No. of Recommendations: 5
hocus asks,

If your boss asked you to provide an estimate of how much it would cost to complete a possible project, and you told him, "oh, why don't we just presume it will cost 80 percent of the last one," you would lose your job. He would expect you to consider whether there are better ways of arranging work schedules, whether there are cheaper materials available, whether you could take advantage of new technologies, etc.

Why do we not consider our lives to be as important to us as our jobs?


Maybe I'm a lunatic, but I was one of those people that actually did a cost/benefit analysis on my expenditures and decided that the 80% rule worked for me -- I saved 80% <grin> and limited my spending to 20% of my gross income.

Of course I didn't net the whole 80% -- taxes whittled my annual savings down to about 50% of gross income.

intercst
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No. of Recommendations: 10
Ignore advice to save 10 percent of your pay, and don't assume that your spending in retirement will be 80 percent of your current income.

Hocus, I just thought I'd repeat and re-emphasize that! (Btw, I originally thought your entire post was gonna be 25 words itself, LOL!)

In order to retire at age 65, he should be saving 1/45th of the total amount needed each year. If he wants to retire early, he needs to do better than that. For example, if he wants to retire at age 45, he needs to be putting aside each year 1/25th of the total capital needed.

The worker earning $50,000 would need to save 25 times $40,000--that's $1 million--to satisfy the “80 percent of income” rule. To stay on track toward meeting that goal in 45 years, he would need to save $22,222 per year. But the “10 percent of pay” savings rule calls for only $5,000 in savings each year. So the worker following the conventional formulas falls more than $17,000 farther behind each year he works.


It is amazing, but this basic understanding only dawned on me five years ago, last summer... I was day dreaming, if I won the state lottery of $3 million, or whatever, how I was gonna use it to stop working and do all the things I loved... as I started to make "real" expectations of what I hoped to do, including quitting work, it dawned on me that the money wouldn't last very long. This thinking was also prompted by random idle chatting with people, who mused about "If I won the jackpot," what they were going to do with it, how long it would last, etc., etc. I've even heard of people who thought they could quit working and live happily ever after if they got civil suit settlements of $100,000, etc. I started to realize that these people, and myself, had NO idea realistically how long money would last... we had no real idea how expensive it was to live, to grow old, to not be vulnerable to outside influences, including political instability, health problems or emergencies, changes in family status (get married or divorced, have children, eldercare, etc.), or the desire to fulfill life long dreams, or anything else that might become a reality.

It catapulted me into a few hours of basic arithmetic, "Gee, if I retired at 65, and hope to live an average of 30 years or so, I would need to have 30 years worth of savings... egad! Does that mean I have 30 years of my current salary all saved up? Even if I saved fully half of my current salary (assuming 30 remaining working years), to have 30 years worth of living beyond working years, that's an amazingly demanding feat!"

When I had the realization of how expensive being retired was, and how long I hoped it would last, it dawned on me that I had to start preparing, saving, fully utilizing the various retirement options that my job(s) offered, or IRA type options, at the least. For the first time in my life, I understand how important the concept was of compounded interest, tax-exempt, etc.

All I can say is, "Wow... I'm glad I realized this!" Five years ago, I finally asked the question, "what happens when I finally stop working?" which was based on advancing age, declining health, or other involuntary mechanisms. Now, five years later, I'm finally asking the question, "okay, how can I go about stop working?" Not working has changed to becoming something that I can control, instead of something I feel I will be at the mercy of.... hmmm! :) I wonder what I'll discover in another five years?

Hocus, thanks for the reminder :)
DollarIQ
13 days of self-discovery, 1,812 to E.R.!
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Hocus - Very perceptive - Could the concept be added as an unwritten rule of wage slavery? i.e., save 10% of pay and assume 80% of working income for retirement? I believed in the maxim, at least the 80% of income for retirement, until I RE'd. Now, I know that simply isn't true. NowInMaui
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No. of Recommendations: 45
What Malarkey. Go back to school. I agree that you should save more than ten percent, but try learning some math: Any money put in will compound, very effectively distorting your figures. Money Put in at the start of the wage-earners life (ie age 20) is worth WAY more than the 1/45 you purport. Please read the fool's school on Compounding.
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No. of Recommendations: 6
Actually, if oyu do the math; one needs to save approximately 25% of wage per year for approx. 33 years assuming a 5% real rate of retrun in order to build anest egg equal to 20 times or more of wage.

25% seems awfully large but becomes manageable if one can find an employer to kick in 10% leaving 15% to the wage earner.

TheBadger

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BlueChipBoy writes,

What Malarkey. Go back to school. I agree that you should save more than ten percent, but try learning some math: Any money put in will compound, very effectively distorting your figures. Money Put in at the start of the wage-earners life (ie age 20) is worth WAY more than the 1/45 you purport. Please read the fool's school on Compounding.

BlueChipBoy points out the most glaring error in hocus's post. I'm surprised other posters didn't catch it.

Very early retirees (i. e., those who retire before 40) must save a very large percentage of their salary because their money will compound for only 10 or 15 years. That's also the reason their retirement date is relatively unaffected by investment returns -- whether they earn 5% or 20% on their money, it's not going to compound enough in 10 or 15 years to make a big difference.

However, the story is very different for folks retiring in their 50's or 60's.

For example, in hocus's post the retiree who retires at age 65 had 45 years of compounding on his first year's savings. At a 10% return, he has $73 for every dollar he contributed to his retirement portfolio that first year -- a huge difference.

BlueChipBoy makes a good point that everyone needs to visit the Fool school on the magic of compounding. Every very early retiree I'm aware of has the arithmetic skills required to understand compounding and use it to his or her advantage.

intercst
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No. of Recommendations: 6
What Malarkey. Go back to school. I agree that you
should save more than ten percent, but try learning 
some math: Any money put in will compound, very 
effectively distorting your figures. Money Put in at 
the start of the wage-earners life (ie age 20) is 
worth WAY more than the 1/45 you purport. Please read 
the fool's school on Compounding.

Compounding takes many years to take effect.  I think 
that is a major reason why people don't save.  They can
put $2000 away per year for 10 years and they have less
than 38,000.  After 15 years of saving $2000/year they 
have $85,000.  If they keep going another five years 
(20 years total), they suddenly have $170,000.  That's 
at a simple 13.5% and no inflation. The killer is that 
first 10-15 years.  You scrimp and save and save and 
save, and the balance just doesn't move. Okay, it did 
more than double in the first ten years, but after 
saving and saving, you have enough to buy a new 
Explorer.

With some very simple assumptions (straight average 
return, straight inflation, 10% saved with straight 
inflation adjustment with 100% equivalent salary needed 
after retirement and a 4% withdrawal (25X factor)no 
taxes or investment fees subtracted) here are the time 
to retirement in years.  

Return  3%_Inflation  4%_Inflation  5%_Inflation
10.5%        43 yrs        49 yrs        58 yrs
11.5%        39 yrs        44 yrs        51 yrs 
12.5%        37 yrs        41 yrs        46 yrs
13.5%        34 yrs        38 yrs        42 yrs

Over the last thirty years or so, the Dow has averaged 
about 11.5% and inflation has averaged over 4%.  Oh 
yeah, one other thing, I didn't factor in a real pay 
raise, the reason, if you add in a real 5% increase 
every year for the first 20 years, it actually pushes 
the retirement date out further. For example, at 
11.5% return and 3% inflation, and a 5% above 
inflation salary increase, the years to retirement 
move out to 44 years, an additional 5 years.

Depressing isn't it.

-Donut
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No. of Recommendations: 12
I've skimmed through some subsequent comments to Hocus' initial post and I just thought I'd say something about Hocus' marked omission of compounded interest.

It is VERY important that this type of foundation, without details about compounded interest, inflation, tax-deferrments, etc. be omitted when talking to newcomers to the entire concept of planning for retirement. I, for one, was completely ignorant about the entire issue of "retirement planning" five years ago. The abrupt realization of how critical it was to start planning, and start planning NOW (whenever "now" might be for each of us), was contingent on scaring the living daylights out of me, that I might one day grow old and unable to work full-time to put a roof over my head and food on my table, or that I might spend the first 2-3 years with money to support myself, but thereafter spend DECADES of my remaining life praying for my social security check to come in, monthy by month.

Also, those who are naively optimistic about "oh, my company pension will cover me, I'll have social security checks to rely on, and I don't have to start saving my own money until I hit 45 or 50" must realize how important it is to start earlier, than later. If they don't understand what inflation will do to their nest eggs, how their standards of living will change, or what other factors that don't concern them now at 30 (but will when they are 60), they will never achieve the "golden years" they complacently expect.

Retiring well takes hard work, serious motivation, and more importantly, an early start. It's hard to impress on people what the value of compounded interest, inflation, and other time-adjusted concepts is if they don't understand the concept of making money work for them. Most of the population STILL think government will care for them in their old age, or think that "money in the bank" at, like, 2% is all they need to retire happily.

Hocus' deliberate presentation of the basic situation and omitting the joys of compounded interest, is important. When I realized it five years ago it scared me to death, enough for me to start reading and figuring out how unstable my retirement would be... it made me REALLY understand how carrying high levels of debt would impact me for the rest of my life, and what I needed to start doing if I don't want my old age to be as much of a struggle as it was then/now. Just imagine it.... what would retirement be like if NONE of us had compounded interest? His vision of a negative utopia (okay, negative retirement) tells us what it could be like. Now that we understand how BAD the future is without compounded interest, we finally understand how valuable it is, what a difference it will make to us in the future, why it's important to start early.

Somebody had to wake me up that if I don't want to suffer and struggle at 65, I better start suffering and struggling now to learn about my individual economics.

Again, thank you Hocus :)
Still counting down (and up), DollarIQ
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Not working has changed to becoming something that I can control, instead of something I feel I will be at the mercy of

DollarIQ:

The change in thought processes you describe in your post exactly matches my own discovery of Retire Early concepts. You noted in your post how you find it "amazing" that the "basic understanding" dawned on you only five years ago. I too find it amazing how confused my thinking about money was until about nine years ago.

I consider myself a reasonably intelligent person. So I've tried to examine my own earlier thought processes for clues as to why many others don't pursue financial independence. I don't think that the problem was that I did not have enough information. I worked in the news industry and there was information all around me. My employers were always trying to get me contributing to 401(k) plans, and handing out literature on all the benefits.

All this information had no effect because it did not offer a goal that held any appeal for me. Once I managed the insight that early retirement was possible, the change was like night and day. Now I had a reason for slogging through all that literature, and reading it was a joy, not a chore.

So what I am trying to understand is, why do so few workers possess the basic insight that early retirement is an achievable goal? My belief is that the explanation lies in widespread acceptance of the two rules of conventional finance (save 10 percent of pay; expect to spend 80 percent of income).

Do away with those, and it becomes clear to most middle-class workers that early retirement is a reasonable goal. But all the personal finance literature in the world won't do much good so long as financial independence appears to be an impossible goal. And it appears to be an impossible goal to workers following the two conventional rules--because, for them, it is.
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I really question the rule that you need to make 80% of your current salary to retire early. That is a rule of thumb that just doesn't apply to everyone. There are a lot of variables that go into that equation. Is your home paid off? Could you sell you expensive home in Silicon Valley and move to a more low income area and be just as happy? What about moving down to Costa Rica and moving in with Galeno? (Just kidding!) That guy making $200,000 a year "needing" $160,00/year is just plain malarkey. No one "needs" $160,000 a year to live. I think a really good lifestyle can be had from $50,000 to $80,000 a year; with this amount of money you can own a nice home, eat good food, have a couple of decent cars, and do some traveling. Of course it would be nice to have more but it isn't "necessary". When doing calculations of how much you need to retire you need to make realistic calculations of what you want. It may or may not be 80% of your current salary. - Art
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Compounding takes many years to take effect. I think that is a major reason why people don't save.

I agree very strongly. People are motivated by things that are real to them. Telling a 25-year-old to save $2 million for when they are age 65 is like telling her to practice for running marathons on the moon. It's theoretically possible that someday the skill will come in handy. But come on. A 25-year-old who can't come up with better uses for her time is not living right.

As you note in your post, donuttopia</b,> a worker with an average income of about $40,000 will have little to show for 5 years of saving at 10 percent. Human nature is such that it is hard to get serious about things that are more than five years in the future. Given how fast the world changes--especially when you are 25 years old--I'm not sure that the disinclination to get too excited about anything more than five years out in the future is anything other than good sense.

So how do you motive a 25-year-old to seek financial independence? By showing her that there are significant goals that can be reached by age 30. If she is assuming that she will need $2 million to retire, it probably cannot be done. And if she is saving 10 percent and expects to continue to save 10 percent as she is promoted and receives pay increases, it probably cannot be done.

But give up the two rules of conventional finance, and I believe that many 25-year-olds will be very excited about the possibilities of devoting more attention to their finances. The motivation has to come before the goal. And an understanding of the possibilities has to come before the motivation.

And the two rules of thumb are cutting off awareness of the real possibilities. Or so it seems to me.
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When doing calculations of how much you need to retire, you need to make realistic calculations of what you want. It may or may not be 80% of your current salary.

At the time when I left corporate employment, my family's expenses (not counting taxes, which are a minor factor for me in retirement) were about 20 percent of my income. Why should I presume that I would increase my spending by 400 percent just because I quit my job? I don't see the logic.

