Does saving 20% towards retirement starting in your twenties allow you to retire early?

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bigtex
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Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by bigtex » Sat Jul 06, 2019 8:22 pm

Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?

bhsince87
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by bhsince87 » Sat Jul 06, 2019 8:27 pm

There is no way to predict how it will turn out.

But I'm very happy that I started investing when I was 22 in 1987.

Compounding IS a mathematical certainty.

I think I invested something like 7% back then.

I recently retired at age 53, so I guess it worked.

But a bigger factor was that I worked hard to increase my salary. There is no substitute for increasing income!
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

livesoft
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by livesoft » Sat Jul 06, 2019 8:30 pm

i don't think so, but I know saving 50% does.
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arcticpineapplecorp.
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by arcticpineapplecorp. » Sat Jul 06, 2019 8:33 pm

check out this chart at Mr.MoneyMustache:

https://www.mrmoneymustache.com/2012/01 ... etirement/

he shows how quick or long it takes to retirement based on savings rates based on:
Assumptions:

You can earn 5% investment returns after inflation during your saving years
You’ll live off of the “4% safe withdrawal rate” after retirement, with some flexibility in your spending during recessions.
You want your ‘Stash to last forever, you’ll only be touching the gains, since this income may be sustaining you for seventy years or so. Just think of this assumption as a nice generous Safety Margin.

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:
Image

does that help?
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Thesaints
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Thesaints » Sat Jul 06, 2019 8:45 pm

Doesn't mean anything. It depends on how much one makes and how much he/she needs in retirement.

chw
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?l

Post by chw » Sat Jul 06, 2019 8:50 pm

Thesaints wrote:
Sat Jul 06, 2019 8:45 pm
Doesn't mean anything. It depends on how much one makes and how much he/she needs in retirement.
+1. I would aim to max out your 401k and IRA contributions annually, and see where the chips fall as you near the age you are targeting to retire. Especially agree with this poster that expenses are a big part of the equation to retire early.

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Vulcan
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sat Jul 06, 2019 8:57 pm

bhsince87 wrote:
Sat Jul 06, 2019 8:27 pm
Compounding IS a mathematical certainty.
There is no compounding with stocks (if we disregard dividend reinvestment component).
Last edited by Vulcan on Sat Jul 06, 2019 9:25 pm, edited 1 time in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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9-5 Suited
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by 9-5 Suited » Sat Jul 06, 2019 8:58 pm

Here's a rudimentary way to estimate this.

1. Assume that you want to build to a portfolio size that is 25x your annual expenses in order to retire. This is on the low end and I want to have more, but realistic based on the "4% rule" which you can look up. Calculate this number using your annual expenses, for example is annual expenses are $100K then you need $2.5M.

2. Take your current nest egg (all invested money in 401K, IRA, taxable account) and add to it both (1) annual contributions at 20% of your income and (2) an assumed rate of return. The rate of return needs to be real, i.e. after inflation to avoid miscalculating. A good conservative number to use here might be 3%. Then use an online calculator (there are many) or Excel to see how many years, under those assumptions, you would need to reach the number from point #1 above.

Note that a better way to do this is a monte carlo simulation to get to probability of outcomes with a range of possibilities, but the above approach at least yields a decent rule of thumb expectation for you. In all likelihood, you'll need to save more than 20% to truly retire early unless you consider late 50s retirement early. But maybe you've got a big inheritance or something that changes that, I dunno!

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by averagedude » Sat Jul 06, 2019 9:00 pm

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
In my opionion, a 20% savings rate of your GROSS pay will allow you to retire in your mid to upper 50's, but there are alot of variables. You will have to invest with a high stock asset allocation because bonds will more than likely have lower long term returns than what current retirees have seen. You will also need the stock market to perform near historic levels. I believe most people in the past and present have been pessimistic of the future, but optimists have been rewarded handsomely as life seems to get better every generation.

randomguy
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by randomguy » Sat Jul 06, 2019 9:07 pm

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
Simple example
100k salary
20k of taxes
20k of savings.

Need ~70k of income (you don't pay payroll taxes in retirement. Taxes might even be lower depending on your situation) to make things meet. Ignore SS. So you want 1.75 million. Invest 20k/year @5%real and it takes 33 years. So you will retire right around 55. Make 7% and you do it in 28 years or at 50. Now in real life most people salaries increase over time above inflation for the first 10+ years and you definitely don't get steady returns. But 20% for 50s retirement is pretty reasonable. As you try and bring the number down, the amount of savings you need goes way up.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by AlphaLess » Sat Jul 06, 2019 9:22 pm

Too many variables.

