Author Topic: FIRE date?  (Read 3872 times)

DeltaBond

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FIRE date?
« on: December 31, 2014, 10:06:03 AM »
So, I noticed a few of you using this term in regards to the day you're able to retire and live on your 'stache'.  This has most likely been discussed somewhere, but do any of you have a financial advisor for learning where to invest?

Also, do any of you calculate living on the interest made on your 'stache'?  I am curious if this is how I need to go about calculating my FIRE date.  I'm 37 so it isn't really pressing, but I'm curious.

tyd450

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Re: FIRE date?
« Reply #1 on: December 31, 2014, 10:20:46 AM »
Financial advisors are generally frowned upon here.  They will "advise" you to invest in funds that pay them the best front loaded commission plus a % of your earnings every year.   Even that "family friend" will not have your best interests in mind.  You are much better off learning to invest on your own.

Take the time to read through all of this :  http://jlcollinsnh.com/stock-series/

Also:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/


And I would probably pick up a copy of this as well:  http://amzn.com/0470067365

It is easier than you think!  Good luck!

DeltaBond

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Re: FIRE date?
« Reply #2 on: December 31, 2014, 10:23:01 AM »
Thank you!  Are you planning on living on the interest of your stash?

Static Void

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Re: FIRE date?
« Reply #3 on: December 31, 2014, 10:31:27 AM »
As for "living on interest", generally basically "yes"-ish, and on this very site (and many others) a "4% withdrawal rate" is described, http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

There's many variations on that theme, and debate about whether 3% or 5% or whatever is better. But that's the gist of it.

tyd450

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Re: FIRE date?
« Reply #4 on: December 31, 2014, 10:31:38 AM »
I won't be living on "interest" per se. 

It is believed that one can safely live on 4% on their stash forever.  That 4% is inflation adjusted as well.  You are "FI" when your stache is big enough that 4% of the stache is equal to or greater than what you need to live on for a year.

Say you need $25,000 to live on each year.  Multiply that by 25 to get your appropriate stache size.  That is $625,000.  4% of $625,000 is your $25,000.

You hit your goal of $625,000 then in year 1 you withdraw $25k to live on for that year.  Year 2 you look at inflation and add that to the $25k you need and withdraw that amount.  Rinse and repeat.

Check out that "simple math behind early retirement" post I linked earlier, this is what that is all about!

neo von retorch

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Re: FIRE date?
« Reply #5 on: December 31, 2014, 11:07:01 AM »
Yes, interest/dividends is a popular strategy but it's not necessarily optimal.

For example, say you need $40,000 per year. You search and search and you find some awesome dividend producing index funds that produce 4% - you build up a $1 million portfolio and you are set for life! But then inflation kicks in and next year you need $41,000 but your funds only crank out $40,000. Slowly you eat more and more of your principal, while earning less and less interest. (Bad example in real world since the stache should grow, in addition to building funds, but I digress...)

Alternate - you need $40k as before. But instead of focusing on dividends, you just build a solid well-rounded portfolio of $1 million. It only produces 2% in dividends but it grows 5-7% each year. You ignore your dividends - reinvest them instead. Your stache grows 7-9% overall because of this. You take 4% of the principal out, but it's less than the growth per year. Who cares if you touched principal? Not you, you're rich!

Exflyboy

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Re: FIRE date?
« Reply #6 on: December 31, 2014, 11:46:33 AM »
As others have pointed to above its really quite simple....

Index investing using Exchange traded funds (ETF's).. is the simplest and ironically most profitable way to invest. Its the most profitable for 2 reasons,

1) the fees are EXTREMELY low
2) ETF's do better than just about every financial advisor in the long run.. This seems like inverse logic.. You get what you pay for right?.. Except in investing. So called expert advisors are simply interested in making profit for themselves.. using YOUR money to do it. Note if your portfolio looses money.. They still charge you the same exorbitant fee.. nice.. For them at YOUR expense!

Now ETF's are stocks, little portions of lots of company stocks.. you just buy an ETF fund like the Vanguard VSTAX .. which is a broad range S&P 500 fund with very low fees.. See MMM for the explanation why these make money.

Now stocks have grown at a high rate of return since 1872.. On AVERAGE, but we all know that stocks go up and down like a yo-yo. So to smooth out the bumps we buy bond funds.. similar to the ETF's but using bonds.

