Saving for retirement is scary. But not if you break it into small numbers.

The goal for your nest egg is 25x your annual consumption. If you spend $20,000 a year, you need $500,000 to have enough passive income monthly to never have to work for money again. If you spend $50,000 a year, you need $1.25 million (see the need to reduce consumption?).

That sounds all so hard and abstract. You want it broken down into easier numbers?

The miracle of compound interest means that saving $5,000 a year and consistently earning 6% on it (after inflation) creates a $841,000 nest egg after 40 years. Using the 25x rule, that produces $33,000 in yearly retirement income. The key is earning 6% after inflation.

Of course, the miracle of compound interest means the reverse if you're in debt. You pay more and more over time the longer you owe money to someone else. And that's a big deal if the rate is 12%-18% like most credit cards. Credit card debt is a fast chute to financial failure. If you have credit card debt, you should pay that off before you even contemplate anything else in this article.

But back to $5k, 40 years, 6%. This should be the bare minimum goal you have in your financial planning. If you can save more than $5k, you shave off the years. If you earn less than 6%, you add years (I would not count on earning more than 6%, that's just magical thinking). 


It sounds so easy and yet it's so hard. First of all, people don't start saving $5000 a year at age 25. Second, even if they did, most typically do not have the discipline to do it EVERY year for 40 years. And that's just the surface of it. After that, most people invest poorly. They buy stocks when the market is hot and the news is how great the market is and then they sell when the market tanks and everyone is panicking. You can't earn the 6% by buying high and selling low. They don't have the systemic education and perspective to have a disciplined system.

Here's Dilbert creator Scott Adams on success:

"A system is something you do on a regular basis that increases your odds of happiness in the long run. If you do something every day, it's a system. If you're waiting to achieve it someday in the future, it's a goal. The system-versus-goals model can be applied to most human endeavors. In the world of dieting, losing twenty pounds is a goal, but eating right is a system. In the exercise realm, running a marathon in under four hours is a goal, but exercising daily is a system. In business, making a million dollars is a goal, but being a serial entrepreneur is a system."

I think it's also the lack of community and the lack of in-depth education around personal finance. We all sorta know to do this, but it's easy to put off because we've never been trained in it. We didn't learn from our parents and school didn't teach us. It's a huge, unconscionable hole in our educational system. Personal finance is inarguably more important and more revelant to life than Algebra II but I spent a year in Algebra II. 

$5k a year, 40 years, 6%. So easy, and yet so hard.



Money is life energy - "Your Money or Your Life"

One great idea from the book "Your Money or Your Life" is the concept of "real hourly wage." You probably know your nominal hourly wage, what your employer pays you. The book makes you calculate how much extra time and money it takes for you to make that hourly wage. First, figure out federal, state, social security, and local taxes and subtract that (around 42% total for Oregonians). Add in commute time. Costuming, i.e. work clothes. Transit costs, either public transit or auto payments. Money you spend due to work stress: drinking, expensive vacations or trips, gym membership, massages, etc..

Do your own calculation. What you will come up with, after all of that, is that your real hourly wage is much less, probably closer to 1/3 of your nominal hourly wage (remember taxes take out a huge chunk before you see anything). So if you make $30 an hour, you're actually making maybe $10 an hour. So when you spend $20 on a meal, you're choosing to spend two extra hours of your life working. If you spend $90 on a piece of clothing, you're choosing to spend 9 more hours of your life working. Reframing spending money as how you spend your life hours is powerful.

A life of "ascetic virtue"

Someone in my current cohort of Financial Freedom 1 asked: "Wait, so you are saying that with a life of ascetic virtue I can quickly (somewhat quickly) 'retire' to live a life of… ascetic virtue?"

I guess other people see the way I've lived my life as "ascetic" or "virtuous." But to me, this goes back to the concept of wealth. What does it mean to be wealthy? I'd rather be wealthy in time to do what I want to do, with the people I want. I take naps every day. I play soccer 5x a week and eat lunch with friends. I nap. I get to do creative endeavors like PUGS or stupid politcal books. In April, May, and June, I'm travelling around the world, visiting friends on 5 continents.

That to me is more luxurious than more belongings and consumerism while having to work at a 40 hour a week job for 40 years. Time is the only wealth to me, especially after seeing my dad die early and not do the things he wanted to do.

Then again, I sorta like the idea of ascetic virtue. :)


How much Social Security will you get?

About 30% of Americans aged 55 or over have no retirement savings. Another 26% have less than $50,000 of retirement savings. Most people will depend on Social Security as their main source of retirement income. 

