
The Simple Math Behind Early Retirement - jrheard
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
======
brazzy
> 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 retire early unless the remaining workforce becomes
correspondingly more productive. Otherwise, if everyone started following the
advice in that blog to try retiring early, what would happen is that average
returns would go down across the board, and that "4% safe withdrawal rate"
would become 2% or even 1%, making the whole math work out quite differently.

Arguably, that is already happening even without additional early retirees,
simply because the increased average life expectancy (and thus the time people
spend in retirement). Effectively, _everyone_ is already doing an early
retirement, compared to people 50 years ago.

~~~
rayiner
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.

~~~
danielweber
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.

~~~
rayiner
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.

~~~
danielweber
_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.

~~~
rayiner
I'm using the difference in edge case behavior to illustrate why I think the
analogy is flawed. I don't think saving in a bank is just an abstraction for
putting away non-perishable food. Not just that it's a leaky abstraction, but
that it's the wrong abstraction. I think that distinction illustrates a deep
difference between the two scenarios. "Saving" in the sense of storing away
pork and beans is retrospective. How well you eat depends on how much you
saved, but not on what else is going on. "Saving" in the financial sense is
prospective. How well you eat depends heavily on what the future looks like.

That isn't to say that savings isn't an abstraction for something. Saving
money in financial instruments isn't a "savings" game. It's a growth game. By
saving, you make available capital. That capital goes towards growing the
economy. Ideally, the growth in future production resulting from your capital
offsets the share of production you take out in retirement. It's this element
of growth that distinguishes financial savings from "savings" in the pork and
beans sense.

------
hudibras
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 reasonable
assumption.

2\. Living on your investment income also means drawing down your principal
eventually. The "goal" is to draw the last dollar from your retirement account
on the day that you die (nobody actually believes that, what with passing
money to your heirs, your presumably unknown date of death, and at least a
small trickle of social security continuing, but that's the theory.)

3\. Some of the lifestyle changes seem drastic, but you have to remember one
thing: you are no longer working. Having complete freedom to do what you want
each day is the whole point of retiring early.

~~~
brazzy
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.

~~~
hudibras
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.

~~~
marvin
I'm a big fan of MMM, but I'm also not from the US. From an external point of
view, making any assumptions about United States pensions far in the future
seems like a bad idea. The United States can barely pay interest on its
foreign debt (debt ceiling/fiscal cliff debate), how do you expect it will be
able to honor its national debt obligations without resorting to inflation?

~~~
hudibras
As you probably know, discussions about Social Security in the U.S. quickly
become holy wars so I'll just answer your question without explanation: I
trust the Democrats will protect and defend Social Security from the
Republicans who want to destroy it.

~~~
marvin
I'm just saying practically. Where will the money come from? Politics aside,
how are you going to be able to afford it at all, without inflation?

------
ColinWright
Take home quotation:

    
    
        Mustachians will remain a rare breed, is because this
        article will never appear in USA Today. (Or if it does,
        people will be too busy complaining about how it can’t
        be done, rather than figuring out how to do it)

~~~
octopus
Once you stop complaining about how difficult it is to become financially
independent in this economy and look in how you spend your money, the
mustachian philosophy is a viable way of life.

------
ChuckMcM
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.

~~~
makira
Fully agree on this one. Assuming "You can earn 5% investment returns after
inflation during your saving years" is the exact reason why so many retirement
funds are having problems. %5 after inflation, although that might have worked
great in the past, is optimist at best regarding the future.

~~~
alsocasey
Be working during the relatively high inflation of the 80s (wages lead
inflation), retire during the record low rates of 00s so you're money
stretches further/longer is definitely a nicer story then the other way
around...

------
simonbarker87
MMM has an excellent philosophy, however following his methods and working
toward early retirement does require a salary level that is a considerable
amount above the minimum basic cost of living for where you are.

By minimum cost of living I'm not talking about the average cost of a
restaurant meal in one area/country vs another or the average cost of a cable
tv package in one country vs another (if you consider those essentials then
you should spent some more time reading the MMM blog).

I'm talking about the cost of a pint of milk, a loaf of bread, a chicken (dead
for eating, not as pet), public transport when you can't cycle, car insurance
(if you can't avoid owning a car - some people can't), rent (in the UK this is
pretty consistent, except in London), mortgage, TV License (don't even try to
tell them you don't have a TV, they won't believe you and you'll be fined),
gas and electric bills etc.

There is a minimum cost to live in a country and you need to earn a reasonable
amount above before you even get to the point of choosing between buying a
starbucks or putting that money into savings.

