Having enough money to live if you stop spending money isn't rich, rich is having enough money that you can spend and you don't have any long term concerns. $500,000 (or even a million) for the rest of your life is not rich, it's being secure. If you can't buy a new sports car on a whim you're not rich. The plan (save and then live off of the returns) is sound and if you're a careful spender it's great, but to say you're rich is a big stretch.
Pitching this as something that will make you rich creates terrible expectations of what the plan actually is.
I somewhat disagree. Rich is always relative. Having substantially more money than you need to live the lifestyle you want to live is rich by my standards.
Over time, this $20,000 stream accumulates and compounds at 5% after inflation, and raises their combined net worth by an additional $1.329 million over the next 30 years.
It wasn't mentioned, but I guess the money is being reinvested in equities. 5% is a stretch goal seeing as the savings rate in the US is around 1% (or less). Inflation there is running at about 2-3%. I see no talk of capital gains taxes or broker fees in there, so I'm a bit skeptical when people throw around instant, magical compounding calculations that net a million dollars.
Oh, it's 5% after inflation which means the money is compounding at approx. 8% or so. That's a very lofty goal!
I think that the lesson is -- if you can get your expenses down to $20,000 (which is really hard), you have a chance. In real life, you'll have to make up the difference somehow
1. Work a little
2. Get expenses even lower
3. Find ways to get the 8% return you need (rental property?)
Even the site's writer admits in comments that he's not there. My biggest gripe is healthcare -- in the US, you need to factor in health insurance costs.
He's also taking out $20k per year, a whopping four percent. Standard in the financial planning industry is that long term retirees need to keep their annual draw down to about 2% to keep their portfolio steady or growing.
So 4% to spend, 5% in real growth, 2% inflation -- 11% nominal gains per year. That's achievable, but he's going to need to be a damn good investor.
This reminds of a conversation I had with a Uncle of mine some weeks back. He is sort of Semi Retired. So I asked him how can one retire at 40.
There came the answer, he asked me to define retirement. After some answers and counter questions he asked me to look at it this way. Retirement is not doing 'nothing ever after'. Retirement is basically having enough money to not fear getting fired, to not worry about bills, expenses, food, clothes, fuel, health care and kids education. Then when you are this free, go and work on what you always wanted to work on. May be that is music, may be that is apple farming or whatever. But when you go down this route, you never stop working. Except that you now work on things you enjoy.
But if your definition of retirement is doing 'nothing ever after'. Then you sure need lots and lots of cash, real estate, good insurance and kids who can take care of you in old age. That is difficult to achieve, assuming you don't win the start up lottery. After total analysis(I'm 27 currently), this is what I believe can make you rich.
a. Never have credit card,loans or any kind of debt.
Interest is a dangerous thing and often eats most
of your earnings.
b. Understand how much you need to save and invest.
Get a good savings and investment plan *now*.
c. Productivity is extremely important because you are
working against time.
d. Have side projects, that can be monetized. Do not
work for your company for more than what they pay
you.
e. Use every savings and investment opportunity, even if
it means saving and investing little.
With a little hard work, clever savings, investments and avoiding debts and interests any person go far. Also I don't get blind consumerism to keep buying stuff you just don't need at all.
With all this and monetizable side projects any person can be financially stable by 40-45ish to have money to relax and take life as it is supposed to be taken.
If the goal of retirement is beach-sitting I don't want it. Money is energy of your experiments in life and if you spend bare minimum you are missing a lot in life. I would rather work on what I love for the entire life and create more possibilities to get rich. Spending $20,000/year sounds like going on hibernation mode for the rest of your life. Its a plan for people who are chronically lazy.
Unless you have a trust fund or came into money early, just saving $50,000 a year for the last 10 years was pretty tough. You'd need to go without health insurance and probably already own a home. Be in a high-pay, low schooling job. No kids, no un-employed spouse, no pets. No health problems. No job or startup failures. NO MISTAKES.
The people who have accomplished this exist but are few and far between. They are the extreme exception, definitely not even a corollary to the rule.
