Author Topic: Tried to explain to my friends about early retirement and failed.  (Read 17134 times)

Emergo

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First it was skepticism about withdrawing from 401k without penalty, but i explained the whole ira conversion thing. And that was okay.

Then i told them, to gain financial independence, 25 times your living expenses must be saved. Lets say for example 1 million.

They asked me how im gonna save a million, i told them by investments. Then they said even if its 10% interest rate it would still take me 20 years or more.

Please help me mustachians. As im still lost on how the math works to get to a million from just maxing 401k, ira, hsa, and taxable accounts and making the right investment choices like vanguard mutual funds.

PencilThinStache

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #1 on: November 15, 2015, 09:41:53 PM »
I sometimes struggle to articulate the "Shockingly Simple Math" (linked at the end of this comment), so I can't blame you, but it really all about providing the right amount of information for your audience's attention level/interest. You started off great by saying "25 times my annual expenses is all I really need," as long as you're prepared to explain why that is. It sounds like the hangup came re: how to get to 25 x your annual living expenses, and I'd say, respectfully that your answer, "investments," falls way short. I'd start by explaining that you intend to maintain a high savings rate for your remaining working years, and you intend to invest all those savings, hoping to achieve a 5-7% annual return over the next 10 or 15 years. I love talking about this stuff w/coworkers, friends, etc, for a few reasons.

-it motivates me to be a more effective saver
-being challenged by friends requires me to delve more deeply and gain a more complete understanding of my personal finance goals and practices.
-it's extremely valuable information, and so many of our friends are lacking terribly in financial literacy.


Good luck, keep at it, get better!

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

marty998

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #2 on: November 15, 2015, 09:50:13 PM »
When you say "25x expenses", I'm guessing they don't know what their expenses are.

So they use 25x their current income as a reference point. And thats where you lose them.


Goldielocks

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #3 on: November 15, 2015, 10:12:08 PM »
You did better than I did, that's for certain!

I like the keep it simple advice above...   Maybe come up with how much you need to save every year to get to a million or what ever your number is.... ie.,  "I just need to save $9,000 per year to get to $1 million before I retire at 55". (assuming you are 25 now)

okits

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #4 on: November 15, 2015, 10:13:01 PM »
I would not bring up the $1MM figure as it's a mental barrier for people (while it is a lot of money, it's not the uber-rich, unattainable-by-any-means image of wealth many people perceive it to be.)

I'd encourage them to build a spreadsheet and project their own future NW via savings and compounding.  Assuming they'll invest in a balanced portfolio (not just leave the cash to rot in a sub-1% savings account), they can see themselves what a decade or two can do for their NW.  Even if it doesn't grow a second comma, the number may still be inspiringly large.

K-ice

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #5 on: November 15, 2015, 11:03:50 PM »

I think the biggest thing you were missng was the high savings rate & low spending.

Would they believe you if you said. "I bet if you save 50% this year you could take a "holiday" from work next year, and spend that 50%."

Ok. Duh! Great, but then you would be at zero again. Well not quite since some investments would have been made while saving & drawing down & taxes would have been close to zero in year 2.

But you might loose them if you explain all that, so let's ignore taxes and interest for another simple example.

"I bet if you save 90% this year you could live off those savings for the next 9 years of "holiday".

That is an extream example. You would either need a very high salary or be very frugal but the simple math is there. And they will argue inflation, and you can argue investments at 7%.

So somewhere in between, with about a decade of aggressive saving & low spending you can stash 25x your spending.


Here is a MMM savings rate:
75% save 25% spend
So each year you save 3 years with of "holiday" money.
You need a total of a 25y "holiday" years to retire & live off the interest 25y/3y = 8.3333 years to retirement.

Here is something a bit easier:
66% save 33% spend
So each year you save 2 years with of "holiday" money.
You need a total of a 25y "holiday" years to retire & live off the interest 25y/2y = 12.5 years to retirement.

Here is a 50% saver:
50% save 50% spend
So each year you save 1 years with of "holiday" money.
You need a total of a 25y "holiday" years to retire & live off the interest 25y/1y = 25 years to retirement.
This example has a person retiring at ~50 which is still "early".

