Investments

It'd be interesting to see commonalities between people who "did everything right" and struggled to retire on time, or struggled to make ends meet in retirement. 

Did they not make enough? Too many hospital visits or too expensive medical care? Too much debt? Too many kids? That kind of data analysis would be interesting. 

NOHOME said:

In reply to dculberson :

I am betting otherwise.

It’s pretty simple math. Unless you have enough savings to pay for 100% of your expenses for the rest of your life, you need an income stream from something. That’s not an opinion or a bet.

So many great things to read.  It's really pretty shocking that this subject isn't really taught in schools. I was lucky that my dad showed me the power of compounding interest, but I'm always shocked that friends in their 30s with relatively high income know nothing about it. 

It's even more frustrating when you understand compound interest and life gets in your way and you can't save much at all when you're young.

Have you guys ever heard of the “Rule of 72”?

It’s a super simple way to determine how long it will take for your initial investment to double in value…here’s how it works:

Just divide your estimated annual rate of return (the S&P 500’s 100 Year average is ~9.7% for example) by 72.

10% would be 7.2 years so even in your head you can closely estimate that 9.7% is going to be ~7.5 years.

I just ran a quick Excel spreadsheet to compound 9.7% for 7.0 years and got 1.912 and 8.0 years and got 2.097.

Perhaps giving someone something so simple that they can work it out in their head will make the point stick.

Robbie said:

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

And don't forget 35-45 years of paying their mortgage. Many many millionaires I'd guess own a primary residence worth 500k or more. 

Actually, one of the stats was that the surveyed millionaires paid of their mortgages in an average of 10.4 years, they didn’t carry balances on credit cards, they drove cars on average 7 years old with 120,000 miles and lived in homes worth less than 300,000. It’s a crazy book.

In reply to RX Reven' :

I love the rule of 72. I simplify it further, to say market increases 10%, inflation loses 3%, 7% is the net gain.72/7 is 10ish.

Therefore, the value of invested savings doubles roughly every ten years. Doesn't get much easier than that! 

In reply to chandler :

Yep. The data was not “cherry picked”.  Hogan had both their internal team and a separate external research firm involved in the study. They talked to people in every state, race, creed, etc. It confirms the premise of  “The Millionaire Next Door”, another great book on the subject. 

Mutual fund investments do compound; just not linearly as in a simple savings account. In a three year span, you are likely to lose money in an S&P 500 fund. At five years, you will probably make money or break even. In 7 years, you will likely double your money.

 I am generalizing. The big thing is to save some every month. If your company offers a match, do what you need to do to take advantage of it. Savings rate is as important, maybe more important that rate of return.

Of course, maintaining debt is like trying to run in ankle weights. It is going to slow your progress. 

Fixed the bold. 

pheller said:

I think one thing people forget about is how much income and earnings matter in the grand scheme of things. 

There are a lot of reasons why living poor in California making $100k a year but putting 20% income into retirement/savings is better than living like a king in Tulsa making $50 a year putting in the same percentage. That first guy might spend 3x as much on housing, drive a Civic, eat lots of beans and rice, but come retirement, he's got a whole lot more money IF he leaves California. 

As such, I've started to realize that the ideal job hop is one that puts more money (amount) in the pocket at the end of the day. That doesn't mean a bigger salary, but if I can put $20k in savings every year working a $50k job thats better than $15k savings a year working a $75k job.

Percentages are great, but amounts matter too. 

 

I don't think you're making an argument for how much incomes matter here. What you're really showing, is how much costs matter. The guy in California with the higher salary only comes out ahead of the person in Tulsa if he's willing to sacrifice some quality of life for the entire time he's working there, because the cost of living is so much higher. If he had a comparable house/car/spending habits/etc as he did in Tulsa, then he could very well be worse off with the higher salary. It's not about how much you make, it's about how much of that you keep. The more you can keep, the higher your quality of life can be. I'm not suggesting that you need to spend more to increase your quality of life, just that an increase in income can be detrimental to your overall quality of life if it means your expenses increase too.

