Author Topic: Is this like a 100% savings rate? (Thought question)  (Read 31838 times)

tooqk4u22

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Is this like a 100% savings rate? (Thought question)
« on: April 13, 2016, 11:17:33 AM »
Assume the following:
-ignore taxes and inflation
-fired
-$1,000,000 investments
-4% SWR

If one still works and makes $40k and spends the full amount is this like having a 100% savings rate because one is not spending the 4% SWR money.  (OR is this a 50% savings rate)

And doesn't this also have the effect of reducing the SWR from 4% to 3.85% as the 4% rule is indifferent of what the market does in any given year.  As an example if the $40k was added to the $1mil but then markets dropped back to $1mil the SWR would still be calculated based on $40k/$1040k.

So any year you work beyond FIRE has the effect of reducing the SWR even if you don't save any of the income.

Thoughts?

BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #1 on: April 13, 2016, 11:21:37 AM »
0%

If you're not selling stocks or taking dividends as cash, they are gains and not income.
If you are earning 40k and spending 40k with no savings, you have 0% savings rate.

Yes to your last question, if you don't take your SWR and you continue to work for sufficient income, you lower your future SWR when your investments gain anything greater than inflation.

Read this, http://www.madfientist.com/safe-withdrawal-rate/
« Last Edit: April 13, 2016, 11:26:19 AM by BackyarBQ »

beltim

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #2 on: April 13, 2016, 11:22:40 AM »
Assume the following:
-ignore taxes and inflation
-fired
-$1,000,000 investments
-4% SWR

If one still works and makes $40k and spends the full amount is this like having a 100% savings rate because one is not spending the 4% SWR money.  (OR is this a 50% savings rate)

0% savings rate.  No one I've seen counts investment returns or a flat 4% of their investment stache as savings before they retire, so they shouldn't include it as savings once they've hit the FIRE point.

Quote
And doesn't this also have the effect of reducing the SWR from 4% to 3.85% as the 4% rule is indifferent of what the market does in any given year.  As an example if the $40k was added to the $1mil but then markets dropped back to $1mil the SWR would still be calculated based on $40k/$1040k.

So any year you work beyond FIRE has the effect of reducing the SWR even if you don't save any of the income.

Thoughts?

Sure, to this part.  There's a complicating factor that the numbers get weird if you start withdrawing after time 0, though, so without running the numbers I think you'd be better off using current values for the withdrawal rate.

dandarc

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #3 on: April 13, 2016, 11:26:53 AM »
Alternatively, working beyond your initial target number allows you to increase retirement spending without additional risk.  You're keeping spending the same which indeed lowers your withdrawal rate as your stash grows higher, but you could also keep your withdrawal rate the same and increase retirement spending.

Savings rate is a short-hand way to encompass income and expenses and help you estimate your time to hitting your number.  Once you've hit your number, it isn't as meaningful - you're now in the withdrawal phase.  FWIW, I would look at the scenario you illustrated as a 0% savings rate coupled with a 0% withdraw rate, and as a bonus, you have enough to retire at a 4% withdrawal rate if you want to.  That is a very happy place to be.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #4 on: April 13, 2016, 11:45:27 AM »
0%

If you're not selling stocks or taking dividends as cash, they are gains and not income.
If you are earning 40k and spending 40k with no savings, you have 0% savings rate.

0% savings rate.  No one I've seen counts investment returns or a flat 4% of their investment stache as savings before they retire, so they shouldn't include it as savings once they've hit the FIRE point.


So if one has no earned income and actually FIRE's then the $40k from the SWR is considered income to pay your spending?  Doesn't seem consistent - how is it different than one taking the $40k SWR withdrawal, earning an additional $40k, and then reinvesting $40k. 

FWIW, I would look at the scenario you illustrated as a 0% savings rate coupled with a 0% withdraw rate, and as a bonus, you have enough to retire at a 4% withdrawal rate if you want to.  That is a very happy place to be.

This would be another way to look at math-wise.....and yes it would be a happy place
« Last Edit: April 13, 2016, 11:47:26 AM by tooqk4u22 »

beltim

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #5 on: April 13, 2016, 11:50:26 AM »
0%

If you're not selling stocks or taking dividends as cash, they are gains and not income.
If you are earning 40k and spending 40k with no savings, you have 0% savings rate.