Here is a 10% saver
10% save 90% spend
So each year you save 1/9 years with of "holiday" money.
You need a total of 25y "holiday" years to retire & live off the interest 25y/(1/9)= over 200 years.

So you can see why the 10% saver will have a hard time retiring. They will need a pension, social assistance or great compound interest.This is why some people, so used to the 10% rule can't believe MMM.

The above 4 examples are all actually better & take less time with compound interest.
But you may want to leave out the interest in a first basic discussion.

If you still have their attention bring out the compound interest spreadsheet :)

I hope this helps.

gooki

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #6 on: November 15, 2015, 11:06:22 PM »
They asked me how im gonna save a million, i told them by investments. Then they said even if its 10% interest rate it would still take me 20 years or more.

You missed the part about saving and investing 65% of your income will allow you to retire in 10 years.

Adjust saving rate/years to FI as per the shockingly simple maths post.

Hey It's Me

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #7 on: November 15, 2015, 11:55:04 PM »
If you really want to change your friends' minds, you have to be prepared for the common objections. You're going to hear the same ones over and over again, so you may as well have answers prepared for them.

Retirement is impossible these days unless you're really loaded.
a. Well... not really. It's definitely a challenge with the lack of company-sponsored pensions, but there are definitely options. The biggest, most bad-ass way to ensure you're able to retire early is by saving your own money. Think about it: if you save half of what you make, each year you work earns you a year off of work - more actually if you're investing that money.

You need millions to retire - how can anyone ever save that much.
a. Actually it's a lot lower than you think. To retire you'll need roughly 25X your annual expenses. (For me that is $XXX,000) The more you're able to cut those expenses down, the more you'll save and the lower that amount will go. Also, we've all heard of compound interest - that will ensure you'll actually have to save a LOT less than you think.

Dude, I don't want to save all my money for when I'm old - I want to live now!
a. Totally with you. You could probably save 90% of your income if you just lived in a box and ate re-fried cat food three times a day - but that's not really living. The point isn't the cut down on the things you love doing so old-you can live large, it's to consciously spend money right now to give you more options in the future. I know you love to travel (aside: who doesn't?) - keep it up and enjoy the experiences. But what if you could save $15/day on those office lunches and use that money to go on a vacation instead? Or better yet, how about a permanent vacation from work?

Emergo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #8 on: November 16, 2015, 04:09:07 AM »
Can someone explain how the compound interest works?

And how does the savings rate grow? Lets say im at 50% saving paychexk every year. How will that increase if i dont get an increase in salary? Another lifestyle change? Or is it from the money gained from interest that goes back to investments and so keeps compounding off of a larger number? Its not clear to me...
« Last Edit: November 16, 2015, 05:04:42 AM by Emergo »

Emergo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #9 on: November 16, 2015, 05:06:33 AM »
They asked me how im gonna save a million, i told them by investments. Then they said even if its 10% interest rate it would still take me 20 years or more.

You missed the part about saving and investing 65% of your income will allow you to retire in 10 years.

Adjust saving rate/years to FI as per the shockingly simple maths post.

They did the math in front of me. Even if investing 65%, doesnt add up to lets say 600k in 10 years.

stlbrah

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #10 on: November 16, 2015, 06:21:50 AM »
At least they didn't bring up the "but then you won't have health insurance" and "what if you get cancer" lines.

ooeei

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #11 on: November 16, 2015, 06:23:57 AM »
Can someone explain how the compound interest works?

And how does the savings rate grow? Lets say im at 50% saving paychexk every year. How will that increase if i dont get an increase in salary? Another lifestyle change? Or is it from the money gained from interest that goes back to investments and so keeps compounding off of a larger number? Its not clear to me...

Hate to break it to you, but if you don't understand how compound interest works you probably shouldn't be trying to explain your financial strategies to people.  I know most of the math pretty well and still don't talk to many people about it, only a few friends my age who I talk about other money stuff with.  I don't think my coworkers would appreciate a recent college grad giving them financial advice after 3 years in the real world.

https://www.mathsisfun.com/money/compound-interest.html

They did the math in front of me. Even if investing 65%, doesnt add up to lets say 600k in 10 years.

