The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: MacGyverIt on July 12, 2012, 04:09:21 PM

Saw this article on lifehacker.com, the same site that introduced me to MMM back in the day. I don't have a head for math and would be interested in people's thoughts on the numbers cited in this article, "How Much Is Enough? A Formula for FU Money" Definitely not "shockingly simple math behind early retirement" from the looks of it!
http://lifehacker.com/5925077/howmuchisenoughaformulaforfumoney
"FU money is defined as: any amount of money allowing infinite perpetuation of wealth necessary to maintain a desired lifestyle without needing employment or assistance from anyone. With only interest (return on investments) as an income, this should last all of the remaining years of my life, while accounting for my lifestyle and inflation. I was curious to see what the formula would look like and this is what I came up with. I made certain assumptions to simplify the exercise but the point is to come up with an analytical formula and understand its nature to see the impact of each variable."

MacGyverIt
The formula looks right to me, actually it FU money amount it comes up with for me is a bit lower than what I am shooting for because I have factored in a margin of safety i.e. never having to draw down principal, if I go with these numbers and accept zero wealth at death, I can retire in 5 years rather than 6.
Cheers

Looks very accurate to me. The biggest problem is it's based on a "die broke" theory  and if you live longer than you estimated, you're out of money.
It gave me about a 5% SWR (given a 6% returns and 3% inflation assumptions), which is obviously high compared to the standard 4% SWR advice, but the standard 4% is based on the idea of you never running out of money (gives a 95% chance to not run out after 30 years). This will give you a higher potential failure rate, but allow you to spend at a higher rate (and/or retire earlier, needing a smaller nest egg at a 5% SWR) so that you die broke.
I'm not a huge fan overall, but it gives the ER layman a target to start.

Something I take exception to is FU and ER money being the same thing and the quote below is the difference. FU money is having enough to meet your basic needs, either temporarily or indefinitely, so that you can tell whoever or whatever FU if needed  it should have nothing to do with desired lifestyle. ER on the other hand is absolutely about desired lifestyle.
....infinite perpetuation of wealth necessary to maintain a desired lifestyle without needing employment or assistance from anyone

The equation he rederives is the inverse of the capital recovery factor (http://en.wikipedia.org/wiki/Capital_recovery_factor) with nonzero inflation (though his exponent is off by one, maybe because he counts expenses at the start of each period rather than the end?). The CRF is what you would use to determine a loan payment amount, which makes sense, because you're essentially loaning money to the market.

It gave me about a 5% SWR (given a 6% returns and 3% inflation assumptions),
I saw the equation too and looks like it really depends on the ration of return and inflation. What if the next 10 years we have super high inflation and not a whole lot of return, or even negative.. That's what I am worried about..

It gave me about a 5% SWR (given a 6% returns and 3% inflation assumptions),
I saw the equation too and looks like it really depends on the ration of return and inflation. What if the next 10 years we have super high inflation and not a whole lot of return, or even negative.. That's what I am worried about..
This is where firecalc.com is so helpful, as well as knowing that as Mustachians, we have multiple margins of safety. Figuring out how many years you will last with 3% inflation and 6% return is helpful, but it's definitely not reality. FIREcalc will at least show all the different results you would have gotten in the past.
I learned about the real interest rate (http://en.wikipedia.org/wiki/Real_interest_rate) after reading the Lifehacker article. I had thought that the real return was simply the difference between market performance and inflation.

Something I take exception to is FU and ER money being the same thing and the quote below is the difference. FU money is having enough to meet your basic needs, either temporarily or indefinitely, so that you can tell whoever or whatever FU if needed  it should have nothing to do with desired lifestyle. ER on the other hand is absolutely about desired lifestyle.
....infinite perpetuation of wealth necessary to maintain a desired lifestyle without needing employment or assistance from anyone
Agreed. FU money is about being able to leave a horrible job or a horrible relationship. FU money has to last long enough to get you back on your feet. ER/FI is for long term financial support.