This is only related, but not exactly to the point:
I don’t get the math people here (in the US, where I’m living) use.
People will frequently cite 2M to 4M as a good stopping poing to never work again. This is a LOT of money. It’s a completely unbelievable amount of money for 99.9% of humans in history. In a completely stagnant economy, this could sustain you for 200 years in present day Brazil, having a good time.
Then people say they don’t eat out because it’s expensive. Say you eat every day, for a counterfactual difference cost of 5 dollars per meal, accounting for lost time and cutlery costs. That’s 400x5 2000USD per year. In the next 40 years, this amounts to a mere 80.000. This is so much less than the difference between 2M and 4M.
Then people say they don’t sign up for cryonics, which costs like 1000 per year.
Then people use lift and uber to go places which on a daily basis could cost half a million dollars over a lifetime.
Anyway, I think the world is somewhat financially mad. I also think I know two classes of Americans, one which earns 100k plus (many of which programmers) and one which earns 17-28k (most of which students or researchers). And I mix their data up in my mind, and come up with a very peculiar idea of the American reasoning about money.
I think it is partly about mixup, and partly because many people don’t think clearly about their financial planning until forced to. If someone who makes 100k+ and spends most of it wants to retire in the same style they are used to living, they may well need 2-4M to do so comfortably and safely if retiring early. Social security is progressive, the max you can get as a single person is around 42,000/year. To get that, you must work for 35 years at a high income level and wait to draw your check until age 70. Then you still need to produce another 58,000 somehow from your own assets, which at current recommended withdrawal rates requires almost exactly 2M to do and maintain your wealth. Now, you could purchase an annuity for much less, but few people are comfortable dumping all their money into such vehicles. At current life income annuity rates, that would be a bit less than 1M$ to provide 58,000/year to a 70 yo. So you only need about 900K, but what if you want to retire at 65, or 60, or 55? Then you need to take less SS, or live off assets until age 70, or maybe you can’t take it at all yet, and must live off assets alone. Whether you need 2M or 4M or more depends on when you retire, and how much risk of breaking your plan you are willing to take.
It’s my job to model this for people. Most are surprised that they don’t need 2 million or more, because their needs are more modest than above, and they don’t plan to retire very early. That said it’s different for everyone, and when younger people talk about stopping/reevaluating their career because they have enough money to retire, they usually mean in middle age not at normal retirement ages. At 40, unless your lifestyle is very frugal by the standards of people who are able to save 2-4M in that time frame (generally 100k+ earners), you probably do need that much to retire comfortably.
It also depends a lot on how you feel about your work. Most higher income earners have found a niche where they feel reasonably good about what they do (it’s hard to create a lot of value when you feel like a cog or a moocher), and enjoy at least big parts of their jobs. In that case, why would you retire before you had plenty? OTOH, if you are burned out and it’s a struggle to go to work every day, you might be willing to live on a lot less if you knew you could quit now, or soon.
Note: I know very few people who actually live like they are poor today in order to have great wealth tomorrow. Those who are very frugal while working, either are hugely committed to earning to give, or intend to retire or do something risky or different at a very young age, and don’t ever intend to not live relatively frugally. Certainly they intend to either give away or enjoy the fruits of their industry long before a typical retirement age.
Inflation is very relevant. Especially when you are talking about annuities—SS is more or less inflation-adjusted, if you invest your retirement money into equities it will inflation-adjust by itself, but if you buy an annuity that pays you $58K/year, that usually means $58K nominal dollars (inflation-adjusted annuities tend to be much more expensive).
For many people it is the case that they have paid off their mortgage by retirement age. Not having to pay a mortgage tends to noticeably reduce the living expenses.
Agreed that inflation adjustment is important—it usually makes sense to annuitize a portion of your portfolio to reduce longevity and market risk. The ballpark I was using is based on a 1% per year increase. hedging more against inflation with a higher escalator or CPI adjustment would be more expensive. Not adjusting at all would be less.
