Author Topic: Who is better off?  (Read 7553 times)

BigBangWeary

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Who is better off?
« on: June 15, 2015, 04:24:58 AM »
Who is better off, a 35 year old individual with invested assets of $700,000 and no debts, or a 65 year old in the same situation?

I know this seems to be a weird comparison, but it looks at the important factor of time in an interesting way. On the one hand, the 35 year old has 3 decades of potential compound interest before even reaching 65, while on the other hand (apologies to the older crowd here), the 65 year old may need to worry less about their money running out ...

Thoughts?

patrickza

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Re: Who is better off?
« Reply #1 on: June 15, 2015, 05:04:54 AM »
It should be pretty clear that it's the 35 year old. Not only does he have plenty of time to compound, (s)he's also able to get a job if things turn south. In fact with $700k invested at 35, they wouldn't need to contribute any more to end up extremely wealthy at retirement age. All they need to do is avoid drawing down and they'll be worth an absolute fortune.

dcheesi

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Re: Who is better off?
« Reply #2 on: June 15, 2015, 05:29:47 AM »
Are we talking about a 35yo retiree? If you withdraw the 4% SWR ($28k in this case), then theoretically you are "breaking even" over the long haul --your 'stache stays the same (in real $) over time. The only difference then is that the younger person is counting on the magic of the SWR statistics for a lot longer.
« Last Edit: June 15, 2015, 05:31:40 AM by dcheesi »

zolotiyeruki

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Re: Who is better off?
« Reply #3 on: June 15, 2015, 08:21:18 AM »
Are we talking about a 35yo retiree? If you withdraw the 4% SWR ($28k in this case), then theoretically you are "breaking even" over the long haul --your 'stache stays the same (in real $) over time. The only difference then is that the younger person is counting on the magic of the SWR statistics for a lot longer.
That's not *quite* accurate.  The 4% SWR means that under the worst-case (historical) scenario, you'll break even at the 30-year mark.  On average, you'll be much better off.

skunkfunk

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Re: Who is better off?
« Reply #4 on: June 15, 2015, 09:02:23 AM »
That's not *quite* accurate.  The 4% SWR means that under the worst-case (historical) scenario, you'll break even at the 30-year mark. 

More like in 80% of cases you'll break even or better. Or something like that. Worst case historical at 4% you run out of money quite quickly, actually.

zolotiyeruki

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Re: Who is better off?
« Reply #5 on: June 15, 2015, 10:23:31 AM »
More like in 80% of cases you'll break even or better. Or something like that. Worst case historical at 4% you run out of money quite quickly, actually.
I thought it was the result of taking every 30-year period in the last 100 or so years, and simulating a X% withdrawl rate, and seeing what percent of the time you still had money at the end of the 30 years, given historical stock performance.  4% was the smallest that would still leave you with money after 30 years.

skunkfunk

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Re: Who is better off?
« Reply #6 on: June 15, 2015, 10:28:09 AM »
More like in 80% of cases you'll break even or better. Or something like that. Worst case historical at 4% you run out of money quite quickly, actually.
I thought it was the result of taking every 30-year period in the last 100 or so years, and simulating a X% withdrawl rate, and seeing what percent of the time you still had money at the end of the 30 years, given historical stock performance.  4% was the smallest that would still leave you with money after 30 years.

You're sorta right, but 4% doesn't leave you with anything in every one of those 30 year periods.

If you go to cfiresim and use the default settings, which are 4% withdrawal and a 75/25 ratio, you get a 93% success rate after 30 years. For example one of the failures is starting in 1966 you run out of money by 1987.

This is largely a failing of the relentless 4% draw. In reality you need to be more flexible, but that's another argument for another time.


sol

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Re: Who is better off?
« Reply #7 on: June 15, 2015, 10:38:54 AM »
Your average person starts life with great earning potential but no assets.  They end life with lots of assets but almost no earning potential.  In between they gradually trade youth for wealth, human capital for financial capital.

Early retirees upset this system by refusing to cash in all of that human capital.  The economy functions by extracting work out of eager young employees, then trapping them in lifelong corporate servitude.  Choosing not to work is just reclaiming your human capital for yourself, rather than trading it for financial capital.

