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 Post subject: Re: Saving Too Much ?
PostPosted: Thu Aug 16, 2012 7:54 pm 

Joined: Thu Aug 09, 2012 7:56 pm
Posts: 14
kombat wrote:
Someone who's in a hurry to retire at 35 is someone who is either lazy or hates their job.


I'm not lazy, nor do I hate my job. I love it.

I don't plan on retiring because I love it.

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 Post subject: Re: Saving Too Much ?
PostPosted: Mon Aug 20, 2012 12:18 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5217
kombat wrote:

Why should I take huge risks and "swing for the fences" when I can take the low-risk route that's been working well for me so far?

Someone who's in a hurry to retire at 35 is someone who is either lazy or hates their job. And the only way to retire so young is by taking big risks. Why not instead find a job you enjoy, and take the low-risk route to riches? It takes a few more years, but if you enjoy your job, who cares?


To each his own. When I was in my mid 20s, not too long after I got my first real job out of college, I realized that we could retire by the time I was about 40. (It actually turned out I had to work until 42 based on my assumptions.) So that sort of became the goal - to follow a plan so I could retire at 40. I knew nothing about withdrawal rates or anything like that and made very modest assumption of stock returns (~8%) and inflation (~5%).

I'm now 47 and still working. We will retire in about 3-4 years. We could retire now if we really wanted to. I don't hate my job. But I have other things I want to do with my time. Some of that time will be spent being incredibly lazy, some will be training for an Ironman maybe, but much will be spent doing research and/or learning about subjects that I've never had enough time for. So I disagree with your contention Kombat that someone who wants to retire early is lazy or hates their job.

I'd also point out that the process of pursuing a plan to retire early has had some additional benefits. The plan basically involved saving modestly but consistently and living modestly to keep expenses reasonable. We've never skimped and are not frugal, but also saw no need for things like cable TV and expensive cell phones...until recently...and now we have that kind of stuff as entertainment and probably still spend less than most people. We did take several trips around the world and otherwise lived well if modestly.

But the early saving meant we had quite a bit already before the internet boom of the 90s and it grew like mad even though it was not invested aggressively. We got way ahead of our plan and were both able to leave work for a while to complete advanced degrees and I was able to take some risks by accepting an executive position with a small company that grew quickly and rewarded me well. That was a tremendous experience both financially and professionally. I made a lot of money and I got to work directly with some very well-known/powerful people that led to some fantastic connections, should I ever need them. I took a big risk in taking the job but was in a position to do so because of the plan we had followed.

By 2005, just shy of my 40th birthday I left that job because I could, and I did not like the direction the firm was taking. We had enough according to or plan. Still no cable and just the minimal cell phone. I considered "retiring" at that point but knew I'd be bored since my wife had a few years before being able to retire with her government pension. I took another job in research in the engineering/science specialty I started in. I am still doing that and I like it. But we are definitely on track to hang it up for good in just a few years. A couple of years after starting this job we realized everything we are doing now is biding our time and earning gravy...so we have cable and smart phones now.

The point is, I don't think retiring early is just for people who hate their jobs and I think the lifestyle of preparing for it carries other benefits with almost no risk and minimal sacrifice.


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 Post subject: Re: Saving Too Much ?
PostPosted: Tue Aug 21, 2012 5:38 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1687
Location: Ottawa, Canada
DoingHomework wrote:
I don't think retiring early is just for people who hate their jobs and I think the lifestyle of preparing for it carries other benefits with almost no risk and minimal sacrifice.


Fair enough, I may have been guilty of indulging in a little hyperbole.

The math, however, is quite daunting. To retire at 35, with an expected mortality of 75, means you have 17 years (age 18 - 35) to earn enough money to support you for 40 years. That's without any higher education. If you attain a post-secondary degree, then that cuts the window down to 13 years (since you'd be in college from 18-22).

At age 35, you do not have the benefit of any government pension programs, so your income must come entirely from your investments.

A standard Safe Withdrawal Rate is 4%, but that provides a theoretical drawdown period of 30-35 years. You must make it last at least 40, so realistically, you can only withdraw about 3.5% per year. That means you need to accumulate about 25.5 times your income, in assets, in just 13 years.

