“Hey man, it is all well and good that you guys lived like paupers for a decade, but you have to admit… that was totally unsustainable!”
The popular corollary to this statement is, “I don’t want to live like I’m poor forever. I want to live a little.”
If I had a dollar for every time I’ve heard this line of reasoning, I could probably afford to retire, or something.
Or maybe the correct pronoun is they.
Saving 50%+ of Income
I can definitely appreciate the sentiment… I too don’t want to live like I’m poor forever.
Which is precisely why we exercised the choice of saving a high percentage of income early in our lives. Saving 10% of income, it takes a decade to save enough to fund even one year without work. But save 50% of income and you reach that milestone in just one year. Repeat for 15 years (plus or minus) and work becomes optional.
The idea isn’t new… in the 1950s it was common advice to save one salary and live off the other. Yet, imagining living off only 50% of income, and then expecting to live that lifestyle FOREVER is disconcerting to many.
“So you want me to live like I’m poor for the next 15 years, just so I can live like I’m poor for the rest of my life? NO THANKS!”
Rightfully so… but work 16 years maybe?
One More Year
The idea of working One More Year is frustrating to many aspiring early retirees. But it’s better than working 40 more years, is it not?
Previously I explored how long it takes to become Financially Independent over the course of modern history. For visual thinkers I borrowed the following chart from that earlier work. What it shows (roughly) is that saving 50% of salary for 15 years +/- leads to assets worth 25x annual cost of living (aka the 4% Rule.) Faster, if you grow income faster than inflation and eschew lifestyle inflation.
An additional 3 and 5 years of work, on average, are required to reach 33x and 50x, respectively. (3% and 2% withdrawal rates.)
Increasing assets to 33x current cost of living is the same as increasing purchasing power by 1/3 at the same risk (again, 4% rule.) If assets increase to 50x cost of living, spending can DOUBLE!
Doubling outlay sure doesn’t sound like being poor forever…
Case In Point
When we were working for the man we were spending about $20k/year.
Our first full year of “early retirement” cost about $40k.
Last year (our 4th full year without a paycheck) was the most expensive year of our entire lives. This year will be even higher.
We doubled our expenditures, and then doubled them again. How does that even make sense?
Simple: I worked 3 full years longer than necessary, and we were saving much more than 50% of income. As planned, we have yet to come close to spending as much as the 4% Rule allows.
By “living like we were poor” (a phrase of privilege if there ever was one) we were able to put as many dollars to work as possible, as early as possible. Compound interest did the rest.
Conclusions
There is no competition to see who retires the youngest, and no bonus prizes at the finish line. In a typical life time, a year or two of hard work and intense savings isn’t a large time percentage, but it can make a substantial difference in terms of “rich” or “poor.”
Where time does play a factor is in the “when.” Saving early is substantially more powerful than saving late. A dollar saved in your 20s will grow more than a dollar saved in your 50s.
Early and intensive saving provides options. The only thing that is truly unsustainable or leads to a “poor” life, is not saving at all.
See All of Your Accounts in One Place
Track your savings, net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital
The terms of “rich” or “poor” are very relative and will mean different things to most people. That being said, you are right about the save a lot and start saving early, don’t think anyone that did this would disagree!
This^. I don’t quite save 50% of my income at the moment, but I still live (mostly) like I did in college. I buy the things I deem will add value to my life, but ignore most of the frivolous wants. My biggest issue is people that need to keep up with the Jones’s and need a 500k McMansion to be happy. We have a 1400 sq. ft. townhouse we rent and we don’t even use an entire bedroom or dining room for anything more than storage for my SO’s acquisitions. Personally I would trash that stuff if I had the ability and downsize again. But the minimal cost that it is to keep that stuff is small and wouldn’t add more than 50 or so a month to the bottom line. Sure, that’s 560/year, or about 10k over 10 years, but it is what it is.
My SO and Jr also mean we live larger than I would otherwise. It’s a good team.
Sounds like you got it dialed in. Nice.
Yes. I’m more thinking of those who disagree before they even get started.
Exactly! We live modestly and that might seem poor to other people with a similar level of wealth. However, we live better than probably 90% of the world population. Life is great in the US even when you don’t spend a ton of money.
Saving a large percentage early is the easiest way to get started. Unfortunately, most people don’t realize that and get trapped in an expensive lifestyle.
Exactly, Joe! I love this line by GCC…
“By “living like we were poor” (a phrase of privilege if there ever was one)…”
Most of us don’t feel poor saving 40% or 50% or our income, but soooo many people around us struggle financially spending every penny they have – and even more using debt.
Living poor or living rich is mostly perception.