From a purely financial perspective, the older worker is clearly better off. He can spend more without ever worrying about money.  Very few 65 year olds, though, wouldn't trade it all back to be 35 again.

BarkyardBQ

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Re: Who is better off?
« Reply #8 on: June 15, 2015, 02:07:13 PM »
Your average person starts life with great earning potential but no assets.  They end life with lots of assets but almost no earning potential.  In between they gradually trade youth for wealth, human capital for financial capital.

Early retirees upset this system by refusing to cash in all of that human capital.  The economy functions by extracting work out of eager young employees, then trapping them in lifelong corporate servitude.  Choosing not to work is just reclaiming your human capital for yourself, rather than trading it for financial capital.

From a purely financial perspective, the older worker is clearly better off. He can spend more without ever worrying about money.  Very few 65 year olds, though, wouldn't trade it all back to be 35 again.

Sol, dude that may be the most logical reasoning behind FIRE I've every seen.

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Re: Who is better off?
« Reply #9 on: June 15, 2015, 02:31:41 PM »
Your average person starts life with great earning potential but no assets.  They end life with lots of assets but almost no earning potential.  In between they gradually trade youth for wealth, human capital for financial capital.

Early retirees upset this system by refusing to cash in all of that human capital.  The economy functions by extracting work out of eager young employees, then trapping them in lifelong corporate servitude.  Choosing not to work is just reclaiming your human capital for yourself, rather than trading it for financial capital.

From a purely financial perspective, the older worker is clearly better off. He can spend more without ever worrying about money.  Very few 65 year olds, though, wouldn't trade it all back to be 35 again.

Actually the "average" person ends up living a life of continuous debt repayment and will soon find that they cannot afford to retire until they drop dead!

A lifetime of financial bondage in other words!

Kiwi Mustache

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Re: Who is better off?
« Reply #10 on: June 15, 2015, 09:54:54 PM »
Better off for what?

For living off it until they die?

BigBangWeary

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Re: Who is better off?
« Reply #11 on: June 16, 2015, 12:27:34 AM »
I agree that 'better off' is a bit of a fuzzy term, but I have purposely chosen it. In most early retirement spaces and discussions online I find that people focus too much on net worth, and leave out the importance of time as it corresponds to freedom to choose at an earlier age. I guess this is why I am so drawn to MrMoneyMustache.

Let's assume both are 'retired' for all intents and purposes and can live off of 4%. Technically, either could do something to earn money at a later stage if necessary (i.e. SWR 4% goes wrong and for some reason they don't adjust accordingly), but obviously the 35 year old has more time to rectify this. The 65 year old (again no offense) has less time to worry about making their money last. Therefore, the 65 year old might have more peace of mind (other than the dying sooner bit ...)

Is 'better off', freedom to choose, or is it freedom to never have to worry? Is it both? Do they both have it?

Retire-Canada

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Re: Who is better off?
« Reply #12 on: June 16, 2015, 10:40:41 AM »
Using the 4% rule and factoring in a bit of flexibility the 35yr old has ~$28K/yr to spend and an extra 30yrs of prime-time health to spend.

I'd rather be the 35yr old every day of the week if those were the two choices.

DeltaBond

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Re: Who is better off?
« Reply #13 on: June 17, 2015, 09:16:39 AM »
I think its an even trade, personally.

Sol, good points on retiring early!

Rural

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Re: Who is better off?
« Reply #14 on: June 17, 2015, 08:43:07 PM »
Assuming the 35 year old is healthy, money is not even part of the equation.

The_path_less_taken

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Re: Who is better off?
« Reply #15 on: June 17, 2015, 08:53:48 PM »
Easy: the 35 year old who thinks like Sol is better off!

At 35 if it all turned to crap SHTF scenario...you'd probably be ok. At 65 if Bernie Madoff/market/gremlins have absconded with all of your money...tough to remake it.

Daisy

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Re: Who is better off?
« Reply #16 on: June 17, 2015, 09:06:28 PM »
Your average person starts life with great earning potential but no assets.  They end life with lots of assets but almost no earning potential.  In between they gradually trade youth for wealth, human capital for financial capital.

