Can You Build Your Retirement Portfolio Young, then Coast?

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Ganacel
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Can You Build Your Retirement Portfolio Young, then Coast?

Post by Ganacel »

Does anyone here have experience with saving and investing heavily while young to build up a retirement portfolio, and then just letting it appreciate on its own over time without contributing as much later on? So for example, how feasible would a plan like this be?

Work hard for ten years during one's 20s/30s. During this time, save $100,000/yr in a mix of tax-deferred + back door Roth + taxable accounts for a total of $1 million contributed. Then quit that job, maybe go back to school to do something else or take a lower-paying job (such as working part-time instead of full-time). Live on wages from lower paying job and do not touch the retirement accounts until retirement in one's 60s. During this time, continue to fund, say, the Roth IRA and possibly a 401k up to the matching limits, but no more taxable account contributions and obviously a much lower rate of savings than when working at the original job.

If this is a realistic thing to do, at what point can the person "afford" to quit the high-paying job? I picked the point when $1 million accumulated because it's a nice round number, though I understand the total number of years worked and money needed will depend on how much the person spends and saves per year, if they have a family, etc. But if you don't like my numbers, then pick some of your own that you think are more realistic.
The Wizard
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by The Wizard »

Not generally feasible to do, for a number of reasons, no.
Some young people DO earn large amounts in their younger years as performers or athletes, but that doesn't always work out for the long run either.

I suppose if you have a particular situation, it could be done, but I'd call it tapering back, not coasting. And I'd try still to contribute 10% of my reduced income to long-term investments...
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Ybsybs
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ybsybs »

Ganacel,

I resemble your example. I saved ~50% of my income, some years a bit more, and then changed careers. My new work might prove more profitable than my old work in a few years, but if not I've got enough set aside for retirement to live very well by my standards from 65 on. One of the benefits of a high savings rate is it results in becoming accustomed to an inexpensive lifestyle which leads to a lower total nest egg needed to get to financial independence.

The practical conflict I've found is that I have no desire to stop saving. I have more than I need, but I really am not interested in inflating my lifestyle to start using up the money even though that may mean being subject to estate taxes eventually. I'll continue to give at least 10% to charity each year, because it was never about just accumulating money for its own sake. And I should probably talk to a lawyer about estate planning eventually so I don't leave behind a mess in five decades or so.
whomever
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by whomever »

You can, and the results are pretty dramatic. Consider Bob who saves $3k per year from 25 to 45 and then stops saving, and Fred who saves only from 45 to 65:

Code: Select all

(assuming 4% ROR)

Age Bob   Bob      Fred  Fred
    Saves Balance  Saves Balance
25  3000     3120     0        0
26  3000     6365     0        0
27  3000     9739     0        0
...
41  3000    73936     0        0
42  3000    80014     0        0
43  3000    86334     0        0
44  3000    92908     0        0
45     0    96624  3000     3120
46     0   100489  3000     6365
47     0   104508  3000     9739
48     0   108689  3000    13249
...
65     0   211715  3000    99744
Both save the same amount, but the early saver ends up with twice as much. In practice, the ratio is likely to be even more dramatic; Bob can afford to be mostly equities for that early period, while Fred probably wants to be lowering risk as 65 approaches.

Of course, it's hard to do - when you're young your salary is frequently less, there are houses to buy and so on. But extending the starving student lifestyle for a while into your working life can payoff big. Also, if Bob and Fred both get riffed at age 55, Bob is a lot better placed than Fred.
Swampy
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Swampy »

Absolutely!


I did this from my 20's to early 40's AND with a lot less money invested than $100K/yr.

Barring any disasters, with intelligent diversification and asset allocation, you should easily reach that goal.

I did, even with a number of serious setbacks.
If I have seen further, it was by standing on the shoulders of giants.
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jh
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by jh »

.....
Last edited by jh on Wed Aug 21, 2019 1:55 pm, edited 2 times in total.
Retired in 2022 at the age of 46. Living off of dividends.
letsgobobby
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by letsgobobby »

We have been saving aggressively since age 29 when I graduated residency. Now age 40. By age 45 I expect to be able to coast/quit saving, but as others have said it won't be second nature so I will probably strike more of a middle ground and just order dessert more often.
Steve723
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Steve723 »

letsgobobby wrote:We have been saving aggressively since age 29 when I graduated residency. Now age 40. By age 45 I expect to be able to coast/quit saving, but as others have said it won't be second nature so I will probably strike more of a middle ground and just order dessert more often.
Yup, it's tough to break all those good habits!
Steve723
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Steve723 »

I'm 45 and in the position you wish to be some day. The problem - if you can call it that - is I'm not sure what I would do in terms of a scaled-back job. I don't really have a dream job, so lacking any other alternative, I hold onto my high-paying job. It's just something to think about as you advance in your career. Sometimes it's tough to find an alternative occupation that interests you, you are qualified to perform, and also minimizes stress.
jbourne99
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by jbourne99 »

If you save a lot early and have low enough expenses then this is possible. Plug your specifics into firecalc.com (it is quite configurable if you delve into the specifics) to get an idea of what is feasible for you.

