Financial Samurai

Sam,

With all respect, those charts are completely bogus.

#1 you don’t consider inflation. So tell me how big is 29K 30 years later with a 2.25% inflation rate? the answer is not much! in fact 29K today at 2.25% only worth 15K in 30 years (roughly). so you can live with 15K a year? I bet you have a house and you can travel every 2 years with this salary, right?

#2 column “disposable income” should read “55% savings” because the 55% is link there

#3 where are coming all those “magical” raise of 10K, 15K, 20K within one year? after reading this post I have a feeling that everybody in the States can make over 100K simply by working roughly 10 years… But then I look at the average salary in the States on the internet and I see 43K for male working full time from wikipedia. You should tell wikipedia that they are completely wrong, right?

#4 Do you consider that people will live up to 85, 90 or maybe 95 years old? where is the saving for that? for health care ?

#5 What is the point of doing so many sacrifices so you don’t do much (don’t tell me you can buy a house with 30K, have kids and pay for college net per year with the current house price) just to stop working early? you must really hate your job (and then you will hate your life because there is nothing fun about it) to do so.

#6 even with a salary of 100K, you will make a poor life for 18 years just to… stop working and keeping the same miserable life. with 35K in your pocket (this is 100K – 23K in taxes = 77K – 55% of it (42K) you are left with 35K according to your table). If you want a house, you will eat more than 30% of your budget! You haven’t eat, have kids, had a car, saving for college, travel, enjoyed life! I rather work longer but being able to enjoy life everyday instead of being forced to minimalist all my life!

This is more a question than a point but who’s paying for the 401(k) in the states? this is coming from solely from the employer and it’s not part of your base salary (because I don’t see the saving related for the 401(k) in your calculation). How much can you get out of your 401(k) with only 18 years worked? I guess it’s not much, right?

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Denise @ The Single Saver Reply:
February 21st, 2012 at 6:57 am

Mike, I agree with your point regarding the unrealistic jumps in salary each year. Where I live, the average raise given each year is 2-4%. If you are really lucky you might get 5-6%, but that is rare. At 3%, and at a $50K annual salary (which is also rare), you only gain an extra $1500 as a raise. Yes, there are opportunities for promotion that might get you $5-$10K, but those usually only come around 2-3 times in a career. Maybe salaries are different our West, but here even Directors and VPs at large corporations are lucky if they make $150K a year.

However, whatever your salary, I agree with the concept of saving as much of it as you can. That makes retirement easier, rather it be in your 40s or 80s.

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Financial Samurai Reply:
February 23rd, 2012 at 8:04 am

Salaries are different out west because things are more expensive here. It’s part of the reason why having a blanket federal tax rate that goes after higher income earners is so penalizing.

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Financial Samurai Reply:
February 21st, 2012 at 7:58 am

See the section on kids and inflation. I’m not sure you are fully grasping the realities of inflation and its affect on savings/investment interest rates, wage increases, and real asset price growth.

In 10 years, will a 35 year old making $100,000 a year seem that unreasonable?

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Andi B. Reply:
February 21st, 2012 at 8:21 am

In 10 years, I think it still might. You’re assuming wages will keep up with inflation, which is usually not the case. I like the principle of what you’re discussing, but I have to agree that a consistent raise of what you show is unrealistic outside of a major metropolis.

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Financial Samurai Reply:
February 21st, 2012 at 8:39 am

A great blog post you can write can be about whether or not wages have kept up with inflation over the years, and by which education and wage segment. I think it would be a fascinating read that will bring a lot of traffic and interest!

Let me know your results!

CultOfMoney Reply:
February 21st, 2012 at 8:19 pm

According to a quick look at the US census page, income in real terms has increased by ~.1% per year for those with a bachelor and ~.5% for those with a masters and ~.25% with a professional degree. However all those gains were made in the 1990′s, all educational areas have lost in real terms for the last 10-13 years.

Thus the idea that income increases in excess of inflation is true for the 20 year period, but false for the most recent 10 year period.

The Genius Reply:
February 22nd, 2012 at 5:45 am

I think a lot of people are perfectly fine with $33,000 a year after tax, and not miserable. The chart is assuming no compound returns, which is very conservative.

If I was just the average person making the average salary, and didn’t have to work another day in the life past 40, I would be ECSTATIC to make $33,000 a year!

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Financial Samurai Reply:
February 22nd, 2012 at 9:19 am

It makes me happy when readers understand the basics. Makes me very happy!

That’s correct. The return on the NUT is just a bonus. I’m assuming no compound interest/investment return on the NUT to be consistent and conservative.

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Locust Reply:
February 23rd, 2012 at 7:01 am

I’m surprised that you don’t understand inflation and these charts if you truly are a financial planner?

There’s no assumption on compound growth in the charts, which is in line with deteriorating power of inflation on wages.

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The Financial Blogger Reply:
February 23rd, 2012 at 7:41 am

Hey Locust,

Financial planner takes inflation in consideration everywhere. This means that if you consider that your income will continuously grow, you are taking inflation in consideration. If you do at that point, you must include an investment return and an inflation rate on everything else. This is really basic. Then, you need to include taxes everywhere too. If you are savings in a non-registered account, you will pay taxes on your benefit. Therefore, a 4% yield is not 4% in your pocket. Then again, really basic concept in financial planning that were ignored here.

I’m surprised that nobody realized that those chart DON’T INCLUDE 401(k) savings. Therefore, at the age of 60, once you have been living on your savings for 20 years, YOU ARE LEFT WITH NOTHING BUT SSB.

So it’s pretty easy to draw those charts with income increasing all the time and only write that you have to simply take your 401(k) at the age of 60 to continue your great lifestyle. But it’s another thing to actually show the people how much will be in that 401(k) account at the age of 60 and how much you would be able to withdraw assuming you pass away at 85. Those charts only show you that if you save 55% of your income during 18 years and you have consistently a high raise, you will be able to live off your savings for 20 years. Then, you are left with nothing but SSB… wow, that sounds like an AMAZING retirement plan! Living poor all your life!

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Locust Reply:
February 24th, 2012 at 5:41 am

The point is, the charts are actually very realistic, and not “BS” at all as you state.

The raises might be due to inflation, but more realistically, the raises are due to promotions and a job well done. Raises are generally 1-3% if they are due to inflation. The assumptions in this chart are bigger jumps, like step functions.

The Financial Blogger Reply:
February 24th, 2012 at 6:12 am

Locust,
I have asked about 6 times to know how much money will be in the 401(k) to continue your retirement at the age of 60 because the chart doesn’t include $1/year saved in the account. So tell me where in this realistic chart that you will have money in your 401(k).

The chart shows a 55% savings that will be 100% used to live from 40 to 60. then, you are left with nothing. Realistic chart? yeah, you will save all your life, perform all the time in order to get promotions every 3 years or so to finish on welfare at the age of 60. Mind you, skip college and start you life on welfare right away, you will save 18 years of work for the same result.

Financial Samurai Reply:
February 24th, 2012 at 8:13 am

Mike – I don’t include the 401K contribution in the charts b/c it then gets too complicated and hairy. But, I hear what you are saying, and you’ve already read the post about what I recommend for my savings guide / 401K contribution guide.

If I had the ability to code a nice widget for people to play with their savings and income assumptions, I would. Based on my charts and assumptions above, they are tautologies.

The Genius Reply:
March 6th, 2012 at 8:12 pm

I’ve saved about 50% of my after tax income for 10 years, make about $250,000 a year and am hardly poor as you say. Instead, I’ve seven figures in the bank and live pretty carefree!

How much are you making? I’m assuming not as much and definitely not saving as much, otherwise you’d agree.

The Financial Blogger Reply:
February 28th, 2012 at 11:37 am

Sam,
if you do a complete chart representing your non-registered and 401(k) account and show the withdrawal until the age of 85 (this is a bare minimum, a realistic chart should stop at 90), you’ll see that your numbers don’t work. It’s not because it’s too complicated, it’s because the numbers you use don’t work. Or… it will translate in a whole life living like a homeless person. Look at your chart when someone makes 100K. They have left roughly 35K. If you take off 17K of this and you add back a 25% tax rebate, you get a net income of $22,250 or $1854 / month. Given the assumption that you need at least $700/month for rent (in a major city), you are left with $1,154 to live on. How can you save to enough money to build a down payment to buy a house? Remember, this is when you are already making 100K. This is not a small amount of money considering that the average income in the USA is at 43K. Take your time to build that chart and come back with your number and the result of a complete projection. You’ll see that it doesn’t work no matter how some people are enthusiastic about those charts in the comments. Who wouldn’t be enthusiastic when you tell them they can retire at the age of 40…. You can also tell them that they will marry both Angelina Jolie and Scarlett Johanson once they retire :-)

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Financial Samurai Reply:
February 28th, 2012 at 1:22 pm

Mike, $17k is pretax contribution.

Definitely build The chart and incorporate my figures and you will see it works. Should be easy for a financial planner like you :)

My wife and I are working on paying off our home first so we are diverting funds towards that at the moment. At our current rate it should be done in 22 months. If at that point we put the money that was going towards the house back towards our savings we’ll be at 60-65% savings rate.

I don’t think we will put it all towards savings and securities because we would like to purchase some rental properties to generate multiple revenue streams.

