Is financial independence impossible until I'm old?

[TexasHusker]

Its called compounding interest, look it up. Thats how people making $50k/year can easily retire as millionaires.

OK hot shot , I'll play. Can you give me a couple of examples of "compound interest" investments that will allow someone making $50K to easily retire a millionaire?

I'll be waiting.

[kork13]

OK hot shot , I'll play. Can you give me a couple of examples of "compound interest" investments that will allow someone making $50K to easily retire a millionaire?

I'll be waiting.

Never fear, the wait is over!

Income: $50k/yr ($4166/mo)
Expenses: $36k/yr ($3000/mo)
Savings: $12k/yr ($1000/mo, 24% savings rate -- somewhat aggressive at that income, but completely doable)
--- $458/mo (11% gross) to Roth IRA
--- $542/mo (13% gross) to 401k
Residual: $2k/yr ($166/mo), for building/maintaining emergency funds.

Assumptions: All investment returns are stated after inflation, in 2016 dollars; Initial AA of 90% stocks/10% bonds, earning 5% real per year.

Bob starts saving for retirement from a zero balance at age 20, the first year's contributions earn ~$280. Over the next 15 years, $180k in contributions are valued at ~$265k.

At age 35, Bob adjusts his AA to 70% stocks/30% bonds, and reduces annual returns to 4% real. 15 years later (age 50), another $180k in contributions are valued at ~$722k.

At age 50, Bob adjusts his AA once again to 60% stock/40% bonds, earning 3% real per annum. 15 years later (age 65), the last $180k in contributions are valued at ~$1.35M.

At age 65, Bob retires a happy man. Social Security has sadly fizzled out, but he's okay, because he adjusts his AA to 50/50 stocks/bonds, earns 2% real, and withdraws $50k/yr (prescriptions are expensive) until he dies at the ripe old age of 100. In his will, he leaves the remaining $200k of his savings to his cat Rupert.

By investing $540k over his 45 years of working, he earned nearly $1M in compounded gains.

As you can see, I actually assumed too high of a savings rate--the guy's money way outlived the man himself. I used the numbers I did for simplicity. In most cases, if started in the early 20's, one can pretty reasonably save enough for a comfortable retirement by saving about 20% of gross income. If you save more aggressively (30%-40% savings rate), you'll be able to retire early.

The math is easy...the discipline tends to be the hard part for most people. Want a comfortable retirement? Don't be like most people.

[TexasHusker]

Never fear, the wait is over!

Income: $50k/yr ($4166/mo)
Expenses: $36k/yr ($3000/mo)
Savings: $12k/yr ($1000/mo, 24% savings rate -- somewhat aggressive at that income, but completely doable)
--- $458/mo (11% gross) to Roth IRA
--- $542/mo (13% gross) to 401k
Residual: $2k/yr ($166/mo), for building/maintaining emergency funds.

Assumptions: All investment returns are stated after inflation, in 2016 dollars; Initial AA of 90% stocks/10% bonds, earning 5% real per year.

Bob starts saving for retirement from a zero balance at age 20, the first year's contributions earn ~$280. Over the next 15 years, $180k in contributions are valued at ~$265k.

At age 35, Bob adjusts his AA to 70% stocks/30% bonds, and reduces annual returns to 4% real. 15 years later (age 50), another $180k in contributions are valued at ~$722k.

At age 50, Bob adjusts his AA once again to 60% stock/40% bonds, earning 3% real per annum. 15 years later (age 65), the last $180k in contributions are valued at ~$1.35M.

At age 65, Bob retires a happy man. Social Security has sadly fizzled out, but he's okay, because he adjusts his AA to 50/50 stocks/bonds, earns 2% real, and withdraws $50k/yr (prescriptions are expensive) until he dies at the ripe old age of 100. In his will, he leaves the remaining $200k of his savings to his cat Rupert.

1. $50K a year ain't much to begin with. To save 24% of that, you're going to live like a pauper for decades. Might be doable but completely unrealistic, and a far cry from "easy".

2. That is not compound interest. It is compound return, which is an entirely different animal. You only get paid "interest" when you are lending money.

