Gyroscopic Investing

Doodle, great work, I'm also very inspired by this. You mention the $400 is after mortgage - I assume this means mortgage and property taxes...what about maintenance, i.e. painting, roof, refrigerator blew up, etc.? Perhaps this is included in the $400/month average.

Just over the past year I came to the realization that more money provides me absolutely no happiness beyond knowing that hitting a certain level of savings can expedite early retirement. Quite ironic considering 3 years ago I walked into a car dealership and ordered a vehicle with every single extra option available just because I finally could. This after finally getting a higher paying job and having some extra dollars in my pocket. Prior to that it was years of saving and penny pinching and hating not being able to afford things that I thought I wanted or needed. In fact, all I really hated was the lack of financial security. The inability to stop working for awhile because I wanted a break. I didn't need that car, and I certainly didn't need the purchase price and gas bills. The value that money brings to my life is totally different now. It's no longer the ability to buy "things" but instead to buy free time and relaxation. A different goal for sure, and for me at least, one with a much happier ending.

I actually think Jacob is more extreme than me in many ways. I think he lived in an RV for a number of years to cut out rent expenses entirely. His diet is also more extreme than mine. It seems he would go for months eating nothing but lentils and rice.

I tag off my neighbors Internet in exchange for little chores when they're out of town...feeding fish, watering plants etc.

I was doing laundry for a while in bathtub but it was so time consuming that I figured it was worth it to pony up for a machine. I only have enough clothes to fill one load of laundry. One of the benefits of living in south Florida is you don't need all the heavy winter gear.

The biggest challenge to this lifestyle is getting your significant other to buy in as well. How does your wife feel about making these changes?

It's amazing to me how the amount you need to save really attenuates downward the more you cut your expenses. $400/month only requires $160,000, a sum which can be saved by anybody in a first world country after a decade or less. But go up to a paltry $1,200/month and you suddenly need $480,000, a sum much larger and more difficult to acquire in a reasonable amount of time.

I realized as well that it is much easier for me to cut expenses than to make gobs more money.

As for house maintenance issues, if something unexpected were to happen, I would pick up some extra weekend shifts at a part time gig with my friends catering company to make the extra money thereby keeping my net expenditures about the same.

POintedStick,

I bought a safety razor years ago which saves me a ton in blades and I only shave about once a week anyways. I've been thinking about the full on straight blade but I must admit the look of the thing makes me nervous.

I'm reading this and I'm thinking I'm achieving wacky "savings" such as not having a cell phone simply out of my laziness.

My wife is generally very happy living frugally, for which I am eternally grateful. She is usually very willing to learn how to achieve the same result for less money, but not as willing as me to go without entirely. For example, she's willing to check eBooks out of the library for her Kindle rather than buying them, but she's keeping the Kindle. We haven't done it yet, but she's indicated that she's willing to use an in-car GPS unit rather than smartphone GPS, but she wants to keep some sort of GPS capability. Frankly, I do too. 

I just bought a WonderWash to offset the cost of those horrible coin laundry machines we have to use, but getting her to buy into that as opposed to a mini automatic unit was a little more challenging. I had to promise to do half of the laundry myself, which frankly will be good for me. Muscle over motor!

Sadly I don't think I'll ever be able to avoid having a car since traveling to see distant family will require flying, and I refuse to set foot in an airport ever again. I wish trains were better in this country. If only the feds would let the market have a go at it!

Straight razors are awesome, doodle! You'll feel like a total badass shaving with one. I think it's unlikely to be cheaper than a safety razor unless you can hone it yourself, but it will be much cooler. You can tell people you shave with a straight razor and get cool reactions, and you really learn a lot about the grain of your facial hair and the muscles of your face.

doodle wrote: Eliminate toilet paper and wash yourself (probably only works if you don't pay for water)

I'm trying to work out whether a barebones TOTO Washlet ( http://www.amazon.com/SW502-01-Washlet- ... 445&sr=1-2 ) is more economical than toilet paper. That depends on how long it lasts, which is hard to know.

