How much is enough?

[matto_]

I am sure this thread/topic has been done before (and maybe to death) - HOWEVER

I have been reading both Mr Money Moustache http://www.mrmoneymustache.com/ (thanks to the wonderful person who posted the link here, not sure who it was) along with Early Retirement Extreme http://earlyretirementextreme.com/

Both of these "blogs" have been a real eye opener for me in enabling me to put a finger on some specific $ goals to aspire for from a passive income perspective.

The additional thing that these blogs/readings have done for me is to reinforce the "time value of money" concept - in terms of both the decisions we make about our current living arrangements, along with the decisions we make with regard to the amount of passive income required.

Both of these blogs go to further extremes than I am willing to go to (living in an RV for example - so that he spends 6-7k per annum) however the concepts underlying the information has resonated with me.

ANYWAY - long story short - post reading these blogs, we have started our minds towards 40k passive income (I intend on putting a specific thread up with regard to our wider strategy), which I dont think will be entirely enough for our family to live on (2 adults and one baby), but will certainly go a long way towards enabling me to reconsider how I work - ie. do I start contracting a couple of days a week instead of working for the man full time.

QUESTION - have other people thought through similar processes, and where on the spectrum do you fit - at the Early retirement Extreme level - Mr Money Moustache - 30-35k per year - or needing to replace your income or more prior to you deciding to "Stop Work".

 

[Jake D]

It was quite possibly me who posted the link to Mr Money Mustache, I got stuck into his blog earlier in the year, reading it from first post to most recent (For anyone interested, do this, the newer posts are nowhere near as good as the originals)

His main point is learning to live off 25% of your income and investing 75%, "retiring" when the invested 75% starts earning you the equivalent of that 25%.

To be honest, despite really enjoying the blog, I haven't thought that far ahead. I take a lot of good points and motivation from the blog, but I'm nowhere near investing 75% (unless you count PPOR payments, which I don't)

 

[kathryn d]

Do a practice run, while you are still working.

My last year of work, we didn't use that income at all. For us, it worked perfectly.
We had plenty of credit available to use, if necessary, in the future.

There is no "one size retirement fits all".

Mr. Moustache and other similar website/blogs hold a fascination for me..I guess because they are other like minded people. Makes me feel normal, because here on SS, when it comes to some subjects, I certainly don't

 

[Ace in the Hole]

His main point is learning to live off 25% of your income and investing 75%, "retiring" when the invested 75% starts earning you the equivalent of that 25%.

This is interesting.
Are there any calculations or real examples of how long this will likely take?

 

[Deltaberry]

The trick is to start early and put your mind to achieving these goals.

When I started work at 22, I probably spent around 5% of my money and saved/invested the other 95%.

Having just turned 27 now, I'm probably more lax these days. While I only spend a bit under 15% of my income these days, this is 15% of a much higher figure than what I earned at 22.

I still save/invest the other 85%. But more importantly, my passive income is generating more than triple of what I spend per year. The key I think is to live within your means and set goals.

 

[Jake D]

This is interesting.
Are there any calculations or real examples of how long this will likely take?

He does work through some calculations, mostly pretty rough though as circumstances obviously differ.

 

[Ace in the Hole]

The thing that always complicates these calculations for me is whether or not to take into consideration PPOR.

I suppose if you are strictly talking about passive income, you have to discount your PPOR.
Alot of oldies seem to have that problem, asset rich but cashflow poor.

 

[Ed Barton]

Not enough information.

Will you 'retire' with debt? IR increases could quickly send you back to work.

Will you rely on interest income? Dividends? Rental income? Other?

Will you do some stuff in retirement that will earn you some non passive income? Artistic stuff, a bit of consulting in your field, tutoring, etc. eg - I believe Kathryn has been working in a road house in central oz, not because she needs the money, but because she wanted the experience of living there.

If you don't want the RV lifestyle then 40k pa would be the bare minimum in your situation imo.

 

[devank]

His main point is learning to live off 25% of your income and investing 75%, "retiring" when the invested 75% starts earning you the equivalent of that 25%.

That 25% is not even enough for our kids (3) child care/ schooling costs

Here is an Excel spread sheet I put together to see how much assets we need to retire

Inputs go into the yellow cells (all in Col B).
Cell B17 is where you can experiment.

Age & Year cols will be shaded in green if you have enough investments.

 

[kathryn d]

Will you do some stuff in retirement that will earn you some non passive income? Artistic stuff, a bit of consulting in your field, tutoring, etc. eg - I believe Kathryn has been working in a road house in central oz, not because she needs the money, but because she wanted the experience of living there.

If you don't want the RV lifestyle then 40k pa would be the bare minimum in your situation imo.

In case my hubby reads this...
Rob (AlmostBob) is working in the roadhouse, they just house and feed me for free
You are correct, it was initially to experience the outback.
They asked if we wanted to come back ...and Rob is enjoying fixing stuff (that isn't ours )
We'll stay a couple of months and decide after that what we want to do.