0% savings rate.  No one I've seen counts investment returns or a flat 4% of their investment stache as savings before they retire, so they shouldn't include it as savings once they've hit the FIRE point.


So if one has no earned income and actually FIRE's then the $40k from the SWR is considered income to pay your spending?  Doesn't seem consistent - how is it different than one taking the $40k SWR withdrawal, earning an additional $40k, and then reinvesting $40k. 

No, it's a withdrawal from savings.  So in your hypothetical, you could withdraw $40k and put $40k in, and your net savings would be 0.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #6 on: April 13, 2016, 11:51:38 AM »
This may be a way for some people to look at a transitional way out - it could be applied to a higher SWR or for someone who is more conservative and desires a lower SWR.   

Somebody who has earned savings rate of 50% but hates their job and wants a change could look at this and realize that they can dial it way back and earn less income but still FIRE but just a bit longer dated.  Just another way to do the math and choose between now or then. 

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #7 on: April 13, 2016, 11:56:56 AM »
0%

If you're not selling stocks or taking dividends as cash, they are gains and not income.
If you are earning 40k and spending 40k with no savings, you have 0% savings rate.

0% savings rate.  No one I've seen counts investment returns or a flat 4% of their investment stache as savings before they retire, so they shouldn't include it as savings once they've hit the FIRE point.


So if one has no earned income and actually FIRE's then the $40k from the SWR is considered income to pay your spending?  Doesn't seem consistent - how is it different than one taking the $40k SWR withdrawal, earning an additional $40k, and then reinvesting $40k. 

No, it's a withdrawal from savings.  So in your hypothetical, you could withdraw $40k and put $40k in, and your net savings would be 0.

I don't see it that way, because in my scenario ($40k earnings, $40k SWR) I could actually spend $80K that year and never run out of money (96% chance anyway - actually better because I have lowered my SWR by .15%) - instead I decide reinvest (or leave in if it makes you feel better) $40k of it.  It should be no different than someone earning $80k with a 50% savings rate. Money is fungible.

aFrugalFather

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #8 on: April 13, 2016, 12:02:31 PM »
You can do mental gymnastics to call it anything that makes you comfortable, but I personally see it as 0% savings. 

beltim

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #9 on: April 13, 2016, 12:03:04 PM »
0%

If you're not selling stocks or taking dividends as cash, they are gains and not income.
If you are earning 40k and spending 40k with no savings, you have 0% savings rate.

0% savings rate.  No one I've seen counts investment returns or a flat 4% of their investment stache as savings before they retire, so they shouldn't include it as savings once they've hit the FIRE point.


So if one has no earned income and actually FIRE's then the $40k from the SWR is considered income to pay your spending?  Doesn't seem consistent - how is it different than one taking the $40k SWR withdrawal, earning an additional $40k, and then reinvesting $40k. 

No, it's a withdrawal from savings.  So in your hypothetical, you could withdraw $40k and put $40k in, and your net savings would be 0.

I don't see it that way, because in my scenario ($40k earnings, $40k SWR) I could actually spend $80K that year and never run out of money (96% chance anyway - actually better because I have lowered my SWR by .15%) - instead I decide reinvest (or leave in if it makes you feel better) $40k of it.  It should be no different than someone earning $80k with a 50% savings rate. Money is fungible.

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

dandarc

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #10 on: April 13, 2016, 12:05:35 PM »
I don't see it that way, because in my scenario ($40k earnings, $40k SWR) I could actually spend $80K that year and never run out of money (96% chance anyway - actually better because I have lowered my SWR by .15%) - instead I decide reinvest (or leave in if it makes you feel better) $40k of it.  It should be no different than someone earning $80k with a 50% savings rate. Money is fungible.
What is the point of calculating a savings rate this way at this point of the curve? 

All the savings rate does is give you a quick way to estimate the length of your accumulation phase.  Is it just to show-off and continue to say "I don't spend half the money I could?"  If so, more power to you, but I really don't understand the why here.  How are you going to use this number to help you understand your situation better?

And it is not the same as someone earning 80K with a 50% savings rate, who has 0 savings (they must, because there is no 4% of balance bonus being added here).  The person who already has $1M invested is way, way better off.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #11 on: April 13, 2016, 12:14:30 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.

beltim

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #12 on: April 13, 2016, 12:15:10 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.