The fictional example forgets to factor in unexpected health costs, emotional distress from no close family and living in a shack in a war torn village.
Okay, slight over exaggeration but anyone could retire early. However it takes sacrifice. It usually involves living away from your family and living in a second/third world country. It assumes you have no unplanned costs (health, weather...). Not terrible but worth considering before quitting your job.
Where do you get living in a third world country? The numbers are reasonable ballpark figures taken from real people living in America. With spouses and kids and health insurance that covers medical disasters.
I have found it quite possible to spend ~$20k annually living in San Francisco and (currently) Palo Alto. Of course, I don't own a car, don't have kids, and live with six housemates, but the lifestyle suits me just fine for now.
This certainly doesn't sound like very much fun. You slave away for 15 years to get your $500k stash. And then, once you've gotten there, you retire, and end up cutting back on expenses by driving a shitty car, quitting your gym, etc. Now, you just "sit back" and wait 30 years for your $1m to roll in. Then you're 65 and practically dead. (Oh and don't forget, inflation is ignored here and has probably eaten well into your real returns.)
Better to save up enough money to live on semi-comfortably for a year or two (say, $200k) and make a leap out of the ratrace. Start a business that has the potential to generate a large amount of income quickly with low startup costs and be sold as equity for a high price after some time. Fail, and repeat for the next two years. Hopefully at some point you will get cash flow positive and will not be forced back into the rat race. If you've played your cards right your incoming cash flows will largely be passive, leaving you the freedom to expand into new areas in the quest for high growth. One can imagine that after 5 years of being out of the rat race, you will end up stumbling upon a high growth business that can start bringing in serious cash.
After 5 years of effort you will hopefully have $1-5m. You almost certainly will have more than the $250k you started with. Provided you have been smart and not increased your standard of living as you earn this money plug it into safe, income generating investments like bonds, CEFs, and dividend value stocks.
Congratulations, you can now kill off any income streams you may have had that were taking up time (and were not passive) and can decide if you want to live on the interest or continue searching for more growth, to get you to that $10m point where the interest starts being "I think I will buy a new car today" levels. You're also probably in your late 30s early 40s and can actually still enjoy life.
You're missing the point of being "frugal". It's not about "giving up" the "good life" and punishing yourself to go without. It's about coming to the realization all that crap isn't making you happier anyway, so better not to go to work to earn money to buy it.
I drive a $450 car, have no TV or cell phone and have never been happier in my life.
> Now, you just "sit back" and wait 30 years for your $1m to roll in.
When you say "Sit back" what you really mean is "do whatever you want with your time". It's important to note that doesn't mean doing nothing - it means exploring your passions and dreams, which could be anything from volunteering at the homeless shelter to contributing to open source projects to building that deck on your house to actually raising your own kids instead of sending them off to expensive childcare. I sure as hell don't sit around and do nothing when I'm not at work.
> Then you're 65 and practically dead.
That's the whole reason you need to get out of work NOW! At this rate, you'll (everyone) will be sitting at a desk until they are "practically dead". At least if you get out of work now, you can enjoy the years between now and 65 doing whatever the hell you want to every day. And, of course, all the years that come after 65 too.
>"I think I will buy a new car today"
I actually have never bought a new car, and have no interest in doing so. If you actually want to buy a new car today, then you have linked happiness with money, and it will be very hard for you to live the frugal life which lets you go to work less.
1) Living frugally doesn't have to suck. Being "I think I'll buy a new car today" rich doesn't actually make you any happier.
2) Retired means that you don't have to work if you don't want to. It doesn't mean that you have to sit around and do nothing.
3) Inflation is not ignored.
4) Most of the people here at HN probably can save $500k in 7-8 years, not 15.
> Start a business that has the potential to generate a large amount of income quickly with low startup costs and be sold as equity for a high price after some time. Fail, and repeat for the next two years. Hopefully at some point you will get cash flow positive and will not be forced back into the rat race.
