### Author Topic: Help me with the math  (Read 5203 times)

#### bothpaninis

• Posts: 15
##### Help me with the math
« on: November 04, 2013, 01:54:15 PM »
I am a beginner Mustachian, so apologies if this has been asked many times over... How does inflation factor into this equation?:

# of years to retirement = ((annual expenses/withdrawal rate) - net worth)/(income after taxes * savings rate)

Is it just that inflation is in the numerator and denominator such that it cancels out? So that's assuming your income, annual expenses, and net worth grow with inflation? (Well, obviously your net worth is going to grow at a higher rate than inflation, but you know what I mean...)

#### grmagne

• Posts: 65
• Location: Toronto
##### Re: Help me with the math
« Reply #1 on: November 04, 2013, 02:40:06 PM »
Is it just that inflation is in the numerator and denominator such that it cancels out? So that's assuming your income, annual expenses, and net worth grow with inflation? (Well, obviously your net worth is going to grow at a higher rate than inflation, but you know what I mean...)

Yes, the inflation factors cancel each other out. You can create cash flow spreadsheets with and without inflation to see how it basically works out the same way. That's why MMM just recommends the simple calculation that you target a 4% real rate of return (after inflation) and try to accumulate 25x your current annual expenses without worrying about inflation.

#### marty998

• Walrus Stache
• Posts: 7254
• Location: Sydney, Oz
##### Re: Help me with the math
« Reply #2 on: November 04, 2013, 02:44:08 PM »
I tend to ignore it. Best if you focus only on the things you can control.

• Stubble
• Posts: 179
• Age: 46
• Location: Portland, OR
##### Re: Help me with the math
« Reply #3 on: November 04, 2013, 05:32:35 PM »
I am a beginner Mustachian, so apologies if this has been asked many times over... How does inflation factor into this equation?:

# of years to retirement = ((annual expenses/withdrawal rate) - net worth)/(income after taxes * savings rate)

Is it just that inflation is in the numerator and denominator such that it cancels out? So that's assuming your income, annual expenses, and net worth grow with inflation? (Well, obviously your net worth is going to grow at a higher rate than inflation, but you know what I mean...)
Your equation ignores the growth of your net worth (from return on investments) until retirement.

#### bothpaninis

• Posts: 15
##### Re: Help me with the math
« Reply #4 on: November 04, 2013, 06:00:14 PM »
So... are you saying my equation is too conservative because it doesn't account for growth in net worth that is greater than the rate of inflation?

• Stubble
• Posts: 179
• Age: 46
• Location: Portland, OR
##### Re: Help me with the math
« Reply #5 on: November 04, 2013, 06:10:32 PM »

My 'stache is saving as much money as I am :)

• Stubble
• Posts: 179
• Age: 46
• Location: Portland, OR
##### Re: Help me with the math
« Reply #6 on: November 04, 2013, 06:32:01 PM »
Strangely enough, I wasn't able to find a good online calculator to help you. None of the of the calculators I found are trying to optimize your years of work (the one parameter you have control over). How very un-Mustachian!

You can make do with this:
http://www.bloomberg.com/personal-finance/calculators/retirement/

Set the rate of return to be 4%. Set your current net worth, and your goal (25 X retirement expenses), then adjust the retirement age until it gives you an annual rate of savings you can achieve.

#### arebelspy

• Senior Mustachian
• Posts: 28419
• Age: -999
• Location: Seattle, WA
##### Re: Help me with the math
« Reply #7 on: November 04, 2013, 06:54:38 PM »
Strangely enough, I wasn't able to find a good online calculator to help you. None of the of the calculators I found are trying to optimize your years of work (the one parameter you have control over). How very un-Mustachian!

I'm sure there are some, even multiple.

I know there are many early retirement calculators, such as Networthify.

What exactly are you looking for a calculator to do?  If you clarify perhaps we can point you in the direction of one that does that.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

• Stubble
• Posts: 179
• Age: 46
• Location: Portland, OR
##### Re: Help me with the math
« Reply #8 on: November 04, 2013, 08:21:24 PM »
Nice!

It's a little rigid in that it requires that current expenses be the same as expenses after retirement. But that can be tweaked if you adjust your income to only look at savings.

#### MilStachian

• Posts: 92
• Location: New England
##### Re: Help me with the math
« Reply #9 on: November 04, 2013, 08:39:21 PM »
If you haven't come across FIRECalc yet, take it for a spin.  Allows you to make all those calculations (expected return, inflation, any inheritances down the ride, increase/decrease in living expenses, etc.) and gives you a likelihood your plan will last for X years of retirement.

FIRECalc
http://www.firecalc.com/

• Stubble
• Posts: 179
• Age: 46
• Location: Portland, OR
##### Re: Help me with the math
« Reply #10 on: November 04, 2013, 08:53:05 PM »
That's also a great utility. I've also played a lot with this:
http://www.cfiresim.com/input.php

Both help determining how big of a 'stache you need under certain assumptions. The OP asked how many years it would take to save that 'stache.

#### arebelspy

• Senior Mustachian
• Posts: 28419
• Age: -999
• Location: Seattle, WA
##### Re: Help me with the math
« Reply #11 on: November 04, 2013, 08:55:31 PM »
If you haven't come across FIRECalc yet, take it for a spin.  Allows you to make all those calculations (expected return, inflation, any inheritances down the ride, increase/decrease in living expenses, etc.) and gives you a likelihood your plan will last for X years of retirement.

FIRECalc
http://www.firecalc.com/

cFIREsim is a better version of FIRECalc - same premise, but updated more recently, and with more features (and actively developed by bo_knows, an MMM forum member and moderator who is very open to suggestions).

www.cfiresim.com

EDIT: Beaten to it by dadof4!  :P
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.