How far below your means?

[Katsmeow]

It has been interesting to me that on financial related boards I see people talking about LBYM - living below your means and about someone (hopefully someone else) living beyond their means.

It is like those are the only two categories. Yet, don't some people simply live within their means?

Let say you earned $X a year, saved $Y for retirement (say 10%), saved $Z for your emergency fund (if not fully funded) and then spent every penny that you had. I would suggest this is living within one's means. It is neither living below your means (since I think some amount of retirement savings is a necessary expense) but isn't beyond one's means either. Let's say you earn $1,000,000 and have a fully funded emergency fund and you save $100,000 for your eventual retirement and spend the other $900,000 that seems to be living within one's means.

Now, let's say you earn that same $1,000,000, save $100,000 for retirement and then spend $400,000 that year and save/invest the rest. That person is living below their means.

To me living below your means fundamentally means living as if you earned less than what you actually earn.

 

[brewer12345]

OK, I just read 24 posts in the thread and I cannot fathom why you would care to define any of this. Who the hell cares? Save your pennies and get out of the rat race. There is no immutable law lurking here.

 

[jacob]

I think the only indicator you need is your savings rate. If it's positive you're LBYM. Then the question becomes how far LBYM. It's moderately easy to show mathematically how to convert this savings rate into the number of years you need to work in order to become FI for the rest of your life.

Here's a link to one of my book reviews. It's a pretty good review, but just scroll down to the first graph.

Early Retirement Extreme Permaculture Research Institute of Australia

Here you can see how long you'd have to work given a real interest rate (nominal + inflation). A real interest rate of 3% is realistic, and somewhere between the red line and the green line in the graph.

So you can see the typical "early retiree" of this forum defined as someone who retires between the ages 40 and 55 and thus works 20-30 years would need a savings rate of 40-50%. The normal retiree would work 40-45 years and thus needs a savings rate of 10-20%. Lower savings rates under 10% would mean working all your life. You can also see how extremely high savings rates, i.e. above 75% would allow you to FIRE within a decade(!) This either means putting your efforts into making a lot of money or putting your efforts into spending very little money or perhaps a combination of the two.

 

[East Texas]

well as Elvis says - Than you vera much.

- Check out my new Avatar !

I can't quit laughing long enough to think of a clever retort.

 

[freebird5825]

I use a simple rule of thumb for LBYM...while w*rking, I made sure that

Net Income - (COL Expenses + TSP + Monthly DCA) = Money Saved

"Money Saved" made it possible to purchase large ticket items without financing any (pay cash), or worst case, no more than 25-50% of the cost of the item. Large ticket items (past) were a car, tag-along vacations, cruises, a new furnace, a new roof, remodeling the kitchen, etc.

Now that I am FIREd, I am in a completely different economy of scale as far as Net Income goes.
I still pay federal tax, of course. BUT...no more TSP, state income tax or the usual federal payroll deductions .
COL Expenses are what they are, a variable I cannot control completely.
I continue to save for my long term retirement, but this time I am using dividends from my muni bond fund to cover the monthly DCA.

 

[clifp]

Early Retirement Extreme Permaculture Research Institute of Australia

Here you can see how long you'd have to work given a real interest rate (nominal + inflation). A real interest rate of 3% is realistic, and somewhere between the red line and the green line in the graph.

So you can see the typical "early retiree" of this forum defined as someone who retires between the ages 40 and 55 and thus works 20-30 years would need a savings rate of 40-50%. The normal retiree would work 40-45 years and thus needs a savings rate of 10-20%. Lower savings rates under 10% would mean working all your life. You can also see how extremely high savings rates, i.e. above 75% would allow you to FIRE within a decade(!) This either means putting your efforts into making a lot of money or putting your efforts into spending very little money or perhaps a combination of the two.

Your chart is similar to my rule of thumb when I was looking at state and local pensions. I said that a typical pension fund that allowed a person to retire at 55 with salary that 2-3% times the number of years worked needs a combined contribution (employee and employeer) in the neighborhood of 25-35% per year.

I think this rule of thumb also applies for folks in the private sector. You need to max out your 401K (12.5%) find an employer that contributes and additional 3-6%. Plus save at least 10% and preferably 20% in IRA and taxable accounts in a very tax efficient (e.g. index funds) manner. The other hidden benefit of LYBM in the accumulation phase if you are socking away 25%+ of your salary than collecting a retirement income in the 65-75% range of your base salary doesn't require a cut back in lifestyle.