Now I'm actually trying to implement a version of what you suggest, myself. So I do believe it's possible. But how likely is it, really? Based on my experience, it is very, very hard. And I'm suspicious that it won't work. It seems far more likely that after a couple years, I'll have spent a bunch of my savings, and will just have to go back to full-time employment.
Also, FWIW, I really don't need a "high income" business at this point. Just enough to cover my yearly expenses, which amount to about $30-40K. More is always welcome of course, but I'd rather live on less and not have to go back to work as an employee. It didn't agree with me.
For those of us who don't follow this site, is there a suggestion as to where the initial half million dollars comes from? That's not always an attainable goal for someone under about 40...
In his case, it was a combination of frugality, a decent paying job, and good investing, esp. in real estate (note the "Eventually both rentals were sold and the gains were put elsewhere.") in the "Brief History of the Stash" article. Having gains on real estate probably means he sold them pre-crash.
I'm a fan of the MMM blog because it describes an attainable alternative lifestyle for talented people who aren't already wealthy. It may not be a lifestyle that many people want, but at least it's a change from the high college debt, two income trap, expensive city lifestyle that seems to be the norm for lots of young families.
I don't aspire to live on 20K per year, but thinking about how lowering your personal "burn rate" can give you more freedom in your life is a great mental exercise.
This isn't really a millions miles away from what Tim Ferris is suggesting in 4 Hour Work Week (which everyone seems to universally hold up as the best self help book ever ... I disagree) but going about it in a different way. I think all ideas like this have merit in certain circumstances, the trick is to realise that it won't all apply to your situation and that you should take the basic principles and see if it fits for what you want in life.
This is the strategy of weak people. If it is actually used, in the way prescribed, by an average middle class American it will inevitably lead to financial ruin.
The only people who can realistically live off of this strategy are investors who know what their doing and can easily make orders of magnitude more than this using their own methods.
Though if you think this is the strategy for you, then more power to you. Can I just get you to sign a waiver that bars you from whining to the government or big business when it doesn't work out for you?
> This is the strategy of weak people. If it is actually used, in the way prescribed, by an average middle class American it will inevitably lead to financial ruin.
It's worth pointing out you've been conditioned to think this is the strategy of weak people. Who are you to call someone else "weak" for choosing to spend less time at a job? This person is not going to have a big screen TV like you, not going to drive a fancy car like you and has a few thousand square feet less than you to live in. These are all choices we are free to make, and calling someone "weak" for that is unproductive and pointless.
You've been manipulated into thinking you must work full-time until a few years before your life expectancy is up, and anything else is "weak". This is a lie.
It's also interesting you think it will lead to financial ruin. If everyone did this, it would undoubtedly lead to lower growth than we have now, and, as sad as it sounds, many corporations would not be making billion dollar profits year over year. Of course, millions and millions of people would have more time to enjoy with their families and to pursue their dreams.
I'm not sure what point you're trying to make. The core idea is that you can live a decent life in America for much less than most people do. By doing so you free up enough money that even simple, fairly conservative investments can generate enough passive income to cover your reduced living expenses in short order. After that you can do whatever you want: sit on a beach, learn metalworking, pile up a huge mountain of redundant cash, anything. That's all he's really saying, and he's got numbers to back it up.
[+] [-] citricsquid|13 years ago|reply
Pitching this as something that will make you rich creates terrible expectations of what the plan actually is.
[+] [-] UkiahSmith|13 years ago|reply
If you work for your money you're not rich. You are rich if your money works for you.
[+] [-] highfreq|13 years ago|reply
[+] [-] ww520|13 years ago|reply
[+] [-] sevenstar|13 years ago|reply
[+] [-] typicalrunt|13 years ago|reply
It wasn't mentioned, but I guess the money is being reinvested in equities. 5% is a stretch goal seeing as the savings rate in the US is around 1% (or less). Inflation there is running at about 2-3%. I see no talk of capital gains taxes or broker fees in there, so I'm a bit skeptical when people throw around instant, magical compounding calculations that net a million dollars.
Oh, it's 5% after inflation which means the money is compounding at approx. 8% or so. That's a very lofty goal!
