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Unique and Interesting Observations or Perspectives

Retirement Intelligence 101 Part 3 How to Achieve FIRE (Financial Independence and Retire Early)

In Part 2 we concluded that in order to retire with an average income of $64,000 per year, we needed $1,600,000 in cash to invest.  And we concluded that $1.6 million is a ton of money that would take forever to acquire so retiring seems out of reach so why try? I’m here to teach you a bunch of tricks now to bring that number down and make it easier to retire.

 

Lesson 1: Budgeting is the critical skill that enables retirement to be attainable.

The first thing we are going to notice is that if we spent less money than the average American, we can retire sooner because the less we spend per year, the less money we need to retire with. This is doable because most people don’t spend intelligently. Learning how to spend intelligently can save us money by reducing our costs.

According to this website, the average expenditures for an American are
$800 per month for rent
$750 per month for transportation
$600 per month for food
$250 per month for health care
$200 per month for fun
$100 per month for misc.
Total of $2700 per month or $32,400 per year. You’ll notice I excluded all debt payments from the website. I did this because you often have the option to ask for a delayed debt repayment plan which allows you to go several years without any or with minimal debt repayments.  Thus you can get that cost close to 0 while you’re executing the plan I’ll explain next.
If you learned to spend more intelligently than the Average American, then you could easily get that cost down to $30,000 per year or even better.  The key point here is that the less you spend per year, the more you save. For example, if you earned $64,000 per year and you spent $64,000 per year. At the end of one year of working you would have saved $0. Meaning that you still need $1.6 million to retire. If instead you earned $64,000 per year and you spent $30,000 per year, then you would have saved $34,000 at the end of one year. And because you only spend $30,000 per year, the amount you need to retire is:

x * ($4 / $100) = $30,000
x = $750,000

and if you are saving $34,000 per year, then it would take you $750,000 / $34,000 = 22 years to retire.  Just think about that. Most people work from 18 or 21 years of age until they are 68.  Some people never get to retire, but taking the worst case scenario of working from 18 to 68, that’s 50 years of working in order to retire.  By spending intelligently and making an average American income, you could retire in less than half the time of everyone else. 22 years instead of 50 years.  Then you would have 28 years of your life BACK. Freedom for 28 years to do anything you wanted every day every hour.

Key Lesson 1: Lowering your costs and saving money can enable you to retire 28 years sooner than everyone else.

 

Lesson 2: The Government provides low risk opportunities to make money out of the money you save. 

We can do better than retiring 28 years faster than everyone else actually. Here’s another trick to retire even faster: Instead of keeping the money you save in cash, invest it. One thing you can invest it in is a Certificate of Deposit. This is essentially investing in the USA government. The only way you lose is if the USA disappears. Therefore, the risk is low for this investment.

Risk is how scary something is. It determines how likely you are to lose.  Higher risk means you will lose more, lower risk means you lose less.

Looking at historical data from this website, we can see that recently the CD options can return roughly 2.5% per year.  What this means is if you invest $30,000 for one year, you would earn $750 back.

Let’s say that instead of saving $34,000 as cash into a bank account, you put this into a Certificate of Deposit paying 2.5% per year.

Start of the year, how much you have During the year, how much you save How much you earned in interest How much you have total at the end of the year Inputs: During the year, how much you save Interest rate on savings
Year 0 $0 $34,000 $0 $34,000 $34,000 2.50%
Year 1 $34,000 $34,000 $850 $68,850
Year 2 $68,850 $34,000 $1,721 $104,571
Year 3 $104,571 $34,000 $2,614 $141,186
Year 4 $141,186 $34,000 $3,530 $178,715
It takes 17 years to save $750,000 if you invest your money in a 2.5% Certificate of Deposit
Year 5 $178,715 $34,000 $4,468 $217,183
Year 6 $217,183 $34,000 $5,430 $256,613
Year 7 $256,613 $34,000 $6,415 $297,028
Year 8 $297,028 $34,000 $7,426 $338,454
Year 9 $338,454 $34,000 $8,461 $380,915
Year 10 $380,915 $34,000 $9,523 $424,438
Year 11 $424,438 $34,000 $10,611 $469,049
Year 12 $469,049 $34,000 $11,726 $514,775
Year 13 $514,775 $34,000 $12,869 $561,644
Year 14 $561,644 $34,000 $14,041 $609,686
Year 15 $609,686 $34,000 $15,242 $658,928
Year 16 $658,928 $34,000 $16,473 $709,401
Year 17 $709,401 $34,000 $17,735 $761,136

Here’s the link to the spreadsheet

By investing it in a 2.5% return Certificate of Deposit, you can retire in 17 years instead of 22. You’ve saved an additional 5 years of your life with this knowledge for a total of 33 years of working life saved! 

Key Lesson 2: Investing your saved money in a Certificate of Deposit can allow you to retire 5 years faster for a total of 33 years of working life saved!