I'd think the keys are avoiding lifestyle creep during your earning years and finding a meaningful way to spend your time during your non-working years.

Here is a firecalc example. I assume we have a 25 y/o with $1 who is saving $100k/year for 10 years followed by 60 years of retirement spending $45k/year. Investment is 100% stock with ER of 0.07%.

http://www.firecalc.com/index.php?wdamt ... rsion=3.0&
dognose
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by dognose »

It's great to save money. It's wonderful to be frugal. By all means, save as much as you can while young, because it will pay off exponentially when you're older. That said, don't become such a cheapskate that you forget to enjoy life. You're only young once, and an occasional splurge is well worth it.
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Ganacel
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ganacel »

Thanks to everyone for your feedback. I just brought this idea up to my parents, and while they were a little surprised, they were supportive too. (I think as long as they don't have to be financially supportive or bail me out of jail, they can't have too many objections!)
Steve723 wrote:I'm 45 and in the position you wish to be some day. The problem - if you can call it that - is I'm not sure what I would do in terms of a scaled-back job. I don't really have a dream job, so lacking any other alternative, I hold onto my high-paying job. It's just something to think about as you advance in your career. Sometimes it's tough to find an alternative occupation that interests you, you are qualified to perform, and also minimizes stress.
In my case, while I don't hate my job, I also don't love it, and I know I don't still want to be doing it when I'm 45. My problem isn't that I have no idea what to do; it's that I have too many things I want to do, and not enough life span to do them all. Right now the top contenders would be to either go to grad school or work abroad for a while, either of which would entail a major pay cut. But I'm thinking if I already have my retirement fully funded, then the pay cut won't really matter as long as it pays enough to support me and won't drain my retirement accounts.
Ybsybs wrote:The practical conflict I've found is that I have no desire to stop saving. I have more than I need, but I really am not interested in inflating my lifestyle to start using up the money even though that may mean being subject to estate taxes eventually.
letsgobobby wrote:We have been saving aggressively since age 29 when I graduated residency. Now age 40. By age 45 I expect to be able to coast/quit saving, but as others have said it won't be second nature so I will probably strike more of a middle ground and just order dessert more often.
Steve723 wrote:Yup, it's tough to break all those good habits!
A very good point, and something I hadn't really thought of. I guess another benefit of my "plan" is that not earning a lot of money later will necessarily force me to stop saving once I already have enough.
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englishgirl
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by englishgirl »

I am trying to do that. I have my second job up and running, but I'm just not earning enough from it to be able to quit the day job yet. But I'm down to 20 hours a week at the day job, so that's something. I've never maxed out my 401k, to be honest, but every time I run the numbers, if I let my 401k coast for 20-24 years or so, it should be enough. I saved at a fairly high rate from ages 25-40, and then at a lower rate from 40-45. It is not a slam dunk though, as it might be if I'd maxed it out every year, but hey ho. My plan is to continue to fund my IRA and HSA once I quit the day job, but not bother setting up a 401k as I don't expect I'll earn enough. *If* my business was ever doing well enough to need to open a 401k to throw some money in, hallelujah. That'll enable an earlier retirement. But if that doesn't happen, I think I'll be OK.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by mtnlover »

Did you ever hear the old saying "While we make plans, God laughs."? What could possibly go wrong? Illness, children, parental need, loss of job, economic meltdown, asteroid impact? Having said that, your plan is one many have tried, some successfully, some not. Hope you are one of the lucky ones. Each of us needs a purpose in life. When you achieve financial independence and leave the rat race, you will still need to fill time productively to live a satisfying life, IMHO. Plan accordingly and best wishes for success!
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by DVMResident »

We are front loading our saving/investments (saving mid-40%) and plan to ease up later. Not sure how it will work out, but you're not alone in this thought.
My wife will help break the habit: I'm a natural saver, while she is "live life to the fullest" type.
yukon50
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by yukon50 »

Can we throw out some examples?

