Obviously, everyone’s financial situation differs, and if someone inherits significant assets early in life, then they have the potential to become financially independent much earlier. But if you only save 10 percent of your income, then you need your investments to provide $180,000 of income, and it will require 50 years to reach that point. Then using some simple basic assumptions (ie, 5 percent real investment return and a 4 percent real withdrawal rate) and ignoring the effects of pensions and Social Security, you can determine how long you need to work for any given savings rate.įor example, if you make $200,000 per year and save 50 percent of your income, then you only need your investments to provide $100,000 in income, and you can reach that point after about 16 years. You can make a chart with a 0 percent savings rate at one end and a 100 percent savings rate at the other. The math behind financial independence is surprisingly simple. Saving more money each year not only increases the size of your nest egg, but it also reduces the size of the nest egg required to maintain the same lifestyle in retirement. Understanding the consequences of a low savings rate (ie, out-of-control spending) is also helpful. Recognizing this completely natural tendency goes a long way toward fighting it. If you have never heard of hedonic adaptation, chances are that you are already on the treadmill. To make matters worse, the increasingly progressive tax burden on that additional income can further destabilize your finances.įinancial literacy can pay great dividends in this respect. Thus, you work harder and harder, spending more and more, and then find you are no happier making and spending $500,000 a year than you were making and spending $100,000 a year. To make matters worse, many of us find ourselves on the “hedonic treadmill,” also known as “hedonic adaptation.”Īs you make more money, your expectations and desires rise in tandem, resulting in no permanent gain in happiness. ![]() It is also a truism of personal finance that decreasing spending is far more psychologically painful than increasing spending is pleasurable. For most people, it requires a conscious and sometimes difficult effort to avoid this process. What should we do?Ī. Just as the time required to perform a chore seems to expand into the time available, so does our spending naturally expand until it consumes our entire income. I am a bit embarrassed to say this, but I don’t see how we could spend much less than we currently do without a dramatic change in our lifestyle. My spouse and I have found this to be very difficult, both early on and now that we’re in our mid-careers. Q. I know you have recommended that attending physicians should be putting about 20 percent of their gross income toward retirement. Jim Dahle and was originally published on The White Coat Investor. It’s incredible how much one can spend when the means are there (or seem to be). Why not? The income will always be there, right? Right?Īnd then there’s Ludicrous Speed. Others are at a sprint, taking on additional debts to fund the lifestyle they’ve been dreaming of for years. Some are going at a manageable, comfortable pace and still managing to set aside plenty of money for their futures while slowly increasing their standard of living. Most high-income professionals are getting a never-ending workout on this contraption they don’t even realize they’re on: the hedonic treadmill.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |