Author Topic: 25X spending vs. income  (Read 1396 times)

merlin7676

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25X spending vs. income
« on: February 19, 2020, 12:24:23 PM »
According to MMM, once you accumulate 25X your spending, you are FI.

Wouldn't it be easier to say once your passive income is making at least what your job income is, then you're FI?

For example, if you make 50K a year, and your passive income hits 50K a year, then you could retire since you're making the same amount (and living on it presuming nothing changes) without going to the job anymore?

Are these just two separate ways of determining FI or do they relate to each other somehow?

Just curious since my spending changes year to year (not significantly) if I need to replace an appliance or something...but my salary is steady throughout the year (other than that measly 2.5% increase each year regardless of performance).

thanks

terrifictim

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Re: 25X spending vs. income
« Reply #1 on: February 19, 2020, 12:33:03 PM »
OP,

Saying that once your passive income exceeds your job income then you're FI has a couple issues with it on both sides of the expenses categories.

1. If I'm earning $100k/yr and spending $110k/yr it doesn't matter whether that income is coming from active or passive accounts - then I'm still in the red and having to pull from elsewhere.
2. The more common approach is that I'm earning $100k/yr and expenses are $40k/yr. 25x spending says I need $1M which generates the passive income of $40k. To generate passive income of $100k I need $2.5M. So replacing my active income with passive income requires 2.5x the amount saved in order to retire.

That's why MMM is so focused on the savings rate - and not just pure income. Yes - replacing my active income with passive income is almost always guaranteed to leave you FI, but you end up working alot longer than you think you would need to.
* Even if you go more real estate focused - it's all about covering your expenses, not covering your income. 

ixtap

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Re: 25X spending vs. income
« Reply #2 on: February 19, 2020, 12:37:25 PM »
If you are saving money now, why do you need to generate the same amount in retirement?

What do you count as passive income? It implies that I never sell my investments, but why shouldn't I sell an investment that is greatly appreciated?

MrThatsDifferent

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Re: 25X spending vs. income
« Reply #3 on: February 19, 2020, 12:38:10 PM »
Youíre earning and rate and spending rate shouldnít correlate, those are the living paycheck to paycheck people. It also means it would generally take you longer to be FI if you use that criteria. Control your spending, donít be wasteful and then have 25x that and youíre good. Everything else is bonus.

If you donít think you can control it, post a case study and let people help you out.

American GenX

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Re: 25X spending vs. income
« Reply #4 on: February 19, 2020, 03:01:54 PM »
According to MMM, once you accumulate 25X your spending, you are FI.

Wouldn't it be easier to say once your passive income is making at least what your job income is, then you're FI?

It might be easy for you to say that, but it would be wrong.

I first made 6 figures years ago, but my spending has been a fraction of that.  My job income is irrelevant.  I could pay my required expenses with a passive income that is very low, considerably less than my spending, even more significantly less than my job income.  I've been FI for some time, so I could FIRE anytime, but I haven't FIREd yet.

MDM

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Re: 25X spending vs. income
« Reply #5 on: February 19, 2020, 09:06:33 PM »
...my spending changes year to year (not significantly) if I need to replace an appliance or something....
One should include annualized estimates for irregular but large expenses when projecting whether investments are sufficient to enable a safe withdrawal rate.

Villanelle

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Re: 25X spending vs. income
« Reply #6 on: February 19, 2020, 09:12:02 PM »
So if someone makes a million dollars a year and spends $25k, your math says that they need $25 million to retire. 

But your math also says that if someone makes $30k/yr and spends $25k, they only need $750k year.

$25m vs $750k.  But the same expenses.  Can you see how that makes absolutely no sense?

Acastus

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Re: 25X spending vs. income
« Reply #7 on: February 20, 2020, 02:13:47 PM »
Many Mustachians save a lot. It is easier to grasp with the example of your income is $100k and your spending is $50k. You need a passive income to replace the $50k, not $100k. The higher your savings rate, the more you notice it.

The reason the standard investment community assumes needing 70% of income in retirement is that most people just save a little, so they need to replace all of what social security does not cover. For most people, SS pays 30% of final salary.

