Author Topic: How much to retire? What numbers are you using?  (Read 13924 times)

crunchy_mama

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How much to retire? What numbers are you using?
« on: July 11, 2012, 06:56:23 AM »
I know MMM has wrote that 500k is enough for 25k income and then arebelspy wrote another one just last week but it seems the numbers aren't exactly the same, well they go at it entirely different ways. MMM that according to firecalc 500k would be enough for an income of 25k.  I'm wondering what numbers people actually use.  I used this calculator:
http://www.bankrate.com/calculators/savings/saving-million-dollars.aspx

And with a 40% savings rate and what we already have it puts us at 13 yrs until we reach 500k at 7% rate of return which IIRC was the number MMM used in his retirement calculation. At 50% it is showing 12 yrs to reach goal.  All of this makes me nervous because I've used no less than 552 calculators over the years as to how much we need and how long it will take to save up that much. 

Currently our 401k is in a target fund of 2040 IIRC and managed by Fidelity,  so is fairly high risk.  We've only contributed up to the match the last few years (6%) as we've been working on a few other goals, ie paying off the house this year and saving for replacement vehicles(which are over 10yrs old).  Our plans is to play off the house by Jan 1st and then increase our contributions then.  So, I'm examining how and where to put this money.

I had thought before that we should only do a 401k up to match and then an IRA but I don't know.  We want the easiest and most automatic action which is why we like the 401k, it is automatic.  Then I was thinking 17k per year in the 401k which I thought I read was the yearly limit and then and then anything else into an IRA.  Or should we only do the match at the 401k and then max out on the IRA and ???.   

But the more I read the more information there is.  I just want to do something and know it will work with relative certainty and relative ease.  Can anyone help me here.  Personally I think we are too high risk right now but my husband says he will have to work until he is 70 anyway, I want to show him the numbers to see that it is possible but I know it can be anything that requires a lot of management time though.  Also, his attitude has changed a lot in this last year as before he thought it impossible to pay off the house but now he is just as excited as me, so it seems a good time to really get settled into a path to earlier retirement.

a few notes: we can live off less than 25k but I want to be conservative there with a growing family
* It would also be nice to have a savings vehicle that is easy to deposit funds electronically for if and when he is able to work OT or we are able to pull in extra money otherwise

eta: I'm sure I'm mixed up some terms and numbers so please excuse me after reading and reading and holding a crying toddler my brain is not fully operational
« Last Edit: July 11, 2012, 06:58:36 AM by crunchy_mama »

arebelspy

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Re: How much to retire? What numbers are you using?
« Reply #1 on: July 11, 2012, 11:23:42 AM »
Keep in mind that 500k producing 25k is in today's dollars.  If you get a 7% REAL return, then that's valid (and both numbers will be accordingly higher), but with inflation it'll look different.

I.e. you'd likely need a 10% return and 3% inflation.  At that point your stache would be closer to 700k to pay expenses of closer to 35k (which would still be only 25k in today's dollars).

Inflation is the silent ER killer many don't think about.

40 years of retirement = 40 years of inflation with no wage increases to help.

I may write an article about how to counteract that at some point.
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crunchy_mama

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Re: How much to retire? What numbers are you using?
« Reply #2 on: July 11, 2012, 11:40:11 AM »
Of course then others argue about the real effect of inflation, or it seems I read that on the ERE site.  The calculations don't figure in any SS at any point and also don't figure in any decrease in lifestyle in later years either.  Considering 500k was a figure that MMM listed I thought that was considered "good." 

grantmeaname

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Re: How much to retire? What numbers are you using?
« Reply #3 on: July 11, 2012, 11:50:26 AM »
MMM has always suggested figuring out your retirement expenses and then determining your total amount from there.

If you need 25k a year, you need a portfolio large enough to produce 25k at a 4% withdrawal rate, which is $625k. (The difference between 4% and the actual return, which will likely be around 7-8% most years, is used to cover inflation so that in thirty years you have the buying power equivalent of today's $625k, something like $1.5M, and not merely $625k)


arebelspy

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Re: How much to retire? What numbers are you using?
« Reply #4 on: July 11, 2012, 11:59:05 AM »
Considering 500k was a figure that MMM listed I thought that was considered "good."

I wouldn't just take anyone else's number and call it "good," including MMM, brilliant as he may be.  There's a million variables that make each individual situation unique.

As grant says, start with your spending.

Also MMM's 4% SWR article may be optimistic, IMO.  For a timeframe longer than 30 years, something more like 3-3.5% may be prudent.  Safety buffers notwithstanding.

YMMV, and that's why you want to run your own calculations.  You ultimately need a plan that will let you sleep at night.
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 three 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.
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crunchy_mama

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Re: How much to retire? What numbers are you using?
« Reply #5 on: July 11, 2012, 01:41:46 PM »
Yes, of course no one else is responsible for our decisions but us.  The calculations as far as time-line and saving rate are pretty similar between your article and MMM 4% Rule Article, accounting for the amount we already have.  Of course ERE's figures are even less conservative and then all the mainstream info is even more conservative.  My husband isn't jumping the gun to retire though, as I said previously.  I'm just thinking how soon could we be in a good position to do so.  I do forsee him continuing in some kind of work.  I like the idea though of a good size nest egg established and him being able to pursue things that are what he wants with so much less stress on him as to how much he makes, all the while still being able to add-on to the nest egg.  Now to see how his job plays out.  It looks like now though that in the next 2 yrs at least he will hopefully be in the position to make more making the timeline shorter.

darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #6 on: July 11, 2012, 01:46:26 PM »
Inflation is the silent ER killer many don't think about.

Of course, official inflation numbers are determined by CPI, which includes the prices of many things us Mustachians aren't likely to buy. So this might not be as big a concern for frugally-minded folk. Best to be on the safe side, though.