~~~
d4rti
TV licensing have a page for declaring you have no TV.
<https://www.tvlicensing.co.uk/no-licence-needed/>

I've never had (or needed) a TV license, and I've never been fined.

~~~
WickyNilliams
I've not had or needed a TV licence for the last 4 or so years. Initially the
tv licencing people were chasing me up constantly, sending letters to which i
just had to respond to say "I _still_ don't need a licence", a few visits to
the house etc (all this is kind of tantamount to harassment really), but
eventually they backed off.

As for needing a tv licence at all, I don't see why anybody does in the era of
broadband. Streaming videos is allowed without a TV licence, provided the
stream is not live, so you can even watch video on BBC iPlayer, legitimately.
Combined with every other terrestrial channel's free online offerings and more
recently netflix, there is no need to pay a tithe to the BBC. It really is a
simple adjustment but it gives decent savings.

------
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.

~~~
darkarmani
He assumes your current expenses are at steady state. It's a pretty obvious
assumption. If you pay off your home, your expenses in debt servicing will be
lower when you retire.

------
nicholassmith
Best thing you can do with your finances is do what people are doing to lose
weight, track _everything_. You spend £2, you put it on. Doesn't matter how
trivial it is, log it with details so you can track it. At the end of the
month have a look to see where it's all gone, it gives you feedback and you
can adjust. My take home hasn't changed but how much I'm not spending has, and
it's very nice.

I probably won't retire early, I like working. Taste of the biscuit, office
natter.

------
octopus
MrMoneyMustache (MMM) has a sound philosophy of life based on his experience
and on Stoic literature.

After reading his blog (and I mean all his articles from 2011) I've stopped
buying myself a new computer every six months or so.

~~~
jere
>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.

~~~
run4yourlives
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.

~~~
stephencanon
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.

~~~
marekmroz
On the flip side, making more and more money just to spend it on useless crap
that gives instant but short-lasting gratification is also silly. The way I
see it, it's a scale, and hitting a balance, not striving for either of the
extremes, should be a goal worth pursuing.

------
brads84
I'm surprised how many people are agitated by the article suggesting that they
can stop working earlier if they save more money.

As the article stated: "The only reason Mustachians will remain a rare breed,
is because this article will never appear in USA Today. (Or if it does, people
will be too busy complaining about how it can’t be done, rather than figuring
out how to do it)"