[+] [-] loumf|13 years ago|reply
1. Work a little 2. Get expenses even lower 3. Find ways to get the 8% return you need (rental property?)
Even the site's writer admits in comments that he's not there. My biggest gripe is healthcare -- in the US, you need to factor in health insurance costs.
[+] [-] ProCynic|13 years ago|reply
[+] [-] cjlars|13 years ago|reply
So 4% to spend, 5% in real growth, 2% inflation -- 11% nominal gains per year. That's achievable, but he's going to need to be a damn good investor.
[+] [-] kamaal|13 years ago|reply
There came the answer, he asked me to define retirement. After some answers and counter questions he asked me to look at it this way. Retirement is not doing 'nothing ever after'. Retirement is basically having enough money to not fear getting fired, to not worry about bills, expenses, food, clothes, fuel, health care and kids education. Then when you are this free, go and work on what you always wanted to work on. May be that is music, may be that is apple farming or whatever. But when you go down this route, you never stop working. Except that you now work on things you enjoy.
But if your definition of retirement is doing 'nothing ever after'. Then you sure need lots and lots of cash, real estate, good insurance and kids who can take care of you in old age. That is difficult to achieve, assuming you don't win the start up lottery. After total analysis(I'm 27 currently), this is what I believe can make you rich.
With a little hard work, clever savings, investments and avoiding debts and interests any person go far. Also I don't get blind consumerism to keep buying stuff you just don't need at all.With all this and monetizable side projects any person can be financially stable by 40-45ish to have money to relax and take life as it is supposed to be taken.
[+] [-] Aftershock21|13 years ago|reply
[+] [-] Zimahl|13 years ago|reply
Unless you have a trust fund or came into money early, just saving $50,000 a year for the last 10 years was pretty tough. You'd need to go without health insurance and probably already own a home. Be in a high-pay, low schooling job. No kids, no un-employed spouse, no pets. No health problems. No job or startup failures. NO MISTAKES.
The people who have accomplished this exist but are few and far between. They are the extreme exception, definitely not even a corollary to the rule.
[+] [-] stephen|13 years ago|reply
Not that there's anything wrong with that.
[+] [-] ChuckMcM|13 years ago|reply
[+] [-] sparknlaunch12|13 years ago|reply
Okay, slight over exaggeration but anyone could retire early. However it takes sacrifice. It usually involves living away from your family and living in a second/third world country. It assumes you have no unplanned costs (health, weather...). Not terrible but worth considering before quitting your job.
[+] [-] ProCynic|13 years ago|reply
[+] [-] lanstein|13 years ago|reply
[+] [-] fivethirty|13 years ago|reply
[+] [-] gghootch|13 years ago|reply
See http://earlyretirementextreme.com/how-i-live-on-7000-per-yea... as also seen in @ProCynic's post.
Edit: ok, fail.
[+] [-] gfodor|13 years ago|reply
Better to save up enough money to live on semi-comfortably for a year or two (say, $200k) and make a leap out of the ratrace. Start a business that has the potential to generate a large amount of income quickly with low startup costs and be sold as equity for a high price after some time. Fail, and repeat for the next two years. Hopefully at some point you will get cash flow positive and will not be forced back into the rat race. If you've played your cards right your incoming cash flows will largely be passive, leaving you the freedom to expand into new areas in the quest for high growth. One can imagine that after 5 years of being out of the rat race, you will end up stumbling upon a high growth business that can start bringing in serious cash.
After 5 years of effort you will hopefully have $1-5m. You almost certainly will have more than the $250k you started with. Provided you have been smart and not increased your standard of living as you earn this money plug it into safe, income generating investments like bonds, CEFs, and dividend value stocks.
Congratulations, you can now kill off any income streams you may have had that were taking up time (and were not passive) and can decide if you want to live on the interest or continue searching for more growth, to get you to that $10m point where the interest starts being "I think I will buy a new car today" levels. You're also probably in your late 30s early 40s and can actually still enjoy life.
[+] [-] grecy|13 years ago|reply
I drive a $450 car, have no TV or cell phone and have never been happier in my life.
