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The Simple Math Behind Early Retirement

mrmoneymustache.com

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Re: The Simple Math Behind Early Retirement

#11

Post by wazoox »

brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. 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 reti…

> This is vitally important because it means it's impossible for a significant percentage of people to retire early ...

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.

Re: The Simple Math Behind Early Retirement

#12

Post by jrheard »

STRML wrote: post #9

This is a really fantastic, simple way of looking at it. 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 th…

> 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.

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...

Re: The Simple Math Behind Early Retirement

#13

Post by brazzy »

wazoox wrote: post #11
brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. 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 reti…

> This is vitally important because it means it's impossible for a significant percentage of people to retire early ... 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 retir…

cf. baby boomers.

Re: The Simple Math Behind Early Retirement

#14

Post by STRML »

jrheard wrote: post #12
STRML wrote: post #9

This is a really fantastic, simple way of looking at it. 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 th…

> 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. 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 anywhe…

Christ, many of us on this site could likely get away with retiring now & moving to Thailand, if you really can assume 5-7% long(long!)-term returns on the stock market.

Re: The Simple Math Behind Early Retirement

#15

Post by ry0ohki »

This is somewhat misleading, because the primary thing that allows these accelerated numbers is an extremely low spending rate. IE you can retire in 2 years if you save 95% because somehow you are able to live on only 5% of your take home pay (in his 50k example, this would mean you could live on $166 per month).

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.

Re: The Simple Math Behind Early Retirement

#16

Post by hudibras »

brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. 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 reti…

>it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive.

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...

Re: The Simple Math Behind Early Retirement

#17

Post by octopus »

STRML wrote: post #9

This is a really fantastic, simple way of looking at it. 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 th…

The author has a kid.

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).

Re: The Simple Math Behind Early Retirement

#18

Post by kaybe »

brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. 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 reti…

The blog adresses this issue somewhere (it's been a while since I read it) and argues that the topic is so niche that it won't be applied by a significant percentage of people.

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.)

Re: The Simple Math Behind Early Retirement

#19

Post by brazzy »

hudibras wrote: post #16
brazzy wrote: post #6

> As soon as you start saving and investing your money, it starts earning money all by itself. 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 reti…

>it's impossible for a significant percentage of people to retire early unless the remaining workforce becomes correspondingly more productive. 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 "…

Very interesting point from that article:

"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."

Re: The Simple Math Behind Early Retirement

#20

Post by jerf »

praptak wrote: post #5
r4vik wrote: post #2

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

Covered here: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-i... Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...

One of my favorite infographics ever: http://www.nytimes.com/interactive/2011/01/02/business/20110...

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.

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