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Comment by speedplane | Hacker News Reader

Real economic freedom varies by the area you live in, but if you live in major metro areas, where you want to take advantage of all the cultural and entertainment offerings they have and also raise children, real economic freedom starts kicking in at around $700,000/year +/- $200k.

To make that much without a job, you need roughly $10M in the bank (yielding ~7% growth). That's a lot. A $500k/yr job w/o taxes or spending anything would take 20 years. The only way to get there is to have family money or hit the startup lotto (or actual lotto).

These articles are not about true economic freedom at 40, they're about limiting your consumption and being happy about it.

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Where in the world do you need $700k/y to live relatively freely?... I can't fathom what kind of life you are aspiring to.

Here's a breakdown:

- After taxes that $700k turns into $450k.

- NYC 3br apartment in a good neighborhood costs ~$3M, which roughly translates into $200k/yr

- If you have 3 kids, childcare and/or private school costs $30-50k/kid, say $120k/yr, this will be much higher when they go to college

- Good healthcare for a family of 5 (you're not working, so you need to buy it), costs roughly $40k/yr

- Basic living expenses of food, clothing, utilities, is another $40k.

That leaves about $50k leftover that you can use for vacations, further savings, luxury items, etc. At this rate, you're living very well with a very nice life, but definitely not a like a king.

You forgot the butler and the nannies!

I think you're just trolling, but let's assume you really believe NYC is a representative choice for a "major metro area" and not simply one of the most expensive cities in the world to live in.

> After taxes that $700k turns into $450k.

You're talking about capital income - taxation varies around the world.

> NYC 3br apartment in a good neighborhood costs ~$3M, which roughly translates into $200k/yr

If you have $10m in the bank, buy the apartment and these $200k/yr will be 0 (just maintenance/running costs) and cost you $210k of your capital income, but pre-tax. You just won $65k/year plus the yearly increase in the apartment's value.

> Basic living expenses of food, clothing, utilities, is another $40k.

You can't be serious. This is far from "basic".

Why do you assume the poster was trolling?

Yes, taxation varies, but if are resident in NY, you pay taxes on worldwide income, so that's not off the mark.

As for buying the apartment: The poster assumes 7% yield on the savings; can the apartment give the same yield? It's not obviously better to purchase it (though the tax shield might make it so).

$40k is maybe more than basic, but it's not exactly luxurious for 5. Deduct a phone and computer, and you're left with less than $500 per person per month for food and clothes - that doesn't buy you LV and Hermes.

> Why do you assume the poster was trolling?

Because NYC isn't exactly the typical "major metro area".

> As for buying the apartment: The poster assumes 7% yield on the savings; can the apartment give the same yield?

That wasn't the point - they claimed it's $3m or $200k/year (which is approx. 7% yield). By buying it, you don't have to pay $200k/year and lower your pre-tax capital income by that much (7% of the $3m capital income lost), which is much less than $200k.

Okay. Where else is a major metro? London. Paris. Hong Kong. Singapore. Tokyo. Chicago. Los Angeles. And maybe, maybe San Francisco or Boston.

If a metro area don’t have a couple major orchestras, operas, a few major sports teams, and a world class hospital, it’s hard to take “major” seriously.

Vancouver, Moscow, Berlin, Madrid, Rome, Melbourne, Sydney, Amsterdam... $700k/year for a comfortable retirement with kids is just so far out of touch anywhere else than SF, NYC, maybe London. How can someting like 95%+ of the population who make less even cope? (Manhattan median household income is ~$85k).

>> Okay. Where else is a major metro? London. Paris. Hong Kong. Singapore. Tokyo. Chicago. Los Angeles.

> Vancouver, Moscow, Berlin, Madrid, Rome, Melbourne, Sydney, Amsterdam

These are all great cities, but once you start arguing about amenities of specific cities, you're already making value judgments about what you would consider a good life. Further, while these cities are significantly less expensive, they are just 30% or 50% less expensive, not multiple order of magnitude.

My point was to show the absurdity of the underlying article's premise: that temporarily forgoing fancy coffees, monthly luxurious dinners, and other personal indulgences can lead to long term riches. It's a fantasy. Attaining either wealth requires much more than that, or changing your definition of wealth.