The average Social Security benefit is $1,317 per month. Baby boomers retirements (about 10,000 a day!) are now reducing the number of workers paying into and adding people taking out of the system. As a result, the ratio of workers to retirees dropped from 3.4 in 2008 to 2.9 by 2012, and is projected to decline as low as 2.1 workers per retiree by 2035.

By 2034, there will be no more social security "surplus" and benefits will drop by 25%. So benefits will be just over $1,000 a month, not nearly enough to live on. Congress has been long talking about doing something about it, but the only real solutions are raising the retirement age or increasing social security taxes on working people.



If you want to an estimate of your Social Security benefits, go here:

One question I always get is: why didn't our parents talk to us about this? I suspect that there are a number of reasons. One, most parents don't like laying their money stresses on their kids (do YOU talk to YOUR kids about money?). Two, it's impolite to talk about money in American society so it becomes the silent pervasive and ubitiquous thing that everything thinks about but no one discusses. Three, previous generations have lifetime secure employment and pensions, which took the responsibility away from them.

How much will you need per month in retirement? If you need more income  than Social Security, you'll need to plan for it. 

For millenials, saving $5,000 a year and consistently earning 6% on it (after inflation) gives you $841,000 dollar nest egg after 40 year. Using the 25x rule, that produces $33,000 of retirement income yearly. Starting to save later means you save a lot less. Call it the miracle of compound interest. 

Look at the chart below. This is what compound interest does at 7% (what the stock market has earned in the last 100 years).


The key is finding investments earning 6% after inflation. But this should be the bare minimum goal you have in your financial planning.

The Most Important Number in the World

Do you know your savings rate?

Your savings rate is the percentage of income you don't spend that you put away for retirement, emergency expenses, and rainy-day savings. It's the money you're paying to your future self. You know, the person who's probably not going to be working from ages 65 to 85. 

In 1981, the average American saved 10.9% of their post-tax income. Readers of this blog and Financial Freedom alumni will recognize this chart, which shows how many years it takes to reach financial independence based on savings rate:


With a 10% savings rate, you work 45 years, say from ages 20 to 65, and have enough money to sustain your life in retirement. 

Do you know what the savings rate is today? (Here's a hint!) As of November 2017, the average savings rate is 2.9%. Now look at the chart above again. With a 2.9% savings rate, people will never retire, or when they do retire, they will not have enough money to survive. 

Don't count on Social Security filling the gap, either. In 2029, it runs out of the surplus we've built for decades and will only pay out at 71% of current levels. That's roughly $1,200 a month, though that number will vary depending on your individual circumstances.

What's perhaps scariest about a 2.9% savings rate is that we're in the midst of an eight-year economic boom, one of the longest post-war economic expansions in our history. Unemployment is at a historic low. So what happens when we hit a recession and people lose their jobs? For most of us, it won't be pretty.

That's why your personal savings rate is actually your most important financial number. You should be planning your entire finances around it.

In the FIRE (Financial Independence, Retire Early) world, there's a saying: "Pay yourself first." It means that any time you get a paycheck, you budget for your personal savings rate before you spend a single penny. Before you pay rent, buy groceries, or go out to eat, you put money aside for your future self. 

Most people do the reverse. They budget for housing, food, entertainment, and everything else, then leave the rest to savings. You see the problem with that already: it's very easy NOT to pay yourself at all. So principle #1: Pay yourself before you pay everyone else. 

Paying yourself first requires a complete shift in perspective: prioritizing investing into your future self. But the side benefit is more security and peace of mind in the present. From the Atlantic:

"A 2014 Bankrate survey, echoing the Fed’s data, found that only 38 percent of Americans would cover a $1,000 emergency-room visit or $500 car repair with money they’d saved. Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn’t have enough liquid savings to replace a month’s worth of lost income, and that of the 56 percent of people who said they’d worried about their finances in the previous year, 71 percent were concerned about having enough money to cover everyday expenses. A similar study conducted by Annamaria Lusardi of George Washington University, Peter Tufano of Oxford, and Daniel Schneider, then of Princeton, asked individuals whether they could 'come up with' $2,000 within 30 days for an unanticipated expense. They found that slightly more than one-quarter could not, and another 19 percent could do so only if they pawned possessions or took out payday loans. The conclusion: Nearly half of American adults are 'financially fragile' and 'living very close to the financial edge.'”

A healthy personal savings rate moves you away from that ledge. It's buying peace of mind in the present while buying your freedom and security in the future. 

In my course Financial Freedom 1 Online, we talk more about savings rates and the core principles you need to follow to achieve financial independence. The next cohort runs February 1 to March 31. 

Do you know your personal savings rate?

The Ownership Experience


Thank you for reading and commenting on the first two Financial Freedom Newsletter. It's been really fun to talk about this. I've taught PUGS Financial Freedom six times in the last year and I've found that so many people have never gotten any education about money and I've found teaching how to take control of your financial life so rewarding. It's been a gift to me.