Say, your pay doubles, even counting inflation, from 22 to 32. Are you still saving only 20%? If so, then probably no.

Or, put another way. Suppose this is your LAST year of working, whatever age you are in. And you are only saving 20%. I doubt that you can be an early retiree in that case.

My point is that while you can start out saving 20%, you will have to save a bigger percentage during later years.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by KlangFool » Sat Jul 06, 2019 9:28 pm

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
20% of what? Gross income? Net income?

It is easy to answer if you specify the % based on your annual expense.

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22twain
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by 22twain » Sat Jul 06, 2019 9:33 pm

If you can live off Social Security (and perhaps a pension), and can keep working until you collect SS, you don't need to save anything. :twisted:

Case in point: DW and I are both postponing SS until age 70. When we're both collecting, it will cover our normal expenses including taxes on the RMDs from our tax-deferred accounts, on the dividends from our taxable accounts, and on the SS itself. If we didn't have those accounts generating RMDs and dividends, we could spend more of the SS on ourselves!

However, I suspect few other people on this forum would want to live a modest lifestyle in a small paid-off house in a small town in flyover country. :wink:
My investing princiPLEs do not include absolutely preserving princiPAL.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by tibbitts » Sat Jul 06, 2019 9:47 pm

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
I'm sure you already know the answer, considering you've made 207 previous posts.

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Svensk Anga
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Svensk Anga » Sat Jul 06, 2019 9:56 pm

I think planning on a level 20% savings rate shortchanges the early retirement possibilities. If you are in a career with some real salary growth potential and save a portion of every raise, you can grow your saving rate over time quite a bit. I started with 6% contribution plus 3% company match at age 23.5 and retired by age 57. But our saving rate ramped up quite a lot over the years. It really took off when the mortgage was retired and the kids were done with school. Late in the game, we were up to about 60%. Those late 60% dollars were more significant than the 9% dollars invested 34 years earlier with all their compound growth.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by willthrill81 » Sat Jul 06, 2019 10:06 pm

As others have noted, with 5% annual returns and a 4% savings rate, saving 20% of your income will put you on path to replace your current spending in about 37 years. However, if you did this from age 20 to age 56, you'd still have nine years before Medicare kicked in. That might be effectively offset by Social Security benefits you'd receive later on.

If you're really thinking about early retirement, I would strongly urge you to save more like 50% of your income and to do so now before you get accustomed to spending 80% of your income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by randomguy » Sat Jul 06, 2019 10:38 pm

willthrill81 wrote:
Sat Jul 06, 2019 10:06 pm
As others have noted, with 5% annual returns and a 4% savings rate, saving 20% of your income will put you on path to replace your current spending in about 37 years. However, if you did this from age 20 to age 56, you'd still have nine years before Medicare kicked in. That might be effectively offset by Social Security benefits you'd receive later on.

If you're really thinking about early retirement, I would strongly urge you to save more like 50% of your income and to do so now before you get accustomed to spending 80% of your income.
MMM uses % of take home pay, not income. 20% of income would be closer to 30 years. Both approaches make a lot of assumptions about expenses and taxes.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by bhsince87 » Sat Jul 06, 2019 10:40 pm

Vulcan wrote:
Sat Jul 06, 2019 8:57 pm
bhsince87 wrote:
Sat Jul 06, 2019 8:27 pm
Compounding IS a mathematical certainty.
There is no compounding with stocks (if we disregard dividend reinvestment component).
I don't know many folks in their 20's who spend dividends.

But I guess theoretically, they might exist.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by willthrill81 » Sat Jul 06, 2019 10:45 pm

randomguy wrote:
Sat Jul 06, 2019 10:38 pm
willthrill81 wrote:
Sat Jul 06, 2019 10:06 pm
As others have noted, with 5% annual returns and a 4% savings rate, saving 20% of your income will put you on path to replace your current spending in about 37 years. However, if you did this from age 20 to age 56, you'd still have nine years before Medicare kicked in. That might be effectively offset by Social Security benefits you'd receive later on.