Yeah, getting 600k in 10 years would require saving a lot of money.  Assuming 7% interest you need to save a little over $40,000 per year.  If 65% of your salary is less than $40,000 (and I think I remember from your last thread, it is), then they're right.

Emergo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #12 on: November 16, 2015, 07:56:33 AM »
I mean i understand how compound interest works, but just not how it would add up to enough for an early retirement.

RWD

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #13 on: November 16, 2015, 08:14:28 AM »
They asked me how im gonna save a million, i told them by investments. Then they said even if its 10% interest rate it would still take me 20 years or more.

$16k/year (less than the 401k max) for 20 years at 10% interest compounded is $1 million.
$29k/year will get you there in 15 years
$58k/year will get you there in 10 years
$149k/year will get you there in 5 years

That's the [very basic] math. If you want to reduce your time to financial independence you need to reduce your expenses (which both increases your savings and reduces your final goal investment number) and/or increase your income.

James

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #14 on: November 16, 2015, 08:23:59 AM »
I mean i understand how compound interest works, but just not how it would add up to enough for an early retirement.


"Compound interest" isn't some magic bean you add to make ER work, it's just one aspect of the math that makes ER work. Whether your savings add up to enough for early ER is a function of expenses, savings, and investment returns. Compound interest is just one aspect of the bigger idea of investment returns, you need to full picture of all three parts to understand how it adds up to ER. If you can't fully explain all three parts perfectly, then you are better off letting others like MMM do the explaining. If they are not interested enough to look through explanations by others and discuss the math in detail as shown by experts, then don't bother with the conversation.
« Last Edit: November 16, 2015, 08:26:25 AM by James »

Cromacster

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #15 on: November 16, 2015, 08:43:04 AM »
I mean i understand how compound interest works, but just not how it would add up to enough for an early retirement.

Well using the above numbers, if you save 40,000 a year after 10 years you have roughly 600k.  If you can live on 24k a year, many people here would say you could FIRE as long as you keep your spending in check.

Timeline is also important here.  What do you consider an early retirement?

Edited to add:
The easiest way to explain it to people is to share your plan.

IE  I save 47,000 a year and I spend 38,000 per year.  After 13 years of saving, my stash of 1.1MM will generate enough return on my investments to cover 40,000 expenses per year.
« Last Edit: November 16, 2015, 08:50:56 AM by Cromacster »

arebelspy

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #16 on: November 16, 2015, 10:22:31 AM »
The simplest way I've found to explain it, that everyone can follow, is this (stop after each paragraph to make sure they follow):

If you save 10% of your paycheck, after 9 years, you'll have saved a full year worth of your living expenses (because you live on 90% of your income, save 10%, so saving 10% for 9 years = 90%, the amount you live on).  You can then take a year off, spend exactly the same amount of money, and then go back to work. ("Got it?"  Tell them to ignore how to save that much, or the problems with the idea of getting a job when you get back, or whatever, for now, just make sure they follow the basic math of save 10% = after 9 years you can take a year off.)

If you save 20% of your income, then after 4 years, you can take a year off (because you're living on 80%, and after 4 years you've saved 20% x 4 = 80%). ("Got it?")

If you live on 50% of your income and save 50%, you can work a year, take a year off, work a year, take a year off. (At this point they go "ooohhhh" if they properly understood the earlier steps.)

If you live on 10% of your income, and save 90%, you can work a year, take 9 years off, work a year, take 9 years off. (At this point they go "wow--but no way you can live on 10% of your income," and I say maybe not, but the goal is to get as high as you can.)

Then I explain that getting to FIRE is a matter of increasing that savings rate as high as possible, and then (rather than work/time off/work/time off) doing all the work up front, so you can work a dozen years or so, then take the rest of your life off.

Then I mention that it's slightly more complicated than that, and you'll be investing the money, so you have compounding working for you (the money you invest earns more money along the way), and we get into discussions of how they think the market is like gambling, etc., but that's the basic introduction spiel I give about early retirement. 

