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Comment by j_lev | Hacker News Reader

> If you’re an employee working for salary, it’s going to be hard to reach that level of independence. ... You can try to radically lower your financial burn rate, but few Americans have taken that step.

So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again:

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...

TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.

View on HN

Well, except for how difficult that is. Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California, this requires living off of 20% of pre-tax income.

As an example, to live off $35k/year in SF as a single person (which would be considered modest in tech circles), you'd need to earn $175k/year.

With a family, this gets more unrealistic. Living off $100k/year (combined) would require earning something like $500k/year.

Except that you don't need to live off $100K/year.

It all depends on what you define as 'comfortably' and how well you are able to control your spending on things you don't strictly need. That way you can build up some capital, make that work for you and relax your spending constraints when you are making more money passively.

Perhaps that means SF might not be a great place to work in spite of 6 figure salaries.

Work remotely. Get paid a SF salary; live in back-of-beyond, Arkansas. Retire at 30.

haha.

not adjusting your employee's wages based on their work location, which company is that delusional?

Companies that claim to be desperate for developer talent?

Why is it delusional? The company should be willing to pay an amount based on the benefit they're receiving. Does a feature developed by someone living in NYC or SF make the company more money than the same feature developed by someone living in Ann Arbor or Atlanta? Offering a premium for people to work on-site versus remotely makes sense. Discounting the value based on expected difficulties with linguistic or cultural misunderstandings makes some sense. But I really don't see why you should be adjusting based on the work location in a more general sense.

wages are not absolute, they vary by location, for the same kind of work. cost of living are taken into account when offering salaries. taxes ditto. this applies to the US as well as Europe.

it is about fairness among workers. there should be no penalty for living close to the HQ or major office hubs, which practically always are in high-cost areas.

counter-example being SAP with Waldorf, but that is ending its lifespan for the inverse reason (no one sane wants to move there).

If you're demanding that the workers live somewhere particular then of course you're going to be paying more when that "somewhere particular" is more expensive. For remote work of comparable quality, it does not make sense to me that it should be adjusted based on where the worker decides to live.

To be fair, you picked one of the world's highest cost of living locations to live in, let alone retire in.

I'm on track to retire in my thirties, or earlier, here in North Carolina. Not hard at all on a mechanical engineer salary.

Can you explain a bit your strategy? Something like MMM?

Yep, pretty much MMM strategy. I've also incidentally got a bit of bitcoin investment that might be a 'shortcut' if it goes to the moon. Otherwise the slow and steady wins the race.

Living on a low percentage of income seems like a great strategy if you're optimizing for dying with the maximum amount of money in the bank.

I think many people in this thread need to consider if that really is the game they want to be playing. I'd think people would be better off maximizing their total happiness. There's research showing that having good memories from the past positively affects momentary happiness in the present [1]. With that in mind, it seems like spending money on great experiences now is a good idea, while excessive saving could be counter productive.

[1]: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%...

But money don't buy good memories. I have much better memories of camping with friends for near zero euros, than expensive hotels.

You need to consider the opportunity cost too. While you were camping in the bush, you weren't earning.

I don't know why you were downvoted, your statement is right. For example, if someone have financial problems for some reason and have to work 2 jobs to deal with it, he/she hardly could get out camping with friends. Money can buy you spare time which you can fill with uncostly memories.

Money doesn't buy good memories, but it sure helps finance many opportunities to make them. It's neither necessary nor sufficient, but that doesn't make it highly enabling.

Yea, it's good relationships with people. I'll throw pets in there too. Some of my best friends have been dogs, and cats.(Some might consider this pathetic, but my pets were important part of my life, and I miss them all. Hell--I don't consider them as pets--they were family members.)

security is a thing. When I went into freelancing I did it easily since I lived so cheaply. My monthly bills were under $1k and I was making an above average wage for software dev in my area.

I knew a guy who wanted to get into freelancing but wouldn't do it because his expenses were too high.

There's happiness, but there's also planning and self control.