If you're really thinking about early retirement, I would strongly urge you to save more like 50% of your income and to do so now before you get accustomed to spending 80% of your income.
MMM uses % of take home pay, not income. 20% of income would be closer to 30 years. Both approaches make a lot of assumptions about expenses and taxes.
Actually, #cruncher analyzed the Networthify calculator, which gives the same numbers as MMM, and he determined that its numbers are based on your after-tax savings, not pre-tax.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

esteen
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by esteen » Sat Jul 06, 2019 10:46 pm

Vulcan wrote:
Sat Jul 06, 2019 8:57 pm
bhsince87 wrote:
Sat Jul 06, 2019 8:27 pm
Compounding IS a mathematical certainty.
There is no compounding with stocks (if we disregard dividend reinvestment component).
Why would you disregard dividends?

randomguy
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by randomguy » Sat Jul 06, 2019 11:30 pm

willthrill81 wrote:
Sat Jul 06, 2019 10:45 pm
randomguy wrote:
Sat Jul 06, 2019 10:38 pm
willthrill81 wrote:
Sat Jul 06, 2019 10:06 pm
As others have noted, with 5% annual returns and a 4% savings rate, saving 20% of your income will put you on path to replace your current spending in about 37 years. However, if you did this from age 20 to age 56, you'd still have nine years before Medicare kicked in. That might be effectively offset by Social Security benefits you'd receive later on.

If you're really thinking about early retirement, I would strongly urge you to save more like 50% of your income and to do so now before you get accustomed to spending 80% of your income.
MMM uses % of take home pay, not income. 20% of income would be closer to 30 years. Both approaches make a lot of assumptions about expenses and taxes.
Actually, #cruncher analyzed the Networthify calculator, which gives the same numbers as MMM, and he determined that its numbers are based on your after-tax savings, not pre-tax.
He is wrong:) Lets walk through a simple example

Basic assumptions:
100k income
20k in savings

To retire you need 60-70k of expenses since you no longer have payroll taxes (~8k/year) and the lower income will also save you money on normal income taxes. You hit that in year 32-34, not year 37. You can't just ignore that expenses are. function of income given the graduated tax code we have.

For MMM the math would be something like
100k of income
20k of savings
20k of taxes (10k payroll, 10k fed/state)
60k of expense
20/60 =33% savings rate call it about 28 years. But MMM assumes you never pay taxes. That might not be true for you.

As I said each approach bakes in some assumptions that you should understand and make sure they apply to you.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by willthrill81 » Sat Jul 06, 2019 11:40 pm

randomguy wrote:
Sat Jul 06, 2019 11:30 pm
willthrill81 wrote:
Sat Jul 06, 2019 10:45 pm
randomguy wrote:
Sat Jul 06, 2019 10:38 pm
willthrill81 wrote:
Sat Jul 06, 2019 10:06 pm
As others have noted, with 5% annual returns and a 4% savings rate, saving 20% of your income will put you on path to replace your current spending in about 37 years. However, if you did this from age 20 to age 56, you'd still have nine years before Medicare kicked in. That might be effectively offset by Social Security benefits you'd receive later on.

If you're really thinking about early retirement, I would strongly urge you to save more like 50% of your income and to do so now before you get accustomed to spending 80% of your income.
MMM uses % of take home pay, not income. 20% of income would be closer to 30 years. Both approaches make a lot of assumptions about expenses and taxes.
Actually, #cruncher analyzed the Networthify calculator, which gives the same numbers as MMM, and he determined that its numbers are based on your after-tax savings, not pre-tax.
He is wrong:) Lets walk through a simple example

Basic assumptions:
100k income
20k in savings

To retire you need 60-70k of expenses since you no longer have payroll taxes (~8k/year) and the lower income will also save you money on normal income taxes. You hit that in year 32-34, not year 37. You can't just ignore that expenses are. function of income given the graduated tax code we have.

For MMM the math would be something like
100k of income
20k of savings
20k of taxes (10k payroll, 10k fed/state)
60k of expense
20/60 =33% savings rate call it about 28 years. But MMM assumes you never pay taxes. That might not be true for you.

As I said each approach bakes in some assumptions that you should understand and make sure they apply to you.
For me to be convinced, you would need to find where #cruncher made an error in his calculations.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

randomguy
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by randomguy » Sat Jul 06, 2019 11:59 pm

willthrill81 wrote:
Sat Jul 06, 2019 11:40 pm
randomguy wrote:
Sat Jul 06, 2019 11:30 pm
willthrill81 wrote:
Sat Jul 06, 2019 10:45 pm
randomguy wrote:
Sat Jul 06, 2019 10:38 pm
willthrill81 wrote:
Sat Jul 06, 2019 10:06 pm
As others have noted, with 5% annual returns and a 4% savings rate, saving 20% of your income will put you on path to replace your current spending in about 37 years. However, if you did this from age 20 to age 56, you'd still have nine years before Medicare kicked in. That might be effectively offset by Social Security benefits you'd receive later on.