------
liber8
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 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.

~~~
chimi
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 invest the rest.
      Rich people invest what they have and spend the rest.
    

I've unwittingly been following this advice for a long time. When I save up
enough money, I buy a HOUSE. An entire house I'm not just talking down
payment. I have 5 houses now. I rent them out. I flip them. I live in them.
Did you know you can buy an entire house for less than $5,000? A lot of people
don't. I think those that buy houses retail or rent are silly. You think
people who try to convince others that giving up coffee works are silly. To
each his own. Why buy stocks and bonds when you can buy a house that pays
$500/mo rent on a $5000 purchase?

Most people think I'm insane when I say that kind of thing, but it happens and
it works. It takes experience, research, and time. It takes dedication and
will. Strength of character and determination. Those are the characteristics
that are lacking in our population right now and unfortunately those things
aren't being taught. Those are the things needed to launch a startup, build
wealth, and pay off credit card debt. They are also what is needed to give up
coffee at Starbucks, so start with the coffee and you'll build better people
for the long run -- that's what's important.

    
    
      > There's no medium ever invented that does this better than television.
    

I internet is better for me, but I get your point.

    
    
      > They want coffee, and buying one at the starbucks next
      > to work is a lot easier and tastier than brewing it 
      > yourself.
    

If Starbucks is tastier and easier than your home brew, you're doing it wrong.

    
    
      > automate your finances
    

If you think automating your finances is easier than not getting a coffee at
starbucks -- well, I disagree entirely. Most people can't even balance a
checkbook.

    
    
      > purchase the bond/equity ratios that suit your age
    

Really? These are advanced investment concepts and it takes a lot of education
to get there. Start first with not spending more than you make. I think that's
the point of the article. Once you manage that, then start thinking about
where to invest. You're putting the cart before the horse.

All these concepts can and are being learned by people all over the world. It
just takes time. You have to crawl before you walk. Crawling out of the hole
of debt is the first move. If you keep spending at starbucks and paying 20%
interest while you're trying to get 6% on bonds (if you're lucky) then you're
still losing money. The secret to building wealth is first and foremost to
stop losing money.

~~~
abstractbill
Where can you buy a house for $5000 that pays out $500/month in rent?

~~~
chimi
You can actually get them for even less than that and get _more_ in rent. The
cheapest way is through Tax Sales. You can buy a 3 bedroom house at a Tax Sale
for low thousands of dollars and rent them out Section 8 for $800/mo or more
and the US Government pays you all or a portion of the rent so it's reliable
residual.

Of course it isn't that simple, sometimes the houses need a lot of work to get
rent-ready and if you don't live near them you need a property manager. It's
complicated and a lot of hard work but the dividends are incredible. You can
also lose your shirt if you aren't careful.

I'll email you.

EDIT: Strike the email, here's a post to a blog with results from a Tax Sale
in Tulsa County Oklahoma last year:

[http://www.gavelhound.com/blog/Final+Results+for+the+2012+Tu...](http://www.gavelhound.com/blog/Final+Results+for+the+2012+Tulsa+County+Tax+Sale)

Some of what you read in these comments below is true. Skepticism is
warranted. It's hard. It's dirty. The houses do need a lot of work. The
tenants don't pay sometimes, but the US Govt always does. Property managers
take 10% or more of the rent to manage the properties. It's a BIG risk but BIG
returns can be had as well. Plus, it does take time and emotional stamina.
Imagine buying a house that was a meth lab. It happens. Imagine removing the
person who lives in it and they burn it down. It happens.

~~~
smackfu
The tricky part is that it's very easy to not notice when your "investment"
turns into a "second job" that may not really be paying that well per hour.

~~~
chimi
It's important to find a good property manager in the area you are investing.
They do the work for you but the returns are less of course. Just like
anything...

~~~
illuminate
"It's important to find a good property manager in the area you are
investing."

Also not as easy as implied.

------
dionidium
_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 have enough money in the bank to live the rest of their
lives like this. But what's the point?

~~~
hudibras
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.

~~~
dionidium
That number was based on the prevalence of reasonable apartments in my city
that rent for $450/mo or less. With a roommate that's $225/mo or $2700/yr.
That leaves $191/mo for food and toothpaste and the like, which is doable for
one person. (Clothes are essentially free if you don't care what you look
like.)

The example was meant to be extreme and you can adjust the dials a bit without
missing my point, which is that of course it's easy to retire if you remove
the requirement that you might want to buy stuff.

~~~
hudibras
No problem, I mostly agree with you. The only assumption I didn't like was
living with a roommate who pays half the rent (not a spouse) for the next 50
years. That's a little extreme even for me.

------
STRML
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 thing becomes a lot less
predictable.