>Living on a low percentage of income seems like a great strategy if you're optimizing for dying with the maximum amount of money in the bank.

MMM/ERE [1][2] are not about maximizing money at all. They are about obtaining only a sufficient level of capital, so that they are no longer obligated to work for income to continue living happily. The numerical value of "sufficient" gets lower as your expenses decrease.

>I'd think people would be better off maximizing their total happiness.

Based on your comments, to you, happiness comes from experiences which require money, which is perfectly fine. Therefore, MMM and ERE are not for you, which again is perfectly fine.

For others who find happiness in experiences requiring little to no funds, MMM/ERE is an exceptional strategy. I would love to spend my days coding, studying chess, reading books, cooking, mentoring youth, and spending time with the small group of people I am close with (I'm rather introverted).

[1] http://www.mrmoneymustache.com/

[2] http://earlyretirementextreme.com/

Living really cheaply in SF is really just a question of cheap rent and never eating out. If your willing to have roommates you can get below 1k/month rent making 25k/year living expenses doable.

Granted, Heath issues, dependents, or debt can make this a non starter. But, just because most people you work with spend most of what they make every month means you need to do the same.

25k / year living expenses still works out to about 40k per year. And you have a lot of room mates. But now if it's only a quarter of your income, you need...

100k / (1 - (0.28[1] + 0.093[2])) = 159,489.

Plus if you retire, you're going to be managing your own health insurance, so the required living expenses number increases, probably by thousands of dollars a year. And it's not like you can flip from a frugal living style to a more flagrant one afterward, so you're going to have to live with room mates for the rest of your life, and never eat out, still.

[1] http://federal-tax-brackets.net/2014-federal-tax-brackets.ht...

[2] http://www.tax-rates.org/California/income-tax

There is little reason to stay in a high cost of living area while retired and even 600$/month can get you a nice place in much of the US let alone the rest of the world with the difference covering health insurance. As to income some people really do make more than 200k/year. And it’s such high income earners where such savings rates really become not just viable, but a reasonable choice.

More importantly the goal is not necessarily full retirement. Plenty of things are entertaining and make some money. Perhaps you only make 5k/year as a writer or painter well on its own that might not mean much but it can easily boost your nest egg over the next 20 years. Or perhaps teach a class at the local collage or even some of those short training classes. Not to mention long shot’s like trying your hand at acting.

PS: Your expenses often rise as you age but even just working 10 years entitles you to some Social Security benefits.

"in SF" - that is not affordable. If you are trying to save money you live somewhere on the BART or Caltrain and take the train into the city every day. My rent in East Palo Alto the year I was there was $400/month all utilities and internet included, for example. Is commuting into big cities like SF and NYC every day by bus and train miserable? Yes. But thousands and thousands of people do it because it is affordable and they have families or retirement they care more about.

to some degree you're right, commutes are a good way to trade time for rent money. many people don't have that time luxury, sadly, especially if dealing with a 9-5 job, caltrain irregularities and school/daycare schedules. many people don't have an extra 3+ hours to spare each day and necessarily trade that for a rent increase or proximity to a daycare or school. as a current resident of epa, i can say that the rents are becoming comparable with regular palo alto, especially if you're not living alone, which is really when these budget issues become much more complex.

>Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California...

How about C) Move to a different state? If the goal is to do this in California, then yes, it's probably not possible.

>Assumptions: >– You can earn 5% investment returns after inflation during your saving years

This would maybe make sense in the 1990s or early 2000s but it's 2014!

ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.

You should take a look at stock market returns over the last few years, this year included.

If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.

Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.

> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.

>You should take a look at stock market returns over the last few years, this year included.

This is exactly what scares me about it. It's frothy as hell.

So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.

>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion

Let's see:

1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).

2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)

3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)

4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.

5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).

So far the path has been identical. Hell, we've even gotten plummeting birth rates too.

>forecasting three decades of economic stagnation is just silly.

I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.

Forecasting safe 5% returns is bullshit, anyway.

you should not unless your close to retirement have much of your pension fund in cash or cash equivelent's.

