As an example, to live off $35k/year in SF as a single person (which would be considered modest in tech circles), you'd need to earn $175k/year.
With a family, this gets more unrealistic. Living off $100k/year (combined) would require earning something like $500k/year.
I think many people in this thread need to consider if that really is the game they want to be playing. I'd think people would be better off maximizing their total happiness. There's research showing that having good memories from the past positively affects momentary happiness in the present [1]. With that in mind, it seems like spending money on great experiences now is a good idea, while excessive saving could be counter productive.
[1]: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%...
MMM/ERE [1][2] are not about maximizing money at all. They are about obtaining only a sufficient level of capital, so that they are no longer obligated to work for income to continue living happily. The numerical value of "sufficient" gets lower as your expenses decrease.
>I'd think people would be better off maximizing their total happiness.
Based on your comments, to you, happiness comes from experiences which require money, which is perfectly fine. Therefore, MMM and ERE are not for you, which again is perfectly fine.
For others who find happiness in experiences requiring little to no funds, MMM/ERE is an exceptional strategy. I would love to spend my days coding, studying chess, reading books, cooking, mentoring youth, and spending time with the small group of people I am close with (I'm rather introverted).
I knew a guy who wanted to get into freelancing but wouldn't do it because his expenses were too high.
There's happiness, but there's also planning and self control.
I'm on track to retire in my thirties, or earlier, here in North Carolina. Not hard at all on a mechanical engineer salary.
It all depends on what you define as 'comfortably' and how well you are able to control your spending on things you don't strictly need. That way you can build up some capital, make that work for you and relax your spending constraints when you are making more money passively.
not adjusting your employee's wages based on their work location, which company is that delusional?
it is about fairness among workers. there should be no penalty for living close to the HQ or major office hubs, which practically always are in high-cost areas.
counter-example being SAP with Waldorf, but that is ending its lifespan for the inverse reason (no one sane wants to move there).
Granted, Heath issues, dependents, or debt can make this a non starter. But, just because most people you work with spend most of what they make every month means you need to do the same.
100k / (1 - (0.28[1] + 0.093[2])) = 159,489.
Plus if you retire, you're going to be managing your own health insurance, so the required living expenses number increases, probably by thousands of dollars a year. And it's not like you can flip from a frugal living style to a more flagrant one afterward, so you're going to have to live with room mates for the rest of your life, and never eat out, still.
[1] http://federal-tax-brackets.net/2014-federal-tax-brackets.ht...
More importantly the goal is not necessarily full retirement. Plenty of things are entertaining and make some money. Perhaps you only make 5k/year as a writer or painter well on its own that might not mean much but it can easily boost your nest egg over the next 20 years. Or perhaps teach a class at the local collage or even some of those short training classes. Not to mention long shot’s like trying your hand at acting.
PS: Your expenses often rise as you age but even just working 10 years entitles you to some Social Security benefits.
How about C) Move to a different state? If the goal is to do this in California, then yes, it's probably not possible.
This would maybe make sense in the 1990s or early 2000s but it's 2014!
ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.
If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.
Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.
> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.
This is exactly what scares me about it. It's frothy as hell.
So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.
>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion
Let's see:
1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).
2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)
3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)
4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.
5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).
So far the path has been identical. Hell, we've even gotten plummeting birth rates too.
>forecasting three decades of economic stagnation is just silly.
I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.
Forecasting safe 5% returns is bullshit, anyway.
If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, so if some years are bad (or really bad) you need to eat into the capital. If these happens for too many years in a row, the capital could be reduced enough that you need to get higher earnings to counterbalance that.
I'm not a finance expert so feel free to show me the fallacies of my reasoning!
Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.
Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.
Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".
Yes, that is true. But how is the bond price relevant, from the Fed's perspective, if they aren't selling the bonds?
And re 5% I have several IT (investment companies) with returns of over 10% pa for the last decade
1999 - 2009 negative real return. Imagine you're the happy dude who retired in 1999 with a family after working for 10 years and diligently saving. Now in 2009 you need to send your kids to school... We also were on the brink of real depression, if that scenario played out you'd be completely wiped.
So basically you need a large buffer than you think you do to account for volatility and rare "tail" events.
If I could earn 5% after inflation without risk I could retire today (well, I'd be retired many years ago, if that's what I want to do). The problem is that's simply not possible. If you have a family you can't take the risk of putting all your money in stocks as there can be periods of well over a decade where the real return is negative and you'll run out of money. You need a lot more buffer.
Unless you earn 3X the median in your area, living on 35% of your salary means living with below average expenses. Whatever your salary, you will probably think normal is normal for your peer group which usually is closer to whatever you earn than median so even if you earn much more than median you will probably be required to be abnormal. Being abnormal is hard to decide.
