First retire, then get rich

[arebelspy]

Continuing the conversation from: http://www.mrmoneymustache.com/2012/05/14/first-retire-then-get-rich

I've long planned to have an extra "cushion" of income in retirement to allow for reinvesting and growing of the 'stache.

Someone made a post on the ERE forums a year or two ago that I liked enough to save into my good quotes text file.  They said:

In electrical engineering there is an expression called "thermal runaway," where an event occurs that heats up a component. The heat creates a positive feedback loop that causes the event to get worse, thus causing the component to get even hotter. And so on, until it goes up in flames... That's my goal with my savings, to reach a point "asset runaway."

I love that.  Asset runaway.

Keep your withdrawal rate less than your returns, and your net worth will get higher and higher exponentially.

A virtuous circle.

The obvious trade off is that you'd have to delay ER to have that going for you.  Or else you'd have to cut expenses and/or earn money in retirement.  Both of which are fine, but lead you back to the idea that you could have ER'd earlier if you could/would do those things.  I.e. if you had planned the smaller budget and planned the minor income, you could have been ER'd earlier.  But then you'd be cutting it close.  You'd need to build that cushion to be comfortable, and building that delays ER.

Either way, I think the asset runaway idea is crucial (I might almost say necessary) for someone retiring super early (say.. 45 or earlier).  Who knows what we'll hit in the future, and if we get a few bad years of inflation in a row, it can be tough to keep up, even for investments (see: 1970s).  But having years and years of accumulating assets having built up will let you weather a lot more storms.

Thoughts?

[velocistar237]

This is an ERE theme. MikeBOS and Jacob have both mentioned in the ERE forums that they would eventually become millionaires without intending to, just because of the inherent conservative nature of the ERE approach, and this for people who can live well off of $300K!

The bottom few lines on a FIREcalc graph always make me a little nervous. What if that bottom line is me? But if you keep the savings rate up, as in, start with $1M and only spend $30K net, you have zero simulation failures, and on average, you end up with $19M after 60 years (I believe in today's dollars).

The asset runaway idea is built into the safe withdrawal rate, and since MMM ingenuity reduces this to something pretty low, there's a decent chance of it happening.

As for the idea of trading away an earlier retirement date, you have to do something with your time, and when you don't have to work full-time, you can enjoy your work much more.

[menorman]

Continuing the conversation from: http://www.mrmoneymustache.com/2012/05/14/first-retire-then-get-rich

I've long planned to have an extra "cushion" of income in retirement to allow for reinvesting and growing of the 'stache.

Someone made a post on the ERE forums a year or two ago that I liked enough to save into my good quotes text file.  They said:

In electrical engineering there is an expression called "thermal runaway," where an event occurs that heats up a component. The heat creates a positive feedback loop that causes the event to get worse, thus causing the component to get even hotter. And so on, until it goes up in flames... That's my goal with my savings, to reach a point "asset runaway."

I love that.  Asset runaway.

Keep your withdrawal rate less than your returns, and your net worth will get higher and higher exponentially.

A virtuous circle.

The obvious trade off is that you'd have to delay ER to have that going for you.  Or else you'd have to cut expenses and/or earn money in retirement.  Both of which are fine, but lead you back to the idea that you could have ER'd earlier if you could/would do those things.  I.e. if you had planned the smaller budget and planned the minor income, you could have been ER'd earlier.  But then you'd be cutting it close.  You'd need to build that cushion to be comfortable, and building that delays ER.

Either way, I think the asset runaway idea is crucial (I might almost say necessary) for someone retiring super early (say.. 45 or earlier).  Who knows what we'll hit in the future, and if we get a few bad years of inflation in a row, it can be tough to keep up, even for investments (see: 1970s).  But having years and years of accumulating assets having built up will let you weather a lot more storms.

Thoughts?

Same thing happens in nuclear physics--it's the whole principle behind a simple atom bomb. And Chernobyl.

