Real Return Fakers & Quitting Investing For Good

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Ben8848
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Real Return Fakers & Quitting Investing For Good

Post by Ben8848 »

For years I've listened to "financial guru's" throw around compound interest rates at 10-12% but after spending time on the forum here I see investors using numbers like 3-5% for their expected real return and to ignore figures that don't account for inflation. It's pretty disappointing after listening to Dave Ramsey for years, I now see him as a hype man. Anyways, I want to be able to quit investing for good and not add anymore money to my accounts. I'm ready to learn how to spend some money and I have a business that provides passive cash flow where one can already feel retired so stacking chips in the markets forever doesn't make sense for me.

What I found was that from 1900-2021 the real return of the S&P 500 is 6.77% while from 1921-2021 it's 7.71% after inflation. In my case all investments are Roth so taxes don't come into account, only inflation. My asset allocation is going to be 90/10 for the long run.

So I'll be 33 this year with 27 years left until retirement. Right now I have about 5.86x my expenses in retirement funds. If I use the 6.77% real return figure compounded for 26 years I will end up with a little over 33x my expenses at 60 (the 3% rule) which would mean I could stop investing now. If I use a 5% figure I would need to invest over $7,500 a year in todays dollar for the next 26 years to get to the 3% rule. If that's the case I would rather just invest like crazy for another year or two and not settle.

What are you using for your real return rate when predicting your investment reruns and what would you use with a 90/10 portfolio?

The vanguard reference suggests its around 9.9% without accounting for inflation.

https://investor.vanguard.com/investing ... allocation
Last edited by Ben8848 on Fri Apr 09, 2021 4:53 pm, edited 1 time in total.
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rockstar
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Re: Real Return Fakers & Quitting Investing For Good

Post by rockstar »

Check out Jack Bogle's book: The Little Book of Common Sense Investing. He walks through his approach for coming up with expected returns. You don't have to agree with it, but it's a good place to start. If you assume that the average PE for equities should be 20x, then equities should return close to zero nominal for the next decade, and bonds with their yield already below inflation and low, should probably return their coupon. So right now, I'd expected negative real returns for another lost decade.

https://www.wsj.com/market-data/stocks/peyields

But let's see how earnings go. The current PEs don't make a lot of sense right now. Let's see what the numbers look like post COVID. I'm definitely not buying bonds now.

If I thought the above had no chance of changing as we reopen, I'd sell my stocks and pay off my mortgage.

As for your investing approach, check out Coast FIRE.
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gwe67
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Re: Real Return Fakers & Quitting Investing For Good

Post by gwe67 »

My quick & dirty formula is percent of portfolio in stocks divided by ten, less the average social security COLA to approximate inflation.

In your case 90% / 10 = 9%
9% - 3.16% = 5.84% real.

In my case 60% / 10 = 6%
6% - 3.16% = 2.84% real.

Yes, I know inflation won't be anywhere near that any time soon, but this builds in a level of conservativeness.

It's as good as anyone else's wild guess.
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Re: Real Return Fakers & Quitting Investing For Good

Post by livesoft »

I don't see a problem for the OP doing what they are suggesting. I also predict they will change their mind later in the future if they do what they are suggesting. That's the prerogative of a 33-year old.
Last edited by livesoft on Fri Apr 09, 2021 5:02 pm, edited 2 times in total.
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jebmke
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Re: Real Return Fakers & Quitting Investing For Good

Post by jebmke »

I solved this whole problem by not trying to predict investment returns.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
GG1273
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Re: Real Return Fakers & Quitting Investing For Good

Post by GG1273 »

You'd have to hit it just right (as the gurus say)

half of our $2.2 portfolio is in my wife's 403b (all Vanguard funds available) and landed at 11.54% ROI per year for 26 years. Most of that was in the Health Care fund (she's a nurse) so had some familiarity with the stocks they bought.

My 401K about 40% of our portfolio is up 9.63% over 15 years; but I tilted ^MID for a long time, then when I lost that option, Small-cap index and a fund of funds. We've moved to Target funds last few years and we close in on retirement.
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Re: Real Return Fakers & Quitting Investing For Good

Post by esteen »

Ben8848 wrote: Fri Apr 09, 2021 4:41 pm For years I've listened to "financial guru's" throw around compound interest rates at 10-12% but after spending time on the forum here I see investors using numbers like 3-5% for their expected real return and to ignore figures that don't account for inflation. It's pretty disappointing after listening to Dave Ramsey for years, I now see him as a hype man.
IMO Dave Ramsey is great for people who need wholesale behavioral changes to eliminate debt and get on a path to financial stability. I've recommended his book or his workshop to several people as appropriate. But he's not an investment finance or retirement planning professional, and his advice on that front is frankly sub-par. Use him for what he's good for, and go somewhere else for what he's not.
jebmke wrote: Fri Apr 09, 2021 5:02 pm I solved this whole problem by not trying to predict investment returns.
Agree it's a fools errand to try to accurately predict returns. But at the same time it's a useful (if ultimately inaccurate) exercise to try as best you can to project into the future, because that's the only way we have to come up with a plan for today. If we just picked a random number to put into retirement accounts each year, we may find we come up short. Best to plan, even if the planning is imperfect.
Ben8848 wrote: Fri Apr 09, 2021 4:41 pm What are you using for your real return rate when predicting your investment reruns and what would you use with a 90/10 portfolio?
I happen to have close to a 90/10 portfolio. For my retirement projections I have typically used a 3% real return. Is that conservative? Probably. Could it happen? Absolutely! It could be even lower. We don't know the future. I don't want to be the one who is safe in, say, 70% of the market outcomes... because that means a 30% chance I'll have a not-so-fun time near/in retirement. While I can't bring the chance of failure down to zero %, I want to get it as close to zero as reasonably possible. The flip side is I save too much money vs what I need in retirement. That's the kind of error I can live with happily.

