The Renewable Wealth Plan — Introduction

The superior man makes the difficulty to be overcome his first interest; success comes only later.
— Confucius

After reading the preceding series on traditional retirement advice, you might well be feeling like it’s all hopeless. Well, I am here to tell you otherwise. Not only is it possible to build a lifetime of sustainable wealth, it can be done in far less time than you might imagine. What’s more, the essence of what’s required is actually quite simple.

Of course, as I’ve mentioned before, simple and easy are two very different things. When I first lay it out, you may well be tempted to throw up your hands and call it all impossible again, but try to keep an open mind.

The truth is that whether you wish to retire after five years or thirty, there is a plan that can get you there, if you are willing to do what is necessary.

A Visit to Crazy Town

Let’s consider an example of a fellow who chooses a very different plan. We’ll call him Bill. Like our hypothetical boomer from the previous series, Bill starts work at age 22 and wants to retire at 65. The thing is, Bill is a terrible investor. During his working years, he earns a real return of precisely zero. He manages to match the rate of inflation, but that is all.

What Bill is very good at, however, is saving. Bill manages to sock away half of his income every year (never mind how for the moment). And let’s say that Bill learns a tiny bit about investing over the years, so that when it comes time for him to retire, he has found he can manage a consistent 3% real return. How do things look for him when he wakes up on his 65th birthday?

The answer is, things look pretty rosy for Bill, seeing as he already retired, ten years ago. That’s right — despite earning zero on his nest egg for his entire working career, and only managing a paltry 3% in retirement, Bill gets to hit the golf course ten years early. How can this be?

It’s quite simple, really. When you save half your income, then every year that you work, you bank a year’s worth of living expenses. That means that after 33 years, you’ll have saved up 33 years worth of expenses. With that much socked away, a 3% return earns you a year’s worth of expenses every year. It really is that simple.

It Gets Crazier

Let’s consider an even more outlandish example. Let’s say Bill manages to save a full 75% of his income, still earning the same 0% return during his working years, and expecting a 3% return in retirement. How long before Bill can retire, now?

The answer is a mere 11 years. Bill gets to retire at age 33, if he so chooses. Why? Because in this scenario, Bill is saving three years’ expenses for every year he works, so it only takes 11 years to save 33 years’ worth.

Impossible?

You may be rolling your eyes right about now. “How the heck can I save 50% of my income? I’m barely able to pay my bills now! And 75%? That’s impossible.”

Well it isn’t impossible. There is a growing community of people out there — people like Mr. Money Mustache, and Jacob from Early Retirement Extreme — who are proving that it is quite possible, and in fact, not nearly as difficult as you might imagine. Jacob in particular managed it on a graduate student income, while living in one of the most expensive cities in the world.

So no, it is not impossible. It will, however, require a fundamental shift in thinking from the standard consumerist narrative you probably grew up with.

Over the next few articles, we’ll look at how to get you moving in the right direction. I ask only one thing of you — try to set aside your urge to rattle off all the reasons why it can’t be done. This urge is only natural, but do your best to fight it off. Instead of “impossible,” call it “challenging,” and devote your mental energy to finding ways to make it happen, rather than excuses not to.

Remember also, you don’t need to get all the way to 75%, or even 50%. If you are unwilling to go that far (and note I said unwilling, not unable), it will just take longer to reach your goal. Chances are that if you make an effort, you’ll still get there far faster than most.

And here’s another bit of good news — you’re probably already closer than you think. More on that soon.

Those Crazy Chinese

I will leave you with this eye-opening fact. Most people would consider China to be a poor country, relatively speaking. The typical American earns vastly more than the typical Chinese person. Yet according to recent reports, the average household savings rate in China is over 38%.

I doubt the average Chinese person would consider a 50% savings rate insane. So why should you?

21 Comments

  1. Glad to see you back! I’m looking forward to this new series. What you are talking about is exactly what I’m doing now. The higher savings rates can be done if, as you said, a person is willing to change their behavior. I came to this lifestyle after twenty years of mindless consumption. It can be done, people can change.

    • Sean Owen

      I’m in the same boat as you. It took me a bit longer in life to see the light than some of the people I admire, like Jacob and Mr. Money Mustache. But as you say, it only goes to show that there’s hope for anyone. You can get back on the right path at any stage in your career, and once you do, the road is much shorter than you would imagine coming in.

  2. greg

    coming over here after reading MMM and ERE for a while, I totally agree. I am currently moving to a smaller place that will lower my annual expenses by 17% and am gearing up to ditch expensive smartphone monthly service for pay-as-you-go mobile functionality (among some other things). It took some frank statements from a friend who noticed my lifestyle was not matching up with my goals of financial independence, and they were totally right.

    But I would argue that the 70% of my salary I will save is so extreme *when compared to the American average* that lots of people will gloss over the details unless there is careful consideration of the huge differences with entrenched behavior; this took me 2-3 years even though I had already begun thinking I should be doing it …

    • Sean Owen

      Hey Greg, thanks for writing. You’re right that such a dramatic shift is extreme by comparison to the way most Americans live, to the point that when faced with it, many people will be forced by cognitive dissonance to assume that there must be something special about you that makes it possible for you and not for them. Or that your life must be miserable for making such terrible “sacrifices.”