What I do see is the damage done by presuming something that needn't be true. Had I presumed that my expenses in retirement would be 80 percent of my working income, I never would have tried to retire early in the first place because it would have been an unrealistic goal.

In that case, my preference would have been to spend most of my income, no matter how much it grew. If I must stay at a corporate job until age 65, I might as well have nice cars, big houses, and exotic vacations to help the time pass more pleasantly.

The notion that you need 80 percent of working income in retirement is a self-fulfilling prophecy. If you believe it to be true, it becomes true. By putting financial independence out of reach, you throw away the best motivation for effective money management.
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I believed in the maxim, at least the 80% of income for retirement, until I RE'd. Now, I know that simply isn't true.

NowInMaui:

My recollection is that you are a highly paid business consultant of some type. So it really is astounding that this simple concept did not occur to you. I am not being critical, of course. So many of us were or are in this boat.

But how is it that people who perform advanced calculations and sophisticated analyses in their work day after day are not able to understand the most simple concepts applicable to their personal lives? How much you should save depends on what you would like to do with your life. How much you will spend in retirement is tied to how much you spend in your working years, not how much you earn in those years.

If your boss asked you to provide an estimate of how much it would cost to complete a possible project, and you told him, "oh, why don't we just presume it will cost 80 percent of the last one," you would lose your job. He would expect you to consider whether there are better ways of arranging work schedules, whether there are cheaper materials available, whether you could take advantage of new technologies, etc.

Why do we not consider our lives to be as important to us as our jobs?
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>> Is your home paid off? Could you sell you expensive home in Silicon Valley and move to a more low income area and be just as happy? <<

I'll raise my hand as an example here.

Our Silicon Valley home will be paid off in just over 13 years from now -- when I'm 48 and my better half is 45.

And we would be MUCH happier in a slower-paced, lower-cost area. There's no way I'd need CLOSE to 80% of my current income, as at least half of our after-tax income is going to (a) paying the mortgage and (b) saving for retirement.

#29
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>> Is your home paid off? Could you sell you expensive home in Silicon Valley and move to a more low income area and be just as happy? <<

I'll raise my hand as an example here.

Our Silicon Valley home will be paid off in just over 13 years from now -- when I'm 48 and my better half is 45.

And we would be MUCH happier in a slower-paced, lower-cost area. There's no way I'd need CLOSE to 80% of my current income, as at least half of our after-tax income is going to (a) paying the mortgage and (b) saving for retirement.


I hope your RE plan takes into account the possibility that real-estate values equalize somewhat in the next 13 years.

If Silicon Valley is now 300% above average, perhaps it will only be 100% above average in 13 years - this would imply that, not only will you get less (relatively) for your house in SV, but that you will also pay more (relatively) for your new house elsewhere !

In any case, the mortgage will be gone by then, so you can just roll the paid-in-full housing into your RE plan.
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Why do we not consider our lives to be as important to us as our jobs? Hocus

Waaaay back when, your name, was your job! Your importance was determined by your job.

GS
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>> I hope your RE plan takes into account the possibility that real-estate values equalize somewhat in the next 13 years. <<

Actually, it assumes that we never move. But at some point, if it's feasible, we would probably like to get some cash out and settle down to a less frenetic, less stressed-out and always-rushed community where the cost of living is low and housing is very affordable.

>> In any case, the mortgage will be gone by then, so you can just roll the paid-in-full housing into your RE plan. <<

Well, yeah, that's the main thing. We're not even factoring equity into our RE calculations -- only what we have saved and invested over time in our various portfolios, and the meager (but vested) pension I'll can start collecting at age 55 from my last employer where I worked for nearly 12 years.

And *no* assumption for Social Security, just to be safe. I suspect it will still be around in 30 years, but won't be nearly as generous. It's easier and safer to assume a big ZERO there.

#29
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BlueChipBoy points out the most glaring error in hocus's post....Everyone needs to visit the Fool school on the magic of compounding.

Intercst:

I certainly agree that compounding is an important concept of retirement planning. However, I don't
think that compounding has a critical relevance to the point of my post. That's why I deliberately excluded it from my calculations, and noted so in the post. Including the effects of compounding would have required making a series of assumptons that would have muddled the basic point unnecessarily.

I would be persuaded otherwise if it could be shown that the benefits of compounding allow an average-income worker following the two conventional rules of thumb to retire significantly prior to age 65. I haven't run calculations on this particular point, but my strong sense is that the benefits of compounding cannot overcome the detriments of following the two conventional rules.

As you note in your post, much of the benefits of compounding do not kick in until the worker has reached his 50's or 60's. At that stage of life, the possibility of retiring at 40 or 45 is gone. So compounding can never give back the losses suffered from an early acceptance of the two conventional rules.

Also, the worker not following the conventional rules on saving and spending does not thereby forfeit the benefits of compounding. So I don't think that taking compounding into consideration changes the comparison to any great degree.

Once I stopped believing in the two conventional rules, I realized the possibility of early retirement and took a much greater interest in my finances. I believe that I understand compounding better now that I did before I realized the flaws in the 10 percent and 20 percent rules.

So, in my view, an enhanced understanding of compounding is just one more benefit of taking to heart the 25 words needed to retire early.
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The notion of needing 80% of income to retire and save 10% of income is just BS. The important thing is what your EXPENSES are and what % of your EXPENSES are you saving every year.

Everyone talks about income because its an easy number to get from your income taxes each year, but expenses are what really count.

Intercest's soapbox report contains a nice chart showing that the really important variable for RE is the % of expenses saved each year, not the amount of income or even the return on your investments.
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I really question the rule that you need to make 80% of your current salary to retire early.

I also question this but mostly because with taxes and other deductions I never see 80% of my salary ;-)
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How To Retire Early--In 25 Words:

Just do it. Just do it. Just do it. Just do it. Just do it. Just do it. Just do it. Just do it. Yes!

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But at some point, if it's feasible, we would probably like to get some cash out and settle down to a less frenetic, less stressed-out and always-rushed community where the cost of living is low and housing is very affordable

We have owned our Silicon Valley house for a little over six years and will be putting it up for sale in a few weeks. The equity and return of down payment will be enough to buy a nicer house for cash in Portland, Oregon, where we are moving. Better house, mortgage disappears. We couldn't resist the allure of that. Of course, not everybody is in a position to pack up and go, but for those who can, it might be worth thinking about.
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So what I am trying to understand is, why do so few workers possess the basic insight that early retirement is an achievable goal? My belief is that the explanation lies in widespread acceptance of the two rules of conventional finance (save 10 percent of pay; expect to spend 80 percent of income).

No, I suspect it is much more fundamental.

The mindset is that you need a million dollars to quit working.

That is the roadblock.

We could argue about whether or not you need a million, but or many, they actually need more, others need half that. A little basic calculation and you realise you will get there 35 years after you save the first $30,000.

Pretty duanting when you are living paycheck to paycheck and can't manage to pay off the $10,000 on your credit card. The masses aren't worried about retirement, they are worried about making their next credit card payment.

-Donut
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I'm not going to check your math, because I believe intuitively that you're right.
I was able to retire early (54) only because I was fortunate to receive stock options which increased in value by 40% per year over the last few years before (and after) I retired. I managed to save 7-10% of my earnings over my 30 years of employment and invested those savings primarily in my employer's stock, which appreciated at the rate indicated above for the stock options (same stock, obviously!). So I broke all the asset allocation "rules" and lucked out. As you pointed out, I didn't save more than 10% because I was unable to keep my level of expenses from increasing in direct proportion to my increase in earnings, and I had planned to work until 65, so wasn't concerned. This unfortunately is human nature...the more you earn, the more you spend! And that creates a further impediment to retiring early: your level of spending (standard of living)in the years before retirement has increased to the point where income from "normal" retirement sources (401K, IRA's,pensions, social security and other savings)is well below the spending levels to which you've grown accustomed. So the 80% rule goes out the window, unless you're satisfied with really cutting back from your pre-retirement spending levels. The only expenses which may decline are college tuition, costs associated with working, and maybe mortgage payments. But I've found that these decreases are substantially offset by increasing costs associated with leisure activities, maintaining a second home, and medical
expenses. If you have inexpensive hobbies (unlike golf!), don't plan fancy vacations,and can do with one (perhaps smaller) home, your expenses will be lower after retirement.

I don't know how the average American can even THINK about retiring early: if anything, I believe they have badly underestimated the amount of savings required to retire at all,or haven't even thought about how they will retire because it's too painful to contemplate. I hope I'm wrong!
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Compounding takes many years to take effect.

Okay, I'm only in this thread from the Best Of board, and it is a shameless plug, but I think you will find a message I posted in the Mechanical Investing board about this very thing. It shows how to measure, based on your rate of return, the number of years until you actually start to feel the compounding is happening.

http://boards.fool.com/Message.asp?mid=12962062

- Joe
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If Silicon Valley is now 300% above average, perhaps it will only be 100% above average in 13 years - this would imply that, not only will you get less (relatively) for your house in SV, but that you will also pay more (relatively) for your new house elsewhere !

Although we have no intention of moving in the near future it is possible after my wife retires that we will move closer to family. It would be great if our house appreciated in value! We bought our home & 5 acres of land in 1986 for $62,000 (+ an additional 5 acres of land adjacent to our property for $8,000). Anyway we refinanced our house in 1994 and had to have an appraisal on our property to get the loan. Our house had increased in value to a whopping $65,000! In 8 years our house had only increased in value by $3,000! - Art

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We have owned our Silicon Valley house for a little over six years and will be putting it up for sale in a few weeks. The equity and return of down payment will be enough to buy a nicer house for cash in Portland, Oregon, where we are moving. Better house, mortgage disappears. We couldn't resist the allure of that. Of course, not everybody is in a position to pack up and go, but for those who can, it might be worth thinking about.

You could probably buy the whole of Possum Valley, where I live, for the equity you are getting out of your house in Silicon Valley! - Art
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Art: Do you really live in Possum Valley?

<grin>

Laura
Living in Buncombe County since 1989 -- And for the curious, yes the word came from the county name, not the other way around
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Do you really live in Possum Valley?

Quando omni flunkus moritati.


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Let us not forget the rate of inflation:

If you saved $10000 this year for retirement in 30 years at an (arbirtary) say 2% inflation average per year over 30 years this $10000 would be worth only
$5454.84 in today's money!

Therefore, you need as high rate of return as possible to offset inflation.

Frank
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Seems to me 80% of current income is a pretty good estimate of needs.

If you are currently saving 10% of income, then you are spending 90% of income. Once retired, you will no longer be paying Social Security which is about 7% of income. Now we're down to 83% (100%-10%-7%=83%). The additional 3% can be attributed lower work related transportation, lunches, clothing, disability insurance, etc.

Added costs could include health insurance (luckily some of us will get this as a pension benefit).

...FiveIron
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""That guy making $200,000 a year "needing" $160,00/year is just plain malarkey. No one "needs" $160,000 a year to live. ""

There are lots of people working 60-90 hour work weeks, scrimping to get by on only $$100,000-150,000 in Silicon Valley and New York City. If you live in a $600,000 house (tiny one at that in California/NYC), and try to keep up with the Jones, you will easily fall into the spend, spend, spend trap.

If you get used to spending this kind of money, it is hard to suddenly have to give up your BMWs and SUVs, Ivy league college for kids, including an SUV to drive around campus, $200 dinners for two, $150 tickets tot he theater, $1500 weekend get-away trips, $5000/yr country club dues, $20,000 vacations, $10,000 wardrobe, $5000 hair salon fees, ski condo, summer house, etc. Big screen TV, every latest gadget, new computer every 18 months, DVDs, Notebook computers, Palm Pilots, a household full of cellphones, etc. eat up lots of money, both to buy and maintain.

The vast majority of people get used to spending everything they make, and more (going deeper into debt). That is good for the rest of us since they have to keep working and paying all those taxes to be 'happy' and live their chosen lifestyle.

The secret to ER is to live below your means. Then you already know what it takes to live a satisfying life, dollar wise. Many LBYM people live on 30-40% of their current income, saving 20-30%. Darn taxes take 30+% while you work, less after.
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Ignore advice to save 10 percent of your pay, and don't assume that your spending in retirement will be 80 percent of your current income.

If we could afford another word maybe add "only." From what I understand, most of the population is saving much less than 10%, we don't want them to stop entirely. This may seem entirely too obvious- but given the lack of financial knowledge in the general population I wouldn't assume much insight.

Ignore advice to save only 10 percent of your pay, and don't assume that your spending in retirement will be 80 percent of your current income.

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<No, I suspect it is much more fundamental. The mindset is that you need a million dollars to quit working. That is the roadblock.

Pretty duanting when you are living paycheck to paycheck and can't manage to pay off the $10,000 on your credit card. The masses aren't worried about retirement, they are worried about making their next credit card payment.>


That is the essential difference between the two camps. Obviously there are even a lot of individual differences between RE's, but at least there are enough common points to know that you CAN get there.

Those whose mindset is week to week or month to month will never see RE. They probably won't do very well when regular retirement arrives either. The FOOL in general and this site in particular offer a fantastic educational opportunity for those willing to learn. Those with a short term outlook have to make a fundamental change in their outlook. My view is that 99% of those living that way will NEVER get out of that mindset (even if they reach a 6 figure income). They see the mountain as to high, so why bother.


