Expand it by 100 and you would be already retired before you would were even born!
I guess the point of the advice is to be realistic.
>The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".
Well, lots of people have started companies or saved themselves from starvation by maxing a credit card.
EDIT: "Almost anyone on Hacker News". Yes, 20% would be significantly harder on minimum wage.
Say I make $100k gross per year. That's a very nice salary for a new grad engineer -- the kind of person who might take this ten-year-retirement advice to heart. Roughly 1/3 of that income goes to taxes, so I'm actually taking home $66k per year. If I save 66% of that, I'm saving ~$44k per year. These numbers can shift a little depending on where you live, how you save, etc., but they're not going to change by a huge amount.
Multiply that $44k by 10 years, and you're not even at half a million dollars. That's not retirement money (unless perhaps your "retirement" is to continue to live off of $20k/year indefinitely and die young from eating too much ramen).
The other half of the equation is finding investments that return a reasonable yield without betting the farm on timeframes <= 10 years. In this market, that's nearly impossible. Your choices are stocks and bonds (which are fine, but are risky on anything less than a ten-year window), or investments that don't yield anything.
With 1 million, you could live off of $25000/yr, which is more than enough to live like a king if you do not have other debt payments.
You could rent a $1000/month apartment, pay for a $400/month car, eat $300/month in groceries, and still have thousands and thousands left over.
Not if you're depending on using that money in the next ten years. Or if you believe in inflation.
A 4% rate of return from an index fund is long-term average behavior, not instantaneous yield. Historically, depending on when you entered the market, a ten-year outlook could have led to anything from a huge gain to a huge loss. If you're the unlucky investor who started saving 66% of your income in the stock market in 1999, you'd still be putting off your retirement today.
Also, your definition of "king" is pretty context-dependent. I can assure you that 25k will not allow you to live like royalty in San Francisco. Or, say, if you have children. It's a difficult concept to grasp when you're in your 20s, but most people do tend to reproducing by the time they're in their 30s. Oops. There goes that 25k retirement...
Average return for S&P 500 from 1928 to 2012 is 11.3% [ source : http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... ]
Inflation rate averages about 3.2% [ source : http://inflationdata.com/Inflation/Inflation_Rate/Long_Term_... ]
11.26 - 3.2 = 8.1 % real return.
Long term investment in a diversified set of equities is a very good investment and is very likely to secure your future finances.
It's scary how many of you don't seem to know this. Did you all read the same book on investing and skip everything after the preface, or something?
Yeah. We aren't. This whole thread spawned because the claim was that you can retire in 10 years if you save 66% of your income.
I don't understand. Retiring after 10 years means you'll be retired for around 50 years, doesn't it?
It's why real-life retired people don't put their entire savings in the stock market. Retirement funds tend to have most of your money in fixed-rate securities by the time you actually quit working.
If you had enough money to live off for fifty years, the market taking a dump isn't going to wipe it out. Especially if you invested part of it before the market got high, and your total without accounting for dumps would have lasted seventy years.
This is interesting - I've shared this multiple times in other discussions like this, and a comment like yours is always the first response, that it seems low, questioning if I included dividends. If anything it might just underscore how our collective "societal" intuition might be a bit off in terms of long term retirement performance.
I think part of it is that people tend to contribute more to retirement when times are good, since they have the extra money, and contribute less when times are bad since they're just getting by. The problem is that the market tends to be high when times are good, and low when times are bad. So this will naturally depress performance for everyone. It's impossible to contribute a consistent amount every week/month without having a cash buffer (which would depress performance anyway).
Also, Firecalc is a good tool for running withdrawal strategies over historical data: http://www.firecalc.com/
It gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years. Obviously, though, there is no 60 year period starting in 1999 for which the data is fully known, so it has its limits and can be prone to overfitting. It does take inflation into account, by the way (by increasing your withdrawal correspondingly each year).
"[Firecalc] gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years."
Well, again, you're not likely to accumulate a $1M portfolio in a decade on a $100k salary without a nice helping of luck. And not for nothing: that 60-year period encompasses the largest bull market(s) in US stock history. Past performance definitely does not extrapolate in this case.
Marry someone with their own $25k/year and you'll be able to pay for plenty of college.