And re 5% I have several IT (investment companies) with returns of over 10% pa for the last decade

There are other, safer, kinds of funds beside stock funds. It sounds like what you want is a fund holding government bonds. Those are pretty safe, and will probably give you better return than the bank.

US government bonds (ten year, so plenty of short term price risk) pay 2.16%. If you are in Europe, German government bonds pay around 0.8%.

if you consider inflation (1.70% in the US,0.60% in Germany) those interests are almost zero.

If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, so if some years are bad (or really bad) you need to eat into the capital. If these happens for too many years in a row, the capital could be reduced enough that you need to get higher earnings to counterbalance that.

I'm not a finance expert so feel free to show me the fallacies of my reasoning!

> I'm not a finance expert so feel free to show me the fallacies of my reasoning!

Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.

Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.

Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".

you do have to be aware of the effect when QE is unwound which will depress the price of gilts

QE doesn't need to be unwound; bonds can roll off into cash.

you do know that bond prices and the bank rate are linked bank rate goes up bond prices go down - sucks if you lose 20% of your capital that way and that has happened recently

>you do know that bond prices and the bank rate are linked bank rate goes up bond prices go down

Yes, that is true. But how is the bond price relevant, from the Fed's perspective, if they aren't selling the bonds?

well I think the down side is for the holders ie you and me and our pension funds :-(

That's exactly why it's 5%, it's an average of the highs and lows. Right now it might be tricky to earn that (it's not impossible though), but in the early 2000s you could easily make that. With decent investments you can make two or three times what the same money sitting in a high interest bank account will make.

You know the stock market has been doing great over the past 3 years, right? Last year I got something like 30%. If you leave your money in money market funds of course you'll get near zero. You need to take some risk.

It would never really make sense. Any investment where you can make 5% after inflation has risk involved. If you're lucky you'll do great. If you're unlucky not so much. "Do you feel lucky punk?" ;-)

1999 - 2009 negative real return. Imagine you're the happy dude who retired in 1999 with a family after working for 10 years and diligently saving. Now in 2009 you need to send your kids to school... We also were on the brink of real depression, if that scenario played out you'd be completely wiped.

So basically you need a large buffer than you think you do to account for volatility and rare "tail" events.

From that link, under assumptions: "You can earn 5% investment returns after inflation during your saving years"

If I could earn 5% after inflation without risk I could retire today (well, I'd be retired many years ago, if that's what I want to do). The problem is that's simply not possible. If you have a family you can't take the risk of putting all your money in stocks as there can be periods of well over a decade where the real return is negative and you'll run out of money. You need a lot more buffer.

It says "during your saving years", which I understand to mean while you are working. This would seem to leave you the flexibility to adjust if your return doesn't meet your expectations (as compared to an assumption of X% return while retired).

And don't have kids.

Or do, and cut from other areas/don't get on the hoighty-toighty daycare/lessons/private school treadmill. But kids are definitely an expense.

Having kids doesn't change the math. That's MMM's point in the post. It's all about savings rate. Kids mean it is harder to save 35%, but the math doesn't change.

I'd add that even if you aren't able to live on 35% for 10 years straight you shouldn't fall into the mindset that it's not worth aiming for at all.

What about rent or mortgage? In most major cities low rent could be easily 35% of after tax income already

Depends on how much home you go for; most people buy or rent far more home than they need or can afford. Sure, if you're in the middle of Mountain View or NYC, even the tiniest apartment can be exorbitantly expensive, both in absolute terms and as a fraction of salary (which does not scale to the same degree). Those locales are fundamentally expensive to live in unless you get very creative. On the other hand, in most other locales, if you're willing to live on the high end of "student" rather than on the high end of "professional", while getting paid like a professional, living on a small fraction of your income is quite feasible.

And in any case, there's no sense giving up on the idea completely even if you can't hit the most aggressive savings rate; even if you only save 50% of your income, you can retire after 17 years, which puts you on track to retire in your early 40s instead of your late 60s. Even better, as you progress through your career, your salary will likely increase, but your spending doesn't have to match. 50% of your salary right out of college may only be 25% of your salary later on.

