User Tools

Differences

This shows you the differences between two versions of the page.

Link to this comparison view

Next revision		Previous revision
retirement [2024/08/09 18:19] – created nyetretirement [2024/08/10 02:21] (current) – nyet
Line 1: Line 1:
 How to Retire One Day How to Retire One Day
  
-diclaimer:  +disclaimer:  
-This is written by a USA. The direct, specific advice is directed at my fellow yanks. Those are the numbers and nuances I know. There will be something here for other folks, mostly in the sections that cover mindset. I'm going to talk about things as they are, not as they should be. I am not an expert, I have read several books on this and this a summary. +This is written by a USA. The direct, specific advice is directed at my fellow yanks. Those are the numbers and nuances I know. There will be something here for other folks, mostly in the sections that cover mindset. I'm going to talk about things as they are, not as they should be. I am not an expert. I have read a few books, followed discussion forums on the topic for a few years, listened to podcasts, etc. I'm a layman, I know enough to provide a good introduction.
  
 +Why should you trust me? 
  
 +You shouldn't. There's a lot of grifters in this space. You shouldn't take any rule of thumb or piece of information without cross referencing it against more than one reputable source. Any data you can easily pull yourself from a primary source you should do so, which almost every number cited about markets you will be able to do this with. 
  
 0. How do you live?  0. How do you live? 
-1. Personal Finance +1. Financial Health 
-2. The Dark Forest Ahead+2. The Dark Forest
 3. F.I.R.E. 3. F.I.R.E.
 4. The Well Trodden Path 4. The Well Trodden Path
Line 18: Line 20:
 10. In Conclusion 10. In Conclusion
  
-0. How do you live? MUSIC: Low Key Gliding - Hal Walker +====== 0. How do you live? ======
-Who are you? What do you value? How much risk can you tolerate? What is you capacity to tolerate catastrphy? Getting finances in order is about making concious decisions when you were not doing so before. One who trods down this path--treating it with the gravity it deservces--will rebuild their finicial world in the image of what they value in life. Finances should be a mirror of what you want your life to be in all stages; iin youth, in middle age, in the elder years, and in death. It's a tool that enables you to live the life you desire, a filter to remove foolish decisions, and a scale to measure things by their proper weight. If you haven't yet sit down in a comfterable spot. For me it'd be with some hot coffee, some tastey lunch food, on a cozy blanket, in a spot overlooking the great river that runs through my city, and with my brother in tow to run my thoughts by. Have a think. How do you live? +
  
-1. Personal Finance MUSIC: Drive45 - Everything I own+ MUSIC: Low Key Gliding - Hal Walker
  
-1a. Savings +Who are you? What do you value? How much risk can you tolerate? What is you capacity to tolerate catastrophy? Getting finances in order is about making conscious decisions when you were not doing so before. One who trods down this path--treating it with the gravity it deserves--will rebuild their finical world in the image of what they value in life. Finances should be a mirror of what you want your life to be in all stages; in youth, in middle age, in the elder years, and in death. It's a tool that enables you to live the life you desire, filters out foolhardy thoughts, and acts as a scale to give decisions their proper weight. Retirement planning and having a solid understanding of personal finance is one of the best tools to decide what kind of live you want. It will give you the tools to plan it, exit ramps if things are going poorly, and tell you how to derive maximum benefit from a windfall. Have a think. How do you live? 
-1b. Spending +
-1c. Monitoring +
-1d. Interest +
-1e. Taxes +
-1f. Investing +
-1g. Insurance+
  
 +====== 1. Financial Health, and Foundational Information ======
  
 +aka. what they should teach you in high school about being an adult human in the modern world
  
-2. The Dark Forest Ahead じぶんがいない - salyu × salyu+MUSIC: Drive45 - Everything I own  
 + 
 +1a. Budgeting 
 +1b. Getting Healthy 
 +1c. Interest, <- the most important thing tbh 
 +1d. How do taxes work? 
 +1e. Investing 
 + 
 +Saving for retirement is important. Ensuring your finances are in good shape is more important. First part of saving for retirement is ensuring you have an okay understanding of personal finance, you're financially healthy, and you understand where money is going. We'll start with checking your financial health.  
 + 
 +Someone who has good financial health is someone who understands where their money is coming from, where it's going, has an emergency fund that will cover a few months expenses, has no high interest rate debt, doesn't spend an outsized amount of income on a single expense, and is capable of saving at least 20% of their income.  
 + 
 +==== 1a. Budgeting ==== 
 + 
 +First step of retirement planning is figuring out your budget. This is the foundation of all further planning. Grab a spreadsheet or find an app to help your plan. Note down your monthly income. If your income or expense are variable assume the worst. If you have a yearly/quarterly expense divide by 12/3 and include it. You want an accurate picture of what's coming in and going out, and to categorize what's going out into need/want/debt/save. Use your debit/credit card or checking account statements to ensure things are accurate. Mentally run down everywhere you regularly spend money and if you're confident make estimations on how much you've spent. If you're not confident in your estimations get a budgeting app and start noting down every time you spend money for a month.  
 + 
 +Note down mandatory expenses:  
 +  *  Housing, including insurance  
 +  *  Groceries  
 +  *  Transportation, including repairs, insurance 
 +  *  Utilities 
 +  *  Healthcare 
 + 
 +Note down Optional Spending: 
 +  * Movies, steaming services, theater 
 +  * Restaurants/dining out (if you're paying someone to cook for you it's optional) 
 +  * Vices, e.g. alcohol, tobacco, gambling, pornography  
 +  * Hobbies, gym memberships 
 +  * Shopping, luxuries 
 + 
 +Debt payments, savings, and investments 
 +  * Retirement investments 
 +  * Saving for major expenses (down payment, new bike, etc) 
 +  * Creating/refilling an Emergency Fund 
 +  * Debt repayments 
 + 
 +=== Red Flags === 
 + 
 +At minimum shoot for meeting the 50/30/20 rule. Up to 50% of your after-tax income on needs, 30% on wants, and 20% into debt repayment and savings. If you have to spend more on needs, or debt, or your want spending is out of control you should adjust. T 
 + 
 +No more than 30% of your wage should be going to your mortgage or rent. If it is get a roommate or a cheaper place.  
 + 
 +Your transportation costs should not exceed 15% of your income. It is very affordable to drive a $3,000 dollar car with liability insurance, even if it needs repairs more often.  
 + 
 +Groceries should not be more than $300 per person per month, even in high cost of living cities. This is applicable to USA as of 2024 
 + 
 +==== 1b. Getting Healthy ==== 
 + 
 +Once you have a budget figured out, you can start setting goals for yourself to improve your finances, and you'll know where to make cuts (or work more) to start working to those goals. The first three things you should do now that you have a good picture is: 
 + 
 +  - Pay off high interest debt 
 +  - Build an emergency fund  
 +  - Start taking the employer match for retirement funds 
 + 
 +=== Debt === 
 + 
 +If you have any high interest debt you should immediately pay it off. If it's a very high interest rate sacrifice as much as you can manage until it is gone. High interest debt is debt that has a higher interest rate than what the returns would be on low risk investments. For most yankees that'd be around 6%. A very high rate would be anything over 10% interest, like credit card debt, payday loans, and predatory vehicle loans. ((Mortgage interest rates that are within a point to half point what what the federal reserve has set interest rates are are not considered high interest debt, even if they're above 6%. The high interest rate is offset by the value of the property increasing, hence the exclusion. More on this later)) 
 + 
 +=== Emergency Funds === 
 + 
 +While paying off high interest debt you should start building an emergency fund. The only time you shouldn't be building an emergency fund is if you have very high interest debt or you've saved enough money. Having money set aside is one of the biggest returns on investment in both terms of money and peace of mind. If your fridge breaks or your car needs repair, it is annoying instead of anxiety inducing. If you are hurt or your stuff burns you have months to figure out what to do. You won't have to go into (likely high interest) debt to dig yourself out of the random big expenses you'll experience being alive.  
 + 
 +Your emergency fund should be somewhere between 3 times and 6 times your monthly expenses. If your income is volatile (freelancers, self employed) you should shoot for more, up to a year set aside.  
 + 
