The Mad FIentist's FI Laboratory

[arebelspy]

I know many of you already follow the Mad FIentist, but for those of you that don't, I wanted to point out his latest mad concoction: the FI Laboratory.

http://lab.madfientist.com/sign_in

You have to create an account (so it can save your information), and then input your spending and expenses for the past year (or however much of that you have), and then it will give you the calculation of how long until you hit FI, along with a pretty graph (example attached).

Definitely worth checking out!

[avonlea]

Ooh!  I like that. Thank you, arebelspy!

[Mortgage Free Mike]

Awesome! 10 years to go, though hopefully it'll be less once I input more data. What a cool and useful tool.

[Ambergris]

This is a really nice tool but it's not totally clear what assumptions the FI estimate is based on.  You can mess with the withdrawal rate assumptions and presumed return on investments under the assumptions tab, which changes your FI date from the graphed assumptions.  I presume the graph calculates FI dates based on average actual portfolio growth so far (based on your inputs, I presume, since the automatic rate I get under "assumptions" is a bit random) and average expenses.  Depending on what I put in in w-d rate (3-3.9) and return (3-7.2) I get everything between 2 years and 5.  But its a bit of a trick to reverse engineer what's going on.  Maybe mad Fientist can tell us!

[arebelspy]

This is a really nice tool but it's not totally clear what assumptions the FI estimate is based on.  You can mess with the withdrawal rate assumptions and presumed return on investments under the assumptions tab, which changes your FI date from the graphed assumptions.  I presume the graph calculates FI dates based on average actual portfolio growth so far (based on your inputs, I presume, since the automatic rate I get under "assumptions" is a bit random) and average expenses.  Depending on what I put in in w-d rate (3-3.9) and return (3-7.2) I get everything between 2 years and 5.  But its a bit of a trick to reverse engineer what's going on.  Maybe mad Fientist can tell us!

It uses fairly standard time value of money calculations and time to FI calculations.

More can be found here: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Naturally the interest rate you earn (your return) will affect your time to FI, because the more it's earning while you're still working, the faster you get to your number.  The withdrawal rate will affect your time to FI also, obviously, a higher WR means a lower stache is needed (e.g. at a 4% SWR you need 25x your expenses in your portfolio.. at a 3% SWR you need 33x your expenses, so a larger amount).

I don't think there are any other assumptions.

I know he does average your spending over the previous 12 months to get your average spending amount, or you can override that with your "future spending amount" and it will calculate your FI number based on that.

Hope that helps, or post again if you're still confused about something).  :)

[Khao]

That's a great tool! I am already obsessed with Mint to know where my money goes and to do my budget, but that only takes care of the past and present. The FI lab is actually a good tool to think about the future. Now my objective is to make that number of years until FI go down fast!

It says on the website that it averages the last 12 months of expanses to figure out your FI income needed per month, but I'm wondering if it does the same with the savings rate. Does it calculate your average savings rate and then figure you'll keep saving that much in the future?

[Ambergris]

Naturally the interest rate you earn (your return) will affect your time to FI, because the more it's earning while you're still working, the faster you get to your number.  The withdrawal rate will affect your time to FI also, obviously, a higher WR means a lower stache is needed (e.g. at a 4% SWR you need 25x your expenses in your portfolio.. at a 3% SWR you need 33x your expenses, so a larger amount).

Right, I get all that (hence my twiddling between those standard withdrawal rate assumptions).  I was just wondering why the need to enter different net worth values per month, and where the random-looking standard return values came from (I got 7.2%). I was wondering if net worth changes vs. savings was a way to estimate average return on the portfolio, rather than having a manual entry.  Of course, if 7.2% is the average real return of the market then we have a boring explanation for why the graph uses that return value.  :)

[GoCubsGo]

Really cool, thanks for posting.  A couple of dumb questions:

Do I include equity in rental properties/personal residence in net worth (using a very safe estimate of value of course)?  I've seen it argued on both sides on this site.

I'm a bit confused on the SWR input and how it correlates to "Time to FI".  Wouldn't inputting higher withdrawal rate in retirement years mean one would have a longer time to FI? If I put in 4% it says 7 years, if I put in 3% it says 11 years. I'm missing something obvious most likely (weirdly I don't spend a lot of time figuring out a time to FI so the Mad Fientist site is very interesting).

[Khao]

I'm a bit confused on the SWR input and how it correlates to "Time to FI".  Wouldn't inputting higher withdrawal rate in retirement years mean one would have a longer time to FI? If I put in 4% it says 7 years, if I put in 3% it says 11 years. I'm missing something obvious most likely (weirdly I don't spend a lot of time figuring out a time to FI so the Mad Fientist site is very interesting).

The quick formula to calculate the required investment needed is : (yearly income needed) X (100 / safe withdrawal rate)

So if your yearly income required for FI is constant (let's assume 20k) and your safe withdrawal rate changes, this is what'll happen :
20k X (100 / 3) = 666k required for FI at 3% SWF
20k X (100 / 4) = 500k required for FI at 4% SWF

Increasing your rate means you think you'll generate more revenue with less investment when you're in FI. If you lower it, you're playing it safer, which is why it takes more time to get to FI.

