As a background, I am a 23-year old security guard and janitor. Between the two jobs (total 60 hours a week) I make about $30,000 before taxes. I have been practicing this as of the New Years, so almost 5 months. In this time, I have saved $50 a day, $350 a week. This comes out to approximately 65% of my post tax income. The biggest help to that is that my largest expense is my student loans, followed by rent and transportation (I take the bus for work). I have an investment account with Vanguard, I rarely eat out, I act as the DD when I go out with friends, and I just received my first (though meager) dividend.
I am currently taking a course in web design, so this will (hopefully) translate into a larger income and speed up the process. At the first Friday of each month, I transfer $350 to Vanguard for each week since my last transfer, and live off the remainder. I have $5,950 in principal and a bit more from dividends and capital gains, which are automatically reinvested.
So far, I have been doing pretty well for myself, better than many of my peers, and I feel pretty optimistic for future success.
$30k? Don’t you feel like it would be better to invest all the current money into yourself, so you can find a job that pays more? You are obviously pretty smart, so it shouldn’t be that difficult to get a job where you could make $50k or more.
I have some questions, if you would like to answer them:
1) Have you needed to make any adjustments over these 5 months (in order to spend less)? If not, are you planning to?
2) How do you know that you will enjoy living frugally and not work? Compared with, say, the “mini-retirements” of Tim Ferriss, which are basically week-to-month long vacations in between work.
3) How long until you expect to be able to retire?
I think it’s better to define “retirement” in this sort of context to mean (not taking some kind of vow never to work again, but) being free to choose whether to work and what on. If you manage, by some combination of accumulating wealth and reducing expenditures, to get into a position where you no longer need to work to live as you want to, and then find that you prefer working—why, then, get a job! But then you have the freedom to turn down jobs that would be no fun, that you don’t see as benefiting the world enough, that are too far from where you live, etc., while if you need to work to live you may not be able to get away with that. [EDITED to add: And if you get bored, or tired, and want a break, you can do so with less fear.]
A conservative estimate: If you assume zero investment growth before retirement, and consider you need 40 years’ worth of money to retire (at which point, unless economic growth has completely stopped by then, you can take out 2.5% per year and probably see your capital growing handily most years), and if every year you save twice what you spend, then you can retire after 20 years. So he’d retire at 43 or thereabouts.
If Petruchio can increase his income faster (proportionally) than his spending, or if his investments grow at all over time, or if he is prepared to be a bit less conservative about how big a pile he needs before retiring, or if he expects to do a bit of paid work while “retired”, his retirement can be correspondingly sooner. If he starts to yearn for a spendier lifestyle, or has children, or if there’s a colossal economic crash, it’ll move further out.
Like you said, that is a very conservative estimate, but entirely accurate. If we experience a horrible depression which gives me no investment returns for 20 years, I still will be able to retire at age 43.
The rule of thumb is that you need (Current_Expenses x 25). This is a 4% withdrawal rate, and should last you forever. If you want to go even safer (the Trinity Study suggests that 4% is plenty safe) go with 3% and multiple your expenses by 33.
Implication: You must save 25 dollars or so for each dollar you spend. So you go out and earn an extra 25 dollars, or figure out how to spend one dollar less.
This is a 4% withdrawal rate, and should last you forever. If you want to go even safer (the Trinity Study suggests that 4% is plenty safe) go with 3% and multiple your expenses by 33.
According to The 4 Percent Rule is Not Safe in a Low-Yield World, the 4% withdraw rate was calculated to have a 6% failure probability over 30 years using historical data. Using today’s lower interest rates to recompute, the failure probability over 30 years is now 57%.
It is true that with a 50% stock, 50% bond diversification, there has been a small historical failure rate for the 4% withdrawal rate. If the first 30 years after my retirement are the worst seen since WWII, then I may be in trouble.
