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Old 05-18-2012, 12:45 PM   #21
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If anyone has ideas for different scenarios or tweaks to this one let me know. I'm having fun with excel in my boredom
One scenario that I am interested in is what about a HS senior who takes a job that makes 25% less than the engineer out of high school, maxes out their IRA at $5k per year starting at age nineteen, and skips college and the 100k cost while earning a salary for 4 years. Lack of college drinking aside, Who turns out better for early retirement?
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I get up at 7 yeah, and I go to work at 9. Got no time for livin yes I'm workin all the time. Seems to me I could live my life a lot better than I think I am. I guess thats why they call me the Working Man.
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Old 05-18-2012, 01:43 PM   #22
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One scenario that I am interested in is what about a HS senior who takes a job that makes 25% less than the engineer out of high school, maxes out their IRA at $5k per year starting at age nineteen, and skips college and the 100k cost while earning a salary for 4 years. Lack of college drinking aside, Who turns out better for early retirement?
Ah the steady yet lowly paid ant versus the highflying grasshopper.

I suppose that the time-weighted savings amounts of each will tell the whole story.

So yes, the lowly paid ant can indeed outperform their higly paid grasshopper peers.
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Old 05-21-2012, 08:40 AM   #23
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Originally Posted by DJRR View Post
One scenario that I am interested in is what about a HS senior who takes a job that makes 25% less than the engineer out of high school, maxes out their IRA at $5k per year starting at age nineteen, and skips college and the 100k cost while earning a salary for 4 years. Lack of college drinking aside, Who turns out better for early retirement?
It's not a binary question. The high school senior could still go to community college part-time while working full-time. Or s/he could get a scholarship, or some other sort of financial aid. Lots of possibilities for bringing that $100k cost down and still work.

The key point remains. Start early no matter how little you can contribute. Unfortunately, and as I mentioned in response to the OP, this all assumes that the high school senior has financial wisdom beyond his/her years. This is why we should make it mandatory that all high school seniors go through at least one practical finance course. Courses in entrepreneurship to find the next Gates, Ellison, Jobs, Zuckerberg, etc.... are nice, but who is going to invest in a company if the founder can't handle his/her own finances?
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Old 05-21-2012, 09:21 AM   #24
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Originally Posted by DJRR View Post
One scenario that I am interested in is what about a HS senior who takes a job that makes 25% less than the engineer out of high school, maxes out their IRA at $5k per year starting at age nineteen, and skips college and the 100k cost while earning a salary for 4 years. Lack of college drinking aside, Who turns out better for early retirement?
here you go...

You provided:
Starting Salary: 25% less than engineer
Started Working: Age 19 (1970)

Assumptions (variables you left out):
- Salary increase: 5.5% (same as engineer)
- $5K set aside in 1970 is not realistic since it is over half of his take home pay. I'll assume what you meant is 13.3% over his working career (which would be the equivalent of starting out today saving $5K on a $37,500 starting salary - which is 25% that of the starting for the engineer)

Results:

He would have $945,062 today... which would represent 16x his salary of $58,209. He could have had the option for early retirement in 2006 (at the age of 55) when he had 21x his salary... but would have required moving some or more of his retirement to safe investments (something I don't account for in these examples because though it makes the scenarios more realistic, it makes them harder to understand at a base level, and harder to define as people have different assumptions and opinions about how and when to move towards bonds and away from equities... like the S&P500 used for this example)

As I indicated in my last post... retirement is more about what you have compared to your salary... not how big the actual number it. In that sense, if someone started working right out of HS with an extra 4 years to grow... AND was also on a career track with a lower increase in salary. They'd likely end up with the possibility of achieving early retirement much easier than the engineer in our first example... because they'd need a lot less money to retire.

Its no surprise, but maximizing how much you save and how early you start... will get you to ER faster. One of the other points I was trying to make is that the more your salary increases over your working career... the harder it becomes to ER if (big if) you plan to carry that higher income into retirement spending too.
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Old 05-21-2012, 09:42 AM   #25
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I think what the example was really asking is... can bypassing college and starting to work earlier make your life easier in terms of getting to ER?

Here is a better example IMO...

first lets bump the birthday back to 1946 so they would both be 65 in 2011...

Lets use the same two guys: Engineer who went to school and started working at age 23 making $50K today's dollars in 1969... vs... HS grad who skipped college to start working for 25% less than engineer in 1965. Lets assume that the engineer salary increases an average 5.5% but the non-college grade has a 5% increase due to less of a career ladder. Lets also assume both start saving 15% of their salary right away and continue for their entire careers investing it all into the S&P500 which we'll use its yearly returns to calculate the actual 401k balance they would have.