If you were earning 0% return, then this is clearly impossible. Even if you lived off of literally nothing for your entire working career, you would only have 13 years' worth of income saved up. Of course, you have to pay income tax, so each year, you're actually only saving, say 75% of your income, meaning after 13 years of saving your entire take-home paycheque, you'd have 9.75 years' worth of income saved up.

The only way to accumulate 25.5 years' worth of income in 13 years is by earning a high rate of return. Specifically, you'd have to earn 13.1%, but that's in a zero-inflation environment. Assuming 2.5% inflation, you'd have to earn 15.6%.

In order to save up enough assets to retire at age 35, you'd have to save your entire after-tax income for your entire working career, and earn a 15.6% rate of return.

Of course, you have to live off some of your income. Let's say you're extremely frugal, and manage to save half your paycheques, living off the other half. Now you'd have to earn a 21.1% return, plus inflation, for a total return of 23.6%.

Do you really think you can earn 23.6% on your investments for 13 years in a row?

Of course not. That's impossible. Which is why the notion of retiring at 35 is a pipe dream unless you take huge risks and get extremely lucky. The math is clear.

I'm going to be honest. The reason I'm being so hard on Billy is not because the math is absurd. It is, but in truth it's not as absurd as I've portrayed here. I've ignored dual-income, no-kid households, inheritances, tax shelters, windfalls, pensions kicking in at 67, living frugally in retirement, and other mitigating factors. It still doesn't make it attainable to the everyman, but it's not completely impossible.

The reason I'm being so hard on Billy is because he's espousing the same brand of "Get Rich Quick" rhetoric that snake-oil MLM shysters use to play on peoples' avarice and indolence to entice them into schemes whose sole purpose is to exploit their naivete and separate them from their money. I despise such programs with a passion, and will shine a bright light on any cockroach that I suspect is trawling these forums for potential victims.


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 Post subject: Re: Saving Too Much ?
PostPosted: Tue Aug 21, 2012 8:41 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1562
Location: Seattle, WA
kombat wrote:
A standard Safe Withdrawal Rate is 4%, but that provides a theoretical drawdown period of 30-35 years. You must make it last at least 40, so realistically, you can only withdraw about 3.5% per year. That means you need to accumulate about 25.5 times your income, in assets, in just 13 years.


This is the flawed assumption in your calculations. You don't need to replace your income, you just need to cover your expenses.

If you are paying living off 50% of your income, then you only need to replace that 50% of your income (perhaps a little less due to lower taxes. Or a little more due to having to cover your own health insurance). Assuming for the sake of argument that those factors cancel each other out, you need to amass a portfolio of 14.3 times your income. That still requires a(n unlikely) 16% return on investment. However, if you can mange to live off of only 40% of your income, then the traditional, historical interest rate of 12% is enough.

There are a lot of (almost certainly flawed) assumptions in there, and I'm not saying it's the right path for everybody. But it is mathematically possible to do by pulling levers within one's control, and without achieving an unlikely return on your investments.


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 Post subject: Re: Saving Too Much ?
PostPosted: Tue Aug 21, 2012 9:28 am 
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Posts: 5217
kombat wrote:
The math, however, is quite daunting. To retire at 35, with an expected mortality of 75, means you have 17 years (age 18 - 35) to earn enough money to support you for 40 years. That's without any higher education. If you attain a post-secondary degree, then that cuts the window down to 13 years (since you'd be in college from 18-22).


Let me clarify a bit...

Our plan started after we were both out of college, had paid off the tiny loans we had ($3000 total, which seemed like a lot back then), both had good jobs, and were about 2-3 years into paying off a modest house that was also dirt cheap (We paid less than $80k and it's worth about $250-300k now with no mortgage). Plus, as you point out later, we were dual-income with no kids or plans for any. We also started with almost $60000 in savings already over 2 years so we had a good idea what was doable.