With this in mind, we may hedge against this. You may work for a bit longer and save enough to go with a 3.5% or even a 3% withdrawal rate, take on jobs or projects intermittently during your retirement to boost your savings, or receiving social security or some other another government social program once you are old enough to qualify. Other more random factors which may hedge in your favor will be your children growing up and moving out of the house (permanently lowering your expenses), downsizing your home or moving to a rental once your kids are grown, or receiving an inheritance.
Of course, the paper you cite anticipates a higher failure rate due to lower bond rates. These lower rates may be a historical aberration, as mentioned in the abstract. I have not invested in bonds because of the very low rates, and am holding a stock-only, albeit dividend paying, index fund. I view bonds as a hedge against deflation. Besides junk bonds, the ROI is much too low for my taste.
I am anticipating an eventual portfolio of 50% Stock, 30% REITs and 20% Bonds, unlike the study’s 50% stock, 50% bond. I also hope to have some rental property, but this is a long term idea. In the meantime, I should anticipate more volatility, but until I retire I will be comfortable with that. If you, on the other hand, prefer otherwise, you should go with bonds, save more and aim for a lower withdrawal rate.
However, the crux of this sequence is not investing, but extreme saving. Investing strategies differ due to anticipated needs and tolerance of risk. However, making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are.
Bond rates are correlated with stock returns, and the paper assumes a lower-than-historical stock return as well. I don’t know whether today’s low bond rates are an anomaly or whether the historically high rates/returns in the US were an anomaly, but it seems to me there’s a fairly high chance the latter is the case. As the paper points out, the 4% wouldn’t have worked in most other countries. If you assume the current rates will continue, then even a 2.5% withdraw rate will have a 10% failure probability over 30 years, and you’d have to go to 1.3% withdraw rate to get a 1% failure probability over 40 years. (And this is assuming optimal mix between stock and bonds so you wouldn’t be able to achieve greater withdraw rate at same failure probability by switching to more stocks for example.)
I myself am doing “”extreme saving”, but it’s a big decision and I think people should make the choice with an accurate picture of the likely benefits and risks. Saying “4% withdrawal rate should last you forever” seems to be overselling the benefits and underplaying the risks. “Making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are” seems like an even stronger statement, which I don’t see how you can defend.
How much are these estimates influenced by a hindsight bias; by a knowledge that during the last century the American economy was able to provide this growth, but many other countries’ economies were ruined at some moment. -- What would happen if someone tried this early retirement idea 100 ago by investing half of their income into Russian market and taking away only 4% per year? How about Germany?
Even if I believe that within the next 50 years some markets will safely provide 4% annual growth, what is the probability that USA will be in that set, and how would you derive this probability from an outside view?
It is not a hindsight bias; it is based using an analysis of historical returns to anticipate future returns, which is a distinction. But you make a good point on comparing the American economy to foreign economy. If someone invested in the Russian economy 100 years ago, they would have lost everything in the Communist Revolution, likewise if they invested in Germany, they would have lost it in WWI, WWII and the partition of East and West Germany. However if you invested in either country 30 years ago, you would have made bank on the fall of Communism.
Generally, if is difficult to hedge against political risks in your own country. If WWIII happens, then pretty much nothing is guaranteed. Investments, property, careers and lives are in uncertain flux, and all may be lost. Barring such catastrophic events, I may hedge the risk of American underperforming the rest of the work by investing in foreign companies, or trans-national companies. This is not something I will be doing right now (I have more faith in America’s economy then the rest of the world) but it is something to consider for the future.
Historically would you in fact have lost everything in a longterm position in the German stock market in World War I and II? Not necessarily. It certainly wasn’t a good place to invest, but there are companies such as Daimler that predate World War I and still exist today. Personal risk, of course, might depend on citizenship and ethnicity. I’m not sure if foreign investors (neutral, allied, or axis) were treated differently. E.g. I don’t know whether a young German/Swiss/British citizen who bought and held shares in Daimler in 1910 would still have owned them in 1960 absent an explicit sale or not. But I suspect at least some subset of hypothetical 1910 shareholders would not have lost everything over the ensuing 50 years.