To recap, I achieved financial independence 3 years ago at age 42 after living on $20,000 and investing everything else for twenty years. In essense, I bought time instead of things or even "experiences." And with the freedom to do what I want, I started PUGS.

Here's a short case study of Olivia and Devin, who took the course this year. Two things I love: they're now able to talk more openly about the financial future. And Olivia has the knowledge and plan to retire in 16 years! 

Q: You talk about the "only two (or three) numbers you know to achieve financial freedom"? What are they?

A: Personal finance really relies on two numbers, which creates the third. You need to know your annual salary and your annual expenses. As we talked about in blog post 1, most people know their income but don't keep a budget and have no idea what their annual consumption is and how to control it. When you subtract your annual consumption from your annual income, you get your annual profit. Once you have your annual profit, you can project how long it will take for you to retire. If you have an annual profit of 50%, you achieve financial freedom in 16 years. 

I know many of you have this first objection: "But Douglas, there's no way I can save half my income each year!" That may or may not be true, but to paraphrase former Blazer Rasheed Wallace, math don't lie. Since there are only three numbers to play with I have only three suggestions:

  • My first go-to is: are you keeping a budget? Do you know what goes to needs, what goes to wants, and what goes to bullshit? That's a core exercise in the course. How you cut into all three of those categories will reduce your consumption.
  • You can find ways to increase income. We talk about having an entreprenuerial mindset to your career, possibly starting your own business, or at least running a side hustle. Your current income is in no way the cap on your income potential. 
  • Lastly, you can target a different number of years to financial freedom. 

Is it worth it? Two answers. First, yes. Working towards financial independence means you create some discipline around money in your life and get to spend your life doing what's valuable to you, on your terms. Spend time with family. Travel. Create your art. Make a difference in people's lives. Second, the alternative is SO bad. If you don't plan for financial independence, what happens as you get older? The average American has less than $60,000 in their 401k when they hit retirement age, not nearly enough to live for the following 20 years, even with Social Security. They can either rely on the income of their children or rely on an increasingly fraying social security net. I think it's much better to provide income for your future self now.

I'm almost done with creating the online course! I'm testing out the links and prepping the online community platform. The course will run November and December and it will help people start 2018 with a sense of empowerment over your financial future. And the people I know interested, would make a great cohort. Stay tuned and watch your email for a notice when I open registration. 

I would love your comments on this blog or on social media. Thank you again for this opportunity. 

The Transformation

Thanks for reading last week's article about how I reached financial independence at age 42 by living on $20,000 a year for 20 years. I got a lot of great responses and interesting comments. I decided to follow up with an article about what happens AFTER you reach financial independence.

This weekend, I asked on Facebook: "If you didn't have to work anymore, what would you do with your time? Assume living at your current standard of living, that you didn't win the lotto or something." You can see what people said here.

It's interesting to note that people don't say that they would do nothing. Independent of needing money, people want work to provide meaning and purpose in their lives. The famous blogger Mr Money Mustasche believes the real purpose of work is to create, that our fundamental desire as human being is not to be lazy but to engage in continual creative effort and learning.  You can see that desire in what people wrote. 

Same with me. When I got laid off 3 years ago, I looked at my finances and realized that I didn't have to work anymore. That's when I founded PUGS. (Actually, I had started PUGS as a side hustle a month before getting laid off, but hadn't intended it to be this big of a project). Here's the interesting thing: once you achieve financial freedom, you have to be honest about what's truly important to you. You don't have anymore excuses for doing what you care about.

My mission in life, one that I wrote in 2000, after my layoff/firing as a intellectual property lawyer in San Francisco, is "I want to help people learn and feel closer to their communities." When I hit financial freedom, I decided to live my life fully that way. That's why I decided to make PUGS. 

That's not to say I do it full time. Again, my health is important to me. So I play soccer 5 times a week. My family and friends are important to me. So I travel about once a month to see them. I also get to teach what I want and when I want. That's the transformation you get when you can make decisions with your life independent of money. 

Most people, when asked what's important to them, say these things:

  • Friendship

  • Family

  • Freedom

  • Health

  • Meaningful work

  • Privacy

  • Community

  • Philosophy of Life

Most people have never been asked to contemplate the question"What do you hope to achieve in your life and what kind of person do you want to be?" If you get a moment, take 15-20 minutes and just write freely, without regard to grammar or spelling. Be concrete: who would you spend more time with? (I go see my parents every few months) How would you live healthier? (I go play soccer every weekday) How much would you sleep? (I take a nap everyday) What places would you see? (This year, I've visited Vancouver, Chicago, Montreal, Spain, Portugal, Berlin, Brussels, and Iceland). The point is not all the cool things I've done. The point is to imagine the life you want, the values you want to live by, and way you want to contribute to this world. It's also the things you get to opt out of: the 40 hour workweek, two weeks of vacation, participating in an economic system you have qualms with. If you do this exercise, you'll see the transformation that's possible for you.