Additionally we are struggling with deciding how much to invest in retirement accounts vs standard brokerage accounts should we decide to exit the rat race early and want to access the funds.

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Financial Samurai Reply:
February 21st, 2012 at 8:05 am

Awesome Matt! saving 60-65% of your after tax income is HUGE! Every year you work is 1.2-1.3 years of living expenses you’ve saved. Keep it up, and have the optionality.

And if you want rental properties, know that it is a PITA, but will provide growing income for your lifetime.

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Matt Reply:
February 21st, 2012 at 8:37 am

To mitigate the PITA factor we will be paying cash for all investment personal properties. That way we can reach our desired amount with fewer properties/PITAs.

Hoping to mix in a vacation condo in Hawaii eventually to partially rent out then semi retire there when ready.

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Financial Samurai Reply:
February 21st, 2012 at 9:00 am

I think we’re talking different PITA factors. What I’m talking about is the pain of having tenants and finding tenants.

Matt Reply:
February 21st, 2012 at 9:21 am

“Financial Samurai Reply:
February 21st, 2012 at 9:00 am
I think we’re talking different PITA factors. What I’m talking about is the pain of having tenants and finding tenants.”

We’re on the same page. I am saying the cash flow from one paid for property might equal 6-8 financed properties. Therefore we reach our desired cash flow with fewer properties and I equate fewer properties with fewer tenant related pains.

The first thing that came to my mind was that one of the sacrifices that would have to be made to save that amount every year (at least for us) is having kids. Our savings will be done in reverse since we started having kids in our mid 20s (and started out with a lot of student loans). When I hit 50, our expenses will be minimal and our income should be in good shape. Not optimal money-wise, but it has been optimal for our family life.

I think that Jane would be insane to retire at 40 with that little amount saved. What is she using for health care by the way? Plus, who wants to retire so young if you can only afford to go to the library with all your extra time?

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Financial Samurai Reply:
February 21st, 2012 at 7:52 am

I definitely see your point. And it’s good your expenses will go way down when you hit 50. My fear is that what if I die by 50, then what? Then, nothing. There’s no retirement dream to live.

I decided best to sacrifice younger, while still enjoying life, to have the optionality, than to wait until later.

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Kris @ Everyday Tips Reply:
February 21st, 2012 at 8:50 am

But if you die by 50, then you sacrificed while you were young and never had the chance to enjoy your money.

If I die by 50, then my kids will be adults. They won’t get a huge inheritence, but that is ok.

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Kris @ Everyday Tips Reply:
February 21st, 2012 at 9:00 am

Going back to the part about children, we are somewhat the anomaly because of the whole private school thing. I can’t even imagine how many years earlier we could retire if we didn’t pay for private school and travel sports.

Even though inflation has been pretty stable, we are still losing money year over year because we have not had wage increases and health care premiums have also increased. If inflation does spike though and wages do not move similarly, then we are screwed.

Financial Samurai Reply:
February 21st, 2012 at 9:02 am

Yeah, private school must be painfully expensive. Public school, for life! :)

The good thing about a compression in cap/interest rates is that our real assets that produce income have SURGED. Take a $30,000 rental income stream and divide it by 2%, now yields $1.5 million in value vs just $750,000 when rates were at 4%.

I’m hoping that I can save around 50% each year. Hopefully living off on one income will greatly enable that.

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Financial Samurai Reply:
February 21st, 2012 at 9:03 pm

Yeah, definitely try it for at least a full year Michelle, and see if you can keep going after. Fast forward 10 years, and you’ll be so happy you did! Freedom is priceless.

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I think your scenario is great for the examples #2 + #3, but it sounds pretty painful if you’re the average Jane. For that scenario I feel like it’s sacrificing a bit too much earlier in life for later in life. But if your main goal is simply to retire then I can see it working.

I’m not so sure what’s realistic for myself, but I know I could be more than comfortable if I could be in a situation like #2. It’s still not an easy road, but the benefits are great if you can save that kind of money.

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Financial Samurai Reply:
February 21st, 2012 at 9:49 pm

Yep, it’s not going to be easy if you’re an Average Jane, but it’s doable, b/c I know people who are doing it and making it work.

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I think the only “excuse” is that some people have to pay for their education, so spend the first couple of years of working paying back their education.

Also, I personally have worked so hard for my education that I feel like I’ll have to work in the field for awhile – I don’t know what I’d have gone through it if I knew I would be retiring in 20 years any way, therefore my earning power wouldn’t be great.

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Financial Samurai Reply:
February 21st, 2012 at 7:53 am

I hear you on wanting to utilize your education. I don’t know how old you are, but that ideology faded for me after about 10 years of working, and 5 years after business school. Instead, the desire to work for myself has grown.

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Tails Reply:
April 12th, 2012 at 9:18 pm

Please research the concept of a sunk cost. The mental and material costs of your education have been expended and there is nothing that can be done to retrieve or “validate” them. Sunk costs have no place in determining future actions.

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If those don’t get anyone excited, I don’t know what will. Kris has a very good point about having children. Children have to be delayed if you’re to make these numbers work. And to TFB’s point, you didn’t include the cost of inflation, but you didn’t assume any growth whatsover in the principal amount, either.

There’s a simple lesson to be learned: save more, save early. In every scenario the saver could accumulate some $200k+ in savings in their 20s. Sacrifices are plenty, sure, but that comes with anything that requires performance more readily found in the outliers.

I’m shooting for that level of savings in my own life – 50% of my income, as well as out-sized returns on invested capital. I think I can quite reliably save 50% of what I earn, and generate at least 20% on capital for quite some time still. I think it can be argued that given the low interest rate environment, such (cash on cash) returns are available even in boring ol’ real estate. Low rates fuel alpha everywhere – the “security analyst” or active real estate investor will get rich in the next 5 years.

Obviously the tailwinds help, but I see no reason why any active investor cannot, at a minimum, generate 10% per year even in broader down cycles. If I keep the pace, I’ll join you in early “retirement.” I’d still want to work, though, at least as far as one considers active portfolio management work. Sounds more like recreation to me.

BTW – wages in the midwest’s bigger cities are actually very good on a wage/cost-of-living basis. Equity analyst positions, for example, are available in areas 15% lower than the US cost of living. I’m sure there’s a slew of positions I’m missing because I’ve never looked. Sales, for example, offers the opportunity of a lifetime for just about anyone who is good at it.

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Financial Samurai Reply:
February 21st, 2012 at 7:55 am

I’m glad you are excited JT, b/c at your age, this article is applicable 100000% to you! It’s up to you, from today forward whether you want this optionality or not.

It’s great you enjoy the midwest. I have a feeling only people from the midwest would rationally enjoy the midwest, since there are places such as Hawaii to choose from!

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i agree that the scenario is difficult / unrealistic for an “average” person who 1) gets married and 2) has kids. on top of that, very few “average” folks have the opportunity to only work 13 years and make a significant amount of money to be able to execute on your scenario.

Sam, i believe you are unmarried and don’t have kids correct? apologies if the assumption is wrong.

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Financial Samurai Reply:
February 21st, 2012 at 7:56 am

The article is focused on the individual, to be as apples to apples as possible. Once you start mixing all the other stuff, things get complicated.

Rely on ourselves, and if we so happen to have extra help, all the better.

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Tails Reply:
April 12th, 2012 at 9:26 pm

Being married creates economies of scale for most expenses, including housing, utilities, health insurance, and transportation. If I had a spouse/partner/roommate, my bills PER PERSON would be significantly reduced. Living alone is simply inefficient. FS’s use of individuals in the examples is actually conservative. Same with the kids. Additionally, tax credits will pay for food, clothes are cheap, and the increase in insurance from 1+1 to 1+family is marginal. One only must avoid giving their kids, and sometimes partners, credit cards.

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I think the Jane chart is the most realistic one for the average Joe. Add in a spouse and this is definitely achievable granted you’re very disciplined. You can magnify this if you take the 55% savings and put it in passive income opportunities. I’m not a fan of just saving tons of cash. I think that will also take care of the inflation argument a lot of your readers are making.

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Financial Samurai Reply:
February 21st, 2012 at 9:49 pm

Yep. I use the 2% risk free rate as a conservative example, and real example of passive income.

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Great Job, FS!! I was wondering if you believed in Early Retirement and it looks like you do! :) I’m glad to see you spreading the Word.

The point here is that it is possible and that many people are doing it already or working on it. We’ve done it and we have a kid. Our scenario probably falls between example #1 and #2, but for 2 people and the salary going up quicker near the beginning and only 10 years of work.

I think the word “retirement” sometimes throws people off as they imagine something rather mundane that requires a lot of money, but your “retirement” can be anything you want it to be. It will likely even include fun part-time work that bring in some supplementary income. The point is that you have the flexibility to stop working and you’re not dependent on the income anymore.

It’s unfortunate that there are so many doubters, but you’re right. If you save 55-75% of your income, then you’re set for an early retirement (regardless of how much you make). And, in fact, as income rises, if you keep your spending the same, your percentage of savings goes up every year.

It’s actually quite liberating to free yourself of the massive consumption going on all around us and to focus on what’s more important. Even more so after you have kids.