~~~
octopus
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).

~~~
Buzaga
yep, if I'm not mistaken he has an article named "first retire.. then get
rich" where he mentions learning carpentry or something like that and making
even more money, even tho he wouldn't need it

~~~
marvin
He has another article where he mentions that since he refused to remove the
word "badassity" from his blog, the credit card companies revoked his
affiliate agreement, costing him something like 800 dollars a month in blog
revenues. But apparently this wasn't a big deal.

------
r4vik
> Assumptions:

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

~~~
praptak
Covered here: [http://www.mrmoneymustache.com/2011/06/06/dude-wheres-
my-7-i...](http://www.mrmoneymustache.com/2011/06/06/dude-wheres-
my-7-investment-return/)

Google cache (his server seems not to take HNing well):
[http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...](http://webcache.googleusercontent.com/search?q=cache:UjYtrDk82uEJ:www.mrmoneymustache.com/2011/06/06/dude-
wheres-my-7-investment-return/+&cd=4&hl=en&ct=clnk&gl=pl&client=firefox-a)

~~~
jerf
One of my favorite infographics ever:
[http://www.nytimes.com/interactive/2011/01/02/business/20110...](http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-
graphic.html)

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.

~~~
jcdavis
That chart takes away inflation. When people say the expect 7%/year they are
not including inflation. 7% a year pre inflation and taxes is likely roughtly
3.5-4%, which is grey on that chart.

~~~
dro77
Yes. This chart goes along perfectly with MMM's math.

------
RyanZAG
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. Your
expenses should be a fraction of what they were before, and your income should
remain similar. Instant years off your working career and no traffic pollution
to spoil your day. I think we might be seeing more of this in the future...

~~~
rdl
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)

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

Ha ha. This is _wildly_ optimistic - this means 7% minimum and prob 8% or 9%.
If he can guarantee these kinds of returns the world's money managers are
going to be calling.

------
bproctor
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 people do that anymore.

Saving money is good, no doubt, but if you're concerned about retiring early,
you're much better off figuring out how to do it by making more money.

~~~
jrheard
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.

~~~
smackfu
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.

~~~
gte910h
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.

~~~
smackfu
Or you could be dead in 10 years.

~~~
gte910h
Yes, sure you could. Highly unlikely though. You probably have decades left.

------
minikites
>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?

~~~
methodover
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.

------
outside1234
There is a incorrect assumption - you can't take out 4% if you are only
assuming at 5% rate of return. The 4% number comes from an assumption of 8.5%
(long term stock market returns) minus inflation minus taxes. So in your 5%
assumption, this means you can only take out 0.5% or less.

But the article is overall directionally right. The less you spend on shiny,
the less you need, and therefore the less you need for retirement.

------
kablamo
My side project is based on this article. I was intrigued by the graph in this
post and so I created an interactive chart to explore it. The calculator will
tell you how quickly you can retire and what your savings rate needs to be.

<http://networthify.com/calculator/earlyretirement>

~~~
jrheard
I've been playing around with this page constantly for the past 12 hours and
gave you you my email address via the signup box this morning :) great stuff!

------
tunesmith
I left a comment over at the site. In short, I also think the 5% assumption is
ridiculous. I have perfect data of the date and amount of every retirement
contribution I've made since I started in 1993. I used historical data to look
up what my APY would be if I had bought an S&P-500 index fund for each of
those dates/amounts. I also compared it with historical inflation records. As
of today, it wouldn't be 5% after inflation - it would be 0.9% . And this is a
_good_ period - for the vast majority of that time, it would have been a
negative APY, and that's over the last twenty years.