3. Finally, if $50K is paltry now, it will be worth half or less in 40 years, after inflation.

If you call that financially independent, then I've also got lakefront property in the Mohave to sell you.

[kork13]

1. $50K a year ain't much to begin with. To save 24% of that, you're going to live like a pauper for decades. Might be doable but completely unrealistic, and a far cry from "easy".

2. That is not compound interest. It is compound return, which is an entirely different animal. You only get paid "interest" when you are lending money.

3. Finally, if $50K is paltry now, it will be worth half or less in 40 years, after inflation.

If you call that financially independent, then I've also got lakefront property in the Mohave to sell you.

1) If your argument is that no one can live on $50k, why ask the question? Would it be a simple, unadorned life? Sure. But if you ask for a demonstration of how someone can do it on $50k, you could at least accept the answer to your question.

2) Compound interest vs. compound returns is semantics. It's the principle of compounding, regardless of how you get the growth.

3) You missed the driving assumption -- all of those numbers are above inflation, keeping the same purchasing power over time, which as long as all the numbers are run that way, it remains valid. Inflation in year 1 is 3%? His earnings were 8%. Year 2 was 2% inflation? 7% earnings...which are reasonable samples of historical returns. Running estimates above inflation is (IMO) a simpler way to consider growth. So yes, I assume that his income, expenses, savings, and returns all follow the same trajectory as inflation. The actual dollar amount of his income at year 40 might be $200k, but the savings rate of 24% would then drive a $48k savings contribution, which would presumably be just fine, because IRA/401k contribution limits are also tied to inflation.

[corn18]

1. $50K a year ain't much to begin with. To save 24% of that, you're going to live like a pauper for decades. Might be doable but completely unrealistic, and a far cry from "easy".

2. That is not compound interest. It is compound return, which is an entirely different animal. You only get paid "interest" when you are lending money.

3. Finally, if $50K is paltry now, it will be worth half or less in 40 years, after inflation.

If you call that financially independent, then I've also got lakefront property in the Mohave to sell you.

So, present your suggested path to financial independence so we can shoot holes in it. You tend to bash the 401k way but never present an alternative. Put up or shut up, buddy.

[TexasHusker]

So, present your suggested path to financial independence so we can shoot holes in it. You tend to bash the 401k way but never present an alternative. Put up or shut up, buddy.

At the core of it, if you are going to achieve significant wealth by your 40s or 50s, you cannot do so by saving all of your money. You can only do so by being an owner. That is, a business owner. Owning a business can take many forms.

In my situation I own three franchises, a property management company, and some rent houses. So effectively three businesses. Certainly, some savings was involved, but the two biggies were leverage (borrowing lots of $$), and significant financial risk.

Most people don't have the stomach for such, and that is perfectly OK. But people that really think you can achieve any sort of wealth through systematic savings and some mutual fund returns are delusional. Of course there are those rare exceptions.

By the way, I kissed my share of toads along the way.

[TexasHusker]

I will add to this that, had I figured out this simple truth in my 20s, I would have been 10X richer. It didn't start occurring to me until along about 38-39, and precious time had passed.

[Singuy]

I will add to this that, had I figured out this simple truth in my 20s, I would have been 10X richer. It didn't start occurring to me until along about 38-39, and precious time had passed.

You wouldn't be able to cash out your 401k of..what..300-500k?..don't remember how much it was in your 20s to start your business. No bank will touch you with a ten foot pole.

[snafu]

I'm concerned that you've only been working in your profession about 2 years and you seem horrified about working for the next 55 yrs. Hope you'll seek and find satisfying employment that has you looking forward to the challenges of the day.

You seem enamored with your gross salary but better to focus on getting the best bang from your net income. I suggest creating, age appropriate, higher risk retirement and ROTH type investment programs, well meshed to reach your goals. You will need to spend time monitoring monthly, keeping in mind economic trends so that you are always buying low and selling high to retain the intended balance between equity, international and income.

If reaching financial independence as quickly as possible, is your main goal, it's all about how much you keep rather than how much you earn. I suggest tracking every dollar spent, just note on an app on your phone for at least a month. While rent and utilities are typically automatic sums withdrawn, using hard cash for all other spending can be an eye opener.