I haven't yet failed to impart the concept, even if some are skeptical of how it is done practically, they all understand the theoretical.  If they want to know more about it, I link them to the shockingly simple math, and the zero to hero posts.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #17 on: November 16, 2015, 10:25:29 AM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Emergo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #18 on: November 16, 2015, 11:37:14 AM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).

I like your link. How does 15k additions to portfolio bring it to 64k though?

neo von retorch

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #19 on: November 16, 2015, 12:01:59 PM »
This is answered in the text of the article.

Quote
We had some investments slowly accumulated during college and graduate school plus a fledgling 401k
We didn’t start Year 1 with zero dollars, but it makes sense to start when I graduated college since that is when our earnings picked up dramatically.

boarder42

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #20 on: November 16, 2015, 12:26:18 PM »
Based on your knowledge, I wouldnt be trying to educate my friends on this concept yet.  You don't understand how this works enough to try to impart your knowledge on others.  And it could easily lead to you not following thru with it. 

you make 65K a year.  maxing out 401k, HSA, and IRA = 26,750 you're putting away annually. 

So to make it easy lets say youre spending the rest of what you bring in... and to make it really simple lets go ahead and just say you save 25k per year and spend 40k - so you need 1MM

so you invest that 25k and it earns 7% returns adjust for inflation so this will all be in today's dollars.  (lets assume you invest it all on Dec 31 for ease of calculations

Year 1 savings 25k
Year 2 savings = 25k(new) +25k + .07*25k = 51.75k
Year 3 savings = 25k(new) + 51.75k + .07*51.75k = 80.375k
etc. etc. surely you can see the pattern. 

it will take you 20 years to save up enough to retire with 1MM saving 38% of you salary or 25k per year in today's dollars

http://www.moneychimp.com/calculator/compound_interest_calculator.htm


Emergo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #21 on: November 16, 2015, 12:32:52 PM »
20 years! That is kind of disheartening.

neo von retorch

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #22 on: November 16, 2015, 12:38:05 PM »
So adjust your attitude...

Ask yourself
  • What do I control in my life?
  • What changes can I make?
  • What will have the biggest impact on my future plans?

If you continue to make $65k going forward, but you decrease your spending from $40k to $30k, now we're looking at saving $35k each year, and needing $750k to retire. That would take you 13 years instead. So saving just $833 more per month will save you seven years of work!

Edit: Math
« Last Edit: November 16, 2015, 12:43:01 PM by neogodless »

boarder42

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #23 on: November 16, 2015, 12:41:09 PM »
how is that disheartening.  normal retirement age is 65 now.

assuming you started working at 25 that puts you a full 20 years ahead of the avg american.

Do you want to retire earlier.  its pretty simple.  you save more.  say you can save an extra 10k per year.  now you're spending only 30k and saving 35k ... now you dont need 1MM you only need 750k. 

now you can retire in 13 years. 

saving is double edged.  it increases how much you are saving, but it also decreases how much you're spending.

Person 1 and 2 both make 50k per year.  person 1 saves 25k per year.  person 2 goes out and finds a better paying job making 75k per year and saves 25k.  Who retires first.

Person 1 does so b/c they are only spending 25k and there for only need 625k to retire

Meanwhile person 2 is spending 50k and needs 2x that to retire. 

HairyUpperLip

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #24 on: November 16, 2015, 12:41:34 PM »
20 years! That is kind of disheartening.

yeah, 40 years sounds better. :)

boarder42

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #25 on: November 16, 2015, 12:42:21 PM »
this isnt magic/ get rich quick/ its a fundamental mathmatical formula save more spend less retire earlier.

Zikoris

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #26 on: November 16, 2015, 12:42:46 PM »
20 years! That is kind of disheartening.

Remember, that's at only 38% savings rate. A lot of people here save well over 50%. Boost your savings up and you slash that 20 years by a lot.

K-ice

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #27 on: November 16, 2015, 12:49:53 PM »
20 years! That is kind of disheartening.

Boarder42 has a good example.  Retirement can't happen instantly.  The standard retirement is 65 so about 45 years of working.