That number will be different for different dates/amounts from different
people, but I can tell you that I have saved pretty consistently and
aggressively over the last twenty years, and there's nothing out of the
ordinary with my savings schedule - no huge gluts just before a crash or
anything like that.

~~~
tunesmith
Not sure anyone is reading this thread anymore, but I have to partially
retract. In my case, when doing the historical analysis, I thought I had taken
dividends into account but I hadn't. So in my case my historical APY would
have been about 2.75% (factoring in inflation), not 0.9% . That still shows
that 5% isn't close to a safe assumption, but it's not as overwhelming as it
was before.

------
jeffdavis
Cutting a spending habit without losing any quality of life is like an annuity
and it increases your freedom. Getting a pay raise keeps paying you for a
while, but has disadvantages like:

    
    
      * By definition, you have to keep working to keep getting it
      * Taxes go up
      * It may come with some implicit strings that
        require you to work more or carry more stress
      * arguably reduces your freedom
    

In our field, getting a pay raise might be the easiest way to improve your
savings rate, but we should just keep in mind that reducing consumption has
some important advantages.

And it's a good idea to practice reducing consumption now. If your income goes
down or surprise expenses come up for any reason (not just retirement), it
will help you get through it comfortably. It's a lot harder to increase your
income in a pinch than reduce your consumption.

~~~
enraged_camel
Cutting spending without losing quality of life is difficult. In the vast
majority of cases, you'll be cutting from social spending (going out less),
convenience, or leisure.