-ES
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GG1273
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Re: Real Return Fakers & Quitting Investing For Good

Post by GG1273 »

I'll have to dig around for it but remember seeing that 50/50 Wellington / Wellesley returns just over 8% over life of Wellesley which began in 1970
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Re: Real Return Fakers & Quitting Investing For Good

Post by esteen »

One more thought: If I used the historical market average of 6.77% (according to OP's research), that is exactly what my output would be... an expected average. While we all know markets aren't normally distributed, for the sake of simplicity I will say that it approximates the median... i.e. 50% of outcomes on one side or the other. I don't want to plan with 50% success rate (and even that is a shot in the dark, because we all know history doesn't repeat itself though it often rhymes).

You may want to re-frame your thinking of expected future value by looking at loss using Tyler's (fellow Boglehead) fantastic https://portfoliocharts.com/ website. Read through some of his articles on market loss and risk mitigation, and use some of the wonderful free tools he has. It will give you a great appreciation of planning for "average" vs planning for "worst case".

-ES
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Re: Real Return Fakers & Quitting Investing For Good

Post by drk »

GG1273 wrote: Fri Apr 09, 2021 5:19 pm I'll have to dig around for it but remember seeing that 50/50 Wellington / Wellesley returns just over 8% over life of Wellesley which began in 1970
This is only since 1985, but 10% CAGR with a max drawdown of ~26% seems pretty good.
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Re: Real Return Fakers & Quitting Investing For Good

Post by KlangFool »

OP,

I save 1 year of expense every year. I use 0% REAL RETURN for my planning. I can be FI in less than 20 years.

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quantAndHold
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Re: Real Return Fakers & Quitting Investing For Good

Post by quantAndHold »

It’s kind of a fool’s errand to try to predict returns, but we all do it at some point during our investing lifetimes, of course. What I do when I’m so inclined is to throw out the inflation rate, and only look at real returns.

For stocks, I guess that the long term real returns will be the reciprocal of the CAPE ratio. If CAPE is high, then stocks are expensive, and expected returns are low, and vice versa. So, if the current CAPE ratio is 25, then expected long term returns would be 4% real. Currently the CAPE ratio is 37, which would indicate real returns of 2.7%.

For bonds, my portfolio is skewed towards intermediate treasuries, so I use the current yield on 10 year TIPS. Which is currently -0.66%.

Then I multiply it out by my asset allocation. For my 70/30 allocation, that would be 70%*2.7% + 30%*-0.66%, which equals...yikes. 1.7%. Not exactly what Dave Ramsey is predicting, but investing isn’t really what that guy is good at. A 90/10 portfolio using this method would currently be about 2.4%.

Is any of this more accurate than consulting a Magic 8 ball? Cannot predict now.
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Re: Real Return Fakers & Quitting Investing For Good

Post by chuckb84 »

I use the mean and standard deviation from the 3-Fund portfolio.

https://www.bogleheads.org/blog/2021/01 ... 20-update/
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Re: Real Return Fakers & Quitting Investing For Good

Post by Jeff Albertson »

jebmke wrote: Fri Apr 09, 2021 5:02 pm I solved this whole problem by not trying to predict investment returns.
+1 exactly

example: https://ofdollarsanddata.com/the-right- ... ight-time/
annualized real returns from 1960 to 1980, less than 2%
annualized real returns from 1980 to 2000, about 13%
from 2020-2040? Maybe try using a few more decimal points to improve your forecast.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Kenkat »

Ben8848 wrote: Fri Apr 09, 2021 4:41 pm What I found was that from 1900-2021 the real return of the S&P 500 is 6.77% while from 1921-2021 it's 7.71% after inflation. In my case all investments are Roth so taxes don't come into account, only inflation. My asset allocation is going to be 90/10 for the long run.
Yup, it’s been a heck of a run. Some have called it “The American Century”. Will it repeat over the next 27 years that you are counting on? Hard to say, but I wouldn’t want to wait until I was 60 to find out that it turns out that it didn’t. I would try to save some money, especially while you are young. Pick some reasonable number and see how you do. 15% of income wouldn’t be a bad number to use, but it could be 10% or 20% or even higher. You will need to find that right balance but you want to continue the savings habits that got you to close to 6x at your current age.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Marseille07 »

rockstar wrote: Fri Apr 09, 2021 4:49 pm Check out Jack Bogle's book: The Little Book of Common Sense Investing. He walks through his approach for coming up with expected returns. You don't have to agree with it, but it's a good place to start. If you assume that the average PE for equities should be 20x, then equities should return close to zero nominal for the next decade, and bonds with their yield already below inflation and low, should probably return their coupon. So right now, I'd expected negative real returns for another lost decade.

https://www.wsj.com/market-data/stocks/peyields

But let's see how earnings go. The current PEs don't make a lot of sense right now. Let's see what the numbers look like post COVID. I'm definitely not buying bonds now.

If I thought the above had no chance of changing as we reopen, I'd sell my stocks and pay off my mortgage.

As for your investing approach, check out Coast FIRE.
This. What the OP seems to be doing is CoastFIRE, which is actually very dangerous.

If our past returns continue, it'll work. But if we pull a Nikkei then they can't retire *at all*.
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Re: Real Return Fakers & Quitting Investing For Good

Post by firebirdparts »

It never crossed my mind, to be honest. If I get rich, I figure I’ll know it when I get there.

I enjoy working, though. It’s a different world when you’re me.
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Re: Real Return Fakers & Quitting Investing For Good

Post by rockstar »

Marseille07 wrote: Fri Apr 09, 2021 7:08 pm
rockstar wrote: Fri Apr 09, 2021 4:49 pm Check out Jack Bogle's book: The Little Book of Common Sense Investing. He walks through his approach for coming up with expected returns. You don't have to agree with it, but it's a good place to start. If you assume that the average PE for equities should be 20x, then equities should return close to zero nominal for the next decade, and bonds with their yield already below inflation and low, should probably return their coupon. So right now, I'd expected negative real returns for another lost decade.

https://www.wsj.com/market-data/stocks/peyields

But let's see how earnings go. The current PEs don't make a lot of sense right now. Let's see what the numbers look like post COVID. I'm definitely not buying bonds now.

