- I don't spend much
- Math
-There's a good chance you're imagining you need to make six figures a year, spend about what you are already minus the frills, and basic subtraction means you'll have enough to live on until you're dead. All three are wrong.
+There's a good chance you're imagining you need to make six figures a year, spend about what you are already minus the frills, and basic subtraction means you'll have enough to live on until you're dead. All three guesses are wrong.
-No, not everyone can retire early. But many more people could if they changed their habits than realize it.
+Once you read the article, you might think "well, I don't really want to be retired at 30 or 40". At least not with the sacrifices it requires. That's fine, you know what you want. Or, you might do the math and realize you can't retire early. Either way, I still recommend the rest of the articles. They're 80% about normal stuff like how to save money. I just go a little further than most people.
-Once you read the article, you might think "well, I don't really want to be retired at 30 or 40". At least not with the sacrifices it requires. That's fine, you know what you want. But I'll still recommend the rest of the articles, because mostly they are 80% or 90% just about normal stuff like how to save money. I just go a little farther than most people.
+I'm going to walk you through retirement math in today's first article, because until you see the math, you will think the remaining 20% of my later advice is insane.
-I'm going to walk you through the math in today's first article, because until you see the math, you will think the rest of my advice is insane.
+Finances innately need math. Financial rules of thumb are bullshit, and only numbers actually work.
-Finances innately need math. Most finances only need addition and subtraction. This article, and this one alone, we're doing math past 4th grade -- interest calculations. That means, you invest $100K per year, at 4% interest, you need to know you make $4K every year. You can use a calculator to follow along if you want, you only need the answers, not any deep grasp. But you should actually follow along. Never take financial advice on faith. The footnotes have the advanced math for the real skeptics, but you can skip them if you're not a math person.
+*Most* finances, hopefully including the rest of these articles, only need addition, subtraction, and maybe multiplication. This article, and this one alone, we're doing interest calculations (division and multiplication). That means, you invest $100K per year, at 4% interest, you need to know you make $4K every year. You can use a calculator to follow along if you want, you only need the answers, not any deep grasp. But you should check if what I'm saying is true. Never take financial advice on authority or faith. The footnotes have the *really* advanced math for the real skeptics, but you can skip them if you're not a math person.
### The math
-- Suppose you make $70K a year, and you spend $20K a year. That means you're saving $50K per year. (These numbers were my actual plan A. In San Francisco it was more like $25K.)
+
+- Suppose you make $70K a year, and you spend $20K a year. That means you're saving $50K per year. (These numbers were my actual plan A, although it didn't work out that way.)
- After 10 years, you will have saved up $500K.
- Assuming 4%[^1] stock market returns on that $500K, you are now making $20K/year.
-- This means that you can now, in theory, stop working and live on your investments.
+- This means that you can now, in theory, stop working forever and live on your investments.
- Not retire for 10 years, not retire for 20 years--*forever*. If you live to 10,000[^2] you'll be fine.
- (As long as the stock market makes 4% each year for 10,000 years.)
That's it, that was the basic math. Now you can retire in 10 years, no matter how old you are. Just make $70K every year, spend $20K, and wait. And don't have the stock market collapse.
-Well, there is a caveat, you need what engineers call a "safety factor", even if the stock market doesn't collapse. You probably want to retire in 12 or 15 years, at 35. Here's why.
+Well, there is a caveat, you need an additional safety margin, even if the stock market doesn't collapse. You probably want to retire in 12 or 15 years, at 35. Here's why:
-- Imagine your balance was "only" 400K. Now you make 16K investment income each year. You still spend $20K each year. So you're now losing $4K per year! 25 years later your balance hits 300K, and you're losing $8k per year. It "snowballs" down exponentially until your savings hit zero, although fairly slowly at first (40 years to go broke).
+- Imagine your balance was "only" 400K, rather than 500K. Now you make 16K investment income each year. You still spend $20K each year. So you're now losing $4K per year! 25 years later your balance hits 300K, and you're losing $8k per year. It "snowballs" down exponentially until your savings hit zero, although fairly slowly at first (40 years to go broke).