But if you can lower your spending and increasing savings, it is win win.

Let’s flip the numbers.  Say you spend 25K and save 40K.

Now because you spend 25K you only need $625K to retire.

Because you are saving 40K that can be done in 11 years @ 7% for a total of $675K.

If you want the magic million that will take 15 years.

If someone told you, you could be a millionaire in 15 years aren’t a few spending sacrifices worth it?

In both cases it is less time. In the main example it takes less time because you are saving more and plan to spend less in retirement.  In the million dollar case you are saving more but maybe want a large cushion or more spending money to travel.


JLee

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #28 on: November 16, 2015, 03:26:30 PM »
Some people just don't understand. One of my roommates is a financial advisor, who insists that I will need $4-5mil to retire. Her husband's opinion of me wanting to retire early is that I want to live absurdly cheap...the exact phrase last time was "stealing chickens, under a bridge."

I guess I'll just have to show them in a few years...I have a long ways to go, unfortunately.

nereo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #29 on: November 16, 2015, 03:45:22 PM »
20 years! That is kind of disheartening.
I have no idea why that would be disheartening... typically people spend ~43 years in the workforce.  With that relatively modest commitment (basically doing little more than maxing out your 401(k) and IRA) you've shifted from working 43 years and being retired for ~13 to working 20 years and being retired for 36. 

With an average life expectancy you will have tripled the number of years you can be retired for (bonus: you get more years when you are younger/healthier).

As Boarder42 and others mentioned you can make slight adjustments and you can retire in 15 years.  If you're willing to work very part time (10-20% of a normal work week) you can shave off a few more years. 

beltim

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #30 on: November 16, 2015, 04:36:01 PM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).

Maybe I'm misreading things, but a large portion of RoG's net worth increase is due to real estate investing.  This is especially true early on – in year 2, for example, they were able to "save" more than twice their income because they sold a rental property. 

Zikoris

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #31 on: November 16, 2015, 08:45:01 PM »
I do think the 50% savings rate = 1 year of freedom for every year of working is a really good, simple way to explain the concept to people. I saw my dad explain it to someone like that once and it clicked for them right away.

SandyBoxx

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #32 on: November 16, 2015, 09:07:23 PM »
This thread has turned into pure gold for use with my financial literacy group - and now that I have commented, I stand a chance of actually ever finding it again! ;)

arebelspy

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #33 on: November 17, 2015, 12:18:46 AM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).

Maybe I'm misreading things, but a large portion of RoG's net worth increase is due to real estate investing.  This is especially true early on – in year 2, for example, they were able to "save" more than twice their income because they sold a rental property.

From one of his comments:
Quote
We bought at $71k, put in $7-8k between improvements and HOA assessments, and sold for $95k, plus made a couple thousand per year cash flow for a couple years while we rented it out.

Spending almost 80k and selling for about 95k isn't a huge real estate gain, IMO.

Additionally, they paid off a primary residence during that time frame and didn't count it in the numbers (which only shows their portfolio totals).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

beltim

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #34 on: November 17, 2015, 12:34:33 AM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).

Maybe I'm misreading things, but a large portion of RoG's net worth increase is due to real estate investing.  This is especially true early on – in year 2, for example, they were able to "save" more than twice their income because they sold a rental property.

From one of his comments:
Quote
We bought at $71k, put in $7-8k between improvements and HOA assessments, and sold for $95k, plus made a couple thousand per year cash flow for a couple years while we rented it out.

Spending almost 80k and selling for about 95k isn't a huge real estate gain, IMO.

Additionally, they paid off a primary residence during that time frame and didn't count it in the numbers (which only shows their portfolio totals).

But then their starting net worth should have been ~3 times what RoG originally said, right?  It's weird that that number just appears out of nowhere.

I mean, it probably wouldn't have made much of a difference to them – at the rate they were saving, had they actually started from 0, it probably would have only added 2 years.  But there's a big difference between "zero" and "$50k in investments and a paid off rental house worth $90k" as a starting point.

arebelspy

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #35 on: November 17, 2015, 12:39:26 AM »
But then their starting net worth should have been ~3 times what RoG originally said, right?  It's weird that that number just appears out of nowhere.