If I thought the above had no chance of changing as we reopen, I'd sell my stocks and pay off my mortgage.

As for your investing approach, check out Coast FIRE.
This. What the OP seems to be doing is CoastFIRE, which is actually very dangerous.

If our past returns continue, it'll work. But if we pull a Nikkei then they can't retire *at all*.
It's worthwhile to continue to invest in things like 401ks to potentially lower ones tax bracket, especially if your company offers a match. No reason to not get more money.
Last edited by rockstar on Fri Apr 09, 2021 10:22 pm, edited 1 time in total.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Beensabu »

You need to keep contributing, no matter what the expected real return is.

I know it feels dumb and useless.

You need to keep contributing. Something. Anything. Keep doing it. Every paycheck. Up to your match in your 401k. And as much as you can in your Roth.

Just do it. Every year. Especially if you're 90/10. You need to keep pumping it in. Especially when your balance goes boom. Don't freak out. Keep putting it in. Just do it.

I know it feels dumb and useless.

Do it anyway. You'll be happy you did, no matter how things play out in the end. Short of expropriation, in which case everyone is probably equally screwed.
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Re: Real Return Fakers & Quitting Investing For Good

Post by pseudoiterative »

As rockstar pointed out, under current conditions fixed-income is not expected to give anything like historical returns, & for equities:
If you assume that the average PE for equities should be 20x, then equities should return close to zero nominal for the next decade
Perhaps. This is much less certain. I think the expectation that the long-run average PE for equities should oscillate around 20x only makes sense if you assume that long-run future average real interest rates are higher than they are now, and current low interest rates are just a temporary departure from normality. But the historical trend of interest rates (over hundreds of years) is that they're more or less steadily trending down.

GMO frame this as their "purgatory" vs "hell" scenario analyses: if we are merely in "purgatory" then the current era of low investor expectations for returns (and willingness to pay high prices for them) is temporary, and when investor expectations increase to be closer to historical norms, yields will rise once again (with a corresponding decrease in asset prices). If we are in "hell" then the shift is permanent and assets are more or less fairly valued. GMO forecast negative real returns for all segments of the equities market over the next 7 years, apart from "emerging value", but who knows how reliable we expect their estimates to be, and how the future will actually pan out.

If you think about what is going on in real world, in terms of what the physical economy looked like in 1900, what it looks like now, and what it will start to look like over the next few decades, trends in populations and demographics, environmental trends, and major changes in technology, why should data from how the economy was running in 1900 be predictive of how reality will pan out in the next 30 or so years? We're always moving forward into conditions that human civilisation has never experienced before.
I'm ready to learn how to spend some money and I have a business that provides passive cash flow where one can already feel retired so stacking chips in the markets forever doesn't make sense for me.
If you get into the habit of spending more money, or if your health care costs grow as you age (like many people's do), note that your expenses in 30 years time might be a fair bit higher than your expenses today.

Moderation in life is not a bad rule of thumb, if you are framing it as "focus on generating income and investing in market to exclusion of other activities for next 1-2 years" vs "stop investing and never start again", maybe there's some middle ground where you get to have more variety of life activities in the short-medium term while still regularly investing a modest amount and seeing how reality will actually pan out.
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Re: Real Return Fakers & Quitting Investing For Good

Post by quantAndHold »

Jeff Albertson wrote: Fri Apr 09, 2021 6:55 pm
jebmke wrote: Fri Apr 09, 2021 5:02 pm I solved this whole problem by not trying to predict investment returns.
+1 exactly

example: https://ofdollarsanddata.com/the-right- ... ight-time/
annualized real returns from 1960 to 1980, less than 2%
annualized real returns from 1980 to 2000, about 13%
from 2020-2040? Maybe try using a few more decimal points to improve your forecast.
The CAPE ratio in 1960 was 18.34, which, using 1/CAPE, would predict about 5% real.
The CAPE ratio in 1980 was 8.85, which would predict about 11%.
The CAPE ratio today is 37.

There are some changes to GAAP since 1980 that would make returns relative to CAPE better than they were back then, but stocks are very expensive right now, by any measure you want to use.
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Re: Real Return Fakers & Quitting Investing For Good

Post by foodhype »

Y'all CAPE and P/Es aren't everything. You also have to take into account extremely low interest rates and higher than normal expected earnings growth. Don't anchor to a specific P/E multiple like 20x. Contextualize.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Beensabu »

foodhype wrote: Fri Apr 09, 2021 7:45 pm Y'all CAPE and P/Es aren't everything. You also have to take into account extremely low interest rates and higher than normal expected earnings growth. Don't anchor to a specific P/E multiple like 20x. Contextualize.
Why. Why must you repeat the thing. I'm so sick of the thing. (This is not a personal attack. I'm just actually really sick of the thing.)

Contextualize this: bond yields have been dropping for a really, really, really, really loooooong time (like an actually really long time in which the 80's are an aberrant blip), and they are super duper low right now. That means we're probably more than likely going to see deflation and a retraction in earnings growth at some undefined but not too terribly far away point from this particular point in time. "Higher than normal expected earnings growth" doesn't mean crap all (unless you would like to explain why it does, in which case I'm very interested to hear what you have to say) and low interest rates do not imply that those expected earnings are actually going to materialize in any way, shape, or form.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Exchme »

Maybe OP has gone to an extreme and is pinching every penny and that's leading to burnout? Pinching pennies is great for a sprint, but savings is a marathon.