>Want to be ready for the day when you're old and paying for medical problems?
Insurance?
RETIRING in San Francisco would be a massive mistake. If you are retired why the hell are you living in a uber-expensive city. Location matters less when you don't have a job. Move up to Oregon.
Also if you decide to have children, that is a conscious decision you made to dump your millions down the toilet. I guess some people like kids enough to work an extra 30 years. I sure don't.
It's only "conservative" if you don't understand variance.
The risk isn't in the value of the average. The risk is in the variation around that average. Like I said: if you invested 66% of your net income in the stock market in 1999, you'd be a long way from retirement today.
And if you're tempted to keep arguing this point, you might want to take a moment to consider how I know this. (Hint: the reality of a great many investors trumps your theories of how the stock market works.)
Not all stocks offer dividends, and not all investors choose stocks with dividends (there are tax disadvantages to returning value via dividends rather than via appreciation of stock value.) Dividends offer a lower risk component of return, but typically in a diversified portfolio you can put some share of the portfolio in a lower-risk investment to have that lower-risk component.
So, for growth focused investors that aren't risk sensitive, dividends can be a negative feature, and for investors that are risk sensitive, they aren't essential as there are other ways to tune a portfolio around risk. This makes, at best, only a weakly positive net incentive, and more likely a negative net incentive, for firms to offer dividends.
More importantly when something bad happens you both have a cushion and a cheap lifestyle so it can last.
Actuarial tables show if you make it to age 40 you have a very high likelihood of making it to 80 or 90. Statistics show that the last decade of your life - thanks to health care needs or assisted living necessities - is often more expensive than any other decade of your life.
That's absolutely important to plan for in your 20's and 30's when you have the time (and energy) to make a difference.
You know that 50% or so of HN readers are not in the US, right? Some have to do with $300-$1000 a month (or less), with the same costs for food and costlier computers, clothes etc -- oh, and 3x the price of gas. And renting some small-ish appartment.
"Never borrow money" would include never having a mortgage, which would be a huge lost opportunity for many. Not to mention borrowing money to invest in oneself, start a business, etc.
Education depends heavily on return on investment; you'd want to carefully analyze how much more you'll make with that education, how long it'll take you to pay off the debt, etc. It can certainly make sense when attempting to bootstrap yourself if your alternative is no higher education at all, but if you're in a financial position where you have to borrow for tuition, you may well qualify for better options such as scholarships. If you're reasonably well off and borrowing to go to a higher-end school, that makes much less sense.
And yes, the savings -> years to retirement table came from a Mr. Money Mustache article: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... .
A lost opportunity? If you can afford a house easily buy one, if you cannot afford it a mortage is anything but a huge opportunity.
http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to...
http://www.jamesaltucher.com/2011/05/why-i-would-rather-shoo...
You have to live somewhere.
Seriously- if you didn't, buying a house would be a terrible investment! But you do, so the cost of owning a house needs to be compared to the cost of renting, instead of being discussed as a normal investment.
Emm, the linked articles get into exactly this.
Unless, of course, you can land an incredibly low interest rate on your mortgage and have something interesting to do with your capitol, like fund your business.
$250,000 invested now could be substantially more by retirement than the cost of the mortgage over its lifetime.
http://www.nytimes.com/interactive/business/buy-rent-calcula...
It all depends on your circumstances.
The other thing missing is to take calculated risks for higher returns. For example, if you see housing starting to recover, picking up a distressed rental is smart. Provided you know what you are doing.
I recall a while back someone posted here about picking up semi-abandoned apps that were generating some cash flow, sprucing them up and letting the revenue drip in. Again, this works if you know what you are doing, but won't work for average Joe.
It depends on how quickly you wish to generate wealth. Leverage (OPM, OPT) must be used wisely, but significantly speeds up the process.
Can you/someone please point to the maths behind this? It sounds to me there are some assumptions about returns on investments and inflation rates.
Basically the thought is that 20-25 years of living expenses will generate enough income for you to early retire on.
If you make 100k (post tax) with a 20% savings rate, you save 20k, and have living expenses of 80k. Ignoring future compound growth, for each year you work, you save 1/4 a year of living expenses.