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Financial Samurai Reply:
February 21st, 2012 at 7:50 am

I definitely believe in it. In fact, I’ve strived for it ever since I graduated from college and went through those suppressive first two years! I just also believe there is a dark side to it.

It’s the optionality that I appreciate the most. To get up and go whenever.

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I definitely think it’s possible to retire early when you have a high savings rate. Mathematically, it makes sense but there’s a lot that could happen between now and then. Kids are definitely one unknown I haven’t factored into my plan but all we can do is save aggressively and stay flexible with the plan.

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Financial Samurai Reply:
February 21st, 2012 at 9:50 pm

Better to save aggressively and cross the unknown bridge when you come to it, rather than not save as much right?

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@JT

Don’t get too excited JT, those charts are completely wrong.
Where is the money used to finance the 401(k)?
You need to add inflation (and investment return) because compounding interest will make a huge difference at time of withdrawal
How do you save for your kids to go to college?
How to you pay for insurance at the age of 40 since you quit your job?
How can you successfully get a 6% income raise for 18 years in a row?

Sorry to tell you that but the math in this post is wrong and should not be used to plan retirement.

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JT Reply:
February 21st, 2012 at 2:46 pm

1) Anything you want.
2) Assume risk-free then you’re at even. Sam assumed zero real growth in the amount saved from year 1 to retirement. That’s a pretty important point.
3) No kids.
4) Canada! Really, you have me there – don’t know.
5) 1.06^18= 2.85. Several fields have that potential. Finance, for example, which is where you managed to do it, right?

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The Financial Blogger Reply:
February 21st, 2012 at 6:14 pm

I guess I thought that making 100K + a year was hard. It maybe just me but I’m definitely under the impression that most people don’t make 100K at the age of 35. If you are telling me that a service provider sales rep with a major in English can easily reach 100K in 10 years, in the State, I’ll consider moving outside Canada. Here, they will pretty much make 40-45K.

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Financial Samurai Reply:
February 21st, 2012 at 9:54 pm

Most people don’t make 100K by age 35, however, if you are in telecom sales in this example, you can easily make 100K+ after 13 years working.

You and I know that making 100K in many professions isn’t that hard, especially after working consistently for 13-14 years after college. Many US graduates in NYC start at $65,000 base and $35,000 bonus at 22 years old!

You should definitely come to US. Why do you think so many people want to come here? They don’t call this the land of the free and the land of opportunity for nothing!

Hey Sam,

I went back to your post to read the children and inflation and I still don’t agree.
First, you assume that mom and dad will meet up in their early 20′s and stick together for the rest of their life. While this is exactly my situation, it’s a bit optimistic to assume that everybody will get this, right? Then, you also have to assume that both parents have booming career (even the average Jane gets a 6% compounded salary raise over 18 years, that is AWESOME, please, I can live in the State and get that? because this is completely impossible in Canada).

Regarding inflation, I have a lot to say but I’ll just ask you one question in regards to this line: “In other words, in a 8% inflationary environment, you might receive a 9% nominal interest rate on your yearly savings account, leaving you with a 1% real rate of interest.”

You don’t pay taxes on investment return in the States? are all investment account are taxed free? In Canada, this situation would resume to making 9% gross, minus 3% of taxes (33%), you get 6% while inflation rate is at 8% which means that you are LOSING 2% every single year. Add to this that the fact that there is not a perfect correlation between inflation and your investment return (the US stock market has been flat from 2000 to 2010 but there was inflation for sure during this period).

I get the point that the more you save, the better your retirement will be (I’m a financial planner after all), but telling people that they can retire at the age of 40 is asking them to drink a lot of koolaid.

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Financial Samurai Reply:
February 21st, 2012 at 8:42 am

Mike, aren’t you around 30 and make more than Average Jane at her age, and about the same as Floyd and Felicity? Don’t you have side income? If so, are you saying you are special and not everybody is like you?

A couple only has to stay together for 18 years, not a life-time, given that is their responsibility to the child if we are on this discussion.

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The Financial Blogger Reply:
February 21st, 2012 at 8:54 am

Well if I look at the stats where I live, I’m part of the 3% of the population that makes this income in my Province. I’m not saying, I’m special, I’m saying that this situation is FAR from being the norm. If I’ve found that the average income for a full time male employee in the USA is 43K, how can you dream that everybody will make 100K in 10 years?

Some people can definitely follow those charts, but I highly doubt that it is more than 10% of the population. And even then, I’m generous.

As another example, in Quebec, we have a provincial pension plan. This money is taken directly from your pay check. In order to receive the “full pension” you need to make over 45K (adjusted with inflation throughout years) for 35 years. Believe it or not, only 12% of the population is entitled to get the full pension. This makes me think that hoping that the “average Jane” will get 100K at the age of 35 is dreaming.

But I’m really curious about the savings for the 401(k), who pays it? Does it have to be added to the 55% of savings? If so, you need to disclose how much it is, right? Because you are not down to save 55% of your income, you must save more than that. Am I right?

As for inflation, I still think that you are the one who doesn’t have a firm grasp of the impact on retirement. Inflation rate in 2011 was 3% in the States. Where can you get an after tax return of 3% with a conventional savings account? Stock market? it was flat (and negative in Canada). Bonds? you need to find bonds paying roughly 5% (and not losing value) to make a 3% net…

Sorry to be a pain, I just can’t understand where you get those numbers.
Great discussion as always :-)

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Financial Samurai Reply:
February 21st, 2012 at 9:15 am

The latest numbers in the US show inflation at around 2%. You can get a 2.3% risk free return on a 7yr CD at this rate if you want. Or you can be like me and have money tied up in a 7yr CD that yields 4.1% from two years ago, with 5 years remaining. I’m not speaking from conjecture. I’m speaking from looking at my own financial situation.

BTW, the US markets are up about 7.5-10% YTD 2012 as well. Sell now, and you are 5-8% above inflation. Everything is aligned. It’s the efficient market.

This site isn’t for the every day folk. It’s for people who believe they can do it, and want more options.

The Financial Blogger Reply:
February 21st, 2012 at 10:46 am

Still don’t get why you ignore taxes in a non pension investment account. And what about the 401(k)? do you have to save for this as well or not?

Financial Samurai Reply:
February 21st, 2012 at 11:18 am

I guess I have not made clear that people should save 55% or more of their after tax income.

I bold this point and highlight it again, maybe with flashiest when I get home tonight.

Tx

The Financial Blogger Reply:
February 21st, 2012 at 11:32 am

I’m not talking about savings; I’m talking about ignoring the taxes to be paid on the investment return. I haven’t the ability to bold it in my comment, but I clearly wrote “non pension investment account”, I’m not about the 55%. Here’s an example:

If you make 2% on your CD, it’s not 2% in your pocket; the tax guy will take its cut. However, the 2% inflation is real and stays as is. So you need at least a 3% CD to beat 2% inflation.

Is the 401(k) savings as to be added to the 55%? If so, how much is it? 2% or 10% of gross income?

Financial Samurai Reply:
February 21st, 2012 at 9:56 pm

Why are we focused on the investment return side of the equation? The investment return is the BONUS!

Average Jane can spend $29,000 based on her savings draw down over 20 years, but will earn about $11,000 with 2% interest from her savings as well.

The Financial Blogger Reply:
February 22nd, 2012 at 4:36 am

I’m asking because the 29K in today’s dollar won’t worth much in 35 years where Jane will only be 75 and will have 10-15… read 20 years to live. This is why I’m so concerned about your calculation.

I think we are just over with this; we definitely don’t see it the same way. I’ll wait to talk to someone who actually stopped working after 20 years of work and still live on that nest egg 15 years later without working. It would be awesome if you do a case study with one of your friend who actually did it. I’m curious to know how they live and how the math works throughout a real life example.

Financial Samurai Reply:
February 22nd, 2012 at 5:29 am

I’ve kept things consistent without inflating the yearly savings for simplicity’s sake.

If you are worried about inflation, then I can easily add in a realistic risk premium of 2% over a risk free rate of 2% to equal 4%, and compound it every year for 18 years til 40. In that case, the draw down will be well over 29K/year.

This is with people doing nothing from 40-60. No change in lifestyle, no part-time work, nada.

Invest It Wisely Reply:
February 22nd, 2012 at 1:41 pm

I believe that any portfolio that does not continually grow is completely irresponsible. Lifespans are going to increase dramatically, and who the heck knows what kind of social security “promises” will remain in 40 years from now. Others can bet on it, but I won’t.

I wish I paid more attention to personal finance in my 20s. I started to pay attention in my mid to late 20s, but there was still so much that I didn’t know and do. I didn’t save anywhere near 55% of my income when I first started working. I saved a couple hundred bucks here and there but nothing material. I’ve been making up for that over the last few years and am happy to see my 401k growing nicely as well as my savings. Not everyone is going to be able to save 55% of their income, but if they saw these charts especially the last one, I think they’d be a lot more motivated to save more and trim their living expenses. I sure hope to retire long before I turn 65! -Sydney

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Financial Samurai Reply:
February 21st, 2012 at 9:57 pm

I hear ya. In retrospect, the kick in the balls my first two years out of high school really helped me save. I don’t like getting kicked in the nuts! :)

We’ll do whatever we want, if we want it bad enough.