If you're really thinking about early retirement, I would strongly urge you to save more like 50% of your income and to do so now before you get accustomed to spending 80% of your income.
MMM uses % of take home pay, not income. 20% of income would be closer to 30 years. Both approaches make a lot of assumptions about expenses and taxes.
Actually, #cruncher analyzed the Networthify calculator, which gives the same numbers as MMM, and he determined that its numbers are based on your after-tax savings, not pre-tax.
He is wrong:) Lets walk through a simple example

Basic assumptions:
100k income
20k in savings

To retire you need 60-70k of expenses since you no longer have payroll taxes (~8k/year) and the lower income will also save you money on normal income taxes. You hit that in year 32-34, not year 37. You can't just ignore that expenses are. function of income given the graduated tax code we have.

For MMM the math would be something like
100k of income
20k of savings
20k of taxes (10k payroll, 10k fed/state)
60k of expense
20/60 =33% savings rate call it about 28 years. But MMM assumes you never pay taxes. That might not be true for you.

As I said each approach bakes in some assumptions that you should understand and make sure they apply to you.
For me to be convinced, you would need to find where #cruncher made an error in his calculations.
The calculations are right. It is the assumptions that are wrong.

FoolStreet
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by FoolStreet » Sun Jul 07, 2019 12:35 am

arcticpineapplecorp. wrote:
Sat Jul 06, 2019 8:33 pm
check out this chart at Mr.MoneyMustache:

https://www.mrmoneymustache.com/2012/01 ... etirement/

he shows how quick or long it takes to retirement based on savings rates based on:
Assumptions:

You can earn 5% investment returns after inflation during your saving years
You’ll live off of the “4% safe withdrawal rate” after retirement, with some flexibility in your spending during recessions.
You want your ‘Stash to last forever, you’ll only be touching the gains, since this income may be sustaining you for seventy years or so. Just think of this assumption as a nice generous Safety Margin.

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:
Image

does that help?
This and bhsince87s comment get at the issue. You may start at 20%, but as your income increases, so do your expenses, even legitimate ones. A 30 something might have gotten big raises since they were in their 20s but also have kids and a mortgage. 4% safe withdrawal on the 20yo salary is not the same as 4% on the 30 something salary. Obviously, it’s nice to stay frugal and keep expenses low, but there are expenses that will increase that are totally appropriate and necessary.

But yeah, starting at 20% or more really does add up over time.

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Vulcan
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 1:43 am

esteen wrote:
Sat Jul 06, 2019 10:46 pm
Vulcan wrote:
Sat Jul 06, 2019 8:57 pm
bhsince87 wrote:
Sat Jul 06, 2019 8:27 pm
Compounding IS a mathematical certainty.
There is no compounding with stocks (if we disregard dividend reinvestment component).
Why would you disregard dividends?
To simplify the point.
Compounding happens with interest payments.
With stocks there is no compound growth.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

msk
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by msk » Sun Jul 07, 2019 2:19 am

I saved and invested at least 30% of my after tax income (job income + investment income from the investments themselves) and retired as per that table! 29 years after my first job. Table says 28. Remarkably accurate! IMHO why it works: You quickly get used to spending only 70% of your income (yes, you can!) and your lifestyle expands to match your rising income (NB investment income can quickly eclipse your job income; and RE rentals make it very obvious, perhaps less so with fluctuating ETFs, but the impact is still there). The day prior to your early retirement you are spending less than 70% of after tax income, as you have been doing for the previous couple of decades. Early retirees tend to be nervous and they do not retire until they are confident that their NW can generate their whole current after-tax income, not just survival expenses that late retirees worry about. Save and invest 30% of after tax income. My preference would be 100% stocks, since you have 28 years ahead of you. Paying off principal on a home mortgage counts as saving-and-investing but not the interest payments, and retire 28 years from today. Comfortably. Aim for 30% not 20% savings rate :moneybag

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by cjking » Sun Jul 07, 2019 3:05 am

Vulcan wrote:
Sun Jul 07, 2019 1:43 am
Compounding happens with interest payments.
With stocks there is no compound growth.
I was a bit puzzled by this, as that's not my definition of compounding. To me compounding is exponential growth in a financial balance. (Edited to elaborate: exponential growth that is happening because any return subsequently generates its own returns.) A random investment-related web-site agrees with me.
What Does Compound Mean?
The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
https://www.investopedia.com/terms/c/compound.asp

Also, dividends are irrelevant. As far as I'm concerned, even a single stock that never pays a dividend can exhibit compounding. (The underlying business has profits which are reinvested, expanding the size of the business.)