BRG
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The secret to ER is to live below your means.

I keep hearing this, but I don't buy it. The secret to RE is not living below your means, but living within your means. I also keep hearing about 80%, but I don't buy it. It's not how much you make that counts. It is how much it takes for you to live; in other words, your standard of living. Once you have a handle on this amount, then you can evaluate whether you can live within your means or whether you need to live below your means. Either life style is fine, but I don't think it is necessary to start off with a fixed rule that favors one over the other.
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Let us not forget the rate of inflation

Things get very complicated very fast if you try to include every factor that affects a retirement in your calculations. There's the efffect of compounding, and the effect of inflation. There's the fact that salaries usually don't remain even over the course of a working life. To come up with precise numbers, you need to make adjustments for different asset classes and different levels of diversification.

All these factors are worthy of study. But I don't think that the average worker forms his basic ideas about retirement possibilities by running all these numbers through his head. That's why the rules of thumb were developed in the first place--to offer a simplified view of reality.

The problem, as I see it, is that the simplified view is misleading and discouraging. Under the best of circumstances, it might provide enough to retire on at age 65. That prospect doesn't offer much incentive for most workers to gain control over their finances.

What if the commonly voiced norm was to live on less than $30,000 (not counting taxes) both while working and in retirement? All workers would know that it takes $750,000 in savings to retire at the "normal" level (presuming a 4 percent real rate of return or safe withdrawal rate). Families earning $60,000 in post-tax income would know that they would need to save $30,000 to satisfy the norm, and families at other income levels would also be able to easily determine their savings goals.

The advantage to this approach is that workers would develop a quick sense of the feasibility of early retirement goals. Not counting the effects of compounding, it would take 25 years for the family earning $60,000 to achieve the goal. Including compounding, it could be done quicker. In my view, it's not as important for the family to know exactly how much quicker as it is to know that the goal itself is a realistic one.

Arguments could be made for alternate rules of thumb, of course. Some might say that the goal should be to live on $40,000 and others might say that it should be $25,000. I am not trying to put forward a specific target.

I'm only arguing that the consequence of following the 10 percent saving and 80 percent spending rules is to make early retirement impossible. I think it's a shame that these rules are so widely reiterated, given the damage done when they are accepted as norms.
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<<But at some point, if it's feasible, we would probably like to get some cash out and settle down to a less frenetic, less stressed-out and always-rushed community where the cost of living is low and housing is very affordable>>

We have owned our Silicon Valley house for a little over six years and will be putting it up for sale in a few weeks. The equity and return of down payment will be enough to buy a nicer house for cash in Portland, Oregon, where we are moving. Better house, mortgage disappears. We couldn't resist the allure of that. Of course, not everybody is in a position to pack up and go, but for those who can, it might be worth thinking about.


Obviously, if too many people start doing this, prices in SV will begin to decline in SV and increase in Portland.
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. The secret to RE is not living below your means, but living within your means. I also keep hearing about 80%, but I don't buy it. It's not how much you make that counts. It is how much it takes for you to live; in other words, your standard of living. Once you have a handle on this amount, then you can evaluate whether you can live within your means or whether you need to live below your means. Either life style is fine, but I don't think it is necessary to start off with a fixed rule that favors one over the other.

Hello ResNullius,
I'm not sure how you are defining living within your means. If you mean at your means. Then you are spending everything you earn and have nothing left over to save. Hence you can not RE. If you mean spending less then you earn and saving the rest then you ARE living beneath your means. If you mean something else please clarify it for me.
Thank you,
Brian
P.S. My point is I think living within or beneath your means are one in the same. Did you mean something else?
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Ariechert wrote: That guy making $200,000 a year "needing" $160,00/year is just plain malarkey. No one "needs" $160,000 a year to live. I think a really good lifestyle can be had from $50,000 to $80,000 a year...

According to the Statistical Abstract of the US, the "average" $200,000 income family only barely spends that $50,000 to $80,000, Art! Here is how they spend their money, after taxes and retirement savings (including life insurance):

   Food $6,320.60
   Alcohol $811.80
   Housing $22,027.20
   Apparel $6,446.80
   Transportation $9,332.40
   Health Care $2,246.66
   Entertainment $4,796.20
   Personal Care $661.80
   Reading $433.20
   Education $1,927.00
   Tobacco $166.40
   Miscellaneous $152.40
   Contributions $440.00

TOTAL $55,762.46

Looks pretty cheap to enjoy a $200,000 income-level lifestyle to me!

Dory36


(Easy access to the Statistical Abstract of the US: http://www.keepingupwithjones.com/utils/form.cfm -- note that you can leave some or all of the fields blank to get aerages across the categories.)
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Re: "Obviously, if too many people start doing this, prices in SV will begin to decline in SV and increase in Portland."

It has already been happening here in Portland. Portland made the charts as one of the areas with the fastest growing real estate values through the 90's. We bought our little house just outside Portland in 1989 for $67K. Now it's appraised at about $190K. If you want a decent house in a decent neighborhood in or near Portland, get out your checkbook (or sell a few shares, if you're coming from the Silicon Valley.) We've actually been thinking about selling our house here and buying something nicer somewhere in the south or the midwest where property values are even more affordable and traffic might be better.

Property values around Portland are held up by a couple of factors: primarily the urban growth boundary which limits residential development and prevents sprawl, and the rapid growth of jobs in the high tech industry. It is a nice place to live, and lots of folks are moving here. You can still get a 40 year-old 3-bedroom 2-bath 1500 sq ft ranch house in my neighborhood for $140K. Ten years ago they were $40K. I think the compounded annual rate of increase in property values comes out somewhere around 10%.

-Dantes
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hocus asks,

If your boss asked you to provide an estimate of how much it would cost to complete a possible project, and you told him, "oh, why don't we just presume it will cost 80 percent of the last one," you would lose your job. He would expect you to consider whether there are better ways of arranging work schedules, whether there are cheaper materials available, whether you could take advantage of new technologies, etc.

Why do we not consider our lives to be as important to us as our jobs?


Maybe I'm a lunatic, but I was one of those people that actually did a cost/benefit analysis on my expenditures and decided that the 80% rule worked for me -- I saved 80% <grin> and limited my spending to 20% of my gross income.

Of course I didn't net the whole 80% -- taxes whittled my annual savings down to about 50% of gross income.

intercst
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The worker earning $50,000 would need to save 25 times $40,000--that's $1 million--to satisfy the “80 percent of income” rule. To stay on track toward meeting that goal in 45 years, he would need to save $22,222 per year. But the “10 percent of pay” savings rule calls for only $5,000 in savings each year. So the worker following the conventional formulas falls more than $17,000 farther behind each year he works.

Please explain something to me. If the worker earning $50,000 per year saves $22,222 per year, he/she will have $27,778 left to spend. If he pays SS Tax and Income Tax on the $50,000, he will probably have around $20,000 left to spend on food, clothing, shelter, and recreation. Why does he suddenly need and income of $40,000 at age 65. If he/she has been saving 22,222 each year I would think that his retirement spendable income wouldn't have to double. Am I missing something?

cf

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telegraph writes,

If you get used to spending this kind of money, it is hard to suddenly have to give up your BMWs and SUVs, Ivy league college for kids, including an SUV to drive around campus, $200 dinners for two, $150 tickets tot he theater, $1500 weekend get-away trips, $5000/yr country club dues, $20,000 vacations, $10,000 wardrobe, $5000 hair salon fees, ski condo, summer house, etc. Big screen TV, every latest gadget, new computer every 18 months, DVDs, Notebook computers, Palm Pilots, a household full of cellphones, etc. eat up lots of money, both to buy and maintain.

The vast majority of people get used to spending everything they make, and more (going deeper into debt). That is good for the rest of us since they have to keep working and paying all those taxes to be 'happy' and live their chosen lifestyle.

The secret to ER is to live below your means. Then you already know what it takes to live a satisfying life, dollar wise. Many LBYM people live on 30-40% of their current income, saving 20-30%. Darn taxes take 30+% while you work, less after.


I had a conversation with a former colleague of mine who's now a CEO of a large company about how I retired early. I explained the 4% safe withdrawal rate and offered "that means that if you spend $40,000 per year, you need to save $1 million to retire early."

My friend said, "Jeez, I'm spending $40,000 a month"

I said, "That's fine, it just means you need $12 million to retire early." <grin>

intercst
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Clufool: Please explain something to me. If the worker earning $50,000 per year saves $22,222 per year, he/she will have $27,778 left to spend. If he pays SS Tax and Income Tax on the $50,000, he will probably have around $20,000 left to spend on food, clothing, shelter, and recreation. Why does he suddenly need an income of $40,000 at age 65. If he/she has been saving 22,222 each year I would think that his retirement spendable income wouldn't have to double. Am I missing something?

Bingo!

I think most people miss this point.

I believe most people will continue their lifestyles after retirement, not go suddenly wild and extravagent with their spending because . . . their income stopped?!

Dory36

PS: I'll repeat a plug for a useful site for seeing how Mr. & Mrs. America spend their money. The data is from the Statistical Abstract of the United States (1998, I believe), but the site, which someone here first brought to my attention, gives you a friendly access to that 300+ page small print book. It is at http://www.keepingupwithjones.com/utils/form.cfm -- try it out, and note how little money people really live on, once the taxes, savings for retirement, and mortgage are taken out...
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<<So what I am trying to understand is, why do so few workers possess the basic insight that early retirement is an achievable goal? My belief is that the explanation lies in widespread acceptance of the two rules of conventional finance (save 10 percent of pay; expect to spend 80 percent of income).
>>


Firstly, this is more than insight --it's a mathematical analysis, and few are good enough at math to look at the possibilities.

Secondly, humans are herd animals, and early retirement is not where the herd is heading. The herd browses in the world of Early Consumption, not Early Retirement.

Shortly after I hired in as a clerk in a utility company in 1979, I recall taking note that LOTS of good stocks were selling at 4X earnings and the Dow was around 850 or so. While I had no goal in mind, it seemed smart to buy such assets at what looked like bargain prices.

I can recall getting the Wall Street Journal read before my morning break (heh, heh!). This produced amused reactions from my co-workers, who thought I was nuts for buying stocks and thought financial pages were boring.

I never planned for Early Retirement until 8-12 months before I made it happen. I'd deliberately added rental properties and my own business to my work day to maximize my income, but I'd done too good a job of that and was driving myself nuts and into actual injury with overwork. So I quit my day job and sold off a couple of rental properties to achieve control over my work life, which constitutes Early Retirement for me.

So, for me, Early Retirement wasn't planned. What was planned was my consumption, which was low, and my income, which I worked to maximize in blue-collar ways. The inevitable difference was savings, which I taught myself to invest in stocks and real estate. That's about all there was to it, for me.


Seattle Pioneer

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Why does he suddenly need an income of $40,000 at age 65? If he/she has been saving 22,222 each year I would think that his retirement spendable income wouldn't have to double. Am I missing something?

clufool:

I don't think you are missing anything. Your "mistake" is that you are applying sense to a subject where conventional advice steers people away from using their sense. There is no logical connection between what one earns and what one will spend in retirement. The more logical way to get a sense of what you will spend in retirement is to look at how much you spend in your working years.

The preceding post by intercst makes the point strongly. If he was saving 80 percent prior to retirement, why would anyone think that retirement would cause his expenses to quadruple overnight so that he would all of a sudden be spending 80 percent?

If anyone on the board knows any of the history of how the 10 percent saving rule and the 80 percent spending rule came to be accepted rules of thumb, I would love to know more about it. These rules seem very odd, and it would be useful to know how they became so popular.

For those like intercst who sit down and do all the calculations for themselves, the rules of thumb don't do any harm. But, as he notes, you are almost made to feel like a "lunatic" if you elect to save 80 percent. It's a rare person who can run counter to the prevailing winds. It seems to me that we should establish norms that encourage rather than discourage sound money management.
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Humans are herd animals, and early retirement is not where the herd is heading.

Seattle Pioneer:

The question I'm hoping to raise in people's minds is: Who is leading the herd and what tools are they using to do it?
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I don't think you are missing anything. Your "mistake" is that you are applying sense to a subject where conventional advice steers people away from using their sense. There is no logical connection between what one earns and what one will spend in retirement. The more logical way to get a sense of what you will spend in retirement is to look at how much you spend in your working years.

Exactly ! There is no easy relationship between what one spends before RE and what one spends after RE. It will be different for a variety of people. Some people's dream RE is to get a house near a decent body of water and spend lots of time fishing and relaxing, while some people's dream of RE is to spend lots of time travelling around the world. The latter will need more money to finance RE.

Meanwhile, lots of expenses go down during retirement, SS tax goes to zero (or near 0 for those working on an ocassional basis), federal and state income taxes typically go down because LTCG have a preferred rate and can be realized in a manner to minimize the tax bite, car costs go down (my wife and I now each have a car, but in RE, we will share one), commuting costs go down, clothing costs go down (depending on the job you retire from), housing costs can go down in some cases, etc...
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The "average" $200,000 income family only barely spends that $50,000 to $80,000.