How about age 40: If one has 460k at age 40 and gets a 4% real return for 20 years, that would turn into 1 mil by age 60.
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market timer
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by market timer »

That's the course I've taken. There are many advantages to this approach. Most important for me is the ability to spend time with family. The places in the US where a young person can earn enough to save $100K+/year are outrageously expensive, to the extent that many of your coworkers will have million dollar mortgages and therefore subject to the whims of their employer and the vicissitudes of the macroeconomy. You'll probably be expected to work 50+ hours per week and still get threatened with layoffs regularly. After a few years of corporate life, I realized I wanted no part in that. Instead, working hard and living frugally for 5-10 years allows you to relocate to a place where you can buy a house in cash and have a large nest egg left over. I worked five years in high cost of living metros, saved about $700K, and started my family in Bangkok, where the cost of living is affordable. I'm really enjoying having so much time to spend with my wife and son without the pressure of a job. If I do work again, it will likely be in some teaching role to make sure my son gets an excellent education at a subsidized cost.
mac808
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by mac808 »

I am doing this. I have been working like a dog for 8 years in a high stress but extremely well compensated field, and saving the majority of my after-tax income. I plan to work for another 4 or 5 years and then transition to something much less stressful. The little voice inside my head often wonders whether I've become addicted to the stress (and income, and success) and might not be able to walk away. Time will tell.
inbox788
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by inbox788 »

Most professional jobs require a decade to get established, the first half in education/training and the next half gaining experience. Often you're into the 30's or later when the salaries peak/plateau.

Many professional athletes can! Unfortunately, there are too many stories of the opportunity squandered.

Not many other jobs are highly paid in younger years to achieve this goal.

Physically demanding jobs favor the young. Miners, oil drilling and rigs, working abroad/dangerous areas, mercenaries/military contractors, commercial fishing, etc. Where you can start young, little or fast training, work lots of hours, little opportunity to spend so you save lots.

Some jobs still give you a pension after as few as 20 years, like police and fire, so you could retire before 45 if you kept costs low.
http://www.nytimes.com/2011/12/14/nyreg ... .html?_r=0
http://earlyretirementextreme.com/how-i ... -year.html
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AlohaJoe
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by AlohaJoe »

It isn't quite as easy you make it out. There aren't many jobs where you save $100,000 a year in your 20s. If it were that easy, lots of people would be doing it. I mean, that's what? $100,000 for savings, maybe $50,000 or $60,000 for living expenses (since you're probably in a high cost of living area) and then throw on taxes. You're looking at needing to earn $200,000 a year in your 20s.

But overall, the idea is sound (if not easy) as others have pointed out.

The things that work against it tend to be

- It is easy to imagine bad outcomes and convince yourself you need another year or two of savings first. "What if I get a divorce and lose half my money?" "What if I need to pay $200,000 for surgery?" "What if the cost of living goes up really fast over the next 50 years?"

- After a few decades of living below your means it is usually quite hard to ratchet up the spending.

- Not everyone has another job that is equally appealing, so they stick with what they know.
TFinator
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by TFinator »

This is the idea that has been swishing around in my head as well. I currently save around 40% of my take-home @ 26 years old. This is very, very far from $100k/year.
I'll feel it out as I go along, but the little dream in my head is getting to $600k or so, then figuring out a way to make $40-50k/year at only 25 hours a week or so. I am in sales and I don't see this being altogether too difficult.
I would hope I could work a bit less, let the DW(to be) follow her marine science passion and work while I can take care of kids, do some work on the side.
Obviously much reevaluation is going to happen throughout many steps of the process - but I hope we can both get there :sharebeer
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AngryBadger
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by AngryBadger »

It's realistic if you're savings rate is high. Check out http://www.mrmoneymustache.com/2013/02/ ... blog-post/. The previously mentioned early retirement extreme is also worth looking at but is much less accessible. I know you're not talking about retiring exactly but the calculations are similar.
Gropes & Ray
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Gropes & Ray »

I have a modified version of this plan. I am currently saving 20% of my income, but I expect that to decrease in the future. If I have kids and my expenses increase, or if I switch jobs and take a lower salary (which I may have to do in order to preserve my sanity), then I'll be glad I really socked away a good amount before I hit 30.
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Watty
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Watty »

Ganacel wrote:Work hard for ten years during one's 20s/30s. During this time, save $100,000/yr in a mix of tax-deferred + back door Roth + taxable accounts for a total of $1 million contributed. Then quit that job, maybe go back to school to do something else or take a lower-paying job (such as working part-time instead of full-time). Live on wages from lower paying job and do not touch the retirement accounts until retirement in one's 60s
If you are in some sort of high tech or creative career where you can earn that sort of money then saving like crazy at first is a very good idea. The problem is that in some fields there is a large attrition rate where many people that were highly desirable in their 20's are well past their prime, or burnt out, by the time they are 40.

If you do get to the point where you are going to downshift when you are in your 30's, then you might be better for to work a few more years then be able to completely retire.