Indeed, "dumping raises into savings" was one of the smartest things I ever did, financially. When I moved from working from a university to working at a mid-sized corporation, I got roughly a 25% pay bump. Every single dollar of that went into savings (fully funding the 401(k) and Employee Stock Purchase Plan, etc.).

This did a couple of things... it kept a lid on living expenses because there was no additional cash, but it also provided an easy way for me to raise my savings every year without having to make too many conscious choices, just by moving every pay raise into savings.

Houses are pretty cheap, compared to how much money you need to retire.

Also as a rough estimate, most yearly rental prices are 5% - 15% the value of the property. If you get a long mortgage (in the UK, 30 years is pretty common) you can easily pay less per month than you would rent.

Mr. Money Mustache will probably tell you to move to a different place[1], saving time and money by reducing the commuting time[2] etc..

NB I neither agree nor disagree with his ideas (still have to decide.. :))

[1] http://www.mrmoneymustache.com/2011/09/28/get-rich-with-movi... [2] http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-c...

By my calculations, it's generally much better to live in a high-cost area while earning a high wage, than to live in a low-cost area while earning a low wage. This is because a lot of products out there have a fixed cost which isn't based on geography (think iPhones). A higher wage makes it easier to purchase those items.

So, the optimum would then seem to be to live in a low cost area making a high wage.

It can be done. My wife and I both work remotely and are able to earn significantly more than the average income for our area. She is an hourly engineer and I work as a consultant. We get to live where we want and do the work we want. We could both make significant;y more if we were to relocate, and we have in the past, but we enjoy the lifestyle here and are happy to give up some top end income for quality of life.

And even if all costs scaled completely linearly with your earnings saving 20% of your income in a high-cost/high-wage are will earn you more money than 20% in a low wage area.

You can always move to the low-cost area when you are ready to stop working.

My calculations differ, though they are probably based on different locations than you used, which changes the numbers.

Median incomes are 75% higher in the high cost area, but housing costs are 200-400% higher, which, being a major expense for just about everyone, quickly erodes any gains you might make on the income side. Services, like internet connections, were also more expensive in the high cost area. Goods like iPhones are the same in both places, you are right, but is actually a larger portion of your disposable income because of the higher living costs.

The one place you might be able to make gains in the high cost area is if you struggle through paying those 400% higher housing costs with the intent of selling your home and moving to a low cost area later in life. Then you can ride that significant equity you have built, assuming the property maintains or increases in value.

That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).

That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).

yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)

I'm thinking about this right in these days, as I'm living and working in a quite rich but expensive country (Luxembourg) where real estate prices (rent&purchase) have grown a lot in the past years, and are still growing (two digits increase of prices yty), while you have surrounding border areas (Belgium, France, Germany) that are way cheaper (half or even less per square meter) but are located 30-40km away with really congested roads or slow public lines (at least 45min per trip, easy to become 1-2hours in case of accidents or traffic jams)

> yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)

Since it seems that English isn't your first language, I thought I'd point out that "telecommuting" means you work from home, and "commuting" means that you travel a long distance to get to work. So, there are no costs or time lost when telecommuting, because you don't have to go anywhere.

The commenter you're replying to is saying he works from home in a low cost area, but works for a company in a high cost area (possibly hundreds or thousands of kilometers away).

you are right I'm not native English speaker so thanks for spotting that, I've always used "remote working" or "teleworking" for describing that, but not telecommuting (maybe because commuting means "travelling to work" and tele means "over a distance", so the compound doesn't make too much sense for me, at least if you don't put a negation somewhere :D)

I think the compound resonates with us because it reminds us of both "telephone" and "telegraph" which work remotely and electronically.

I tend to agree. The other point to consider is that if you are (for example) putting 30% of your salary in to a mortgage in a high cost high income area, you will have a much more valuable asset by the time you have paid off your mortgage than you would if you put 30% of your salary into a mortgage in a low cost low income area. In fact you may well have enough equity to fund a nice retirement in a cheaper part of the country.