Thanks for adding that data to the discussion, Dory36. Some day I'd like to use data from the Statistical Abstract and other sources to reveal the extent to which increased income gets converted into savings at different income levels. If a family earning $200,000 is spending only $56,000 (plus taxes), they must be saving a good bit more than 10 percent.

However, I would argue that they are not saving nearly as much as they could, given their income. I view each dollar of income beyond the number needed to provide for a pleasant middle-class lifestyle as an "Opportunity Dollar." It's hard to gain access to Opportunity Dollars (money that can be used to buy freedom without requiring any real sacrifice), so my rule is to think three times before devoting them to any purpose other than saving.

It would be interesting to know whether it is low-income, middle-income, or high-income workers who squander more Opportunity Dollars. From your numbers, it's clear that high-income workers are saving far more in dollar terms. But do they make better use of their opportunities than others? I don't know, and I'd love to see more data bearing on the question.
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Seattle Pioneer wrote humans are herd animals, and early retirement is not where the herd is heading.


Some days I feel like I'm breaking away from the herd. Other days I feel like I'm cleaning up behind the herd.


ER, hurry up!

Dory36
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Yep! I really live in Possum Valley. Just go to Yahoo People Search and do an address search for Art Riechert in TN. My address is Possum Valley Rd. Maynardville, TN. Pretty funny huh? Our air conditioner has a little hose where water comes out; skunks get around that scratching around for bugs and when the air conditioner kicks on they are startled and spray. The air conditioner sucks it in and then the whole house smells like skunk. We had a possum in our garage for several days once. What a mess. My wife looked out one day and there was a grey fox trotting through our yard. There is a big hawk nesting in a pine tree in our driveway. My bird feeder had a little flying squirrel nesting in it. When I opened it up she jumped out and I looked down and she had four little half grown flying squirrel babies in there. Since I got two little terriers they keep all the varmints run off. I just couldn't handle the skunks anymore. There were thirty wild turkeys in the field next to our woods the other day.
- Art
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If you do the math; one needs to save approximately 25% of wage per year for approx. 33 years (assuming a 5% real rate of return) in order to build a nest egg equal to 20 times or more of wage.

TheBadger

It appears that you are more adept than me at pulling all the factors (including compounding of interest) into an analysis. Is it possible to explain in words the calculations you used to come to your conclusion, or is a spreadsheet required? I would like to have a way of expressing the points made in my original post that includes the compounding factor, but which does not require an overly lengthy discussion.

Also, can you say whether there is any income level at which it is possible by saving 10 percent to accumulate enough to satisfy the 80 percent spending rule much prior to age 65? My numbers gave me a rough sense that it is not possible, but it would be much better to offer an analysis that takes compounding into effect.
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Maybe I'm a lunatic, but I was one of those people that actually did a cost/benefit analysis on my expenditures and decided that the 80% rule worked for me

Other than intercst who "misunderstood" the 80% rule and retired early, I haven't seen the 10% savings/ 80% spending rule mentioned in connection to early retirement.

In decades past, the "average" worker had some sort of non-contributory pension plan and expectations of drawing social security and retiring at 62-65. The advice that you should save something (as opposed to nothing) and anticipate some retirement savings (reduced commuting costs and clothing were usually mentioned) was probably not wrong for most individuals. The Fidelity magazine had an article reiterating the conventional wisdom a couple of years ago and received a letter. The writer said he was living on 50% of his income and he wondered why fidelity thought he needed to spend 75% of his pre-retirement income once he retired. The response was something to the effect that he was an outlier and generalized advice works for people tending to spend closer to the average.
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If you do the math; one needs to save approximately 
25% of wage per year for approx. 33 years (assuming a 
5% real rate of return) in order to build a nest egg 
equal to 20 times or more of wage. 

I ran a simple spreadsheet on this (simple in that I 
assumed that income and real returns were fixed, and 
for ease of calculation that interest was paid at the 
end of each year). I also assumed the goal was 80% of 
pre-retirement spending, which I took to be pre-tax 
earnings minus the savings rate, with a further 
slightly inappropriate assumption that tax rates were 
the same for regular income and retirement income. I 
actually have a more complex spreadsheet for my own 
planning, but it would take forever to explain the 
assumptions and methodology. Here are my conclusions 
for the simplified version:

Years to retire, given fixed savings rate and fixed 
real return, and neglecting income changes:

Savings        5%        6%       8%      10% 
rate        return     return   return  return

10%            47        42       35       30

15%            38        35       30       26

20%            32        30       25       23

The 5% real return strikes me as rather low for 
planning purposes. Someone preparing to retire early 
ought IMHO to have a more aggressive stock allocation. 
The 10% return strikes me as slightly optimistic, but 
the numbers do sound nice, and they are not too far out 
of line with the most recent decade. For realism, I 
normally assume 7% to 9% as the most likely outcome for 
real returns in the next decade. 

As for savings rates, It's pretty easy to work up to 
20% or more by simply splitting your raises in your 
early earnings years. If you say that half of each 
raise goes to increased long-term savings, then even a 
4% raise will mean an additional 2% into savings for 
more than a 20% increase in the amount saved. 

I also like looking at "years to retirement" as a 
function of increased savings this year or in the later 
years. I'd suggest running the spreadsheet yourself, 
with the most realistic assumptions you can make.
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The advice that you should save something (as opposed to nothing)... was probably not wrong for most individuals.

Ataloss:

I agree that it's better to save something than nothing, of course. It's my experience, though, that most people fall a bit short of whatever goals they aim to hit. If you establish a goal of 10 percent, the average person is going to save 5 percent or so. Why not set a goal of 40 percent, so that the average person is saving 30 percent?

The increases in productivity we've seen since World War II allow for savings rates far higher than those in effect at that time. Why haven't the targets been increased to reflect the reality that workers earn a lot more with their labor today, and thus have a lot of extra money after meeting their basic needs?

The message I am hearing from several posts is that most human beings by nature prefer to spend most of their incomes, and that is is unlikely that many would elect to retire early regardless of the norms advocated in financial advice. The idea seems to be that some are savers and some are spenders, and only changes at the margin are possible.

I would argue for a different set of categories. I'd say that there are savers, who generally understand how money works, and spenders, who generally do not. That's why I see it as harmful for norms to be advocated which mislead people as to the possibilities that follow from saving.

The reason why I reject the idea of spending as something fixed in a person's nature is that I have heard so many stories of people who made dramatic changes in their handling of money.
This sort of dramatic change would not be possible, it seems to me, if the desire to spend was part of the person's nature. But if the problem is a failure to understand possibilities, it is not surprising that we see dramatic turnabouts when people gain insight.
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Seems to me 80% of current income is a pretty good estimate of needs.

If you are currently saving 10% of income, then you are spending 90% of income. Once retired, you will no longer be paying Social Security which is about 7% of income. Now we're down to 83% (100%-10%-7%=83%). The additional 3% can be attributed lower work related transportation, lunches, clothing, disability insurance, etc.

Added costs could include health insurance (luckily some of us will get this as a pension benefit).


I would prefer to see it phrased as 100% of current spending, which is what my current spreadsheet assumption is. I am roughly figuring that my increased spending in the areas of health care and recreation will be nearly exactly offset by decreases in taxes, clothing, and automotive.

I think most early retirees save far more than 10% of their income, particularly in the several years prior to their retirement. I bet there has been a poll on this in the past already.

--malakito.
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I also assumed the goal was 80% of
pre-retirement spending.


RDDrudd:

Thanks for running the spreadsheet. The numbers are helpful. Would you mind also running numbers for what happens if your target is to have 80 percent of pre-retirement earnings in retirement, rather than 80 percent of pre-retirement spending?

It makes much more sense to look at pre-retirement spending, as you did. However, the point I was trying to make in the original post is that the 10 percent saving rule and the 80 percent spending rule (which looks to pre-retirement earnings for some mysterious reason) work together to make early retirement a mathematical impossibility.

It appears to me, given your finding that it would take 47 years to retire with a 5 percent real return, even if one were not following the 80 percent rule, that my crudely formed conclusion was correct--it is impossible to retire early following the two conventional rules.

I deliberately kept things simple, perhaps too much so. But I'd like to know for sure that, by avoiding some of the complexities of the real world, I was not led to a false conclusion. I would also like to develop a clean way to present this conclusion to people lacking familiarity with Retire Early ideas. I now see a danger in simplifying too much, but I also remain concerned that the message can be lost if the message is made too complex.
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Arguments could be made for alternate rules of thumb, of course. Some might say that the goal should be to live on $40,000 and others might say that it should be $25,000. I am not trying to put forward a specific target.

I found it interesting when people were posting what they plan to live on or actually live on in retirement, and that it was pretty close to the $25,000 number, if not a bit below. I found it even more interesting when I did an analysis of my own spending and found that I would be right at that same number. I would therefore propose that a good rule of thumb for "after tax after housing excluding kids' college middle class basic retirement living expenses" is about $25K. Of course it's not a very catchy description, so it may never catch on.

--malakito.
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The question I'm hoping to raise in people's minds is: Who is leading the herd and what tools are they using to do it?

The leaders of the herd are the retail businesses of this country, and their tools are advertising, convenience, and perks.

People don't really want stuff. They want to be fulfilled. The basic message of advertising, then, is "Buy our stuff and you will be fulfilled." Sometimes there's a bit of indirection in the form of "Buy our stuff and you'll be sexy and, of course, we all know that sexy people are fulfilled." An insidious and common form of this message is "Buy our stuff 'Saturday only at the Bon Marche' and you'll be lucky because it's 'Saturday only' and, or course, we all know that lucky people are fulfilled."

The indirect form of advertising, by the way, generally focuses on the standard things we think will make us happy: sex/pleasure, money, power, knowledge, excitement. Even odd combinations work; I've seen advertisements using sex appeal to sell a particular brand of margarine.

Convenience comes in several different forms. The most obvious one is extension of easy credit. No money down, no interest until May 2001 on a new Mitsubishi. Instant credit applications at Bon Marche, heck, even at the car dealer. The most ridiculous thing I saw here was being able to finance a $99 fitness club membership fee. Are people that strapped that they need to finance $99 at 18% interest?

Perks include those airline miles and all of the little "Buy 10 get one free" cards that people (including me) carry around in their wallet.

These same retail businesses, of course, have a vested interest in you not retiring, as well as the dollars to buy the airwaves, send you those flyers and catalogs, and generally implement their plans to separate you from more of your money. I'm less sure why financial pundits continue to declare the 10%/80% rules of thumb hocus mentions except that perhaps they are brainwashed as well by the retailers and saving more than 10% is sheer deprivation.

I think that overall there are a few things that make ER an inherently tough sell. First, you're competing against a multi-multi-billion dollar industry segment. Second is the aspect of instant gratification: given the choice between, say, a new car and retiring a year earlier, when the year earlier is 35 years from now, most people would probably choose the new car. Third, financial freedom is kind of "theoretical": it's tangible form is perhaps a few brokerage accounts and some Excel spreadsheets. Fourth, ER's have somewhat of a disincentive to spread the good news because they probably own stock in some retailers or have friends who work in the retail industry and they wouldn't want themselves to lose money or their friends to lose their jobs.

--malakito.
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Also, can you say whether there is any income level at which it is possible by saving 10 percent to accumulate enough to satisfy the 80 percent spending rule much prior to age 65? My numbers gave me a rough sense that it is not possible, but it would be much better to offer an analysis that takes compounding into effect.

Just by reading this board and doing my own retirement spreadsheet, I agree with you.

There are two other factors that are pretty important to consider in this analysis: the rate of return on your savings, and the rate of salary increase. Some thought experiments here will make my point, I hope.

A person saving 10% of their income can easily set aside 80% of their spending times 25 if they invested their 10% in a single stock that goes through the roof for a few years. On the other hand, investing one's savings in lottery tickets will never get you there. So clearly rate of return on one's savings matters.

The rate of salary increase also matters. As you have rightly pointed out before, someone on track for retirement should turn down a raise by the logic of the 80% rule. Conversely, someone who's making a cool $1M a year for thirty years and then takes a pay cut to an $100K a year job could easily make it to 80% of income on 10% of savings. Of course, for most people there is a gradual increase in salary over the years, but still, salary history plays a role.

Unfortunately, both of these factors are compounding effects by nature, and thus are harder to communicate and, as you point out, may muddy the waters.

--malakito.
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To BlueChipBoy:

Thanks! I'm glad someone else realizes compounding plays a big role. I read his post twice thinking I just missed it!
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ataloss:

I agree that it's better to save something than nothing, of course. It's my experience, though, that most people fall a bit short of whatever goals they aim to hit. If you establish a goal of 10 percent, the average person is going to save 5 percent or so. Why not set a goal of 40 percent, so that the average person is saving 30 percent?

The increases in productivity we've seen since World War II allow for savings rates far higher than those in effect at that time.


Hocus, I agree but I guess I am just not ambitious enough to try to change the thinking of the majority of the population.

ataloss
happily representing a small high saving RE fraction of the population
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>>Obviously, if too many people start doing this, prices in SV will begin to decline in SV and increase in Portland.>>

Honey, they already have.

Our state motto in Oregon used to be something like, Sure, come and visit--but please don't stay! ;)
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<<Humans are herd animals, and early retirement is not where the herd is heading.