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Not sure I was clear earlier, but I agree with the concept whole-heartedly. Let’s say you’re income doesn’t jump in raises the way the charts show. All that means is you should be used to living on less for a longer period of time, it doesn’t necessarily limit your savings potential. It is your responsibility to make sure that you are being properly paid for your work, and if you’re not, then it’s a choice to stay or go. People cling to the statistics that kids are going to cost a bundle, but those statistics also show that the cost of raising a child is proportionate to how much income someone has. They don’t have to spend more; they choose to. You’re plan, however, takes a significant amount of discipline and wisdom in your youth. I lacked the latter, though I’m working on the former.

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Financial Samurai Reply:
February 21st, 2012 at 9:58 pm

No problemo. I no longer think kids are expensive. If they were, I wouldn’t constantly see and read about families making $50,000 in combined income have 2-4 kids. You’re exactly right. Kids cost in accordance with your income.

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My extreme early retirement plan is to ignore the lump sum needed and focus on the assets needed. This means as I accumulate the money, I will buy: ranch land, a fully off the grid house, livestock, garden, irrigation, etc.

I will know it’s time to retire once I have all these items and enough passive income to pay property taxes, health care, etc.

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Financial Samurai Reply:
February 21st, 2012 at 9:59 pm

I like your idea of a fully off the grid house. Sounds like a simple plan, and a happy life!

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I think you’ve got an interesting point sam, but I would also posit that many people would find this rather difficult to do. It could be easier as a married couple (no kids) – living off of one spouse’s income and banking the other, effectively living off of 50%.
Is the reason this is so difficult because people dont make enough, or because they have a difficult time deciding what is a “need” and what is a want?

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Financial Samurai Reply:
February 21st, 2012 at 10:00 pm

Jeff, nothing good comes easy. And everything easy stops becoming that good b/c there’s not much reward in the easy.

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50% savings of after tax income is huge. It would make for a very different life experience. Am I missing something? I spent 18+ years preparing for a career, I must hate to sacrifice almost all my earnings to get away from! If I hate what I do, I would change my career.

I can now save 50-55% of my net income, but I no longer have to support my children or buy a home. This was not possible when I earned less (recent grad) or trying to support a family. This is savings to the extreme and is not sustainable at lower earnings.

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Financial Samurai Reply:
February 21st, 2012 at 10:02 pm

You’d think saving 55% after tax a year would crimp… but I will tell you that based on my experiences, and what I have, I do not feel crimped in the least bit. I see it as a game, and a force of discipline. Save every other paycheck, and I’m there. Save a year end bonus, and I’m saving even more.

We have a decision to live on less income, and make due. I still pay off all my CC bills and take on average 20 days off a year for the past 5 years. After a while, it stops feeling like a sacrifice. It just feels natural!

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krantcents Reply:
February 22nd, 2012 at 12:39 pm

I know it can be done because I do it too. I think a lot depends on where you are in life and how much you are earning. It is a lot harder to do this when You are only earning $60K and starting out vs. $150K and you already own a house.

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I am totally on board with your early retirement plan to save 55%+ of my after-tax income! I include my 401(k) contributions in my calculations and last year I saved 61% of my net income. This year, I am on track to save 57% of my net income.

Buying a two bedroom condo is part of my long-term financial independence plan since it will eventually reduce my monthly expenses and I will definitely take a bit of a hit this year for that, but I think it will be worth it rent can be raised completely arbitrarily where I am, leaving renting to be a very unstable way to budget for your housing expenses.

That said, I don’t have any interest in quitting my job – I love what I do. But I do want to have the flexibility provided by not relying on my salary to enjoy my life. To help in that, I max out my 401(k), my Roth IRA, bank all of my bonuses, save for my next car even though I just bought one within the last couple of years, invest in taxable investment accounts, prepare to buy a condo, and maintain 6 months of emergency reserves, while still living the life that I want to live.

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Financial Samurai Reply:
February 21st, 2012 at 1:54 pm

Rock on Leigh! I’m proud of you and I hope you build that aNUT over the years!

At some point, we all find new love in work. Hope yours stays strong for a long time!

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@The Financial Blogger
The raises are not that unreasonable. There are many years where the salary stayed the same. There are some big jumps due to a promotion. It’s not that difficult to get a raise when you are a top performer at the beginning of your career (IMO.) It’s much harder to get good raises when you’re established.
I don’t think living frugally is a bad lifestyle. If you can’t do that, then you just have to work longer.

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The Financial Blogger Reply:
February 21st, 2012 at 6:24 pm

I don’t have a problem with the fact of saving money. This definitely make sense.

I have a problem with the math that won’t make it when you reach 40 and quit your job to retire.

It would be impossible to expect such raise in Canada. If you are telling me it’s the norm to get 6% increase for someone who has a simple major in English and work as a sales rep (or getting a promotion giving +10k or +15K each 3 years) in USA, I can’t argue, I have no clue. I just know that I’ve never seen this in my country. I thought both countries were pretty similar but most people on this thread say that it’s easy to make 100K so I guess it’s different on my side of the border :-).

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Financial Samurai Reply:
February 21st, 2012 at 10:03 pm

Mike, I think Joe is going to prove you wrong. Just follow his blog and see.

US is a very different model. Incomes are much higher and there is so much more productivity and innovation. Name three huge Canadian businesses out there besides RIMM? I’m sure you can name 20 from the US. It’s just different.

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The Financial Blogger Reply:
February 22nd, 2012 at 4:37 am

I’ll follow him and wait until I see it happen :-)

Invest It Wisely Reply:
February 22nd, 2012 at 1:39 pm

Those in your government are trying very hard to stifle that innovation, whereas Canada is improving. ;)

Locust Reply:
February 23rd, 2012 at 7:03 am

By the second year after college, I worked in LA at a finance company and made $125,000 after bonus. I was 23 years old.

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HMI Reply:
February 22nd, 2012 at 10:56 am

You’re working in the wrong province FB. Oil and gas you will see those types of wage increases and you can expect to start at 60k as ol’ Floyd the overachiever did. I have a number of friends who work in the US and they can make more, usually in bonuses. The AVERAGE wage in Calgary for O&G is 47.04/hour, roughly 100k a year.

As for large companies, TD, CIBC, RBC, BMO, Suncor, Imperial, CNRL, Potash Corp, Transcanada, Nexen, Husky. See a trend? All of these companies outside of Potash and the banks operate primarily in Alberta, whose GDP per capita dwarfs both the US and Canadas averages. There is only one state with a higher GDP per capita. I’m not fond of the excuse that the same types of opportunities don’t exist in Canada.

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Very well telegraphed Sam! It’s funny how there are a lot of dissenters, when the “Simple Chart” above mathematically shows you want it takes.

I save about 30% of my after tax income and plan to retire closer to 50, and then die at 85!

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Financial Samurai Reply:
February 21st, 2012 at 10:03 pm

Good stuff mate. Hope you live until 86!

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Great post Sam. I really admire you for saving and investing so much of your income. If I got whipped that hard during my first 2 years, I might have done the same. I saved less than you, but I got married over 10 years ago. Having two incomes helped a lot even if one career took a little while to get going.
Working a bit after retirement is the way to go. You only need to make a little bit of money to help cover a few bills.
You’re doing great! I’m looking forward to your “I quit” post. ;)

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Financial Samurai Reply:
February 21st, 2012 at 1:52 pm

Thx Joe! You are an inspiration as well!

I will never write an I Quit post! Instead, I will write an I Got Laid Off Post :). Never quit! Get made redundant and collect your severance!

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retirebyforty Reply:
February 21st, 2012 at 11:36 pm

Oh yeah, I briefly forgot about your severance pay plan. That is much better than just quitting.

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Financial Samurai Reply:
February 23rd, 2012 at 6:49 am

Are you working on yours? Please, don’t quit man. Don’t ever quit! Plenty of firms provide 2-3 weeks a year of work severance, on top of a 1-2 month minimum!

go for it. you’re the financial samurai!

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I can definitely imagine it would be tough to eat into that principal savings – I know I have enough pain spending earmarked savings on their intended purpose!

It seems to me the key is financial literacy from a young age (so that you don’t start out with lots of consumer debt or excess educational debt). And things like having a high-earning partner and choosing a lucrative career also play a big part in getting ahead. And of course, the things you can’t control, ie serious illness or other catastrophes.

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Financial Samurai Reply:
February 21st, 2012 at 10:04 pm

I would love to have a sugar mama!

Insurance is so important. Need to protect from disaster scenarious!

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1) Low salary = spend it all on basic necessities = no way to save 55%
2) Stagflation
3) I wouldn’t be complete without kids and they can totally blow out your charts
4) Congrats on being so dedicated about saving
5) Live life – do what you enjoy and make money at it – don’t wait for retirement, early or late.

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Sam,

Most traditional families spend heavily in their initial years due to children. Your idea is great as long as someone stays single until 40 or get married but choose not to have children.

For those who have children, golden age to make most money is in their 50′s. And, apparently, that’s the age for maximum savings as well.

So, it’s a catch-22 situation for someone with children.

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Financial Samurai Reply:
February 21st, 2012 at 10:06 pm

I thought the thinking with the US economy now is that people who are in their 50′s are the ones most at risk? It’s sad, but that’s all I hear.. age discrimination, statistics for emloyment for those over 50 etc.