> My point was to show the absurdity of the underlying article's premise: that temporarily forgoing fancy coffees, monthly luxurious dinners, and other personal indulgences can lead to long term riches.

That's not the premise of the article, you've just weaseled this into the topic. First "economic freedom", now wealth and riches. The premise of the FI movement and the subject of the article is retiring comfortably at 40 without a luxurious lifestyle. No NYC penthouse, no jet-setting. Of course you will always find an even more expensive place and lifestyle for anything someone proposes, but that's just moving the goal post and missing the point of the article and movement.

> How can someting like 95%+ of the population who make less even cope?

For starters, most don't aim to retire at 40 in "economic freedom".

> As for buying the apartment: The poster assumes 7% yield on the savings; can the apartment give the same yield? It's not obviously better to purchase it (though the tax shield might make it so).

You misunderstood me, I said you would buy the $3M apartment, but I did not say you would buy it all 100% in cash. On the contrary, the standard approach is to put 20% down (~$600k) and pay the rest off with a 30 year mortgage at ~4% interest. The interest alone comes to ~$100k/yr and with principal and building common charges, the cost can easily near $200k.

Your yield calculations fail to appreciate the leverage that exists in real-estate. Even in NYC, with a fast-growing real-estate market, market value rarely grows beyond 3%/year. So purchasing an apartment in 100% cash is almost certainly worse than renting and investing. However, few people buy in all cash (except for Russian oligarchs, and they have other issues). Most put down 20% and take loans on the rest. If you put down 20% on the apartment, pay 4% interest on the loan, and the apartment's value grows 3%/year, you net 11% increase on your initial down payment investment, making it attractive when compared to renting/investing.

Or just rent the apartment for < $8k/mo ($96k/yr). (And that’s for a new luxury building in a top neighborhood. Make a couple compromises and you can fairly easily bring that down to $6k.)

Yeah, living on an income of less than $500k (which is what the vast majority of people - including families - do, even in NYC) requires making a compromise here or there and not having the absolute best of absolutely everything. Shocker.

Not quite. For one thing, that +/- 200k matters a lot. Start out making $100k out of college. Get a 10% raise per year. Save half of everything you make over that initial $100k—like pretending you only got a 5% raise. You’ll be able to retire with $10M in the bank in your early 50s. At 40, you’ll have a couple million in the bank, kids in school, and be able to take modest family vacations without worrying about it. You can absorb health problems, needs for therapy of various sorts—give your kids a great launch.

The trick is finding ways to keep that compensation number moving up 10%/year. The first decade is easy. The second... can be done. Past that, I dunno.

> Start out making $100k out of college. Get a 10% raise per year. Save half of everything you make over that initial $100k—like pretending you only got a 5% raise.

Do the math, it doesn't work. Starting with $100k at 20, with 5% raises every year gets you to $430k/yr at 50. You're still nowhere near $10M.

Get a 10% raise. At 50 you’re at $1.7M/yr. You save 0.8M that year, spend 900k—including paying off your kids’ education. Assuming 5% returns, your savings tick over to $11118263.51.

But you’re right that it’s not pretending you only got 5% raises.

A 10% raise per year over 3 decades means 17x your original salary, earning you $1.7m annually by 50. Probably not something you can reliably plan for. That's why it's important to keep consumption in check.

I'd say you can have substantial freedom (not luxury) with less.

But 7% yield is a bit optimistic, because you pay tax on nominal growth. Say, if you achieve 8% nominal growth, have a 37.5% tax rate, you're left with 5%. Now deduct 2% inflation, and you can only take out 3% per year.

Thus, your $10m only give you $300k a year (after tax, real), which is enough for 5, I'd say (maybe not in NY, but in many other nice places). However, that assumes 8% nominal return, which is not something I'd bet my retirement on, given current elevated asset values.

This 7% being thrown around is not a real return. Adjusted for inflation you’d be lucky to get 4%, assuming you are not collecting when the market is tanking.

Yes. My claim is that the situation is exacerbated by the fact that you pay taxes on the nominal return; in other words, you need to "pay" inflation out of after-tax return. Thus, your real after-tax return is minuscule; and you should, in my view, calculate only with 2% or max 3% sustainable withdrawal rate to be prudent.

I don’t think FIRE is for families of 5 living in one of the most expensive places.

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