I mean, it probably wouldn't have made much of a difference to them – at the rate they were saving, had they actually started from 0, it probably would have only added 2 years.  But there's a big difference between "zero" and "$50k in investments and a paid off rental house worth $90k" as a starting point.

As he said in the article:
Quote
We didn’t start Year 1 with zero dollars, but it makes sense to start when I graduated college since that is when our earnings picked up dramatically.

He also noted elsewhere that if he did roll it back to when he literally had 0 NW, it would be within the decade mentioned in the title. So the charts show it starting at that point, but the title is still valid.

From reddit:
Quote
More like $30-35k equity when I started the timeline in 2004. Maybe not that much since I failed to actually sell it at my asking price until 2 years later.
Net worth was actually $44,194 on Dec 31, 2004 looking at all assets and liabilities (from my detailed spreadsheet). And that was after almost a year of working, paying down debt, investing, etc. I didn't track NW before Dec 31 2004 (not enough to track ;) ), but in Nov 2003 right before we bought our current house at $30k below market value, we were close to zero net worth at the beginning of the ten year period I'm referring to in the title.
Our finances in Nov 2003 looked something like this: $90k condo, $45k in cash and investments, $20k worth of cars, so $155k in assets. $50k ish mortgage plus $100k-ish in student loans. So maybe $5k positive net worth at the start of this 10 year period. Still not zero but pretty close like I said. We just hit the ground running accumulating valuable assets, saving, and investing.

Note also that they hit it in under 10 years (chart goes from 04, and they hit it in 13-- plus they hit 1.2MM, so they probably hit 1MM early in the year).  So if you rolled back a year to 03 to 13, it's likely they went 0 to 1MM in a decade.

Any more complaints, or is it good enough yet?  ;)

« Last Edit: November 17, 2015, 12:41:57 AM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #36 on: November 17, 2015, 12:42:37 AM »
Also he's completely transparent, and honest.  Just ask him anything you don't understand.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

patrickza

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #37 on: November 17, 2015, 03:46:12 AM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).
That is a really inspiring write up. I can't imagine how many people must have out-earned him, but been far outclassed in terms of his savings...

RootofGood

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #38 on: November 17, 2015, 06:42:46 AM »
Hey, just saw the thread.  Happy to clarify anything else Beltim!  But I think Arebelspy has answered as well as I could (maybe he'll start doing my taxes, too? :) ).

I'll also throw out this reddit post:  https://www.reddit.com/r/financialindependence/comments/3s5kus/zero_to_millionaire_in_ten_years_great_post_by/

I spent a lot of time there explaining what's up with "zero" and answered a bunch of other questions. 

As arebelspy said, I try to be very transparent, and I'll answer just about anything.  It may take a while, got a busy day ahead.  :)

James

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #39 on: November 17, 2015, 06:49:54 AM »
For a clean, straightforward real life example (if they say it's great in theory, but what about in practice), RootofGood's latest post is amazing: http://rootofgood.com/zero-to-millionaire-ten-years/

Straightforward example of two professionals (earning between 50 and 70k each) become FI in about a decade.

The best part of it as an example is they didn't do anything exotic (no lotto winnings or inheritance, tech stock IPO luck, real estate investing, etc.), just slow and steady live frugally, invest most of their paychecks regularly for a decade, and BOOM, FI.  Also they had 3 kids, so it heads off that objection as well (you'll get the "but I don't earn that much" problem, but they just can do what they can).
That is a really inspiring write up. I can't imagine how many people must have out-earned him, but been far outclassed in terms of his savings...

I would be one of them... :)

It's a good inspiring and straightforward story.
« Last Edit: November 17, 2015, 07:02:48 AM by James »

Emergo

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #40 on: November 17, 2015, 10:19:03 AM »
I need a wife so i can have twice the household income...

JLee

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #41 on: November 17, 2015, 10:20:36 AM »
I need a wife so i can have twice the household income...