Xtal

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Re: How much to retire? What numbers are you using?
« Reply #7 on: July 11, 2012, 01:58:54 PM »
Currently our 401k is in a target fund of 2040 IIRC and managed by Fidelity,  so is fairly high risk.

Whoa hey!  This stuck out for me as I also have an employer plan with Fidelity.

Watch out for account fees!  I was in the same plan as your husband... the "Lifecycle 2040" fund.  This was the default fund my employer put me into.  The expense ratio is 0.14%, or $1.40 per $1000.

I moved my Fidelity plan to 75% S&P 500 Index and 25% bonds.  The S&P 500 Index fund I'm in now has an expense ratio of 0.011%, or only $.11 per $1000.  The bond fund has an expense ratio of 0.042%, or $.42 per $1000.

I've been seeing a lot of articles lately about how fees can eat into your retirement gains, so that's why I changed my allocations with Fidelity.

crunchy_mama

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Re: How much to retire? What numbers are you using?
« Reply #8 on: July 11, 2012, 02:01:06 PM »
Xtal thanks for the info I've been considering whether or not we should switch funds.

arebelspy

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Re: How much to retire? What numbers are you using?
« Reply #9 on: July 11, 2012, 02:33:58 PM »
Inflation is the silent ER killer many don't think about.

Of course, official inflation numbers are determined by CPI, which includes the prices of many things us Mustachians aren't likely to buy. So this might not be as big a concern for frugally-minded folk. Best to be on the safe side, though.

I think that's mostly an ER myth.  Sure, on the stuff you don't buy prices going up don't affect you.  But inflation will still hit you on the things you do buy.. so what does it matter if other items you don't buy go up?

ER/ERE types say stuff like "oh well I do my own maintenance, so the increasing cost of a plumber doesn't matter to me"... wellllll, surrrreeee... but on the 25k (or whatever you DO spend) that part will still have inflation.

Unless you have some logical reason to think that the things you do buy will be immune to inflation (and this is hard to imagine for me unless you're - literally - 100% off the grid - no utilities, no food, etc.), then inflation will hit you just as hard.
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 three 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.

skyrefuge

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Re: How much to retire? What numbers are you using?
« Reply #10 on: July 11, 2012, 03:02:56 PM »
I moved my Fidelity plan to 75% S&P 500 Index and 25% bonds.  The S&P 500 Index fund I'm in now has an expense ratio of 0.011%, or only $.11 per $1000.  The bond fund has an expense ratio of 0.042%, or $.42 per $1000.

Wow, are you sure about those numbers?  Looking at Fidelity's website, the lowest expense ratio they have on any fund is 0.07% (and 0.75% for their 2040 fund).  Vanguard now has their 500 Index Admiral Shares down to 0.05%, which is their lowest-expense fund.  Maybe your particular 401(k) plan somehow reduces the expense ratios even lower, to that crazy-low 0.011%?

Anyway, regardless what the particular numbers are, it looks like you reduced your expenses either way, so good move.  Though for future reference, 0.14% is really pretty good too.  In my crappy 401(k), my 500 Index fund has a ridiculous 0.92% expense ratio!

tooqk4u22

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Re: How much to retire? What numbers are you using?
« Reply #11 on: July 11, 2012, 03:11:00 PM »
Unless you have some logical reason to think that the things you do buy will be immune to inflation (and this is hard to imagine for me unless you're - literally - 100% off the grid - no utilities, no food, etc.), then inflation will hit you just as hard.

Adding further to this point I would go as far to say that the ER/ERE/MMM $25k spending/budget consists mostly of needs that are more succeptible to inflationary pressures and there is no flex to cut them back/out.  Although there are positives that can come with inflation especially if being driven by improving economic fundamentals and can result in higher returns.

The real killer is stagflation.  This isn't good for anyone.

TLV

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Re: How much to retire? What numbers are you using?
« Reply #12 on: July 11, 2012, 05:36:02 PM »
Maybe your particular 401(k) plan somehow reduces the expense ratios even lower, to that crazy-low 0.011%?

401ks with large companies can get access to super-low expense ratios. My employer's 401k plan offers VIIIX, which is Vanguard's S&P 500 index with 0.02% expenses, so it wouldn't surprise me if there were even lower cost offerings out there. (VIIIX has a minimum investment of $200 million, so it's not something you're likely to get outside of your 401k.)

darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #13 on: July 11, 2012, 06:16:52 PM »
Inflation is the silent ER killer many don't think about.

Of course, official inflation numbers are determined by CPI, which includes the prices of many things us Mustachians aren't likely to buy. So this might not be as big a concern for frugally-minded folk. Best to be on the safe side, though.

I think that's mostly an ER myth.  Sure, on the stuff you don't buy prices going up don't affect you.  But inflation will still hit you on the things you do buy.. so what does it matter if other items you don't buy go up?

This is a good point. In order for inflation to be not as much of a concern, the price increase percentage of the things you don't buy would have to raise more rapidly than the price increase percentage of things you do buy. But it's not like the price of things you do buy are somehow totally immune to inflation (unless you buy everything you need at the Dollar Store! :-) ).

I'm going to have to review the YMOYL chapter that argues we shouldn't sweat inflation that much.

arebelspy

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Re: How much to retire? What numbers are you using?
« Reply #14 on: July 11, 2012, 08:18:14 PM »
The YMOYL idea is based on just investing in inflation protected t-bills, something that's not really a viable option today. TIPS are paying a negative return.  Ridiculous.

Others base a lot of their ideas on spending going down.  I'd rather not count on that as part of the plan and then be forced to contract spending beyond a comfortable level when inflation rages.

As a young person, the idea of inflation is hard to actually comprehend, as I've never seen major inflation.  Yet over my lifetime many things have doubled in price or more. 

As a (hopefully) future early retiree, the idea of inflation scares the crap out of me.  By far the biggest threat to a 40+ year retirement.  I'll gladly take a decade of flat markets over raging inflation.

The problem with inflation is it compounds.. and we can all appreciate how great compound interest is.. to have it work against you is rough.