Most jobs have crunch times that require extra effort but I would caution you that if when you say "Work hard" when you are younger you mean that you are working very long hours for years on end with little social life that is likely a poor tradeoff. It will take a physical toll on your body and you may have missed a lot of possible family time with a spouse and possibly kids and you will never get that opportunity back. Being a workaholic that suddenly retires is rough way to go.
yukon50
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by yukon50 »

Or front-loading maybe could allow you to retire at 60 rather than 62. That would be a nice benefit.

I love how the common wisdom is increase your % as you get older. It's so backwards.
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Ganacel
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ganacel »

AngryBadger wrote:It's realistic if you're savings rate is high. Check out http://www.mrmoneymustache.com/2013/02/ ... blog-post/. The previously mentioned early retirement extreme is also worth looking at but is much less accessible. I know you're not talking about retiring exactly but the calculations are similar.
Thanks for the link; I'd never read the money mustache blog before. That guy is a little nuts, and I'm saying that partly in admiration and partly in incredulessness. I'm not sure it's necessary to take things quite to the extreme he takes them, but like you said, he definitely proves it can be done.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by RobG »

You don't need $100,000/year unless you want to coast in a King Air. I wish I had a third of that available. When I got my first "real" job at 24 I decided I would save as much as I could until my contributions became about 1/2 of my expected annual returns. That took about 15 years, although you still have to work enough that you don't have to tap into your savings. I went to grad school at 38, then formed my own company which has sporadic work. When I have a good year I save money; when I have a bad year I ski hunt and fish a lot but I do it on a budget and have no expensive toys. Just don't invest it all during a bubble, have any disabling accidents or illnesses, and find the perfect spouse for life. It is easy :).
Stay thrifty my friends.
Paul78
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Paul78 »

I am doing a very scaled back version of this at the moment.

Working an off tour (10% pay increase), working weekends (10% pay increase), and working OT. This lets me say and extra 10-20k in taxable accounts a year. I figure by contributing an extra 50-100k before I turn 30 will go a long way.

Then I will scale back and just max out my roth ira and tsp accounts. Improving my lifestyle by moving to a mon-fri day shift job (cutting my salary to just 83% of what it is in my current case. I will get some raises, nothing extreme, so a more accurate number would be 90% of my current salary), cutting down/out on the OT, ect
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ybsybs »

RobG wrote:You don't need $100,000/year unless you want to coast in a King Air. I wish I had a third of that available. When I got my first "real" job at 24 I decided I would save as much as I could until my contributions became about 1/2 of my expected annual returns. That took about 15 years, although you still have to work enough that you don't have to tap into your savings. I went to grad school at 38, then formed my own company which has sporadic work. When I have a good year I save money; when I have a bad year I ski hunt and fish a lot but I do it on a budget and have no expensive toys. Just don't invest it all during a bubble, have any disabling accidents or illnesses, and find the perfect spouse for life. It is easy :).
If losing half the value would freak you out, make sure to put a good portion into bonds instead of all stock. And if you go all stock, remind yourself during the crashes to come that you have nerves of steel and that means you keep investing during the down markets.

If you have disabling accidents and illnesses, you are in much better shape for having saved with such dedication. Imagine if you'd just put aside 10%/yr expecting to be able to work for a full 35 year career. You did well for yourself by saving as much as you could as early as you could. (Unless you can somehow prove that not saving would have prevented the accident or illness?!?)

As for finding the perfect spouse... If you are living well below your means while dating, you are likely to be more attractive to similarly frugal-minded people. That doesn't mean you'll instantly find the right person for you, or even that you won't divorce. But living the high life and flashing a lot of cash may attract a certain kind of person that is, err, less conducive to your longterm good than you might wish for.
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Ganacel
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ganacel »

Ybsybs wrote:As for finding the perfect spouse... If you are living well below your means while dating, you are likely to be more attractive to similarly frugal-minded people. That doesn't mean you'll instantly find the right person for you, or even that you won't divorce. But living the high life and flashing a lot of cash may attract a certain kind of person that is, err, less conducive to your longterm good than you might wish for.
This topic no doubt deserves its own thread. But I'm ok with taking this thread on a bit of a tangent, because what you said made me remember something, and I'm curious what the rest of you (especially the older/wiser people) think about this.

I got set up and went on a date a while ago, and for some reason, the topic of prenup agreements came up. Maybe I'm just an incurable romantic, but I would not want to ask my future spouse to sign a prenup or be asked to sign one myself. Partly it's because I feel like if I didn't trust that person with my money, then why would I bother marrying them in the first place? And partly it's because I truly believe in the "for better or for worse, for rich or for poor" part of marriage vows. Plus, like Ybsybs said, I wouldn't want to marry someone who was a spendthrift anyway. To add insult to injury, my date earns far less money and has a considerably lower savings rate than I do. If one of us would need to be asking the other one to sign a prenup some day, it should be me! I found the whole conversation very offputting, and needless to say, there was no second date.