Seattle Pioneer:

The question I'm hoping to raise in people's minds is: Who is leading the herd and what tools are they using to do it? >>


That puts a sharp point on your inquiry.

I always imagined that Personnel/Human Resources was always delighted when they received requests for employment verification for mortgages, car loans and so on. "Oh," I've supposed they said, "Joe is planning to be with us for another 30 years!"


A couple of years before I early retired from my utility company blue collar job, I served as the Strike Co-ordinator for my union during the contract negotiations.

The general theme was "Be Prepared" (stolen from the Boy Scouts) with an emphasis on avoiding new debt, paying off old debt and saving cash for a possible strike. This was an opportunity to talk turkey about finances with my co-workers.

Many were loaded down with debt and living payday to payday, if that. These were the people who would least be able to support an effective demand on the company for higher pay. We established a committee to work with the financially distressed in the event of a strike, to identify people who might be unable to buy food, work with creditors and so on.

I always imagined what it would be like if the blue collars confronted management with their debts paid off and ample cash in the bank, fully prepared to go on strike say, the day after a windstorm had destroyed significant parts of the distribution network, or during a period of unseasonably cold weather when automatic system aren't capable of carrying the load and the only way to make the system carry the load is to have blue collars operating key parts of the system manually.


Seattle Pioneer
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<<Humans are herd animals, and early retirement is not where the herd is heading.

Seattle Pioneer:

The question I'm hoping to raise in people's minds is: Who is leading the herd and what tools are they using to do it? >>


That's a question with a sharp point.


I've always imagined that corporation personnel/human resources departmentsa were always delighted to receive employment verification requests for mortgage loans, car loans and so on. "Look," I suppose they'd say, "Fred's planning on working another thirty years with us!"

The aim of the system is clearly to maximize consumption on consumer junk and paying taxes. I'm not sure who might have been the chief conspirator in designing such a system, but I know he has millions of willing co-conspirators with VISA cards out there!


Seattle Pioneer

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<<. I view each dollar of income beyond the number needed to provide for a pleasant middle-class lifestyle as an "Opportunity Dollar." It's hard to gain access to Opportunity Dollars (money that can be used to buy freedom without requiring any real sacrifice), so my rule is to think three times before devoting them to any purpose other than saving.
>>

Personally, I wouldn't take that pleasent middle class lifestyle as a given either. In my view the key is for each person to examine what luxuries they may really desire when balanced against opportunities lost by purchasing that luxury.

At the top of that list is marriage and children. While marriages can be self supporting, children are horrendously expensive luxuries in terms of both time and money.

A decision to avoid marriage and children changes a person's financial needs dramatically.

]

Seattle Pioneer
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"""The secret to ER is to live below your means."

I keep hearing this, but I don't buy it. """

Maybe that is why you are still working, while I am retired early???

Depending upon your priorities, the more you save, the earlier you will be able to retire. If you need to accummulate assets of at least 25 times the amount you need to live on, the less you need the live on, the faster you will reach this goal.

If someone is 25, they could desire to retire at 50, then they need to accummulate that amount in 25 years more work.

If someone is 35, starting with zero savings, it becomes more of a challenge to get to ER that soon.

The choices you make at 25 and 30 about investing and purchasing have very significant impact 20-30 years later.

It is not what you 'can afford' as the marketeers would have to believe you should spend, but what YOU want to spend. You can 'afford', according to them, about 150% of your income!

You don't need to drive a Lexus SUV or Ford Expedition. That extra $25,000 over a Honda or Toyota or Saturn could be the better part of $5000,000 if invested for 35 years. Instead, think of it as a half million dollar purchase (at age 25-30). Do you really want to buy it now?

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BUDGETS of the RICH

I followed your link for $200,000 incomes and it went nowhere for families of 4, or homeowners, or urban dwellers.

At $100,000, family of 4 spend $77,000/yr of their income. That left $23000 for taxes. Total 'retirement' savings was $9100, and that included social security - now about $7500 a year. So they 'saved' $1600 a year additional in pension plans or 401Ks. Hardly a way to RE.

I don't believe people who make $200,000 spend $55,000 a year. No way! I'd believe more like $135,000-$140,000, or just about everything after the tax man is done with them.

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We had a possum in our garage for several days once.

Warning: this post is off-topic and contains Possums.


One day I was passing our outdoor garbage can that had the lid half off and stopped to adjust it. I glanced in and there was a possum. It had rained a lot the night before and he was standing on his hind legs to keep his head clear of the water. There was no trash in the can, just the possum and water. Knowing they can be fierce, I stood way back and knocked the can over, and out he flowed, and trundled off under the house. I took my good-deed brownie points and thought no more of it.

The next morning DH got up before dawn. When he took the trash out he left the kitchen door open behind him. When he came back, the possum was in the kitchen. He left the door open and the possum went back out. I like to think he stopped by to say thanks - we never saw him again.





Reader99
Entralled with her own dull anecdotes.
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"It's possible that the compounding of earnings on the savings (which I have not included in these calculations), would make up the difference. But because most workers earn relatively low incomes in their early working years, saving 10 percent does not allow for compounding to play much of a role until hope for a significantly early retirement is gone."

HOCUS, HOCUS, HOCUS! While I can't help but agree with the broad premise of your rant, (which I take to be that most folks aren't thinking or saving enough), how can you so foolishly (VERY small "f") dismiss the absolutely ENORMOUS power of compounding???

DO THE MATH, MY FRIEND....YOU COULD EVEN USE ONE OF THE FREE CALCULATORS ON THIS VERY FOOLISH (big "F") SITE...

riz <-rich mouse potato who did one smart thing in his life....start early!
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<<Our state motto in Oregon used to be something like, Sure, come and visit--but please don't stay! ;) >>


Heh, heh! That motto didn't work for the Indians, or for the English Hudson's Bay Company traders. Why do you think it will work now?


Seattle Pioneer
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When he came back, the possum was in the kitchen. He left the door open and the possum went back out. I like to think he stopped by to say thanks - we never saw him again.

Reader99
Entralled with her own dull anecdotes.


Off, off topic!!!

I imagine you never expected or wanted a reply to this but since I consider myself an expert on possums since I worked at the Vet School for seventeen years, here goes! And yes, we did use opposums once in a research project. They are incredibly nasty animals when kept in small stainless steel cages! I took a class in Anthropology once and the professor brought casts of the brains of various mammals. One of those casts was of an opossum. It was about the size of a peanut and looked very much like one. He said an opposum was essentially a furred lizzard. Ever since then that is how I've thought of them - furred lizzards.

- Art who promises never to mention opossums again on the Retire Early Homepage Message Board!
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DO THE MATH, MY FRIEND....YOU COULD EVEN USE ONE OF THE FREE CALCULATORS ON THIS VERY FOOLISH (big "F")
SITE...


Indeed, do the math. The historical DOW CAGR over the last thirty years is ~11.7% and post WWII inflation is ~4%.

Save that dollar today and in forty years you will have enough money to fill the gas tank on your honda accord once. Maybe twice if you get 13.5% or more.

Skip one tank fillup this year though and you'll have a year supply in forty years.

Make do with that old car for an extra couple months and you'll have enough to buy a new one in forty years.

If you can't get by on spending little, you won't retire at all.

Which I think was Hocus' original point. If you are spending most of what you currently make and need almost as much as your gross income today when you retire, you will most likely never make it.

-Donut

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>A decision to avoid marriage and children changes a person's financial needs dramatically.

This also has the additional benefit of reducing the total population. Which is also a good thing...

--Valrith
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Do you really live in Possum Valley?

Quando omni flunkus moritati.


I'm guessing -

"When all else fails, play dead?"




Reader99
Took Latin 24 years ago
"Donde mihi basia millia...."
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You state: "Those who live in the world of conventional advice think that those who talk of retiring early must not be disclosing everything about their circumstances--they must be earning huge incomes, having extraordinary luck in the stock market, electing not to have children, or receiving large inheritances. It seems from this point of view that there must be some “trick” to retiring early".

There is no "trick" to retiring early, just disciplined saving/investing, living below your means to have money to save, and starting early (in 20's is best, 30's at the least). The main point missing in your discussion is the power of compounding (which you admit to). You are right - it is impossible to save enough to retire early without the benefits of compounding.

For example, at age 42, I had an IRA with $10,000 in it, and now eight years later, without adding any money to it or taking any money out of it, it is now worth more than $70,000 (thanks to good investing returns).

Happy investing - it goes hand-in-hand with savings.

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Telegraph: I followed your link for $200,000 incomes and it went nowhere for families of 4, or homeowners, or urban dwellers.

If there are fewer than 10,000 families in the sample, you won't get a result. If you leave some of those options (home ownership, urban/rural, etc) blank, then you'll be pulling in the sample from each category, and have enough data to get the results.

I don't believe people who make $200,000 spend $55,000 a year. No way! I'd believe more like $135,000-$140,000, or just about everything after the tax man is done with them.

Most people don't save enough to RE, as you and others suggest. I wan't meaning to say that these folks only spent $55,000 a year -- rather, I was saying it would take about that much after taxes for an ERee to live the lifestyle that the $200,000 income family was "enjoying" -- and it would take a lot less if you got rid of that mortgage interest!

Dory36


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Do you really live in Possum Valley?

Quando omni flunkus moritati.


I'm guessing -

"When all else fails, play dead?"


Well done. It's swiped from the Possum Lodge slogan. See http://www.redgreen.com/

Doug
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This post should have been written by someone who understands compounding! How can you not take into account compounding! Are you stuffing the investments under a mattress? A mere $2000 investment with a real rate of return of a conservative 8% will grow to over $13000 in 25 years, $20,000 in 30 years, #29,000 in 35 years, $43,000 in 40 years!!!! This is a one time investment! $2000 yearly for twenty five years is $171,606.
The point is good, Save as much as you can, but start now!! Don't let hocus discourage young investors from starting early, IT DOES MATTER!
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This post should have been written by someone who understands compounding! How can you not take into account compounding! Are you stuffing the investments under a mattress? A mere $2000 investment with a real rate of return of a conservative 8% will grow to over $13000 in 25 years, $20,000 in 30 years, #29,000 in 35 years, $43,000 in 40 years!!!! This is a one time investment! $2000 yearly for twenty five years is $171,606.
The point is good, Save as much as you can, but start now!! Don't let hocus discourage young investors from starting early, IT DOES MATTER!



Okay.

I've waded through this long thread. Hadn't commented. But I feel I must respond to this insulting nonsense post above!

The original hocus post (and subsequent additional posts by hocus within this thread) have been quite clear.

hocus did indeed mention compounding in his original post and the reasons for excluding it. He did not ignore compounding as has previously been stated.

The points of this thread and indeed RE are clear:

1) Get debt free first.

2) Keep living expenses low.

3) Start saving early.

4) Invest well.

5) And let compounding do the trick.



Obviously the sooner you plan to retire, the higher the emphasis must go on the amount being saved as it will not have the chance to compound big time in later years as you will already have retired & will be spending it.

To start discussing compounding, laying out all sorts of complicated figures isn't always helpful. I find it quite wrong to have figures banded about that if I save x amount for x years, I will have x down the line. Frequently it doesn't include due consideration for capital gains taxes (40% here in the UK) and the real dollar value. That is because the effects of these factors vary so it's hard to be specific as you are generalizing up to a point. It is well and good to say $2,000 for 40 years will be $43,000 at an 8% appreciation, wonderful, but what will $43,000 really be worth then? Without offering an estimate of that too, it's a meaningless figure and really misleading to state it.

Recently I have read about Einstein's Rule of 72, where you divide 72 by the percentage rate of return on investment to reach the time it will take to double in value. Useful I thought. But then I run some numbers on a spreadsheet. I discovered that when I removed the effects of inflation, and taxation too, it didn't get even halfway close to doubling. And if it doubled at all I would be lucky. I wondered what the value of $100 would be after 10% return for 30 years, with 4% inflation yearly and capital gains of 40%. By my poor math I came out with around $185. I would be interested to hear other people's calculations on this one with explanation, for my own retirement planning.

So please lets stop rallying against hocus, I think he's done a splendid job here. And two, no one is forgetting compounding, it's just a complicated thing to discuss and provide meanful analysis that can both be easily understood and encouraging, instead of confusing and discouraging.

Petey
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Hocus, I read this right after you posted it, and I think it's a great article. I had no idea it would spawn such a long thread or cause such a discussion.

"My purpose here, though, is not to offer a precise account of how retirement are financed. It's to outline the general course of financial planning followed by most workers, and to thereby come to understand better why most workers don't strive to achieve financial independence." - Hocus

I think you did a good job.

I started saving for retirement when I was 21. I didn't do it because I cared about SEPP's, knew about stock returns vs. other investments, knew how compounded returns work or even because I wanted to retire early--it had never crossed my mind. I started saving because I saw two simple graphs illustrating saving early versus saving later and how they affect the amount of money I'll have at age 60.

I saw the graphs, and I was interested. I looked at the numbers and came to understand why the graph looked like that, and agreed with its simple analysis. I didn't know how or why my annual returns might vary; I didn't know how I was going to spend the money when I turned 60.

After a year or two, I saw from my statements that my money was growing. Talking with coworkers helped me learn about stock funds, which I hadn't been interested in before because I wasn't saving money for the future, but now I had a nest egg and wanted the best for it. I reviewed the information available, understood it and agreed that the volatility and risk was worth the higher long term returns.