[thepokercab]

What an awesome tool.  Looks like i'm 13 years from FI.  I'm going to love seeing how quickly I can bring that down.   

[arebelspy]

I'm a bit confused on the SWR input and how it correlates to "Time to FI".  Wouldn't inputting higher withdrawal rate in retirement years mean one would have a longer time to FI? If I put in 4% it says 7 years, if I put in 3% it says 11 years. I'm missing something obvious most likely (weirdly I don't spend a lot of time figuring out a time to FI so the Mad Fientist site is very interesting).

A higher withdrawal rate means you're okay withdrawing a larger percent of your stache, so for the same expense level, a higher WR means a lower stache needed.

For example, if you need 25k annually to live, and you want a 4% SWR then you need 625,000 (625k x 0.04 = 25k).  If you want 25k at 3% SWR, then you need 833,333.33 (because 833k x .03 = 25k).

Thus a lower SWR = a higher stache needed.

A lower SWR means you are withdrawing less of your portfolio, so to be able to do that, but still have the amount you need, you'll have to have a larger portfolio (a larger portfolio, withdrawing a smaller amount), and it takes longer to get to that larger portfolio.

[DollarBill]

How come there's always a lot of 6's when I compute?? I'm I domed when I reach FI? lol

[GoCubsGo]

Thanks Khao and Arebelspy for the clarification.  The more blogs I follow (after finding them through this site) I find that it is sort of a fun hobby expanding my knowledge base across the myriad of topics that all eventually feed into FI.  I've always tended to focus on Real Estate and tax efficiency type topics but it's great to start to delve into different areas of the FI spectrum and look at things from others perspectives.  I for one really appreciate when these types of blogs/calculators/sites are referenced, so thanks!

[arebelspy]

Naturally the interest rate you earn (your return) will affect your time to FI, because the more it's earning while you're still working, the faster you get to your number.  The withdrawal rate will affect your time to FI also, obviously, a higher WR means a lower stache is needed (e.g. at a 4% SWR you need 25x your expenses in your portfolio.. at a 3% SWR you need 33x your expenses, so a larger amount).

Right, I get all that (hence my twiddling between those standard withdrawal rate assumptions).  I was just wondering why the need to enter different net worth values per month, and where the random-looking standard return values came from (I got 7.2%). I was wondering if net worth changes vs. savings was a way to estimate average return on the portfolio, rather than having a manual entry.  Of course, if 7.2% is the average real return of the market then we have a boring explanation for why the graph uses that return value.  :)

The current net worth value lets the program calculate how much longer until you reach your stache amount (and the previous net worth values for each month lets it calculate about how much investment income you earned that month based on your return numbers, so that it can plot that blue line).    I don't know why yours said 7.2, mine said 7.1 (and 3.9 for the SWR).  Either way, change those to numbers that make you happy.  :)

[Ambergris]

...the previous net worth values for each month lets it calculate about how much investment income you earned that month based on your return numbers, so that it can plot that blue line...

A-Ha!  The mysterious blue line, curiously labeled "income"!  I took it that that was the income your portfolio could generate based on the WDR, not the amount of interest/growth it had.  This is why the blue line is of use vis-a-vis the red line - when they cross, you are FI  (sort of a better version of YMYL's crossover point).  I suspect the growth rate is in there, but its use is to help calculate future portfolio growth.

[arebelspy]

...the previous net worth values for each month lets it calculate about how much investment income you earned that month based on your return numbers, so that it can plot that blue line...

A-Ha!  The mysterious blue line, curiously labeled "income"!  I took it that that was the income your portfolio could generate based on the WDR, not the amount of interest/growth it had.  This is why the blue line is of use vis-a-vis the red line - when they cross, you are FI  (sort of a better version of YMYL's crossover point).  I suspect the growth rate is in there, but its use is to help calculate future portfolio growth.

Correct.  :)

The blue line is exactly the YMOYLK crossover point idea - it's based on the amount you'd have generated from your portfolio that month based on that month's net worth and the SWR you set. 

The growth rate is used to calculate the time to FI number on the left.  It is not used in calculating that blue line (the blue line number comes from your net worth that month x your SWR divide by 12 months in a year).

[tipster350]

There is a problem with the time to FI calculator. When I increased my withdrawal rate from 4 to 5%, my time to FI decreased.

[jordanread]

I am definitely going to be looking into this. I was going to create something similar, but haven't had the time yet. Thanks for the update arebelspy.

[dragoncar]

There is a problem with the time to FI calculator. When I increased my withdrawal rate from 4 to 5%, my time to FI decreased.

That's how it works -- a higher withdrawal rate means you need less money.  But you increase your chance of failure.

[Herbert Derp]

It says I will be FI in 1 years, 5 months. Just in time for my 25th birthday! That's assuming a 3% withdrawal rate and 5% ROI.