Travelling is nice, but I wouldn't want to do it for the rest of my life.

 

[Terry_w]

This is interesting.
Are there any calculations or real examples of how long this will likely take?

It is interesting.

Say you earn't $100,000 and lived on $25,000. That would mean you are investing $75,000 pa.

Based on a 5% yield you would need $25,000/5% = $500,000 net egg to retire.

To build up $500,000 at $75,000 per year would take about 6.67 years.

But it would be shorter than this as you would be earning income on the savings as you build it up, so perhaps 6 years,

 

[Ace in the Hole]

It is interesting.

Say you earn't $100,000 and lived on $25,000. That would mean you are investing $75,000 pa.

Based on a 5% yield you would need $25,000/5% = $500,000 net egg to retire.

To build up $500,000 at $75,000 per year would take about 6.67 years.

But it would be shorter than this as you would be earning income on the savings as you build it up, so perhaps 6 years,

Seems about right.
We are getting to around year 5 now and close to the percentages given in the above example, another couple of years will probably do the trick.

However, 25k per annum passive probably won't do it for most people.
The initial earning figure is the most important factor here.
And when that initial earning figure is higher, spending 25% or less, of income, is relatively easy.

 

[HiEquity]

I put up a link to MMM a little while ago but only after someone else from here already directed me there.

He has a good calculator for the "how much is enough" question in one of his articles (ie when you are saving 100% of your actively earned income you can retire) and is more focussed on reducing expenses than increasing income for the average person. He has good examples of how to live a more efficient life and in that sense helps to make me feel more normal.

But I'm not such a fan of his treatment of the income question. He struggles with the use of leverage for investing - he can see and acknowledges the advantages but would rather live a cheap lifestyle and have less than leverage up to access a greater income. His use of index funds and reliance on studies of past returns from the share market leaves me cold. I only feel comfortable when I contemplate greater income and capital buffers than he advocates. Not so I can spend the money on stuff but to give my family greater financial security.

So while I agree with the vast majority of his lifestyle stuff, I'm not a fan of his investing and income stuff. I can see he is trying to make financial freedom seem easier to achieve for a lot of people who otherwise would not pursue an "efficient lifestyle" and that's fine as far as it goes. But I prefer working a bit longer and using leverage to access greater financial resources to gain that greater level of security for the future. His method of saving tax paid cash for investing with the US equivalent of super to acquire a small lump sum to try and sustain you through all of life's circumstances is just not convincing enough for me.

 

[Deltaberry]

It is interesting.

Say you earn't $100,000 and lived on $25,000. That would mean you are investing $75,000 pa.

Based on a 5% yield you would need $25,000/5% = $500,000 net egg to retire.

To build up $500,000 at $75,000 per year would take about 6.67 years.

But it would be shorter than this as you would be earning income on the savings as you build it up, so perhaps 6 years,

Correct. That's why my passive hit my expenditure in a bit under 2 years, because my % was not 25 but around 5-10, and my return on savings was >5%.

As I always tell people, it's just a numbers game. Same game regardless of the scale. That's why they say first bucket of gold the hardest.

 

[Terry_w]

I've been reading that blog on early retirement extreme (ERE) and it all makes sense. We all spend most of money on things that are unnecessary. This not only wastes money, but clutters our lives. We need bigger homes to store the useless stuff.

Imagine if we didn't buy those things we didn't need. That $100 item could be costing you $7 per year for the rest of your life because if you had put that $100 into your home loan you would have saved $7 per year in interest. I recall buying some jeans many years ago that I have never worn (don't fit now!).

Think about how much your car costs you each year - depreciation, parking, petrol, maintenance, insurance etc. Imagine if you could use that money and pay off some loans instead. I know people who have 3 cars (2 people).

Steering clear of take away food will save you money, but also be much healthier for you.

 

[HotRod]

Try to live off $25K???? Pffffttttttt.

That's just less than a combined pension.

To think how much fun pensioners have these days trying to make ends meet, eating cat food and both sides of a square of toilet paper, no thanks.

But hey, if someone can make it work living off the land with solar panels, water tanks, vegie patch and a few chooks, good on them. Not me.

 

[Terry_w]

Correct. That's why my passive hit my expenditure in a bit under 2 years, because my % was not 25 but around 5-10, and my return on savings was >5%.

As I always tell people, it's just a numbers game. Same game regardless of the scale. That's why they say first bucket of gold the hardest.

Deltaberry that is great. 2 years is amazingly short. It is also amazing that you can live on so little. How do you do it?

 

[Terry_w]

eating cat food and both sides of a square of toilet paper,

Is that what they call a good square meal?

 

[HotRod]

Is that what they call a good square meal?

I missed a word. Should be "using" in there. I'll let you ponder where.

 

[Ace in the Hole]

My cats eat better than me alot of the time.
That Gourmet Fancy Feast cat food is expensive, and tasty.