 

Lesson 3: The stock market provides a low to medium risk opportunity to make money out of money even faster, if you are able to keep the money in the stock market for over 5 years. 

The stock market is another common choice for investment. Over long periods of time, it has been shown that the stock market returns 7% per year (here is an article explaining why 7%).  The key here is that you have to keep your money in the stock market for many years in order for that to be true.  What you need to understand is that if you put $100 into the stock market today, that money could become $20 in a year, or it could become $180 in a year.  However, if you DO NOT SELL, then it will eventually become roughly a 7% return per year over 5-10 years.  Running the numbers again:

Start of the year, how much you have During the year, how much you save How much you earned in interest How much you have total at the end of the year Inputs: During the year, how much you save Interest rate on the stock market
Year 0 $0 $34,000 $0 $34,000 $34,000 7.00%
Year 1 $34,000 $34,000 $2,380 $70,380
Year 2 $70,380 $34,000 $4,927 $109,307
Year 3 $109,307 $34,000 $7,651 $150,958
Year 4 $150,958 $34,000 $10,567 $195,525
It takes 13 years to save $750,000 if you invest your money in the stock market with 7% average annual returns
Year 5 $195,525 $34,000 $13,687 $243,212
Year 6 $243,212 $34,000 $17,025 $294,237
Year 7 $294,237 $34,000 $20,597 $348,833
Year 8 $348,833 $34,000 $24,418 $407,252
Year 9 $407,252 $34,000 $28,508 $469,759
Year 10 $469,759 $34,000 $32,883 $536,642
Year 11 $536,642 $34,000 $37,565 $608,207
Year 12 $608,207 $34,000 $42,575 $684,782
Year 13 $684,782 $34,000 $47,935 $766,717

Here’s the link to the spreadsheet

By investing it in the stock market with an average 7% annual return, you can retire in 13 years instead of 17. You’ve saved 4 additional years of your life with this knowledge for a total of 37 years of working life saved!  

Side note: The stock market goes through cycles of good years and bad years, much like life does in general.  During the good years, stock prices go up and you earn lots of money for the money you give to the stock market. This is called a bull market.  Bull markets earn you money.  During the bad years, stock prices go down and you lose money when you give it to the stock market. This is called a bear market. Bear markets lose you money.

For this reason, the calculations above are unrealistic because depending on whether you start saving money during a good year or a bad year, you may have to wait a few more years past 13 years in order to retire. However, the key point is valid, which is that investing in the stock market provides better returns long term than investing in a Certificate of Deposit

Key Lesson 3: Investing your saved money in the stock market can allow you to retire up to 5 years faster than investing in a Certificate of Deposit, leading to a total of 37 years of working life saved!

 

Lesson 4: If you are willing to take on more risk, you can retire even faster by using leverage to accelerate your investment earnings. 

If you can borrow money for less than 7% per year over many years, then doing so will allow you to earn money on the difference between the profit and the debt interest payment.  For example, if you can borrow $10,000 at a rate of 4% per year over 5 years, then you should wait for a Bull Market and then put that $10,000 into the stock market to get 7% per year for 5 years.   $10,000 * (1.07) ^ 5 = $14.000.  Thus you will earn $4,000 from the stock market.  You will pay $1000 in interest fees (using this calculator) and therefore earn $4,000 -$1,000 = $3,000 this way.  This is higher risk because you are trying to predict the future and if you are wrong then you can lose money. However, if you’re willing to take the risk then you should learn more about this opportunity. Doing this can earn you extra money to save and therefore retire even faster.

Key Lesson 4: If you can find opportunities to earn more money than it costs to borrow money, you should consider learning more about that opportunity to decide whether to take that risk or not.  Doing so will allow you to earn more money faster and retire sooner.

 

Lesson 5: An extremely good way to accelerate your investment earnings is through real estate.  Real estate enables you to make medium risk investments with high leverage multiples. Doing so can rapidly accelerate your retirement opportunities. 

Real estate prices rise roughly 2.38% per year (according to this website).  This sounds low compared to the 2.5% that Certificates of Deposit offer and the 7% that the stock market can offer. The difference is that with real estate, you rarely pay for the whole house upfront. Instead, you borrow money from the bank in the form of a mortgage, and then make payments on the mortgage while owning the home. For example, if you buy a house for yourself or for a family member, you can put down 10% of the price of the home. Let’s say the house costs $100,000 and you put down $10,000. Even though you only paid $10,000 in total on day 1, you own the house. The title and the deed for the property is under your name. What this means is that after one year, when the house earns 2.38%, it earns that 2.38% on $100,000, the total price of the house.  This means you’re earning $2,380 per year. Since you put down $10,000, that means you earn $2,3800 / $10,000 = 23.8% per year on your investment.  You put down $10,000 but your profit is based off of $100,000 so your leverage factor is $100,000 / $10,000 = 10.  You get 10x the return you would normally get. Which makes sense because 2.38% * 10 = 23.8%.

