving the first 10% to savings then setting an ambitious goal each month to put toward debt. Good luck!

Good job! After years of putting around with debt, I have kept a promise to myself that I wouldn't get into debt unless it was under dire circumstances. Peace has value, in my opinion. Not having to worry about debts and payments really frees my mind (and my funds) for other things.

I'm not one for biblical citations, but "the borrower is slave to the lender" always gets to me.

As a follow up, after April I intend to reallocate so that 20% goes toward savings each paycheck.

That sounds to me like an excellent way to approach your debt, good job.

Ironic "Never borrow money" shows up here considering the start-up orientation of this site... Small business owners are a cornerstone of capitalism and our economy so we should incentivize people to take risks when they can.

Borrowing money for current consumption and for investment are very different things.

Furthermore, borrowing money for investment and selling equity in a business to investors are two very different things.

Never borrow money? You've just completely eliminated car ownership for a good chunk of the middle class, and homeownership for pretty much everyone but the very rich. That's probably a defensible position, but it's definitely not normal financial advice.

If putting $7,000 away for retirement right now nets you more by retirement age than the lifetime cost of a car loan, you should take the loan.

I've owned cars since I was 17 year old, and never had to borrow money for a car till I decided to buy a brand new car years later Since then, I've decided to do the following: So you make "car payments" into your savings account every month, and after 1 - 3 years you can get a usable or very nice used car. Then continue to make car payments into your savings, and 5 years afterwards you can get a brand new car -- one that will last you for 15 years (at least). Then, in the last 5 years, do the same thing if you want to continue to drive new vehicles.

Buying brand new cars is not good financial advice either. Instant depreciation, no time for problems to blow up in someone else's face first, tiny longevity gain over buying a 2-3 year old car for drastically less.

Oh, I agree with that in general. I've just never been able to get a 2-3 year old car to be worth keeping for more than another 3-5 years (either previous owner got rid of it early because it was a lemon, or didn't take care of it [oil changes, garage kept, easy driving, etc]). Whereas a car I've owned from day one (since year 2000) has only needed minor repairs (most of which I do myself, except when the fuel pump went out far from home). Once it starts costing me more than a couple thousand a year for repairs, or becomes unreliable, it will be time to trade up. If I keep it for a couple more years, it comes out to about $1500 a year. Heck, I may keep it for 20 years. I just can't see me wanting to keep a car I bought used for 20 years though (or till the car is 20 years old even).

Human beings are not perfectly rational automatons. Sometimes they want brand new stuff.

I have a friend who is 15 years older than me and very financially savvy. He grew up in India in a poor family and his father spent all his free time repairing their ancient clunker that kept breaking down. That memory is enough that he only buys new cars.

Why would you want to retire in 10 years? Isn't that like saying you hate your work? I enjoy my work, and am working to make it more enjoyable. The idea that I would try to live like a pauper so I could retire in 10 years and not do anything seems kind of strange.

If I retired, I would just find another job or career to make stuff.

Just because you have enough savings to retire doesn't mean you have to retire; it just means you have the option to. And "retire" doesn't mean you have to stop doing interesting work, either. You could keep working an existing job that you enjoy knowing that it's completely optional for you, or you could spend 100% of your time doing work that doesn't necessarily pay (e.g. a startup, or working on random Open Source projects that tickle your fancy).

"Save 20%" ... gross or net?

Net. Gross is uninteresting for almost all purposes other than pre-tax investments you can make; just write off taxes as a drag force and pay attention to what fraction of your net income you're saving.

The important detail about increasing your savings rate: it also means decreasing your spending rate, and you can retire as soon as your savings generates income greater than your spending rate, not greater than your overall income.

Fair question, but OTOH it kinda doesn't matter since nobody does either.

Seriously, everybody talks about saving money, and everybody intellectually agrees it's a good thing, but next to nobody actually does it.

Which means, even if you're aiming for 20% of the little number, you're behaving smarter than the vast majority of your peers.

It would have to be net. Your tax situation determines the conversion from gross to net, and can vary wildly from person to person making percentage rates based on gross too variable.

While you should of course do what you can to reduce taxes, that's so complicated it warrants completely independent dialogue.

One of the recommendations is actually wrong, and in fact outright harmful.

"Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds."

Yeah, no. Mutual funds, even those by Vanguard, have high expense ratios, and there is absolutely no evidence that they outperform their equivalent index funds. Jack Bogle, founder and retired CEO of Vanguard, himself recommends index funds over mutual funds for this reason.

Their expense ratios are pretty decent: https://personal.vanguard.com/us/funds/vanguard/all?sort=nam...

And, the idea of the target funds is that they become more conservative as you reach the target. The pure index funds do not. So they are basically index funds with portfolio rebalancing.

https://institutional.vanguard.com/VGApp/iip/site/institutio...

Vanguard Target funds are nothing but a collection of passively managed index funds. The ER is slightly higher than doing it a la carte, but it re-balances without having to worry about it.

it is only higher if you qualify for admiral shares in all the funds contained in the target fund. With the current case of most target funds having a 2% holding in International Bonds, you would need to have $500,000 invested to make it cheaper to buy the individual funds.

Yes, Vanguard is a lot better than others in this regard, that is true. But the fees are still higher. Automatic re-balancing is nice, but it's not like balancing a portfolio is anything to "worry about" once you figure out the basics (which you should).

There's also the fact that not everyone's 401k is offered through Vanguard. For example, if you're stuck with Fidelity like I am, then you will definitely need to avoid their mutual funds and choose their index funds instead. (With 401k, you cannot pick a fund outside of the broker that manages it.)

The MER for the Vanguard Target 2030 is 0.17%. Stated differently: 0.0017.

Yes, it's slightly lower if you buy all the composing Vanguard index funds individually, but for an index card comment, I'd say it's good enough.

(Minor quibble: index funds can be mutual funds or ETFs)

Good point, although I think he implicitly implies "index funds" in this case because later there's a bullet that says:

* Pay attention to fees. Avoid actively managed funds.

An article that elaborates on your point:

http://www.forbes.com/sites/baldwin/2013/06/05/the-trouble-w...

Vanguard mutual index funds are very cheap. I'd recommend them.

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