If OP wants to bet on himself and put money in his business instead of the market, that could work out, but businesses can have downturns and losses and need to be well capitalized to survive long term. OP brought up Dave Ramsey and he told a story of how he was a multi-millionaire on paper (real estate) at the OP's age, then the bank called his loan and everything collapsed and he was broke.

Putting aside all the macroeconomic stuff, OP has barely started his life's journey and there will be plenty of curveballs, unexpected expenses, natural lifestyle increases along the way, so I would say he is off to a really good start and should be applauded for that. But I would not feel secure enough at this point to quit saving.
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Re: Real Return Fakers & Quitting Investing For Good

Post by foodhype »

Beensabu wrote: Fri Apr 09, 2021 8:09 pm
foodhype wrote: Fri Apr 09, 2021 7:45 pm Y'all CAPE and P/Es aren't everything. You also have to take into account extremely low interest rates and higher than normal expected earnings growth. Don't anchor to a specific P/E multiple like 20x. Contextualize.
Why. Why must you repeat the thing. I'm so sick of the thing. (This is not a personal attack. I'm just actually really sick of the thing.)

Contextualize this: bond yields have been dropping for a really, really, really, really loooooong time (like an actually really long time in which the 80's are an aberrant blip), and they are super duper low right now. That means we're probably more than likely going to see deflation and a retraction in earnings growth at some undefined but not too terribly far away point from this particular point in time. "Higher than normal expected earnings growth" doesn't mean crap all (unless you would like to explain why it does, in which case I'm very interested to hear what you have to say) and low interest rates do not imply that those expected earnings are actually going to materialize in any way, shape, or form.
I hate to do this to you, because I know it will come off as lazy, but I'd recommend calculating a discounted cash flow a few times. You're talking about interest rates somehow affecting earnings, and it seems you're misunderstanding how valuations work. I legitimately think it would be a useful exercise to you, and I'm not trying to be condescending -- just get a little flustered every time I see this issue. The key thing to look out for is how much the non-linear terms -- the interest rate and the implicit earnings growth rate -- dominate the valuation, and why linear P/Es are a poor metric for valuations.

This post I just made explains issues with how P/Es are used:
viewtopic.php?f=10&t=345664&p=5934633#p5934633
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Beensabu
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Re: Real Return Fakers & Quitting Investing For Good

Post by Beensabu »

foodhype wrote: Fri Apr 09, 2021 9:37 pm
Beensabu wrote: Fri Apr 09, 2021 8:09 pm
foodhype wrote: Fri Apr 09, 2021 7:45 pm Y'all CAPE and P/Es aren't everything. You also have to take into account extremely low interest rates and higher than normal expected earnings growth. Don't anchor to a specific P/E multiple like 20x. Contextualize.
Why. Why must you repeat the thing. I'm so sick of the thing. (This is not a personal attack. I'm just actually really sick of the thing.)

Contextualize this: bond yields have been dropping for a really, really, really, really loooooong time (like an actually really long time in which the 80's are an aberrant blip), and they are super duper low right now. That means we're probably more than likely going to see deflation and a retraction in earnings growth at some undefined but not too terribly far away point from this particular point in time. "Higher than normal expected earnings growth" doesn't mean crap all (unless you would like to explain why it does, in which case I'm very interested to hear what you have to say) and low interest rates do not imply that those expected earnings are actually going to materialize in any way, shape, or form.
I hate to do this to you, because I know it will come off as lazy, but I'd recommend calculating a discounted cash flow a few times. You're talking about interest rates somehow affecting earnings, and it seems you're misunderstanding how valuations work. I legitimately think it would be a useful exercise to you, and I'm not trying to be condescending -- just get a little flustered every time I see this issue. The key thing to look out for is how much the non-linear terms -- the interest rate and the implicit earnings growth rate -- dominate the valuation, and why linear P/Es are a poor metric for valuations.
Where's the sob face emoji? Thanks for apologizing in advance I guess. I'm not talking about how interest rates affect earnings. I'm talking about how interest rates don't affect earnings. I'm talking about how that is some monumental mass pipe dream that somehow entrenched itself in our collective consciousness and it doesn't make any sense and it's literally driving me crazy that people keep repeating it when it doesn't make any sense...
This post I just made explains issues with how P/Es are used:
viewtopic.php?f=10&t=345664&p=5934633#p5934633
Cool. I'll go look at that now. I'm okay. I promise. Thanks for replying.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
rockstar
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Re: Real Return Fakers & Quitting Investing For Good

Post by rockstar »

pseudoiterative wrote: Fri Apr 09, 2021 7:30 pm As rockstar pointed out, under current conditions fixed-income is not expected to give anything like historical returns, & for equities:
If you assume that the average PE for equities should be 20x, then equities should return close to zero nominal for the next decade
Perhaps. This is much less certain. I think the expectation that the long-run average PE for equities should oscillate around 20x only makes sense if you assume that long-run future average real interest rates are higher than they are now, and current low interest rates are just a temporary departure from normality. But the historical trend of interest rates (over hundreds of years) is that they're more or less steadily trending down.
What I'm curious about is how much impact an aging population is having on bonds and their yields. If you assume people are following age in bonds or using target dated funds, then as they age they'll add more bonds. How much is this impacting yields? And what happens when Boomers pass away?

And why are people buying bonds that can't keep up with inflation? This is happening in the developed world. It's not just the US.