And the plan was to be able to retire, minimally, by a certain time which turned out to be about 2007. In other words, the original idea was to be able to cover our basic expenses and then work a little to pay for play and luxuries. Without doing the math I'd say that would be about $40,000 in today's dollars. That does not include taxes and investments. Our actual expense now are higher, but not by a factor of 2, and there are things in that number like cable, travel, and dining out that could be cut. I think $40,000 is still a decent target for a minimal retirement (for us). We would work just a little to pay for the extras like cable and travel. Obviously some people live on less, maybe a lot less, and some people would need quite a bit more. But the idea was not to have to sacrifice and we haven't.

I exclude taxes because, though we clearly pay a lot now, much of our savings was after tax, and we churned it to pay the taxes along the way so that our withdrawals will see very low taxes. Of course our retirement plans will be taxed but they will also grow for almost the first 20 years of retirement so that's more than a wash.

So basically, we need $40,000 a year for 40 years. We can take out 2.5% of the principal every year and it will last 40 years with certainty. If we got a return of 5% over that we'd need a little under $500000 and we had about 17 years to accumulate it according to the plan. That meant saving about $27000 per year assuming no growth (return). Between 2 people and including employer contributions to retirement plans, that was not at all unreasonable. It worked out to about a 30% savings rate in the beginning. We both worked in jobs where the employer contributed about 8% of income as a "match." (At the time we had defined benefit plans that we later were able to roll out into IRAs and, in my wife's case, keep the credit for.)

We got lucky with a couple of years of spectacular returns in the 90s and some advantageous changes to our pensions back then. But our plan did nominally succeed and get us to a good place where we had good options to retire or not. I think the key was long term consistency and having a plan. Luck has led to having considerably more than we need at this point but the original plan did not require luck.

kombat wrote:
A standard Safe Withdrawal Rate is 4%, but that provides a theoretical drawdown period of 30-35 years. You must make it last at least 40, so realistically, you can only withdraw about 3.5% per year. That means you need to accumulate about 25.5 times your income, in assets, in just 13 years.


I think a safe withdrawal rate for early retirees is closer to 3-3.5% depending on how early. In reality though it makes sense (at least for Americans) to follow a different withdrawal plan for tax efficiency and that's what we plan. I suspect you are familiar with this.

kombat wrote:
I'm going to be honest. The reason I'm being so hard on Billy is not because the math is absurd. It is, but in truth it's not as absurd as I've portrayed here. I've ignored dual-income, no-kid households, inheritances, tax shelters, windfalls, pensions kicking in at 67, living frugally in retirement, and other mitigating factors. It still doesn't make it attainable to the everyman, but it's not completely impossible.

The reason I'm being so hard on Billy is because he's espousing the same brand of "Get Rich Quick" rhetoric that snake-oil MLM shysters use to play on peoples' avarice and indolence to entice them into schemes whose sole purpose is to exploit their naivete and separate them from their money. I despise such programs with a passion, and will shine a bright light on any cockroach that I suspect is trawling these forums for potential victims.


Yes, I agree with what you say about Billy. And he still has not even addressed many of the Ferrari story.

My biggest peeve with the snake-oil MLM folks is that they always try to sell laziness (and sliminess). Our plan worked because we worked hard, put in the effort, worked the extra hours when necessary, did our own yardwork, bought reasonable cars, and so forth. People wanted to employ us because we made worthwhile contributions and benefited them. The whole idea of sitting on my duff being lazy and buying a ferrari does not even appeal to me. And I've met or worked with a few very powerful and wealthy people over the years and almost none of them drove fancy sports cars or wore expensive watches either. (Though a couple of them had their own private jets.)

And, where on the Forbes list of rich people are the MLM folks???


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 Post subject: Re: Saving Too Much ?
PostPosted: Tue Aug 21, 2012 10:19 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1687
Location: Ottawa, Canada
stannius wrote:
You don't need to replace your income, you just need to cover your expenses.


Of course, you're right, and I did attempt to permit myself a little leeway in admitting that I had ignored several mitigating factors. The point you raise would be one of them.

stannius wrote:
If you can mange to live off of only 40% of your income, then the traditional, historical interest rate of 12% is enough.


Not to nitpick, but the "historical interest rate" is nowhere near 12%. You're thinking of the rate of return. There is an enormous difference.

stannius wrote:
There are a lot of (almost certainly flawed) assumptions in there, and I'm not saying it's the right path for everybody. But it is mathematically possible to do by pulling levers within one's control, and without achieving an unlikely return on your investments.