I think people have different expectations of what living like you’re poor means. We are currently living in 450 square feet with a baby and we don’t feel like we are depriving ourselves of anything.
Respect. We lived for a time in about 450 sq. ft. in Seattle, and it was tight with just the 2 of us. The apartment was poorly laid out, and you couldn’t cook anything unless the front door was open or the smoke alarm would go off. One of our neighbors was an elderly man who liked to cook in his tighty whities…
Your next door neighbor was Walter White ?
Heisenberg
Absolutely. To many, I might seem poor but I definitely don’t feel that way! We spend GOBS of money, but it’s still far less than 4%.
I feel pretty dang spoiled in fact!
Good post. These comments come from people who believe that every expense of their life is a necessity/need. For them, cutting down even one expense creates ‘unsustainable’ visions of poverty or deprivation. So, it is no wonder they see sensible people who save 40% or more of their income as living in poverty – when there is no need to do so in their minds. To justify their hedonistic lifestyle, they paint a life that enables high savings as “poor”. Using their own words, a saver might say he would rather live poor than be poor!
Totally agree with the ending. Each life is unique so do things your own way. No need to compete as that will make you feel poor when the reality is that others will be working for decades longer.
“…in the 1950s it was common advice to spend one salary and live off the other.” Surely you meant *save* one salary, yes?
Solid post. I imagine it was born of some frustration with those who just don’t get it — like me, two or more years ago, before I stumbled across your site.
ahh, so I did. Thanks.
As always …..great read Jeremy
Chris
Thanks Chris
I like the way you’ve framed it up here. It’s a matter of tradeoffs: wanting to live an expensive life just means you’ll have to work longer (maybe forever) to pay for it sustainably.
I’m actually okay with that approach so long as others understand the math. If people want to spend six figures a year, are spending 90% or more of their available income, and are fine working into their sixties to do so, then good for them.
My lifestyle probably wouldn’t make them happy, and I’m sure the opposite is true, too. Different strokes are fine.
Thanks man. Agreed.. there is no one right way to live. Diversity is a great thing.
You’re exactly right. My wife and I decided to save a decent 50% of left-over cash and spend 50%. While I think your lifestyle makes better sense and I love your plan, I’m glad we did what we did. We have been living life to the fullest, traveling and buying items we want .. not need. Why? We worked hard and don’t want to miss a minute of living in the present. And having a brain tumor removed, skin cancer and prostate cancer convinced us our plan is the right plan for us. You never know how long the party will last. But we are saving just in case.
I agree with others that everyone interprets living poor differently. For example, we live in an inexpensive part of the country COL-wise, and we have a 5K sqft home and travel 4-5 months out of the year in timeshares. Some would consider us rich beyond their wildest imaginations, while others would consider our situation tragic or even pathetic. It takes all types to make the world go round. But just ask yourself one question – “Am I Happy?” If the answer is yes then you are rich beyond many.
It is a nice cliche. Given the choice, I’d rather be happy with a portfolio of “enough” than with zero liquid net worth.
Totally agree that not exiting the workforce as soon as you have 25x expenses gives you a ton of options. Especially if you retire into one hell of a bull market ;)
Having a strong tailwind is definitely nice, but it has only been 5 years… things could change.
I figured out we were financially independent right about the time I discovered the concept via MMM about three years ago. I worked nearly three more years full time and am now scaling back to part time. This will be “one more year” #4 although I fully planned on working about five more years once I discovered that work was optional, anyway.
Many factors went into that decision, but among them are family considerations, protecting against future desire to spend more, being overly conservative, liking my job well enough to make sticking it out a while longer at least tolerable, etc…
Cheers to OMY syndrome and its benefits!
-PoF
I had similar considerations. We wanted the option of future higher spending, as we were basically targeting our ideal lifestyle in the US. It is nice to have options
If you start out with an attitude of “I could never..” it is almost inevitable that you will never.
I discovered FIRE late in life. I was already ‘old’ by the standards of this community. I am just glad that I wasn’t so old that I was stuck in my ways. I am grateful everyday that instead of saying “I could never” I said “Holy hell, this is awesome pants and I bet I could too”. I should be able to retire by the time I am 40 years old.
Awesome.
People go from zero to retired in just 10 years. Some people start at age 20, others start at 40 or later, but we all have the same 10 years of hard savings ahead…
How much does a millionaire get to spend per year without working? About the same as a $20/hr McDonald’s Manager. People often confuse net worth with spending power. I decided I would retiree with $5K per month coming in, $3M in the bank and my house paid for. I’m currently at $6K, $4M and still working.
More, more, more?