I’ll answer here too since I’m doing something similar. I’m a 25 year old software engineer and make about $140k/year before taxes. I live on about $35k, donate some money on top of that, and invest the rest.
1) I try to keep my large recurring monthly obligations low, but I spend pretty freely on smaller things. I live in a city but keep my rent cheap by living with 4 roommates. I don’t own a car—I bike, walk, and take public transit, and occasionally use a zip car. All together my housing and transportation costs come out to about $750/month. I spend plenty of money though at restaurants, gyms, and Amazon.
2) I already know that I enjoy living relatively frugally. I have everything I need and lots of the things I want. I don’t think I’d be any happier if I spent more money. I’m not sure I’d enjoy not working, but I figure it can’t hurt to have the freedom to stop whenever I want, or do “work” that doesn’t generate income. If I decide I really want a full-time job, I will probably choose to work and then donate all my income.
3) According to Mr Money Mustache I’m on track to retire at around 36 years old (11 years from now).
Excellent questions:
1) There has been adjustments, such as cutting out fast foods and eating/drinking out. Also, I delayed purchasing a new computer by a few months (paid with my tax refund). Also, I am stingy with using my car, and I am more apt to carpooling whenever I do go out (a generally rare occasion). I have cut out alot of impulse purchases. For instance, I would buy a $1 package of gummy worms around four times a week. Gone. Lastly, I pack a lunch for work each day. Nothing too big, just several small habit changes. This lead to aot of excess cash. It became really easy to do these changes since I transferred my cash at the beginning of the month, and forced myself to live on the remainder. All these changes have been for the better, and I have not notice a real decrease in happiness or satisfaction. It would be pretty ridiculous to expect my satisfaction to go down because of less fast food and candy in my life.
2) I do not know for sure that I will enjoy not working, and I can certainly see having “mini-retirements” of Tim Ferriss. As of current, I do not have any particular attachment to my jobs now. This may change in the future, and I hope it does. Post-retirement, I do not plan on sitting on my butt watching TV, going to the golf course each day, or moving to Florida and sipping alcoholic beverages on the beach. I will have projects to do (I would like to build a house, exercise more frequently, and run a psychology laboratory) and if I receive income for those things, I will be glad to. Most importantly, I hope to have a wife and children one day, and I hope that I will prefer to spend time with them over working.
3) This is pretty murky. I am currently severely underemployed, and in a recovering economy. I am completing a course in webdesign, then doing another one for programming, and that will translate into new career opportunities. I may move, and have my expenses go up, I will pay my student loans ahead of schedule, and lower my expenses considerably. And I may get into a serious relationship and start a family. That may slow it down, but if my potential spouse shares my vision, we may wait on children and in fact may speed up the timeline to retirement.
All together, I think my income will outpace my expenses. One of the links above, here, gives a straight forward chart comparing your savings rate to the number of years till you are able to retire (presuming average returns, and living off the interest alone, not touching the principal at all). I am at 65%, putting me at 10.5 years, or 34 years old. I think my expenses will end up increasing in the shorter term, then my income will catch up, before my student loans drop out of my life forever, freeing up another $500 or so a month. My ideal situation would a 75-80% savings rate, allowing me to retire before I’m 30.
All said I think I will retire by age 35 with 65% confidence, age 30 with 10% confidence and age 40 with 80% confidence. My income prospects in the next year and my spouse are the biggest factors in determining my success.
Does MMM take into account the cost of time spent saving money? For instance, it seems to me that trying to eat as cheaply as possible involves a lot of time spent going to different shops and finding the best deals. It might be better to spend that time working more or gaining further qualifications so to improve income in the future.
You can exercise the mental switch of delaying gratification. I practice this with lots of little things and find it translates well when the time comes for bigger stuff.