So I just did the math. I work at a startup in NYC and could probably make more money at $BigCo. I should be able to save %50 of my current salary and be able to pay rent and have a decent daily spend to the point that it's 2AM and I'm furiously recalculating a lot of scenarios. That has to count for something. :)

Not that I'm recommending it, but this strategy is radically different from the norm, so it will require you to be abnormal. Mortgage @ 35% of net income is the norm.

Unless you earn 3X the median in your area, living on 35% of your salary means living with below average expenses. Whatever your salary, you will probably think normal is normal for your peer group which usually is closer to whatever you earn than median so even if you earn much more than median you will probably be required to be abnormal. Being abnormal is hard to decide.

However you achieve this, it will probably require you to make lifestyle changes that most people like you consider unacceptable. Move someplace cheap. Start a commune in an old mansion with 6 other families/couples. Live in a cabin. Squat. :) Live with your parents. Don't own a car.

Whatever the specific setup, spending 25-35% of your salary is unlikely to be a moderately different from the norm in your peer group. But, also not impossible.

Consider:

(a) Students, broke artists, unemployed and lots of other people do live on very low incomes. It's possible. If you earn the median, then 10-20% of people in your area live on 35% of what you do. Matt mentioned 14k p/a as a grad student.

(b) This is the "find a way" scenario like a startup. Startups may require you to deal with ungodly stress work, 100 hour weeks and do "impossible" things. If retiring within 10 years is valuable to you, it might be worth it.

Don't forget health insurance. Everyone forgets hrealth insurance. Having a family is tricky too.

I think I read that MMM was (is?) paying around 250-300$/month for a family of three. So not that much.

>Assumptions >– You can earn 5% investment returns after inflation during your saving years

At least, in the US this assumption is not valid any longer. There is no risk-free investment that can earn you 5% after inflation annually.

> TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.

You might as well say:

TL:DR; Move out into the forest and live off the land and you retire today!

Come on, man. 35% of AFTER TAX income? I make good money and I'd have to live like a homeeless man for 10 years in order to do that. While working as hard as I do. That's absurd.

"live like a homeless man" is going to the extreme. But it's either retire in 10 years, or 30.

You need sacrifices to get a reward.

Except it doesn't feel like sacrifice after a while.

Netflix/Cable TV --> reading a book (from the library) or HN. Starbucks --> broaden your horizons and explore the world of "grind your own." Eating out more than once a week --> eating out once a week, and preparing healthy meals the rest. Sometimes having your friends over for dinner. Gym membership --> enjoy looking for new kettlebell and bodyweight exercises that you can do at home. Go for walks with your wife in the evenings, or incorporate walking/exercise into your weekly date.

I'll admit that overseas travel is one area where I still overspend, so this would fall into the "sacrifice" category if I were to cut back. Even so, the skills in frugality that you learn while working your day job are useful on overseas trips. Haggling while jostling with old ladies at a wet market (in a language you don't understand) in order to buy ingredients for breakfast and a packed lunch is an experience that many travelers will miss out on.

(full disclosure: last holiday was a "relax by the hotel pool/private beach" affair. But even then we had a trip to the supermarket to buy some beer, fruit and snacks instead of pay hotel rates).

Anyway, it's not something that happens over night, rather a skillset you work on like any other. You find your own level of "sacrifice," your own groove, that you're comfortable with. Mr Money Mustache is just one guy but there are plenty of people who have entire sites dedicated to the movement who can talk about this idea of "sacrifice" better than I can.

I don't think it's impossible to do it (I think I could be around that but I should run some numbers before confirming that.. and no, I'm not homeless :)), but it's also not that easy to do the calculation: it's easy for rent and maybe other expenses (internet access, bills) but when you go to one-shot expenses like furnitures or cars etc.. I think there's not an agreed methodology on how to split them over the years (5 years ? 10?) so those could easily spoil the maths.

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