As with many of the readers here I'm fairly young, and don't remember the crazy inflation of the early 80s, so I found this thread from the e-r.org forums particularly interesting.

Do you perceive an inflation generation gap?

I commented in that thread:
Quote
Speaking as a younger person, while I understand the effects of inflation, my mind still boggles at a statement like this:

Quote from: clifp
3 years of double digit inflation.
Simply because I understand compounding, I think, that idea (3 years of double digit inflation) just floors me.

There's just a huge gap between understanding something and living it.

If we hit a sequence of returns like that, even for a few years of your 40 years, you could be sunk.  In fact, it's inflation that makes many FIRECalc simulations fail, rather than negative market returns.

I don't mean to spread fear, and there are potential solutions, but it is a big issue that any early retiree needs to think about and plan for.

Lucky COLA'd pensioners aside.
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 three 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.

Lars

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Re: How much to retire? What numbers are you using?
« Reply #15 on: July 11, 2012, 10:44:26 PM »

If we hit a sequence of returns like that, even for a few years of your 40 years, you could be sunk.  In fact, it's inflation that makes many FIRECalc simulations fail, rather than negative market returns.

I don't mean to spread fear, and there are potential solutions, but it is a big issue that any early retiree needs to think about and plan for.

Lucky COLA'd pensioners aside.

I find it simpler to consider failure the result of negative real (after inflation) market returns since high inflation does not guarantee low market returns nor do significant negative real market returns require high inflation (2000-2008).

Are you sure you aren't trying to spread just a little bit of fear? Perhaps so we're more likely to read your article. :-)

Lars

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Re: How much to retire? What numbers are you using?
« Reply #16 on: July 11, 2012, 11:27:42 PM »
I know MMM has wrote that 500k is enough for 25k income and then arebelspy wrote another one just last week but it seems the numbers aren't exactly the same, well they go at it entirely different ways. MMM that according to firecalc 500k would be enough for an income of 25k.  I'm wondering what numbers people actually use.  I used this calculator:
http://www.bankrate.com/calculators/savings/saving-million-dollars.aspx

And with a 40% savings rate and what we already have it puts us at 13 yrs until we reach 500k at 7% rate of return which IIRC was the number MMM used in his retirement calculation. At 50% it is showing 12 yrs to reach goal.  All of this makes me nervous because I've used no less than 552 calculators over the years as to how much we need and how long it will take to save up that much. 

I hope there is not too many posts already for me to comment on the original posting. Either way here goes:

Like you my family is probably a minimum of ten years from early retirement. After I did a few calculators with differing results, I was remind of a quote often attributed to Yogi Berra "It is hard to make predictions especially about the future." As these calculations require so many assumptions about future returns and more importantly our future behavior, I've settled on reasonable numbers and accepted that they are rough estimates that will need to be revised when I get closer. I use 5% real return, 4% safe withdrawal rate, slightly higher (20%) future tax rates and slightly lower (10%) social security benefits. I think your 7% return is on the high side of reasonable but otherwise agree.

Based on your information and my favorite numbers, my opinion is you can retire early in 15 to 20 years with approximately $625,000 adjusted for inflation.

sol

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Re: How much to retire? What numbers are you using?
« Reply #17 on: July 11, 2012, 11:30:34 PM »
Lucky COLA'd pensioners aside.

I'm going to be one of those lucky COLA'd pensioners, and inflation is still my biggest concern.

Why?  Because of all the years that will elapse between the day I retire and the day I collect my first pension check.  That pension doesn't get a COLA for all of those years you're not collecting it. 

If I retire in 2015 with a pension based on my 2015 salary, and then don't collect that pension until 2040, suddenly that pension is worth about diddly squat.  Then consider the fact that pensions are typically based on years of service, which an early retiree has very few of, and suddenly the whole pension idea is kind of a waste.

In retrospect, I'd even go so far as to say that pensions are DESIGNED to keep you working until retirement age.  The earlier you quit working, the more heavily penalized you are.  Work til 65 and you're set for life.  Golden handcuffs.


crunchy_mama

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Re: How much to retire? What numbers are you using?
« Reply #18 on: July 12, 2012, 03:35:41 AM »
I know MMM has wrote that 500k is enough for 25k income and then arebelspy wrote another one just last week but it seems the numbers aren't exactly the same, well they go at it entirely different ways. MMM that according to firecalc 500k would be enough for an income of 25k.  I'm wondering what numbers people actually use.  I used this calculator:
http://www.bankrate.com/calculators/savings/saving-million-dollars.aspx

And with a 40% savings rate and what we already have it puts us at 13 yrs until we reach 500k at 7% rate of return which IIRC was the number MMM used in his retirement calculation. At 50% it is showing 12 yrs to reach goal.  All of this makes me nervous because I've used no less than 552 calculators over the years as to how much we need and how long it will take to save up that much. 

I hope there is not too many posts already for me to comment on the original posting. Either way here goes:

Like you my family is probably a minimum of ten years from early retirement. After I did a few calculators with differing results, I was remind of a quote often attributed to Yogi Berra "It is hard to make predictions especially about the future." As these calculations require so many assumptions about future returns and more importantly our future behavior, I've settled on reasonable numbers and accepted that they are rough estimates that will need to be revised when I get closer. I use 5% real return, 4% safe withdrawal rate, slightly higher (20%) future tax rates and slightly lower (10%) social security benefits. I think your 7% return is on the high side of reasonable but otherwise agree.

Based on your information and my favorite numbers, my opinion is you can retire early in 15 to 20 years with approximately $625,000 adjusted for inflation.
Yes, you cannot control everything or know everything.  We can save what we reasonably can and do our best but life can still happen.  I'm weary of reading so many things and so many people have different opinions from the super conservative to the super lax.  I'm at the point that I'm looking at how quickly could we reasonably build up a fair size stash of cash on our income.  I think 500k is a good goal to start and then we'll go from there.  For us here with dh's long term job prospects some what in the air I want to know how much we can cut spending, without deprivation, to get to that point as soon as possible.  I'd like to get it done in 10yrs personally, but life can easily throw curveballs.  He could lose his job next year, one of us could max out our high ded insurance plan or both cars could die.

