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Comment by typicalrunt | Hacker News Reader

Over time, this $20,000 stream accumulates and compounds at 5% after inflation, and raises their combined net worth by an additional $1.329 million over the next 30 years.

It wasn't mentioned, but I guess the money is being reinvested in equities. 5% is a stretch goal seeing as the savings rate in the US is around 1% (or less). Inflation there is running at about 2-3%. I see no talk of capital gains taxes or broker fees in there, so I'm a bit skeptical when people throw around instant, magical compounding calculations that net a million dollars.

Oh, it's 5% after inflation which means the money is compounding at approx. 8% or so. That's a very lofty goal!

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I think that the lesson is -- if you can get your expenses down to $20,000 (which is really hard), you have a chance. In real life, you'll have to make up the difference somehow

1. Work a little 2. Get expenses even lower 3. Find ways to get the 8% return you need (rental property?)

Even the site's writer admits in comments that he's not there. My biggest gripe is healthcare -- in the US, you need to factor in health insurance costs.

I spent 2 years driving from Alaska to Argentina, having the time of my life, and only spent $27k for EVERYTHING. (K13.5/yr) [1]

I think living on less than $20k is easy.

[1] http://theroadchoseme.com/the-price-of-adventure

So how do you pay for medical bills when you or a spouse gets cancer and needs chemotherapy, or even something as basic as a root canal causing horrendous pain? Will all that fit in a 27k budget?

It's a good point.

My countr(ies) of permanent residence have health care for all.

Also, checkout what happened when I took a foreigner into the ER in a Third World country (Ecuador) [1]

When I made the journey, I got a bunch of immunizations (free in Canada) and the doctor had lived and worked in Central and South America for many years. His advice was not to bother with Travel Insurance, because outside America, it would be cheaper to just pay for whatever I needed than pay the premiums, then deductibles, the deal with the hassle. Health-care is only unimaginably expensive in America. In other countries it's priced reasonably and I'm certain something like a root canal or even a broken bone would not have made a significant impact to my budget.

[1]http://theroadchoseme.com/heath-care-in-a-third-world-countr...

How did people do it before allopathic medicine? The old "original" way was a lot better.

With a spouse and two kids in tow?

No spouse or kids for me.

These guys [1] Are making the same journey right now through every country in central and south America with 2 adults and 5 kids !

You can do it, if you want.

[1]http://www.discovershareinspire.com/

5% after inflation is a rule of thumb he has for a long term investment portfolio. He talks about it more here: http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-s... . I'm not sure what the US saving rate has to do with anything.

I should have explained myself better. I'm assuming he's in the US. The savings rate comes into play when you consider that it is determined by looking at the prime lending rate between banks, which is currently at or near 0% in the US.0

But it's all about risk. If you want 0 risk to your principal, you are going to get 0% interest rate. If you put your money in the bank where it is (hopefully) FDIC insured, you get a bit of risk but not a lot, so you get a bit of interest. Since risk and reward (your interest) are correlated, the higher your return (8% compounded before inflation) the higher risk bracket you are in.

If US interest rates go up, the bank savings rate will go up as well, making it easier to get to 8% annual compounding rate with little risk. That means any other type of investing (equities, etc) will become less risky at the 8% level (but not without some risk).

you can spend an infinite amount of time talking about investing, but yeah it's stocks, counting on diversity for risk management. And it's more about dividends than stock price http://www.mrmoneymustache.com/2012/01/02/guest-posting-the-... . The goal is to get a steady stream of cash now, not have assets that you plan on selling when you get to 70.

From the article:

- buying a conservative dividend-paying stock index fund – go to Vanguard.com and start an account to buy some units of the VFINX fund, or if you have a brokerage account you can buy SPY shares. - last resort: just putting the money into a cash account that pays the highest level of interest you can find – Vanguard’s Prime Money Market fund or ING Direct’s Orange Savings Account.

VFINX is a -0.76% for 5 years ING Orange is currently at 0.80%

How can you assume 5% after inflation? That is no different that assuming that home prices will go up by 2-3% a year. It sounds reasonable but there is no way of knowing exactly how that will play out.

Because historically, that's what you've been able to get. You can't look at a 5 year timeline (and, obviously, cherry-picking the 5 year time period where stocks dropped by half isn't exactly fair). You should be looking at a 30 or more year timeline.

Even on a 30 year timeline, you can find runs where the average return is less than 8% (just as you can find periods where the return is greater). That doesn't mean it's not a reasonable forecast of what you can expect.

"Historically" home prices went up in the US until 2006 for well over 30 years.

It is interesting that you bring up cherry picking because that is exactly how mutual fund companies work. They have a lot of funds, the funds that do well stay around and the funds that do not do well are canceled. This fund that I mentioned is only 8 years old. Knowing which mutual funds are going to produce over 30 years is like knowing what stocks are going to produce over 30 years. You can 'cherry pick' examples for 8% or -8%, but it is crazy to assume that the fund you pick is going to get 5% over inflation over 30 years.

...and home prices will continue to go up for another 30 years (and the 30 years after that). Of course there will be recessions (and likely even depressions) during those times. What's your point?

I think you're missing something here. Nobody is talking about picking actively managed mutual funds (which you're right, are a total gamble/ripoff). The Vanguard fund mentioned above is an index fund. It's not at all crazy to assume that by picking the world's biggest index fund, you are going to get 5% over inflation over 30 years.

There is a reasonable line of thinking that the Internet and modern computer modeling and retail investing have had the effect of pricing in the future growth in equities, and so traditional growth will not continue.

Huh?

Pricing in the future growth in equities =!= no more growth...

you could invest is in australia, where banks are giving 5-6% on regular savings accounts: http://www.savingsaccounts.com.au/

Good luck with that if you're American. Thanks to the new IRS regs, a lot of foreign banks won't do business with Americans.

http://www.accountingtoday.com/debits_credits/Taxpayers-Stra...

I don't think it's ever been feasible; most countries won't let you open a bank account unless you have an address in the country, unless you're in some kind of special situation, like a "high net-worth individual" interested in private banking services.

The big risk in any kind of investment like that is you can be burnt on small variations in the exchange rate.

Australian banks pay 5.5% PA. The exchange rate can vary 1-2% per day, and trying to predict long term trends is difficult at best.

(I'm Australian if it matters)

He's also taking out $20k per year, a whopping four percent. Standard in the financial planning industry is that long term retirees need to keep their annual draw down to about 2% to keep their portfolio steady or growing.

So 4% to spend, 5% in real growth, 2% inflation -- 11% nominal gains per year. That's achievable, but he's going to need to be a damn good investor.

Why would a retiree need to keep their portfolio growing?

Any discussion on early retirement is incomplete without a mention of John Greaney's safe withdrawal rate study: http://www.retireearlyhomepage.com/safesum.html I highly recommend his site.

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