interesting post

I’d love to see some examples of his this all works if possible

@Marlene – Rather than focusing on how much I would spend I would focus on what I want to live in a particular way and then try to pay as little as possible for that in a way that can be sustained.

@Marlene – Yeah, I’m not quite sure what I’d do with $17k/year, it’s almost 3 times what I spend currently.

Cheap is not frugal though. Cheap is clipping coupons to get 25c of box of mashed potatoes and then haggling for the price on top of that. Frugal is buying 50 pounds of potatoes from a local farmer, storing them, and making your own mashed potatoes.

@Paul – Quite possible with the healthcare. Personally I have an HSA with a $3500 deductible to protect me from bankrupting illnesses (this costs me $72/month). I think health care costs are like oil prices. There is actually a ceiling beyond which people will no longer pay. In fact the health care ceiling is better since it is harder to export health care elsewhere. I think in the future this means that US healthcare will revert to a more European system where doctors do not test for everything and put you on four different medications (because they can). It also means that some of the rare and expensive treatments will no longer exist. This will come at the price of perhaps reducing the average life span by a few years. Personally I don’t mind living three years less if the last couple of years would be spent in a hospital hooked up to some machine.

If I may make a political statement: I think the fact that companies can offer their employees group health care is WRONG and patently unfair. This only happens because of the ways the tax laws are written. Rewrite this law and let everyone get their own health care and the system would change for the better. The alternative is socialized medicine which I do not think is such a bad thing in this case. There is clearly a conflict of interest in a capitalist transaction when one of the parties is or may be ill.

Thanks for the brilliant post, Jacob.

Rather than being a disincentive, leveraging the thought that a one-time $3.33 expense (for something simple and transitory like a coffee and a cookie) at a cafe is equivalent to the monthly interest thrown off by $1000 yielding 4% (and this is leaving inflation out of the picture) is one way I have learned to stop spending even “small” amounts of cash unthinkingly. Also, knowing that it requires a minimum of $30000 invested at that rate to support $100 worth of food expense per month is a major motivator to earn more and save more. {Probably the real figure, accounting for inflation, is more like $120,000 if we are talking about money to throw off that amount of inflation adjusted income for perpetuity}.

Can you elaborate? I am curious what you meant by saying the the 4% leaves inflation IN the picture. (Maybe you were referring to the multipliers in your original post, as opposed to the numbers I gave as an example in my comment) It seems that if inflation is at 3% and you get a 4% return, your effective return of 1% on $1000 is 10/12 of a dollar per month. Whereas the coffee and cookie in my example cost 3.33, or 4 times that interest.

So really to have that coffee and cookie once a month for perpetuity, taking into account 3% inflation you would need $4000 invested.

Of course, we don’t live in perpetuity so I realize it would be more practical to pick a lower figure that would equate with depleting those funds after a number of years that represents the upper margin of one’s expected remaining lifetime.

Yes the 4% is canonical. It is a precise value (in a sense) but of course not an accurate indicator of the future. It is a good guideline if the caveats are understood.

My strategy is somewhat different. I rely on dividends from companies that generally (not all) tend to increase their dividend. I buy if the yield is over 5%, I sell if it’s under 3% (this varies by sector, but 3% is the global minimum). If the yield comes close to 3% I start selling calls on the underlying for extra money. This results in cash flow that does not depend on capital gains and so at all times I have a fairly good idea of what my income will be.

Have you given thought to the possibility of your bank(s) going belly up? Have you diversified your accounts? Do you really believe that the FDIC could repay the insured amounts of the accountholders? Are you considering gloom and doom scenarios? These are things I wonder about…

For US residents, I would
include the retirement
accounts among assets even for
those of us younger than 55.
There’s a little hassle involved,
but the money is still quite available
for EREers regardless of age.

Here’s a 72t calculator for
those interested.

http://www.finance.cch.com/sohoApplets/Retire72T.asp

-FF

I agree with firefighter’s post above about including 401K accounts among assets.

In addition to the 72t , the accounts are available for penalty free distribution after 59.5 . So the taxable assets just have to bridge the gap.

I have always planned to retire at 51, but now that the date is closed, I am not so sure if it makes sense to do so.

Why should I stop working and live in a frugal lifestyle, if I can continue working and just enjoy life in full?

quick question.

In the your rule of 35 x annual dollar you did not calculate taxes. Why was that?

For example if someone needs 50000/year x 35 = 1750000

But 50000 would be whats needed after taxes because even the market gains require taxes?

Hi Jacob,

I’ve recently discovered your website. I went on a path of investing in real estate and getting rental income instead of Dividend income from stocks/bonds/FD etc. The 25x annual expenses don’t quite work for me as 25 x mortgage repayment could be quite astronomical and the rental income could easily cover monthly expenses. How does one begin to calculate how much is needed for retirement?

Supposedly a more realistic way for property investors would be 2 (rental income – all Expenses) Plus Annual Mortgage expenses reserved in cash?

Hope to hear from you.

Catching up on 6 years of blogs and comments is a long, but enjoyable process. A website devoted to early retirement is rightly directed to planning for the future, but the future for a 30 year old is far different than that of one who may be 70 or like me, much older.
I agree with most of the wise lines of logic in Jacob’s posts, but also realize that many readers have older relatives and parents, for whom they may care for, or hold counsel with.

In this case, I would suggest a somewhat different approach in calculating retirement needs… one that does not rely on the safe withdrawal rate, nor the means of calculating a measure of safety for the retirement years. I briefly outlined this in my first journal, but would add it as a comment to this Day10 blog.

The basic precept in “extreme” seems to me to be a sustainable income stream… basically ad infinitum. Limiting risk by establishing an amount to be withdrawn, while maintaining the capital.

Life is not infinite, nor does everyone want to maintain their net worth, to leave a monetary legacy.

Since we are “there”… retired with a relatively fixed net worth, and no intent to leave a significant inheritance, our approach is different. Since age 70, our plan has been this:

1. Calculate the income stream. Estimates from pensions (which we don’t have) annuities, other known income and amounts from Social Security.

2. Calculate net worth. Realistic estimates, of assets that can be converted to cash. Real property Savings. Capital savings.

3. Set a date final… Our original date was age 85, but as we are ahead of plan, can now use age 90.

4. Divide the net worth by the number of years between today and date final. Add this amount to the income stream. The total will be an annual income.

Example Annual expenditure:
Pension $8K, Rental income $5K Social Security $25K, and (Net Worth of $240K divided by years between age 70 and age 90 =20 years) or $12,000yr equals an annual $50K.

Whether for self, or someone else, a very easy, quick calculation that can be made in minutes to determine.
………………………………………
For planning purposes we look at this as a separate phase of planning. Different and apart from the earlier years when expenses may be higher… travel, support expenses for education, higher automotive costs, social activities, hobbies, golf, more eating out etc, etc.
From our experience, expenses after age 70 dropped by at least 20%. Using this kind of 2 step planning could result in earlier retirement, or a higher standard of living in the earlier more active years.

To some extent, we did this type of planning, using spreadsheets (back in 1990) that included home downsizing, lower vehicle costs, and a reduction in our itemized budget for entertainment, travel, and the “sin”/frill items.