So my question is, how do those of you who accumulate money at a relatively young age while still single handle the issue if you have a lot more money than your future marriage partner does? Is it common to ask them to sign a prenup in these cases?
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grap0013
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by grap0013 »

I ran a spreadsheet on this topic a while ago. Once you get to 25% of final goal the difference in retirement age only moved by 3 years for me with a 50% savings rate vs a 0% savings rate. OP, if you really want to coast then get to 25%.
There are no guarantees, only probabilities.
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Ganacel
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ganacel »

grap0013 wrote:I ran a spreadsheet on this topic a while ago. Once you get to 25% of final goal the difference in retirement age only moved by 3 years for me with a 50% savings rate vs a 0% savings rate. OP, if you really want to coast then get to 25%.
25% of final goal at what age? I imagine it would make a big difference if you hit that mark at age 25 than at age 45.
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englishgirl
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by englishgirl »

Ganacel wrote:
Ybsybs wrote:As for finding the perfect spouse... If you are living well below your means while dating, you are likely to be more attractive to similarly frugal-minded people. That doesn't mean you'll instantly find the right person for you, or even that you won't divorce. But living the high life and flashing a lot of cash may attract a certain kind of person that is, err, less conducive to your longterm good than you might wish for.
This topic no doubt deserves its own thread. But I'm ok with taking this thread on a bit of a tangent, because what you said made me remember something, and I'm curious what the rest of you (especially the older/wiser people) think about this.

I got set up and went on a date a while ago, and for some reason, the topic of prenup agreements came up. Maybe I'm just an incurable romantic, but I would not want to ask my future spouse to sign a prenup or be asked to sign one myself. Partly it's because I feel like if I didn't trust that person with my money, then why would I bother marrying them in the first place? And partly it's because I truly believe in the "for better or for worse, for rich or for poor" part of marriage vows. Plus, like Ybsybs said, I wouldn't want to marry someone who was a spendthrift anyway. To add insult to injury, my date earns far less money and has a considerably lower savings rate than I do. If one of us would need to be asking the other one to sign a prenup some day, it should be me! I found the whole conversation very offputting, and needless to say, there was no second date.

So my question is, how do those of you who accumulate money at a relatively young age while still single handle the issue if you have a lot more money than your future marriage partner does? Is it common to ask them to sign a prenup in these cases?
I love a tangent. I'll kind of skate the prenup issue, although there was a time that I would have wanted one. It is a practical step, and you want a practical spouse, no? Now, I don't find I want one - maybe having become a bit of a Mr Money Mustache fan, and having lowered my expenses a lot, I find the thought of having less money to not be as daunting as it used to be. Maybe also because I know I won't be rushing into marriage, and assuming I marry my current guy, I know him so well now that I just don't worry about divorce as much. But anyway, the main point I wanted to make was that my guy has a much lower salary and lower savings rate than I do. But he's Mr. Frugal Extraordinaire, and has taught me such a lot on living with less. Yes, I have been a Boglehead for many years and thought I was frugal before but I was just playing at it. So, I think, finding a partner who has a lot less doesn't need to derail anything.

p.s. check out the "rule of 72" about doubling times. On rough historical stock market averages, you can hope for a doubling of your money in 10-12 years. So if you reach 25% of your final goal 24 years ahead of retirement age, you could expect to roughly kinda sorta get to the final goal with no further investments. Of course, yadda yadda, so many variables, and you better have adjusted your goal to account for inflation and all that. But I find it a useful ballpark.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by jimb_fromATL »

Ganacel wrote:Does anyone here have experience with saving and investing heavily while young to build up a retirement portfolio, and then just letting it appreciate on its own over time without contributing as much later on? So for example, how feasible would a plan like this be?
Hmmm. Interesting question. It's prompted me to finally get around to developing a few specialized vba spreadsheet functions to make it easier to incorporate inflation into the calculation for investments in just a few cells.

Here's are a couple of gee-whiz observations ... subject to a lot more work to make sure it's right:
  • If you invested 50% of your income earning an average APY of 8% for 4.1 years then coasted for 31 years, it would give you the same net result as investing 15% of your salary every month for the entire 35 years.

    With a 3% increase in your salary and your contributions to retirement every year it would give the same result as contributing 11.1% per month for the entire 35 years.

    --------
    If you invested 50% of your income earning an average APY of 8% for 5. years then coasted for 35 years, it would give you the same net result as investing 17.1% of your salary every month for the entire 40 years.

