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August 11, 2010


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I have been saving from the time I did a paper route as a young schoolboy.
My wife and I have saved throughout our lives even when raising our three children. We both came from working class families in England, where each of our fathers were firemen.
I worked from 1951 until 1992. My wife also worked her whole life except for some years when the children were small.
We are now in our mid seventies and both happily retired. Our investments have done very well indeed because we lived through some very good economic times and also because, after retirement, I became my own financial advisor and educated myself about how to invest successfully during both good and bad years.

Our total annual income is now more than four times what it was when we retired, when pensions and social security are included. We can afford anything we want, however we no longer want very much. We have no debt, love the home we have lived in since 1977, our children are each doing well, and apart from an expensive vacation overseas every year we spend very little - the only splurge is now Business Class. Aging has put a crimp in the kind of vacations that we can now both enjoy - no longer do we go on exciting treks in the Himalayas, safaris in Africa, or to small villages in Indonesia and Nepal, but having already done the exciting and very physical things we are now very content with a much slower lifestyle. I am fitter than my wife but after a very happy marriage of 54 years neither of us have any desire whatsoever to go on separate vacations.

The only downside to being a livelong saver is that the habit becomes extremely addictive. It's rather ridiculous that multi-millionaires can find themselves clipping coupons, looking for the best deals around, and still drinking inexpensive wines because they happen to enjoy them. When you have been doing it all of your life we just wouldn't feel right paying more than we need to for anything.
That's the only downside I can think of about saving but it's a downside that we don't lose any sleep over. Having more money than you know you will ever spend can provide great peace of mind and security.

$16.25/day at 10% annual rate of return grows into 1 million after 30 years? Yes, in the fantasy world where you get that high of return for that long! Unfortunately for those of us living in the present, it's going to be a loong time before 10% is once again a reasonable expectation of investors.

MC I agree. While high returns will come again I don't think that we can reasonably expect to have the gains we've had over the past 30+ years. Logically speaking we are now a developed nation and as such growth/gain will slow. When we were a developing nation things were rapidly changing and growing and it is reasonable that we had the growth that we had. I think now it is a dangerous notion to expect 10%, 15%, 20% returns like we had in the past and should think about adjusting our expectations down. Maybe I'm a pessimist but I'd rather plan for a 6% gain and get a 10% than the other way around.

So this article can be summed up by saying that everyone should save?

The tax code doesn't punish savings for 98% of the population-IRA's and 401ks protect a tremendous amount of income from taxation, certainly enough for all of most people's retirement savings. Income from investments outside of these saving vehicles is taxed at the normal rate, but I'm not sure why that counts as punishment for saving, any more than the income tax counts as punishment for making money. Its not like there is a tax on principle.
Marotta, I don't understand why you insist on throwing these little incorrect asides about politics into otherwise fair and useful posts.

MC and PMT --

The answer is to SAVE MORE anyway. Move that $16.25 to $20 or $25 or more! Then you don't have to worry as much about getting a high return rate.

I believe you are correct. To obtain a wealth of $5M or more today starting from nothing requires one of several things to take place.
1) Start a very successful business.
2) Become a very good real estate speculator.
3) Receive a large inheritance.
4) Experience an investment bubble and have enough money and experience to take the utmost advantage of it.

In my case it was #4 and I regard the introduction of the Internet into our society as the greatest innovation by far in my lifetime and of the last 100+ years. It was even more profound than the discovery of electricity, the telephone, the invention of the automobile, or the invention of the airplane.

There will be another lifechanging innovation one day that will produce another financial bubble but at this time nobody knows what it will be.
I retired in 1992 and the Internet started to take the public's fancy between 1993 and 1994. It just happened at the perfect time for me.

Old Limey --

I'd add one more:

5. Grow your income as much as possible, keep expenses under control, and save/invest like crazy.

This is what I'm doing and it's working out pretty well so far. In addition, it has the advantage of being a more likely option/more within a person's control than any of the items you list above.

Annual income $2.381 trillion, annual expenditure $3.55 trillion, result....