Xtal

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Re: How much to retire? What numbers are you using?
« Reply #19 on: July 12, 2012, 04:46:00 AM »
I moved my Fidelity plan to 75% S&P 500 Index and 25% bonds.  The S&P 500 Index fund I'm in now has an expense ratio of 0.011%, or only $.11 per $1000.  The bond fund has an expense ratio of 0.042%, or $.42 per $1000.

Wow, are you sure about those numbers? 

I laughed at this, because my husband had the same response.  He didn't believe me until I logged into my account and showed him.  Yes, I'm sure. 

Anyway, regardless what the particular numbers are, it looks like you reduced your expenses either way, so good move.  Though for future reference, 0.14% is really pretty good too.  In my crappy 401(k), my 500 Index fund has a ridiculous 0.92% expense ratio!

I had no idea I was getting such a good deal, though!  Now I feel foolish for cautioning against a 0.14% expense ratio.  I'm so new at this -- maybe I shouldn't be doling out advice to other people.

Maybe your particular 401(k) plan somehow reduces the expense ratios even lower, to that crazy-low 0.011%?

401ks with large companies can get access to super-low expense ratios. My employer's 401k plan offers VIIIX, which is Vanguard's S&P 500 index with 0.02% expenses, so it wouldn't surprise me if there were even lower cost offerings out there. (VIIIX has a minimum investment of $200 million, so it's not something you're likely to get outside of your 401k.)

Yes, this.  I work for a huge company.  I feel very lucky -- my job has good benefits.  This info about the expense ratio was a surprise to me -- a hidden benefit, I guess.

darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #20 on: July 12, 2012, 02:10:44 PM »
So I read through the thread on e-r.org, and re-read the section of YMOYL that deals with inflation. It's given me a lot to think about. Sol presented his first "book" to the MMM community in the biking-trend-turned-global-warming-debate thread. I present my first novella! :-)

The YMOYL idea is based on just investing in inflation protected t-bills, something that's not really a viable option today. TIPS are paying a negative return.  Ridiculous.

The investment strategy outlined in YMOYL is distinct from the argument that inflation concerns are exaggerated (at least in the 1992 edition). That is to say, the reasoning Dominguez and Robin lay out isn't "No need to worry about inflation! TIPS got you covered!" The argument is that many inflation concerns are based on the CPI, and the CPI presents a distorted picture of real cost:
  • The prices of many goods actually fall over time, even while those goods improve in quality (a handful of examples cited, comparing a drop in prices between 1970 and 1991; and, of course, double digit inflation occurred during a portion of this window).
  • Many of the items listed in the CPI don't need to be purchased every year, and some may never be purchased.
  • CPI isn't adjusted to account for durability/lifespan of products.
  • CPI isn't adjusted to account for the price fluctuation in everyday commodities (e.g. orange juice prices skyrocket well above CPI quote due to drought in Florida, but apple orchards in the NW US do well, driving down apple juice cost compared to original CPI quote).
  • CPI isn't adjusted to account for improvements in product efficiency (e.g. electronics draw less power and do more during the time they run, cars get increasingly better gas mileage, etc.)
  • Consumer behavior can change to adjust for spikes in prices, such that the consumer retains their past spending level or even decreases it (e.g. vacationing closer to home when travel & hotel prices spike).
  • CPI isn't adjusted to account for "our very mobile society" (e.g. buying a home in a coveted urban area for $500,000 vs. buying nearly the same home in a less coveted mid-sized town for $100,000).
  • CPI doesn't account for preventative measures that can be taken to reduce health care costs.
  • CPI doesn't account for the fact that some things do double duty, eliminating costs included in the index (e.g. yardwork, human-powered travel, etc. can count towards exercise).

Given the historical context, I think this is mostly meant to curb the irrational fear of inflation that some (most?) of their audience might have been inclined to indulge in, due to their living through the inflationary periods of the late 70's and early 80's. They didn't want to see their audience sell themselves short on FI because of exaggerated inflationary concerns. But that's not to say they don't think we should be concerned with inflation at all; it just takes a back seat to things like lifestyle inflation, which we have greater control over. The following paragraph, I think, sums up their position nicely:

Quote from: Your Money or Your Life, p. 303. 1st ed.
None of this is to say that there hasn't been real inflation, even without the distortions of the CPI. The prices of auto insurance, hospital rooms, prescription drugs, higher education and hundreds of other items have skyrocketed. Yet, despite the higher prices in these areas, please notice the enormous increase in multiple-car families, documented overuse of prescription drugs and the unfounded assumption that an expensive private college provides a better overall education than a state university. These items represent choices, not necessities.

This seems to be sound advice: Before protecting your buying power from the corrosive effects of price inflation, focus on the really big wins first. Be mindful of your spending habits and adjust them to preserve as much of your buying power as you can.

As a young person, the idea of inflation is hard to actually comprehend, as I've never seen major inflation.  Yet over my lifetime many things have doubled in price or more. 

As a (hopefully) future early retiree, the idea of inflation scares the crap out of me.  By far the biggest threat to a 40+ year retirement.  I'll gladly take a decade of flat markets over raging inflation.

As with many of the readers here I'm fairly young, and don't remember the crazy inflation of the early 80s, so I found this thread from the e-r.org forums particularly interesting.

Do you perceive an inflation generation gap?

