From: Zachary Vance Date: Sun, 3 Jul 2022 00:26:31 +0000 (-0400) Subject: Add 'how to retire for infinity years' X-Git-Url: https://git.za3k.com/?a=commitdiff_plain;h=bf92d13123569662b02bc950210fb00ed9eda52f;p=za3k.git Add 'how to retire for infinity years' --- diff --git a/finance/retire_forever.md b/finance/retire_forever.md new file mode 100644 index 0000000..19fde9f --- /dev/null +++ b/finance/retire_forever.md @@ -0,0 +1,87 @@ +[za3k](/) > finances > how to retire for infinity years + +This is the first in a short series of articles. This will be by far the longest (and therefore the least interesting). But it's the one that people ask me about the most, so I figured I'd get it out of the way. + +I retired at 31, which is pretty unusual. And I get asked about it a fair deal (and even more people want to ask but are too polite). So I wanted to go ahead and answer "how did you retire early?". The basic answer is + - I made a bunch of money + - 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. + +No, not everyone can retire early. But many more people could if they changed their habits than realize it. + +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. 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. + +OK, 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, and my co-workers eyes still bugged out at my low rent.) +- 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. +- 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. +- 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 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! +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). + +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 +- Your yearly income **I** +- Your yearly expenses **E** (AND, these need to stay the same after you retire!) +- How much you expect to make on the stock market, which I'm just going to set for you, at 4%[^1] yearly. Sometimes you'll see 0.04, sometimes 25[^3]. + +The rough[^4] estimate is that you can retire in: **25 * expenses / (income - expenses)** = 25 * 20K / (70K per year - 20K per year) = 500K / 50K per year = 10 years. Substitute your own numbers to find out your own situation.[^5] + +Now let's say you make $50K/year, and spend $40K/year. The same math says it will take you (40K/4%)/(50K-40K)=1,000K/10K=100 years, or 150 years to be safe. You will never be able to retire indefinitely; you'll die first. That is a huge difference between those two examples! We'll talk about that in a second. But first, what gives? That's a pretty typical person, right? Why is everyone not starving on the street at 80? + +In practice of course people do spend a lot of what they make and then retire. There are many reasons. +- The formulas assume you're going to retire indefinitely. Actually, you only need enough money until you die. It's a 2.2X difference[^6], if you retire at 65. That's a 55% discount for being mortal. +- People just retire. They're going to, frankly whether they can afford it or not. Some people retire at 65 because they're told they can or should, or they feel they deserve it. Even past that point, others can't work starting at a certain age. +- Some people just go broke. Some go back to work, some starve on the street when they can't. It does happen. You can retire when it was a bad idea. +- Beyond that, some people realize they don't have enough money, and cut back significantly. The imaginary people in my head do this when they're running out of money, not immediately when they retire. Cutting back may or may not fix the problem. +- Most people in the US have special retirement accounts, which they must or are heavily encouraged to pay into. Employers may "match" retirement money (paying an equal share), or it may have special untaxed status. Usually you can't take money out of a retirement account until you're 65, to force people to actually use them for retirement. The account may also be designed so you can't take all the money out at once even after that point. +- 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 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. + +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 deal. 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. + +Personally, I have never had a job I liked better than not having a job. And I've had some damn good jobs, frankly! I don't think I'll suddenly find something better. It's me, not the jobs. I am 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. + +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? + +Anyway, now you've heard why I think it's really important to spend half as much, or save twice as much. Way more important than you might have thought without the math. + +For most people, finding a job that pays twice as much is hard. Spending half as much is also hard. Which is easier depends on your situation. For most people, I would bet spending half as much is a little easier. It's certainly more general--what saves one person money, will save another person money. So it's easier to teach. Most of the rest of the articles will focus on money-saving tips and how to keep track of your money. + +[^1]: This is very conservative. Since it's founding in 1957, the S&P 500 on average made 7% yearly over inflation. +[^2]: Which I am 100% in favor of. Get cracking on that science. +[^3]: Why 25? 25 is (1/0.04). You need 25 times any amount to make it at 4% per year. Want $100 per year? Invest $2500 at 4% per year. +[^4]: The rough estimate assumes you don't invest until you retire. If you invest all your money the whole time, you can retire in 25 * ln(1+E/(I-E)) years. Good luck! You may need a calculator. + For anyone who wants the derivation: + ``` + > S(0)=0 + > 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... + ``` +[^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? + -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 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 $1,000K * (1- e^(-0.04 * years)). $1000K is the number from the "rough" formula. +[^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.