      It’s just human nature, and hugely reinforced by the prevailing culture. I fell into the same patterns for much of my life, and still haven’t made all the changes I’d like to make.

  3. I have been drinking this Kool-aid for several months now and I cannot wait to hear your full take on it!

    A big part of this for me was in shifting from a “consumer” mindset into a “creation mindset.” What I did specifically was to wake up one day and say to myself:

    “Why am I just blowing money and wasting time playing video games? What is the point? How will this affect my life in ten years? Etc.”

    I sold my video game system on eBay at that time and made a decision that I was going to create a side business in my life. I had a job, I had some free time, and I was sick of wasting time and money playing games. I wanted to build something. I wanted to create something, something with real value.

    So I started learning. I got on the web and I started doing research.

    I built a business online. It failed miserably. I tried to sell some horrible digital product, because it sounded like easy money. It failed.

    But I did not mind. I knew that people were making money with lean businesses out there, and I was determined to learn the process. I had free time, I had the basic computer skills, and I was determined to create a profitable business.

    So I learned more, tried a new tactic. This one caught hold. I built a successful business, slowly, and found success over several years. It did not happen overnight.

    After over four years of working part time on this side business, I sold it for six figures.

    Along the way, I shifted my mindset further to reduce my consumption, my spending, and so on….so that after I achieved this success, my lifestyle did not inflate. I did not run out and upgrade my car (still have a 2002 Hyundia). I still live in an apartment for $470/month.

    So I am excited to learn more about your renewable wealth strategy, Sean. I have learned a lot from Jacob and MMM, and I know that you have some killer ideas as well. And, I think I am in a good position to put your advice into practice.

    Eager for the next installment.

  4. Sean Owen

    That’s an awesome story. The best part is how you didn’t allow that sudden inflow of wealth to inflate your lifestyle. Just think how most lottery winners are broke after just a few years. Professional athletes as well. But not you.

    Honestly for most people, avoiding lifestyle inflation is all that is required to become wealthy.

  5. I am “Bill” right down to the 50% savings rate and some truly horrendous investment mistakes. Yet by 40 I was FI.

    If I had only found VTSAX and just poured my money into it sooner….

    • Sean Owen

      Yep. Savings trump investment returns in a major way, especially in the “extreme” scenarios. The power of compounding is all about time. Compress the timeframe with big savings and the compounding effect mostly vanishes.

  6. Andrew

    Keep up the good work. I have recently come across your site as well as mmm, and it is great to find that there are others out there sharing the dream of early retirement via fiscal responsibility. The common thread I find is the “if only I knew about thids earlier”, I say it myself. This new savings and minimilism appears to be a small counterculture that was the norm 50 years ago. It is foolish this day and age to put your blind trust and money in a financial group and expect piles of money when you are too old to work. Thanks for the articles.

  7. Glad to see you’re back!
    I had no idea that the Chinese were so good with their money. I think culturally, they are very different from Americans in a lot of ways, most notably: we have a huge sense of entitlement which makes us feel like we “deserve” all of these fine things. And somehow it seems perfectly rational to finance all of these luxuries up to and beyond what we take in every month.

    Ridiculous!

  8. Mike

    I’m enjoying this blog quite a bit. Is there an RSS feed I can add?

  9. Petra

    OK, so a little question: you go for 3% withdrawal every year… And as you say, Bill is not very good at investing and barely can correct for inflation with his savings. So… if he retires at age 33 (saving 75% of his income), he will only have 33 years of savings left before he runs out. Because his savings only would grow with inflation and so each year his assets would go down.

    I like all the previous posts you made on how to be careful, but then you also have to be careful yourself. It would be more prudent for Bill to work say five year more, so that he is 38 when he finishes and has money until age 86…

    • Chris

      @Petra:
      Unless I am mistaken, he said that Bill earns a 3% real return, which is approximately the sum of the nominal rate and the rate of inflation. So, if Bill’s real return is 3%, that figure has already taken into account the decrease in purchasing power due to inflation.

      A simple example shows that Bill could easily retire with this amount if he continues to earn 3%. For example, let’s say that Bill’s total living expenses are $10k per year. If he has 33 years’ worth of savings, then he has $330,000 saved. If he earns a 3% real rate, then he nets $9,900 in the first year, which is only a scant $100 less than he needs for that year’s expenses. As such, he will barely touch the principle of his investment by taking out $10k. This means that he will be able to withdraw $10k per year pretty much forever. I hope that clears it up!

      • Stephen

        I think what Petra meant was that $10k when Bill retires will not have the same purchasing power as $10k 33 years later.

        If he increases his withdrawal rate to keep up with inflation, he will start eating into principal and will run out of money after 33 years (assuming 3% inflation).

        • Stephen

          Never mind. Clearly my reading comprehension needs work. :-)

  10. CrucialBucks

    You need timestamps. I don’t know if you wrote this yesterday or a year ago, and I want more.

    • So true.

    • smorgasbord

      14/03/2012 according to the feed.

      • Sean Owen

        Wow, has it really been that long? I’m embarrassed, now. New posts this week.

  11. Seeker

    What do you recommend for a place to put your savings while you’re accumulating for FI? Index funds, dividend stocks or safer things like CD’s, high interest savings accounts (even though they’re not much interest), other? Thanks!

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