    With a 3% increase in your salary and contributions every year it would give the same result as contributing 12.8% per month for the entire 40 years.
    -------

This of course would depend on being able to afford to invest 50% of your salary. And I'll bet it would be a wild ride with some sleepless nights during crashes of the market like 2001/2 and 2008.

If I had known a lot more about how compound interest works 30 to 40 years ago, I bet we could have a lot more things in retirement now ... like those groceries and heat that I've heard so many good things about. :wink:

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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by grap0013 »

Ganacel wrote:
grap0013 wrote:I ran a spreadsheet on this topic a while ago. Once you get to 25% of final goal the difference in retirement age only moved by 3 years for me with a 50% savings rate vs a 0% savings rate. OP, if you really want to coast then get to 25%.
25% of final goal at what age? I imagine it would make a big difference if you hit that mark at age 25 than at age 45.
Shooting for 40-45. I like this calculator: http://www.mycalculators.com/ca/401kcalcm.html

Plug and chug and you shall see.
There are no guarantees, only probabilities.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by leonard »

dognose wrote:It's great to save money. It's wonderful to be frugal. By all means, save as much as you can while young, because it will pay off exponentially when you're older. That said, don't become such a cheapskate that you forget to enjoy life. You're only young once, and an occasional splurge is well worth it.
Why the assumption that:

spending money = enjoying life
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by letsgobobby »

You have to save a lot, very early, and also get lucky with nice returns. If you save a lot early then lose half of it over the next five years, you probably can't coast. But you're better off than you would have been if you hadn't saved.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Ganacel »

leonard wrote:Why the assumption that:

spending money = enjoying life
It's the American way. It's like when my mom told me I'd regret it my whole life if I didn't go to my senior prom. Besides the prom being totally not fun (my date and I ditched it early and went to the movies in our prom clothes), I especially regret wasting so much money on all the accoutrements "necessary" to go to the prom. Mom got a lot of other stuff right, but two thumbs down on that particular advice.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Leeraar »

I am convinced this can work. In fact, we are trying to execute it for my son.

He decided not to go to college, but found a decent job at a company that has a 401k. He is contributing 80% of his salary to the 401k while he lives off his college fund. He also maxes out the Roth IRA. By the time he is 30 he will be well into six figures, yielding close to what allowed tax-advantaged contributions are. Essentially, he will be done.

I don't think he should / will stop saving, but it will be much less of an issue than for someone starting later.

And, by the way, a part of his college fund enabled him to pay cash for a house, so that future mortgage drain is not an issue either.

It's actually a very sobering calculation. Start with 18-year old twins and $160,000 each, the cost of a 4-year degree at a decent (or even not so decent) school.

Twin 1 goes to college, graduates at age 23 with no savings and the $160,000 spent.

Twin 2 gets a job, maxes out a Roth IRA for those four years and, over time, manages to squirrel the $160,000 away in a 401k. By the time his twin graduates, he probably has $200,000 saved.

Twin 2 will probably always earn a lower salary, thus lowering his expectations. In my estimation, it is not clear that twin 1 will ever catch up.

Another issue is that I read the other day that fully 25% of college graduates earn no more than if they had never gone to college. That's a scary thing, all these kids graduating with college loan debt but no better prospects.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by Pizzasteve510 »

Removing personal info...thanks for being a fine community.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by grayfox »

Ganacel wrote:Does anyone here have experience with saving and investing heavily while young to build up a retirement portfolio, and then just letting it appreciate on its own over time without contributing as much later on? So for example, how feasible would a plan like this be?

Work hard for ten years during one's 20s/30s. During this time, save $100,000/yr in a mix of tax-deferred + back door Roth + taxable accounts for a total of $1 million contributed. Then quit that job, maybe go back to school to do something else or take a lower-paying job (such as working part-time instead of full-time). Live on wages from lower paying job and do not touch the retirement accounts until retirement in one's 60s. During this time, continue to fund, say, the Roth IRA and possibly a 401k up to the matching limits, but no more taxable account contributions and obviously a much lower rate of savings than when working at the original job.

If this is a realistic thing to do, at what point can the person "afford" to quit the high-paying job? I picked the point when $1 million accumulated because it's a nice round number, though I understand the total number of years worked and money needed will depend on how much the person spends and saves per year, if they have a family, etc. But if you don't like my numbers, then pick some of your own that you think are more realistic.
Consider default-free bonds as the risk-free baseline scenario.

Baseline Scenario
Suppose, starting at age 27, you save $100K per year for 10 years.
For each of 10 year, you invest in a Treasury bond that matures when you turn age 60.
After that, no more savings or investing.
That is 10 separate investments of $100K, each of which grows to some amount depending on the rate and number of years.
At age 60, you purchase an immediate life annuity.