No idea if 20x is the right anchor. Maybe it's higher. But how much higher? I don't know. But PEs are a lot higher these days.
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Re: Real Return Fakers & Quitting Investing For Good

Post by foodhype »

rockstar wrote: Fri Apr 09, 2021 10:29 pm
pseudoiterative wrote: Fri Apr 09, 2021 7:30 pm As rockstar pointed out, under current conditions fixed-income is not expected to give anything like historical returns, & for equities:
If you assume that the average PE for equities should be 20x, then equities should return close to zero nominal for the next decade
Perhaps. This is much less certain. I think the expectation that the long-run average PE for equities should oscillate around 20x only makes sense if you assume that long-run future average real interest rates are higher than they are now, and current low interest rates are just a temporary departure from normality. But the historical trend of interest rates (over hundreds of years) is that they're more or less steadily trending down.
What I'm curious about is how much impact an aging population is having on bonds and their yields. If you assume people are following age in bonds or using target dated funds, then as they age they'll add more bonds. How much is this impacting yields? And what happens when Boomers pass away?

And why are people buying bonds that can't keep up with inflation? This is happening in the developed world. It's not just the US.

No idea if 20x is the right anchor. Maybe it's higher. But how much higher? I don't know. But PEs are a lot higher these days.
Re: aging people and target date funds. I don't think that's going to move the needle very much.

Re: anchoring to the right P/E multiple. See viewtopic.php?f=10&t=345664.
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Re: Real Return Fakers & Quitting Investing For Good

Post by JBTX »

Ben8848 wrote: Fri Apr 09, 2021 4:41 pm If that's the case I would rather just invest like crazy for another year or two and not settle.
I think this is your answer. Do this for 2 years and then see where you are and how you feel.
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Re: Real Return Fakers & Quitting Investing For Good

Post by mffl »

JBTX wrote: Fri Apr 09, 2021 11:06 pm
Ben8848 wrote: Fri Apr 09, 2021 4:41 pm If that's the case I would rather just invest like crazy for another year or two and not settle.
I think this is your answer. Do this for 2 years and then see where you are and how you feel.
Lol and then come back here and we'll talk you into another two years at that point.

In all seriousness though, I think the above advice is the way to go.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Marseille07 »

I guess what I don't understand is, what do you do with cash if you don't put it in the market.

If you have some big purchases coming up that's a different story, but having cash in HYSA doesn't go very far. Ray Dalio famously said, cash is trash.
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Re: Real Return Fakers & Quitting Investing For Good

Post by dsasdg »

foodhype wrote: Fri Apr 09, 2021 7:45 pm Y'all CAPE and P/Es aren't everything. You also have to take into account extremely low interest rates and higher than normal expected earnings growth. Don't anchor to a specific P/E multiple like 20x. Contextualize.
extremely low/negative interest rates - correct

higher than normal expected earnings growth - I can't agree, but maybe because of the massive buyback push from cheap money, the growth of your share of total earnings can be very high
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Re: Real Return Fakers & Quitting Investing For Good

Post by Schlabba »

Ben8848 wrote: Fri Apr 09, 2021 4:41 pm ...
Anyways, I want to be able to quit investing for good and not add anymore money to my accounts. I'm ready to learn how to spend some money and I have a business that provides passive cash flow where one can already feel retired so stacking chips in the markets forever doesn't make sense for me.
...
So what are you going to do with your leftover cash? Are you compulsively spending it down to 0 every month? Is your goal to live paycheck to paycheck from now on?
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Re: Real Return Fakers & Quitting Investing For Good

Post by Ben8848 »

rockstar wrote: Fri Apr 09, 2021 4:49 pm Check out Jack Bogle's book: The Little Book of Common Sense Investing.
As for your investing approach, check out Coast FIRE.
Thanks, I never heard of Coast Fire before. This is where my mind has been with my current expense so I can focus on other things.
gwe67 wrote: Fri Apr 09, 2021 4:56 pm In your case 90% / 10 = 9%
9% - 3.16% = 5.84% real.

In my case 60% / 10 = 6%
6% - 3.16% = 2.84% real.
Thanks for this, the inflation is high as you said but a good conservative figure.
drk wrote: Fri Apr 09, 2021 6:25 pm This is only since 1985, but 10% CAGR with a max drawdown of ~26% seems pretty good.
This is a cool resource, thanks!
quantAndHold wrote: Fri Apr 09, 2021 6:39 pm For stocks, I guess that the long term real returns will be the reciprocal of the CAPE ratio. If CAPE is high, then stocks are expensive, and expected returns are low, and vice versa. So, if the current CAPE ratio is 25, then expected long term returns would be 4% real. Currently the CAPE ratio is 37, which would indicate real returns of 2.7%.
Thanks, yes I'm aware the market is incredibly overvalued right now but I think the figures for the CAPE or P/E..Schiller P/E need to be adjusted higher in determining real return given the last 20 years. Unless someone sees valuations going back to the 90s during a lost decade. Right now I am not purchasing equities, only upping bonds.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Ben8848 »

Beensabu wrote: Fri Apr 09, 2021 7:26 pm You need to keep contributing. Something. Anything. Keep doing it. Every paycheck. Up to your match in your 401k. And as much as you can in your Roth.
Exchme wrote: Fri Apr 09, 2021 8:21 pm Maybe OP has gone to an extreme and is pinching every penny and that's leading to burnout? Pinching pennies is great for a sprint, but savings is a marathon.

If OP wants to bet on himself and put money in his business instead of the market, that could work out, but businesses can have downturns and losses and need to be well capitalized to survive long term. OP brought up Dave Ramsey and he told a story of how he was a multi-millionaire on paper (real estate) at the OP's age, then the bank called his loan and everything collapsed and he was broke.

