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The Simple Math Behind Early Retirement

mrmoneymustache.com

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Re: The Simple Math Behind Early Retirement

#41

Post by rdl »

RyanZAG wrote: post #32

Interestingly, if you look at the break-down of how much you spend, for many people a majority of that spend is simply a function of where they live. If you're living in SF, your food+housing+etc is going to be a far greater multiple than if you live out in the sticks. 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.…

Particularly if you can combine that with some kind of passive/recurring income (do consulting from Vietnam, and then also build a product/service from that experience with minimal maintenance)

Re: The Simple Math Behind Early Retirement

#42

Post by NickM »

brazzy wrote: post #33
liber8 wrote: post #25

Earlier quoted context omitted.

You do realize you've disproved your own point, right? >>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 retireme…

I haven't disproved my main point at all (returns from investment are ultimately funded by the working population) - just perhaps not given the proper weight to the caveat about increased productivity when talking about the effects. 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 ri…

If you look at peoples' gross paycheck income, it appears to have stagnated, but much of this is due to the rising costs of healthcare. Incomes are effectively continuing to rise, it's just that much of that increase is being funneled into benefits rather than take home pay.

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.

Re: The Simple Math Behind Early Retirement

#43

Post by brazzy »

hudibras wrote: post #38

It's always embarrassing to admit that you're a part of a cult, but I'm a huge fan of MMM and his spiritual godfather Jacob (earlyretirementextreme.com) and I'm currently on track to retire in 4 years in my early forties. 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 reasonabl…

There are very few really reasonable assumptions over a 50 year timeframe. 5-7% ROI is not one of them, I'd say. On the other hand, you missed an important point:

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.

Re: The Simple Math Behind Early Retirement

#44

Post by jasonkester »

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 cool thing is that your statement can be 100% true and you can still retire early.

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.

Re: The Simple Math Behind Early Retirement

#45

Post by brazzy »

jasonkester wrote: post #44
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 cool thing is that your statement can be 100% true and you can still retire early. 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 po…

Unless it gets taken care of by the increasingly significant fraction of the population who has their lives extended for a few more years at any cost.

Re: The Simple Math Behind Early Retirement

#46

Post by Irregardless »

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…

Sure, if you assume everyone just sits around twiddling their thumbs and going on vacations once they're retired. A large number of people end up continuing to be productive during retirement, but they choose "jobs" based on enjoyment rather than salary. With a free market and a global economy, I fail to see the potential dilemma large numbers of early retirees could cause.

Retirement != not working.

Re: The Simple Math Behind Early Retirement

#47

Post by smackfu »

jrheard wrote: post #40
bproctor wrote: post #31

I don't know whose life works in this extremely simple way, but it sure isn't mine. I've gone from making good money to being broke to making good money again and everywhere in between in my 35 years on this planet. 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 p…

If you save a high enough percentage of your take-home income, the article actually argues that you could be done in 7-10 years starting from scratch, which sounds a lot more doable to me than the 30 years you're expecting.

The problem with the extremes of this logic is that if you scrimp and save and live poor to get to that 75% savings rate... you still have to live poor for the rest of your life on that 25% of your take home.

Re: The Simple Math Behind Early Retirement

#48

Post by wikwocket »

I would disagree with his point that "cutting your spending rate is much more powerful than increasing your income." He says this is because it permanently reduces your cost of living, which reduces your required retirement nest egg.

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. :)

Re: The Simple Math Behind Early Retirement

#49

Post by hudibras »

brazzy wrote: post #43
hudibras wrote: post #38

It's always embarrassing to admit that you're a part of a cult, but I'm a huge fan of MMM and his spiritual godfather Jacob (earlyretirementextreme.com) and I'm currently on track to retire in 4 years in my early forties. 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 reasonabl…

There are very few really reasonable assumptions over a 50 year timeframe. 5-7% ROI is not one of them, I'd say. On the other hand, you missed an important point: 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 whi…

That's true, it's the flexibility to work exactly as much as you want--even if it's zero hours a year.

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.

Re: The Simple Math Behind Early Retirement

#50

Post by cma »

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…

Yes, arguably. For instance, before we got increased life spans, a lot of people participated in early retirement too--e.g. dying of scarlet fever before they even made it into the work force. That side of the equation no longer happens.
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