Every time you buy items that adds interest like a vehicle, electronics or student loan, you are throwing barriers in front of your goal. Would you consider finding some type of part time work tp bring in another income stream?

I've been looking at a weekly managed, core ETF program [2% annual fee] which are fun to watch and am about to embark on, using a different income stream for the experiment.

[rennigade]

OK hot shot , I'll play. Can you give me a couple of examples of "compound interest" investments that will allow someone making $50K to easily retire a millionaire?

I'll be waiting.

When I first started my "real" job I was making $52k/year. I was able to max my 401k and roth ira. I also had money left over for all my bills and was able to save some...not sure of the amount though. No this isnt an example of compounding interest and maybe by definition I misused the world...point being allowing your money to snowball over time. OP...save, invest, allow money to grow, rinse and repeat.

Id go into more detail but im in Hawaii now. My salary is $63k/year, still maxing 401k and roth and investing in index funds. I guess by your definition im poor. Ill gladly take my "poor" lifestyle any day.

[TexasHusker]

You wouldn't be able to cash out your 401k of..what..300-500k?..don't remember how much it was in your 20s to start your business. No bank will touch you with a ten foot pole.

Yeah, you might be right. Hindsight is always 20/20.

[MakeAStash]

Sounds like it's time to put your budget into a spreadsheet and see where the money is going, and where you can trim. Save and wisely invest 50% of your pay and you can be financially independent in 10 to 15 years.

[Captain Save]

I'm in my mid twenties (24-26 years old). I have been working for almost two years, and my before tax income is in the range of $100K - $130K.

I also max out on employer retirement contributions.

The median income in the U.S. is apparently $53,657 for 2014, and the median income for a post grad is $50,556 according to a Google search.

By those measurements, I should be doing amazingly well--making twice the median income of all U.S. citizens, which is not just new graduates. It does not feel that way though.

I also live very frugally. I have several roommates, so my rent is much lower than most people. I go out to eat maybe 1-2 a week on average, and otherwise rarely buy things I don't immediately need (e.g. clothes, new computer, etc.).

My roommates barely make double digits but have much nicer stuff than I do (go figure right?).

With all that, I find I only have around $1000 - $2000 left over every month after all my expenses.

I'm stressed out because even if my income would grow 3% each year, it would still take me another ~20-30 years of working to be financially independent--that is my passive income is enough to pay for my retirement and life style.

If I'm making twice the median, should I not be able to retire twice as fast? Otherwise, if people are really make 50K a year, how on earth can they expect to retire when they hit 60, if I'm barely making it on twice that much while living a very frugal lifestyle?

So, basically, I need to take some risk, like start a company in order to get where I want sooner?

Or is the system broken?

Have you tried using a service like Mint to see where the money is going .. this is done best without u..sing cash.. going out to eat twice a week can be pretty expensive if you're sitting down and drinking etc.. if you're just ordering take out .. then it's much more affordable..

if you save $2000 a month ..that's not too shabby but of course you could be doing better.. you can put some of that money to work ..

[scfr]

sethmachine, what changes are you considering making? What are your next financial moves?
When I was your age the whole thing seemed very overwhelming. The first time I ran a "retirement calculator" I literally felt sick to my stomach. It seemed like a massive, cruel joke.
Even though you can't see it now, I can assure you that even a small positive step in the right direction will pay off down the road.

[Tabs]

I just wanted to add that I think "alarm" and "feeling sick to your stomach" is the correct reaction to have in these cases. That's because the financial challenges ahead of most of us are immense. The question, really, is whether we even realize it or not.

If we don't realize it; if we don't feel ill and even overwhelmed about our predicament, then I say we are not grasping the gravity of our situation here. And there is a good possibility we will not survive, financially, much less even hope for Financial Independence.

I believe that only by realizing how dire our situation is, can we have the proper mindset to make the necessary changes. That's because, for the great majority of the people out there, the situation is precisely that dire.

The irony though, is that the ones who need to realize and make changes the most are also, generally speaking, the most oblivious about their financial predicament.

That is the one hopeful thing I did see from OP. That sense of grasping the situation at hand, and reacting correctly with much concern.