- Imagine your balance was all the way up at $600K. You make $24K investment income each year. You still spend $20K each year. So now you're making $4K per year. 25 years later your balance hits 700K, and you're making $8K per year. It "snowballs" up exponentially instead, and you just make more and more money indefinitely. Also slowly at first.
- So there's this "magic" line at 500K. If you're above $500K, you expect your savings to grow forever with no work. If you're below $500K, you expect it to shrink forever unless you get a job.
-- The 4% per year from the stock market is an average. Stocks don't actually make 4% per year--they make 20%, 1%, lose money, whatever. So in practice, your bank balance is going up and down the whole time. You want to have more like $600K so you don't start "snowballing" down if the stocks are doing a little badly for a year or two.
-- In fact, in the "snowballing up" case, if you start making $25K, you can spend $22K now and still make money. The rich literally get richer with no work. Another reason to aim a little high--you want to enjoy retirement!
+- The 4% per year from the stock market is an average. Stocks don't actually make 4% per year--they make 20%, 1%, lose money, whatever. So in practice, your bank balance is going up and down the whole time. That means if you're close to $500K, whether it snowballs up or down is basically random based on the first couple years. You want to have more like $600K instead, so you definitely snowball up, even if the stocks do badly for a year or two.
+- There's another advantage to "snowballing" up. If you start making $25K, you can spend $22K now and still make money. The rich literally get richer with no work. Another reason to aim a little high--you want to enjoy retirement!
-To summarize, if you live on $20K/year, and work at $70K/year, you can retire indefinitely in theory, after 10 years (maybe at 32). In practice, add a safety margin against snowballing (maybe 34 or 37).
+To summarize, if you live on $20K/year, and work at $70K/year, you can retire indefinitely in theory, after 10 years (maybe at 32). In practice, add a safety margin (maybe 34 or 37). Now you're secure against random stock market problems, and you make more money over time.
Well, what if you're not making $70K and spending $20K? I'll walk you through the general formula. You need to know three numbers
- The USA has governement programs to help. Medicare provides free health care for almost every old person. Social Security sends monthly checks to old retired people, although rarely enough to live on comfortably.
- We have social support programs. Families often support older relatives. Churches and other social groups can offer help too (as well as for broke and poor people).
-If you're retiring at 30, almost **none** of the above apply to you. You need to get by on savings, no external support. You don't get a 55% mortality discount on retirement, you get a 15% discount. You probably don't have much in your standard retirement account, and even if you do, you can't access it for another 35 years. You don't get medicare (though you *may* get medicaid). You don't get social security. Expect no social support. If people see a healthy 50-year old go broke from poor retirement planning, they should tell you to get a job. I would.
+If you're retiring at 30, almost **none** of the above apply to you. You need to get by on savings, no external support. You don't get a 55% mortality discount on retirement, you get a measly 15% discount. You probably don't have much in your standard retirement account, and even if you do, you can't access it for another 35 years. You don't get medicare (though you *may* get medicaid). You don't get social security. Expect no social support. If people see a healthy 50-year old go broke from poor retirement planning, they should tell you to get a job. I would.
## Retiring early
Returning the the topic of the retirement formula, we can see that there are exactly two numbers that affect you. How much you save (income minus expenses), and how much you spend (expenses). Making a lot of money is good. But not spending money is at least as important. Imagine you made a lot, say six figures ($100K) but spent $50K per year. It would take you 25 years to retire. Not bad! What if you wanted to retire faster? If you spend $25K per year instead, you can retire in 8.3 years. If you make $200K instead, you can retire in 8.3 years. Both are equally good. You can halve your expenses, or double your savings. They have the same effect.[^9]
To me, that's 25-8.3=16.7 years of my life. If I make twice as much, I can get 16 extra years to do anything I want, instead of working a job I kind of tolerate. If I spend half as much (remember, for my whole life, not just until I retire!) I get 16 extra years. That's a *huge* chunk of time. How much would you pay to live 16 extra years? And I get those years now, when I'm healthy and energetic. Prime years. I would do a lot of things to live 16 extra years however I want. Changing my job or spending is just a no-brainer. And the reality is that for most people, it's more than 16 years--it's going from retiring at 65, to retiring at 40 or 30. 25 or 35 years, that's a massive chunk of your life.