I think a quick and easy metric to use to determine "money you keep" or  "chances of having a decent quality of life" is to compare a salary to the median income in the area.

Income increases only help if they increase relative to your expenses. Lets say you're an engineer that lives in Indianapolis, makes 75k/yr, and lives comfortably. Median income is roughly 60k, median house price is 164k so your income is 1.25 X the median for the area and you can get an average home for 2.2 times your annual income. One day, a head hunter calls and says that a company in Seattle wants you and is offering 100k/yr. "Great, that's a 33% raise!" you think. But the median income in Seattle is 100k/yr, and median housing price is 730k. So your income would be 1.0 times the median, and to have an average house for the area you'd be spending more than 7 times your income on housing. The 33% income boost would probably mean that you'd be worse off financially because your dollar wouldn't go as far, and you either stretch things even further to have an average home, or you have to settle for a worse home than you had in the Midwest. Either way, your quality of life suffers because your costs increased more than your income increased.

To work the same example backwards, in order to  have a similar quality of life in Seattle as Indianapolis, you'd have to be paid 1.5 times the median income for the area, which would put you in the 150k ball park (200% of your current income). And that doesn't account for the more expensive housing in Seattle. To get a similar house/income ratio, you'd have to be paid 330k/yr.

chandler said:

Robbie said:

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

And don't forget 35-45 years of paying their mortgage. Many many millionaires I'd guess own a primary residence worth 500k or more. 

Actually, one of the stats was that the surveyed millionaires paid of their mortgages in an average of 10.4 years, they didn’t carry balances on credit cards, they drove cars on average 7 years old with 120,000 miles and lived in homes worth less than 300,000. It’s a crazy book.

If you max your 401k, with zero company match and zero savings to begin with, you'll be a millionare within 19 years.  Thats a 18% savings rate for someone making 100k.  Not really anything crazy, and you certainly wouldn't have to cherry pick.

I'm shocked they paid their mortgage off so early.  Seems dumb.

chandler said:

Robbie said:

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

And don't forget 35-45 years of paying their mortgage. Many many millionaires I'd guess own a primary residence worth 500k or more. 

Actually, one of the stats was that the surveyed millionaires paid of their mortgages in an average of 10.4 years, they didn’t carry balances on credit cards, they drove cars on average 7 years old with 120,000 miles and lived in homes worth less than 300,000. It’s a crazy book.

Well, I already do 3 of those 4 things. Haven't had a mortgage for 10.4 years yet though.

I agree paying a mortgage off early is a bit of a mixed argument. Strictly numbers it's better to invest the extra above the monthly payment rather than paying off the mortgage. But I think there is befenit to the reduced mental stress of owing someone something.

Robbie said:

chandler said:

Robbie said:

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

And don't forget 35-45 years of paying their mortgage. Many many millionaires I'd guess own a primary residence worth 500k or more. 

Actually, one of the stats was that the surveyed millionaires paid of their mortgages in an average of 10.4 years, they didn’t carry balances on credit cards, they drove cars on average 7 years old with 120,000 miles and lived in homes worth less than 300,000. It’s a crazy book.

Well, I already do 3 of those 4 things. Haven't had a mortgage for 10.4 years yet though.

I agree paying a mortgage off early is a bit of a mixed argument. Strictly numbers it's better to invest the extra above the monthly payment rather than paying off the mortgage. But I think there is befenit to the reduced mental stress of owing someone something.

Also security. You do need a place to live, after all. 

I always liked this graphic. It presumes a simple 12% annual rate of return instead of actual fluctuations annualized to 12% but it still shows the power of early compound interest.

btw chandler - thanks for the book recommendation. Sounds interesting. I just placed a hold on it at the local library. 

Johnboyjjb said:

 

I always liked this graphic. It presumes a simple 12% annual rate of return instead of actual fluctuations annualized to 12% but it still shows the power of early compound interest.