Thus, if you change your strategy so that the first year you save $34,000 you put that money as a downpayment to a house at 10x leverage (meaning you buy a place that’s worth $340,000) and then every year after the first year you put $34,000 into the stock market, then your investment returns look like this:

Start of the year, how much you have During the year, how much you save How much you earned in interest Total at the end of the year from Stock Start of the year house value House Appreciation End of year house value Net Profit from House Total from both Stock and House
Year 0 $0 $34,000 $0 $0 $0 $0.00 $0 $0 $0
Year 1 $0 $34,000 $0 $34,000 $340,000 $8,092.00 $348,092 $8,092 $42,092
Year 2 $34,000 $34,000 $2,380 $70,380 $348,092 $8,284.59 $356,377 $16,377 $86,757
Year 3 $70,380 $34,000 $4,927 $109,307 $356,377 $8,481.76 $364,858 $24,858 $134,165
Year 4 $109,307 $34,000 $7,651 $150,958 $364,858 $8,683.63 $373,542 $33,542 $184,500
Year 5 $150,958 $34,000 $10,567 $195,525 $373,542 $8,890.30 $382,432 $42,432 $237,957
Year 6 $195,525 $34,000 $13,687 $243,212 $382,432 $9,101.89 $391,534 $51,534 $294,746
Year 7 $243,212 $34,000 $17,025 $294,237 $391,534 $9,318.51 $400,853 $60,853 $355,089
Year 8 $294,237 $34,000 $20,597 $348,833 $400,853 $9,540.29 $410,393 $70,393 $419,226
Year 9 $348,833 $34,000 $24,418 $407,252 $410,393 $9,767.35 $420,160 $80,160 $487,412
Year 10 $407,252 $34,000 $28,508 $469,759 $420,160 $9,999.82 $430,160 $90,160 $559,919
Year 11 $469,759 $34,000 $32,883 $536,642 $430,160 $10,237.81 $440,398 $100,398 $637,040
Year 12 $536,642 $34,000 $37,565 $608,207 $440,398 $10,481.47 $450,879 $110,879 $719,087
Year 13 $608,207 $34,000 $42,575 $684,782 $450,879 $10,730.93 $461,610 $121,610 $806,392

Here’s the link to the spreadsheet

This might look like you’d still be retiring in 13 years, so why buy a house the first year instead of putting all your money into the stock market?  Well for one, you would own a house.  Second of all, with a house you get a lot of tax break benefits.  First, you can tax deduct the interest payments you make on your mortgage.  Second, instead of paying your rent to a landlord, that money gets to go into the mortgage that you pay to buy your home. Third, in most places, a $340,000 place is a seriously nice place with many bedrooms and bathrooms. What this means is you can rent out your extra bedrooms, or convert your living rooms and garages into more extra bedrooms to become a landlord and generate more income.  Generally speaking, you can get about 5% of your home’s value in rent by renting out rooms you’re not living in.  If you put that 5% rental cash flow into stocks, then your chart now looks like this:

Start of the year, how much you have During the year, how much you save How much you earned in interest Income from Rent Total at the end of the year from Stock Start of the year house value House Appreciation End of year house value Net Profit from House Total from both Stock and House
Year 0 $0 $34,000 $0 $0 $0 $0 $0.00 $0 $0 $0
Year 1 $0 $34,000 $0 $17,000 $51,000 $340,000 $8,092.00 $348,092 $8,092 $59,092
Year 2 $51,000 $34,000 $3,570 $17,405 $105,975 $348,092 $8,284.59 $356,377 $16,377 $122,351
Year 3 $105,975 $34,000 $7,418 $17,819 $165,212 $356,377 $8,481.76 $364,858 $24,858 $190,070
Year 4 $165,212 $34,000 $11,565 $18,243 $229,019 $364,858 $8,683.63 $373,542 $33,542 $262,561
Year 5 $229,019 $34,000 $16,031 $18,677 $297,728 $373,542 $8,890.30 $382,432 $42,432 $340,160
Year 6 $297,728 $34,000 $20,841 $19,122 $371,690 $382,432 $9,101.89 $391,534 $51,534 $423,225
Year 7 $371,690 $34,000 $26,018 $19,577 $451,285 $391,534 $9,318.51 $400,853 $60,853 $512,138
Year 8 $451,285 $34,000 $31,590 $20,043 $536,918 $400,853 $9,540.29 $410,393 $70,393 $607,311
Year 9 $536,918 $34,000 $37,584 $20,520 $629,022 $410,393 $9,767.35 $420,160 $80,160 $709,182
Year 10 $629,022 $34,000 $44,032 $21,008 $728,062 $420,160 $9,999.82 $430,160 $90,160 $818,222

Here’s the link to the spreadsheet

As you can see, you can retire in 10 years, a full 40 years faster than everyone else, AND you can own a house at the end of it.