I suppose people can define compounding so that returns have to pass through the investors hands before being reinvested, if they wish, but I don't see why growth at a geometric average of say 5% should be described differently in one case than another, just because some extra admin was involved.
Last edited by cjking on Sun Jul 07, 2019 6:10 am, edited 1 time in total.

JoeRetire
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by JoeRetire » Sun Jul 07, 2019 5:42 am

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
Saving 20% will allow you to retire earlier.

How much earlier depends on how much you need to fund your lifestyle in retirement.

flyingaway
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by flyingaway » Sun Jul 07, 2019 5:56 am

I think there is a way to do the computation. Assuming the person spends all his money after the saving rate, I.e., that is his expenses. I am just not interested in figuring that out.
(Maybe I will wait until I start my personal finance blog to write a paper on it.)

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Vulcan
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 8:22 am

cjking wrote:
Sun Jul 07, 2019 3:05 am
Vulcan wrote:
Sun Jul 07, 2019 1:43 am
Compounding happens with interest payments.
With stocks there is no compound growth.
I was a bit puzzled by this, as that's not my definition of compounding. To me compounding is exponential growth in a financial balance. (Edited to elaborate: exponential growth that is happening because any return subsequently generates its own returns.)
With stocks, you can have exponential growth, exponential losses, or anything in between.
There is no mathematical certainty with stocks in the same way that exists when compound interest formula is applicable

Image
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by MathIsMyWayr » Sun Jul 07, 2019 8:35 am

Vulcan wrote:
Sun Jul 07, 2019 8:22 am
cjking wrote:
Sun Jul 07, 2019 3:05 am
Vulcan wrote:
Sun Jul 07, 2019 1:43 am
Compounding happens with interest payments.
With stocks there is no compound growth.
I was a bit puzzled by this, as that's not my definition of compounding. To me compounding is exponential growth in a financial balance. (Edited to elaborate: exponential growth that is happening because any return subsequently generates its own returns.)
With stocks, you can have exponential growth, exponential losses, or anything in between.
There is no mathematical certainty with stocks in the same way that exists when compound interest formula is applicable
Compounding leads to exponential growth or losses. One problem is that the rate of compounding is not fixed, but varies year to year. It is like the price increase due to inflation.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 8:41 am

MathIsMyWayr wrote:
Sun Jul 07, 2019 8:35 am
Vulcan wrote:
Sun Jul 07, 2019 8:22 am
cjking wrote:
Sun Jul 07, 2019 3:05 am
Vulcan wrote:
Sun Jul 07, 2019 1:43 am
Compounding happens with interest payments.
With stocks there is no compound growth.
I was a bit puzzled by this, as that's not my definition of compounding. To me compounding is exponential growth in a financial balance. (Edited to elaborate: exponential growth that is happening because any return subsequently generates its own returns.)
With stocks, you can have exponential growth, exponential losses, or anything in between.
There is no mathematical certainty with stocks in the same way that exists when compound interest formula is applicable
Compounding leads to exponential growth or losses
...or anything in between.
If you define compounding this way, then sure, this is the picture of compounding :)

Image
If you torture the data long enough, it will confess to anything. ~Ronald Coase

Olemiss540
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Olemiss540 » Sun Jul 07, 2019 8:46 am

Vulcan wrote:
Sun Jul 07, 2019 8:22 am
cjking wrote:
Sun Jul 07, 2019 3:05 am
Vulcan wrote:
Sun Jul 07, 2019 1:43 am
Compounding happens with interest payments.
With stocks there is no compound growth.
I was a bit puzzled by this, as that's not my definition of compounding. To me compounding is exponential growth in a financial balance. (Edited to elaborate: exponential growth that is happening because any return subsequently generates its own returns.)
With stocks, you can have exponential growth, exponential losses, or anything in between.
There is no mathematical certainty with stocks in the same way that exists when compound interest formula is applicable

Image
Who cares? Can we circle back to the point of the thread?