As a background, I am a 23-year old security guard and janitor. Between the two jobs (total 60 hours a week) I make about $30,000 before taxes. I have been practicing this as of the New Years, so almost 5 months. In this time, I have saved $50 a day, $350 a week. This comes out to approximately 65% of my post tax income. The biggest help to that is that my largest expense is my student loans, followed by rent and transportation (I take the bus for work). I have an investment account with Vanguard, I rarely eat out, I act as the DD when I go out with friends, and I just received my first (though meager) dividend.
I am currently taking a course in web design, so this will (hopefully) translate into a larger income and speed up the process. At the first Friday of each month, I transfer $350 to Vanguard for each week since my last transfer, and live off the remainder. I have $5,950 in principal and a bit more from dividends and capital gains, which are automatically reinvested.
So far, I have been doing pretty well for myself, better than many of my peers, and I feel pretty optimistic for future success.
$30k? Don’t you feel like it would be better to invest all the current money into yourself, so you can find a job that pays more? You are obviously pretty smart, so it shouldn’t be that difficult to get a job where you could make $50k or more.
This sounds great!
I have some questions, if you would like to answer them:
1) Have you needed to make any adjustments over these 5 months (in order to spend less)? If not, are you planning to?
2) How do you know that you will enjoy living frugally and not work? Compared with, say, the “mini-retirements” of Tim Ferriss, which are basically week-to-month long vacations in between work.
3) How long until you expect to be able to retire?
(I’m not Petruchio, but:)
I think it’s better to define “retirement” in this sort of context to mean (not taking some kind of vow never to work again, but) being free to choose whether to work and what on. If you manage, by some combination of accumulating wealth and reducing expenditures, to get into a position where you no longer need to work to live as you want to, and then find that you prefer working—why, then, get a job! But then you have the freedom to turn down jobs that would be no fun, that you don’t see as benefiting the world enough, that are too far from where you live, etc., while if you need to work to live you may not be able to get away with that. [EDITED to add: And if you get bored, or tired, and want a break, you can do so with less fear.]
A conservative estimate: If you assume zero investment growth before retirement, and consider you need 40 years’ worth of money to retire (at which point, unless economic growth has completely stopped by then, you can take out 2.5% per year and probably see your capital growing handily most years), and if every year you save twice what you spend, then you can retire after 20 years. So he’d retire at 43 or thereabouts.
If Petruchio can increase his income faster (proportionally) than his spending, or if his investments grow at all over time, or if he is prepared to be a bit less conservative about how big a pile he needs before retiring, or if he expects to do a bit of paid work while “retired”, his retirement can be correspondingly sooner. If he starts to yearn for a spendier lifestyle, or has children, or if there’s a colossal economic crash, it’ll move further out.
Like you said, that is a very conservative estimate, but entirely accurate. If we experience a horrible depression which gives me no investment returns for 20 years, I still will be able to retire at age 43.
The rule of thumb is that you need (Current_Expenses x 25). This is a 4% withdrawal rate, and should last you forever. If you want to go even safer (the Trinity Study suggests that 4% is plenty safe) go with 3% and multiple your expenses by 33.
Implication: You must save 25 dollars or so for each dollar you spend. So you go out and earn an extra 25 dollars, or figure out how to spend one dollar less.
According to The 4 Percent Rule is Not Safe in a Low-Yield World, the 4% withdraw rate was calculated to have a 6% failure probability over 30 years using historical data. Using today’s lower interest rates to recompute, the failure probability over 30 years is now 57%.
It is true that with a 50% stock, 50% bond diversification, there has been a small historical failure rate for the 4% withdrawal rate. If the first 30 years after my retirement are the worst seen since WWII, then I may be in trouble.
With this in mind, we may hedge against this. You may work for a bit longer and save enough to go with a 3.5% or even a 3% withdrawal rate, take on jobs or projects intermittently during your retirement to boost your savings, or receiving social security or some other another government social program once you are old enough to qualify. Other more random factors which may hedge in your favor will be your children growing up and moving out of the house (permanently lowering your expenses), downsizing your home or moving to a rental once your kids are grown, or receiving an inheritance.
