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Comment by JoshTriplett | Hacker News Reader

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.

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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.

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