 

[foxfirev5]

Establish your priorities and go from there. At the bare minimum max out the 401K/403b and Roth's while building the other accts you desire. Meanwhile live your life

 

[Ronnieboy]

Some of them still didn't get it and someone actually said "I can't believe you still drive that old thing."

"That is why I am retired and not you "

Would have been my response.....

 

[SunsetSail]

Here is the secret LBYM formula:

Or you can just do what works for you.

 

[jacob]

Here is the secret LBYM formula:

LOL! I actually used to work with the general relativistic version of this momentum equation. The continuity equation is more what you're looking for when considering LBYM: money in - money out = money saved.

 

[GeoffC]

Quite a range of responses - let me clarify

People seem to have taken my original post in a number of distinctly different ways.

First, there are those who interpreted my post as a need for an estimate of how much I need--such as the posts suggesting that I try ES Planner or other calculations. While this is interesting, this is not what I am looking for in bring this up. These tools (including FIREcalc, FinancialEngines, and a range of others) are great--I developed one of the commercially available tools--but not my purpose.

Second, there are those who interpreted this as a request for advice. Clearly I did not provide enough information for that.

Many of you have read The Millionaire Next Door and will understand that one of the powerful things about the book is that it creates metrics that can help people figure out where they are and how other people achieve a specific goal. I am, by nature, analytical (I AM a member of Bogleheads forum--good call). I am interested in this stuff. I have previously written a book that focuses on the use of quantitative tools for long-term planning (I will not mention the name because I don't want to appear to be promoting a product here).

There are many ways to get to a state of financial security and I am interested in the common themes. We can surely just declare that we all need to live below our means and we can use estimates from some of the better calculators to figure out how to get there, but it is valuable and interesting to see how people *really* do this. Obviously more saving is better, but I don't think that most of the people here are the kind of folks who budget their toothpaste consumption. A lot of people here apparently own second homes.

I see the age-related issue. The younger you are, the less you probably save as a % of income. There is also the income level issue. Several of you have suggested that it is much harder to save 20% of your income if you are making $40K vs. $150K. Probably true--makes sense. Its hierarchy of needs. First you need to cover food, shelter, healthcare--then you can save.

If there are no generalities, so be it. If there are generalities (think Millionaire Next Door), this would be inspirational and potentially very helpful to a lot of people. We get our ideas from what we observe. That book helped many people to reconsider their choices.

Regards,

 

[MasterBlaster]

Here is the secret LBYM formula:

Or you can just do what works for you.

That would be the simplified version that applies only due to the assumption of spherical chickens.

The actual full-field LBYM equation(s) are listed below:

 

[GeoffC]

Specifically to Jacob...

I just checked out your blog. My guess is that you are are the far fringes of the FIRE socioeconomic choices. All well and good--someone has to be the extreme and its interesting to see how you do it. Most people who want to be FIRE do not want to live on $5000-$7000 per year (I think) and limit themseves to $300/month on housing. Perhaps I am wrong

 

[SunsetSail]

...the assumption of spherical chickens.

I find your lack of faith in spherical chickens disturbing.

 

[freebird5825]

That would be the simplified version that applies only due to the assumption of spherical chickens.

The actual full-field LBYM equation(s) are listed below:

Hey, cut that out. I'm having Physics final exam flashbacks.

 

[dex]

(I AM a member of Bogleheads forum--

(everyone) Hello Geoff

If you were to have a solution to your question; what would it look like?

Are you looking for a mathematical formula to help reach a goal?

Are you looking for a measurement tool that takes into account different parameters to evaluate where you are in reaching a goal?

Are you looking for a list of do's and don't's?

Did the people at Bogleheads forum determine the angel question? If so, what is the answer?

 

[jacob]

I just checked out your blog. My guess is that you are are the far fringes of the FIRE socioeconomic choices. All well and good--someone has to be the extreme and its interesting to see how you do it. Most people who want to be FIRE do not want to live on $5000-$7000 per year (I think) and limit themseves to $300/month on housing. Perhaps I am wrong

Indeed. I think you are right. However, I also think that part of the reason you're right is simply that the average savings rate of this country is approximately 0%. "Extreme" is simply a question of being several sigma away from the average with the average being quite low. To wit, in China saving 50% of your income is normal(!)

This is actually why I started my own forum. My readers were prodding me because they didn't feel they fit in here given that their typical savings rates are 50-90%. It becomes a "difference in kind" rather than a "difference in degree". Note, that some are on both forums, me including.