Of course, the paper you cite anticipates a higher failure rate due to lower bond rates. These lower rates may be a historical aberration, as mentioned in the abstract. I have not invested in bonds because of the very low rates, and am holding a stock-only, albeit dividend paying, index fund. I view bonds as a hedge against deflation. Besides junk bonds, the ROI is much too low for my taste.
I am anticipating an eventual portfolio of 50% Stock, 30% REITs and 20% Bonds, unlike the study’s 50% stock, 50% bond. I also hope to have some rental property, but this is a long term idea. In the meantime, I should anticipate more volatility, but until I retire I will be comfortable with that. If you, on the other hand, prefer otherwise, you should go with bonds, save more and aim for a lower withdrawal rate.
However, the crux of this sequence is not investing, but extreme saving. Investing strategies differ due to anticipated needs and tolerance of risk. However, making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are.
Bond rates are correlated with stock returns, and the paper assumes a lower-than-historical stock return as well. I don’t know whether today’s low bond rates are an anomaly or whether the historically high rates/returns in the US were an anomaly, but it seems to me there’s a fairly high chance the latter is the case. As the paper points out, the 4% wouldn’t have worked in most other countries. If you assume the current rates will continue, then even a 2.5% withdraw rate will have a 10% failure probability over 30 years, and you’d have to go to 1.3% withdraw rate to get a 1% failure probability over 40 years. (And this is assuming optimal mix between stock and bonds so you wouldn’t be able to achieve greater withdraw rate at same failure probability by switching to more stocks for example.)
I myself am doing “”extreme saving”, but it’s a big decision and I think people should make the choice with an accurate picture of the likely benefits and risks. Saying “4% withdrawal rate should last you forever” seems to be overselling the benefits and underplaying the risks. “Making a habit of saving most of your income should give you the greatest possible utility no matter what your investment or retirement plans are” seems like an even stronger statement, which I don’t see how you can defend.
How much are these estimates influenced by a hindsight bias; by a knowledge that during the last century the American economy was able to provide this growth, but many other countries’ economies were ruined at some moment. -- What would happen if someone tried this early retirement idea 100 ago by investing half of their income into Russian market and taking away only 4% per year? How about Germany?
Even if I believe that within the next 50 years some markets will safely provide 4% annual growth, what is the probability that USA will be in that set, and how would you derive this probability from an outside view?
It is not a hindsight bias; it is based using an analysis of historical returns to anticipate future returns, which is a distinction. But you make a good point on comparing the American economy to foreign economy. If someone invested in the Russian economy 100 years ago, they would have lost everything in the Communist Revolution, likewise if they invested in Germany, they would have lost it in WWI, WWII and the partition of East and West Germany. However if you invested in either country 30 years ago, you would have made bank on the fall of Communism.
Generally, if is difficult to hedge against political risks in your own country. If WWIII happens, then pretty much nothing is guaranteed. Investments, property, careers and lives are in uncertain flux, and all may be lost. Barring such catastrophic events, I may hedge the risk of American underperforming the rest of the work by investing in foreign companies, or trans-national companies. This is not something I will be doing right now (I have more faith in America’s economy then the rest of the world) but it is something to consider for the future.
Amusingly, they wouldn’t’ve lost everything: http://lesswrong.com/lw/h5p/what_rate_of_return_should_you_expect/8pvq
Try historical returns in Argentina.
Historically would you in fact have lost everything in a longterm position in the German stock market in World War I and II? Not necessarily. It certainly wasn’t a good place to invest, but there are companies such as Daimler that predate World War I and still exist today. Personal risk, of course, might depend on citizenship and ethnicity. I’m not sure if foreign investors (neutral, allied, or axis) were treated differently. E.g. I don’t know whether a young German/Swiss/British citizen who bought and held shares in Daimler in 1910 would still have owned them in 1960 absent an explicit sale or not. But I suspect at least some subset of hypothetical 1910 shareholders would not have lost everything over the ensuing 50 years.