Putting aside all the macroeconomic stuff, OP has barely started his life's journey and there will be plenty of curveballs, unexpected expenses, natural lifestyle increases along the way, so I would say he is off to a really good start and should be applauded for that. But I would not feel secure enough at this point to quit saving.
Marseille07 wrote: Fri Apr 09, 2021 11:13 pm I guess what I don't understand is, what do you do with cash if you don't put it in the market.
If you have some big purchases coming up that's a different story, but having cash in HYSA doesn't go very far. Ray Dalio famously said, cash is trash.
Schlabba wrote: Sat Apr 10, 2021 4:18 am So what are you going to do with your leftover cash? Are you compulsively spending it down to 0 every month? Is your goal to live paycheck to paycheck from now on?
Thanks, yes my penny pinching is extreme and moderation doesn't work for my typically. I am self employed and manage my own self employed 401k so I need to manually contribute to it. I don't have any debt or leverage debt in my business. If I'm not investing then funds would be reinvested into my business and/or buying a new house towards creating rental income. My thinking has been to "Coast Fire" to a conservative figure then focus on generating cash flow elsewhere while leaving investments alone, so pumping money from my business into housing as opposed to equities.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Marseille07 »

Ben8848 wrote: Sat Apr 10, 2021 1:28 pm Thanks, yes my penny pinching is extreme and moderation doesn't work for my typically. I am self employed and manage my own self employed 401k so I need to manually contribute to it. I don't have any debt or leverage debt in my business. If I'm not investing then funds would be reinvested into my business and/or buying a new house towards creating rental income. My thinking has been to "Coast Fire" to a conservative figure then focus on generating cash flow elsewhere while leaving investments alone, so pumping money from my business into housing as opposed to equities.
OK, then that seems fine. Equities ain't the only way to make money. Some people do well landlording. My personal take is though, holding equities is easier & possibly more profitable, but there's no guarantee of success (markets can crash). With landlording, you have some floor on the rent income you can reasonably expect.
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Re: Real Return Fakers & Quitting Investing For Good

Post by imak »

CAPE ratio based valuations do have a catch - they are calculated over a 10 year horizon.

If we look at Robert Shiller's original reasoning for choosing 10 year duration, it was to account for a full business cycle including expansion and recession. 10 year was estimated as the "average" duration of a typical cycle.

In case of current 2020-2021 CAPE ratio values, we are looking at a timeframe which doesn't really account for entire cycle. 2011-2020 period doesn't really include a recession (except about last 3 quarters of 2020).

As per Federal Reserve's classification, 2008 was the last major recession period and then we entered an unusually long expansion cycle lasting about 12 years until Covid hit in Feb 2020.

Hence, probably a 12 or 15 year CAPE should be calculated to account for a full cycle containing 2008 recession and a decade long expansion and last 3 quarters of 2020 marked as recession again.
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Re: Real Return Fakers & Quitting Investing For Good

Post by dmcmahon »

esteen wrote: Fri Apr 09, 2021 5:17 pm
Ben8848 wrote: Fri Apr 09, 2021 4:41 pm For years I've listened to "financial guru's" throw around compound interest rates at 10-12% but after spending time on the forum here I see investors using numbers like 3-5% for their expected real return and to ignore figures that don't account for inflation. It's pretty disappointing after listening to Dave Ramsey for years, I now see him as a hype man.
IMO Dave Ramsey is great for people who need wholesale behavioral changes to eliminate debt and get on a path to financial stability. I've recommended his book or his workshop to several people as appropriate. But he's not an investment finance or retirement planning professional, and his advice on that front is frankly sub-par. Use him for what he's good for, and go somewhere else for what he's not.

-ES
Beginners, especially the financially illiterate who may have dug themselves a deep debt hole early in life, have to start somewhere, and they could do a lot worse than listening to Ramsey.
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Re: Real Return Fakers & Quitting Investing For Good

Post by esteen »

dmcmahon wrote: Sun Apr 11, 2021 12:06 am
esteen wrote: Fri Apr 09, 2021 5:17 pm
Ben8848 wrote: Fri Apr 09, 2021 4:41 pm For years I've listened to "financial guru's" throw around compound interest rates at 10-12% but after spending time on the forum here I see investors using numbers like 3-5% for their expected real return and to ignore figures that don't account for inflation. It's pretty disappointing after listening to Dave Ramsey for years, I now see him as a hype man.
IMO Dave Ramsey is great for people who need wholesale behavioral changes to eliminate debt and get on a path to financial stability. I've recommended his book or his workshop to several people as appropriate. But he's not an investment finance or retirement planning professional, and his advice on that front is frankly sub-par. Use him for what he's good for, and go somewhere else for what he's not.

-ES
Beginners, especially the financially illiterate who may have dug themselves a deep debt hole early in life, have to start somewhere, and they could do a lot worse than listening to Ramsey.
100%. I should clarify I don't even agree with all his debt reduction stuff, but as you say it's a great place to start for people who are otherwise illiterate or behaviorally unable to control themselves financially.
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Re: Real Return Fakers & Quitting Investing For Good

Post by whereskyle »

Ben8848 wrote: Fri Apr 09, 2021 4:41 pm For years I've listened to "financial guru's" throw around compound interest rates at 10-12% but after spending time on the forum here I see investors using numbers like 3-5% for their expected real return and to ignore figures that don't account for inflation. It's pretty disappointing after listening to Dave Ramsey for years, I now see him as a hype man. Anyways, I want to be able to quit investing for good and not add anymore money to my accounts. I'm ready to learn how to spend some money and I have a business that provides passive cash flow where one can already feel retired so stacking chips in the markets forever doesn't make sense for me.

What I found was that from 1900-2021 the real return of the S&P 500 is 6.77% while from 1921-2021 it's 7.71% after inflation. In my case all investments are Roth so taxes don't come into account, only inflation. My asset allocation is going to be 90/10 for the long run.

So I'll be 33 this year with 27 years left until retirement. Right now I have about 5.86x my expenses in retirement funds. If I use the 6.77% real return figure compounded for 26 years I will end up with a little over 33x my expenses at 60 (the 3% rule) which would mean I could stop investing now. If I use a 5% figure I would need to invest over $7,500 a year in todays dollar for the next 26 years to get to the 3% rule. If that's the case I would rather just invest like crazy for another year or two and not settle.

What are you using for your real return rate when predicting your investment reruns and what would you use with a 90/10 portfolio?