There’s no reason why one can’t still save 25% or 30% of their after tax income w/ kids no?

*****

WHAT ABOUT CHILDREN?

Children are obviously a big determinant in whether you’ll have the ability to retire early or not. But, are children really that expensive if you see plenty of couples who earn $50,000 or less have multiple children? The government provides a $1,000/year tax credit per child for middle class families as well.

The conventional wisdom is that if you decide to have children, you should immediately slap roughly 22 years of work to your life. You want to be able to provide for their living expenses and tuition through college, just in case your child isn’t that gifted to get a scholarship, or work to support themselves.

The good thing is that conventional wisdom is often times wrong. If two parents decide to save 55% of their after-tax income every year after college for 18 years, the “Average Janes” of the world will have $78,000 a year to retire on and provide for a family. The “Floyds” of the world will have roughly $120,000 a year to spend, and the “Felicities” of the world will have about $170,000 a year to spend. Can you make these numbers work to provide for your family? I think so, but it will obviously be much harder if you were a single parent.

What’s even “easier” than both parents saving 55% of their after-tax income is that one parent works, while only one parent saves as aggressively. This way, the early retiree parent can simply be added on the working parent’s healthcare and all other benefits. Hey wait a minute, I think this is what happens already for stay at home moms or dads! Again, the difference is the aggressive savings plan, so study the chart above once again!

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Shilpan Reply:
February 22nd, 2012 at 7:01 pm

Sam,
You are absolutely right about aggressive savings. If you add time dimension to it, that’s your perfect recipe for early retirement. Einstein’s rule of 72 will do its magic to grow the nest egg.

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This is the kind of post that I have to read a coouple of times to fully digest. That is good as it makes me think. The “extreme saver” concept is obviously going to be applicable to the majority of people vs. the “extreme investor” (leaves too much to risk) or the “extreme income” (very few can obtain it). I think if one can remain healthy and apply any of these, financial prosperity is within reach. The upside of the “extreme saver” is that all the right habits are built in to ones day-to-day operation. I am an “extreme income” that’s weaving in the philosophies of the the “extreme saver”.

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Financial Samurai Reply:
February 22nd, 2012 at 6:54 am

It’s definitely worth studying the last chart several times, at the very least. 20 years of saving at 10% after tax income rate only lets you accumulate a lousy 4 years of living expenses. That sucks, and SHOULD ring alarm bells for readers.

What’s your definition of a minimum level of “extreme income” BE?

thx

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Sam, really like the talk and charts in this post, however, I really believe savings / salary saved like this is almost a perfect world scenario. It’s hard to live with the suggested necessary expenses ‘money’ after the 55% savings scenario, but know it’s possible if you give up alot of sacrifice and live a frugal lifestyle. I prefer balance and at least have a comfortable lifestyle while still helping others do what i do.

Your above scenario if you finally achieve Financial Freedom as it it gives your income a steroid like boost if you have the discipline. Good Blog post, it makes me dream a bit bigger!

Dwight Anthony
Financially Elite Blog

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Financial Samurai Reply:
February 22nd, 2012 at 6:50 am

Why not dream a little bigger right? I think if anybody went through the 5:30am-8pm daily shift, in a high pressurized environment, and got unhealthy in the process, they too would save like a mad-man, b/c they NEVER WANT TO GO BACK!

“Unfortunately”, life is pretty easy for the average college grad in America who get jobs. Laws are in place to prevent abuse, and everything must be carefully documented, or else. With the pain, I wouldn’t have been this disciplined.

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Seeing these numbers is a huge incentive to save a bigger chunk of my income, but I have to say I don’t see the big draw of never working again. I have a few recently retired friends and they are B-O-R-E-D. I know it’s a choice to sit around and do nothing or to travel, find a hobby, volunteer, or whatever – but I enjoy working and I also find it’s an important part of my identity (and I felt this way when I was in jobs I loved and jobs I couldn’t stand.)

I just think it’s important to think through how you’ll spend your days and what level of enjoyment and fulfillment you’ll get from them before taking a job a shoving it. :)

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Financial Samurai Reply:
February 22nd, 2012 at 6:52 am

Never shove it! Always get laid off instead!

Imagine if you could blog for 3-4 hours a day, then go travel or do whatever you want, with no boss to report to. I think I would enjoy that, wouldn’t you in retirement?

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Invest It Wisely Reply:
February 22nd, 2012 at 1:37 pm

I wasn’t patient enough to wait another year for the company to fail or whatever. ;)

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Locust Reply:
February 23rd, 2012 at 7:04 am

Financially, you made your company very happy by quitting! Providing severance is expensive.

Anna @ Good Cents Savings Reply:
February 23rd, 2012 at 6:16 am

True – but I would consider the 3-4 hrs a day of blogging still working. I think the blogging “work” would give you the fulfillment and sense of purpose (as well as some income!) that being 100% retired for decades might not.

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Financial Samurai Reply:
February 23rd, 2012 at 6:32 am

Yep. Working 3-4 hours a day online would be enough to give me the sense of fulfilment FOR SURE. I like to go play tennis and workout for 2 hours a day, go out to eat, visit friends, spend time with family, watch movies, and travel the other times, so absolutely.

Take the worst job out of school like you did, that is the ticket to cultivating good savings habits. I started working in the Midwest in my first job for a fairly boring but established company- I swore to myself that I will save up enough to have the option to hang it up because I couldn’t see a lifetime doing that and was saving 40% of my after tax income.

Fast forward 16 years and continuing to practice that habit while growing my career and I am ready to retire early. But the challenge I face now is should I hang it up or stick it out and try to get up to the higher levels of running businesses. Feel bad to throw away the good opportunity of just that, I guess time will tell.

-Mike

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Financial Samurai Reply:
February 22nd, 2012 at 7:27 am

Mike, thanks for sharing your story. I kinda feel bad too, but every year I work, I feel less bad leaving. There’s really a never ending climb. One method I’ve used is to just look at the life of the person one or two rungs above you. If that’s the life you want to lead, go for it. If not, then time to start planning.

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Invest It Wisely Reply:
February 22nd, 2012 at 1:36 pm

This is a great comment. I did look at that and I said “no, I don’t”.

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Now if I can double my income I will be able to save 55% of it :)
S’ok I’m happier now than at any other time in my life so the temporary lack of savings is no big deal. As PF bloggers I think we sometimes put too much emphasis on the importance of money (versus experiences and relationships), but I like your way of thinking and I can attest that it is true what you say about getting used to a certain standard of living. I don’t miss many of the things I once thought were “necessary”. What do you think?

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Financial Samurai Reply:
February 22nd, 2012 at 9:12 am

I’ve always believed there’s no point making money if you don’t spend your money, so I hear you on that!

What I want to demonstrate is that if you WANT to retire early, then you CAN, you follow the suggestions in this post.

There are very few things that are necessary besides food, water, love, shelter.

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I agree that inflation MAY increase your salary so in the working years I am not too worried. But what about inflation spiking after you are no longer working? Would that not deplete your savings really fast when there is no way to replenish it?

Also healthcare is a big issue. So not sure without employer sponsored insurance how high the cost would be in retirement.

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Financial Samurai Reply:
February 22nd, 2012 at 9:10 am

If inflation spikes, your rate of return on your risk free and non risk free assets also speaks. Think about what is inflation, and why it happens.

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Invest It Wisely Reply:
February 22nd, 2012 at 1:35 pm

Inflation doesn’t affect people equally. There are always winners and losers, and if you’re not sitting on capital hill or on wall street, you are most likely one of the losers… and that is the whole point.

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Financial Samurai Reply:
February 23rd, 2012 at 6:50 am

Own hard assets. Those, by definition will inflate.

Locust Reply:
February 23rd, 2012 at 7:05 am

Why wouldn’t you want to just put yourself in a position to let inflation positively affect you then? ie invest.

Yep, I am married with kids so it is complicated.

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Sam, last question, I swear!

I’ve made my own research on the 401(k) program to understand it (it seems quite similar to what we have in Canada). So the maximum per year one can invest is 15,5K, right? So there is something I don’t get from your chart:

Let’s take Floyd’s chart:
If he withdraws the 45K/year from his savings until he reaches the age of 60, he gets barely nothing out of his savings at that point. Where is he taking the same 45K (+ inflation) until he passes away? Technically, he still has a good 25 years in front of him. I guess that SSB is not that generous. But if he has to also save 15,5K/year in addition to the 55% he is saving already, this means that he has to live on less than 20K per year for 9 years? can you both pay rent and eat with less than $1,000 per month in NYC?

I thought I read that your 55% savings plan was on top of saving for the 401(k) but I don’t see this reference on this post anymore. So I’m confused: what happen to Floyd at the age of 60? where is he getting his revenue? from SSB only?

thx for the clarification!

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Financial Samurai Reply:
February 22nd, 2012 at 12:34 pm

One can now contribute 17k tax free to a 401k now.

I removed the 401k reference because it was way too confusing to some readers and getting in the way of the overarching point which is to save aggressively if you want to retire early. Only US use 401k too.

If one is Felicity The Talented, she should be able to max out the 401k and save 55% after tax income.