The thread was very informative. I couldn't understand the high-inflation period during the early 80's, since I was 1 - 4 years old during the time, but I do have memories of when my dad was on strike for 6 months from his job at Ohio Edison in 1980-1 and received a $20 per week stipend from the union for groceries and housing expenses. The buying power of that $20 diminished noticeably over those six months due to price increases, which eventually completely ate into the savings my parents set aside so that they could cover basic living costs. The last month or two of the strike, we experienced what I would later come to know by the name of "scraping by." My dad told me in a recent conversation that the money they saved should have lasted longer than even 6 months, but they didn't account for a 12% inflation rate.

As crappy as that was, and as scary as it is to think that late 70's to early 80's level inflation could happen again, I'm optimistic that it's very unlikely we'll see anything like it. The monetary policy of the Fed is particularly keen on avoiding high levels of inflation, simply due to how destructive those levels can be (Oh god, I hope mentioning the Fed doesn't explode heads and lead to stupid political flame-wars). Commenter gone4good in the e-r.org forum thread summarizes briefly but well, I think, why high levels of inflation are unlikely:

Quote from: gone4good
if you look at the year-to-year inflation rates over the past century, you'll see extreme volatility up until modern times when Central Banks discovered how to control inflation. Since 1990, inflation as measured by CPI has averaged 2.6% and has rarely exceed 5% in any given year. If anything, the trend has been toward lower inflation. Now with an explict 2% Fed target, we're more likely to have even lower inflation over the next 30 years than we had over the prior 30.

Even though my wife and I are expecting to see around 1 - 1.5% inflation on items we buy, in our FI calculations we're planning for roughly 2.5 - 2.75% inflation, which is consistent with gone4good's remark.

The problem with inflation is it compounds.. and we can all appreciate how great compound interest is.. to have it work against you is rough.

Right. Even a "low" 2% yearly inflation rate over a ten year period will reduce purchasing power by ca. 18.3%, which is clearly significant enough to warrant attention.

mechanic baird

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Re: How much to retire? What numbers are you using?
« Reply #21 on: July 12, 2012, 02:59:24 PM »
Inflation is the silent ER killer many don't think about.

Of course, official inflation numbers are determined by CPI, which includes the prices of many things us Mustachians aren't likely to buy. So this might not be as big a concern for frugally-minded folk. Best to be on the safe side, though.

With Feds printing money like mad, I am banking on a sky high inflation in the future... If that's true, it's gonna be hard to beat it..

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Re: How much to retire? What numbers are you using?
« Reply #22 on: July 12, 2012, 08:17:20 PM »

I find it simpler to consider failure the result of negative real (after inflation) market returns since high inflation does not guarantee low market returns nor do significant negative real market returns require high inflation (2000-2008).

Yes, it may indeed be simpler.  And both of those things are true.  Nevertheless, I think inflation doesn't get enough attention, and, like I said, many FIRECalc simulations fail in the high inflation periods, rather than the low market periods.

That is, a retiree historically would be more likely to run out of money due to inflation meaning they need to increase their spending (running out of money faster than they would otherwise) than due to low market returns (also running them out of money, as their portfolio isn't getting a good return, or even is getting a negative one).

It may be simpler, sure.  But I don't think one should just ignore inflation because of that.


Are you sure you aren't trying to spread just a little bit of fear? Perhaps so we're more likely to read your article. :-)

I have no agenda.  I have no blog to promote.  I have made no money, nor plan on making any money, from anything MMM related.  I just like to share information, and help others as best as I can, the same attitude I see in many, many posters here.

I know you were joking, based on the smile, but I wanted to address it anyways.  :)
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arebelspy

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Re: How much to retire? What numbers are you using?
« Reply #23 on: July 12, 2012, 08:23:22 PM »
I'm going to be one of those lucky COLA'd pensioners, and inflation is still my biggest concern.

Why?  Because of all the years that will elapse between the day I retire and the day I collect my first pension check.  That pension doesn't get a COLA for all of those years you're not collecting it. 

If I retire in 2015 with a pension based on my 2015 salary, and then don't collect that pension until 2040, suddenly that pension is worth about diddly squat.  Then consider the fact that pensions are typically based on years of service, which an early retiree has very few of, and suddenly the whole pension idea is kind of a waste.

In retrospect, I'd even go so far as to say that pensions are DESIGNED to keep you working until retirement age.  The earlier you quit working, the more heavily penalized you are.  Work til 65 and you're set for life.  Golden handcuffs.

I will be one too, and there will be approximately 28 years between my quitting work and being eligible for my pension.  So yeah, I discount a LOT of it due to inflation.

Not only that, but my pension's COLA increase is CAPPED.

After taking my pension, I get no increase years 1,2,3.. a 2.5% years 4,5,6.. 3% years 7,8,9.. 3.5% 10,11,12.. and 4 or 4.5% (can't remember) years 13 and 14.  Then year 15 and onward I get 5% per year.

So even after getting the pension, years 1-3 are hit by inflation, and any subsequent year is hit when the inflation is above my cap (i.e. inflation of 4% when I'm getting 2.5%.. or inflation of 10% when I'm capped at 5%).

Even worse, each of those years is capped in that it can't go above the CPI!  Meaning if there is only 1% inflation, and I'm capped at 5%... I get a 1% increase.  So in years of low inflation, I get a small increase.  In years of high inflation, I get capped and still a small increase. 

This is not uncommon with pensions either, may way to check into how your COLA works.

So yeah, not only the time between stopping work and collecting, but even when collecting inflation is scary.  Even WITH a COLA'd pension.  Still, better than not having one.
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arebelspy

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Re: How much to retire? What numbers are you using?
« Reply #24 on: July 12, 2012, 08:25:59 PM »
I had no idea I was getting such a good deal, though!  Now I feel foolish for cautioning against a 0.14% expense ratio.  I'm so new at this -- maybe I shouldn't be doling out advice to other people.

Much learning happens when someone posts something wrong, and someone more knowledgeable comes along and corrects them. If the first person hadn't posted, all the people reading that thread wouldn't have learned something.  So please do continue to post, for your education and ours.  :)

(I screw up stuff all the time and have to be corrected.. stupid 120-your age in bonds? or stocks?  Heh.)
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Re: How much to retire? What numbers are you using?
« Reply #25 on: July 12, 2012, 08:33:49 PM »
Good post darkelenchus.  I agree with much of what you say.