It has been shown that a fund with 50% stocks (ETF's) and 50% Bonds you can safely withdraw 4% each year of such a fund and have enough money to last forever.

Bottom line is .. if you have say 15 to 20 years before you intend to retire.. then simply buy (ETF's) and don't bother with bonds.. this will give you max growth.

As you near retirement, then start adding a portion of your portflio to a bond fund.. say your 5 years out.. then maybe add 5 to 15% in bonds.

Thats it in a nutshell.

Frank

NewStachian

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Re: FIRE date?
« Reply #7 on: December 31, 2014, 12:24:21 PM »
The forumla to calculate my FIRE date:

FIRE: (log((Yearly Spending * 25)/Net Worth)/log(1+Annual Savings Rate)) + TODAY() = 9/17/2020
$1M:  (log((1,000,000)/Net Worth)/log(1+Annual Savings Rate)) + TODAY() = 8/7/2016

Yearly Spending in $
Net Worth in $
Annual Savings rate (not a very good name for this, as ASR implies many other things. Think annualized aggregate appreciation) is actually the annualized net worth appreciation averaged over the last 10 years since i've started tracking my net worth.

What I like about this formula is it adjusts each month. My annual spending is a rolling average of my last 12 months of spending tracked on another tab. net worth also updates monthly as does annual savings rate. If my net worth and spending go up, this date gets farther in the future, so it prevents the lifestyle inflation from sneaking up on me.
« Last Edit: December 31, 2014, 12:26:10 PM by VarsityFinances »

BarkyardBQ

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Re: FIRE date?
« Reply #8 on: December 31, 2014, 01:21:42 PM »
The forumla to calculate my FIRE date:

FIRE: (log((Yearly Spending * 25)/Net Worth)/log(1+Annual Savings Rate)) + TODAY() = 9/17/2020
$1M:  (log((1,000,000)/Net Worth)/log(1+Annual Savings Rate)) + TODAY() = 8/7/2016

Yearly Spending in $
Net Worth in $
Annual Savings rate (not a very good name for this, as ASR implies many other things. Think annualized aggregate appreciation) is actually the annualized net worth appreciation averaged over the last 10 years since i've started tracking my net worth.

What I like about this formula is it adjusts each month. My annual spending is a rolling average of my last 12 months of spending tracked on another tab. net worth also updates monthly as does annual savings rate. If my net worth and spending go up, this date gets farther in the future, so it prevents the lifestyle inflation from sneaking up on me.

Is ASR a percentage or a dollar value? I am getting 2/24/15 and 3/4/15, and I guarantee you I'm no where near that close.

NewStachian

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Re: FIRE date?
« Reply #9 on: January 27, 2015, 05:25:48 AM »
The forumla to calculate my FIRE date:

FIRE: (log((Yearly Spending * 25)/Net Worth)/log(1+Annual Savings Rate)) + TODAY() = 9/17/2020
$1M:  (log((1,000,000)/Net Worth)/log(1+Annual Savings Rate)) + TODAY() = 8/7/2016

Yearly Spending in $
Net Worth in $
Annual Savings rate (not a very good name for this, as ASR implies many other things. Think annualized aggregate appreciation) is actually the annualized net worth appreciation averaged over the last 10 years since i've started tracking my net worth.

What I like about this formula is it adjusts each month. My annual spending is a rolling average of my last 12 months of spending tracked on another tab. net worth also updates monthly as does annual savings rate. If my net worth and spending go up, this date gets farther in the future, so it prevents the lifestyle inflation from sneaking up on me.

Is ASR a percentage or a dollar value? I am getting 2/24/15 and 3/4/15, and I guarantee you I'm no where near that close.

The ASR is a percentage, so 0.19 if you went form 100k to 119k in a single year. Mine annualizes the total over the entire time frame. For example, if you go from 100k to 130k in 3 years it will give you 9.13% instead of 10% due to factoring in compounding (of note, you have to use a > 365 day time period for this formula to work).

The ASR I use is: =(((Current Net Worth)/(Initial Net Worth))^(365/(days from initial to current net worth))-1
This should give average appreciation. Over the last 11 years mine is 19%, and over the last 5 it's 25%. I use the 19% since it's more conservative (And I didn't do much budgeting or earning in those early years so i feel it's even more conservative).

Sorry for the late reply - I don't check these threads that frequently.
« Last Edit: January 27, 2015, 05:36:57 AM by VarsityFinances »