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The Simple Math Behind Early Retirement

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Re: The Simple Math Behind Early Retirement

#111

Post by breischl »

wikwocket wrote: post #48

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 toda…

Greater income only last until you stop working, which may not be very long if you're seriously planning on retiring early. But you can maintain a lower cost-of-living until you stop living, which will hopefully be a much longer time. :)

Re: The Simple Math Behind Early Retirement

#112

Post by cynicalkane »

Swizec wrote: post #83
liber8 wrote: post #52

MMM 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 c…

Ramit Sethi's advice on this really rang true with me "Stop saving on lattes, that doesn't matter, negotiate a $5k+ per year pay increase instead"

Someone who spends $5 on a latte everyday, that would make you no happier than coffee from the break room, is likely not in a stable equilibrium of spending.

If better tasting drinks really did make you happy--something I don't believe--the rational thing would to be to brew your own coffee or tea. This has the added bonus of being a learning experience. The $5 latte drinker, at most income levels, is someone who hasn't evaluated his incentives rationally.

Thinking rationally about money is a muscle. Negotiating a $5000 salary increase then buying $5 lattes is the equivalent of going to the gym, then driving a ten minute walk home.

Re: The Simple Math Behind Early Retirement

#113

Post by gte910h »

smackfu wrote: post #47
jrheard wrote: post #40

Earlier quoted context omitted.

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.

Nope. 10 years later you can go screw it all, and still have 35k in passive income a year and a huge nest egg.

You're also probably think 35k in an expensive place, where he lives in a random suburb of boulder I think.

Re: The Simple Math Behind Early Retirement

#114

Post by [deleted] »

liber8 wrote: post #52

MMM 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 c…

[deleted]

Re: The Simple Math Behind Early Retirement

#115

Post by marvin »

cerebrum wrote: post #89
liber8 wrote: post #52

MMM 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 c…

> The reason it fails is because it ignores basic psychology. What about economics, it assumes that you have a return of 5% over inflation on your investment. Is this really a good assumption? According to this link( http://home.earthlink.net/~intelligentbear/com-dj-infl.htm ) the annual Dow Jones return adjusted for inflation and after taxes is more like 1.1%.

If I read this correctly, it excludes dividends (2% a year) and has taxation every year. The last point is very, very important for long term investing; you'll preferably not realize gains and pay taxes for 20 years and hence get interest and compound interest of the part of your profits that you would have paid in tax if you paid every year.

In short, the chart is dishonest. (I am also surprised that is lands to far away from most other people's analysis, but I can't comment on this).

Re: The Simple Math Behind Early Retirement

#116

Post by afterburner »

Irregardless wrote: post #100
liber8 wrote: post #52

MMM 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 c…

Reminds me of a great article I saw posted on HN a few months ago. I wish I could remember where it was, but it basically said "You'll never get anywhere by skipping coffee and bringing lunch to work, focus on the big gains like increasing your salary by 30% instead". The frugal lifestyle BS most likely does more harm than good for the average person. People shouldn't be sacrificing quality of life because they're wo…

I agree. It reminds me of the story of a low income divorced father barely scraping by month to month, who could have used a several hundred dollar windfall to try his shot at a trade school or some such training program, but instead spent it on a fun weekend with his son when he had a couple days with him. Long term possibly maybe shot at improving his life slightly, or a good life experience with his son now... it's not an obvious decision. And that kind of thinking applies to far less noble uses of the money as well, such as beers with friends and such.

Re: The Simple Math Behind Early Retirement

#117

Post by rapind »

liber8 wrote: post #52

MMM 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 c…

I agree with some of your points, but disagree with the overriding sentiment that spending less isn't as significant as some other savings.

I think the problem is people try to cold turkey everything at once, last a couple of days, then say "screw this". Keep TV, cut out lattes, then later you can downsize your TV (switch to netflix and OTA maybe?), etc. Track your savings and get competitive with it (make a game out of it).

Above and beyond current savings, our consumption is out of control. There's a decent chance that the average person's consumption level, if unchanged, will become increasingly expensive as there's more competition for the resources required to feed it (China, India, etc.). I'm not trying to be alarmist about it or anything, but I think it's safe to assume we're at least dealing with a moderate increase in resource prices compared to salaries (which are stagnant) year after year until we retire. It follows that consuming less (and getting used to consuming less) will have increasing returns. So working on consuming and spending less seems like a worthwhile goal, just don't go all hardcore off the bat.

Re: The Simple Math Behind Early Retirement

#118

Post by jordan0day »

Irregardless wrote: post #100
liber8 wrote: post #52

MMM 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 c…

Reminds me of a great article I saw posted on HN a few months ago. I wish I could remember where it was, but it basically said "You'll never get anywhere by skipping coffee and bringing lunch to work, focus on the big gains like increasing your salary by 30% instead". The frugal lifestyle BS most likely does more harm than good for the average person. People shouldn't be sacrificing quality of life because they're wo…

We should note how fortunate many of us are to be working in an industry where increasing your salary by 30% doesn't require a ton of extra work or going back to school and obtaining an advanced degree. For software developers, increasing your salary by 30% usually just requires: - A little extra work after-hours and weekends, improving on your craft. - Changing the company you work for.

I don't think this is quite so easy for say, an educator, or a firefighter, or a plethora of other occupations.

Re: The Simple Math Behind Early Retirement

#119

Post by hudibras »

dionidium wrote: post #56

Are 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…

Five grand a year is probably too extreme, that's less than $15/day. But $15k/year is definitely doable with a $400K nest egg. 16 million households in the U.S. survive on less than that and most of them have to work to do so.

Re: The Simple Math Behind Early Retirement

#120

Post by rayiner »

danielweber wrote: post #66
rayiner wrote: post #39

Earlier quoted context omitted.

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.

He's right that all savings are someone else's debt. But, if that is your big sticking point, you can literally load up on the cans of pork and beans as your retirement fund. "Savings account" is an abstraction for that, and it's important to realize how abstractions leak and fail, but for most people the abstraction is just fine.

Savings accounts are not abstractions for loading up on cans of pork and beans. If everyone simultaneously did that, then stopped working, everyone could still eat. If everyone put money into a savings account, then stopped working, they'd all starve. I think this is a deeply meaningful distinction. "Saving for retirement" in the modern financial sense is really more akin to having your kids take care of you when you can't work, except the transaction is severed from the familial unit and carried out in the market.
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