It's a great table to illustrate compound interest.  But it's not so good at reflecting reality.  The $16k Ben invested would be very, very hard for most, since that's the time people are still finishing what the are learning to be able to do and starting the first jobs.  And seeing much of the news of the recent shut down, there's a large amount of people who really struggle to save any money.

But to illustrate the math, it's a great table.

ProDarwin said:

chandler said:

Robbie said:

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

And don't forget 35-45 years of paying their mortgage. Many many millionaires I'd guess own a primary residence worth 500k or more. 

Actually, one of the stats was that the surveyed millionaires paid of their mortgages in an average of 10.4 years, they didn’t carry balances on credit cards, they drove cars on average 7 years old with 120,000 miles and lived in homes worth less than 300,000. It’s a crazy book.

If you max your 401k, with zero company match and zero savings to begin with, you'll be a millionare within 19 years.  Thats a 18% savings rate for someone making 100k.  Not really anything crazy, and you certainly wouldn't have to cherry pick.

I'm shocked they paid their mortgage off so early.  Seems dumb.

What industry starts at 100k in a location where you can actually live on $82k before taxes?

27 years ago, I started working at less than 1/3 of what I make right now. So while it's a really interesting example, how many people can actually do that?

In terms of the mortgage- one has to do the math, and factor in every aspect, including the value to a person to not have a large debt.  I, too, have seen the math where a 30 year mortgage is a better math to take vs paying off early.  But I didn't, and paid it off in 26 years, and it feels good now.  Especially when people have to factor in economic down turns and housing costs- there is security in owning your property instead of having a huge forced liability every single month.

mtn said:

Robbie said:

I agree paying a mortgage off early is a bit of a mixed argument. Strictly numbers it's better to invest the extra above the monthly payment rather than paying off the mortgage. But I think there is befenit to the reduced mental stress of owing someone something.

Also security. You do need a place to live, after all. 

Word.   im 52, and I have 6.5 years left on my 15-year note.   if my medical device gets bought out before my mortgage is paid off, the first check i'm writing is to pay off the mortgage.   purely a mental thing this late in the term, as my payments are mostly principal / taxes / insurance.

alfadriver said:

It's a great table to illustrate compound interest.  But it's not so good at reflecting reality.  The $16k Ben invested would be very, very hard for most, since that's the time people are still finishing what the are learning to be able to do and starting the first jobs.  And seeing much of the news of the recent shut down, there's a large amount of people who really struggle to save any money.

But to illustrate the math, it's a great table.

I think the point of tables like that and discussions like this one is to try to get people to be better about saving their money. Everyone with a middle class salary - which includes almost everyone directly affected by the government shutdown - can save some money for the distant future. One of the reasons they don't is a lack of motivation due to a lack of education about why to save for the future. Most people think of saving money as building up a pile of cash to buy something in the short term, not building up an asset pool that can support you financially in the long term. Education is key, and giving idealized examples is part of that education.

I know for a fact I could have saved somewhere near that $2000/year beginning at 19, and it would have gotten easier as the years went on. It wouldn't have negatively impacted my lifestyle much, and I would have been ahead of where I am now, financially. I was no spendthrift and kept debts low-to-non-existent, but there were always unnecessary expenditures.

alfadriver said:

ProDarwin said:

chandler said:

Robbie said:

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

And don't forget 35-45 years of paying their mortgage. Many many millionaires I'd guess own a primary residence worth 500k or more. 

Actually, one of the stats was that the surveyed millionaires paid of their mortgages in an average of 10.4 years, they didn’t carry balances on credit cards, they drove cars on average 7 years old with 120,000 miles and lived in homes worth less than 300,000. It’s a crazy book.

If you max your 401k, with zero company match and zero savings to begin with, you'll be a millionare within 19 years.  Thats a 18% savings rate for someone making 100k.  Not really anything crazy, and you certainly wouldn't have to cherry pick.