Please read How To Save More For Retirement If You Dont Much. http://www.financialsamurai.com/2012/01/12/24402/

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The Financial Blogger Reply:
February 22nd, 2012 at 1:21 pm

Thx for the additional info on the 401(k), pretty clear now. But I am now pretty scared for both Jane and Floyd…

What happen if you don’t make 200K-300k like Felicity? you starve to death at the age of 60 since you only have SSB left? There is no place in your chart for additional savings in the 401(K) unless you are making way over 100K. At 100K, you are left to live with roughly 22K if you put 17K aside for 401(k) and you count the tax deduction, right? So before you make 100K, you must live at your parents house and after, I guess you don’t live an interesting life with less than 1K/month in NYC or San Francisco? Can you at least afford to eat after you paid your rent?

I don’t call this early retirement; I call it living on welfare for the rest of your life.

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Financial Samurai Reply:
February 23rd, 2012 at 6:54 am

Just adjust the charts. When I was making $60,000 a year, I put away the max 401K contribution then, which was around $15,000 pre-tax and saved 50% given I got a roommate.

My taxable income was $45,000, and next income was about $30,000. I saved ANOTHER $15,000 as a 22 year old living in NYC baby! I had a BLAST!

Going from a poor college student, to suddenly living in the big city AND having $600 to spend after my $700/month rent was good enough!

I’ll be honest, I kind of glazed over reading the numbers! My head says, ahhh that probably makes sense! It’s not because I can’t add up, it’s because I fully believe that agressive saving can lead to the possibility of early retirement.

The thing is agressive saving comes at a cost of course so for me personally I am always trying to find balance. The first halve of 2011 was a great saving time, the end half, not so good! I moved around too much and acted a little as if I was retired but I am getting back on the rails and moving full steam ahead.

Right now I am not necc aiming for retirement, just a solid plan to save as much of my income as makes sense whilst living a good life. The rest should slot into place.

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Financial Samurai Reply:
February 22nd, 2012 at 4:20 pm

Definitely a long post that takes time to digest. The key chart is the chart with the ORANGE title. It’s simple math that spells out exactly what one can expect.

Glad you are living the good life, and hope you can make more in 2012!

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Forest Reply:
February 29th, 2012 at 3:39 pm

Thanks :), I am going to do great this year I think!

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Sam,

Pretty comprehensive post, but I don’t understand something: Are you recommending that one consume the entire capital between 40-60? I don’t really agree with that.

I also disagree completely with your view of inflation; inflation is always a monetary phenomenon and has nothing to do with how well the economy is doing, unless you mix up cause and affect: excessive credit expansion *can* create the *illusion* of a prosperous, healthy economy. This never lasts and one must be prepared for a crash.

In addition, because taxes do not take inflation into consideration, it is not only a tax on savings, but it is a double tax on all capital gains. I don’t agree with not worrying about it.

However, there is another way: Go with index funds and commit to withdrawing 3% to 3.5% a year. It is very unlikely you will go broke (and if things change you can always adjust long before that happens). Combine this with a high savings rate, and $500,000 can spin off $18,000 a year. This isn’t as much as in your scenario, but this money continues to increase year after year, and most certainly gives a lot of additional freedom. Most importantly, your capital grows instead of being consumed.

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Financial Samurai Reply:
February 23rd, 2012 at 6:57 am

One can consume their entire savings capital from 40-60 if they want, and if they NEVER WANT TO WORK AGAIN.

Of course, I would say a vast, vast majority of us are going to be doing SOMETHING from ages 40 to the age social security and tax deferred savings vehicles kick in. Some of us might start making $20,000 a year in operating profit online… just right there would allow one to hardly even touch the principal savings.

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Locust Reply:
February 23rd, 2012 at 7:05 am

Now you’re thinking about how to let inflation affect you positively!

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Sam,
Is saving 55%+ income and still living a comfortable life actually realistic? Next year I will have about £21,000 net income and after rent and commuter fees I am left with £11,500 so how am I meant to save 55%?
Kind regards,
Ashley

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Financial Samurai Reply:
February 22nd, 2012 at 4:21 pm

Unfortunately Ashley, the answer is, you can’t unless you live with relatives or something But, you could still probably save half that 11,500 a year right, and that would equal 25%?

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I had never thought about the simple math like that before. I feel like I should just hop over to my automated savings and add an extra 5%-10% to savings. I am paying off my student loan in less than 3 months. Maybe the extra money I was spending there should go into a low risk “early retirement” account?

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Financial Samurai Reply:
February 23rd, 2012 at 6:58 am

Like maxing out the 401K, you will wake up 10 years from now after consistent 55%+ after tax savings and say, “Holy shit! I can conceivably walk away in several more years if I keep this up!”

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We’ve been saving about 50% of our income (living off of 1 income), but I also think it’s important to stop – breathe – enjoy life! We could save more, but we prefer to have yearly vacations and spend a little bit more on “the extras”. If I die tomorrow I want to have no regrets. Rather than say “someday, when I’m retired and have money I’ll do xxx”. Do it now!

I think some of your income scenarios are a little lofty though. It’s good to consider both ends of the spectrum.

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Financial Samurai Reply:
February 23rd, 2012 at 6:59 am

Indeed. No point making money if you don’t spend your money. One of the assumptions here is that we don’t die early deaths ie die in our 40s. However, by retiring early and saving so much, it is actually MORE CONSERVATIVE, b/c dying in your 60s and 70s is much likelier than dying in your 40s.

So to retire early allows you to live life even more!

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Sam, Silly thing for me to focus on, but I like your tables….clean and clear. Did you use a plugin for them? If so, which one?

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Financial Samurai Reply:
February 23rd, 2012 at 9:52 am

My plugin in is Excel and I just copy and paste it in the visual tab :)

Now tell me your thoughts on the analysis of this post!

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It’s definitely a hot topic. Kids however change more than meets the blog. Even in NYC we are lucky to not be paying EVERYTHING we make while sending 2 kids to daycare, however, it’s not a pretty figure. That being said we are making sacrifices that we hope to pay off in the future.

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Financial Samurai Reply:
February 23rd, 2012 at 6:47 pm

I can’t imagine having 2 kids living in NYC! But, cant be that bad since many people do. Hope all goes well with finding the desires schooling etc.

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I wish the idea of retiring could come early as possible for me but as a student and in university, that’s not happening. I’m still young to worry about real retirement advice but I enjoy reading your personal Financial advices. Please keep it up.

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Financial Samurai Reply:
February 23rd, 2012 at 9:34 pm

How do you know you want to retire when you haven’t started work yet? Thanks for stopping by!

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I try to explain this to people Sam. Instead, I get blank looks and told that the government should support us all in retirement. Oh, and they should support us to whatever standard of living we want because they get their money from some magical pot of gold (I guess the USA/Canadian governments finally found the end of the rainbow). Any idea when the whole house of cards comes down on this government-supported retirement?

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So I’ve read every single comment and still no-one has decided to answer, with numbers, what someone who follows this plan will spend when they hit 60. Is it 20k a year? 40k a year? Is this spending the interest + principle? How long do you expect it to last? If it’s 20 years, what happens if you live till 90? 20-40k in 40 years will be a very low amount of money by then, what are you going to do when a big mac costs you $15?

TFB is correct on many fronts, including the issue of inflation. It’s naive to think that inflation will always be lower than the risk free rate. In addition, if you are still pulling out the same nominal amount for 20 years, your purchasing power would be greatly diminished by the time you are 60. Inflation is not under 2% at the moment anyway, calculate inflation using personal experience at the cash register, not what the govt. puts out. They tend to lie.

This plan sounds absolutely terrible:
- Live like a dog for 18 years, with no wife, no kids and no house.
- Live like a dog for the next 20 years “retired” with no wife, no kids and no house.
- Scrape by and hope you don’t have to live on the street, have no money and no wife, no kids and no house.

AS TFB has said, this is like living on a pension your whole life. You spend your best party and fun years scraping by saving every penny, then you spend your strongest working years (40-60) doing nothing (and not even doing it rich). Then when you reach the age where no-one will hire you, you run out of money. Completely inefficient.

The smarter plan would be to just live a nice normal comfortable life until you’re 50, have enough saved so that you can live off the interest in your investments indefinitely. You can also keep up with inflation in your twilight years by increasing what you take out because you aren’t spending your principle. You’ll also be able to leave some for the kids that you’ll most likely have because girls won’t think you’re a scrooge and you’ll actually have a chance to procreate.

You also mentioned keeping money in something that rises with inflation, such as gold right? So will you keep a couple of hundred ounces under the bed and cash them in once a month? What if the value of gold declines for the next 20 years? Gold is not risk free. It also doesn’t generate any sort of income so once you use some of it, it’s gone.

Saving 55% is extremely unrealistic unless you are earning way above the average or you are a couple (but this is a post about a single person right? And is this a blog for the top 5% or the masses?). The average person can live a decent life on a 60/20/20 plan, but changing that to something like 45/55 (no entertainment expense??) is just pure stingy.

Cheers

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Financial Samurai Reply:
February 26th, 2012 at 1:15 pm

Hi Henry,

Thanks for reading and sharing. Have you read this article on saving for retirement, and 401K as well? If not, please do so, as it will help illustrate how to save.