It isn’t quite the same as the Micky D’s Manager, but around 20% more due to taxes (FICA, Fed, State.) That’s the median income for the entire country
With USA inflation of ~2.2% and risk free CD 1-year yield of 1.65% resulting in a negative yield of 0.55%, the millionaire can only spend their dwindling capital after paying the negative yield ‘tax’. The millionaire could take more risk and assume that the extra yield, the risk premium, is spendable without longer term consequences to the purchasing power of the principal.
I’ve been so impressed with your blog/lifestyle. You’ve really shown what early retirement looks like in style. I’ve been reading since 2013 when I graduated college with -30k. I’m now 26 and have saved $150k. I don’t know if I’ll early retire but the amount of compounding with all those future years in vti is exciting. Thanks for all that you do
Wow, this is awesome!
For sure there is no need to retire at any age, but having that wealth building will provide options.
In January you said “Total spending for the year was $72,002, or ~$197/day. If we use the 4% rule, it would require a portfolio of around $1.8 million to sustain this level of spending. That isn’t our plan.”
I interpreted that as saying that level of spending was unsustainable (more than 4%?). But now you’re saying “Last year … was the most expensive year of our entire lives. This year will be even higher. … As planned, we have yet to come close to spending as much as the 4% Rule allows.”
So I’m a bit confused. What SWR are you targeting? Are you trying to stay well under 4% to be conservative, or are you scaling spending up as the stock market has increased the dollar value of 4% in only the last 10 months?
Hi Patrick
In the post The Worst Retirement Ever, I outlined a 10 year upward spending path. Quote: “Because the early years are critical to a portfolio’s long term survival, the plan is to spend a little less than 4% while we get used to our new life.” This is what we are doing.
Our plan for 2017 was to stay in Asia and nest / have another kid. But by April we had already decided to wait another year, so we hit the road again. For 2018 our cost of living will drop back down again since we are officially nesting. In any case, $72k/year is sustainable for us.
I see. So you plan on travel years being more expensive, and intend spending to be fairly variable from year to year. Interesting. Good to know the big picture. For me “nest-in-place” has generally been more expensive than traveling, but I think that’s because we live in a high cost-of-living place (Seattle).
I’ll go read that prior post – it was a while ago (2015) so I think I missed it.
It depends where and how we travel. Wining and dining all over Europe cost us ~$250/day, but doing the same in Mexico (sans kid) was closer to $85. Staying in one place in Taipei cost about $125/day, although we spent closer to half that when we were saving hard in Seattle.
We saved slow and steadily when we were younger and to be honest, we were not quite sure what for.
In the peak of our earning power over last 5 years, a very large savings rate combined with a bull market has propelled our net worth to a level that should sustain a 2.5% WR when we retire next year. Yep, we are conservative.
I agree completely that we all might have different time windows to knuckle down and save. But the mindset to do it is the same whether you are 20, 30 or 40.
Living like I’m poor is exactly how I describe this lifestyle. I’m practiced, given that my father raised a family of 5 on less than $18k per year in the US. The wisdom of continuing to spend little came back to me fortunately after some profligate spending in my 20s.
I also think of it as living a well balanced middle class 1950s lifestyle
That’s an interesting way of looking at it. Very true! It’s how my grandparents continue to live. I’m amazed by how long they keep things working and how little they spend.
The problem with “acting rich” is that it’s just acting. If you really want to act rich buy some striped pants and a top hat at Goodwill, then play dress-up like the Monopoly guy on Halloween. But if you don’t man up to the fact that your resources do not rise to the standard of living you desire, then you’ll lack the will to make changes to get more resources. Debt and acting rich are lies we tell ourselves, then tell the Joneses next door. Living on less than you make, significantly less, over the long haul is the sufficient cause of wealth. Acting poor is also just acting, but at least it pays YOU interest, not some banker.
very well said
Great article Jeremy. I really enjoy your blog.
We spend exactly the same amount per year as we did fresh out of college (adjusted for inflation). Our lifestyle now is infinitely better because back in the day, 50% of what we brought home was spent on debt. Although this is due to some bad decisions early on, 17 years of spending patterns give me great comfort in our early retirement spending plan (21 months to go!). Besides some specific large purchases (cough, cough, Sailboat) that I have accounted for, I just don’t see my spending increasing significantly.
Our savings rate is now about 75% and my income is higher than I thought it would ever be. I would be lying if I said “a couple more years ” doesn’t cross my brain frequently, but since I am 44, those thoughts are counter balanced with the fear and regret that would come from waiting too long. Nothing in life is guaranteed, including tomorrow.
I still dig how you’re making it happen with a little one in tow now. Nice work, Jeremy! True to your point – save now and appreciate the important things that don’t require lavish spending (friends, family, point-driven travel) and you’ll get to your goals without feeling like you’ve “sacrificed” anything.
