Get rich by saving 25%

[Delawaredave5]

Good article - author calls "rich" having 20x your income - and you can get there by saving 25% per while working. Author then assumes 5% SWR (steep, I know) and retire. Numbers /assumptions all seem reasonable.

Secret to getting rich - CSMonitor.com

 

[W2R]

If a nestegg of 20x income is "rich" to this guy, then he would probably think that most of the retirees on the forum are "filthy stinkin' rich".

But yes, his assumptions seem reasonable, although a 5% SWR would keep me up nights worrying.

 

[arebelspy]

I saw this post on The Simple Dollar a day or two ago, and saw a few flaws I figured would drive people here nuts (such as using income, rather than expenses).

Overall it's a decent article for someone brand new to the concept of LBYM and RE.

 

[Ronnieboy]

I have read the authors blog "The Simple Dollar" before. He is very frugal also, he has had posts on making ones own washing machine soap, hot cocoa mix, and instant oatmeal. He even showed where he could make a better $1 hamburger for less than McDonalds.

Interesting, but I know my DW wouldn't eat my homemade instant oatmeal over Quaker's. In fact I couldn't get her to eat the Target generic instant oatmeal packets even though Consumer Reports said it was just as good

 

[nun]

Good article - author calls "rich" having 20x your income - and you can get there by saving 25% per while working. Author then assumes 5% SWR (steep, I know) and retire. Numbers /assumptions all seem reasonable.

Secret to getting rich - CSMonitor.com

If you are able to save 25% of your income then you are definitely LBYM so that you don't need 20x that income to retire. If you can actually save 25% then you should be able to retire on savings of 15x income and if you include SS it will be less, for me I'm looking at being comfortable on 10x income. And what's income got to do with it....it should be expenses

The flaw in the basic premise is that only people on ER forums save 25%. mention that number to most people and they will rightly laugh at you as most live pay check to paycheck.

 

[GaryInCO]

If a nestegg of 20x income is "rich" to this guy, then he would probably think that most of the retirees on the forum are "filthy stinkin' rich".

No wonder y'all have such comfy retirements, if you have >> 20x income in the bank. I'd be retired too if I had that.

I'm 54 and I've only got about 5x in liquid, plus another 5x or so in paid-off real estate, some of which I gotta live in. Plus maybe 3x in inheritance from my mom sometime within 5-10 years. Plus two teenagers approaching college. We LBOM for most of the last 20 years but my stock-market record sucks, and DW wasn't much better. (And now she's walking with her half of our joint assets anyway.) Awful hard to grow your nest egg when you seem to keep losing the $10-20k you stick into the 401k every year. That's why we put the money into paying off mortgages.

I sure did something wrong... and I don't know when I'll be able to retire. I have nightmares of working as a Walmart greeter in my 70's.

 

[steelyman]

No wonder y'all have such comfy retirements, if you have >> 20x income in the bank. I'd be retired too if I had that.

One thing that seems confusing to me when reading the posts here is whether people are talking about income (as in, gross income when you were working or take-home after taxes) or expenses (the LBYM thing).

20x income is indeed a lot of money. I suppose I would be there, but I'd need to add in the value of my expected pension (i.e., how much needs to be banked to reliably throw off that annual income), which I do not do.

 

[W2R]

Ah, Steelyman is right. I was thinking about 20x retirement income, not 20x gross working income. Expenses are really low in retirement, for me.

Oops!

 

[clifp]

Ah, Steelyman is right. I was thinking about 20x retirement income, not 20x gross working income. Expenses are really low in retirement, for me.

Oops!

Exactly if you make 100K and are saving 25%, plus paying SS and Medicare, higher income taxes, and various work related expense. You are probably living on the equivalent of $60-$65K pre tax income. Living on 60K in retirement involves no major cutback in lifestyle and can be done with 15x your gross salary or the more useful 25x retirement income.

 

[chinaco]

Here is his definition.

Let’s say you have someone who is making $40,000 per year. They have no debts, but no assets, either – a net worth of $0. Let’s also define “rich” as being having 20 times your annual income in investments, which means if the investment earns just a 5% return, you can live on just that return in perpetuity.

 

[nun]

Here is his definition.

Let’s say you have someone who is making $40,000 per year. They have no debts, but no assets, either – a net worth of $0. Let’s also define “rich” as being having 20 times your annual income in investments, which means if the investment earns just a 5% return, you can live on just that return in perpetuity

That would definitely be rich. However, it isn't really relevant to whether or not you could retire. Obviously if you save 25% of that $40k your income for retirement calculations should be $30k. Then you have to account for costs that go down in retirement and paying off the mortgage. So the conclusion is that you don't need to be rich (by the columnists definition) to retire.