My article shows you HOW to retire early. It doesn’t show you how to retire early, live on a lot of money, and make no sacrifices. Of course not everybody has the capability of retiring early, since not everyone makes enough or has enough discipline or desire. This article shows you how.

I’ve saved 50-75% of my after tax income every year, and am at the upper end of what I think I should have in my 401K for someone my age. I take two international vacations a year, and 3-4 more weeks of domestic vacations a year as well. I do not feel deprived of anything, “scraping by” or “living like a dog” as you say.

I realize it’s easier to make excuses, and that’s your choice. Sure, working to 50 makes the math even easier, and that’s great too. Just know that you have a choice. Even if I only have $500,000 in my 401K at 60 to withdraw from based on todays prices, that’s still 5-10 years of good savings. Add on social security, and actually NOT spending ALL your money from 40-60, and you’ve got enough.

Sam

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Henry Reply:
February 28th, 2012 at 2:47 am

Hi Sam,

Sorry I should probably mention I’m from Australia – I think in America it’s possible to save 50-75% of your income, but probably not so much here. The cost of food and housing here is way higher than over there in the states (and our taxes are almost double yours).

It’s obviously possible to save 50-75, heck, even 90%, but that only works if you have a relatively high income.

For example, in Australia, for a single person to survive with a tiny amount of entertainment, is about 25-27k. If someone is earning 40k after tax (so about 60k in Aus, which is about average), the most they can save is is about 32%. Now if this person gets a pay rise with a new job and earns 80k but keeps their expenses the same, they save an extra 14k (57k earn after tax), which takes them to 53%.

I think rather than telling people to save 50-75% straight up and survive on dog biscuits, you should point out that the individual should figure out his expenses and keep this number constant (or pegged to inflation) and let pay rises push them in to the 50-75% range.

You can easily flatten the curve in this way – when your wage pushes you up to the 80-90% range, this wil make up for the loss when you are only saving 30%.

Cheers
Henry

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The Financial Blogger Reply:
February 28th, 2012 at 11:41 am

Sam,

you could have save you a lot of trouble working out those chart by simply moving to Canada. At the age of 18 (not 40), you can put yourself on welfare and make roughly the same type of lifestyle illustrated in your chart. Then, instead of going to college, work your ass off for 18 years and retire poorly, you can start chilling at the at of 18 and still make about the same amount of money ;-)

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I think your guideline is unrealistic, for the average Jane at least.
I understand you are suggesting saving 55% for the early retirement, and save on top of that for the actual retirement. I have read “How To Save More For Retirement If You Don’t Make Much Money”, and it still doesn’t make a sense to me.

at age 23, Jane earned $35k, after tax and 55% saving rate, left with $13,388.
You suggest saving 10% for 35k salary, so: $3,500 to contribute 401(k) at work.
$13,388-$3,500: $9,888. How could a person live with $9,888 a year??? with $824 a month, how could Jane pay for her rent, food, and transportation??? Assume she spends $600/ month for rent + utilities (splitting with a room mate)A month access to NYC subways is $104. She left with $120 for food. Average: $4 a day. Not to mention, to buy new clothes for work from time to time.
9 years later, Jane earn $75k at age 31, with disposable income of $27,000.
you suggest to contribute 25% pre-tax or maximum to 401(k): $17,500. She still left with less than $10,000 a year. You also suggest to save outside 401(k) too, between $750 to $5000 for that income range.

I hardly can understand how people live with $10,000 a year. Please help me out by breaking down the expenditure for average June. Please clarify. Thanks!

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Financial Samurai Reply:
February 27th, 2012 at 7:11 am

1) Not everybody can make this happen
2) Not everybody lives in NYC, the most expensive place in the world
3) If you make this little from the beginning, I suggest living at home or having multiple roommates

How much disposable income did you spend while you were in college? Did you have a lot of fun still?

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Nicole C. Reply:
February 27th, 2012 at 8:07 am

I know you will go after my NYC metro card examples.

Please show me some numbers that how average Jane lives with $10,000 a year by breaking down her expenditures.

I did the calculation for average Jane at her 40 years old.
Earning $100,000, She has $33,750 disposable income.
$33,750- $17,000(your suggestion of pre tax contribution to 401(k)) – $13,000(your suggestion of post tax savings for actual retirement)= $3,750 per year. Really??
Things are getting worse when you earn more and being old, if I totally follow your guideline to retire early and to save more for retirement.

I try hard to put your two articles together, but I can’t quite follow.
I show you my calculation. Please do the same. Proof yourself with NUMBERS, and stop BS-ing that “not everyone to do it”.

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Financial Samurai Reply:
February 27th, 2012 at 8:32 am

Nicole, I just don’t think with your attitude you can do it.

Your math right there is wrong in your example. Seriously Nicole, do you not know how 401K contribution works? It’s offensive that you’re trying to make an argument if you do not understand the basics. All was fine until you said BS, and now you are really wasting my time.

$100,000 gross
-$17,000 in pretax savings in your 401K
= $83,000 taxable income
20% effective tax rate
$66,400 left after tax
Save 55% of after tax = $33,625
You’re left with $32,775 to spend on whatever you want. Can you not live on $32,775 after tax income a year?

Please, PLEASE try to understand this basic concept! Please talk to your friends who might be in the business, or who’ve saved, or whatever. This is so BASIC, that it concerns me we are arguing about this.

Locust Reply:
February 27th, 2012 at 8:38 am

Nicole, I’m sorry, but are you stupid? I think it’s obvious Average Jane is a stretch for you! Can’t believe Sam actually has the patience to respond to you.

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Nicole C. Reply:
February 27th, 2012 at 9:53 am

Locust, I admit I am average Jane. So What???
Why not Sam shows more statistics on his belief???

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Wow, I’ve read every single comment on this post. Looks like I’m a little late on this one.

Nicole, there is no need to get ugly and attack. Take it easy. I take it you were never involved in any debate team of any sort to be able to allow for and dish out constructive criticism?

We can all learn from this post and its follow up comments, as I’m certain many have. If nothing, it will get many to start crunching numbers and start the planning before it is too late. It is I’m sure one of Sam’s intentions on writing it.

Sam, Kudos to you as you have more patience than me.
T

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That first job was indeed a blessing on so many levels. I saved the absolute biggest percentage of my salary when I was working all the time. When you have zero free time, you don’t have a lot of time to spend money either.

I’m in a dual career situation and we do have a lot more disposable income than most because we’re conservative with spending. I guess I’ve had the blessing of us both working at a very volatile company where layoffs every 18 months were common. We never felt entitled to our salary and felt that it could be taken away at any moment, so we were always careful with how much fixed debt we took on.

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Hi all,
I am interested in this topic, for reasons of my own. It is kind of a long story but I have been working steadily toward “break-even” point where monthly basic expenses are covered.

But, there is one variable people here are forgetting:
Insurance.

Health insurance is expensive. In the states for a freelancer, a bare-bones plan is $450/month for somebody in their mid-30′s. This cost only goes up with age and inflation.

I also do think it a valid question to ask, what happens when a person reaches 60. If you spend until 40 making money, and then another 20 years living similarly bare-bones, and the tank is empty at 60…….. then what?

Then there ARE life issues. Children, world travel, hobbies, romance… life has to have something involved, to be worth living! It does not need to be overly pricey. But, you only live once!

Lastly, are there any actual case studies of people who have successfully pulled this off? This is all well and good on paper… but… all of the Florida Condo underwater mortgages started off with numbers that looked good on paper.

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Jason Reply:
February 28th, 2012 at 11:44 pm

…by case study I mean the actual stories, with actual numbers, not a similar percentage-ratio of differing income levels. How old are each of these people, and what do their lives look like?

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Financial Samurai Reply:
February 29th, 2012 at 7:11 am

I’ve shown someone how, now it’s up to someone to make it happen for themselves. I can’t.

Even though I assume someone doesn’t work a day after 40, we should all realize that I’m sure many of us will do something before we start withdrawing from our 401ks and collecting from social security that will last for the rest of our lives.

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Financial Samurai Reply:
July 10th, 2012 at 9:36 pm

Is $450/month a lot for health insurance btw? That’s around 6% of my total passive gross income. Seems like a reasonable expense to me.

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Jason Reply:
July 10th, 2012 at 9:49 pm

It was the cheapest I could find. Does not include the good hospitals or doctors-of-the-year. For a top tier plan, expect to pay $850/month for one person.

6% of a passive income gross is not bad. But remember that “gross” deductions don’t count for much until you pass your standard deduction–which if you are amortizing real estate then you probably are, so never mind this point. :)

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Thank you Sam for your calculation. I have a better picture now.

I like to learn from you. I want to make it happen, but I don’t know where my maths goes wrong. That’s why I turn to you by writing you a comment, instead of walking away.
That’s why you are a financial blogger, with hundreds of readers.
Thank you for pointing out what I have missed- 401(k) contributions are tax-deferred.

The followings I want to point out, but no, I don’t plan to start another argument with you.
$100,000 gross
-$17,000 in pretax savings in your 401K
= $83,000 taxable income
20% effective tax rate
$66,400 left after tax
Save 55% of after tax = $33,625 —>>>should be $36,520
$66,400-$36,520: $29,880
$29,880 – $13,000 (your suggestion of post-tax savings for retirement):
$16,880 = ~$1,400 monthly expenses
It sounds very realistic.