If you go the other extreme, and have 66% savings rate, you save 66k, and have living expenses of 33k. With 33k living expenses you need 660k to retire. Each year of working you end up with 2 years of living expenses. Even ignoring the effect of investment growth before you retire, that is only 10 years of working.
Of course 20 years of savings maybe be too optimistic. The book is good and has more details.
Ignoring growth rates and inflation is also a huge simplification. E.g. 3% yearly growth doubles your money in about 24 years. So it may again be a factor bigger than two between the two scenarios above.
So if you have 25 years of living expenses and each year take out 1 year of living expenses, that is 4% of your money. If you earn ~4% a year then your account balance stays the same.
The 4% number matches the 4% rule: http://www.investopedia.com/terms/f/four-percent-rule.asp
Of course after the great recession now the common wisdom is that the 4% rule can't be trusted: http://online.wsj.com/article/SB1000142412788732416230457830...
Personally I think it would be foolish to plan on retiring with only 20 years of living expenses. However some people also plan on holding a part time job at least in early retirement.
Burning question: what to do when you have (education) debt? Do you put every spare dollar in repaying it or still inculcate a habit of saving 20%?
The savings rate still applies; it determines how fast you can pay off the debt. If you can reduce your spending and increase your savings rate, you'll pay off the debt that much faster, and the same principle applies once you've paid it off and started investing.
I'd caution that you should still keep a small cash reserve for emergencies, of course. Savings are liquid: student loans are not.
The general advice I got was that if the loan interest rate is less than 6%, you're better off investing the majority of your excess cash into something like an index fund since it theoretically will give you >6% gains.
However, I hate the stress, mental overhead, and risk involved in owing somebody money, so I decided to automatically save 10% of each paycheck (set up direct deposit to funnel 10% to a separate savings/investment account) and essentially contribute as much as possible after that to student loans.
I'm happy where I currently am - almost out of debt and with a non-trivial amount saved up. The key for me was automatically moving the first 10% to savings then setting an ambitious goal each month to put toward debt. Good luck!
I'm not one for biblical citations, but "the borrower is slave to the lender" always gets to me.
Furthermore, borrowing money for investment and selling equity in a business to investors are two very different things.
If putting $7,000 away for retirement right now nets you more by retirement age than the lifetime cost of a car loan, you should take the loan.
I have a friend who is 15 years older than me and very financially savvy. He grew up in India in a poor family and his father spent all his free time repairing their ancient clunker that kept breaking down. That memory is enough that he only buys new cars.
If I retired, I would just find another job or career to make stuff.
The important detail about increasing your savings rate: it also means decreasing your spending rate, and you can retire as soon as your savings generates income greater than your spending rate, not greater than your overall income.
Seriously, everybody talks about saving money, and everybody intellectually agrees it's a good thing, but next to nobody actually does it.
Which means, even if you're aiming for 20% of the little number, you're behaving smarter than the vast majority of your peers.
While you should of course do what you can to reduce taxes, that's so complicated it warrants completely independent dialogue.
"Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds."
Yeah, no. Mutual funds, even those by Vanguard, have high expense ratios, and there is absolutely no evidence that they outperform their equivalent index funds. Jack Bogle, founder and retired CEO of Vanguard, himself recommends index funds over mutual funds for this reason.
And, the idea of the target funds is that they become more conservative as you reach the target. The pure index funds do not. So they are basically index funds with portfolio rebalancing.
https://institutional.vanguard.com/VGApp/iip/site/institutio...
There's also the fact that not everyone's 401k is offered through Vanguard. For example, if you're stuck with Fidelity like I am, then you will definitely need to avoid their mutual funds and choose their index funds instead. (With 401k, you cannot pick a fund outside of the broker that manages it.)
Yes, it's slightly lower if you buy all the composing Vanguard index funds individually, but for an index card comment, I'd say it's good enough.
(Minor quibble: index funds can be mutual funds or ETFs)
* Pay attention to fees. Avoid actively managed funds.
http://www.forbes.com/sites/baldwin/2013/06/05/the-trouble-w...
That's one of the most important factors in your personal finances: not how much you make off your investments, not whether you max your 401k, but how much of your income you save and how much you spend. The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".