 +You should keep your emergency fund somewhere you can access it quickly. For most folks this will be a savings account. Preferably one with higher interest. Other options would include bonds and CD accounts. You can sell these for their entire value whenever, you'll only loose out on interest gains. A CD account at a bank, and you put money in and you're not allowed to touch it for some amount of time. If you don't touch it you get paid a higher interest rate than a normal savings account. If you do touch it you only loose out on the interest rate. Regardless of where you put your emergency fund you should make sure you can access almost all of it within a day or two.  
 + 
 +=== Employer Matched Retirement Accounts === 
 + 
 +You should always contribute as much as needed to get the full employer match. It is free money. A bonus wage they pay you for saving. If your employer offers multiple types of account see below and decide what works best for you. For most folks (read: yanks) this will be a 401(k). Taking the employer match to retirement is literally the highest return safest investment you can make in your life.  
 + 
 +=== In Conclusion === 
 + 
 +Do some mix of the above three until you have payed off all your high interest debt, built an emergency fund, and are able to take the full employer match to retirement accounts. Prioritize ultra high interest debt first, followed by making progress towards the emergency fund, followed by taking that employer match. If doing the above three is impossible you need to either live a less lavish lifestyle, or pursue education to make more money. 
 + 
 +==== 1c Interest ==== 
 + 
 +Understanding interest, and the difference between interest (sometimes called simple interest) and compound interest, is important foundational knowledge. If someone lends you money, they're going to want to get paid for that service. The longer and more money you borrow, the more the lender wants to get paid. Interest refers to the amount you pay to the lender for money they borrowed you. It is often charged on a yearly basis at a specific rate. This yearly rate is call an APR, or annual percentage rate. Simple interest is calculated by multiplying how much money you borrow, by the term of the loan, by the APR.  
 + 
 +Example, if you borrow $10,000 dollars for 10 years at an annual rate of 10%. You'd end up paying the lender $1,585.81 per year for 10 years. Or $15,858.09 over the life of the loan. This is simple interest at work. 
 + 
 +Compound interest is when you earn interest both on the initial amount loaned, and on the interest on top of that. This is how savings accounts and investments work. Compound interest is super intuitive. It is also one of the most powerful tools you can use save month and grow wealth.  
 + 
 +How much money will $10,000 be after accruing 10% compounding interest over 10 years? 11% is the average yearly return of the stock market over the last 50 years, everything rounded to keep the math simple. Pick a number in your head, seriously. That $10,000 dollars will grow to $27,182.82, a return of $17,182.82. What happens if let that $10,000 dollars grow for 30 years? I'd like you to guess in your head again.  
 +The investment would have grown to $200,772.91. If this was simple interest and it didn't compound the value would only be $31,592.58 
 + 
 +This is the power of compounding interest. This is how you retire. You put away money into investment accounts. You let that money accrue compound interest (or in the case of investment and we're being pendants, compounding returns) for as long as possible. Once there's enough money in the account to cover every dollar you'll spend for the rest of your life you retire. Simple as. I encourage you to play with a compound interest calculator to try to see how very small (or large amounts) grow with time. How much or little contributions over time change the final result, and how different interest rates change how fast or slow it grows. [[https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator|Investor.gov has a simple and decent calculator.]] 
 + 
 + 
 +==== 1c Taxes ==== 
 + 
 +Taxes are fairly complex and nuanced. I'll primarily be talking about income and capital gains taxes, as these are the two most relevant. I won't be talking about deductions or credits all that much in this section. In other sections (such as buying real estate) I'll touch on tax advantages.  
 + 
 +=== Income taxes === 
 + 
 +For every dollar you're payed, your government is going to take some percentage of it. The more you make, the more they take. Money withdrawn from retirement accounts is usually considered income, as is money payed by disability benefits, pensions, social security (for the yanks), gifts, proceeds from selling drugs, winning the lottery, etc. As you make more money your tax rate goes up. There will never be a situation where earning more money will cause you to have less after-tax income due to taxation; taxes work in a bracketing system.  
 + 
 +For example, lets say Ollie made $50,000 in 2023. Here's the relevant bits of the federal income tax brackets:  
 + 
 +^ tax rate ^ income range    ^ 