KevinW wrote:

doodle wrote: Eliminate toilet paper and wash yourself (probably only works if you don't pay for water)

I'm trying to work out whether a barebones TOTO Washlet ( http://www.amazon.com/SW502-01-Washlet- ... 445&sr=1-2 ) is more economical than toilet paper. That depends on how long it lasts, which is hard to know.

Also keep in mind that it's an electronic gadget, and all gadgets eventually break. Most are not designed with an eye for longevity, as my engineering career has taught me. If you can't repair it yourself, the price of buying a new one or hiring someone else to repair it should be factored into the cost.

Pointedstick wrote: Sadly I don't think I'll ever be able to avoid having a car since traveling to see distant family will require flying, and I refuse to set foot in an airport ever again. I wish trains were better in this country. If only the feds would let the market have a go at it!

One point for Obama?
You mentioned mint dot com. I do use it and love it. I hesitated for a few months after hearing about it due to security concerns, but so far, so good. I've been using it for years.

You can eliminate the washlet by squatting in the tub and getting one of those shower heads attached to a hose....though you might have to take off your shoes and pants every time you wanna wash up after a crap. :-) when I lived in Europe almost every house had a bidet. Love the clean and fresh feeling especially with mud butt which in my experience can eat half a roll trying to clean up after.

That's probably the most economical solution, but has been vetoed by other members of the household.

doodle wrote: Eliminate toilet paper and wash yourself (probably only works if you don't pay for water)

Americans are way behind in using bidets.  I just bought a hot/cold water bidet attachment (new concept to America) for grandma and we'll see how it goes.

dualstow wrote: You mentioned mint dot com. I do use it and love it. I hesitated for a few months after hearing about it due to security concerns, but so far, so good. I've been using it for years.

Just put your expense accounts on it and avoid your asset accounts.  I was an enthuiastic early adopter but then I had second thoughts (I use Quicken now).  Given their track record, I don't trust corporations and hired employees to be as concerned about security as myself.

Why do you trust Quicken but not Mint when they're both owned by the same company (Intuit)?  Just not a fan of online services?

Tyler wrote: Why do you trust Quicken but not Mint when they're both owned by the same company (Intuit)?  Just not a fan of online services?

All of your data is fetched from the individual financial institutions directly by Quicken and stored on your local hard drive, not stored at Mint's servers acquired via a third-party consolidator.  There's too many weak links in that chain for me.

Pointedstick wrote: I just bought a WonderWash to offset the cost of those horrible coin laundry machines we have to use, but getting her to buy into that as opposed to a mini automatic unit was a little more challenging. I had to promise to do half of the laundry myself, which frankly will be good for me. Muscle over motor!

I can just imagine the debate in the PointedStick household.  That's exactly what I use, in combination with the spin dryer.  Nice low-level arm workout and probably easier than trying to attach a hose to the kitchen faucet.  Please let us know how it works for you.

Those are good points, Clive. My personal answer is still yes because I intend to be living on a lot less than 30k a year and also still intend to make some money after I reach financial independence. So in practice, sometimes I'll be selling shares to pay for current expenses, while sometimes I'll be spending current earnings to pay for them. Tax rates may go up, but that's why I have Roth IRAs I can withdraw from tax-free. Congress could remove that benefit too, but then again congress could also impose a 100% tax on any savings above $200,000 or declare gold illegal to own. I feel like I've diversified myself against congressional risk enough to let me sleep at night.

Clive wrote:

Re: If you had $1 Million in the PP, can you live off of that?

The assumption of a 3% to 5% real from the PP is also IMO on the high side, driven by favourable conditions for the PP (and many other assets) over the past 30 years (general downward trend in yields since the 1980's combined with near ideal favourable rebalance conditions for the PP).

Clive, can you elaborate a bit on "ideal favorable rebalance conditions for the PP"?

That's one of the reasons why I prioritized maxing out my 401k before maxing out my wife and my Roth IRAs: I get to skip the taxes now, rather than hope the promise is kept in the future. Having tax-deferred, tax-free, and taxable investments seems like it's a pretty good hedge against tax rates doing anything in particular. If they go up, the Roths are a better deal. If they go down, the 401k and taxable accounts benefit. If the Roth promise is broken, I still have a sum in the 401k that I've already skipped taxes on.