 

[mystang52]

In some ways this is a self-fulfilling prophesy. For most people, socking away 25% of income defines someone who knows how to LBYM, and therefore will accumulate a significant amount of $$.
Except for people whose income is in the stratosphere, it is very difficult to save 25% for the typical income earner. There are so many "leaks" pulling at one's income - home maintenance, cars, kids, kids' college expenses, etc. If despite these tugs on one's income a person can sock away 25%, that person will have no trouble accumulating riches.

 

[nun]

In some ways this is a self-fulfilling prophesy. For most people, socking away 25% of income defines someone who knows how to LBYM, and therefore will accumulate a significant amount of $$.
Except for people whose income is in the stratosphere, it is very difficult to save 25% for the typical income earner.

+1. It's increasingly difficult to save as wages don't keep pace with inflation and costs like medical and pensions (ironically) are shifted from the employer to the employee. Add in the cost of education and the idea that 25% of income can be found to save for retirement is pretty laughable for the average family. If you still have a DB pension, work for Government or military, own a successful business or are well paid and single you might be able to find some extra cash....but it's almost impossible for most people working in regular salaries positions.

 

[jackontrack]

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.

 

[nun]

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.

I think it would require more than lifestyle changes....more like deprivations.

 

[scrabbler1]

I saw this post on The Simple Dollar a day or two ago, and saw a few flaws I figured would drive people here nuts (such as using income, rather than expenses).

Overall it's a decent article for someone brand new to the concept of LBYM and RE.

This was the first thing I noticed, too. In my case, suddenly decreasing my wage income twice in the last decade (I switched to part-time from full-time then cut my hours again a few years later) would surely disrupt the author's algorithm.

As Mystang pointed out, there are more tugs on one's income while younger than older. For me, these included buying cars, my apartment, and paying off my student loans all before I turned 30, all causing my savings rate to be very erratic. Then I refinanced my mortgage which saved me a chunk of money. I am childfree so I did not have to worry about any kids draining my nest egg.

Once I paid off the mortgage, my savings rate was at least 42% for the next 8 years and that included the first of two pay cuts.

 

[rescueme]

Once I paid off the mortgage, my savings rate was at least 42% for the next 8 years and that included the first of two pay cuts.

Yes, it is amazing that these articles related to "what you should/must do" don't reflect real life facts for the vast majority of folks.

Just some more BS (and a bit of income, for the author).

Hey - I don't charge a penny for my opinion ...

However, I don't think the article applies to most folks on this forum.

 

[GaryInCO]

I think it would require more than lifestyle changes....more like deprivations.

For some people, sure. Some people truly are desperately living check to check.

But for a huge number of people, they could easily LBYM if they gave up some things that too many people see as "necessities:" daily $5 cups of Starbux liquid gold, fancy iPhones or Androids and $100/mo or more for cellphone plans, $60-100/mo for cable/satellite/etc, 50"+ flatscreen TV, lots of eating out, frequent new cars, yadda yadda.

DW makes her multiple daily lattes at home using a 20-yr-old wedding-gift espresso machine -- which is much more convenient, considering she works at home. We canceled our $80/mo satellite TV and replaced it with $10/mo Netflix. We have minimal cellphone plans, no data or texting. Her car is a Porsche but it's 26 yrs old; mine is a 9 yr old Saab and I love it. These are not deprivations, just choices.

If more people were willing to drop some of these frivolous "necessities," a lot more could easily LBYM.

 

[Major Tom]

Overall it's a decent article for someone brand new to the concept of LBYM and RE.

Agreed. Very few on this board would find much of interest in the article. The kind of people who would find it interesting are most likely only just getting interested in saving and investing and for these people, ball-park figures and rough ideas work well enough; that's what this article provides.

 

[FUEGO]

I like the article. Simple, almost trite advice. But it gets the point across to people who aren't saving anything today. Buckle down, save a quarter of what you make, and in 28 years you will be rich. Roughly the same amount of time it takes to get a pension from government employment.

There are probably plenty of people who put away 5-10% of their income and think that that will give them a secure well funded retirement at a relatively early age. This article suggests you may need to up the percentage some to attain a comfortable retirement. A wake up call for many I would think.

 

[ziggy29]

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.

 

[Independent]

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.

 

[GaryInCO]

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.)

 

[Nords]

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.

 

[growing_older]

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.