Right. If you earn an unusually high income, and are able to live at an unusually low level of expenses, it can be done. If you earn $200,000/year, and are able to live off $18,000/year, then it can be done.

But I'm arguing that for the vast majority of the population, earning $48,000 and spending every last nickel (and then some), it is a hopelessly optimistic pipe dream.


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 Post subject: Re: Saving Too Much ?
PostPosted: Tue Aug 21, 2012 11:16 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1095
DoingHomework wrote:
Yes, I agree with what you say about Billy. And he still has not even addressed many of the Ferrari story.

My biggest peeve with the snake-oil MLM folks is that they always try to sell laziness (and sliminess). Our plan worked because we worked hard, put in the effort, worked the extra hours when necessary, did our own yardwork, bought reasonable cars, and so forth. People wanted to employ us because we made worthwhile contributions and benefited them. The whole idea of sitting on my duff being lazy and buying a ferrari does not even appeal to me. And I've met or worked with a few very powerful and wealthy people over the years and almost none of them drove fancy sports cars or wore expensive watches either. (Though a couple of them had their own private jets.)

And, where on the Forbes list of rich people are the MLM folks???

I think 'ol Billy is pitching his MLM stuff to the wrong crowd. The GRS folks are too sharp for all of that.


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 Post subject: Re: Saving Too Much ?
PostPosted: Tue Aug 21, 2012 1:11 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1562
Location: Seattle, WA
kombat wrote:
The reason I'm being so hard on Billy is because he's espousing the same brand of "Get Rich Quick" rhetoric that snake-oil MLM shysters use to play on peoples' avarice and indolence to entice them into schemes whose sole purpose is to exploit their naivete and separate them from their money. I despise such programs with a passion, and will shine a bright light on any cockroach that I suspect is trawling these forums for potential victims.


I now appreciate what you were trying to say in this paragraph. The OP said (s)he was on track to retire at age 55. That's an ambitious but not ludicrous goal. Billy Murphy tried to ratchet it up to 35. As you say, that requires saving a large fraction of your income, an unsustainable return on investment, or both. (Or a deus ex machina such as an inheritance, lottery win, sports/rock star career, selling an internet startup, etc.)

Anybody who is truly extreme enough to retire at 35 doesn't need your, my, or Billy Murphy's approval or advice to do so.


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 Post subject: Re: Saving Too Much ?
PostPosted: Wed Aug 22, 2012 9:54 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1569
Billy hasn't logged in since his last post on the 16th. I think Elvis has left the building.

Curiously enough, fortunecookie, who started a thread (called Another "get rich quick" or solid advice?) about Billy's site, hasn't been back since the 13th. Coincidence? I don't think so.


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 Post subject: Re: Saving Too Much ?
PostPosted: Wed Aug 22, 2012 11:28 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1562
Location: Seattle, WA
VinTek wrote:
Billy hasn't logged in since his last post on the 16th. I think Elvis has left the building.

Curiously enough, fortunecookie, who started a thread (called Another "get rich quick" or solid advice?) about Billy's site, hasn't been back since the 13th. Coincidence? I don't think so.


It's weird since the OP in that case is so negative. But I guess "there's no such thing as bad publicity."

Since this whole tangent has almost nothing to do with the original post of this thread, I wonder if a helpful moderator would be willing to split it? Or move the posts to that other shill thread?


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 Post subject: Re: Saving Too Much ?
PostPosted: Wed Aug 22, 2012 4:02 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1063
Location: Illinois
stannius wrote:
Since this whole tangent has almost nothing to do with the original post of this thread, I wonder if a helpful moderator would be willing to split it? Or move the posts to that other shill thread?

I would, but I don't seem to have the ability to split threads or move posts... I can move whole threads and delete posts.


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 Post subject: Re: Saving Too Much ?
PostPosted: Wed Sep 12, 2012 2:38 pm 

Joined: Mon Sep 10, 2012 2:44 pm
Posts: 17
If you have saved enough then stop. Just leave what you have saved alone. Saving isn't a burdon because it reduces stress. The more I have in my emergency fund the less I worry about work. More in my IRA means less worry about retirement.


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