I'm asking you what you think the savings rate is.

prognastat

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #13 on: April 13, 2016, 12:22:43 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.

You don't count the interest you earn up to the point where you are FIRE/FI as part of your savings rate do you? Then why would you afterwards?

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #14 on: April 13, 2016, 12:24:06 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.

I'm asking you what you think the savings rate is.

47%....as I rethink my version it should be 50% not 100% - it came to mind quickly at 100%, put it in the title then was unsure and your question made up my mind. 

Either way my point is that it is not a 0% SWR because after hitting the FIRE number the 4% can in fact be withdrawn for income in perpetuity.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #15 on: April 13, 2016, 12:25:03 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.

You don't count the interest you earn up to the point where you are FIRE/FI as part of your savings rate do you? Then why would you afterwards?

Why wouldn't you?

beltim

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #16 on: April 13, 2016, 12:27:41 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.

I'm asking you what you think the savings rate is.

47%....as I rethink my version it should be 50% not 100% - it came to mind quickly at 100%, put it in the title then was unsure and your question made up my mind. 

Either way my point is that it is not a 0% SWR because after hitting the FIRE number the 4% can in fact be withdrawn for income in perpetuity.

What happens if your investments go down in value that year?  Say, they fall from $900k to $860k.  Did you save money that year?

I'm trying to illustrate that cash flow is different from changes in asset value, and from a nominal arbitrary withdrawal rate.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #17 on: April 13, 2016, 12:29:22 PM »
What is the point of calculating a savings rate this way at this point of the curve? 

Partly its fun to look at things different ways, but it would be relevant to someone who is concerned about sequence of returns or wants to lean out of work but not entirely but be aware that the impact might not be as great as they think. 

And it is not the same as someone earning 80K with a 50% savings rate, who has 0 savings (they must, because there is no 4% of balance bonus being added here).  The person who already has $1M invested is way, way better off.

I Never suggested that the $80k with 50% savings rate had nothing....it was meant to be equivalent to the savings of $40k.....but yeah kind of obvious that someone with a million is better off than someone with nothing - thanks for the clarification anyway.

JZinCO

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #18 on: April 13, 2016, 12:29:28 PM »

I'm not sure how much clearer I can be.  Let's try something else.  In the year before retirement, let's say the person have a stache of $900k.  4% of that would be $36k.  They earn a salary of $40k and spend it all.  What is that person's savings rate?

You are ignoring the $36k in your scenario that could be withdrawn as income and spent or reinvested.
How??? What??

I really like to just use a cash flow statement to calculate savings rate:
In the accumulation phase if inflows are 50 and outflows are 25, you have a 50% SR
If you could fire and live off investments but don't and isntead earn 40 and spend 40 that is a 0%SR. If you have more outflows than inflows, it is not rational to determine a savings rate. Because as outflows approach inflow, savings rate approaches 0
so in this case if you have $0.9mil and you spend 36K, you instead calculate a withdrawal rate.

So here's the basic summary.
Inflow > outflow. You have net savings. Determine savings rate.
Outflow > Inflow. If Inflow>0, then calculate either burn rate or withdrawal rate. If Inflow=0, calculate withdrawal rate.

FYI 100% savings rate are only possible if inflow >0 and outflow=0.
« Last Edit: April 13, 2016, 12:32:17 PM by JZinCO »

Tester

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #19 on: April 13, 2016, 12:30:06 PM »
I will ask several things.

You are earning 40k.
You spend it all.
What is your savings rate?

You ask about the potential amount which could be withdrawn from the stache at 4%.

If you withdraw it and spent it, what is the savings rate?

If you don't withdraw it you don't "save it" after, so what is the saving rate?

If you withdraw it and reinvest it you don't "save it", you don't have any more money than before withdrawing it.

I really don't see any way of saying that spending all your earnings means a saving rate greater than 0%.

We can look in various places for what saving means:

http://www.merriam-webster.com/dictionary/saving

a plural :  money put by
b :  the excess of income over consumption expenditures —often used in plural


Do you see your 4% as income?
Even then my opinion is that it is 0%.
You don't get more money into your stache by consuming all your wages.

