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Old 06-20-2011, 12:27 PM   #21
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If you can save 25% of your income, you've already demonstrated you can live on 75% of your current income. So 20x your current income *is* a 5% withdrawal rate at your current income level, but at your lower needs (75% of current income) the rate drops to 3.75% of the reduced income.

For example, with a $100K current income and a $2M nest egg, you only need $75K for living expenses since you can save $25K now. And $75K/$2M = 3.75%.

Also with a lower income come lower income tax rates and a lower percentage of income paid out as income tax, so your after-tax needs would be even lower.
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Old 06-20-2011, 03:05 PM   #22
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Nobody here is going to argue that if you want to retire on more than SS, you need to LBYM. That's virtually a tautology.

But the author is taking this to extremes. He has a plan to live on peanut butter while you're working so you can enjoy steak after you retire early.

The median family of four in the US has an income below $80k. He thinks this couple should live on $60k while the kids are home, and they have four mouths to feed, so they can spend $80k per year after the kids leave. That doesn't sound "rich" to me, it sounds foolish.

Maybe he thinks the "25% savings challenge" is a good way to get younger readers to think about LBYM. I'm thinking it will just scare them off.

It's better to say that at a 7%* real return your money will increase by a factor of more than 7 over 30 years. So think of every $1 you put into savings today buying $7 worth of stuff 30 years from now. Think about what you want to spend 30 years from now, divide by 7, and that's what you need to save.


* I'm using his number, which is fairly optimistic historically, even with 100% stocks.
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Old 06-20-2011, 03:32 PM   #23
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However if past history is any guide, that $7 of stuff 30 years from now will only be equivalent to 7/2.5 = $2.80 worth of stuff in today's dollars. ($1 in 1981 was worth $2.49 in 2011 dollars, sez the BLM.)
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Old 06-20-2011, 09:32 PM   #24
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Love the concept, however in reality that would be extremely hard for most people living check to check.
I guess it's good to start young, or have that savings automatically deducted so one can develop a lifestyle based on the remaining 75% of that income without having to think too much about it. For most, it would certainly require some major lifestyle compromises in the short term.
It would require them to re-think their values. After that the 25% part is pretty straightforward.
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Old 06-20-2011, 11:35 PM   #25
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Love the concept, however in reality that would be extremely hard for most people living check to check.
I strongly disagree. If you can take 25% out as a deduction, like a 401k contribution for example, all the work is done, the willpower required is minimal, and the resulting check is no smaller than many other people struggle to live paycheck to paycheck with. So do it.

If you are saying it can be tough to scale back by 25%, that I can agree with. But it's certainly still doable, as obviously many people do live on 25% less than you.
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Old 06-20-2011, 11:50 PM   #26
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We have expenses of $4-5k if you take out the nice vacations we do splurge on. I know if we retired today, we could get that to $3k and even less SOB in Mexico. Let's say $3k for argument sake.

If I make $36k + 3% inflation, I would need to have appx. $950k making 5% + SS to more than cover us assuming $20k or so from SS.

We've saved $950k in appx. 13 years (we've been married 14 now, starting with $6k in debt). We both made $38k each when married and always lived on one salary. Now we make $225k total, living on $60k, saving 50+% for the past 4-5 years (after tax, of course). We are now looking to take off on an adventure, using some of our savings to do some good things.
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Old 06-21-2011, 01:06 PM   #27
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We have expenses of $4-5k if you take out the nice vacations we do splurge on. I know if we retired today, we could get that to $3k and even less SOB in Mexico. Let's say $3k for argument sake.

If I make $36k + 3% inflation, I would need to have appx. $950k making 5% + SS to more than cover us assuming $20k or so from SS.

We've saved $950k in appx. 13 years (we've been married 14 now, starting with $6k in debt). We both made $38k each when married and always lived on one salary. Now we make $225k total, living on $60k, saving 50+% for the past 4-5 years (after tax, of course). We are now looking to take off on an adventure, using some of our savings to do some good things.
For high earners like you and me it's easy to save 25% and we probably need less than 10x income to be comfortable because it's easy for us to LBYM. The 25% saving rate gets hard when you're a family of four on $50k a year and see your expenses increasing while your wages stagnate.
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Old 06-21-2011, 03:59 PM   #28
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However if past history is any guide, that $7 of stuff 30 years from now will only be equivalent to 7/2.5 = $2.80 worth of stuff in today's dollars. ($1 in 1981 was worth $2.49 in 2011 dollars, sez the BLM.)
I'm assuming he meant the 7% to be net after inflation. Like I said, that seems high. But the total real return on large cap US stocks did exceed 6% for most of the 20th century.
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Old 06-21-2011, 09:32 PM   #29
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While I like the general concept, the author's example invests 10K per year for 28 years at 7% to arrive at the 800K to produce the 5% WR. However no one earns the same amount every year. If the 40K is an average over a working career, then when this worker is just starting out he may be making 20K, and near his retirement, 60K. This means he can only invest 5K per year in his early years, so the full 28-year compounding period will apply to fewer $, and the ending balance will be smaller.