However you achieve this, it will probably require you to make lifestyle changes that most people like you consider unacceptable. Move someplace cheap. Start a commune in an old mansion with 6 other families/couples. Live in a cabin. Squat. :) Live with your parents. Don't own a car.
Whatever the specific setup, spending 25-35% of your salary is unlikely to be a moderately different from the norm in your peer group. But, also not impossible.
Consider:
(a) Students, broke artists, unemployed and lots of other people do live on very low incomes. It's possible. If you earn the median, then 10-20% of people in your area live on 35% of what you do. Matt mentioned 14k p/a as a grad student.
(b) This is the "find a way" scenario like a startup. Startups may require you to deal with ungodly stress work, 100 hour weeks and do "impossible" things. If retiring within 10 years is valuable to you, it might be worth it.
And in any case, there's no sense giving up on the idea completely even if you can't hit the most aggressive savings rate; even if you only save 50% of your income, you can retire after 17 years, which puts you on track to retire in your early 40s instead of your late 60s. Even better, as you progress through your career, your salary will likely increase, but your spending doesn't have to match. 50% of your salary right out of college may only be 25% of your salary later on.
This did a couple of things... it kept a lid on living expenses because there was no additional cash, but it also provided an easy way for me to raise my savings every year without having to make too many conscious choices, just by moving every pay raise into savings.
NB I neither agree nor disagree with his ideas (still have to decide.. :))
[1] http://www.mrmoneymustache.com/2011/09/28/get-rich-with-movi... [2] http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-c...
Median incomes are 75% higher in the high cost area, but housing costs are 200-400% higher, which, being a major expense for just about everyone, quickly erodes any gains you might make on the income side. Services, like internet connections, were also more expensive in the high cost area. Goods like iPhones are the same in both places, you are right, but is actually a larger portion of your disposable income because of the higher living costs.
The one place you might be able to make gains in the high cost area is if you struggle through paying those 400% higher housing costs with the intent of selling your home and moving to a low cost area later in life. Then you can ride that significant equity you have built, assuming the property maintains or increases in value.
That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).
yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)
I'm thinking about this right in these days, as I'm living and working in a quite rich but expensive country (Luxembourg) where real estate prices (rent&purchase) have grown a lot in the past years, and are still growing (two digits increase of prices yty), while you have surrounding border areas (Belgium, France, Germany) that are way cheaper (half or even less per square meter) but are located 30-40km away with really congested roads or slow public lines (at least 45min per trip, easy to become 1-2hours in case of accidents or traffic jams)
Since it seems that English isn't your first language, I thought I'd point out that "telecommuting" means you work from home, and "commuting" means that you travel a long distance to get to work. So, there are no costs or time lost when telecommuting, because you don't have to go anywhere.
The commenter you're replying to is saying he works from home in a low cost area, but works for a company in a high cost area (possibly hundreds or thousands of kilometers away).
You can always move to the low-cost area when you are ready to stop working.
At least, in the US this assumption is not valid any longer. There is no risk-free investment that can earn you 5% after inflation annually.
You might as well say:
TL:DR; Move out into the forest and live off the land and you retire today!
Come on, man. 35% of AFTER TAX income? I make good money and I'd have to live like a homeeless man for 10 years in order to do that. While working as hard as I do. That's absurd.
You need sacrifices to get a reward.
Netflix/Cable TV --> reading a book (from the library) or HN. Starbucks --> broaden your horizons and explore the world of "grind your own." Eating out more than once a week --> eating out once a week, and preparing healthy meals the rest. Sometimes having your friends over for dinner. Gym membership --> enjoy looking for new kettlebell and bodyweight exercises that you can do at home. Go for walks with your wife in the evenings, or incorporate walking/exercise into your weekly date.
I'll admit that overseas travel is one area where I still overspend, so this would fall into the "sacrifice" category if I were to cut back. Even so, the skills in frugality that you learn while working your day job are useful on overseas trips. Haggling while jostling with old ladies at a wet market (in a language you don't understand) in order to buy ingredients for breakfast and a packed lunch is an experience that many travelers will miss out on.
(full disclosure: last holiday was a "relax by the hotel pool/private beach" affair. But even then we had a trip to the supermarket to buy some beer, fruit and snacks instead of pay hotel rates).
Anyway, it's not something that happens over night, rather a skillset you work on like any other. You find your own level of "sacrifice," your own groove, that you're comfortable with. Mr Money Mustache is just one guy but there are plenty of people who have entire sites dedicated to the movement who can talk about this idea of "sacrifice" better than I can.
So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.