My guess is that most people on this forum are in the 30-40% savings rate range.

So to reiterate: What's typical depends on who you ask ...

A large group of people who will never retire or retire on SS only: Savings rate <10%
A big group who may retire at 60-70: Savings rate 10-20%
A decent group who will retire at 40-55: Savings rate 30-50%
A small group who will retire before 40 Savings rate >75%

 

[GregLee]

If there are no generalities, so be it.

There are no appropriate generalities, because LBYM is, as dex said above, a tactical rather than a strategical consideration. To the question "How far beneath your means?", the only sensible answer is "As far as necessary to achieve your goal." Because we don't practice frugality for its own sake, but only to get enough saved to FIRE.

 

[jacob]

To the question "How far beneath your means?", the only sensible answer is "As far as necessary to achieve your goal." Because we don't practice frugality for its own sake, but only to get enough saved to FIRE.

This is where I disagree or, more accurately, see it differently.

I actually do practice frugality for its own sake to reduce environmental impact and be more sustainable as well as to become more self-sufficient and economically resilient.

This also means that frugality is not a sacrifice to me, rather it's a way of life. FIRE then becomes a nice side-effect.

 

[dex]

This is where I disagree or, more accurately, see it differently.

I actually do practice frugality for its own sake to reduce environmental impact and be more sustainable as well as to become more self-sufficient and economically resilient.

This also means that frugality is not a sacrifice to me, rather it's a way of life. FIRE then becomes a nice side-effect.

You do not see it differently. You have more goals. You have retirement + environmental as the goal.

 

[GeoffC]

Okay--now I'm learning something

Okay...this is pretty cool. So we have two different world views. On one hand we have the 'save enough to meet your goal.' On the other hand, we have 'frugality is its own reward. FIRE is a consequence, but not THE goal.' Hmm. Interesting. I can definitely see both sides and how they manifest themselves. The way that is expressed in The Millionaire Next Door, which is somewhat more similar to Jacob's outlook in some ways--FIRE as a natural consequence of choices / actions rather than a goal.

To Dex: you ask what my goal is in looking at this? Really more of a philopsophical goal, I suppose. No, I don't think that there is a magic formula, but I bet there are some guidelines that would apply to most of the people who manage to achieve FI. It would be cool to identify those, as possible.

Perhaps the ideal is to reach a place where one actually has the ability to choose between Jacob's extreme or some other path. Most American's are not even close to the place that they could make Jacob's choice even if they wanted to...

Thanks for the thoughts--more welcome if people find this interesting.

 

[dex]

To Dex: you ask what my goal is in looking at this? Really more of a philopsophical goal, I suppose. No, I don't think that there is a magic formula, but I bet there are some guidelines that would apply to most of the people who manage to achieve FI. It would be cool to identify those, as possible.

You have gone from metric/measurement to philosophical/guidelines.

You have been thinking about this for awhile so it would be helpful to others if you kicked off the discussion with your ideas. It would also help in focusing the discussion.

 

[East Texas]

I never used a calculator to determine how much I needed to save / have available for retirement. Somehow I managed to rely on good old common sense.

 

[travelover]

I never used a calculator to determine how much I needed to save / have available for retirement. Somehow I managed to rely on good old common sense.

I was lucky, too.

 

[brewer12345]

Okay...this is pretty cool. So we have two different world views. On one hand we have the 'save enough to meet your goal.' On the other hand, we have 'frugality is its own reward. FIRE is a consequence, but not THE goal.' Hmm. Interesting. I can definitely see both sides and how they manifest themselves. The way that is expressed in The Millionaire Next Door, which is somewhat more similar to Jacob's outlook in some ways--FIRE as a natural consequence of choices / actions rather than a goal.

To Dex: you ask what my goal is in looking at this? Really more of a philopsophical goal, I suppose. No, I don't think that there is a magic formula, but I bet there are some guidelines that would apply to most of the people who manage to achieve FI. It would be cool to identify those, as possible.

Perhaps the ideal is to reach a place where one actually has the ability to choose between Jacob's extreme or some other path. Most American's are not even close to the place that they could make Jacob's choice even if they wanted to...

Thanks for the thoughts--more welcome if people find this interesting.

Did you buy that stuff on a street corner or did you make/grow it yourself? Do you prefer to smoke it, shoot it, snort it, suppositories, something else?