 +| 10%      | $0-$11,000      |  
 +| 12%      | $11,001-$44,725 | 
 +| 22%      | $44,726-$95,375 | 
 + 
 +The first $11,000 they make will be taxed at 10%, the first $11,001 to $40,725 is taxed as 12%, and so on. This give Ollie an effective income tax rate of 12.82%. Total income tax burden would be $6,413.  
 + 
 +=== Capital Gains === 
 + 
 +Capital gains tax is a tax on the profits made from investments, including investments into real estate and stocks. Retirement accounts are exempt from capital gains. This will be covered in detail later. Capital gains is split into two categories, long term capital gains and short term capital gains. Long term cap gains is on profits gained on assets held for more than a year, and short term cap gains is on profits from assets held for less than a year.  
 + 
 +You are not charged capital gains if you simply by and hold an asset. You are only charged capital gains on the total profits you've made by selling held assets that year. If you sell assets and you loose money, that the loss from that sale reduces the tax burden on your profits.  
 + 
 +==== 1e. Investing ==== 
 + 
 +Once you've met your basic needs, have a small nest egg for emergencies, and have payed off credit high interest debt you ought to have some extra money in your budget. I'm going to keep this as simple and only explore less risky options. This space is //filled// with grifters, be careful where you source information. Picking individual stock is virtually always a bad idea. You are not smart or better at it than your average professional investor. They will eat your lunch.  
 + 
 +The average inflation in the US over the last 50 years was 3.89% ((based on December end-of-year data from https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202312.pdf)). You need to have compounding returns on investment that beats inflation by a few percent, on average throughout your life. The more you beat inflation, the greater the returns. In the United States (and other places with access to American Financial markets), this is fairly easy.  On average the American stock market grows in value by 11% per year. If you stick your money in a fund that tracks the American stock market you're golden. For almost everyone that will be a low fee index fund for the S&P500. This will be an option in virtually every retirement plan offered by an employer.  
 + 
 +=== Dollar Cost Averaging, and Stock/Bond mixes === 
 +You should not care what the market is doing when investing into it. Your goal for it is for it to grow over the course of 20 to 40 years. If the market is down you buy the same amount of stock as when it's up. You, nor anyone else, is capable of predicting what the market is going to be doing in a few months. If the S&P 500 is down from today in 40 years you're going to have a lot more to worry about than retirement savings.  
 + 
 +As you age, grey, become wise, wrinkle, and being to look distinguished you need to start shifting money out of the stock market. A market crash when you're 15 years away from retirement does not matter. The market will (more than) recover of the ensuing 15 years and it will have no impact on how much you make overall. If a the market crashes when you've retired, where your living expenses are covered your portfolio it's going to impact your quality of life as you'll be forced to sell at a loss to keep funding your life.  
 + 
 +You should shift your stock/bond asset mix to more and more bonds as you age. The rule of thumb is 100 minus your age should be in stocks. A 30-year-old should have a 70/30 mix between stocks and bonds. If you can (or need to) tolerate more risk you can adjust this number upwards, following a 120 minus your age rule. This is more risky, but if you expect to live longer than average it will be worthwhile. The inverse is true if you expect to die at 60. 
 + 
 +=== Moral Investing === 
 + 
 +Moral funds have vastly under preformed since they were developed a good 40 years ago or so. It is incredibly challenging to passively invest and make money. Unfortunately due to pensions being rare, social security not being enough, being alive costing money, and inflation existing it is hard to retire in this country without benefiting some real shitty people. Real Estate is an option here if you can fix up a house, you're willing to be landlord, and you have significant savings. This is a genuine and proven path to generational wealth that will remain open as long as common people can afford a house, due to housing being so massively tax advantaged and subsidized. Going into the details of real estate investing is out of scope, as it's a //lot// more involved (and work) than passive investment into the stock market. Being a landlord also suck ass so either way you benefit from harm imo. Back before I held a negative opinion of landlords and real estate people in general biggerpockets was a good source if it's something you want to explore. I don't know if that remains the case today, as it's been many years.  
 + 
 +==== Retirement ==== 
 + 
 +How much money  
 + 
 +====== 2. The Dark Forest ====== 
 + じぶんがいない - salyu × salyu
  