[skyrefuge]

In electrical engineering there is an expression called "thermal runaway," where an event occurs that heats up a component. The heat creates a positive feedback loop that causes the event to get worse, thus causing the component to get even hotter. And so on, until it goes up in flames... That's my goal with my savings, to reach a point "asset runaway."

I love that.  Asset runaway.

I think it's also useful (particularly for younger Mustachians) to realize that any level of compounding growth is exponential, and thus, puts you on the path to "asset runaway"; this is what any "power of compounding" presentation tries to illustrate.  "ooh, look at that curve blasting through the top of the graph!"  So "asset runaway" is really a continuum, rather than a particular point on that exponential curve.  I guess if we more-narrowly define the point of "thermal runaway" as the point-of-no-return, where the temperature increase can no longer be stopped and catastrophic damage will occur, then the point of "asset runaway" could more-happily be defined as the point at which your returns are large enough that you couldn't find a way to spend them all even if forced to.  "Aughhh, someone turn off the firehose of cash, I can't keep up, it's drowning me!!!"  It sounds like MMM at least has already reached that point. 

If the rate (the difference between your returns and your withdrawal rate) is small, then it will take more time to reach a subjective level "asset runaway", but you're likely to still get there eventually.

The obvious trade off is that you'd have to delay ER to have that going for you.  Or else you'd have to cut expenses and/or earn money in retirement.  Both of which are fine, but lead you back to the idea that you could have ER'd earlier if you could/would do those things.  I.e. if you had planned the smaller budget and planned the minor income, you could have been ER'd earlier.  But then you'd be cutting it close.  You'd need to build that cushion to be comfortable, and building that delays ER.

I feel like one of MMM's major messages that he's wanted to get across from the beginning to those of us nearing early retirement is that things will work out *better* than we assume; he's speaking back to us from across the divide: "c'mon, jump in, the water is fine, you'll love it!"  Even though we might feel like we'd be "cutting it close", I think he's trying to tell us that in reality, we probably aren't, and should stop being such a bunch of wussies and make the leap already.  When he retired 6(?) years ago, I bet MMM had no idea he'd reach "asset runaway" at all, much less this soon.

Now (as I noted in my comment of that blog entry), I just have to figure out to what extent believing this message negates its effect; if I accept that my initial idea of "cutting it close" was actually too conservative, then my new idea of "cutting it close" might now be too accurate to achieve "asset runaway" that I otherwise would have unwittingly stumbled into. 

[arebelspy]

Now (as I noted in my comment of that blog entry), I just have to figure out to what extent believing this message negates its effect; if I accept that my initial idea of "cutting it close" was actually too conservative, then my new idea of "cutting it close" might now be too accurate to achieve "asset runaway" that I otherwise would have unwittingly stumbled into.

That comment, by the way, was brilliant.  I had thought of a similar thing, but you put much better than I could have.

I was thinking of copy-pasting it into this thread, but felt bad stealing a comment from some random person.  Since you're posting here and referencing it, I'm gonna steal it guilt free.  ;)

Comment:

One slight issue I have is that simply reading this blog entry could cancel out the purported benefit. Sure, Jill (can I get her number before she meets that Jack fellow?), MMM, and some of MMM’s early-retiree friends overestimated their actual post-retirement expenses, but that’s because they never had the chance to read and learn from the awesome MMM blog! In contrast, for us pre-retiree MMM-readers, the cat is now out of the bag, and we will use the experience gained by our trusty trailblazers to predict our own post-retirement expenses/income more accurately than they could. I mean, c’mon, we’d all deserve a face-punch for being terrible MMM readers if we still believed we’d be driving 10,000 miles @ 25mpg in retirement! So it seems like we’re less likely to be pleasantly surprised by our net yearly expenses, and are more likely to end up like Jack, smoldering through our nest-egg exactly as we thought we would. Which, as MMM points out, is still a pretty sweet way to live the last 63 years of your life. But this news has essentially removed one layer of safety margin for us.