-Of course, this assumes the value of time when you're at work is next to nothing compared to free time. That's actually how I feel. I'm the kind of person who just fundamentally, dislikes being told what to do by someone else, for 8 hours a day, 5 days a week. Why would I want that? I got my own shit I want to do. I'ver had a job I liked even close to the weekend afterwards. I've taken a month off, and a year off[^9]. At the end my reaction was always "ugh, I have to work again?". I have felt passionately about projects, and felt like they're my life's goal. I've been paid to do work. But so far, I've just never found any overlap. I wanted to retire early exactly so I can spend my life on what I'm passionate about.
+Of course, this assumes the value of time when you're at work is next to nothing compared to free time. That's actually how I feel[^10]. If you don't, if you think it's only a bit better, then it's not as amazing. But basically, do the math. 15 years is a HUGE chunk. Even if it's just 10% better, having every day be 10% better for 15 years is still a huge impact.
It could be someday I'll change my mind, of course. I could go back to work. I could decide I don't want to live on $20K into my 50s, or have kids and need to change my plans. But there's nothing really irreversible involved. You're just saving up some extra money and not spending as much. No big deal to have some extra cash if you go back to work, right?
> S'(t)=0.04*S(t)+I-E
...differential equations, too hard so ask Wolfram Alpha...
> S(t)=25*(I-E)*(e^0.04t-1)
- ...algebra, solve for S(t)=E/0.05...
+ ...algebra, solve for S(t)=E/0.04...
+ t=25 * ln(1+E/(I-E))
```
[^5]: Actually, the sitation is a little better, because you make money from investments before you retire, which I haven't take into account. If you're spending a small fraction of your income like in the first example, the exact[^4] and rough formulas give similar answers (within a couple years).
-[^6]: What about in between?
+[^6]: What about in between? As a reminder, we're making $50K and spending $40K each year.
-If you plan to retire at 65 and die at 80[^7], you need 15 years of savings. That would be $600K ignoring interest, but it's actually $451K[^8].
- -If you plan to retire at 40 and die at 80, you need 40 years of savings. That would be $1600K ignoring interest, but it's actually $798K.
- -If you plan to retire at 30 and die at 80, you need 50 years of savings. That would be $2000K ignoring interest, but it's actually $864K.
+ -If you plan to retire at 40 and die at 80[^7], you need 40 years of savings. That would be $1600K ignoring interest, but it's actually $798K[^8].
+ -If you plan to retire at 30 and die at 80[^7], you need 50 years of savings. That would be $2000K ignoring interest, but it's actually $864K[^8].
-If you plan to retire at any age and live forever[^2], you need infinity years of savings. That would be $infinity dollars (!) ignoring interest, but it's actually $1,000K.
That's surprising! We might expect that with twice the money, you could retire for 30 years, but it's actually not true--you can retire indefinitely. Focusing on this magic cutoff point was, to me, a huge deal.
[^7]: Not, you know, that people *plan* to die at 80. They don't circle a date in their calendar. But you have to know how long you'll be retired to plan financially. Actually, living to 100 can turn into a financial problem! This is part of how insurance [got started](https://en.wikipedia.org/wiki/Tontine).
[^8]: The equation here is 25 * E * (1 - e^(-0.04 * years))
[^9]: The effect is not anything easy and constant. It doesn't remove the same number of years, or the same fraction of years, each time.
-[^10]: I recommend doing this if you want to check whether you'd enjoy retired life. If you're going stir-crazy after a year, maybe don't retire.
+[^10]: I'm the kind of person who just fundamentally dislikes being told what to work on what someone else cares about, for 8 hours a day, 5 days a week. Why would I want that? I got my own shit I want to do. I've never had a job I liked even close to the weekend afterwards[^11]. I have felt passionately about projects! I've felt like they're my life's purpose. I've been paid to do work. But so far, I've just never found any overlap between my passions and paid work. I wanted to retire early exactly so I can spend my life on what I'm passionate about.
+[^11]: If you're considering whether to retire, take a month off. Then take a year off. If you're going stir-crazy after either, maybe don't retire. If after a year, you think "ugh, I have to go back to work?" both before and after your first month back? Start working out the math. That said, if I had the option to work 6 months out of every year, I might take it.
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