 2a. Tax Advantaged Investments 2a. Tax Advantaged Investments
Line 40: Line 170:
 2d. Children and Community MUSIC They Caught us Doin' it - The Vaudevillian 2d. Children and Community MUSIC They Caught us Doin' it - The Vaudevillian
  
-To retirement your money must be working for you. Money in a bank, in a mattress, or in non-appreceating assets are not retirement savings. A healthy retrement savings is one in which those savings are growing heavily in value. The most common way folks invest their retirement savings is into the stock market. It is the safest way to get to retirement. +There are three dials to adjust to get close to retirement, saving 
  
-2a. Tax Advantaged Investments+===== 2a. Tax Advantaged Investments =====
  
-The main way most folks save for retirement is tax advanataged investments. These are in two broad catagories, Tax Differred and Tax Exempt. Both reduce the amount of taxes you pay on income, just at different points in your life. Withdrawls from tax advantaged are penalized if done before retirement, with some exceptions and nuances. Broadly speaking they protect your money as well; they can't be seized if you go bankrupt, are generally sheilded if you get sued, and are hard for creditors to access. +The main way most folks save for retirement is tax advantaged investments. These are in two broad categories, Tax Differed and Tax Exempt. Both reduce the amount of taxes you pay on income, just at different points in your life. Withdraws from tax advantaged are penalized if done before retirement, with some exceptions and nuances. Broadly speaking they protect your money as well; they can't be seized if you go bankrupt, are generally shielded if you get sued, and are hard for creditors to access. 
  
-Tax Differred+=== Tax Differed ===
  
-Tax Differred accounts reduce your immedate tax burden. You should put more of your retirement savings into a tax differed account if you expect your income to be lower in retirement than what your current income. Most folks will make less in retirement than they make for most of their career, and as such they ought to place most or all of their retirement savings into a tax differed account. A 401K (offered by private employers) is the most common type of tax differed account, but there's also 403(b) (offered by nonprofits), TSPs (for government workers), and  Tradtional IRAs (available to everyone). These work mostly the same, but there are nuances. You should read about the details of these accounts when they're made available to you. If you don't have access to these (e.g. you are self employed) you should read about and invest into a Traditional IRA. +Tax Differed accounts reduce your immediate tax burden. The most common types are; 401(k), offered by private employers; 403(b), offered by nonprofits; TSPs, for government workers; and Traditional IRAs, available to everyone. These work mostly the same, but there are nuances. You should read about the details of these accounts when they're offered to you. If you don't have access to these (e.g. you are self employed) you should read about and invest into a Traditional IRA. 
  