However, I wouldn't say a 20 year track record is enough for saying the Feds can control inflation long term.  I hope you're right.


The problem with inflation is it compounds.. and we can all appreciate how great compound interest is.. to have it work against you is rough.

Right. Even a "low" 2% yearly inflation rate over a ten year period will reduce purchasing power by ca. 18.3%, which is clearly significant enough to warrant attention.

Exactly.  Even if the fed CAN mostly control it, if it shoots up, even for a few years in a row (due to massive printing of money or whatever) before it gets back under control, it can be devastating to an early retiree due to the compounding nature.  At that point even a low 2% rate is based on a much larger amount.

Anyways, it's just another thing to be aware of and plan accordingly.

But I do believe that it is the #1 most ignored potential problem by the average person looking to retire early (wit healthcare being the #1 overblown problem).  But it's also very ignored by the MMM/ERE type community simply because (in my opinion), most of that community is too young to have experienced serious inflation (but we have experienced anemic market returns). And that's trouble.

Cause when working.. your wages go up. When not working?  Better have a plan to make sure your income is still going up.

Off topic edit: Sorry for the multiple posts in a row, was having internet issues and it was much easier to quote one particular thing and reply to it rather than gather multiple quotes from different posts into one reply.  And since they were all different replies, rather than fitting together, it seemed to make sense to have them split up anyways.  My apologies for cluttering the thread like that, however.
« Last Edit: July 12, 2012, 08:39:20 PM by arebelspy »
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darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #26 on: July 12, 2012, 10:46:58 PM »
Good post darkelenchus.  I agree with much of what you say.

However, I wouldn't say a 20 year track record is enough for saying the Feds can control inflation long term.  I hope you're right.

Perhaps. It could be that some other factor has kept prices relatively stable in the recent past. Some unforeseen future event might lead to inflation beyond Fed control. It's hard to imagine, though. A lot can be accomplished by setting interest rates and expanding/contracting the money supply.

Cause when working.. your wages go up. When not working?  Better have a plan to make sure your income is still going up.

The frustrating thing for many is that wages haven't gone up in real terms. A side hustle could be beneficial before and after retirement, in this regard.

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Re: How much to retire? What numbers are you using?
« Reply #27 on: July 12, 2012, 11:00:52 PM »
I'm going to be one of those lucky COLA'd pensioners, and inflation is still my biggest concern.


I will be one too, and there will be approximately 28 years between my quitting work and being eligible for my pension.  So yeah, I discount a LOT of it due to inflation.

Not only that, but my pension's COLA increase is CAPPED.

After taking my pension, I get no increase years 1,2,3.. a 2.5% years 4,5,6.. 3% years 7,8,9.. 3.5% 10,11,12.. and 4 or 4.5% (can't remember) years 13 and 14.  Then year 15 and onward I get 5% per year.

So even after getting the pension, years 1-3 are hit by inflation, and any subsequent year is hit when the inflation is above my cap (i.e. inflation of 4% when I'm getting 2.5%.. or inflation of 10% when I'm capped at 5%).

Even worse, each of those years is capped in that it can't go above the CPI!  Meaning if there is only 1% inflation, and I'm capped at 5%... I get a 1% increase.  So in years of low inflation, I get a small increase.  In years of high inflation, I get capped and still a small increase. 

This is not uncommon with pensions either, may way to check into how your COLA works.

So yeah, not only the time between stopping work and collecting, but even when collecting inflation is scary.  Even WITH a COLA'd pension.  Still, better than not having one.

I'm surprised by the variations in COLA setups in pensions. My wife's COLA is capped as well but is different yet. We get COLA between stopping work and collecting but it is in a band of between 2.1 and 3.1% depending on the health of the pension system and inflation (it can be more than inflation).  i everyone so far glad we have and even with inflation concerns at least it is currently well funded.

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Re: How much to retire? What numbers are you using?
« Reply #28 on: July 12, 2012, 11:16:40 PM »

The frustrating thing for many is that wages haven't gone up in real terms.

Um, yes, but we're talking about dealing with inflation, so if it stays flat in real terms, at least it keeps up with inflation.

Why should it necessarily go up in real terms?  There may be some reasons (more experience providing more value), but that would be what a raise in real terms (not just cost of living increase) or promotion would be for.  Many workers shouldn't see a raise in real terms, just nominal.

/disclaimer: I work for the state, and my wages have been frozen since 2007, not even the cost of living increases that are part of my contract have been given.

Versus what we mean: quitting work and 30 years later collecting a pension on an income that has drastically declined in real terms.  So like I said, when working, your wages go up (even if flat for a short period of time, if there's inflation, they have to go up, or no one could afford food.. And then prices wouldn't rise, and we wouldn't have inflation.. Almost by definition wages would have to rise), when not working, you need to somehow make your income increase.
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Re: How much to retire? What numbers are you using?
« Reply #29 on: July 13, 2012, 08:06:58 AM »
But it's also very ignored by the MMM/ERE type community simply because (in my opinion), most of that community is too young to have experienced serious inflation (but we have experienced anemic market returns). And that's trouble.

I guess that might be true for an MMM/ERE person deriving their own equations or designing a retirement calculator from scratch.  Maybe they forget about inflation, or don't weight it highly enough.  But much of the advice from experienced people on early retirement calculations is informed by SWR research, FIREcalc, or similar backward-looking data, all of which has inflation baked into their results.  Lots of FIREcalc simulations include those 3 years of late-70s double-digit inflation, yet 90%+ of plans succeed nonetheless with a 4% withdrawal.