It'd be pretty damned helpful, that's for sure!

boarder42

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #42 on: November 17, 2015, 10:26:56 AM »
I need a wife so i can have twice the household income...

you currently live at home with your mother.  thats better than cohabitation and paying rent.  2x your income doesnt really change anything for you . if you think you need to spend 40k a year now with no rent that only goes up with cohabitation.

Scandium

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #43 on: November 17, 2015, 10:30:53 AM »
I need a wife so i can have twice the household income...

If it flies, floats or fucks it's cheaper to rent..

JLee

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #44 on: November 17, 2015, 10:35:48 AM »
I need a wife so i can have twice the household income...

If it flies, floats or fucks it's cheaper to rent..

Then you're doing it wrong. My SO's savings rate is at least twice what mine is...unfortunately we're about 2400 miles apart right now. :(

beltim

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #45 on: November 17, 2015, 10:43:48 AM »
Hey, just saw the thread.  Happy to clarify anything else Beltim!  But I think Arebelspy has answered as well as I could (maybe he'll start doing my taxes, too? :) ).

I'll also throw out this reddit post:  https://www.reddit.com/r/financialindependence/comments/3s5kus/zero_to_millionaire_in_ten_years_great_post_by/

I spent a lot of time there explaining what's up with "zero" and answered a bunch of other questions. 

As arebelspy said, I try to be very transparent, and I'll answer just about anything.  It may take a while, got a busy day ahead.  :)

I appreciate the offer, but as you pointed out, I think arebelspy got to all my questions.  It's really just the starting point that gets muddled – as I thought, how can you start from "zero" when you have so much in investments and a (mostly) paid-off rental?  But it seems like that's mostly balanced by debt so the net worth really is pretty close to 0 at the starting point.  I think a statement like that in the blog post would have helped me – otherwise, some of the "contributions" seem crazy like I pointed out before.  But when a "contribution" is a shift from rental assets to stocks, it's not crazy at all.

Again, thank you and congratulations!

RootofGood

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #46 on: November 17, 2015, 11:45:58 AM »
Again, thank you and congratulations!

You're welcome! 

sirdoug007

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #47 on: November 17, 2015, 03:35:57 PM »
This stuff is really not complicated.  Save a ton of money every year by being very thoughtful about how you spend your money.  Minimize the big ticket items of housing and transportation.

Root of good averaged about $70k/year in savings.  Over 10 years that is $700k, so it's really not that surprising that a bit of investment gains gets you to a cool million.

As best I can tell from MMM's post about his path to FIRE (which is much less specific about additions to the portfolio), he also averaged about $60k/year over 8 years and then started doing home renovation full time after hitting $600k.  $60k x 8 = $480k.  Again not surprising he hit $600k.  The real trick is cutting out the nonsense in regards to houses, cars, eating out, etc. so you can free up that $50k+ to invest.

Of course, most people will scoff that saving $50k+/year is impossible.  Well it is obviously not if there are multiple people who have done it and documented it!

Goldielocks

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #48 on: November 17, 2015, 03:37:35 PM »
I mean i understand how compound interest works, but just not how it would add up to enough for an early retirement.

oh, man!

The best way to get a "gut feel" for how compound interest works is to take pencil and paper and do it yourself.

Start with 1 dollar.
Double it every year.

How many years until you hit a million?

Just keep writing it out
Year 1 - $1
Year 2 - $2
Year 3 - $4
Year 4 - $8

etc.   


The only difference between that and retirement, is that most people start with more funds for retirement, add money to it each year, but get a lower annual return

But as an exercise, just try it.

Goldielocks

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Re: Tried to explain to my friends about early retirement and failed.
« Reply #49 on: November 17, 2015, 03:40:52 PM »
Some people just don't understand. One of my roommates is a financial advisor, who insists that I will need $4-5mil to retire. Her husband's opinion of me wanting to retire early is that I want to live absurdly cheap...the exact phrase last time was "stealing chickens, under a bridge."

I guess I'll just have to show them in a few years...I have a long ways to go, unfortunately.

LOL!

I had someone say to me that they "didn't share my quaint notions about using landromats while travelling"...