Clive, could you share your math on the 21 year bankruptcy please?

Suppose the net PP reward was 0% after paying for taxes and inflation and everything.  You still have an inflation adjusted $1m.  And your expenses are still an inflation adjusted $30k.  This should last $1m/$30k => 33.3 years.

I understand that my little back-of-the-envelope calculation is not including volatility, but even still, 21 years seems way too low, especially since the PP did better than 0% real.

PS: $1m would be plenty for me and my expense level.

I think it's important to keep in mind just what's inflating. If you're car-less and own a home free and clear, those are two huge sources of inflation you're immune to. If you grow your own food, that's another cost you can mostly bypass. Generating your own electricity kills another inflation source.

Clive wrote: You have to expand the $30,000 by inflation to maintain the same purchase power. $30,000 the first year withdrawn for living expenses, $31,200 the next assuming 4% inflation, $32,448 the next..etc. Works out close to 21.5 years to drawdown to zero when the investment return = 0% real.

Death spiral of where the pot is pacing inflation, but you're withdrawing 3% from a big amount the first year, but further on that income amount is an increasingly larger proportion of what remains in the pot.

To not draw-down the pot would have to have grown at inflation+3% to support a 3% inflation adjusted withdrawal rate.

Clive, it appears to me that you're using -4% real.  0% real would be something like 4% PP return and 4% inflation.  With 0% real your $1m is inflation adjusted (it makes just enough each year to offset inflation), just like your $30k, so the whole thing lasts about 33 years.

Here's our toy example with 4% inflation on the expenses, and a 4% PP return.

PP return 4%
inflation 4%
real return 0%
starting $1,000,000.00
expenses $30,000.00

year expenses savings income
0 $30,000.00 $1,000,000.00 $40,000.00
1 $31,200.00 $1,010,000.00 $40,400.00
2 $32,448.00 $1,019,200.00 $40,768.00
3 $33,745.92 $1,027,520.00 $41,100.80
4 $35,095.76 $1,034,874.88 $41,395.00
5 $36,499.59 $1,041,174.12 $41,646.96
6 $37,959.57 $1,046,321.50 $41,852.86
7 $39,477.95 $1,050,214.79 $42,008.59
8 $41,057.07 $1,052,745.42 $42,109.82
9 $42,699.35 $1,053,798.17 $42,151.93
10 $44,407.33 $1,053,250.74 $42,130.03
11 $46,183.62 $1,050,973.44 $42,038.94
12 $48,030.97 $1,046,828.76 $41,873.15
13 $49,952.21 $1,040,670.94 $41,626.84
14 $51,950.29 $1,032,345.57 $41,293.82
15 $54,028.31 $1,021,689.10 $40,867.56
16 $56,189.44 $1,008,528.36 $40,341.13
17 $58,437.01 $992,680.06 $39,707.20
18 $60,774.50 $973,950.25 $38,958.01
19 $63,205.48 $952,133.76 $38,085.35
20 $65,733.69 $927,013.64 $37,080.55
21 $68,363.04 $898,360.49 $35,934.42
22 $71,097.56 $865,931.87 $34,637.27
23 $73,941.47 $829,471.58 $33,178.86
24 $76,899.12 $788,708.97 $31,548.36
25 $79,975.09 $743,358.21 $29,734.33
26 $83,174.09 $693,117.45 $27,724.70
27 $86,501.06 $637,668.05 $25,506.72
28 $89,961.10 $576,673.72 $23,066.95
29 $93,559.54 $509,779.56 $20,391.18
30 $97,301.93 $436,611.20 $17,464.45
31 $101,194.00 $356,773.73 $14,270.95
32 $105,241.76 $269,850.67 $10,794.03
33 $109,451.43 $175,402.94 $7,016.12
34 $113,829.49 $72,967.62 $2,918.70
35 $118,382.67 $(37,943.16) $(1,517.73)

There's still a death spiral here, it's just not as fast as you're making it out to be.

So is the only real difference here whether you withdraw the money at the start or end of the year?

Clive,

I think akratic has shown that your "0% real" shortcut is an oversimplification.  Just because inflation is equal to the rate of growth doesn't mean that you can gloss over it to say the account balance never changes.