You probably remember the old example of the IRA earning 7%. If a 22 year-old puts 2K per year into an IRA for 10 years and then stops contributing altogether, he will have more money at age 65 than someone who starts putting 2K per year into an IRA with the same 7% ROR at age 32 and continues contributing for 33 years. The author's example doesn't capture this effect.
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Old 06-22-2011, 02:30 AM   #30
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Well if you have to have 20x your preretirement income to be rich then I'm not rich. And I'm OK with that as long as he isn't saying you have to be rich to retire. BTW is that 20x your income when you just start out or is it 20x your income right before you retire? The first --- OK. The latter? DH and I would never retire if we had to have 20x our incomes right before retirement.
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Old 06-22-2011, 06:03 AM   #31
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Love the concept, however in reality that would be extremely hard for most people living check to check.

I guess it's good to start young, or have that savings automatically deducted so one can develop a lifestyle based on the remaining 75% of that income without having to think too much about it. For most, it would certainly require some major lifestyle compromises in the short term.
25% was probably a bit of an arbitrary number the author used to make a point. Obviously if one is trying to prepare for retirement, there is some level of their income they need to save to hit their target retirement age and not have to cut their lifestyle.

For those living check to check...

If one is poor, then it is very difficult to save much. It all goes out in bills. If they are careful they might scratch together an emergency fund to smooth out some of the bumps in the road.

For the poor, the actual problem is several steps back in life decisions and/or circumstances. Some persevere and pull themselves out of it. Others just resign themselves to it and accept it.

For the rest of us... most people have some level of discretionary spending and part of that could be saved. It just takes a plan and some self discipline.
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Old 06-22-2011, 10:34 AM   #32
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For the poor, the actual problem is several steps back in life decisions and/or circumstances.
Often, all the way back to when you picked your parents genetics. A good choice there can go such a long way, and too few souls take full responsibility for this important step.

Ha
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Old 06-22-2011, 11:00 AM   #33
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Often, all the way back to when you picked your parents genetics. A good choice there can go such a long way, and too few souls take full responsibility for this important step.

Ha
Point taken. "Good" parents (parenting, coaching, role models, etc) are a huge factor that contribute to the the success of young people and it carries over into adulthood.

When I posted that comment the specific thing I was thinking about was young pregnancy, single mother, etc. It is rampant and seems to be a big contributor to welfare or low income.
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Old 06-22-2011, 11:18 AM   #34
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When I posted that comment the specific thing I was thinking about was young pregnancy, single mother, etc. It is rampant and seems to be a big contributor to welfare or low income.
I believe that you are 100% correct.

Ha
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Old 06-22-2011, 11:34 AM   #35
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Point taken. "Good" parents (parenting, coaching, role models, etc) are a huge factor that contribute to the the success of young people and it carries over into adulthood.
OTOH, those that were raised in dysfunctional families reach adulthood (quite quickly, I might add) and have the drive to live their lives and strive for success based upon quite a different set of circumstances from the “traditional” family style, 180° from the norm.

They have no desire to repeat what they went through, growing up.

There is more than just one way to reach success as an adult, regardless of background.
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Old 06-22-2011, 01:41 PM   #36
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For high earners like you and me it's easy to save 25% and we probably need less than 10x income to be comfortable because it's easy for us to LBYM. The 25% saving rate gets hard when you're a family of four on $50k a year and see your expenses increasing while your wages stagnate.
I'm reminded of our choices in life dictate some of the outcomes.

Choice to have 4 kids vs. 1; choice of having 1 early in life & getting college / wedding out of the way early; both parents working vs. 1; moving for the sake of a better paying job or staying where you are raised....
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Old 06-22-2011, 02:47 PM   #37
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OTOH, those that were raised in dysfunctional families reach adulthood (quite quickly, I might add) and have the drive to live their lives and strive for success based upon quite a different set of circumstances from the “traditional” family style, 180° from the norm.

They have no desire to repeat what they went through, growing up.

There is more than just one way to reach success as an adult, regardless of background.
Yes sir. You are correct. It is not a certainty. There are many people that persevere and do well.

I know people who began with very little and rose above it.

I know people who had every advantage and wound up in poverty due to their own foolishness and laziness.
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