I guess an alternative is to attempt to wipe this blog entry from our memories, and continue to believe that we’ll need $20,000/year and wait to retire until our ‘stash is big enough to produce that, even though deep down we’ll know we’ll actually end up spending only $15,000/year. “Fooling yourself” doesn’t sound particularly Mustachian, however. In the end, it’s probably better to just consciously include this particular safety margin if we want to, rather than having it be a “surprise” like it was for MMM. Especially for people who would prefer to trade the chance at an ever-increasing ‘stash for an even-earlier retirement.

And Mrs. MM's reply:

Haha! That’s an interesting point.

What we found is that working created a lot of expenses. When you work every day, you end up driving more, spending more on clothing (and other things to try and look good), going out to lunch, going out to dinner since you feel too busy to cook, potentially going on bigger trips to “get away from it all”. As soon as we both stopped working, we suddenly spent a LOT less than we used to. Since every day seemed like a nice vacation, we didn’t feel the need to travel as far. It’s something that few people think about…

Also, we ended up working quite a bit more than we expected and both enjoy different types of work from time to time. This was also unexpected, especially since we had a young child. As our son gets older, we seem to be interested in working more, but this need fluctuates quite a bit and we might work for 2-3 months and then not work for the next 2-3 months.

It’s also true that opportunities seem to come knocking almost constantly. Maybe it’s because you have the chance to actually talk to people and get to know your community? For example, I walked into a children’s consignment shop a couple of years ago during the day and was talking to the owner and suddenly she was asking me if I wanted to do some bookkeeping work for her, since I had experience in that area. It was totally random (and I didn’t take the job), but when you slow down you see opportunities everywhere.

Another thing to consider, is that you can easily move around when you retire as your job is no longer tying you to a potentially expensive area.

It’s been a really interesting time and we’ve done many things we never would have predicted. I really don’t think you can know what will happen, but it will most likely be Excellent! :)

I absolutely agree with you that someone who has been Mustachian for years and already has expenses to the level they want them, and can accurately project post-ER expenses (i.e. no work-related expenses, lower taxes, etc.) means you'll have that issue I brought up at the bottom of the OP: you will have the trade-off of working a bit more to build that cushion for asset runaway.  That's likely A-OK.  Unless you really hate your job, I suppose.   But by the time your 'stache is that large, it's growing pretty quickly.  Or you go to semi-ER or you get some income in retirement somehow.  But your comment was spot on, IMO.

[skyrefuge]

That comment, by the way, was brilliant.  I had thought of a similar thing, but you put much better than I could have.

Woo hoo, props from Mrs. MM and arebelspy, two of the most valuable members of the MMM community.  I'm honored!  :-)  Feel free to steal my comments any time!

I absolutely agree with you that someone who has been Mustachian for years and already has expenses to the level they want them, and can accurately project post-ER expenses (i.e. no work-related expenses, lower taxes, etc.) means you'll have that issue I brought up at the bottom of the OP: you will have the trade-off of working a bit more to build that cushion for asset runaway.  That's likely A-OK.

Yep, it ends up just being a caveat that should be added to MMM's general "leap now, because things will generally turn out *better* than you expect" advice.  But those of us who already have things mapped out that accurately are also probably aware enough to include that caveat on our own.

When I conceived the idea of early-retirement 7 or 8 years ago, I estimated that I could live happily in retirement on $20k/year.  So I created a report in Quicken called "Regular Expenses" that reports my yearly expenses that I would expect in retirement, and I use that to "prove" to myself that it can be done (so far I haven't proven my estimate wrong, yay!)  In reality, income taxes and mortgage interest are the only actual expenses that I exclude from that report, and reading MMM unfortunately hasn't resulted in me excluding anything more.  Being single and living alone means that I don't think my going-out/looking-good expenses would decrease as they would if I was married, moving somewhere cheaper (away from friends/family) is less attractive when single, etc.  So becoming an MMM-reader hasn't really affected my planning there, for better or worse.