After another year or so, I was making more money and had more invested. I heard about asset allocation, different mutual funds, management fees and such. I never cared before, but now I new about how my money was growing in stock funds and T-bond funds, and I was interested in learning more. I bought a couple of books and read the material Vanguard sent me. I understood the new info and agreed that I should adjust my allocation a particular way for my time frame and risk tolerance.

Cut to two months ago, nine years after I started saving for retirement, and I'm really impressed by how my money has grown overall, but I'm wondering if I really need any bond funds and if I want to stay in my international fund. I also have time since I'm unemployed. I ask around, read books and find The Motley Fool. I decide to roll my old 401(k) into an IRA, open a brokerage account and start buying into stocks as I learn more about them, understand them and then agree that they (the individual stocks) are right for me.

I also see that others are speaking of early retirement. Hey, so far I like not working. Could I do this, too? I hear about SEPP's; gee, I'd heard about that before but never cared. And so on and so forth.



If I came across this board 9 years ago (with no savings) and saw everyone talking about SEPP's, safe rates, whatever-ladders (still haven't learned those) and such, I would've clicked on to the next thing because that wouldn't have interested me; it would seem too complicated--that's for people with money.

I think Hocus' "25 Words" post is the equivalent of those graphs I saw 9 years ago. They are simple and easily understandable, and I think they catch the novice RE'er's interest.

"The journey of a thousand miles begins with a single step." - Confucious
(The above quoted and spelled from memory--I could be wrong.)

To retire early, one must first understand a simple concept or two. After he or she feels comfortable with that, then he or she will be ready for a little more.


I didn't take Hocus' post as an all-encompassing guide to retiring early; it's just the introduction to the book. So as I read I mentally let him get away with ignoring compound interest and inflation and another thing or two. The RE'er can get to those in chapters 4, 5 and beyond.

That's my 2 cents compounded over about 35 posts.

-Jim

P.S. I love the technical posts, too. I'll learn about ladders eventually, but until then I'll stay below the third rung.
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"It's possible that the compounding of earnings on the savings (which I have not included in these calculations), would make up the difference." (a quote from your post)

Man, that's a WHOLE lot of crap to have written to not take into account the very BASIC and IMPORTANT aspect of compounding of earnings on savings. Any trained monkey with a spreadsheet can easily put together a compounded gains simulation. That's your FIRST HUGE mistake in your silly post.

The SECOND HUGE mistake is, once I DO retire, I don't extract all my money at once...I take out what I need, and the rest is STILL INVESTED and GROWING.

Well...thank goodness there will be silly old men like you running McDonald's for me when my wife and I are on yet another retirmenet vacation.
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Penalty box - dkulkis.

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Recently I have read about Einstein's Rule of 72, 
where you divide 72 by the percentage rate of return on 
investment to reach the time it will take to double in 
value. Useful I thought. But then I run some numbers on 
a spreadsheet. I discovered that when I removed the 
effects of inflation, and taxation too, it didn't get 
even halfway close to doubling. And if it doubled at 
all I would be lucky. I wondered what the value of $100 
would be after 10% return for 30 years, with 4% 
inflation yearly and capital gains of 40%. By my poor 
math I came out with around $185. I would be interested 
to hear other people's calculations on this one with 
explanation, for my own retirement planning. 

The rule works well IF you apply it correctly. Saving 
to pay off a balloon mortgage? Then you need actual 
dollars. Saving for retirement at a certain standard of 
living? Then you need constant (inflation adjusted) 
dollars. In the first case you apply the rule of 72 to 
the expected rate of return, which is likely to be 
11%-13% with a stock portfolio for a doubling time of 
around six years. In the second case you apply the same 
rule to a return that is 2.5%-3.5% lower, for a 
doubling time around seven to nine years. 

You just have to start by deciding whether you wish to 
adjust for the effects of inflation. As for taxes, that 
may be done within the rule or outside it. If you buy 
and hold, the compounding effect is small and taxes can 
be subtracted at the end with only small errors due to 
dividends. If you turn over your portfolio annually, 
then you need to reduce your annual return to the after 
tax rate.

How accurate is the rule when applied correctly?

Rate     Years            Multiplier 
                  (2.00 would indicate doubling)
6%         12               2.01
7%         10.29            2.01
8%          9               2.00
9%          8               1.99
10%         7.2             1.99
12%         6               1.97

The rule of 72 is not exact, but it's a whole lot 
more precise than our predictions of future return 
rates. I use it with confidence up to the 12% rate. It 
falls apart rather severely for high returns over short 
periods, although one can take an average (geometric 
average if you're ambitious) of the rule of 72 doubling 
time and the non-compounded doubling time to extend the 
rule somewhat if you feel a need to do calculations in 
your head for annual rates of return from 12% to 36%.
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At first I thought your post was a joke or a lead in to the Fool School.

Simply stated, if you Earn $50k per year and never get a raise in your entire lifetime, you can still retire after 30 years of contributing 10% into an S&P index fund with over one million dollars!!

The S&P index has returned an average of about 11% over its lifetime.

$5,000 per year for 30 years equals $150,000, however with the magic of compound interest it becomes $1,104,565.87. Do the math!! Check out the fool school.
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hocus did indeed mention compounding in his original post and the reasons for excluding it. He did not ignore compounding as has previously been stated.

Thank you, peteyperson, for noting this. I now regret not having placed the disclaimer up higher. I also should have put it in bold so it would stand out. Compounding is important. I say it first thing when I get up in the morning, and just before I go to bed at night. Not really, but almost. Compounding really is important. Really.

But it's not the only important thing in the world. Compounding had some relevance to the message I was trying to convey, but not critical importance, in my view. And discussing it was going to add a lot of complexity. It's clear to me that I need to find a different way of making the point I was trying to convey in the post, and I will work on that. But I think it's unfortunate if some readers are allowing the compounding issue to distract them from the point of the post.

Let's say that a worker is 25 years old. He determines that he needs $500,000 to retire. He has saved $20,000 for the year and wants to know whether he is on track. To my way of thinking, one way to gain a quick and dirty insight into this is to determine what percentage he has put away compared to the number of years he has to reach the goal. Without compounding, he will reach his goal in 25 years and retire at 50. He's doing pretty well.

The reality is that compounding will allow him to reach the goal a lot sooner. But it's hard to say how much sooner. If he invests in stocks, he may make it sooner than if he invests in TIPS. Or perhaps not--it depends on how the market is doing at some unspecified number of years in the future.

If he invests in growth stocks, the result will be different than if he invests in value stocks. And so on. I didn't see a need to make all sorts of assumptions and then to justify each of them in a post that was trying to explain what blocks most workers from seeing the possibility of early retirement.

And then there is the issue of how many years of compounding there are going to be. If the worker works until age 65, there will be 40 years of compounding. If he works until age 40, there will only be 15 years of compounding.

I could have listed multiple scenarios, but it would have made the post much longer. Instead, I elected to note that the numbers were by no means precise because of the failure to incorporate compounding (among other factors) and then to proceed to the points at the heart of the post.

One advantage of not making the assumptions that are required to include compounding in the analysis is that the analysis as set forth in the initial post applies to workers in a wide variety of circumstances. It applies to young and old, high-income and low-income, stock investors and TIPS investors. That wouldn't be so if I had to specify a certain number of years of compounding or a particular investment vehicle.

Should we say that, when a 25-year-old worker puts away $20,000, he has really put aside $100,000 because that is what the $20,000 will turn into over time? I question going too far with this way of thinking. When I am considering a purchase, I do find it a useful mental exercise to consider compounding and take note of how much money a small sum can grow into over time.

But I'm reluctant to apply a multiplier to every saving decision. If we did this, we would end up having workers proclaim that they have "saved" more than their entire salaries each year. It's a dangerous practice to get into because, in a sense, you are counting chickens before they are hatched.

The purpose of the post was to reflect on how the two conventional rules influence savings goals, savings decisions, and the ways workers think about financial planning. Compounding has no direct effect on any of these questions.

Yes, the $20,000 saved today will be worth more 30 years later because of compounding. But so will $40,000 saved today, or $60,000 saved today. Compounding works for people who do not follow the two conventional rules just as it does for those saving 10 percent and spending 80 percent.

I don't think that anyone has objected too strongly to the central point of the post--reiteration the two conventional rules is the biggest factor preventing more workers from seeing the possibility of early retirement. I think that's an important point that more workers need to hear. Now I just need to find a way to say it better so that the point is not lost.
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<<Penalty box - dkulkis.
>>


Perhaps you can explain the purpose of this kind of post. If you can't stand to listen to the opinions of someone else, use the tools available to shut your ears.

But why post someone's name? That strikes me as ill mannered and very rude behavior.


Seattle Pioneer
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Perhaps you can explain the purpose of this kind of post. If you can't stand to listen to the opinions of
someone else, use the tools available to shut your ears.

But why post someone's name? That strikes me as ill mannered and very rude behavior.


Oh, I don't know. The only way someone would know that they are in a penalty box is if the P-Boxer lets the offender know. And I think letting them know makes it clear what kind of behavior is not being tolerated.

That person's post who was put in the P-Box was pretty rude and ill-mannered, too.

After all, you are letting the person know who posted the original know that they are being rude for putting someone in the P-Box--isn't your post above kind of doing the same?

Janet
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But why post someone's name? That strikes me as ill mannered and very rude behavior.
************************************************
Oh, I don't know. The only way someone would know that they are in a penalty box is if the P-Boxer lets the offender know. And I think letting them know makes it clear what kind of behavior is not being tolerated.

That person's post who was put in the P-Box was pretty rude and ill-mannered, too.

After all, you are letting the person know who posted the original know that they are being rude for putting someone in the P-Box--isn't your post above kind of doing the same?

Janet


This reminds me of one of Miss Manners' strictures that I have always chafed against:

"It is incorrect to correct the manners of another adult."

I really hate that rule. So much more fun to tell people when they aren't acting right!



Reader99
Illmannered

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<<I don't think that anyone has objected too strongly to the central point of the post--reiteration the two conventional rules is the biggest factor preventing more workers from seeing the possibility of early retirement. I think that's an important point that more workers need to hear. Now I just need to find a way to say it better so that the point is not lost.>>


I liked your effort to find a simple way to encapsulate a new conventional wisdom, and I wasn't offended by not bowing down to the god of compounding interest.

But, it's apparent that despite the best effort of the engineers of new ideas such as yourself, the consumer test market thinks your bright idea is a Firestone tire with tread separation problems!

Picky, picky, picky!

Back to the drawing board.


Seattle Pioneer
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I think hocus' post is the equivalent of those graphs I saw nine year ago. They are simple and easily understandable, and catch the novice RE'ers interest.

Thanks for posting those words,BigMoneyJim. That was exactly my aim. The whole point of the post was to get inside the head of the worker who is not pursuing early retirement--that's the idea behind the "25 words" title. To start pulling out spreadsheets and calculators when trying to persuade such a person is a mistake. As you note, however, such tools have tremendous value in their place.

Of course, I wouldn't want to mislead the novice into not considering the impact of compounding at all. That's why I included a line noting that compounding might well allow the worker described to retire at age 65. Given the fact that there was a savings shortfall of $17,000 per year without compounding, that line suggests that compounding would have a powerful impact indeed.

As a rough guess of compounding's effect (not looking at the possibility of extraordinarily high or low rates of return), it still looks right to me to say that it would add about $17,000 per year. Not insignificant. But not enough to allow for early retirement.
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<<Penalty box - dkulkis.
>>


Perhaps you can explain the purpose of this kind of post. If you can't stand to listen to the opinions of someone else, use the tools available to shut your ears.

But why post someone's name? That strikes me as ill mannered and very rude behavior.


Seattle Pioneer



Too true, Seattle!

I'm so tired of this kind of pointless and childish behaviour.

Petey
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Recently I have read about Einstein's Rule of 72,
where you divide 72 by the percentage rate of return on
investment to reach the time it will take to double in
value. Useful I thought. But then I run some numbers on
a spreadsheet. I discovered that when I removed the
effects of inflation, and taxation too, it didn't get
even halfway close to doubling. And if it doubled at
all I would be lucky. I wondered what the value of $100
would be after 10% return for 30 years, with 4%
inflation yearly and capital gains of 40%. By my poor
math I came out with around $185. I would be interested
to hear other people's calculations on this one with
explanation, for my own retirement planning.

> The rule works well IF you apply it correctly.



I'm sorry, but I do find the tone of your response to be both sarcastic and unhelpful.

You have not either answered successfully the question posed, that of how much $100 invested at a rate of 10% over 30 years would eventually turnout to when appropriate deduction of 40% capital gains and yearly 4% inflation is made. Your chart merely states the obvious on how the rule works, the divide 72 by the rate of return.

But lets change the example to something more real. What if someone invested $1k a year for 30 years, at 10% return, 4% inflation, with 40% capital gains. You would have to take a view on how long the basket of stocks were each held for prior to getting hit for taxation (can any of you really say you have or will hold all stocks for 30 years and avoid gains taxation for that long?) Perhaps therefore several final today's dollar figures, resulting from turning over the entire portfolio every one year, five years, ten years etc to thirty years to predict around that. Anyone want to take a crack at that, with methodology/calculations given?