OP. Aim for 30% if you are hoping for a somewhat early retirement! 20% seems to put one in line for a late 50s.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by willthrill81 » Sun Jul 07, 2019 9:21 am

cjking wrote:
Sun Jul 07, 2019 3:05 am
I suppose people can define compounding so that returns have to pass through the investors hands before being reinvested, if they wish, but I don't see why growth at a geometric average of say 5% should be described differently in one case than another, just because some extra admin was involved.
The topic of stocks compounding or not has come up before, and it's a distinction without a difference.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by MJS » Sun Jul 07, 2019 9:47 am

You might enjoy playing with Investor.gov's Compound Interest Calculator in 5 year increments (with increased Monthly Contribution as you get older, and moving your Initial Investment to the prior five-years' value ... noting that compounding and asset growth are not quite the same.)

The difference between a 4% interest rate compounded annually versus a 9% interest rate compounded daily provides a rough estimate of what you can expect from saving 20% of your salary.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 10:27 am

willthrill81 wrote:
Sun Jul 07, 2019 9:21 am
The topic of stocks compounding or not has come up before, and it's a distinction without a difference.
While there may not be a difference once "compound" rate of returns is calculated a posteriory, a priory it is the difference between a mathematical certainty and an aspirational goal.

There are no guarantees whatsoever of continued exponential economic expansion, and OP might as well recognize that early on.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by KlangFool » Sun Jul 07, 2019 10:58 am

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
Early = no.

On time at 60 = maybe.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by alter » Sun Jul 07, 2019 11:02 am

Vulcan wrote:
Sun Jul 07, 2019 10:27 am
willthrill81 wrote:
Sun Jul 07, 2019 9:21 am
The topic of stocks compounding or not has come up before, and it's a distinction without a difference.
While there may not be a difference once "compound" rate of returns is calculated a posteriory, a priory it is the difference between a mathematical certainty and an aspirational goal.

There are no guarantees whatsoever of continued exponential economic expansion, and OP might as well recognize that early on.
There is no mathematical certainty that ANY investment vehicle or bank account will pay interest, the world may end tomorrow, a bank or bond-issuer could go bankrupt, or any number of things in between. Does this mean compounding doesn't exist with any financial vehicle, since there is no mathematical certainty?

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by CurlyDave » Sun Jul 07, 2019 11:12 am

Vulcan wrote:
Sat Jul 06, 2019 8:57 pm
bhsince87 wrote:
Sat Jul 06, 2019 8:27 pm
Compounding IS a mathematical certainty.
There is no compounding with stocks (if we disregard dividend reinvestment component).
If one is a stickler for definitions, this may well be true. BUT we often refer to the CAGR (Compound Annual Growth Rate) for individual stocks, mutual funds, ETFs, and various indices, which leads me to believe that money invested in the stock market is widely understood to "compound", even if that is not right in the strictest definition of the word.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 11:25 am

alter wrote:
Sun Jul 07, 2019 11:02 am
There is no mathematical certainty that ANY investment vehicle or bank account will pay interest, the world may end tomorrow, a bank or bond-issuer could go bankrupt, or any number of things in between. Does this mean compounding doesn't exist with any financial vehicle, since there is no mathematical certainty?
The post I was responding to stated that "compounding IS a mathematical certainty".

I couldn't leave that unchallenged:)
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Vulcan
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 11:28 am

CurlyDave wrote:
Sun Jul 07, 2019 11:12 am
Vulcan wrote:
Sat Jul 06, 2019 8:57 pm
bhsince87 wrote:
Sat Jul 06, 2019 8:27 pm
Compounding IS a mathematical certainty.
There is no compounding with stocks (if we disregard dividend reinvestment component).
If one is a stickler for definitions, this may well be true. BUT we often refer to the CAGR (Compound Annual Growth Rate) for individual stocks, mutual funds, ETFs, and various indices, which leads me to believe that money invested in the stock market is widely understood to "compound", even if that is not right in the strictest definition of the word.
It's just a way to express the sequence of returns in apples to apples fashion.