So the only way then that inflation would be underestimated is if you expect it to be *worse* sometime in the next 50 years than it was at any time over the last 100-whatever years.  Which it very well may be, but making that assumption isn't any different than assuming that stock market returns will be worse than they've been in the last 100-whatever years, or that our lifespans will grow to be far longer than expected.

darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #30 on: July 13, 2012, 11:06:38 AM »

The frustrating thing for many is that wages haven't gone up in real terms.

Um, yes, but we're talking about dealing with inflation, so if it stays flat in real terms, at least it keeps up with inflation.

Why should it necessarily go up in real terms?  There may be some reasons (more experience providing more value), but that would be what a raise in real terms (not just cost of living increase) or promotion would be for.  Many workers shouldn't see a raise in real terms, just nominal.

/disclaimer: I work for the state, and my wages have been frozen since 2007, not even the cost of living increases that are part of my contract have been given.

Versus what we mean: quitting work and 30 years later collecting a pension on an income that has drastically declined in real terms.  So like I said, when working, your wages go up (even if flat for a short period of time, if there's inflation, they have to go up, or no one could afford food.. And then prices wouldn't rise, and we wouldn't have inflation.. Almost by definition wages would have to rise), when not working, you need to somehow make your income increase.

Yes, of course this is correct! If your real wages have flat lined, you're at least keeping up with inflation.  (My bad. Not to make excuses for myself, but I was banging on my keyboard way past the time I should have gone to bed. I'm more lucid now, so let's see if a better expression of my ideas hold up to Mustachian peer review. :-) )

What I had in mind was this: you're right that you're very likely far more vulnerable to inflation after RE, but you shouldn't ignore it when you're working, either. Reaching FI is contingent upon preserving and/or growing a high savings rate during your working years. It's not a foregone conclusion that your real wage will remain flat or improve. In these cases, inflation will eat into your savings rate, thus postponing FI.

Purely from a wage perspective, I'm assuming that your case shows this, arebelspy, given the wage freeze. I experienced something similar when my wages were frozen for 2 years or so during the early 2000's, when I worked at the public library. Inflationary effects weren't that bad (biggest one was tuition hikes), but the change in buying power didn't go unnoticed. I'm experiencing something again at the schools I teach at. Beginning in 2008, raises haven't come close to keeping up with inflation. Thankfully my wife has received pretty large raises during this time frame, so our household savings rate has risen (having no mortgage helps, too, even though it's only been a month). But any additional income stream that beats inflation will help stave off the reduction in savings rate increase caused by my stagnant nominal wage.

This is why you want the increase in real wages. All things being equal, that will increase your savings rate and thus reduce time to FI. For instance, crunchy_mama seems frustrated with a 40% savings rate. If crunchy_mama has already taken a critical mass of expense reduction measures (e.g. it will take ridiculous effort to see a 1% or less savings rate increase from this) and has optimized their investments, the best option to raise the savings rate will very likely be to find ways to increase their real wage, whether through a raise, a side hustle, a second job, etc. Crunchy_mama won't want to take a job at, say, Burger King, where they're paid minimum or near minimum wage and any raises they receive likely won't keep up with inflation, pretty much guaranteeing that they'll see diminishing returns over time. Obviously such work will increase the savings rate some, but at a significant time tradeoff, which is counter-productive to a primary goal of FI, viz. reclaiming your time.

Anyway, I hope this makes more sense.

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Re: How much to retire? What numbers are you using?
« Reply #31 on: July 13, 2012, 03:51:52 PM »
I guess that might be true for an MMM/ERE person deriving their own equations or designing a retirement calculator from scratch.  Maybe they forget about inflation, or don't weight it highly enough.  But much of the advice from experienced people on early retirement calculations is informed by SWR research, FIREcalc, or similar backward-looking data, all of which has inflation baked into their results.  Lots of FIREcalc simulations include those 3 years of late-70s double-digit inflation, yet 90%+ of plans succeed nonetheless with a 4% withdrawal.

Yes, FIRECalc is the best way to do that, IMO, which is why I mentioned it several times in this thread.  ;)

I still see many, many, many potential early retirees not understanding inflation. The fact of the matter is, basically everyone on these forums will be a millionaire some day.  But it won't mean much.

Darkenchelada: Yes, you want wages to go up in real terms, sure.  But I don't know why they should without a promotion or performance based raise.  Otherwise a cost of living increase leading to flat real wages seems reasonable to me.  But sure, who doesn't want more money in real terms?

You're right though, in that if you have your wages decline in real terms, it will delay your time to FI.  It seems unlikely to me that can last for a long time though, as people couldn't afford food then, and inflation would stop.  At some point wages have to match inflation or come close on a long enough timeline, or there wouldn't be inflation.
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darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #32 on: July 13, 2012, 05:50:05 PM »
Darkenchelada:

hahaha... I guess a dark "enchelada" is better than a burnt one. :-)

Yes, you want wages to go up in real terms, sure.  But I don't know why they should without a promotion or performance based raise.  Otherwise a cost of living increase leading to flat real wages seems reasonable to me.  But sure, who doesn't want more money in real terms?

If your wage isn't likely to get you a savings rate that will lead to FI in a reasonable time frame (what's considered "a reasonable time frame" will have great variety, obviously - i.e. 5 years? 10? 20?), this will be a point of frustration. You'll have to seek other ways to increase your income which offer a significant enough return for the time invested.

Looking at it purely from the perspective of an employer/employee contract, however, indexing salary increases to cost of living increases is certainly fair. Productivity has increased significantly during the period of stagnant real wages. One could argue that wage increases should be indexed to productivity increases, but the productivity gains aren't necessarily from labor.

You're right though, in that if you have your wages decline in real terms, it will delay your time to FI.  It seems unlikely to me that can last for a long time though, as people couldn't afford food then, and inflation would stop.  At some point wages have to match inflation or come close on a long enough timeline, or there wouldn't be inflation.