How much will you end up with and how much annuity income can you get?

This is pretty easy to calculate, if you make a couple of assumptions about interest rates.

1. Assume that the current Treasury yield curve doesn't change and the rate for greater than 30 years is 30 year rate.
2. Assume immediate life annuity for a single male age 60 has payout rate of 6.024%. Not inflation-indexed.


Code: Select all

   Year Age Term Inv.Rate Investment End.Bal Payout.Rate Annuity.Income
1  2014  27   34     3.35          0       0       6.024           0.00
2  2015  28   33     3.35        100     297       6.024          17.89
3  2016  29   32     3.35        100     287       6.024          17.29
4  2017  30   31     3.35        100     278       6.024          16.75
5  2018  31   30     3.35        100     269       6.024          16.20
6  2019  32   29     3.32        100     258       6.024          15.54
7  2020  33   28     3.29        100     248       6.024          14.94
8  2021  34   27     3.27        100     238       6.024          14.34
9  2022  35   26     3.24        100     229       6.024          13.79
10 2023  36   25     3.21        100     220       6.024          13.25
11 2024  37   24     3.18        100     212       6.024          12.77
12 2025  38   23     3.16          0       0       6.024              0
13 2026  39   22     3.13          0       0       6.024              0
14 2027  40   21     3.10          0       0       6.024              0
15 2028  41   20     3.10          0       0       6.024              0
16 2029  42   19     3.05          0       0       6.024              0
17 2030  43   18     2.99          0       0       6.024              0
18 2031  44   17     2.94          0       0       6.024              0
19 2032  45   16     2.89          0       0       6.024              0
20 2033  46   15     2.83          0       0       6.024              0
21 2034  47   14     2.78          0       0       6.024              0
22 2035  48   13     2.73          0       0       6.024              0
23 2036  49   12     2.67          0       0       6.024              0
24 2037  50   11     2.62          0       0       6.024              0
25 2038  51   10     2.62          0       0       6.024              0
26 2039  52    9     2.46          0       0       6.024              0
27 2040  53    8     2.29          0       0       6.024              0
28 2041  54    7     2.29          0       0       6.024              0
29 2042  55    6     1.83          0       0       6.024              0
30 2043  56    5     1.83          0       0       6.024              0
31 2044  57    4     1.45          0       0       6.024              0
32 2045  58    3     1.07          0       0       6.024              0
33 2046  59    2     0.58          0       0       6.024              0
34 2047  60    1     0.11          0       0       6.024              0
You can see that the first $100K investment, made at the beginning of 2015, after 34 years at 3.35% grew to $297K and bought $18K of income.

Code: Select all

          age.end  total.investment total.end.balance      total.return       payout.rate    annuity.income 
            60.00           1000.00           2536.00              2.54              6.02            152.77 
You made ten $100K investments, so the total amount you invested was 1 million dollars.
You end up with 2.536 million dollars at age 60. That is a total gain of 2.54x

For a single male age 60, 2.536 million will buy $152,770 annual annuity income for life, not inflation indexed.

Inflation
For inflation indexed annuity, the payout rate would probably be 2-3% lower.
If the payout ratio for an i.a. annuity was 3.5%, the inflation-adjusted income would be about $88K.

Also, what will be the purchasing power of $152,770 in 2047 ?
2.5% inflation for 34 years would erode $1 down to $0.42.
So $152,770 would be like $64,594 today.
$88K would be like $37K today

By my estimate, if you used the lowest-risk approach, you could have somewhere around $37K inflation-adjusted income at age 60, in 2014 dollars.

What about stocks?
The terms of the investments are from 24 to 34 years, so you would probably do better with stocks, but no guarantees. That's why I would always look at the risk-free approach as the baseline scenario. If the risk-free solution solves the problem, then no need for taking risk.

But if I had to guess, I would say better than 95% chance that having any amount of stocks would do better than the risk-free approach. How much better? Who knows? Instead of growing by 2.5x, stocks might grow by 4x or more. It's a calculated risk I would consider.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by ks289 »

I think this is feasible and admirable to pursue a 2nd career more focused on quality of life and satisfaction.

Here are reasons it could conceivably be difficult or at least risky.
-higher than expected expenses (lifestyle creep, kids/education, medical expenses/health problems, etc)
-lower than expected investment returns
-no appealing 2nd career at that stage in your life
-desire to just keep your job, save a lot for a little longer, and then just RETIRE EARLY rather than working into your 60's
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by linenfort »

leonard wrote:
dognose wrote:It's great to save money. It's wonderful to be frugal. By all means, save as much as you can while young, because it will pay off exponentially when you're older. That said, don't become such a cheapskate that you forget to enjoy life. You're only young once, and an occasional splurge is well worth it.
Why the assumption that:

spending money = enjoying life
I didn't read that into dognose's comment, only the idea that being frugal to an extreme (miserly) can impede the enjoyment of life.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by HomerJ »

Over 15 years from age 28-43 (I'm 45 now), my wife and I went from 200k net worth to $1.5 million net worth...