Any takers?

Petey
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At first I thought your post was a joke or a lead in to the Fool School.

Simply stated, if you Earn $50k per year and never get a raise in your entire lifetime, you can still retire after 30 years of contributing 10% into an S&P index fund with over one million dollars!!

The S&P index has returned an average of about 11% over its lifetime.

$5,000 per year for 30 years equals $150,000, however with the magic of compound interest it becomes $1,104,565.87. Do the math!! Check out the fool school.



I'm not sure if you are referring to my post, tromeo36, as you did not quote from a post so the readers would know...

But if you referring to my post, I clearly stated that a figure in 30 years time is meaningless because it neither takes account of the heavy effects of capital gains taxation at 40% nor inflation.

As for doing the math, I have studied compounding thank you very much! Adding in more complicated issues like tax and inflation go beyond Fool School instruction.

Petey
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Perhaps you can explain the purpose of this kind of post. If you can't stand to listen to the opinions of
someone else, use the tools available to shut your ears.

But why post someone's name? That strikes me as ill mannered and very rude behavior.

Oh, I don't know. The only way someone would know that they are in a penalty box is if the P-Boxer lets the offender know. And I think letting them know makes it clear what kind of behavior is not being tolerated.

That person's post who was put in the P-Box was pretty rude and ill-mannered, too.

After all, you are letting the person know who posted the original know that they are being rude for putting someone in the P-Box--isn't your post above kind of doing the same?

Janet



Janet, is it really necessary to state it in a single post for everyone to see though? Why not post a private email to that person with your greavances, or post a comment on the board discussing it if absolutely necessary. But why one line just saying penalty box? It's a childish approach to it and like you say, the poster won't learn from it.

I rarely use the penalty box myself as I like to try to open myself up to all views, however harsh some of them might be. The particular individual did indeed get the honor of being only the second person in my six month posting tenur to get blocked. I just don't make a big song and dance about it. To do that is to say " Hey, look at me, I made a big decision, come look see! I'm important. No Really!! "

Kind of sad.

P.S. And please no one try and be slick by saying that I've stated that I did the same so I am contradicting myself. I did so as an example!

Petey
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""and it would take a lot less if you got rid of that mortgage interest" - no no no........I disagree...you buy an expensive house, and it will eat money forever - just in different ways.

If you buy a big expensive house, it is almost irrelevant if you have a 'mortgage' or not. A mortgage takes money out of current income, but having a big house, paid for, takes money out of your investment account as you don't get 'interest' on that money, and if your house is not appreciating, it is just a 'cost'.

First note you need a place to live - be it a moderate house, an apartment, cabin, or what have you. So there will be 'housing expenses' each month. You do you a lot of choice in how much house you buy.

You can't live on the equity in your house - (unless you sell it and move to less expensive place, in which case you recover some of the equity).

Too many people buy all the house they 'qualify for' - which is typically about 2.5 times their annual income. (make $200,000, can afford $500,000 house, or for the rest of us, make $50,000, afford $125,000 house)

A house will cost you roughly 10-15% of the value of the house to maintain (taxes, insurance, utilities, maintenence, etc).

If you have a $200,000 house, you are looking at $20,000 plus per year to maintain that house. At $500,000, it is $50,000/yr!......and that doesn't include mortgage or equivalent money cost.

However, if you have a mortgage (less us assume on entire amount at 7.5%), that is another $15,000/yr expense on a $200,000 house. ( would you believe $32,500/yr on a $500,000 mansion?)

If you don't have a mortgage, and had put that money into the market (or even a balanced portfolio 50/50), you would be getting 10-11% on that money. So if you didn't buy a $200,000 house, 'paid for', you would be getting $20,000/yr income from that money. Once your house is paid for, at $200,000 value, it is costing you lost income of $20,000/yr.

The choices people make at 25 or 30 or 35 have major impacts on their ability to RE. That 'all you can afford house', which also takes lots of new furniture to furnish, is eating cash which could have gone to savings.

You need a place to live - however, just like your choice in car, you can live below your means -
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Telegraph wrote If you have a $200,000 house, you are looking at $20,000 plus per year to maintain that house. At $500,000, it is $50,000/yr!......and that doesn't include mortgage or equivalent money cost.

I don't see that at all. We have a house now valued at over $500,000 and we don't spend anywhere near $50K per year to maintain it. Our property tax is around $5K per year and we have spent somewhere around $25K on improvements/maintenance over the last six years, much of that optional. Utilities are only a little higher than for a smaller apartment. If we had to put on a new roof, replace the furnace and get it painted inside and out all in one year, it would still be far, far less than $50K--and those are all the biggies.

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A house will cost you roughly 10-15% of the value of the house to
maintain (taxes, insurance, utilities, maintenence, etc).


How do you figure?

I think this is a big generalization--it depends where you live. Here, my property taxes are very low,utilities are pretty cheap (keep in mind you have to pay some utilities in a apt, too!).

I did a quick calculation and my maintenance costs are about 2500 per year (that's taxes, insurance, and utilities). Add another $3000 for maintenance (and that's on the very high side--real costs so far have probably been more like $2000 per year) and I am still at less than 5% of the total value of my house.

Just wondering what you are basing this 10-15% on. Maybe it's that high for someone in New England where taxes and utilities are high, but I think that's a very high estimate for someplace like the deep south, where I live.

Janet
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A house will cost you roughly 10-15% of the value of the house to maintain (taxes, insurance, utilities, maintenence, etc).

I just went back & looked at 1998 & 1999 & prorata 2000. My total housing expenses: mortgage interest, real estate taxes, gas, electric, garbage, snow removal, repairs, & everything else I could think of come to 4.5% of value.

TheBadger
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""A house will cost you roughly 10-15% of the value of the house to maintain (taxes, insurance, utilities, maintenence, etc). "

Glad you hear of your good experience...mine were good for first six or 8 yrs of home ownership. Now that deferred maintenence is kicking in.

Country folks will obviously have less expense...but suburban people who own a $200,000 house(that gets you 4-5 bedrooms, 3500 sq feet, tiny lot, 2 car garage), say in Dallas Suburbs, are looking at $5500-7500/yr taxes, $1400 insurance ($2000 deductible), yearly electric bills of over $2000, gas bills of $600-700, lawn maintenence of several hundred, water/sewer/garbage of $600/yr, then we throw in cable tv, phone service, of $65/mon, or $800/yr. Furnace maintenence/ac another $100/yr. Pool chemicals another $300/yr. Fence costs $500 every three years to get stained/preserved. Pest control another $100-300/yr. (nasty termites).

If you are real handy, you can save some on painting and other repairs...otherwise they are going to happen...first ten years is relatively trouble free, but after that things go bad more often. Refrig, garbage disposal, washer/dryer, range, microwave,etc.

You will replace the roof here every ten years, and insurance will not cover all, even if it is damaged by hail (happens a lot). . You will need to repaint outside every ten years....the a/c units (3 in $200,000 house) will die about every ten years at $1500-2000 a pop. Plumbing goes bad, appliances die, furnaces go bad, swimming pools eat money (and over half the houses here have them), pumps wear out, etc.

I would still suggest you need to have a good buffer in your budget for repairs/depreciation. NOthing might happen for several years, then everything go to heck in a hurry. Last year I replaced an AC unit, paid for a plumbing repair, but a new roof on the house (hail damage), paid for fence repainting (not covered by insurance), had lawn sprinkler repairs. Had furnace repair - bad year - but they happen.

Same with car.....you need to budget many thousands of dollars in depreciation/maintence....that new $20,000 car is depreciating thousands a year - and if you don't allocate something for replacement, when you need to replace it, it could be a big hit against your portfolio.


OK folks, what do you think the right number is for the upkeep/maintence of a house, percent wise? Same for a car...

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I live in a townhome, it's twenty years old. The roof is currently being replaced. Luckily the previous boards were deligent, the portion of the association dues allocated are enough to cover the roofing contract.

My housing maintenance is running me roughly 2.5% per year, half of which is my association dues which does the drives, exterior painting, replaced the patio fencing with slumpstone walls etc. The other half I've kicked in. My property tax, California, is limited by a proposition passed many years ago. It's currently 1.25%. That varies greatly from suburb to suburb, in other states, and should be checked before buying. If the community does not have businesses, non-retail, the property tax can be horrible.

So I'll forward 3%-5% (3% maintenance plus property tax), not including the interest/mortgage. Such a rate coincidentally, corresponds to the 30 year depreciation class of a single family home used as a rental. I have a feeling the Gov. actually has it right since it is real property, doesn't become obsolete, and has been a staple of business for as long as they've been taking taxes.

It doesn't include any of the other sundries like Cable, Sewer, etc, since many of those you get socked with even as a renter.

-Donut





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Seattle Pioneer: <<Penalty box - dkulkis.
>> (quoting me)

Perhaps you can explain the purpose of this kind of post. If you can't stand to listen to the opinions of someone else, use the tools available to shut your ears.

But why post someone's name? That strikes me as ill mannered and very rude behavior.


Can't stand to hear other opinions? Wrong diagnosis. I enjoy listening to various opinions, including those with which I disagree. You should meet the group I meet weekly for a political opposites breakfast!

Seattle Pioneer, I agree with a lot of what you post, and disagree with a lot as well. But while I find your posts frequently "politically incorrect" (including many I agree with), I don't recall that they have been very obviously and deliberately insulting to other authors who were posting their thoughts about early retirement. (Or about other topics, as we do wander off on occasion.)

But some folks feel like they can overcome logic and thoughtful dialogue with insults and the online version of shouting -- this author was simply the straw that broke my camel's back. But if s/he chooses to join a forum and make the initial (and only) post such a rude and ill mannered one, then I do not feel compunctions about naming the screen name of the poster.

I was sick and tired of an increasing number of insulting responses to the post by hocus, and to other conversational posts here.

So I used the penalty box for the first time ever -- and hoped by saying so to tone down the level of emotion on what ought to be a calm logical discussion about early retirement strategies.


Dory36
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<<OK folks, what do you think the right number is for the upkeep/maintence of a house, percent wise? >>


Didn't you know that all houses come with a LIFETIME guarantee?


The only problem is, the guarantee is, "If it's not one thing, it's another."


Another theory of mine is that the function of a house is to absorb all the owner's spare time and money.


Fit that into your budget!


Seattle Pioneer
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"It is incorrect to correct the manners of another adult."

I'll make a note of that one, so I can correct any adults I encounter if they haven't learned.

;-)
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Penalty box - dkulkis.

Ooops...sorry about the harsh language by which I earned the penalty box (read the fool posting rules this morning. Bad me...) BUT, I stand by my point, which is that he whom I was replying to deserves not just the penalty box, but and ejection! for making me waste my time reading his babbling while he blatantly ignores THE most important aspect of retirment savings - Compounding earnings on savings!! I mean...DUHH!!

So - apologize for harsh words...I'll probably get slammed for this post, too...but REALLY now...I thought this web site would have more educated people. The REALLY bad thing, I linked to that ridiculous post out of the Fool newsletter that came in my email!! THAT makes it look like Fool promotes such nonsense - I find that VERY disturbing, and it frankly lowers my opinion of Fool if they can include links in their newsletters that they haven't even read - which they couldn't have or else they never would have included that posting as a link, because it was so blatantly wrong.
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Country folks will obviously have less expense...but suburban people who own a $200,000 house(that gets you 4-5 bedrooms, 3500 sq feet, tiny lot, 2 car garage), say in Dallas Suburbs, are looking at $5500-7500/yr taxes, $1400 insurance ($2000 deductible), yearly electric bills of over $2000, gas bills of $600-700, lawn maintenence of several hundred, water/sewer/garbage of $600/yr, then we throw in cable tv, phone service, of $65/mon, or $800/yr. Furnace maintenence/ac another $100/yr. Pool chemicals another $300/yr. Fence costs $500 every three years to get stained/preserved. Pest control another $100-300/yr. (nasty termites).

It's amazing how things vary. Here's my rough numbers:

$125,000 house (4 bedrooms, 1500 sqft, average lot, 2 car garage)

Annual expenses:

$1200/year property taxes
$222/year insurance ($500 or $1000 deductible)
$2064/year utilities (electric, gas, water, sewer, trash, phone)
$50/year lawn upkeep (gas for mower and trimmer, new spark plug and blade sharpened once/year)
$0/year cable (don't have it -- no TV)
$0/year furnace maintenance/ac (wash furnace filters 4x/year, wash ac unit off with hose once/year)
$0/year pool expenses (don't have one)
$0/year fence expenses (don't stain it)
$0/year pest control (no termites)

So excluding utilities, which I don't consider a maintenance item personally, I spend $1472 per year on my $125,000 house, which looks to me like a shade over 1 percent. Including utilities would push it to just under 3%.

I do agree with you about the longer term maintenance items such as roofs and major repairs/replacements, but I still think those wouldn't bring the average up that much on a yearly basis. A new roof around here probably runs $3000 or so for my size house, so if I replace that every ten years that adds $300 pear year. Repainting is probably a $500 job every five years (I'll paint it myself, just need some rollers and paint, and yes, I've painted the exterior of a large house before), so there's another $100 per year. I have one A/C unit, and the compressor on that is about $1000 to replace, so if that's every 10 years there's another $100 per year. I fortunately haven't had many plumbing, appliance, or furnace problems, but say that's another $500 per year. So I'd need to add another $1000 per year, which would put me at about an annual 4% cost.