The FI journey is a frame of mind. If you believe, you will achieve. We are late the the FI party and are focused and determined to make it happen in about 7 years. We will still early retire but just not crazy early. The FI community has really been a kick in the pants to get focused. Thank you for all you provide!
Another thing I would add to this is that, assuming you’re starting with a good income, reducing your spending doesn’t have to be a major sacrifice. Many people spend frivolously on expensive houses/cars/travel/clothing/eating out, and being more mindful of spending habits can result in a lot of savings without a lot of sacrifice. And sometimes people are happier with spending less, because they are more creative with their activities, and they focus their lives around the things that really make them happy. The key is overcoming the mindset that spending more money is the path to happiness.
Spending less on food of greater nutritional value has health benefits beyond the wealth benefits.
I grew up poor, so I know what it’s like to have no option but to live in poverty.
What I like about frugality and wise investment is that we can choose to live like we’re poor for a certain period of time and relax a little once we start accumulating more wealth. I want to have the option of living like I’m poor knowing that hubby and I have a financially secure future.
P.S. I listened to your interview on Fire Drill podcast the other day and loved it! You’re so articulate!
Also referred to as ‘Living Well Below One’s Means’.
Awsome post as always! So I’m really realy cose (I think)…My plans are to live in an area for a few months and then move on. Just getting down to the nitty gritty of things. Curious how people are minimizing housing expenses? Airbnb, VBRO? I don’t need a lot of space,as long as I’m in a safe area, 500 square feet will do. I hike alot so a RV really isn’t really an option since some of the roads to the trails can be filled with bad potholes. Or maybe it is…Opinions?
Thanks from a left brained overthinking gen xer
The head scratching thing about the argument of living like you’re poor is that you’re not!!! You are able to save so much if you aim for 50% or higher. Your net worth chart will prove that by ‘living like you are poor’ you actually become rich!!
That is definitely a way to get rich. I think most people take exception around the level of income required to save 50% comfortably. Is it $10k, $50k, $100k, more…? Lots of opinions on that one.
Most of the time, I spent money on the necessities only. I don’t have a big list of Wants fortunately. I’m content with my simple life, and try not to compare with others. Am I living poor? Some people might think so. But the key is, it doesn’t matter what others think about me. I just don’t care. I only care about what I think, and what matters to me. I’m very healthy, have a descent place to live, have a car I can go anywhere I want to. I’m retired, happy, and can spend the time anyway I like to. Poor? No, I’m not.
I totally agree. It is a strange and prevalent attitude and I think it is entirely faulty. Our goal is to save up all this money so we can buy back the most expensive yet valuable thing – our time and freedom. The idea of that does not make me feel poor, quite the opposite!
Yep. Teacher, married to a teacher, two kids…5 and 2. We spend about 40k/year and save about 70k. I think it’s good to mentally envision the college days…we lived on SOOO little each year, but were so happy. 40k can buy the four of us a kings ransom compared to those years:)
Nice
I just want to see if you’ll be willing to do that in a long strong bear market…Nobody wants to be poor forever but there is no need to blow your expenses just to show off your things to people you don’t like!
Not sure I follow, but stick around long enough and I’m sure we’ll all experience a nice bear market together. See here for my thoughts on what we would do.
Insurance – like deep out of the money puts?
Mostly short term cost reduction via spending time in lower cost of living countries.
Through my wife I have residency rights in the Philippines. She said ‘I’ve been spoilt, I’d not like to go back to having to be concerned about security again.’ The cost is not greatly different for a similar standard of living. I could achieve similar cost of living savings for similarly reduced standard of living by moving within Australia.
The idea that lower cost means reduced standard of living or worse safety doesn’t match my experience.
We live in a very low crime area part of the world. The ratio of cost of living to income is lower than much of the world. In retirement, our costs are low so we save ~80% of income. Spending more would likely decrease our quality of life even while increasing our supposed ‘standard of living’ – we are already ‘quality optimised’. Should we be forced to reduce our cost of living, my wife agrees that the same reduced quality of life would cost about the same, perhaps more, in the Philippines as in Australia.
Makes sense, thanks.
The irony of this mindset is that no one in the United States needs to live like they are poor if they have a middle-class job and above. This concocted feeling occurs because of misplaced values. How can you appreciate everything when you do not have enough time to enjoy every new purchase daily. Instead, spend your money on impactful things and be meaningful with the remainder of your expenses. If you do this, saving becomes natural and not a burden.
For example, I am not someone who values their vehicle; instead, I appreciate exploring new and exciting foods. As a result, I drive an economy car that I bought used and has minimal maintenance. With the money I save by not having a vehicle payment and low-cost insurance, I enjoy eating out with my spouse and investing the rest.