Happy Blogging~

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Jason Reply:
February 29th, 2012 at 8:33 pm

Nicole: Does your 20% effective tax rate include social security, medicare and state taxes?

Here are figures from a somewhat recent tax return (after pre-tax deductions into my SEP IRA) (all numbers rounded off to nearest $500 for simplicity purposes):
- Adjusted Gross Income: $82,000
- Federal Tax: $14,500
- Social Taxes: $6,000
- State Tax: $5,000

Total Taxes: $25,500
Total Net: $56,500

My effective tax rate for this year was ($25.5/$82=) 31%.
Subtracting the target 55% of $56.5k, can you really live on a grand total of $25,425?

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Financial Samurai Reply:
March 1st, 2012 at 11:04 am

I know I can, b/c I did. Just the fact that I am socking away tens of thousands of dollars in my bank account and 401K makes me happy! Living off $25,425/year is a PEACE OF CAKE for one person imo.

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Financial Samurai Reply:
March 1st, 2012 at 5:19 am

Nicole – You’re saving more than this article recommends, but that’s fine.

1) You saved $17,000 pre-tax in the 401K.
2) You saved 55% of your after tax income of $66,400, which equals $36,520. This is the 55% I recommend in this article.
3) With $29,880, this is what you are left to live on for the year.
4) You are WELCOME to save another $13,000 of the $29,880… but you don’t have to as you’ve already saved #1 and #2 above.

Thanks for no longer attacking. Just believe in yourself, and you will become.

S

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The Genius Reply:
March 6th, 2012 at 8:10 pm

Good answer sam. I was wondering what Nicole was smoking. Clearly you can live off $100,000 gross a year and save a lot!

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Lifestyle design based on budget is a great concept. The real boogie man is health care and health insurance. A high deductible health insurance policy, for someone in there 50′s, is about 10k per year. That’s going to chew up a big piece of your savings pie.
Social Security payout is the other big unknown. Since it’s based on your earnings, and adjusted for inflation accordingly, it will be a lot lower if you haven’t worked in your 40s and 50′s than if you did.
I’m finding with most successful people, who would actually save a high percentage of their cash flow, they see retirement as a “myth”. They design careers they enjoy, and after becoming financially independent, often keep at it for other reasons.

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Financial Samurai Reply:
April 8th, 2012 at 8:28 am

The great thing is, if you never count on SS benefits, those alone should be able to cover a high deductible health insurance policy.

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This is great! Now, all I need is a time machine to get back to age 22.

Cynicism aside, What would you recommend for a guy who’s 42, married, 2 kids, lives in the midwest, no debt aside from mortgage, married income of 90k/yr, and approx. 150k in roth/401k’s? disposable ~1-2k/month being put into a MM savings acct.

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Financial Samurai Reply:
April 13th, 2012 at 10:15 am

The good thing, as a new dad, you can get your child to read this post very early on!!

Sounds like you are doing great. MidWest ic cheap, and a 90K/yr income should be enough yeah? I’d max out 17K in 401K for sure first though… then go from there.

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Sam,

Your numbers in the last chart are wrong. If you save 50%, then yes you save 1 year of expenses. If you save 66%, you save 2 years of expenses (You’re spending 33% a year, providing twice that in savings). If you save 90%, then you’re saving 9 years of expenses. I think your numbers are wrong because you’re assuming the same fixed expenses regardless of how much percentage you’re saving. Jacob from ERE made this point nicely in one of his posts.

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Financial Samurai Reply:
June 8th, 2012 at 7:33 pm

What is wrong and what is right?

I don’t want to live in a trailer like Jacob did, and I’m sure the majority of people don’t either. I assume a fixed operating nut that is good enough to keep one living reasonably well. That is open to determination, but I can say that unless you make a million+, saving 90% of your after tax income is bad living.

You can save 90% for a little bit, but I’m sure lifestyle and desires will change. People have to be realistic.

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h Reply:
June 8th, 2012 at 10:43 pm

I’m saying your math is wrong. Saving 70% of your income is not saving 1.4 years of expenses. It’s saving over two years.

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Financial Samurai Reply:
June 9th, 2012 at 8:38 am

I’ll make it clearer that the base case of operating expense is 50% of after tax income.

This is a very interesting post. I hope I had to work 75+ hours right after college. Unfortunately on my case, it happened a little late (late 20′s) with additional heap of debts. While my desire to save is huge at this moment, paying debts is I think more important now. What works for me is the “Snowball Debt Plan” by Dave Ramsey.

I’ll be following your blog.

Best regards,
Belinda

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Financial Samurai Reply:
July 7th, 2012 at 10:55 am

Good luck Belinda! Given that you are aware, I have faith you will succeed!

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A few major misses – health insurance costs (increasing far beyond inflation); plain old ability to procure health insurance if not working – difficult and expensive; reduce skills to rejoin the work force if there is a problem during that 20+ year retirement before social security; and social security assumptions are wrong – minimum retirement age is increasing so you need to cover more years than you calculate; and finally this is targeted to a small population that earns enough money that they can live easily on half – at my salary – $140K – no biggie – if I made $30K – not a chance in hell.

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Financial Samurai Reply:
July 7th, 2012 at 10:54 am

Spruby, are you that unhealthy that you can’t get private health insurance for under $1,000 a month? Sounds like you want out from your $140K a year job.

If one is making only $30,000 for their rest of their lives, you are right. Unfortunately early retirement is not going to happen. A healthy traditional retirement can with aggressive savings.

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Since savings @ 55% doesnt include 401k (has been said many times). I would like to see your chart for average jane including 401k contributions. Honestly, I dont think it works you would have to assume something like 10% annual growth in the 401k. More importantly it leaves little disposable income (if 10-20% was moved to the 401k). Average jane would have to rent a small house with 10 people for the rest of her life. Or maybe just just marry FELICITY :)

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I like this article and although I haven’t read it in full I see a couple of errors.

1. What about a home? With no paid out mortgage rents are going to soar and you will miss out on paying a reasonable price for a home and having that behind you.

2. You won’t have much 401k because it wasn’t leveraged and just 18 years of work will put bugger all into it.

3. The person in the equasion/scenario has failed to hedge against inflation or invest into growth assets, meaning they never leveraged their wealth and it’s just running out

4. NEVER trust the age pension.. (Unless you really couldn’t give a rats)

5. There are probably loads more but I can’t be stuffed

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I’ll let you into my little retirement plan.
I’m 32, have four properties, one which my Wife and I live in and are paying off. We plan on selling one investment property within 5 years, paying down (or off) our mortgage, then we’re home and dusted (although can choose to work for a better retirement if we’d like) The equasion looks like tis in 5 years time: Home worth around $900,000 (all in Aussie dollars) 2x investment properties worth (combined) $900,000 and a debt of $700,000 (total LVR of 40%)but rents more than covering the loan repayments and expenses. We then use a line of credit on an investment property but never spend any more than 5% of the total value. If we make more than 5% capital on the investment over a one year period, we’ve made our money back, plus a little extra, if not we consider going back to work (heaven forbid!) but in reality we’d probably work anyway out of boredom. We’d like to purchase more property for a better retirement along the way, the more the better and lets face it: Who wouldn’t like to buy a multi million dollar home? I think it’s really a toss up of: live modestly, retire. Or, live like a king (& queen) work really hard, for a long time but come home to a big beautiful house. I’m torn

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Financial Samurai Reply:
September 12th, 2012 at 9:52 pm

I think the big beautiful house gets old after a while. Perhaps not old, but you get used to it and stop feeling like it’s that grand.

I’d just be happy with what you have.

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Perhaps it is very different in the wild west, or in the golden paved streets of New York City, but here in the hinterlands, or anywhere an educator, or personal caregiver, service worker is employed, they are unlucky to EVER see the sunny side of 75,000 annually – no matter HOW long they work. And lest you point to the Bachelor’s degree requirement – many in food service have multiple university degrees – including advanced ones – and are unable to get employment in their fields. Finally, careers with “ladder” salaries do not give much in raises and career caps are fairly early and are low. Aside from remaining childless and at home when not working, how does the real “average Jane” save more than 10 – 15 k a year? Thank you, Kate

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Financial Samurai Reply:
September 16th, 2012 at 11:28 pm

Is not the hinterlands much cheaper to live in than NYC? If so, then perhaps $40,000 there is equivalent to $75,000 in NYC and you don’t need to save as much.

We all have different skills, and I’m pretty sure we can figure out some way to make a side income with the skills we have. We just have to make the effort.

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No edit button, so need to note that the sentence ” they are unlucky to EVER see the sunny side of 75,000 annually – no matter HOW long they work” should read with “UNLIKELY” for “unlucky.” Apologies for the typo.

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Sam are you honestly saying you can discount inflation? Are you honestly advocating in today’s environment with the FED, ECB, Japan CB etc printing billions per month inflation will not be a problem?

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Editorial comment: Average Jane, 3rd paragraph, you wrote, “… only spending about $32,000 a month after taxes …” I think you meant to write $32k per year.

Anyway, great post, as several examples to show how saving consistently over a long enough time period can amount to serious bank!

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