Such a rule of thumb will probably have a bigger impact on my actual behavior than the rest of the linked info combined.
I’ll answer here too since I’m doing something similar. I’m a 25 year old software engineer and make about $140k/year before taxes. I live on about $35k, donate some money on top of that, and invest the rest.
1) I try to keep my large recurring monthly obligations low, but I spend pretty freely on smaller things. I live in a city but keep my rent cheap by living with 4 roommates. I don’t own a car—I bike, walk, and take public transit, and occasionally use a zip car. All together my housing and transportation costs come out to about $750/month. I spend plenty of money though at restaurants, gyms, and Amazon.
2) I already know that I enjoy living relatively frugally. I have everything I need and lots of the things I want. I don’t think I’d be any happier if I spent more money. I’m not sure I’d enjoy not working, but I figure it can’t hurt to have the freedom to stop whenever I want, or do “work” that doesn’t generate income. If I decide I really want a full-time job, I will probably choose to work and then donate all my income.
3) According to Mr Money Mustache I’m on track to retire at around 36 years old (11 years from now).
Excellent questions: 1) There has been adjustments, such as cutting out fast foods and eating/drinking out. Also, I delayed purchasing a new computer by a few months (paid with my tax refund). Also, I am stingy with using my car, and I am more apt to carpooling whenever I do go out (a generally rare occasion). I have cut out alot of impulse purchases. For instance, I would buy a $1 package of gummy worms around four times a week. Gone. Lastly, I pack a lunch for work each day. Nothing too big, just several small habit changes. This lead to aot of excess cash. It became really easy to do these changes since I transferred my cash at the beginning of the month, and forced myself to live on the remainder. All these changes have been for the better, and I have not notice a real decrease in happiness or satisfaction. It would be pretty ridiculous to expect my satisfaction to go down because of less fast food and candy in my life.
2) I do not know for sure that I will enjoy not working, and I can certainly see having “mini-retirements” of Tim Ferriss. As of current, I do not have any particular attachment to my jobs now. This may change in the future, and I hope it does. Post-retirement, I do not plan on sitting on my butt watching TV, going to the golf course each day, or moving to Florida and sipping alcoholic beverages on the beach. I will have projects to do (I would like to build a house, exercise more frequently, and run a psychology laboratory) and if I receive income for those things, I will be glad to. Most importantly, I hope to have a wife and children one day, and I hope that I will prefer to spend time with them over working.
3) This is pretty murky. I am currently severely underemployed, and in a recovering economy. I am completing a course in webdesign, then doing another one for programming, and that will translate into new career opportunities. I may move, and have my expenses go up, I will pay my student loans ahead of schedule, and lower my expenses considerably. And I may get into a serious relationship and start a family. That may slow it down, but if my potential spouse shares my vision, we may wait on children and in fact may speed up the timeline to retirement.
All together, I think my income will outpace my expenses. One of the links above, here, gives a straight forward chart comparing your savings rate to the number of years till you are able to retire (presuming average returns, and living off the interest alone, not touching the principal at all). I am at 65%, putting me at 10.5 years, or 34 years old. I think my expenses will end up increasing in the shorter term, then my income will catch up, before my student loans drop out of my life forever, freeing up another $500 or so a month. My ideal situation would a 75-80% savings rate, allowing me to retire before I’m 30.
All said I think I will retire by age 35 with 65% confidence, age 30 with 10% confidence and age 40 with 80% confidence. My income prospects in the next year and my spouse are the biggest factors in determining my success.
Does MMM take into account the cost of time spent saving money? For instance, it seems to me that trying to eat as cheaply as possible involves a lot of time spent going to different shops and finding the best deals. It might be better to spend that time working more or gaining further qualifications so to improve income in the future.
You can exercise the mental switch of delaying gratification. I practice this with lots of little things and find it translates well when the time comes for bigger stuff.