American GenX

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Re: 25X spending vs. income
« Reply #8 on: February 20, 2020, 03:59:21 PM »
Many Mustachians save a lot. It is easier to grasp with the example of your income is $100k and your spending is $50k. You need a passive income to replace the $50k, not $100k.
You don't need $50K of passive income for $50K spending if you have assets you can live off of, like the principle of taxed investments, CDs, cash.  Only the realized gains, dividends, capital gains distributions, and interest are income.  As I mentioned in my earlier post, my spending will be much higher than my passive income after I FIRE.

spartana

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Re: 25X spending vs. income
« Reply #9 on: February 20, 2020, 04:05:34 PM »
Many Mustachians save a lot. It is easier to grasp with the example of your income is $100k and your spending is $50k. You need a passive income to replace the $50k, not $100k. The higher your savings rate, the more you notice it.

The reason the standard investment community assumes needing 70% of income in retirement is that most people just save a little, so they need to replace all of what social security does not cover. For most people, SS pays 30% of final salary.
Add to that that many pay off mortgages and other debts before RE. Or downsize to a lower COL area.. Or launch the rug rats. Etc.  So much of your $50k spending of your $100k income may be gone by the time you FIRE and you may find you only have $25k a year in spending/expenses. So may be a good reason to save less and FIRE sooner.
« Last Edit: February 20, 2020, 04:07:08 PM by spartana »

Malkynn

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Re: 25X spending vs. income
« Reply #10 on: February 20, 2020, 06:41:37 PM »
According to MMM, once you accumulate 25X your spending, you are FI.

Wouldn't it be easier to say once your passive income is making at least what your job income is, then you're FI?

For example, if you make 50K a year, and your passive income hits 50K a year, then you could retire since you're making the same amount (and living on it presuming nothing changes) without going to the job anymore?

Are these just two separate ways of determining FI or do they relate to each other somehow?

Just curious since my spending changes year to year (not significantly) if I need to replace an appliance or something...but my salary is steady throughout the year (other than that measly 2.5% increase each year regardless of performance).

thanks

No...

No, no, no, that's not how it works unless you spend A LOT of your income.

Also, some of us have highly variable incomes, so it doubly doesn't make sense.

No matter what metric you use, you still need to project an anticipated spend in retirement in order to be able to stop working and retire.

Some people will spend the same in retirement, some will spend less, and others will spend more, and none of that will have anything to do with what their pre-retirement income was.

blingwrx

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Re: 25X spending vs. income
« Reply #11 on: February 20, 2020, 08:52:49 PM »
If you make 50k salary and spend 50k annual. Having a passive income of 50k isnít going to be enough if you want to retire early. Most full time jobs come with subsidized benefits like health/dental. Thatís extremely expensive out of pocket without an employer to subsidized it for you. It can be anywhere from 5-20k a year just for premiums for a family.

Villanelle

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Re: 25X spending vs. income
« Reply #12 on: February 20, 2020, 09:12:08 PM »
If you make 50k salary and spend 50k annual. Having a passive income of 50k isnít going to be enough if you want to retire early. Most full time jobs come with subsidized benefits like health/dental. Thatís extremely expensive out of pocket without an employer to subsidized it for you. It can be anywhere from 5-20k a year just for premiums for a family.

OTOH, plenty of people report lower expenses once they retire.  They have more time to cook meals from scratch, they stop outsourcing things, they spend less on a commute, wardrobe, dry cleaning,  etc.  That could offset increased insurance expenses. 

So much of this is individual. 

tawyer

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Re: 25X spending vs. income
« Reply #13 on: February 20, 2020, 09:37:22 PM »
Wouldn't it be easier to say once your passive income is making at least what your job income is, then you're FI?
If you wish to frame it that way, consider not your job income, but your expenses: once your passive income is making at least your expenses, then you're FI.

Many Mustachians save a lot. It is easier to grasp with the example of your income is $100k and your spending is $50k. You need a passive income to replace the $50k, not $100k. The higher your savings rate, the more you notice it.
As Acastus said.