And we haven’t even begun to scratch the surface of all the tricks and tools you have at your disposal if you learn more financial engineering intelligence.

If you are privileged enough to be a Software Engineer in San Francisco, you can retire in 4 years. Here’s the link to that spreadsheet.

This concludes the introductory course of Retirement 101. I will hold an advanced course someday in the future. If you have any questions please leave a comment below or message me at attemptedliving@gmail.com

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Find Perspective with 5 Thoughts on Life in 2018

In this post, I’d like to share some thoughts I’ve had that helped me accept reality and find peace.  I hope by reading about them, you can gain that same benefit. The dates are the day I recorded the thought:

1.  2/25/18

To fly a plane you need a license, because you’re responsible for the lives of many. Yet to be a parent, you don’t need a license, despite also being responsible for lives.  So if you had bad parents, this is likely why: they didn’t go through parent training.  And if you think ill of someone else, realize that they may have been a product of bad parents.  Parenting is hard, and this world sadly does not do a good job training parents.

2. 3/4/18

Taking a vacation helped me to focus on the future and not the past.  While on vacation, I realized I’m spoiled because I have much to appreciate and be grateful for.  I also realized that I’m much older than I was the last time I took a vacation, so time is running out for me to live life. Thus I need to take more time to enjoy life and move on from the problems of the past or else I’ll run out of time before I know it.

3. 6/21/18

We celebrate success more than we celebrate the courage to try.  Society should reward failure, because daring to try and fail takes as much strength as daring to try and succeed.

The greatest lie we’ve been taught is that effort always means success, and failure always means a lack of effort.  The truth is that luck matters, and being unlucky matters.  By celebrating only the successful, we teach people not to take risks.  As a result, we have raised a generation of scaredy cats so afraid to be themselves that they would commit suicide than risk failing.

The saddest part of this is that they are committing suicide because they are afraid of failing to become someone they are not, because they don’t have the courage to even set their goal to be themselves.  To successfully be someone they are not is a fundamentally impossible and unreasonable request, so an entire generation is setting themselves up for failure, and then not having the skillset to handle failure, and so therefore setting themselves up for depression and mental health issues which come with the shunning that society wrongly gives to those who fail.

4. 7/9/18

When faced with a problem, you can change yourself or change the world.  Sometimes it’s correct to change the world. Sometimes it’s correct to change yourself.  A problem I’ve faced recently is that I am a sensitive person, so I get hurt by insensitive people.  How do I solve this problem?  I can either become insensitive myself, or I can convert the world’s insensitive people into sensitive people.  I want to live in a world where people are considerate of others, so I intend to use this platform www.attemptedliving.com to provide sensitivity training for people who lack the skills of sensitivity.

5. 8/13/18

Masculinity might be a response to mortality
I was thinking about how I could convince an insensitive person to take the time and energy to learn how to be sensitive, and so I tried to imagine what would motivate that person to take action.  So I looked at the actions that insensitive people take and it’s often to be macho man and be strong and dominating.  So then I asked why someone would overly express certain emotions.  Psychology says imbalance is a sign of overcompensating for something, so with that lead I presume insensitive people act strong out of the fear of being weak. What’s wrong with being weak? It means you’re mortal. Thus, masculinity may be a response to mortality.
When something disrupts a macho man, they feel threatened and so they respond with anger rather than compassion. Responding with compassion is coming from a place of strength: security, and then abundance, and then to give help.  Responding with anger is coming from a place of weakness: insecurity, and so fear, and so uncontrollable emotions.
To counteract mortality, insensitive people crave and chase power, status, respect, and conquest over others, because in their mind it distances themselves further from mortality.
They tell each other to ignore their emotions, suck it up and move on, because they are afraid that they are too weak to handle the emotions. They can’t afford the time, energy, resources that understanding their emotions would take, so out of that fear and insecurity they respond to their emotions by shutting down their emotions.

 

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Tools for Optimal Performance

This post will be updated over time to be a list of resources for achieving optimal performance.

https://www.ted.com/talks/sian_leah_beilock_why_we_choke_under_pressure_and_how_to_avoid_it

  • over focus and over concentration causes worse performance. So focus less and go on autopilot for the things you normally do and should autopilot
  • write things down so that they exit your mind rather than stick inside
  • Anxiousness is contagious: if you run into other people who are anxious, you are likely to mirror it
    • Systematic Culture like “math is hard” causes us to associate emotions that hold our performance back
    • Change your attitude to change your performance

To find out when more Life Education Curriculum is released, subscribe on the side! Follow on Twitter, on Facebook, on Google+, on Tumblr.  Please share your comments to this post below.