In every single case, getting an after-tax $10,000 raise is going to be
overwhelmingly preferable to cutting your spending by $10,000.

~~~
jeffdavis
"Cutting spending without losing quality of life is difficult."

But it's easier to cut habitual spending, and replace it with discretionary
spending and maintain or increase quality of life.

You may choose to spend your limited money on a large house, a new car, and a
boat; but with limited money for extras; or you can get a smaller house, a
late-model used car, and have lots of extra money for social occasions and
travel.

The former has a high level of habitual spending and you are locked in. If
times are tight, even temporarily, you have to sell those things, often at a
heavy loss. You are also very strongly attached to your current salary, which
reduces your freedom to try a career shift of some kind.

The latter could also be a high quality of life, because you leave your
smaller house to go on vacation twice a year, and you can enjoy spending on
social events or conveniences. But you have much more freedom and flexibility
in your life.

"In the vast majority of cases, you'll be cutting from social spending (going
out less), convenience, or leisure."

What about getting a smaller house, or driving a late-model used car rather
than a new one, or not buying that boat/plane?

"In every single case, getting an after-tax $10,000 raise is going to be
overwhelmingly preferable to cutting your spending by $10,000."

That's true in the sense that more money is better. And cutting total spending
(rather than replacing habitual spending with discretionary spending) can
often reduce quality of life.

However, there are a lot of dangers in only focusing on getting raises. For
one thing, a raise is not necessarily permanent, so it doesn't necessarily
translate into more money. And it can lead you to increase your habitual
spending, which is much harder to cut later than discretionary spending.

So, I think I would change my point slightly to be: keep habitual spending
small, and grow it slowly in response to increases in income. To maintain a
high quality of life, spend money in discretionary ways (e.g. "pay for it
once") like vacations, conveniences, social outings. Oh, and renting does not
necessarily count as discretionary, but it can.

------
roc
Maybe I missed it, but did the Shockingly Simple Math completely neglect that
wages and thus lifestyle typically _increase_ over a career? And that
plausible-savings-rates go up as wages increase, as many lifestyle costs are
regressive? [1]

Calling out young professionals for $4 coffees is not only an act devoid of
human understanding, it seems to be ignoring that many young professionals can
only _maintain_ their higher pay/higher stress jobs _because_ small treats
keep them energized and sane. And maintaining those careers, even with such
expenditures, makes higher total savings possible. [2]

Similarly the article gives short-shrift to retirement _lifestyle_. It
concedes, in passing, that lifestyle at retirement is fixed based on prior
working wages. (By admitting that you need to maintain the lifestyle inherent
in your savings rate even _after_ you retire).

But it doesn't spend any time talking about the human implications of that.

Most people would look at a $10/hr-and-saving-nearly-every-penny lifestyle and
say "this is not retirement. even if i can maintain this lifestyle after only
10 years of work". They see it as scrimping and saving and deferring joy so
that they can ... continue scrimping and saving? [3]

Facing such a situation most would opt to _continue_ working, earning
promotions, adding to their nest egg and disposable income level, rendering
that "achievement" of early retirement as academic-at-best but utterly
irrelevant to their actual life.

This is all why sensible retirement planning _starts from defining the desired
retirement lifestyle_ and working backwards from there -- accounting for
likely wage increases, the declining impact of necessary spending as wages
increase, allowing for reasonable levels of luxury spending [4] and accounting
for planned life changes, like a house, spouse and children.

Even in the "early retirement" fantasy that hinges on the notion that after
retirement you would simply 'work for yourself' or pursue some creative or
personal dreams, the costs implicit in pursuing said endeavors need to be
calculated into retirement lifestyle to determine an _actual_ retirement age
and thus savings rate.

This is particularly necessary when you're pitching the idea of pursuing those
things only _at_ retirement, by deferring any and all possible costs in the
pursuit of some maximal savings rate. [5]

Most people typically say something like "I'd like to retire and travel and
paint". They'll then do things as crazy as including costs related to
preparing for years of travel and learning to paint _during_ their working
years so they'll actually be ready for their 'retirement' (also: so that
they'll actually know whether or not they'd actually enjoy traveling and
painting).

At which point the "live more frugally and retire earlier" approach is, again,
revealed to be irrelevant for most, as those preparatory and exploratory costs
push down feasible savings rates.

The curves in the article allow for this sort of thing, of course, and one can
argue "individuals can simply adjust their savings rate downward to allow for
their desired lifestyle". But it still neglects that retirement lifestyle is
the _fundamental_ consideration. Further, once the exercise is _done_ and the
curves adjusted, the whole notion of retiring all-that-much-earlier is, for
most people, exposed as infeasible or unattainable.

Lastly, the math above completely ignores that _time_ is not fungible. That
is: skipping luxuries in your 20s is not necessarily equivalent to additional
years of hypothetical leisure in your 60s. There are things that can only
realistically be pursued at a younger age and their costs can make the high
savings rates required for such 'early retirement' dreams largely
unattainable.

Which is all to say: Yes, one can attain academic early retirement with a very
high savings rate. But the lifestyle before _and_ after aren't going to look
like something the majority of people can find happiness in. And once you
adjust those to allow for likely attainment of happiness, 'early' retirement
generally isn't all that 'early'.

[1] A $4 coffee habit has a bigger hit on savings rate at $10/hr than it does
at $25/hr. Ergo many more people can more feasibly attain high savings rates
at $25/hr, or more generally, later in their career when their salaries are
higher. Pushing for a high savings rate early is silly-to-self-defeating (as
it sets easy-to-trip 'failure' conditions that are emotionally demoralizing,
particularly to those already demoralized by trying to press their lifestyle
expenditures to a minimum).

[2] Earnings from higher stress jobs >>> the $4 coffee habit and $100 bar
nights necessary to tolerate said job.

[3] Philosophically: if the pursuit of happiness is largely a function of
disposable income and we're reducing disposable income to a point that allows
'early' retirement, then we're necessarily reducing the capacity to pursue
happiness in our working life to achieve that goal. But said early retirement
is contingent upon _maintaining_ that lifestyle of reduced disposable income,
raising the question of when exactly does one get to pursue happiness? Let
alone pursue the happiness that was deferred? Talk about your pyrrhic
victories.

[4] Budgeting 101: You _budget_ for things like the $4 coffee, $50 dinner out
and $100 yoga classes. Because asking people to give them up in the name of
maximizing savings just makes most people miserable until all they give up is
_the budget_. Which is far more dangerous to savings than having budgeted for
things like this in the first place.

[5] One doesn't retire early by living on $1000/mo and then suddenly have the
money to buy the cameras/mics/etc required to pursue a dream of making
documentaries. At retirement you still have to live on $1000/mo. Sure, savings
are generating that $1000, but if there was no room in such a budget for gear
_before_ there'll be no room _after_. It's necessarily the same budget. And
taking money from your savings to buy said gear breaks the math that sustains
the retirement lifestyle in the first place. Even if you take from an
unexpected windfall -- you need those to cover over unexpected losses.