@PointedStick, no, that would give us a difference of a year or so, not a decade.

@Clive, so your Pot column is inflation adjusted but your Withdraw column isn't.  You either need to inflation adjust both columns or neither.

Neither:

Pot Withdraw
0 $1,000,000.00 $30,000.00
1 $1,010,000.00 $31,200.00
2 $1,019,200.00 $32,448.00
3 $1,027,520.00 $33,745.92
4 $1,034,874.88 $35,095.76
5 $1,041,174.12 $36,499.59
6 $1,046,321.50 $37,959.57
7 $1,050,214.79 $39,477.95
8 $1,052,745.42 $41,057.07
9 $1,053,798.17 $42,699.35
10 $1,053,250.74 $44,407.33
11 $1,050,973.44 $46,183.62
12 $1,046,828.76 $48,030.97
13 $1,040,670.94 $49,952.21
14 $1,032,345.57 $51,950.29
15 $1,021,689.10 $54,028.31
16 $1,008,528.36 $56,189.44
17 $992,680.06 $58,437.01
18 $973,950.25 $60,774.50
19 $952,133.76 $63,205.48
20 $927,013.64 $65,733.69
21 $898,360.49 $68,363.04
22 $865,931.87 $71,097.56
23 $829,471.58 $73,941.47
24 $788,708.97 $76,899.12
25 $743,358.21 $79,975.09
26 $693,117.45 $83,174.09
27 $637,668.05 $86,501.06
28 $576,673.72 $89,961.10
29 $509,779.56 $93,559.54
30 $436,611.20 $97,301.93
31 $356,773.73 $101,194.00
32 $269,850.67 $105,241.76
33 $175,402.94 $109,451.43
34 $72,967.62 $113,829.49
35 $(37,943.16) $118,382.67

Both (aka 2012 dollars)

Pot Withdraw
0 $1,000,000.00 $30,000.00
1 $970,000.00 $30,000.00
2 $940,000.00 $30,000.00
3 $910,000.00 $30,000.00
4 $880,000.00 $30,000.00
5 $850,000.00 $30,000.00
6 $820,000.00 $30,000.00
7 $790,000.00 $30,000.00
8 $760,000.00 $30,000.00
9 $730,000.00 $30,000.00
10 $700,000.00 $30,000.00
11 $670,000.00 $30,000.00
12 $640,000.00 $30,000.00
13 $610,000.00 $30,000.00
14 $580,000.00 $30,000.00
15 $550,000.00 $30,000.00
16 $520,000.00 $30,000.00
17 $490,000.00 $30,000.00
18 $460,000.00 $30,000.00
19 $430,000.00 $30,000.00
20 $400,000.00 $30,000.00
21 $370,000.00 $30,000.00
22 $340,000.00 $30,000.00
23 $310,000.00 $30,000.00
24 $280,000.00 $30,000.00
25 $250,000.00 $30,000.00
26 $220,000.00 $30,000.00
27 $190,000.00 $30,000.00
28 $160,000.00 $30,000.00
29 $130,000.00 $30,000.00
30 $100,000.00 $30,000.00
31 $70,000.00 $30,000.00
32 $40,000.00 $30,000.00
33 $10,000.00 $30,000.00
34 $(20,000.00) $30,000.00

I don't mean to be nitpicky, but there's a huge difference for me between lasting 20 years or lasting 30 years. 

(PS: my two examples really should last the same number of years... I think I'm being sloppy about the details of the beginning of the year, end of the year thing, etc.  I'm quite confident in the ~30 years instead of ~20 years though.)

Cool, glad we got to the bottom of it.

Now back to the important question of how to spend almost no money so that we can live on our hypothetical $1m PP portfolios. 

I recommend:
- walking/biking everywhere you can instead of driving
- learning how to cook so well that you don't really want to go out to eat anymore
- getting a library card and some cheap hobbies like hiking
- building a network of friends that don't care much about status/flaunting wealth
- exercising regularly and eating well to keep health care costs as low as you can
- possibly, arguably, potentially, being willing to sacrifice years 89 to 93 in order to free up years 33 to 45, etc.
- living somewhere modest
- and reading lots of ERE and MMM