The vanguard reference suggests its around 9.9% without accounting for inflation.

https://investor.vanguard.com/investing ... allocation
You really shouldn't predict investment returns. You should save a lot, invest broadly, and stop saving only when you have enough.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Ben8848 »

whereskyle wrote: Sun Apr 11, 2021 1:12 pm You really shouldn't predict investment returns. You should save a lot, invest broadly, and stop saving only when you have enough.
With this thinking someone could work until they're 75 and have 100x their expenses after investing in CDs for 50 years but question if it's enough. I don't buy the "don't predict returns" idea, you have to at some level otherwise no one would ever retire.

What's your expenses multiple (25x for 4%, 33x for 3%) to know what is enough for you to retire then if you aren't already?
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Re: Real Return Fakers & Quitting Investing For Good

Post by whereskyle »

Ben8848 wrote: Sun Apr 11, 2021 2:57 pm
whereskyle wrote: Sun Apr 11, 2021 1:12 pm You really shouldn't predict investment returns. You should save a lot, invest broadly, and stop saving only when you have enough.
With this thinking someone could work until they're 75 and have 100x their expenses after investing in CDs for 50 years but question if it's enough. I don't buy the "don't predict returns" idea, you have to at some level otherwise no one would ever retire.

What's your expenses multiple (25x for 4%, 33x for 3%) to know what is enough for you to retire then if you aren't already?
No. If you have 100x your expenses, you don't need to invest in anything and can retire. 25x is plenty. Fixed expenses at 3% and have fun at 4% when you can. But don't stop contributing cuz you're expecting growth to get you to a number. Wait until you actually get to your number.
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Re: Real Return Fakers & Quitting Investing For Good

Post by bikechuck »

Marseille07 wrote: Fri Apr 09, 2021 11:13 pm I guess what I don't understand is, what do you do with cash if you don't put it in the market.

If you have some big purchases coming up that's a different story, but having cash in HYSA doesn't go very far. Ray Dalio famously said, cash is trash.
Cash is trash, until it is not. As a retiree in the deaccumulation phase I would hate to continuously have to take distributions year after year in an environment where both stocks and bonds are losing money or failing to keep up with inflation. If such an environment were to occur, and it could, I would be thankful to have 3 years of cash on hand.

At some point capital preservation becomes more important than capital growth. And yes, I do know that whatever I hold in cash today is losing purchasing power due to inflation.
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Re: Real Return Fakers & Quitting Investing For Good

Post by coachd50 »

KlangFool wrote: Fri Apr 09, 2021 6:32 pm OP,

I save 1 year of expense every year. I use 0% REAL RETURN for my planning. I can be FI in less than 20 years.

KlangFool
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Your posts have been extremely informative and beneficial on this board. I have seen you make the above comment often lately. Surely you must realize that some if not many posters (and many many many more non bogleheads) don't have an income level to save 1 year of expenses, even if they cut those expenses to just bare bones.
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Re: Real Return Fakers & Quitting Investing For Good

Post by Ben8848 »

whereskyle wrote: Sun Apr 11, 2021 3:08 pm No. If you have 100x your expenses, you don't need to invest in anything and can retire. 25x is plenty. Fixed expenses at 3% and have fun at 4% when you can. But don't stop contributing cuz you're expecting growth to get you to a number. Wait until you actually get to your number.
Thanks, this makes sense and I never heard the fixed a 3%, fun at 4%. As I mentioned earlier in the thread it's a battle of two minds for me as I'm looking to build cash flow outside of equities as I plan for the future.
Also, someone who invests in CDs for 50 years wouldn't have known their expenses so the example was flawed to begin with.
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Re: Real Return Fakers & Quitting Investing For Good

Post by KlangFool »

coachd50 wrote: Sun Apr 11, 2021 3:15 pm
KlangFool wrote: Fri Apr 09, 2021 6:32 pm OP,

I save 1 year of expense every year. I use 0% REAL RETURN for my planning. I can be FI in less than 20 years.

KlangFool
KlangFool
Your posts have been extremely informative and beneficial on this board. I have seen you make the above comment often lately. Surely you must realize that some if not many posters (and many many many more non bogleheads) don't have an income level to save 1 year of expenses, even if they cut those expenses to just bare bones.
coachd50,

A) The median US household income is around 50K to 60K. We have some members of the forum earn around that level and save 1 year of expense every year.

B) I live in a very affluent neighborhood with a median annual household income of 150K. But, many folks live paycheck to paycheck.

C) In summary, it is NOT about the income.

It is very simple but hard to do.

Average American saves less than 5% of their gross income. If a person live like an average American of their income level, they will save close to nothing. In order to save at this level, the person has to live like an average American with 2/3 of the gross income. It is very simple but hard to do. The person will have to choose to live at a lower tier of income.

I come from a culture/country with an average gross saving rate of 30+%. In that culture, by default, we saved 30+% of our gross income first before we spend on anything. Hence, I am used to live on 2/3 of my gross income. Ditto for most of my family. I am just continued doing what I had brainwashed to do.

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Re: Real Return Fakers & Quitting Investing For Good

Post by Ben8848 »

KlangFool wrote: Sun Apr 11, 2021 3:52 pm I save 1 year of expense every year. I use 0% REAL RETURN for my planning. I can be FI in less than 20 years.
Klangfool, with your savings rate at 100% of your expenses, what income multiple or percentage rule do you use for your retirement comfortability? (33x/3%..)
I'm guessing you enjoy your work at this rate or would have retired very young. Perhaps you will still retire young though compared to the average.
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Re: Real Return Fakers & Quitting Investing For Good

Post by geerhardusvos »

Ben8848 wrote: Fri Apr 09, 2021 4:41 pm For years I've listened to "financial guru's" throw around compound interest rates at 10-12% but after spending time on the forum here I see investors using numbers like 3-5% for their expected real return and to ignore figures that don't account for inflation. It's pretty disappointing after listening to Dave Ramsey for years, I now see him as a hype man. Anyways, I want to be able to quit investing for good and not add anymore money to my accounts. I'm ready to learn how to spend some money and I have a business that provides passive cash flow where one can already feel retired so stacking chips in the markets forever doesn't make sense for me.