Your fifth method is certainly very realistic. It is working for you - it would even be working better if you were not a charitable and religious person but running the blog strictly to make money. It seems that the majority of the readers of your blog are very well educated, earn well above average salaries, and keep their expenses under control, and method #5 is the way to go at the current time. However what are lesser educated investors with low salaries and more menial jobs going to do when it comes to retirement? That's not a happy prospect the way things look today.

6.LBYM Then, you dont feel the stressful need to accumulate 5 mil or 2.7 or 1 mil.... you learn to live on what you DO have. I recall that Roper study showing that people who make 100 k a year are not twice as happy as people who earn 50K a year ; in fact, they are just as likely to be happy or unhappy as people earning half that, because human nature is to spend just above your means, as noted in the Micawber Principle in the above article.Once the basic needs are met, then the rest is just stuff that breaks or sits unused.

Old Limey --

A few thoughts on your comments:

1. Yes, I would be in a much better position financially if I didn't give away so much, but think of all the people that are being helped. And really, I'm doing fine anyway (better than fine.) ;-)

2. Yes, method #5 can work, but you have to follow all the steps (like earn a decent income.) If you don't, of course the method falls apart.

3. Yes, "lesser educated investors with low salaries and more menial jobs" are going to have trouble getting wealthy using method #5. Then again, they're going to have trouble getting wealthy using almost any method.

4. That said, people don't have to have $5 million (the amount we've been discussing) to be rich. Someone with an average income can still become a millionaire with enough time and determination. Couple that with Social Security (for now) and they can have a decent retirement.

5. In the end, the key is to improve from where you are now. Work to grow your income, keep expenses in check, save and invest. If these are done, people will end up much better in the long run than if they had not followed these principles.

10% Rate or Return? Are we baxk in the 1990's again? If you can find that consistently, sign me up!

You're quite right that $5M+ is overdoing it especially in my case where we each receive SS and pension checks that easily cover our normal living expenses. Having more than you need really just provides greater peace of mind and the added security of knowing that you can better deal with unexpected events that might include long term care, maybe a natural disaster of some kind, or even a major home repair that becomes necessary. It's also nice when money that you don't plan on ever needing can keep earning money for you and enabling you to have some luxuries that would otherwise be out of reach. Do you remember a post I made many months ago about comparing "Money" to an "Invisible Slave" that works for you 24/7. Some readers didn't like my "slave" analogy, it reminded people of a period in American history that we aren't proud of and wish had never taken place.
As for charity and generosity, my wife often tells me that it's sad that I have never discovered the joy of giving whereas she has. Fortunately I control our investments but she likes to make gifts, especially produce from my vegetable garden that is far more than we can use. Maybe that's why all of the Thank-You cards that come to our mailbox are addressed to her, and maybe it's one of the reasons I married her 54 years ago. She's still trying to convert me but it isn't working.


Bernie Madoff provided 10% consistently. ( I know , bad joke, but I had to got there)

Poor choice of the author of that article to use that 10% figure, maybe the article was written in 1998. Better to have updated it with PMT's more reasonable 6 annual rate, something quite achievable with a 60/40 asset mix, and still end up with close to half a mil, which is nothing to sneeze at.

Old Limey --

Yes, I remember that comment. I liked it because it illustrated a good principle -- that money will do whatever you tell it.

And just so you know, I'm cheering on your wife... ;-)

By the way, the Premier League kicks off another season this weekend. Time to watch soccer!!!!

FMF, could the author explain what is meant by paragraph 5?

"The savings rate in America is abysmally low, and those who do try to acquire wealth are chastised by a punitive tax code."

While additional income is subject to different rates of taxation, to the best of my knowledge there is no tax on accumulated wealth, only income. Do they mean the fact that interest income is taxed at all?

Sarah --

No, there is no tax on wealth (net worth/assets). I believe he hates the current tax system and claims that it's set up to prevent people from becoming wealthy.

Above all, have a plan. Without a plan, you don't know what to spend on, how much you can really afford, and will be saving/spending blindly.

This is a very good article with real advice that works. This post appears in my weekly financial independence compilation.

I hope to see another article in my next release on Sunday August 22.

Saving money, as important as it is, is likely the most underrated method of financially preparing for retirement. There's far more emphasis in the press about investment schemes including "get rich quick" opportunities. Bill

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