Author Topic: I have a dumb 4% rule question  (Read 3274 times)

ETBen

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I have a dumb 4% rule question
« on: October 09, 2018, 06:32:06 PM »
I realized today I donít actually understand something despite socking away money like thereís a fire. Letís say an annual spending of 50k. Doing 25x puts that at a $1.25M goal.

But thatís 1.25M in todayís dollars right?  So how do you track progress?  I know the 4% rule accounts for inflation. But would we be tracking against a goal of 1.25M x (1.03)^n.

What I was originally looking at this morning is what I need to save today to equal a day of retirement ( Iíve seen a few methods).

RWD

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Re: I have a dumb 4% rule question
« Reply #1 on: October 09, 2018, 07:06:24 PM »
Yes, you'll need 25x your expenses in future dollars.

You can get a good sense just by looking at the current year. Running with your example, let's say we're currently at $500k invested (10x spending). So we're 40% of the way there and I figure that will increase along with inflation at least. So next year that $500k would be $515k and spending would be $51.5k, still a 10x ratio so the progress is the same if you don't add anything to the pile (and your investments don't exceed inflation).

Personally I have a spreadsheet with a row for each year since I've been tracking and then projecting out many years in the future using estimates for inflation, investment gains, and savings. The closer we get to FIRE the more accurate this will become.

JLee

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Re: I have a dumb 4% rule question
« Reply #2 on: October 09, 2018, 07:10:22 PM »
Annual spending of $50k in today's dollars is $1.25m in today's dollars.  If your annual spending stays at $50k for the next 5 years, inflation doesn't really matter to you because your spending is still the same.  If your spending goes up by 3-4% a year, your target amount will go up as well.

Assuming your spending for one day in retirement will be the same as it is today (plus inflation), then nothing changes for your calculations.

So for me, my barebones FI target is $24k/yr, or $600k.   $1643.86 buys me one day.  If that goes up by 3% a year for a few years and my spending is then $26,225/year, I'd need $1796.26 in 3-years-from-now dollars to buy one day.

erutio

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Re: I have a dumb 4% rule question
« Reply #3 on: October 09, 2018, 07:12:19 PM »
The simple answer is that your stash is invested in the market, index funds, which grow at a much faster rate than inflation. The 4% rule already has inflation built into it.

ETBen

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Re: I have a dumb 4% rule question
« Reply #4 on: October 09, 2018, 07:14:32 PM »
Ok so am I correct below. I donít know why I never looked at this before. I suppose bc I was focused more on increasing my savings rate in general to my best possible.

- 25x is the goal in todayís dollars.
- goal in future dollars would that $goal x (1.03)^n
- the amount Iím saving this year needs to increase for inflation each year (on top of simply trying to save more).
- a days worth of retirement is FutureGoal / 365. And then I could look at the TMV any given year N. (This one is more out of curiosity).

ETBen

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Re: I have a dumb 4% rule question
« Reply #5 on: October 09, 2018, 07:16:17 PM »
Annual spending of $50k in today's dollars is $1.25m in today's dollars.  If your annual spending stays at $50k for the next 5 years, inflation doesn't really matter to you because your spending is still the same.  If your spending goes up by 3-4% a year, your target amount will go up as well.

Assuming your spending for one day in retirement will be the same as it is today (plus inflation), then nothing changes for your calculations.

So for me, my barebones FI target is $24k/yr, or $600k.   $1643.86 buys me one day.  If that goes up by 3% a year for a few years and my spending is then $26,225/year, I'd need $1796.26 in 3-years-from-now dollars to buy one day.



Thanks that makes sense

erutio

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Re: I have a dumb 4% rule question
« Reply #6 on: October 09, 2018, 07:16:29 PM »
Ok so am I correct below. I donít know why I never looked at this before. I suppose bc I was focused more on increasing my savings rate in general to my best possible.

- 25x is the goal in todayís dollars.
- goal in future dollars would that $goal x (1.03)^n
- the amount Iím saving this year needs to increase for inflation each year (on top of simply trying to save more).
- a days worth of retirement is FutureGoal / 365. And then I could look at the TMV any given year N. (This one is more out of curiosity).

 This is wrong.  Inflation is taken into consideration in the 4% rule.

ETBen

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Re: I have a dumb 4% rule question
« Reply #7 on: October 09, 2018, 07:17:51 PM »
The simple answer is that your stash is invested in the market, index funds, which grow at a much faster rate than inflation. The 4% rule already has inflation built into it.

That I know. I was looking at making a tracker and realized the 1.25M probably wasnít right for ongoing tracking purposes.

erutio

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Re: I have a dumb 4% rule question
« Reply #8 on: October 09, 2018, 07:21:24 PM »
Oh, actually I understand what you're trying to say now.

ETBen

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Re: I have a dumb 4% rule question
« Reply #9 on: October 09, 2018, 07:30:08 PM »
Oh, actually I understand what you're trying to say now.

Thatís actually why I had to post bc I couldnít get the right thing in a Google search lol.

Nudel

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Re: I have a dumb 4% rule question
« Reply #10 on: October 12, 2018, 03:02:02 PM »
To track your progress against your goal, think of it like this: In 2015 your yearly spending goal is $50K for 1.25 mil. You can check an inflation calculator like this against today's dollar. https://www.usinflationcalculator.com/

Your $50K in 2015 becomes $53,253.35 in 2018.

ETBen

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Re: I have a dumb 4% rule question
« Reply #11 on: October 12, 2018, 07:37:25 PM »
Thanks!  Iím not sure why this gave me so much trouble!

Plugra

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Re: I have a dumb 4% rule question
« Reply #12 on: October 15, 2018, 04:11:58 PM »
The simple answer is that your stash is invested in the market, index funds, which grow at a much faster rate than inflation. The 4% rule already has inflation built into it.

That I know. I was looking at making a tracker and realized the 1.25M probably wasnít right for ongoing tracking purposes.

Instead of tracking your total (aiming for 1.25M), track the ratio of your current savings to your current expenses. That ratio gets bigger every year, and when it hits 25 you are done.

CCCA

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Re: I have a dumb 4% rule question
« Reply #13 on: October 15, 2018, 04:37:26 PM »
The simple answer is that your stash is invested in the market, index funds, which grow at a much faster rate than inflation. The 4% rule already has inflation built into it.

That I know. I was looking at making a tracker and realized the 1.25M probably wasnít right for ongoing tracking purposes.

Instead of tracking your total (aiming for 1.25M), track the ratio of your current savings to your current expenses. That ratio gets bigger every year, and when it hits 25 you are done.


exactly.  You know (or should know) your each year, and can make adjustments for how much you'll spend in retirement.  Then multiply that by 25x or whatever to get your FIRE amount. 


my fire calculator (https://engaging-data.com/fire-calculator/) and others do everything in constant dollars, which is fine for estimating time to retirement, but if you want to know what your actual FIRE target is (e.g. $1.8 million), you'll have to adjust for a new set of current dollars every year.