In keeping with the spirit of the OP, I was thinking of inflationary effects on declining real wages at the personal or household level, rather than on the macro level. I've suffered it, you're suffering it, I've had friends suffer it. It might not be so common that it shows up in the official stats, but it's common enough to deserve consideration. I agree, though, that there's no way declining real wages can be sustained for an extended period of time at a macro level, precisely for the reason you mentioned.

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Re: How much to retire? What numbers are you using?
« Reply #33 on: July 13, 2012, 06:17:33 PM »
Darkenchelada:

hahaha... I guess a dark "enchelada" is better than a burnt one. :-)

:D  I finally looked up what the rest of your name means.  It's awesome!  A weird animal, insect, and Socratic Method?  Nice.

As for the rest of your post, you're absolutely right.

The only minor point I have to add is that this:
If your wage isn't likely to get you a savings rate that will lead to FI in a reasonable time frame (what's considered "a reasonable time frame" will have great variety, obviously - i.e. 5 years? 10? 20?), this will be a point of frustration. You'll have to seek other ways to increase your income which offer a significant enough return for the time invested.

is true, however I think many won't get to that savings rate due to spending, not due to wages.  Looking at the numbers for the median household wage, I think the average family should be able to have a 50% savings rate fairly easily (i.e. earn 50k, spend 25k). 

That would, of course, assume they didn't buy a house bigger than they needed, pay interest on credit cards, finance new cars, etc. etc.

They do all those things, and it hinders their FI time much more than stagnant wages.  I don't think many Mustachians will have an issue.
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MooreBonds

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Re: How much to retire? What numbers are you using?
« Reply #34 on: July 13, 2012, 08:28:57 PM »
Because I'm single and not currently in a relationship, I don't know what the (hopeful) future Mrs. MooreBonds would offer as a comfortable household income. I'm hoping that we would be able to maintain a 3% SWR off of the stash when I/we call it quits - essentially, skimming the dividends/interest off the top and letting the equity values/dividend payouts grow over time.

I'm hoping to hang it up in my 40s, so I would need a good 40+ years of portfolio sustainability (both for genetic reasons as well as peace-of-mind planning).

I see some people suggesting withdrawal rates of 5% or so for a significant time duration. Remember that the oft-cited 4% SWR (along with the FIRECALC results) are originally based on a 30 year retirement horizon, and that one or two of those 30-year "success" periods ended with a nominal portfolio value (like $1,000).

We always suggest people having an emergency fund for "just in case" scenarios, so if you do shoot for retiring early, make sure you have Plan B (and even a C). When you are assuming a present-day budget of $25k to meet your needs, how much healthcare inflation are you assuming? Are you ok with one day possibly going on Medicaid for nursing home care (or whatever the minimum gov't offers 50 years from now)? What is your Plan B or C in case you get sued,  or your portfolio drops more than the market averages due to a few bad investments? What would you do if you were simply unable to cut expenses any more, and your 5% withdrawals weren't able to fund your yearly budget?

If you will have a very difficult time finding a job after being out of the workforce for 10-20 years, might want to create a back-up plan or some form of an emergency fund by working an extra year or two to help reduce that withdrawal rate down for a longer retirement horizon. It's up to you if you would rather roll the dice on a higher withdrawal rate than many younger ERs use and possibly be stuck working 40 hours/week in a low-skills job for not much pay, or work just a few more years and have an ample stash to really minimize the chance you might have to slave away 20 years down the road.

darkelenchus

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Re: How much to retire? What numbers are you using?
« Reply #35 on: July 13, 2012, 08:50:18 PM »
Darkenchelada:

hahaha... I guess a dark "enchelada" is better than a burnt one. :-)

:D  I finally looked up what the rest of your name means.  It's awesome!  A weird animal, insect, and Socratic Method?  Nice.

I love double meanings and tightly reasoned argumentation in dim-lit settings. What can I say? :-)

If your wage isn't likely to get you a savings rate that will lead to FI in a reasonable time frame (what's considered "a reasonable time frame" will have great variety, obviously - i.e. 5 years? 10? 20?), this will be a point of frustration. You'll have to seek other ways to increase your income which offer a significant enough return for the time invested.

I think many won't get to that savings rate due to spending, not due to wages.  Looking at the numbers for the median household wage, I think the average family should be able to have a 50% savings rate fairly easily (i.e. earn 50k, spend 25k).  That would, of course, assume they didn't buy a house bigger than they needed, pay interest on credit cards, finance new cars, etc. etc. They do all those things, and it hinders their FI time much more than stagnant wages.

Absolutely. Lifestyle inflation is far and away the bigger fish to fry. The order of priority seems to be, 1) Get your habits/appetites in check, 2) decrease expenses & invest savings, 3) find ways to increase income. You'll likely get the most bang for your buck with (1) and (2). Concerns about inflation during working years will only come to the fore at stage (3), and even then inflation post-FI is a greater concern.

« Last Edit: July 13, 2012, 08:52:45 PM by darkelenchus »

crunchy_mama

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Re: How much to retire? What numbers are you using?
« Reply #36 on: July 14, 2012, 05:31:32 AM »
Well, I don't think living off of 25 k is all that bad but you are assuming that a lot of people are starting young and at a great place.  MMM didn't just fall into a 25k lifestyle, for most everyone w/ expenses at that level it took years of work and planning to get them down that far.  MMM has invested in energy efficient appliances, light bulbs, etc for his utility bill to be that low.  Super fuel efficient cars cost more money than an old beater but yet save a ton on gas.  I get my food bill lower by being able to buy in bulk which requires spending more upfront often.  Many people have to recover from those lifestyles of debt.  Living on 25k also assumes a very small or no mortgage for a lot of the country as well, or a very long loan.  50% savings rate for retirement at that level also doesn't factor in savings for college, which many people do.  It can be totally thrown off as well by those with medical needs.  If you have to meet your 5k-10k deductible every year, I have a few friends in that boat.  IIRC most people file bankruptcy due to medical bills.   So, I think it better not to assume that it is just people living extravagantly.