> Now, you just "sit back" and wait 30 years for your $1m to roll in.
When you say "Sit back" what you really mean is "do whatever you want with your time". It's important to note that doesn't mean doing nothing - it means exploring your passions and dreams, which could be anything from volunteering at the homeless shelter to contributing to open source projects to building that deck on your house to actually raising your own kids instead of sending them off to expensive childcare. I sure as hell don't sit around and do nothing when I'm not at work.
> Then you're 65 and practically dead.
That's the whole reason you need to get out of work NOW! At this rate, you'll (everyone) will be sitting at a desk until they are "practically dead". At least if you get out of work now, you can enjoy the years between now and 65 doing whatever the hell you want to every day. And, of course, all the years that come after 65 too.
>"I think I will buy a new car today"
I actually have never bought a new car, and have no interest in doing so. If you actually want to buy a new car today, then you have linked happiness with money, and it will be very hard for you to live the frugal life which lets you go to work less.
[+] [-] ProCynic|13 years ago|reply
[+] [-] dragons|13 years ago|reply
> Start a business that has the potential to generate a large amount of income quickly with low startup costs and be sold as equity for a high price after some time. Fail, and repeat for the next two years. Hopefully at some point you will get cash flow positive and will not be forced back into the rat race.
This is the part where you lose me. It reminds me of Sidney Harris' cartoon: http://www.flickr.com/photos/jpallan/4633000725/
Now I'm actually trying to implement a version of what you suggest, myself. So I do believe it's possible. But how likely is it, really? Based on my experience, it is very, very hard. And I'm suspicious that it won't work. It seems far more likely that after a couple years, I'll have spent a bunch of my savings, and will just have to go back to full-time employment.
Also, FWIW, I really don't need a "high income" business at this point. Just enough to cover my yearly expenses, which amount to about $30-40K. More is always welcome of course, but I'd rather live on less and not have to go back to work as an employee. It didn't agree with me.
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] sevenstar|13 years ago|reply
[+] [-] ProCynic|13 years ago|reply
[+] [-] ww520|13 years ago|reply
[+] [-] fennecfoxen|13 years ago|reply
[+] [-] rflrob|13 years ago|reply
[+] [-] ProCynic|13 years ago|reply
[+] [-] wiredd|13 years ago|reply
I'm a fan of the MMM blog because it describes an attainable alternative lifestyle for talented people who aren't already wealthy. It may not be a lifestyle that many people want, but at least it's a change from the high college debt, two income trap, expensive city lifestyle that seems to be the norm for lots of young families.
I don't aspire to live on 20K per year, but thinking about how lowering your personal "burn rate" can give you more freedom in your life is a great mental exercise.
[+] [-] simonbarker87|13 years ago|reply
[+] [-] unknown|13 years ago|reply
[deleted]
[+] [-] chives|13 years ago|reply
The only people who can realistically live off of this strategy are investors who know what their doing and can easily make orders of magnitude more than this using their own methods.
Though if you think this is the strategy for you, then more power to you. Can I just get you to sign a waiver that bars you from whining to the government or big business when it doesn't work out for you?
[+] [-] grecy|13 years ago|reply
It's worth pointing out you've been conditioned to think this is the strategy of weak people. Who are you to call someone else "weak" for choosing to spend less time at a job? This person is not going to have a big screen TV like you, not going to drive a fancy car like you and has a few thousand square feet less than you to live in. These are all choices we are free to make, and calling someone "weak" for that is unproductive and pointless.
You've been manipulated into thinking you must work full-time until a few years before your life expectancy is up, and anything else is "weak". This is a lie.
It's also interesting you think it will lead to financial ruin. If everyone did this, it would undoubtedly lead to lower growth than we have now, and, as sad as it sounds, many corporations would not be making billion dollar profits year over year. Of course, millions and millions of people would have more time to enjoy with their families and to pursue their dreams.
[+] [-] ProCynic|13 years ago|reply
[+] [-] bstewartnyc|13 years ago|reply