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The Simple Math Behind Early Retirement

mrmoneymustache.com

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Re: The Simple Math Behind Early Retirement

#121

Post by gnaritas »

chimi wrote: post #105
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…

Yours is a very pessimistic view. You have no faith in your fellow human beings. There are a lot of smart enough people out there with sufficient will power to make these changes in their life if only they have the education and awareness of the opportunities. Sometimes all it takes is seeing the impact these changes have. One of the best quotes I have seen about finances is this: Poor people spend what they have and…

> Yours is a very pessimistic view.

That dude is not a pessimist, he just looks that way to you because you're ridiculously optimistic.

Re: The Simple Math Behind Early Retirement

#122

Post by Ntrails »

RyanZAG wrote: post #53
Ntrails wrote: post #30

Earlier quoted context omitted.

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…

First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money.

The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital.

This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets.

The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically).

I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.

Re: The Simple Math Behind Early Retirement

#123

Post by methodover »

minikites wrote: post #92

>If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart In what universe is saving half your paycheck a reasonable percentage?

That's what I was thinking... About a year ago, I started making $40k/year. It's just barely enough to get by. Most of my take-home goes to rent, student loans, and other expenses that I can't lower. And I'm fairly frugal as it is -- I try to keep my food expenses down, I don't visit restaurants very often, I don't have cable tv, I don't really even have much furniture. I do my best to take super frugal vacations. I don't have any credit card debt or vehicle debt.

Saving 50% of my income is not possible for me without living in an untenable situation.

Re: The Simple Math Behind Early Retirement

#124

Post by logn »

ChuckMcM wrote: post #60

Sadly 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.

I had been saving money in cash for years went the financial meltdown happened (the stars aligned such that I graduated from college about 4 years before this). I happened to invest around the market low and got great deals. I decided to just hoard all of my money again and wait. With the insane leverage of banks, it shouldn't be too long now. I'm just hoping this time I have a few hundred grand to invest and can retire overnight: http://etfdailynews.com/2013/01/15/derivatives-and-extreme-u...

Re: The Simple Math Behind Early Retirement

#125

Post by patrickgzill »

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"

Even better, buy someone else a latte, sit down and talk with them and learn something new. Then with that, go earn more.

Re: The Simple Math Behind Early Retirement

#126

Post by jimbokun »

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…

"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".

Most likely, your spending will just increase by 30% along with it. Instead of the latte, maybe it's a new computer, car, or vacation now.

Ever read about athletes and celebrities and entertainers who make 10s of millions and end up broke? Without some form of discipline, our capacity to squander wealth is astounding.

Re: The Simple Math Behind Early Retirement

#127

Post by simonh »

minikites wrote: post #92

>If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart In what universe is saving half your paycheck a reasonable percentage?

Bear in mind that payments against the principle of a mortgage count as savings. My wife and I have been saving abut half our earnings for some time now, despite having kids.

It helps that I have a reasonably well paid Tech job and she's on a starting Nurse's salary (She's Chinese so had to re-educate/qualify from scratch which set her back a bit), but we were saving 1/3 while she was studying Nursing.

Re: The Simple Math Behind Early Retirement

#128

Post by mephi5t0 »

This all works only if everything is steady in life and it isn't. Today you work and save tomorrow you got a kid and your spendings take off and fly. Sometimes you want to celebrate something so you go to a bar and drink with friends which will kill your "latte-savings" for 2 weeks. Then you wake up and your tooth is killing you. you have to do a root canal and even with insurance it will dig into savings. Graph is too simplified. It will have spikes and drops - depends on each persons life and experiences...

Re: The Simple Math Behind Early Retirement

#129

Post by danielweber »

rayiner wrote: post #120
danielweber wrote: post #66

Earlier quoted context omitted.

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…

If everyone simultaneously did that

But, they won't. Not everyone is of the same age, for one. So, it's an abstraction that usually works.

Instead of accumulating pork bellies, you can accumulate pork belly futures. This is another abstraction. Not everyone can do this at once, either, but the price of pork belly futures will rise in response, telling people to stop accumulating so much of that good.

It feels like you are saying -- based on my experience talking with other people who think economics is just a sham, so perhaps I'm too sensitive to that and applying their thinking to you, unfairly -- that any savings are just a confidence game. This is what I'm arguing against.

Re: The Simple Math Behind Early Retirement

#130

Post by hudibras »

jrheard wrote: post #110
eric970 wrote: post #95

Am I the only one that feels like I'd rather be making money and enjoying myself at the same time, rather than stressing out about putting 50% of my income towards retirement?

If you set up automatic 401k deposits and direct deposit a percentage of your paycheck to Vanguard, you won't stress out about it at all. You'll just see a different number on your take-home paycheck, get used it it quickly, and go on enjoying yourself without stressing out. Or at least that's my theory - I'm setting up that direct deposit situation today, and I'm planning on setting the percentage a lot higher than…

This is exactly the right thing to do. It takes a leap of faith, but you really do get used to the lower level of take-home pay quickly.

An added bonus is getting the Vanguard statement each month and seeing it grow.

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