Stocks don't compound. They go up, and down, and sometimes sideways. And yes, some of them pay dividend sometimes.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

finite_difference
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by finite_difference » Sun Jul 07, 2019 4:50 pm

arcticpineapplecorp. wrote:
Sat Jul 06, 2019 8:33 pm
check out this chart at Mr.MoneyMustache:

https://www.mrmoneymustache.com/2012/01 ... etirement/

he shows how quick or long it takes to retirement based on savings rates based on:
Assumptions:

You can earn 5% investment returns after inflation during your saving years
You’ll live off of the “4% safe withdrawal rate” after retirement, with some flexibility in your spending during recessions.
You want your ‘Stash to last forever, you’ll only be touching the gains, since this income may be sustaining you for seventy years or so. Just think of this assumption as a nice generous Safety Margin.

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:
Image

does that help?
I think that savings rate analysis is more than a little unfair since it assumes your spending is constant.

If you save 20% of your salary while raising kids, saving for college, and paying your mortgage, etc. that doesn’t mean you will have the mortgage, raising kids cost, and college costs in retirement. It seems unrealistic to expect you need to work for 37 years to retire if you save 20% of your salary. And then you want it to last for 70 years? I guess if you start working when you’re -20 years old.

And 5% real returns are pretty bad over 37 years but it’s possible.

And no Social Security included.

So there are a lot of flaws with that analysis.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by yangtui » Sun Jul 07, 2019 4:55 pm

Your question is extremely vague and requires a bunch of assumptions to give an answer.

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MikeWillRetire
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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by MikeWillRetire » Sun Jul 07, 2019 6:16 pm

Well it depends. Let's say you work from age 22 to age 55. And during those 33 years you paid off your house, raised 2 children, put them through private school, paid for their college, and successfully launched those children, while saving 20% every year. Then in that case, you may be able to retire early because your expenses drop dramatically.
But if you had no children, you rented for 33 years, and you only saved 20% each year, then maybe not.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by H-Town » Sun Jul 07, 2019 6:23 pm

bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
It's a start. It's a step to the right direction. But if you want to retire early and do it on your term, you gotta get after it. Increase your pay, make good decisions on house, car, kids education, and live below your means. If you actively get after it, you'll find out that increasing saving rate to 50% isn't that difficult.

On the other hand, if you spend first, save later, and cap saving rate to 20%, there'll be a lot of outside factors preventing you from retiring early.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by willthrill81 » Sun Jul 07, 2019 6:25 pm

H-Town wrote:
Sun Jul 07, 2019 6:23 pm
bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
It's a start. It's a step to the right direction. But if you want to retire early and do it on your term, you gotta get after it. Increase your pay, make good decisions on house, car, kids education, and live below your means. If you actively get after it, you'll find out that increasing saving rate to 50% isn't that difficult.
This is especially if you're blessed with a lot of tax-advantaged space while working.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by smitcat » Sun Jul 07, 2019 7:06 pm

willthrill81 wrote:
Sun Jul 07, 2019 6:25 pm
H-Town wrote:
Sun Jul 07, 2019 6:23 pm
bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
It's a start. It's a step to the right direction. But if you want to retire early and do it on your term, you gotta get after it. Increase your pay, make good decisions on house, car, kids education, and live below your means. If you actively get after it, you'll find out that increasing saving rate to 50% isn't that difficult.
This is especially if you're blessed with a lot of tax-advantaged space while working.
Or if you have a pension and other benefits as part of your job. (Police, FIRE, military, Municipality, State ,etc)

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by aristotelian » Sun Jul 07, 2019 8:31 pm

Yes. Start saving 20% in your 20's and don't give in to lifestyle inflation. Progress in your career and your savings rate will increase. Say you are saving $10K on $50K after tax. By the time you are making $80K, you can now save $40K with the same cash flow but 50% savings rate. Keep doing that and you can definitely retire early.

If you save 20% and keep saving only 20%, then you probably get a comfortable retirement at the normal age.

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Re: Does saving 20% towards retirement starting in your twenties allow you to retire early?

Post by Vulcan » Sun Jul 07, 2019 8:39 pm

H-Town wrote:
Sun Jul 07, 2019 6:23 pm
bigtex wrote:
Sat Jul 06, 2019 8:22 pm
Will 20% savings rate towards retirement starting in my mid 20s allow me to retire early in my 40s, 50s, or on time at 60?
It's a start. It's a step to the right direction. But if you want to retire early and do it on your term, you gotta get after it. Increase your pay, make good decisions on house, car, kids education, and live below your means. If you actively get after it, you'll find out that increasing saving rate to 50% isn't that difficult.
What is a good decision on kids education?
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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