I'm shocked they paid their mortgage off so early.  Seems dumb.

What industry starts at 100k in a location where you can actually live on $82k before taxes?

27 years ago, I started working at less than 1/3 of what I make right now. So while it's a really interesting example, how many people can actually do that?

In terms of the mortgage- one has to do the math, and factor in every aspect, including the value to a person to not have a large debt.  I, too, have seen the math where a 30 year mortgage is a better math to take vs paying off early.  But I didn't, and paid it off in 26 years, and it feels good now.  Especially when people have to factor in economic down turns and housing costs- there is security in owning your property instead of having a huge forced liability every single month.

I do want to point out that I said they made less than 100,000k and many made far less. He also said that they started early saving. I discovered that the 6% my company matched when I was 18 wasn’t noticed missing from my check; which is what the book is saying. When you get to 6 figure income if you continued living at a lower lifestyle than you can continue snowballing debt and savings. Only on TV do people start at 100,000 and really I think few people make it there individually.

alfadriver said:

It's a great table to illustrate compound interest.  But it's not so good at reflecting reality.  The $16k Ben invested would be very, very hard for most, since that's the time people are still finishing what the are learning to be able to do and starting the first jobs.  And seeing much of the news of the recent shut down, there's a large amount of people who really struggle to save any money.

But to illustrate the math, it's a great table.

Nobody really sees 12% returns over 47 years either. I think the idea is to embellish the chart a little in order to get the point across more clearly so that a novice can understand the concept clearly, and perhaps be more motivated than they would if the numbers were more accurate of "real world" scenarios.

That being said, I have to say that it's entirely possible for a young person to invest 2k/yr, and I say that speaking from experience. A part time job in retail that offers a 401k is all that's needed to get there. $15/hr job, 20 hrs/week during the 30 or so weeks of school, and 40 hrs/week during the other 22 weeks of breaks. That's $22,200/yr before taxes. 10% goes into 401k, and you've got your $2k/yr. If you include employer matching, that number goes up. The number of young people that are willing to work that much through school, and understanding enough to save via the 401k is small, but that's not an issue of possibility, it's an issue of willingness and/or understanding.

alfadriver said:

What industry starts at 100k in a location where you can actually live on $82k before taxes?

None?  Why is the starting salary relevant?

ProDarwin said:

alfadriver said:

What industry starts at 100k in a location where you can actually live on $82k before taxes?

None?  Why is the starting salary relevant?

well, you could be a petroleum engineer in the middle east

Robbie said:

ProDarwin said:

alfadriver said:

What industry starts at 100k in a location where you can actually live on $82k before taxes?

None?  Why is the starting salary relevant?

well, you could be a petroleum engineer in the middle east

Or some sort of wallstreet banker.  I read an article about one of the FIRE (fixed income, retire early) millennials about her strategy to to save and retire early.  The key point of her strategy was a ludicrously high salary (despite being young and inexperienced), so she could save a massive amount while living an otherwise fairly typical lifestyle.

For most of us, a longer timeline is necessary.

I think FIRE means 'financially independent, retire early'

chandler said:

There’s an interesting book I just read by Chris Hogan called Everyday Millionaire; they interviewed 10,000 millionaires and nearly all of them (net worth between 1 and 10 million) had made that money working jobs less than $100,000 a year but investing heavily in nothing more than their company match 401k. Very Few had won money, few had inherited enough to add to their wealth. Pretty crazy stats, I’m sure they were cherry picked but it was an interesting read.

I have confirm this as I am one who has a net worth greater then $1M, not by much, but I've been pulling cash out the past 5+ years to live on so that did reduce the gains I would have made the past 6-7 years. I also never made anywhere close to $100K  when I did work.  I just saved and invested as much as I possibly could and withdrew very little before I retired.  

Granted not having ever been married and being childless helped a lot!  That was my choice and I know it won't work for most people.