Engineer: Starting Salary in 1969 is $8,198 ($50K today's dollars), and ends up with a salary of $77,680 in 2011. His 401k grew to $1,312,127 or 17x his final salary

HS-Grad: Starting Salary in 1969 is $5,480 ($37.5K today's dollars), and ends up with a salary of $51,700 in 2011. His 401k grew to $1,191,519 or 23x his final salary.

I would argue that the HS-Grad ended up better off... he certainly had a better opportunity to ER in 1999:

Engineer: salary was $40,858 and 401k was $1,129,730 (27x salary)
HS-Grad: salary was $28,788 and 401k was $1,050,005 (36x salary)

The answer is definitely YES... but you have to actually save. I think that is the problem. When you first start working is the optimal time to learn to LBYM and start saving for retirement... however, a person who starts working at 19 is even less likely to make that decision to save than someone who is 23.
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Old 05-21-2012, 02:13 PM   #26
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When you first start working is the optimal time to learn to LBYM and start saving for retirement... however, a person who starts working at 19 is even less likely to make that decision to save than someone who is 23.
The main reason for this is because the vast majority of 19-year olds (and 23-year olds for that matter) consider retirement so far away that it's not even fathomable. In other words, when you're young you think you're going to be young forever. It's not until you undergo some change in your life that the idea of getting old (and retiring) is even a nascent thought.
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Old 05-21-2012, 04:09 PM   #27
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The main reason for this is because the vast majority of 19-year olds (and 23-year olds for that matter) consider retirement so far away that it's not even fathomable. In other words, when you're young you think you're going to be young forever. It's not until you undergo some change in your life that the idea of getting old (and retiring) is even a nascent thought.
Our daughter's lived half of her life with ERs. That includes her having to slog off to school each day while we've gone surfing, or slept in, or just lazed around the house having all sorts of fun without her. Then we'd sit around all evening telling sea stories while she was trying to get her homework done.

It'll be interesting to see if she's driven to achieve her own financial independence, or if she totally rebels against the parental stereotype and finds an avocation that she can love and never have to retire from.
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Old 05-21-2012, 07:46 PM   #28
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The main reason for this is because the vast majority of 19-year olds (and 23-year olds for that matter) consider retirement so far away that it's not even fathomable. In other words, when you're young you think you're going to be young forever. It's not until you undergo some change in your life that the idea of getting old (and retiring) is even a nascent thought.
I guess that was my real thought. I did not find out about compound interest until I was ~ 30 while looking for a new career and went to a financial planner presentation. Skipped the career, but started investing Really changed my view when they said that x% of people live on Social Security only but if you put away x% you can do much better than average.

Hoping that my two daughters will start in high school and end up as multi millionaires or financially independent if they will act on it. One will be very successful in corporate America if she chooses, but one is a very talented musician/artist who I don't want to take a soul sucking job. If she saves early she could cobble together a career of teaching music, doing weddings, etc. and still be FI even if she never makes it really big.
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I get up at 7 yeah, and I go to work at 9. Got no time for livin yes I'm workin all the time. Seems to me I could live my life a lot better than I think I am. I guess thats why they call me the Working Man.
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Old 05-22-2012, 01:42 PM   #29
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Hoping that my two daughters will start in high school and end up as multi millionaires or financially independent if they will act on it. One will be very successful in corporate America if she chooses, but one is a very talented musician/artist who I don't want to take a soul sucking job. If she saves early she could cobble together a career of teaching music, doing weddings, etc. and still be FI even if she never makes it really big.
My dream is that my children will be financially independent such that they can pursue their passions from a young age. Historically, this is how many great artists, musicians, scientists, etc... were able to achieve their success. Namely, they came from families wealthy enough that they did not have to worry about working a job just to pay the rent. As a parent, the key is to fund their passion, not their laziness. They have to treat their passion as one would treat an enjoyable job, which in the end is exactly what it will become. Do what you love, and the (necessary) money will follow....
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Old 05-23-2012, 07:16 AM   #30
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They have to treat their passion as one would treat an enjoyable job, which in the end is exactly what it will become. Do what you love, and the (necessary) money will follow....
There were a couple of interesting short articles on this issue in the May 21, 2012 WSJ (page R7).

Rob Johnson, "Point. Set. Match. I Lose": "A realization started dawning on me. My passion for tennis was superficial - an outlet from my working life as a journalist - and I mistook it for something more. Teaching the game was like moving in with someone you've been dating, and then finding out you get on each other's nerves."

Tom McNichol, "Do What You Love? Maybe Not": "The problem is that 'do what you love' is incomplete advice, and sometimes misleading. Marty Nemko, a career coach and author in Oakland, California, says he often deals with clients who pursued a passion, only to find disappointment or financial disaster - because they went into it blinded by that love.... Many people believe that the best strategy is to pursue a pre-existing passion, and that will lead to career satisfaction, he explains. More often than not, he says, they find they're not actually good at it, don't like the work or can't make a go of it."
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