[ichangedmyname]

How many months of data did y'all enter?

[homehandymum]

28years??!!  :(

Time to get a bit more serious about this deal.

[arebelspy]

How many months of data did y'all enter?

Only what it would let me - 2013 and 2014.

[arebelspy]

There is a problem with the time to FI calculator. When I increased my withdrawal rate from 4 to 5%, my time to FI decreased.

That's how it works -- a higher withdrawal rate means you need less money.  But you increase your chance of failure.

+1.  See the explanations above given to GoCubsGo by Khao and myself.

[RMD]

6 years?  I think I need to add more data to verify because I had in my head that this would be a 10+ year haul.  (But, hey, I'm mathematically challenged and I would be *thrilled* if the 6 years sticks!)

[_C_]

Do I include equity in rental properties/personal residence in net worth (using a very safe estimate of value of course)?  I've seen it argued on both sides on this site.

I never include personal residence in my calculations. I'd only include it if I was planning on selling and renting for an indeterminate amount of time, or if downsizing/puling equity out of my personal residence was part of my plan. But in my personal situation, where I don't foresee either of those, I don't include it.

[ichangedmyname]

How many months of data did y'all enter?

Only what it would let me - 2013 and 2014.

Cool. I'll do this later. I did January and February and it said 28 years LOL

[ShavinItForLater]

Seems useful for a quick and dirty estimate, but I think for my own situation I prefer some of the additional modeling and other features of firecalc.  Specifically:

- I have two kids to put through college, over the next 10 years
- DW may be doing a graduate degree in the near future
- A small pension that is vested but probably won't pay out until traditional retirement age
- Social security (assuming it doesn't implode)

I might be able to hack it by playing with the retirement expense and net worth numbers, but I'd prefer to be able to model things like that more directly.

[arebelspy]

Seems useful for a quick and dirty estimate, but I think for my own situation I prefer some of the additional modeling and other features of firecalc.  Specifically:

- I have two kids to put through college, over the next 10 years
- DW may be doing a graduate degree in the near future
- A small pension that is vested but probably won't pay out until traditional retirement age
- Social security (assuming it doesn't implode)

I might be able to hack it by playing with the retirement expense and net worth numbers, but I'd prefer to be able to model things like that more directly.

Oh, absolutely.

Nothing beats www.cfiresim.com for historical accuracy (precision? ;) ) and modeling. 

But for those who want a general trend line and time to FI ala YMOYL crossover point and aren't proficient enough at Excel to create their own and make a pretty graph, it's a pretty nice tool.

[fallstoclimb]

A couple questions on this that I think wasn't totally answered above (or maybe I'm just missing it).  The prefilled withdrawal rate is 3.9% and the growth rate is 7.1% - why is it not just a flat 4% and 7%, anyone know? 

Also, this is not correcting for inflation, right?  I would have to decrease the growth rate to 4% to do so?  Or is that not accurate?

I've been in the debt-payoff side of MMM and am very new to the actual investing/retirement part of it, so I apologize for the basic questions!

[arebelspy]

Also, this is not correcting for inflation, right?  I would have to decrease the growth rate to 4% to do so?  Or is that not accurate?

You need to use whatever assumptions you're comfortable with.  I believe the author has it as a 7.1% real return (10% - 3% inflation or so).  I think that's a bit high, personally, for the future, but that is what it has been historically.

[fallstoclimb]

Also, this is not correcting for inflation, right?  I would have to decrease the growth rate to 4% to do so?  Or is that not accurate?

You need to use whatever assumptions you're comfortable with.  I believe the author has it as a 7.1% real return (10% - 3% inflation or so).  I think that's a bit high, personally, for the future, but that is what it has been historically.

Oh!  Okay.  So when I see 7% thrown around all over the place, that is already accounting for inflation.  Is there a discussion or consensus on the board about future expectations?  (I did read this:  http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/)

[arebelspy]

Also, this is not correcting for inflation, right?  I would have to decrease the growth rate to 4% to do so?  Or is that not accurate?

You need to use whatever assumptions you're comfortable with.  I believe the author has it as a 7.1% real return (10% - 3% inflation or so).  I think that's a bit high, personally, for the future, but that is what it has been historically.

Oh!  Okay.  So when I see 7% thrown around all over the place, that is already accounting for inflation.  Is there a discussion or consensus on the board about future expectations?  (I did read this:  http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/)

Correct.  From that article: "After adjusting for inflation, this 11.1% annualized number would become 7.16% over the 1950-2011 period."

There is no "consensus" per say, because everyone has different expectations about the future versus where we are now (P/E levels, for example), different goals (and thus perhaps investing for a lower return with less volatility), etc.  How your AA is arranged will affect those assumptions, among other things.

Best to research it yourself and decide what you think based on your factors.

(Mine, for example, is quite different due to my real estate investments.)

[jordanread]

Going to start messing around with this for an episode of the Frugal FIRE show. I may jump back in here if I have issues.