Another one, which mentions that savings accumulates.
In your case nothing accumulates.

http://www.businessdictionary.com/definition/savings.html

The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities.


tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #20 on: April 13, 2016, 12:33:38 PM »
What happens if your investments go down in value that year?  Say, they fall from $900k to $860k.  Did you save money that year?

I'm trying to illustrate that cash flow is different from changes in asset value, and from a nominal arbitrary withdrawal rate.

Yes, because the trinity study is indifferent as to what the portfolio does year to year (with the exception of the 4 out of 100 years that it failed of course)....so if you had a $900k portfolio at start and the next year the portfolio went down to $500k you would still be able to take out $36k and have a 96% chance of success.

JZinCO

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #21 on: April 13, 2016, 12:40:17 PM »
I think we should all keep in mind, as has been pointed out by myself and others already that savings literally means keeping a part of something acquired. So, if you earn 0 income and live off investments you are not saving by using less of those investments because:.
1) You cannot keep part of nothing that you acquired. That is illogical.
2) Those investments are not acquired. You cannot save part of what has already been saved. Leads me to emphasizing this,
3) Those investments constitute prior savings from a past year. To count those again is REALLY BAD accounting.

Did I tell you guys that I have a 99.999% savings rate because YOLO and spend all my prior savings down but I didn't? So because I was going to withdraw six figures but didn't that means I 'saved' all that money (even though I already saved it once).
This is like people saying they saved money because there was a sale going on. No, you just spent less.
« Last Edit: April 13, 2016, 01:10:48 PM by JZinCO »

dandarc

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #22 on: April 13, 2016, 12:50:53 PM »
JZ makes a great point - if I decide a 50% withdrawal rate is my Safe Withdrawal Rate, then wow is my savings rate huge!

I think maybe this figure needs a different name - I'll suggest the miser index.

EI = Earned Income = usual after-tax income computation = take-home + 401K deferrals and similar
CHS = Could-have-spent but didn't = 4% of stash
SPEND = spending

The miser index then equals:

(EI + CHS - SPEND) / (EI + CHS)

If CHS is 0, the miser index equals the savings rate, which by definition is:

(EI - SPEND) / EI

A very high miser index indicates you need to live a little.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #23 on: April 13, 2016, 01:14:34 PM »
I will ask several things.

You are earning 40k.
You spend it all.
What is your savings rate?   0%

You ask about the potential amount which could be withdrawn from the stache at 4%.

If you withdraw it and spent it, what is the savings rate?  0%

If you don't withdraw it you don't "save it" after, so what is the saving rate?  100% based on the premise that 4% could be taken as income but wasn't

If you withdraw it and reinvest it you don't "save it", you don't have any more money than before withdrawing it.   same as above

I really don't see any way of saying that spending all your earnings means a saving rate greater than 0%. 

We can look in various places for what saving means:

http://www.merriam-webster.com/dictionary/saving

a plural :  money put by
b :  the excess of income over consumption expenditures —often used in plural


Do you see your 4% as income?  yes - as should everyone who is FIRE as that is what they are living on and using to pay for everything with the expectation of never running out of money (again qualified 96% chance for 30 years
Even then my opinion is that it is 0%.
You don't get more money into your stache by consuming all your wages.  I agree but that's not my argument

Another one, which mentions that savings accumulates.
In your case nothing accumulates.  doesn't it though

http://www.businessdictionary.com/definition/savings.html

The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities. but we are not talking about disposable income purely from a wage earner point of view - we are talking about it from a FIRE with wage POV - so Disposable Income would include the 4% SWR plus other earned income

I think you all are thinking too literally about the definitions and not the realities of them. 

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #24 on: April 13, 2016, 01:19:10 PM »
JZ makes a great point - if I decide a 50% withdrawal rate is my Safe Withdrawal Rate, then wow is my savings rate huge!

No he doesn't and no it doesn't, a 50% withdrawal rate is not a SWR that you can retire on unless there is a study that I am not aware of and one that everyone on this forum subscribes to on top of it. 




BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #25 on: April 13, 2016, 01:32:29 PM »
JZ makes a great point - if I decide a 50% withdrawal rate is my Safe Withdrawal Rate, then wow is my savings rate huge!

No he doesn't and no it doesn't, a 50% withdrawal rate is not a SWR that you can retire on unless there is a study that I am not aware of and one that everyone on this forum subscribes to on top of it.

