Get rich by saving 25%

[Surewhitey]

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.

 

[nun]

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.

 

[Independent]

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.

 

[FIRE'd@51]

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.

 

[Katsmeow]

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.

 

[chinaco]

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.

 

[haha]

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

 

[chinaco]

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.

 

[haha]

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

 

[rescueme]

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.

 

[Surewhitey]

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....

 

[chinaco]

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.