Fighting the Media and Learned Helplessness, You really can afford to retire.

This evening I was looking at my facebook feed and this article on why the 4% rule only works for the wealthy popped up.

http://www.nbcnews.com/business/retirement/why-4-rule-retirement-only-works-wealthy-n346191

After reading the article and comments, it reminds me how much people need to learn about basic math and finances. Sadly, many of these articles are doom and gloom and don’t provide any of the easy solutions that FIRE proponents advocate.

Simply speaking the 4% rule applies to everyone as long as you adhere to the math. So what math is that you ask?

It basically boils down to two factors: Earning and Spending. Lets start with spending first and then move on to earning.

Determining your spending: 

Before you can reach your goal of financial independence you need to know where you are. In order to do this you need to track your spending. Personally, I use mint.com to track my spending. It lets me see my “fixed” monthly debt (mortgage payments and student loans) and my other expenses- utilities, groceries, child care, leisure/extraneous spending. Looking at these gross numbers you can get an idea of what your annual spending is, some of this will change with retirement (that is one thing the above article got right).

Let’s just say that my anticipated expenses will be 50K a year based on my current spending and the wife and I make 120K a year- this should give me some wiggle room since I should not have child care, mortgage, and student loans, but I may have other medical expenses (hopefully, not).

Figure out your expected earning rate (return rate):

How much do you expect to earn, and how that helps you reach your retirement goals.

Now you have to decide how much you expect to earn off your investments. For the sake of argument let’s anticipate a 7.94% stock return on average and a 4.06% bond return loosely based on the the following link: average http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histret.html

So if I decide to leave 80% of my money investments in stock and 20% in bonds I can expect the following return:

80% x 7.94% stock return + 20% x 4.06% bond return= 6.35% + 0.81% =7.16%

If we expect that up to 3.1% of our money would be taxed or loss to inflation (unlikely given current environment and other vehicles like Roth IRA and HSA) that gives us a 4% earning on our investment.

Figure out your nest egg number:

Based on the 4% rule how much do we need to retire:

Total Retirement fund x earning rate= spending amount

TRF x 4% =$50,000 in our scenario

We would need 2.0 million in order to retire taking into account inflation based on our scenario. It seems like a lot, but it really is not that much once you take in the power of compounding interest. (it is even easier and you likely need an even lower number if you optimize your IRA, Roth, HSA, etc).

Figure out how long you need to keep working:

So let’s run the math on this to figure out how long we need to work in order to retire:

If we start at 0 and put away 70k (120k-50k) a year at earn 4% on it post inflation and taxes it would take us 19 years based on compounding interest calculators.

I used this calculator to help me with the math: http://www.moneychimp.com/calculator/compound_interest_calculator.htm

This same math works for everyone regardless of if you are “poor” or “rich” in the article.

Of course if you don’t want to save this much you have a couple options:

1. Increase earning:

A. You can continue to work part time during retirement- rental income, part time work, etc. This will reduce the money you will need to take out from your investments so they can continue to grow.

B. Change your investment allocations: i.e. increase the proportion of money you have in stocks since they have higher returns. The downside is the relatively higher volatility in stocks, I personally plan to keep 5 years worth of spending in bonds or other “safer” investments to help me weather the storm during bear markets.

2. You can cut down your spending.

A. You can downsize your home once your kids move out and then actually invest any possible earning you have on it.

B. You can cut down your luxury expenses, and find other fun free things to do like enjoy the outdoors and/or spend time with family and friends.

Hope this posts helps put things in perspective. Let me know what you think about it and feel free to post any suggestions.

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2 thoughts on “Fighting the Media and Learned Helplessness, You really can afford to retire.

  1. Hi!

    Found your blog through MMM’s forum, as I am also a fellow Mustachian living in Kansas City (Well, Olathe, really). I am relatively new to the Mustachian lifestyle, and backed my self into a corner in my former hyper-consumer life. A few details:

    I am 34, have a wife, two kids, two houses, a rent payment, a car with a loan, a very small amount of CC debt (expect to pay off this year), and some medical/student loan debt. I am now making about $36,000/yr and going to school to try to up my income. I am trying to pay down the CCs, and the car is pretty modest – $7500. We just recently moved to Olathe, having lived in a tiny town before, so needed a reliable car to get around. We were driving a Suburban when I found MMM and my wife did NOT want to get rid of that! So, the car is a compromise that will not be able to be sold. So, a few questions:

    Do you have any advice for anyone living on a small amount of money? We are trying to sell the houses, but until then, we are stuck. One of them is a money pit we are stuck in because we bought it right before everything crashed. Lucky us.

    We already shop at Aldi’s, open the windows when it’s between 40 and 85 degrees, are VERY happy users of Republic Wireless (never again will I throw money down the Verizon pit), use the library. The only TV we have is Netflix. My wife wants to go out and do more stuff, but I don’t really know what to do. I found the Mustachian group on Facebook. Do you have any meetups for biking or BBQ or something cheap and fun that you do? Also, do you know any other ways we can save?

    Thank you for posting the knowledge you have, and answering my questions! I look forward to reading more!

    Trevis

    Like

    1. HI Trevis, welcome to KC/Olathe. I think you are doing a good job working on paying down your debt. Hitting the high interest CC first and then hopefully the car next. I understand the need to compromise, I am in the same situation. I think you have been doing a good job with your expenses. You can always look at reducing them more by growing some of your own fruits/vegetables. As for the house that is underwater, you can do the same thing that I did, which is rent it out. At first the rate I was getting for it was not covering all my expenses for it but it was better than it being a total money pit, and I was able to write of the depreciation for a tax refund. If you decide to rent, I would check out BiggerPockets.com. I wish I had known about it before I started renting, it would have saved me a lot of headaches. So far we have not had any Mustachian KC meetups. I would be interested in attending some, my weekends. I would be open for some biking/BBQ, but probably not until my wife is off maternity leave in October. Thanks for reading!

      Like

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