What I found was that from 1900-2021 the real return of the S&P 500 is 6.77% while from 1921-2021 it's 7.71% after inflation. In my case all investments are Roth so taxes don't come into account, only inflation. My asset allocation is going to be 90/10 for the long run.

So I'll be 33 this year with 27 years left until retirement. Right now I have about 5.86x my expenses in retirement funds. If I use the 6.77% real return figure compounded for 26 years I will end up with a little over 33x my expenses at 60 (the 3% rule) which would mean I could stop investing now. If I use a 5% figure I would need to invest over $7,500 a year in todays dollar for the next 26 years to get to the 3% rule. If that's the case I would rather just invest like crazy for another year or two and not settle.

What are you using for your real return rate when predicting your investment reruns and what would you use with a 90/10 portfolio?

The vanguard reference suggests its around 9.9% without accounting for inflation.

https://investor.vanguard.com/investing ... allocation
Returns will continue to surprise us all. Index fund investing is truly passive and very tax efficient. It’s not going anywhere. Sure, returns might not be as great over the next 5 to 15 years, but for those of us with multi-decade time horizons, having 25-28X our living expenses in index funds is almost for sure sufficient to carry us through. The market(s) goes up and down, but in the long term it goes up. That’s very likely not going to change. No reason to bail on index fund investing and the bh philosophy now.
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Re: Real Return Fakers & Quitting Investing For Good

Post by coachd50 »

KlangFool wrote: Sun Apr 11, 2021 3:52 pm
coachd50 wrote: Sun Apr 11, 2021 3:15 pm
KlangFool wrote: Fri Apr 09, 2021 6:32 pm OP,

I save 1 year of expense every year. I use 0% REAL RETURN for my planning. I can be FI in less than 20 years.

KlangFool
KlangFool
Your posts have been extremely informative and beneficial on this board. I have seen you make the above comment often lately. Surely you must realize that some if not many posters (and many many many more non bogleheads) don't have an income level to save 1 year of expenses, even if they cut those expenses to just bare bones.
coachd50,

A) The median US household income is around 50K to 60K. We have some members of the forum earn around that level and save 1 year of expense every year.

B) I live in a very affluent neighborhood with an annual median household income of 150K. But, many folks live paycheck to paycheck.

C) In summary, it is NOT about the income.

It is very simple but hard to do.

Average American saves less than 5% of their gross income. If a person live like an average American of their income level, they will save close to nothing. In order to save at this level, the person has to live like an average American with 2/3 of the gross income. It is very simple but hard to do. The person will have to choose to live at a lower tier of income.

KlangFool
I don't disagree with the underlying premise that many if not most American's spend beyond their means. Just saying that a blanket "I save 1 year of expenses every year" would not be feasible with many of people I work with (public school teachers in Louisiana). It doesn't mean that they shouldn't try to cut their spending. I was just pointing out that some studies have shown that a "living wage" for a family of 4 might be estimated at just over $61,000 gross. Obviously the definition of what consists of a living wage would be debatable.
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Re: Real Return Fakers & Quitting Investing For Good

Post by KlangFool »

coachd50 wrote: Sun Apr 11, 2021 4:20 pm
KlangFool wrote: Sun Apr 11, 2021 3:52 pm
coachd50 wrote: Sun Apr 11, 2021 3:15 pm
KlangFool wrote: Fri Apr 09, 2021 6:32 pm OP,

I save 1 year of expense every year. I use 0% REAL RETURN for my planning. I can be FI in less than 20 years.

KlangFool
KlangFool
Your posts have been extremely informative and beneficial on this board. I have seen you make the above comment often lately. Surely you must realize that some if not many posters (and many many many more non bogleheads) don't have an income level to save 1 year of expenses, even if they cut those expenses to just bare bones.
coachd50,

A) The median US household income is around 50K to 60K. We have some members of the forum earn around that level and save 1 year of expense every year.

B) I live in a very affluent neighborhood with an annual median household income of 150K. But, many folks live paycheck to paycheck.

C) In summary, it is NOT about the income.

It is very simple but hard to do.

Average American saves less than 5% of their gross income. If a person live like an average American of their income level, they will save close to nothing. In order to save at this level, the person has to live like an average American with 2/3 of the gross income. It is very simple but hard to do. The person will have to choose to live at a lower tier of income.

KlangFool
I don't disagree with the underlying premise that many if not most American's spend beyond their means. Just saying that a blanket "I save 1 year of expenses every year" would not be feasible with many of people I work with (public school teachers in Louisiana). It doesn't mean that they shouldn't try to cut their spending. I was just pointing out that some studies have shown that a "living wage" for a family of 4 might be estimated at just over $61,000 gross. Obviously the definition of what consists of a living wage would be debatable.
coachd50,

<<I was just pointing out that some studies have shown that a "living wage" for a family of 4 might be estimated at just over $61,000 gross. >>

1) As seen by the definition of "living wages", the answer should be obvious. All those expenses are necessary. But, if the household has only the income of 40K, they would spend a lot less. Obviously, there are household with an income of 40K in your area. Can you convince someone with a household income of 60K to live on 40K?

2) We have forum member with a household of 4 with that income and save 1 year of expense every year.

<<Just saying that a blanket "I save 1 year of expenses every year" would not be feasible with many of people I work with (public school teachers in Louisiana). >>

3) It is not feasible for many folks. And, it is their lives. Who am I to tell anyone how they should live their lives?

4) As to those that choose to listen and think differently, I had shown them a different path.

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