All it takes is financial freedom:

2015-12-01 (2).jpg

Haha. Leave a question or a comment below if you want me to answer it my next blog post. In it, I'll answer a few more of your financial freedom questions and talk about how to make it all happen. That will happen in the couple of days. 

The Opportunity

Hey, I'm Douglas. I'm the founder of PUGS.

I created PUGS three years ago after retiring at age 42. Of course, the first question people ask is how I retired at age 42. Here's the story.

I grew up in an immigrant family who fled the Communists for the U.S.. Money was tight. When I was in college, my personal budget was $5,000. When I graduated, I got a job as a paralegal at the Justice Department and made $25,000 and spent $15,000. I felt rich! I was spending literally three times more than I was used to. I decided then and there, philosophically, environmentally, financially, that that amount was **enough** to make me happy. So I decided that that was what I was going to spend annually from there on out. Since then, I've had jobs as a corporate lawyer at $150,000 and jobs as a Quaker schoolteacher at $30,000 and everything in between. But each year, I only spent $15,000 (now $25,000 through inflation) and invested everything else. When I got laid off 3 years ago, I realized that I had made enough money not to have to work anymore.

A major key is keeping a tight lid on expenses: I need a smaller nest egg to produce the annual passive income I need. Also, having a rigorously tight budget means I had a lot of freedom even during those 20 years. I had two separate periods where I didn't work for 2 year stretches because I wanted to switch careers. 

The big thing I've discovered about financial freedom is you get to do what you truly want with your life. Do you care about your health? I play soccer and take naps everyday. Do you care about your relationships? I get to travel to see family when I want and vacation with my friends when I want. Do you want to make a positive impact? I get to create PUGS and enact the vision of what I want in the world. I think the best thing you can buy with your money isn't things or experiences, it's your freedom.

Visiting my former student jasper in sydney in 2014

Visiting my former student jasper in sydney in 2014

People can't imagine saving enough to gain financial freedom. Or thinking about money causes a lot of anxiety so they avoid it. But I think those attitudes and beliefs being from lack of education, which cause a lack of empowerment. Most people weren't taught financial literacy when they were young. Their parents didn't teach them and they certainly were taught this in school. But avoidance is a really bad strategy.  56% of Americans have less than $10,000 in retirement savings. Looking at people closer to retirement age, Americans average $60,000 in their 401k at retirement. That's not nearly enough to fund 20 years of retirement, especially with the upcoming crisis in Social Security. 

I got a number of outstanding questions when I asked the PUGS mailing list what questions they had about Financial Freedom. 

How should I be investing my money and thinking about the future? How should I keep track of my spending without feeling like I'm counting pennies? The way I think about it is annual profit. Take a company, say Apple Computer. When you ask Apple Computer who much they made last year, they tell you their profit ($37 billion in 2016, BTW). They take their gross income (sales from phones and computers etc) and subtract all their expenses (salaries, materials etc). But when you ask a person how much money they make, they tell you their salary. In other words, they tell you their gross income without thinking about their expenses. I want to offer a new way of thinking: what's your annual profit? How much money do you have after all your expenses? That's what you're using to buy your financial freedom. I think that shift in thinking helps you stop thinking about counting pennies and towards building a future you want. 


How does a couple whose individual relationships with money differ negotiate and deal successfully with their differences?

How do I change my relationship with money/scarcity and how to know what "enough" looks like (spiritually and financially).

How can I get out of the cycle of saying (every single month): My god, we spent a lot! Next month we have to do better?

These are all great questions individually and yet there's a common theme to them. Money is never about money; it's about your relationship to money. We all grow up with money scripts, unconscious stories we've learned and then tell ourselves about money: it's evil, or it's love, or it's never enough. Part of financial freedom is becoming aware of those money scripts and learning to tell a new story of money in your life. For couples, understanding that they come with different scripts and desires is so important to coming to a joint understanding of what they want together. 

The best personal finance book out there is Your Money or Your Life. It talks about how "most people’s money problems are actually connected to a lack of fundamental direction in their life." If you deepen into your values and what you really care about (your children, being healthy, learning, making a difference), knowing what "enough" is and actually keeping a budget becomes a lot easier. 

In the next blog post, I'll talk about the how thinking about money is really thinking about deeper questions about your sense of purpose and discovering what makes you happy. 

Thoughts? Feel free to add a question or contribute to the comments section below.