Modeling for FIRE - 401K Assumptions

[aehf89]

Hello MMM community!

First of all, this is my first forum post - I discovered MMM several weeks ago and it was a revelation. The concept of maximizing your savings rate hit me like a brick - DUH! and now I'm seriously excited to start building my 'stash.

If this question has been answered elsewhere on the forum, I apologize and would appreciate a link.

I spent some time building a Google sheets model that will allow me to effectively track my spending. I'm now trying to build a longer term model that can let me play with potential FIRE timelines based on income, savings rate, 401k etc.

In this case, my question is: are there any good rules of thumb for modeling 401K growth? I contribute 5% of my salary, and my employer provides 5% match. Should I then assume a 5% return? In any given year, is it accurate to simply take:

 (Current 401K * 1.05) + ((monthly deposit * 12)*1.05) ?

Or does that not take into account the fact that the January monthly deposit has been providing returns for 11 months by year end, and I should factor that in?

Greatly appreciate any feedback. So happy I found this community!

[dandarc]

Any long-term projection is an estimate - so no need to be super precise.

With that in mind, I personally like to use a 5% real return as my assumption, and then just apply it annually.  Your formula sort of does that, but I'd personally do:

(current 401K * 1.05) + (monthly deposit * 12)

Just to err even further on the side of caution.  If you really want to estimate the earnings on contributions in the year the contribution is made,

(current 401K * 1.05) + (monthly deposit * 12 * 1.025)

is more appropriate, because on average your monthly contributions are only there for an average of 6 months in the 1st year, so they would only get half the growth of money that was already in the plan at the beginning of the year.

[MDM]

As dandarc noted, the difference between whatever (e.g., 5%) you assume for growth vs. what will actually happen is likely much greater than any difference in when contributions are made during a year.

If you would like to learn a little more about financial functions such as Future Value (the thing you are estimating here), Time value of money - Wikipedia may be a decent place to start.

[aehf89]

Thanks so much for your replies. I'll stick with the conservative, simpler approach. Thanks again!