At the point, we determined we could "coast" to retirement, and my wife retired (she hated her job the last couple of years).

We're now living off my salary alone, and saving a LOT less... but we should be fine.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by HomerJ »

AlohaJoe wrote:After a few decades of living below your means it is usually quite hard to ratchet up the spending.
I do not think that is usually the goal... Usually the goal is the financial freedom to get a lower-paying job (or no job!)
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by letsgobobby »

HomerJ wrote:Over 15 years from age 28-43 (I'm 45 now), my wife and I went from 200k net worth to $1.5 million net worth...

At the point, we determined we could "coast" to retirement, and my wife retired (she hated her job the last couple of years).

We're now living off my salary alone, and saving a LOT less... but we should be fine.
So she got to quit. What did you get to do?
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by HomerJ »

letsgobobby wrote:
HomerJ wrote:Over 15 years from age 28-43 (I'm 45 now), my wife and I went from 200k net worth to $1.5 million net worth...

At the point, we determined we could "coast" to retirement, and my wife retired (she hated her job the last couple of years).

We're now living off my salary alone, and saving a LOT less... but we should be fine.
So she got to quit. What did you get to do?
Heh, she's 8 years older than me, so she's already worked (and saved) 8 years longer than I have...

Hopefully I'll retire in 10 years, so it works out pretty fair... :) I'll only work a few years longer that she did

Besides I like my job... And it's been good for our middle-school kid to have her around (and good for me, since I no longer have to do any chores on the weekend, since she gets them done during the week)
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by RadAudit »

Leeraar wrote:Start with 18-year old twins and $160,000 each, the cost of a 4-year degree at a decent (or even not so decent) school.

Twin 1 goes to college, graduates at age 23 with no savings and the $160,000 spent.

Twin 2 gets a job, maxes out a Roth IRA for those four years and, over time, manages to squirrel the $160,000 away in a 401k. By the time his twin graduates, he probably has $200,000 saved.

Twin 2 will probably always earn a lower salary, thus lowering his expectations. In my estimation, it is not clear that twin 1 will ever catch up.
Twin 1 can catch Twin 2 - if he saves $14,867 / yr more than Twin 2 for the 42 years between 23 and 65, and gets 7%/ yr on the investment. + or -. Yeah, I not convinced Twin 1 can do it either.

However, and I'm sure your child will be the exception to the rule, I'm not but so sure I'd trust the the average 18 year old with $160,000. That said, there are some apprentice programs that may come close to providing a way to duplicate this type of scenario. But, it's a rough road to put in an eight hour shift and do the academics after work. It may be lower risk than betting on Twin 1 graduating from college and getting a good job with a four year degree; but, I think Twin 1 would have the easier path - all things considered.
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by goaties »

delete
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Re: Can You Build Your Retirement Portfolio Young, then Coas

Post by RobG »

RadAudit wrote:
Leeraar wrote:Start with 18-year old twins and $160,000 each, the cost of a 4-year degree at a decent (or even not so decent) school.

Twin 1 goes to college, graduates at age 23 with no savings and the $160,000 spent.

Twin 2 gets a job, maxes out a Roth IRA for those four years and, over time, manages to squirrel the $160,000 away in a 401k. By the time his twin graduates, he probably has $200,000 saved.

Twin 2 will probably always earn a lower salary, thus lowering his expectations. In my estimation, it is not clear that twin 1 will ever catch up.
Twin 1 can catch Twin 2 - if he saves $14,867 / yr more than Twin 2 for the 42 years between 23 and 65, and gets 7%/ yr on the investment. + or -. Yeah, I not convinced Twin 1 can do it either.

However, and I'm sure your child will be the exception to the rule, I'm not but so sure I'd trust the the average 18 year old with $160,000. That said, there are some apprentice programs that may come close to providing a way to duplicate this type of scenario. But, it's a rough road to put in an eight hour shift and do the academics after work. It may be lower risk than betting on Twin 1 graduating from college and getting a good job with a four year degree; but, I think Twin 1 would have the easier path - all things considered.
Pretty unrealistic assumptions for Twin 1, both in having the $160,000 to invest up front and the attitude and income to save $5-10k/year right out of high school. Sounds like a trust fund baby to me...
Stay thrifty my friends.
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