On housing—it doesn’t always make the most sense from a financial standpoint to pay off your mortgage. If you do, on the one hand, that’s less money that you need for living expenses, on the other hand, it’s net worth tied up in home equity—tends to be close to a wash in terms of the net worth required to retire at various points. In the current low mortgage rate environment, many people would need more net worth to support expenses with a paid off house than without.
thanks for the links—although I think some of the people in Millionaire Next Door skirt closer to what OP was referring to—people who never spend money, not to retire early or do something interesting with their money, but just to hoard it.
I have known a few people who I considered pathological savers—people who, like the fictional Scrooge, seem to save for the sake of saving, and do not ever enjoy the wealth they have created, nor do they turn it to a useful purpose in the world via large charitable donations. This is very rare in my experience, however. The only people i have known like this are in the generation that grew up during or shortly after the Great Depression.
Another factor—I don’t eat out because it is too expensive. But not because I couldn’t afford the difference cost of 5 dollars per meal; I certainly could. But the additional utility of eating out is less than $5 -- in some cases, the utility is actually negative (that is, there are cases in which I would spend more money to make my own meal than to have to go out; I have certainly turned down free meals!) I really like having control over what I eat, and I don’t like a lot of things that restaurants think I should like. I hate waiting around for food; if I must wait, I’d prefer to spend that time cooking. I do not enjoy the environment of most restaurants.
Whether or not this sort of thing is what your friends mean when they say it’s too expensive, I don’t know. But it’s hard to believe that it is not at least part of what they mean; after all, most of us can identify a simple way to save $5 that we don’t take, so we must be weighing the value of the goods and services differently. It is also worth noting that it is not uncommon for people to consider going out to eat, but find that they are not particularly motivated by any of the choices—a clear indicator that the value of going out (in those cases) is not that they are motivated by the food served.
This is only related, but not exactly to the point:
I don’t get the math people here (in the US, where I’m living) use.
People will frequently cite 2M to 4M as a good stopping poing to never work again. This is a LOT of money. It’s a completely unbelievable amount of money for 99.9% of humans in history. In a completely stagnant economy, this could sustain you for 200 years in present day Brazil, having a good time.
Then people say they don’t eat out because it’s expensive. Say you eat every day, for a counterfactual difference cost of 5 dollars per meal, accounting for lost time and cutlery costs. That’s 400x5 2000USD per year. In the next 40 years, this amounts to a mere 80.000. This is so much less than the difference between 2M and 4M.
Then people say they don’t sign up for cryonics, which costs like 1000 per year.
Then people use lift and uber to go places which on a daily basis could cost half a million dollars over a lifetime.
Anyway, I think the world is somewhat financially mad. I also think I know two classes of Americans, one which earns 100k plus (many of which programmers) and one which earns 17-28k (most of which students or researchers). And I mix their data up in my mind, and come up with a very peculiar idea of the American reasoning about money.
I think it is partly about mixup, and partly because many people don’t think clearly about their financial planning until forced to. If someone who makes 100k+ and spends most of it wants to retire in the same style they are used to living, they may well need 2-4M to do so comfortably and safely if retiring early. Social security is progressive, the max you can get as a single person is around 42,000/year. To get that, you must work for 35 years at a high income level and wait to draw your check until age 70. Then you still need to produce another 58,000 somehow from your own assets, which at current recommended withdrawal rates requires almost exactly 2M to do and maintain your wealth. Now, you could purchase an annuity for much less, but few people are comfortable dumping all their money into such vehicles. At current life income annuity rates, that would be a bit less than 1M$ to provide 58,000/year to a 70 yo. So you only need about 900K, but what if you want to retire at 65, or 60, or 55? Then you need to take less SS, or live off assets until age 70, or maybe you can’t take it at all yet, and must live off assets alone. Whether you need 2M or 4M or more depends on when you retire, and how much risk of breaking your plan you are willing to take.