You're missing the point. 50% is hypothetical for your very specific line of questions. SWR is irrelevant, no one is suggesting 50%.

SWR, whether used or left alone is not SAVINGS, it is a percentage of assets.

If your home price value increases by 10% have you 'saved' anything? No, you would only be able to call your initial investment (downpayment) and principal payments (debatable) as savings. Likewise, your portfolio is based off savings contributions and growth. You cannot save it again.

If I give you 5 sunflower seeds and you plant 1 and eat 4 and your planted seed grows up and produces 10 more seeds, have you saved them or gained them?
« Last Edit: April 13, 2016, 01:43:35 PM by BackyarBQ »

Tester

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #26 on: April 13, 2016, 01:39:28 PM »
I will ask several things.

You are earning 40k.
You spend it all.
What is your savings rate?   0%

You ask about the potential amount which could be withdrawn from the stache at 4%.

If you withdraw it and spent it, what is the savings rate?  0%

If you don't withdraw it you don't "save it" after, so what is the saving rate?  100% based on the premise that 4% could be taken as income but wasn't

If you withdraw it and reinvest it you don't "save it", you don't have any more money than before withdrawing it.   same as above

I really don't see any way of saying that spending all your earnings means a saving rate greater than 0%. 

We can look in various places for what saving means:

http://www.merriam-webster.com/dictionary/saving

a plural :  money put by
b :  the excess of income over consumption expenditures —often used in plural


Do you see your 4% as income?  yes - as should everyone who is FIRE as that is what they are living on and using to pay for everything with the expectation of never running out of money (again qualified 96% chance for 30 years
Even then my opinion is that it is 0%.
You don't get more money into your stache by consuming all your wages.  I agree but that's not my argument

Another one, which mentions that savings accumulates.
In your case nothing accumulates.  doesn't it though

http://www.businessdictionary.com/definition/savings.html

The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities. but we are not talking about disposable income purely from a wage earner point of view - we are talking about it from a FIRE with wage POV - so Disposable Income would include the 4% SWR plus other earned income

I think you all are thinking too literally about the definitions and not the realities of them.

We might be, but the reality for me is that when I save money my stache goes up by the amount I put in it.
If I don't put anything in it or if I withdraw and put the same amount back then I am not saving.
Also, you already had a savings rate when you put the money in, now you count that again?

The fact that I could use some of the stache but don't do it does not mean I saved that money.
The fact that I could spend more but don't do it does not mean I have a savings rate.

If I have 1 million USD and I don't spend anything from it then this means I saved 1 million USD?

In the end, if you want to think that you have a 50% savings rate in the case you described nobody will be able to convince you of something else.
You are in a good position and your stache continues to grow, so the way you think about this won't affect you :).

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #27 on: April 13, 2016, 01:48:08 PM »
We might be, but the reality for me is that when I save money my stache goes up by the amount I put in it.
If I don't put anything in it or if I withdraw and put the same amount back then I am not saving.
Also, you already had a savings rate when you put the money in, now you count that again?

The fact that I could use some of the stache but don't do it does not mean I saved that money.
The fact that I could spend more but don't do it does not mean I have a savings rate.

If I have 1 million USD and I don't spend anything from it then this means I saved 1 million USD?

In the end, if you want to think that you have a 50% savings rate in the case you described nobody will be able to convince you of something else.
You are in a good position and your stache continues to grow, so the way you think about this won't affect you :).

I think you need to stop thinking as the withdrawal as simply a withdrawal, because when you are FIRE it is your income. 

Another example....what if I am FIRE and NOT working, so I pull out $40k of my $1mil (otherwise known as my income and a 4%SWR)....then some distant relative gives me $40k somewhere later in the year and I didn't spend it....I ask was this not additional income to me and was it not saved.

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #28 on: April 13, 2016, 01:53:44 PM »
JZ makes a great point - if I decide a 50% withdrawal rate is my Safe Withdrawal Rate, then wow is my savings rate huge!

No he doesn't and no it doesn't, a 50% withdrawal rate is not a SWR that you can retire on unless there is a study that I am not aware of and one that everyone on this forum subscribes to on top of it.