But the part that has been truly eye-opening and enticing to me that I had not considered before MMM is "that opportunities seem to come knocking almost constantly" in retirement.  I have a high enough opinion about myself to believe this might be *possible* for me, but I'm also self-aware enough to know that I'm not nearly as inherently awesome as Mr. and Mrs. MM, and I get the feeling that Opportunity spends a disproportionate amount of time wearing out the MMs' door-knocker vs. the average person's.  So my challenge at the moment is trying to guess an Awesomeness Derating Factor that I could apply to myself to predict the amount of income-opportunity I could achieve in retirement.  The easy option is to ignore this news that I've learned from MMM and then be pleasantly-surprised if/when it happens.  But I've found that even though I have not included it in a hard-numbers way yet, it's already pervading my soft assumptions. 

My plan hatched 7-8 years ago was to retire at 41 (6 years from now), and throughout my 7-8 year experiment, that prediction/hope stayed remarkably stable.  If anything, I thought maybe I'd work another year to achieve an extra cushion to increase the chances of achieving "asset runaway".  But now after reading MMM, his optimism for all things has me thinking 6 years would be MORE than enough, and that 0 more years might even be plenty.  But which one?  Or somewhere in between?  It doesn't help that this new factor (income in retirement) is even less-predictable than stock-market returns or inflation or lifespan.  Argh!  Fuck uncertainty! :-)  For now I'm still trying to keep the "work 6 more years" idea in my head, at least until I have more concrete reasons to adjust.

[Gerard]

  Argh!  Fuck uncertainty! :-) 

Yes. But maybe positive uncertainty (other than unexpected income opportunities) will help more than we know or expect. Our energy consumption and costs, or need for space, might be reduced by technological advances -- commercially available or McGyvered. Mild deflation or economies of scale might reduce the costs of some of the things we need or want. We might get even smarter than we are now, or meet people who will do wonderful things for us for free, or through barter. We might get tired of some fairly-expensive thing that we do/buy now, or grow to enjoy or accept its cheaper alternative. Government policies to encourage good behaviour might in the future align more closely with mustachian values. And entrepreneurs may see a market niche for something that will help us out.

If I'd hit FI 10 or 15 years ago, my budget wouldn't have taken into account laptops (instead of big "home offices"), Megabus, streaming music/video, Hotwire/Priceline, online airfare comparisons, microbreweries, consumer solar power packs, reduced income tax (at least in Canada), iPod-type devices, line drying clothes, Skype, wheat berries, online banks, or my increased confidence with variable rate mortgages, hostels, cooking, and walking long distances to get somewhere. And I'm still working to wrap my head around CSAs, tiny homes, couch surfing, home exchanges, giving up my land line, and the McGyvered-chest-freezer refrigerator.

These all add up to a fair whack of loot. Granted, it's hard to cut expenses as they get very very low, but my point is that ten years ago I thought I was badass. And in another ten years I'll realize I'm not very badass right now!

[arebelspy]

I was working on a 5-year real estate investing plan yesterday, and after running some numbers realized it has a nice buffer built in to get rich after FIREing: principal pay down.

Naturally appreciation will help (and, over time, appreciation should match inflation), but even ignoring appreciation I ran some numbers and when I have the cash flow to cover my living expenses and am FI, I'll have enough money paying down principal on my mortgage amounts each month to still be saving 31% of my gross.  That is, I'll have about 50k in cash flow, and 23k in principal pay down each year.  Even spending all of my cash flow and counting on no appreciation, just from the mortgages being paid down I'll be "saving" 23k/year (realized as equity gains), or 31% of the 73k total coming in.

(Naturally I'll diversify, but that's a topic for another day.)

That's a nice buffer, and a savings rate of 2-3X more than the traditional advice (10-15% of your salary).  Saving 2-3X the normal recommended amount while FIRE'd?  Yes please.  And passive, so I don't have to count on paid work or anything like that.  Being able to donate my time instead of sell it for a peace of mind buffer is an appealing idea.