~~~
gshubert17
>Maybe I missed it, but did the Shockingly Simple Math completely neglect that
wages and thus lifestyle typically increase over a career?

Perhaps. On the other hand, if one assumes that real (inflation-adjusted)
wages are stable, then adjusts the rate of return to 3% and the withdrawal
rate to 2.5% in real terms, the numbers work out in a similar way, and the
general results that follow are the same.

~~~
roc
> _"if one assumes that real (inflation-adjusted) wages are stable"_

How many careers does that describe, over a period of 15-20 years?

------
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. :)

~~~
breischl
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. :)

------
nlawalker
These two posts should be required reading before digesting anything else on
MMM:

[http://www.mrmoneymustache.com/2011/09/15/a-brief-history-
of...](http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-
how-we-saved-from-zero-to-retirement-in-ten-years/)

[http://www.mrmoneymustache.com/2012/06/01/raising-a-
family-o...](http://www.mrmoneymustache.com/2012/06/01/raising-a-family-on-
under-2000-per-year/)

His advice is solid, I won't deny it. But his goals aren't everyone's goals,
and the lifestyle that his advice results in isn't what everyone wants from
life and certainly does not represent the only way to be happy.

MMM's primary goal was to stop working a full time job as quickly as possible,
and he was willing to do a lot to reach it. The goal of his advice is to help
you do the same.

------
campnic
I admit to some naivety on the issue, but it seems like these retirement plans
have a some exposure when it comes to inflation. Looking at the world economy
and the unprecedented measures that were/are being taken to avoid inflation
(fed. resv lending, IMF / Eurobank bailouts for Spain/Greece, etc.) it seems
like I would be worried about the future value of my money.

I want to retire. I would worry that if I lived very frugally and planned to
retire at 35-40, I could get depressed if outside of my control my future
expenses doubled because of inflation while others who are focused on
maximizing their earnings would be able to benefit from (possible) inflation
through higher wages.

I guess thats the same sort of snow globing that gets people in trouble when
they make investments. Who knows what inflation will do.

------
smackfu
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.

------
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...

~~~
dmm
The author has a kid.

------
eric970
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?

~~~
jrheard
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 I would
have before reading this article.

~~~
hudibras
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.

------
cerebrum
> \- 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.

~~~
muzz
Are you referring to the housing bubble?

The 10-year return on the S&P 500 index (not including dividends, otherwise it
would be higher) is slightly over 5%, and that includes the biggest stock
market meltdown since the Great Depression.

~~~
cerebrum
Are you taking inflation into account?

------
petercooper
My strategy is a bit different though is ultimately still a case of
sacrificing now for an income later.

I'm building a company that can keep running (eventually) without my
involvement so I can continue to draw a salary for as long as I wish or, if I
so wish, sell it to provide the lump sum I need. Slightly risky since I'm not
saving for retirement at all but putting all my money into building said
business.. ;-)

------
ritchiea
The suggestion that I could, living in New York, both live off of half of my
take home pay and retire early based on the amount I'd have in the bank after
16 years of doing so, is completely absurd

~~~
brandoncor
Why is it absurd? The former is completely based on a combination of income
and lifestyle, so I can't argue with that.

However, the latter is just math. According to the article, if you save 50%
and maintain your current lifestyle, assuming a 4% withdrawal rate, you'll be
financially independent.

------
geoka9
_Assumptions: \- You can earn 5% investment returns after inflation during
your saving years_

That's a mighty assumptious assumption to make. The rest of this article is a
no-brainer, I think :)

------
PKop
_The most important thing to note is that cutting your spending rate is much
more powerful than increasing your income._

Note to our government, cut spending!

------
OGinparadise
Nothing new, but every time I put some aside, something happened: I either
lost on the market or needed it for unexpected expenses.

(On the bright side I have a paid-off home and minimal living expenses.)

