This is definitely simple math, because it assumes minimum current living expenses = retirement living expenses. But for people with kids or who live in expensive areas now, current living expenses are much higher than will be required in retirement.
The Simple Math Behind Early Retirement
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Re: The Simple Math Behind Early Retirement
#52MMM has a philosophy that is mathematically sound, and might even work for some people. Unfortunately, it's proven to fail for just about everyone (the spend less, save more advice has been around since the industrial revolution, and it isn't working to well: the average American has $16k in credit card debt). The reason it fails is because it ignores basic psychology.
The key quote in this article is:
>>But simply cutting cable TV and a few lattes would instantly boost their savings to 15%, allowing them to retire 8 years earlier!! Are cable TV and Starbucks worth having two income earners each work an extra eight years for???Again, mathematically accurate, but not helpful (pick up any financial "advice" in the last 30 years and you will see this exact argument). Americans are busy. When most of them get home from work, they want to relax and be entertained. There's no medium ever invented that does this better than television. Americans are also rushed. They want coffee, and buying one at the starbucks next to work is a lot easier and tastier than brewing it yourself. People firmly believe that these things make their lives appreciably better. That's why they pay for them. Telling them to go without is foolhardy. Yes, they may do it for a bit, but then they slip and get a coffee one morning. Then they're back to their routine.
The insidious problem with this is that it sucks up attention and breeds a mentality of failure. You've now got this guy constantly worrying about the $20 a week he spends on coffee. Then, when he inevitably heads to starbucks he thinks he's failed. "Man, I can't even stop paying $4 a day for coffee..." How likely is that guy to focus on things that actually matter, like setting up an automated draw from his checking account into his retirement account? He's not. That's one of reasons the average American nearing retirement has less than $100,000 saved. It’s not for lack of education. People are well aware that cutting expenses and saving more means they can retire earlier. It’s for lack of execution. People think the path to retirement starts with lattes and cable. That’s a much bigger daily sacrifice, so people don’t even start.
Finally, this quote is complete nonsense:
>>The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect:(1) it increases the amount of money you have left over to save each month, and (2) it permanently decreases the amount you’ll need every month for the rest of your life.Giving up lattes, cable, or any other luxury, is not permanent. As millions of Americans can attest to, these spending habits nearly always recur. It’s psychologically no different than the people who make new years resolutions to work out, sign up for a gym membership, go three times, and then continue to get fat the remaining 50 weeks of the year.
If you want to retire early, focus on the things that will have the largest impact: automate your finances. Set up a system that automatically deposits a portion of your paycheck into your savings, investment, and retirement accounts. Automate your investment and retirement accounts to purchase the bond/equity ratios that suit your age (or if you’re lazy, just buy lifecycle funds). Once you’ve got this down, you should focus on building skills to earn more money. Your skills, unlike your ability to stay away from lattes, won’t diminish over time if you use them. Or, if you’re lazy, then you can focus on cutting lattes and cable. But good luck with that.
Re: The Simple Math Behind Early Retirement
#53Earlier quoted context omitted.
Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.
This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the cour…
Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee.
If the stock market performs on average or better than average, you lose by using a guaranteed annuity.
If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits.
If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything.
So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
Re: The Simple Math Behind Early Retirement
#54> 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…
Bingo! This is why I find a lot of the economic debates frustrating. People think that money in the bank is like cans of pork and beans in storage. They don't realize it's just an earmark on the labor of some future person.
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Re: The Simple Math Behind Early Retirement
#55Earlier quoted context omitted.
>I've stopped buying myself a new computer every six months or so. Err.. why would you do that to start with? Even my hardcore gaming friends can make machines last for years.
For the same reason people buy $5 lattes. People are people. That said, I question a life so stoic it has absolutely no frivolousness. Sounds a little boring.
In particular, money has no intrinsic value. It only has value when you spend it. Saving money just to prove that you can is silly.
Re: The Simple Math Behind Early Retirement
#56Are cable TV and Starbucks worth having two income earners each work an extra eight years for???
Well, of course they are, for your values of "cable TV" and "Starbucks". Here's a thought. Move to the Midwest. Get a couple roommates and eat simple foods. Never eat out and don't own a car. And don't buy anything else.
You could survive on less than five grand a year with that lifestyle. I'm sure a lot of HNers already have enough money in the bank to live the rest of their lives like this. But what's the point?
Re: The Simple Math Behind Early Retirement
#57> 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.
Shouldn't salary correspond to productivity in a free market, though? So the retirees will work in less productive jobs, on average.
It's an interesting question what it will do to the job market. I suppose it means it becomes pretty much impossible to find a joby that is both enjoyable and pays well because the retirees who don't care for the salary will drive that down.
Re: The Simple Math Behind Early Retirement
#58> - You can earn 5% investment returns after inflation during your saving years
Is this a realistic assumption? Just consider how much people have lost in the housing bubble.
Re: The Simple Math Behind Early Retirement
#59> Assumptions: > - You can earn 5% investment returns after inflation during your saving years
Yes, this is quite the assumption.
While the US Gov't is doubling down on Keynesian spending (borrowing money, printing it, keeping interest rates near 0), there is no safe/guaranteed investment (CD) that comes close to 5%.
I've hedged myself by investing in "foreign" equities. But this is no where near a steady guaranteed 5%. It's super volatile.
Life is a risk. You pay your money and you take your chances.
Re: The Simple Math Behind Early Retirement
#60Sadly MMM and others don't mention the whole "all 5% per year after tax gains get reset by 20 years when the world markets crash" scenario. Also he doesn't take into account if you have kids and want to help them with their college education where that leaves you savings wise. Yeah, I'm annoyed to have been trying to save money through the second depression.