As for cars, I do depreciate them according to KBB values, and you're right about the car replacement issue, I think, as my car is depreciating at about a 10% clip annually right now. I'm mainly depreciating them to get a more accurate net worth picture, but the replacement issue is one on my list of things to figure out. Right now we don't plan on buying a new car until about 2010, so I've got a bit to think about it.

--malakito.
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My housing exepnses are similarly in the 4% per year range (see my earlier post) & I suspect that typical suburban / rural exepnses are in the 4% to 5% per year range.

This, then (and I do not really intend to reopen this battle) would bode well for owning over renting. With owning running in the 4% range and renting typically runs in the 8% to 12% range for comparable hosuing, there is no way renting can be more cost effective; even taking into account the investment of capital issue.

TheBadger
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My housing exepnses are similarly in the 4% per year range (see my earlier post) & I suspect that typical suburban / rural exepnses are in the 4% to 5% per year range.

This, then (and I do not really intend to reopen this battle) would bode well for owning over renting. With owning running in the 4% range and renting typically runs in the 8% to 12% range for comparable hosuing, there is no way renting can be more cost effective; even taking into account the investment of capital issue.

TheBadger


My conclusion is that my house is a relatively poor investment. My house goes up in value by maybe 5% a year (around here), and costs me 4% in upkeep. My stocks go up in value by maybe 25% a year, and cost me 0.1% in upkeep. Hmmm, let me think about that some more.... :-)

--malakito.
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Our property tax is around $5K per year and we have spent somewhere around $25K on improvements/maintenance over the last six years, much of that optional. -fleg9b0

Our house payments, taxes, and insurance on a 1700 square foot house and ten acres of land, all wooded, are $609.00/month! I put a new roof on our house about 6 years ago that cost me $1,200. One of my neighbors is a roofer and he did it for me.
- Art Living in the hills of East Tennessee and loving every minute of it.
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but suburban people who own a $200,000 house(that gets you 4-5 bedrooms, 3500 sq feet, tiny lot, 2 car garage), say in Dallas Suburbs, are looking at $5500-7500/yr taxes, $1400 insurance ($2000 deductible), yearly electric bills of over $2000, gas bills of $600-700, lawn maintenence of several hundred, water/sewer/garbage of $600/yr, then we throw in cable tv, phone service, of $65/mon, or $800/yr. Furnace maintenence/ac another $100/yr. Pool chemicals another $300/yr. Fence costs $500 every three years to get stained/preserved. Pest control another $100-300/yr. (nasty termites). - telegraph

This reminds me of something I've thought about. Kids today when they first get married grow up in these big fancy houses and they think this is normal and that they have to have one right off the bat. What they don't know is that their parents probably started off in a little white frame house in a lower middle class neighborhood and worked their way up to the mega mansion mentioned above. They don't remember the cheap little frame starter home that their parents bought and were so proud of. - Art

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"It is incorrect to correct the manners of another adult."

I'll make a note of that one, so I can correct any adults I encounter if they haven't learned.

;-)


I had a little Chinese friend, a 50 year old woman, who was FOB (Fresh Off the Boat) that worked in the lab next to mine. We were good friends and I really missed her when she moved away. She used to like to practice her English on me during lunch. She would also talk to me with her mouth open and full of rice. I couldn't take it anymore and actually told her that in this country people traditionally didn't talk with mouth full of food. She didn't seem offended that I had told her that. She also used to put this purple stuff all over her lips when she got a cold sore and I told her that you could buy a clear cold sore lotion at the pharmacy. She never appeared in the lab again with her lips painted purple! She really was a lot of fun. I did teach her about 401K's, IRA's, and 403B's and she and her husband seemed real grateful for that! They immediately opened up a retirement account. - Art
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areichert wrote:
I had a little Chinese friend, a 50 year old woman, who was FOB ... She really was a lot of fun. I did teach her about 401K's, IRA's, and 403B's and she and her husband seemed real grateful for that! They immediately opened up a retirement account

The immigrant perspective on this is that it is always easier to accept correction when you couldn't have been reasonably expected to know something. "We did it differently in the Old Country" always explains what one does, and "How do you do it here?" always opens one to new opinions.

So, maybe if we all treated every conversation as if we were in a new country, we'd have fewer flame wars and more learning?

-Ron
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My conclusion is that my house is a relatively poor investment. My house goes up in value by maybe 5% a year (around here), and costs me 4% in upkeep. My stocks go up in value by maybe 25% a year, and cost me 0.1% in upkeep. Hmmm, let me think about that some more.... :-)

But the house keeps you warm in the winter, cool in the summer, and dry in the rain. Can your stocks do that ?

The answer is YES if you have enough stocks :-) If a 4% withdrawal rate can pay your rent, or heck, pay for fancy hotels every night of the year, go for it :-))))))
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3500 sf house with swimming pool? (Let's NOT keep up with the Joneses, dear) There's your problem. As soon as you buy a house that size, you have to fill it with junk and heat it and cool it and maintain it and fix it and remodel it, an endless project and bottomless money pit. You don't own it, the house owns you. It eats your vacations and all your free time. I loved the old real estate TV commercial where the young couple is standing next to a old three-story Victorian and saying to the agent "we can't wait to move into that big old house" and then it cuts to a retirement-age lady saying "I can't wait until I can move out of that big, old, house." I know what she was thinking!
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"My conclusion is that my house is a relatively poor investment." - malakito

Maybe, but you have to put out money somewhere to keep a roof over your head and computer.

Earlier, regarding low owning expenses: "This, then (and I do not really intend to reopen this battle) would bode well for owning over renting." - TheBadger

Oh, it's already been discussed? I guess that was before I came on. Can someone point me to those threads, because I'm currently trying to decide whether I want to buy in the next year or two or continue renting indefinitely. I was about to start a new thread on the matter.

Thanks,
Jim
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""3500 sf house with swimming pool? (Let's NOT keep up with the Joneses, dear)"

This is a small "starter house" in new Dallas suburbs....you move up to 4500-5000 sq with 3 car garage, five bedrooms, three living areas, formal everything, tile, fancy kitchen and built ins, pool, spa, 10-12 foot ceilings, spectacular entry way, etc.

The 30 somethings with dual income over $140,000 combined think nothing of buying $250,000-300,000 of house - and lots of $400,000 houses to buy too! After all, they couldn't be seen living in a tiny house! Of course, they are terribly in debt, but heck, with their income, so what?



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""currently trying to decide whether I want to buy in the next year or two or continue renting indefinitely""

If you aren't sure, then you shouldn't be buying a house - it is a difficult to undo decision - and expensive if you make a mistake.

I would suggest that if you are sure you are staying in the area for at least five or more years, that you rethink things many times before committing.(unless if you get transferred you get good move package).

A house will take more money and effort over renting - you can literally lock the door on a rental and go away for 2 months - not so easy with a house.

However, if you decide to buy a house, then an even bigger decision is how much house to buy. Real estate agents will sell you all the house they can - they make more money, and have more bragging rights by selling more $$$ worth of property each year.

Big factors in your house decision would include neighborhood (new, old, improving, declining?), size of your house compared to others in area, schools - even if you don't have kids - features in house - current or not. Sooner or later you will have to sell, so when you sell, your house will be lots older - what will potential buyers think of it compared to tohers? (try selling a 2 or 3 bedroom home with one bath these days! - very tough!)

Bottom line - a house is an asset - which will hopefully appreciate over time. It takes $$$$$ to maintain it. Owning a paid for home is a very nice feeling when you reach early retirement age, and have sufficient resources not to have to tap your equity to live on. Don't 'overbuy' and wind up with big house and no savings.
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""currently trying to decide whether I want to buy in the next year or two or continue renting indefinitely""


I go away for a few months to come back to one of my favorite topics, rent vs. buy. God life is good sometimes. If you search the archives you can read more technical analysis on this topic than you can shake a stick at so I'll focus elsewhere.

If you are not sure if you want to buy, then don't. While I will say the home ownership will work out pretty good for most, there are other options. If you save foolishly and invest, in the end it probably won't matter whether you rent or buy.

I believe the main reason I will be able to retire early one day is because I have kept my money in the market and not real estate.

For those with no investing savvy, a house is great because it is usually there only method of forced savings. For the enlightened few like everyone in the fooldom, spread sheets can be run umpteen different ways to create a scenario where renting or buying wins.

So go with your lifestyle, me I am lazy when it comes to chores and I much prefer the convenience and no hassles of renting. If you're gonna rent just don't rent the most expensive place you can afford just like you shouldn't buy the most expensive house you can afford.

Boy that was a lot of wind, to say, do what feels right and you will be OK either way.

Fishin
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Malakito proposed a good rule of thumb for "after tax after housing excluding kids' college middle class basic retirement living expenses" is about $25K. Of course it's not a very catchy description, so it may never catch on.

I'd ammend that to "excluding taxes, housing, college, and debt". 25K+THCD might be short enough for a slogan.


Ad Sach - who is fine with THC and whose DW is paying down D
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BigMoneyJim writes:
Oh, it's already been discussed? I guess that was before I came on. Can someone point me to those threads, because I'm currently trying to decide whether I want to buy in the next year or two or continue renting indefinitely. I was about to start a new thread on the matter.

Here is an excellent RE thread from April on the subject of owning vs. renting:
http://boards.fool.com/Message.asp?mid=12327031&sort=threaded

The above thread outlines a methodology anyone can use to determine if it is financially better to own or rent his or her home (shelter). Tax consequences (benefits of mortgage) are briefly touched on, but not in great detail.

The reason for the lack of in depth analysis of tax benefits may be found in this thread:
http://boards.fool.com/Message.asp?mid=12368038&sort=threaded

Bottom line from the tax thread: I expect (and give solid analysis via real world examples to prove) that taxes will be dramatically lower on my (most?) early retirees income. Therefor, the tax benefit of having a mortgage is commensurately reduced, even to the point where it may be ignored.

Enjoy!

PtSurMr
Who is John Galt?
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"""3500 sf house with swimming pool? (Let's NOT keep up with the Joneses, dear)"

This is a small "starter house" in new Dallas suburbs....you move up to 4500-5000 sq with 3 car garage, five bedrooms, three living areas, formal everything, tile, fancy kitchen and built ins, pool, spa, 10-12 foot ceilings, spectacular entry way, etc.

The 30 somethings with dual income over $140,000 combined think nothing of buying $250,000-300,000 of house - and lots of $400,000 houses to buy too! After all, they couldn't be seen living in a tiny house! Of course, they are terribly in debt, but heck, with their income, so what? "

Wow. I live in Connecticut where you can get a 2 bedroom CONDO for $250,000. Of course, that's nothing compared to Silicon Valley and San Fran where I hear you can get a 2 bedroom 1 bath CLOSET for $1M.

blissduran
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The numbers in this post are meaningless. They assume no "real" returns during 45 years of savings.

They reflect someone saving for 45 years in a no inflation environment by putting money in the mattress.
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"3500 sf house with swimming pool? (Let's NOT keep up with the Joneses, dear)"

This is a small "starter house" in new Dallas suburbs....you move up to 4500-5000 sq with 3 car garage, five bedrooms, three living areas, formal everything, tile, fancy kitchen and built ins, pool, spa, 10-12 foot ceilings, spectacular entry way, etc.



When my family lived in a 1200sf home in Oakland, Ca on a 3200 sf lot it actually had more living area than our current 2200 sf home in Scottsdale, AZ.

Most of the year in California I lived indoor/outdoor on the 3200 sf lot. Most of the year in Arizona I live in 2200 sf of house. 4 big rooms with 15ft ceilings doesn't seem like a luxury when the other choice is to get in your car and drive to somewhere indoors.


Ad Sach - who sometimes wishes everyone who moved to California after 1960 would leave so he could go back there to live

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Ad Sach complained: Most of the year in California I lived indoor/outdoor on the 3200 sf lot. Most of the year in Arizona I live in 2200 sf of house. 4 big rooms with 15ft ceilings doesn't seem like a luxury when the other choice is to get in your car and drive to somewhere indoors.


You can have all of Arizona to live in if you will just give up air conditioning and acclimate to the heat.

I lived in Tempe. I know. I've also lived in Las Vegas and remember noticing "It's cooler today" when the temperature came down from 114 to 109.

The only trouble I had was at one job where the boss insisted on keeping the air conditioning cranked down to 60 degrees. This was quite refreshing when I came in from the survey crew, where we couldn't survey after noon because of the heat waves. However, the boss made me stay in the office for three weeks and I lost my heat tolerance. It took me about two weeks to re-acclimate to the heat. Drink lots of water and stay in the shade while acclimating.

Vickifool -- who did refuse to move back to hot climates after living in Oakland for a while.
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Amen. The original article completely disregarded the effect of compounding interest, the very reason we INVEST instead of merely SAVE (bank account, CDs, mattress, etc.) Let me see...if I invest (save?)$33,000 a year for 30 years, I should almost be a millionaire.

Hellooo?
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I prefer the scott adams advice more than 25 words but less than a page

http://boards.fool.com/Message.asp?mid=20213892
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