It’s my job to model this for people. Most are surprised that they don’t need 2 million or more, because their needs are more modest than above, and they don’t plan to retire very early. That said it’s different for everyone, and when younger people talk about stopping/reevaluating their career because they have enough money to retire, they usually mean in middle age not at normal retirement ages. At 40, unless your lifestyle is very frugal by the standards of people who are able to save 2-4M in that time frame (generally 100k+ earners), you probably do need that much to retire comfortably.
It also depends a lot on how you feel about your work. Most higher income earners have found a niche where they feel reasonably good about what they do (it’s hard to create a lot of value when you feel like a cog or a moocher), and enjoy at least big parts of their jobs. In that case, why would you retire before you had plenty? OTOH, if you are burned out and it’s a struggle to go to work every day, you might be willing to live on a lot less if you knew you could quit now, or soon.
Note: I know very few people who actually live like they are poor today in order to have great wealth tomorrow. Those who are very frugal while working, either are hugely committed to earning to give, or intend to retire or do something risky or different at a very young age, and don’t ever intend to not live relatively frugally. Certainly they intend to either give away or enjoy the fruits of their industry long before a typical retirement age.
Two comments.
Inflation is very relevant. Especially when you are talking about annuities—SS is more or less inflation-adjusted, if you invest your retirement money into equities it will inflation-adjust by itself, but if you buy an annuity that pays you $58K/year, that usually means $58K nominal dollars (inflation-adjusted annuities tend to be much more expensive).
For many people it is the case that they have paid off their mortgage by retirement age. Not having to pay a mortgage tends to noticeably reduce the living expenses.
Agreed that inflation adjustment is important—it usually makes sense to annuitize a portion of your portfolio to reduce longevity and market risk. The ballpark I was using is based on a 1% per year increase. hedging more against inflation with a higher escalator or CPI adjustment would be more expensive. Not adjusting at all would be less.
On housing—it doesn’t always make the most sense from a financial standpoint to pay off your mortgage. If you do, on the one hand, that’s less money that you need for living expenses, on the other hand, it’s net worth tied up in home equity—tends to be close to a wash in terms of the net worth required to retire at various points. In the current low mortgage rate environment, many people would need more net worth to support expenses with a paid off house than without.
Obligatory links:
See 80,000 Hours.
See Mr. Money Mustache.
See The Millionaire Next Door.
thanks for the links—although I think some of the people in Millionaire Next Door skirt closer to what OP was referring to—people who never spend money, not to retire early or do something interesting with their money, but just to hoard it.
I have known a few people who I considered pathological savers—people who, like the fictional Scrooge, seem to save for the sake of saving, and do not ever enjoy the wealth they have created, nor do they turn it to a useful purpose in the world via large charitable donations. This is very rare in my experience, however. The only people i have known like this are in the generation that grew up during or shortly after the Great Depression.
Another factor—I don’t eat out because it is too expensive. But not because I couldn’t afford the difference cost of 5 dollars per meal; I certainly could. But the additional utility of eating out is less than $5 -- in some cases, the utility is actually negative (that is, there are cases in which I would spend more money to make my own meal than to have to go out; I have certainly turned down free meals!) I really like having control over what I eat, and I don’t like a lot of things that restaurants think I should like. I hate waiting around for food; if I must wait, I’d prefer to spend that time cooking. I do not enjoy the environment of most restaurants.
Whether or not this sort of thing is what your friends mean when they say it’s too expensive, I don’t know. But it’s hard to believe that it is not at least part of what they mean; after all, most of us can identify a simple way to save $5 that we don’t take, so we must be weighing the value of the goods and services differently. It is also worth noting that it is not uncommon for people to consider going out to eat, but find that they are not particularly motivated by any of the choices—a clear indicator that the value of going out (in those cases) is not that they are motivated by the food served.
Also related, also not to the point:
http://lesswrong.com/lw/hfw/why_is_it_rational_to_invest_in_retirement_i_dont/