Early retirees upset this system by refusing to cash in all of that human capital.  The economy functions by extracting work out of eager young employees, then trapping them in lifelong corporate servitude.  Choosing not to work is just reclaiming your human capital for yourself, rather than trading it for financial capital.

From a purely financial perspective, the older worker is clearly better off. He can spend more without ever worrying about money.  Very few 65 year olds, though, wouldn't trade it all back to be 35 again.
^This. Plus, as the saying goes, "Time waits for no man" and I'd rather be the 35 year old early retiree who dies at 65 than the 65 year old regular retiree who dies at 65.

A close friend just recently got diagnosed with advanced cancer. She hasn't mentioned it yet, but I fear the doctor may have given her a timeline for the amount of time she has left.

We've both talked about retiring early. For me, that's before I'm 50 and I'm a few years away. I could FIRE in one or two years. She is 49 and said she had about 8-10 years left of work. She is a big spendypants, hasn't saved a lot, and has big expenses. I think she is reevaluating her life right now. I'm not pushing her for anything she doesn't want to discuss, but my sincere hope is that she beats this cancer and then has a chance to live her "second" life now instead of 8-10 years from now.

Me - this whole situation is lighting a OLY fire (or FIRE?) in me. We take time left in our lives for granted. We take healthy time left in our lives even more for granted.

BigBangWeary

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Re: Who is better off?
« Reply #17 on: June 17, 2015, 11:56:05 PM »
Sol is wise indeed, thank you. I wish it worked that way mentally though. We have the opportunity to pull the plug and be ‘ok’ in our mid to late 30s, but it is the ‘fear’ of giving up this opportunity to make more and be more secure, that makes it hard to relate to being 65 and looking back.

I grew up in a very financially unstable home (father laid off for years, eventually parents lost everything in a messy divorce, ate at a soup kitchen for a while, etc.), and I guess this has been a driving force in my goal to accumulate and reach FIRE. But with each passing year, I still do not feel overly secure as I understand more and more about the intricacies of finance, markets, and those great unknowns (government intervention, politics, schooling costs, etc.).

My head gets the idea that I am lucky to have my health and time, but it feels like a big leap between understanding that, and trusting in it enough to release the golden handcuffs any time soon.

Very sorry to hear about your friend Daisy.

catccc

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Re: Who is better off?
« Reply #18 on: June 18, 2015, 08:36:27 AM »
Your average person starts life with great earning potential but no assets.  They end life with lots of assets but almost no earning potential.  In between they gradually trade youth for wealth, human capital for financial capital.

Early retirees upset this system by refusing to cash in all of that human capital.  The economy functions by extracting work out of eager young employees, then trapping them in lifelong corporate servitude.  Choosing not to work is just reclaiming your human capital for yourself, rather than trading it for financial capital.

From a purely financial perspective, the older worker is clearly better off. He can spend more without ever worrying about money.  Very few 65 year olds, though, wouldn't trade it all back to be 35 again.

holy shit, Sol, you are blowing my mind. 

arebelspy

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Re: Who is better off?
« Reply #19 on: June 18, 2015, 09:03:29 AM »
Better off in what way?  I'd rather be broke 35 year old than 65 year old with 700k, and I'm betting most 65 year olds with 700k would say the same.

Better off in terms of who's less likely to outlive their money?  The 65 year old.
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houstonnative

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Re: Who is better off?
« Reply #20 on: June 18, 2015, 09:05:31 AM »
Your average person starts life with great earning potential but no assets.  They end life with lots of assets but almost no earning potential.  In between they gradually trade youth for wealth, human capital for financial capital.

Early retirees upset this system by refusing to cash in all of that human capital.  The economy functions by extracting work out of eager young employees, then trapping them in lifelong corporate servitude.  Choosing not to work is just reclaiming your human capital for yourself, rather than trading it for financial capital.

From a purely financial perspective, the older worker is clearly better off. He can spend more without ever worrying about money.  Very few 65 year olds, though, wouldn't trade it all back to be 35 again.

this is really solid.

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Re: Who is better off?
« Reply #21 on: June 18, 2015, 09:07:01 AM »
Does the 65 year old get SS?