-Example: If Oliver made $50,000 and invests $3,000 into a tax differed account they'd only be taxed on $47,000 of their income. When Olliver retires they to withdraw $40,000 to cover their living expenses. The $40,000 withdrawn is treated as income, and will be taxed as such. +Example: If Oliver made $50,000 and invests $3,000 into a tax differed account they'd only be taxed on $47,000 of their income. When Oliver retires they to withdraw $40,000 to cover their living expenses. The $40,000 withdrawn is treated as income, and will be taxed as such. 
  
-Tax Exempt+=== Tax Exempt ===
  
-Tax exempt accounts are accounts that reduce your tax burden in retirement. You still pay income tax on tax exempt accounts, but you will not need to pay it in income taxed when you withdraw from your retirement accounts. +Tax exempt accounts are accounts that reduce your tax burden in retirement. You still pay income tax on tax exempt accounts, but you will not need to pay it in income taxed when you withdraw from your retirement accounts. These are best if you suspect you're making less now than when you will in retirement. For most of your life this won't be the case. Very early in your career, if you're taking a sabbatical, you win or inherit a lot of money, etc. are when you'd want to put more month into a tax exempt account over a Tax Differed. Examples of tax exempt accounts include a Roth 401(k), and a Roth IRA 
  
-3. F.I.R.E. MUSIC: Fire Sale - Church & AP Remix+Example: If Oliver made $50,000 this year and put $5,000 into a Tax Exempt account, they'd still be taxed on the full 50,000. Oliver is now old, and has reached retirement age. The $5,000 investment grew at 6% per year over 20 years and is now worth $16,036. Oliver can now withdraw the money and it wouldn't increase his income for that year. 
 + 
 +=== The Rule of Thumb === 
 + 
 +You should put more of your retirement savings into a tax differed account if you expect your income to be lower in retirement than what your current income. Most folks will make less in retirement than they make for most of their career. This isn't true for everyone. If you're early in your career and are not making much money, but expect that to change, or are switching careers, or are taking a sabbatical, or otherwise are not making much money that year (and thus will have a low income tax burden for the year) you ought to save using a ROTH. If you're not sure whether you'll make more or less you can always invest in both types of accounts and use vibes and napkin math to help decide how much will go to each. 
 + 
 +====== 3. F.I.R.E. ====== 
 + MUSIC: Fire Sale - Church & AP Remix 
 + 
 +====== 4. The Well Trodden Path ======
  
-4. The Well Trodden Path 
  
-5. The Paths to Gold SWEAT - MUSIC: Nice Things - Tank and Bangas+====== 5. The Paths to Gold ====== 
 + SWEAT - MUSIC: Nice Things - Tank and Bangas 
 +====== 6. The Paths to Time ====== 
 + MUSIC: Drugs - The Philharmonik
  
-6. The Paths to Time MUSIC: Drugs - The Philharmonik+====== 7. On Work ====== 
 + 
  
-7. On Work +====== 8. On Financing, Loans, and Homeownership ====== 
 + MUSIC: An Elusive Nightmare - Rockos
  
-8. On Financing, Loans, and Homeownership MUSIC: An Elusive Nightmare - Rockos+====== 9. On Death ====== 
 + MUSIC - Waiting for Death - CandleKid
  
-9. On Death MUSIC - Waiting for Death - CandleKid+====== 10. In Conclusion ====== 
 + MUSIC: Back when I was 4 - Jeffery Lewis
  
-10. In Conclusion MUSIC: Back when I was 4 - Jeffery Lewis+Do not worry about being optimal. Folks can obsess over this stuff. All of this is is a tool enable you to live the life you want, it shouldn't be a major stressor. Once you've sat down and made the decisions you can forget about the details. The details only need to be considered when you're making massive life changes, e.g. a career change, a house purchase, finding/loosing a life partner, etc. That initial hump of planning and getting finances in order takes a while. After that maybe an hour a month, 20 minutes a week. Most of this stuff is automatic. You make a decision when you're young, execute as your age, and change course when your life plans change.