You're missing the point. 50% is hypothetical for your very specific line of questions. SWR is irrelevant, no one is suggesting 50%.

Ummmm...yeah it was actually suggest specifically above.

Quote
SWR, whether used or left alone is not SAVINGS, it is a percentage of assets.
Agreed - that is not what I am saying.  But SWR at 4% which is what the trinity study gets to and most rely on for FIRE turns out to be your income in FIRE....so if you spend less than the actual 4% it is equivalent to saving the difference.


[/quote]
If I give you 5 sunflower seeds and you plant 1 and eat 4 and your planted seed grows up and produces 10 more seeds, have you saved them or gained them?
[/quote]

Not while accumulating, but if you have gotten to harvesting stage and your 10 produce 10 more but you only need 4 then I would argue that you have saved an excess of 6.

BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #29 on: April 13, 2016, 01:55:16 PM »
We might be, but the reality for me is that when I save money my stache goes up by the amount I put in it.
If I don't put anything in it or if I withdraw and put the same amount back then I am not saving.
Also, you already had a savings rate when you put the money in, now you count that again?

The fact that I could use some of the stache but don't do it does not mean I saved that money.
The fact that I could spend more but don't do it does not mean I have a savings rate.

If I have 1 million USD and I don't spend anything from it then this means I saved 1 million USD?

In the end, if you want to think that you have a 50% savings rate in the case you described nobody will be able to convince you of something else.
You are in a good position and your stache continues to grow, so the way you think about this won't affect you :).

I think you need to stop thinking as the withdrawal as simply a withdrawal, because when you are FIRE it is your income. 

Another example....what if I am FIRE and NOT working, so I pull out $40k of my $1mil (otherwise known as my income and a 4%SWR)....then some distant relative gives me $40k somewhere later in the year and I didn't spend it....I ask was this not additional income to me and was it not saved.


1) Doesn't matter what your 'status' is. Money in the bank, Money in Funds, FIRE, Not Fire, Part-time. Keeping money in the bank doesn't change it's status to savings over and over again, unless you add something new.

2) No.

That's a gift. It's not earned income, it's not taxed as income. If you live of the relatives 40k, and put your 40k back, you've just brought your SWR to 0% for the year and are living on the gift. You did not save it. If you 'save' your gift, and live on your SWR, it's the same thing.  For the same reason that in your example... if you received said gift later in the year, would you not just keep it in cash, pull out your inflation adjusted difference (1,200) and keep the rest invested... again, no savings.

Money is fungible, it doesn't matter what you call it, it only exists (or doesn't).
« Last Edit: April 13, 2016, 01:57:12 PM by BackyarBQ »

ooeei

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #30 on: April 13, 2016, 01:56:03 PM »
I have $100k invested right now, make $74k, and spend $37k.  My savings rate is 50% as far as I'm concerned, even though I theoretically could withdraw $4k from my investments and spend it indefinitely.  My withdrawal rate is currently 0%.

Based on your calculations, if I had $1,000,000,000 invested, my "savings rate" would be ($37,000+$40,000,000)/($74,000+$40,000,000)= 99.9% savings rate.  Yet since I count the $40,000,000 as savings, that means it is being withdrawn and reinvested.  So I could either say I have a 50% savings rate and 0% withdrawal rate, or a 99.9% savings rate and 4% withdrawal.

I understand what you're saying, but I don't understand why you'd ever care what your "savings rate" is when you're withdrawing from your investments.  If it makes you feel good to brag about spending less than you could, that's fine, but I don't see any way it helps you analyze your situation.  You're basically combining savings rate and withdrawal rate to make your savings rate look higher. 
« Last Edit: April 13, 2016, 01:59:17 PM by ooeei »

BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #31 on: April 13, 2016, 02:07:27 PM »
JZ makes a great point - if I decide a 50% withdrawal rate is my Safe Withdrawal Rate, then wow is my savings rate huge!

No he doesn't and no it doesn't, a 50% withdrawal rate is not a SWR that you can retire on unless there is a study that I am not aware of and one that everyone on this forum subscribes to on top of it.

You're missing the point. 50% is hypothetical for your very specific line of questions. SWR is irrelevant, no one is suggesting 50%.

Ummmm...yeah it was actually suggest specifically above.

Quote
SWR, whether used or left alone is not SAVINGS, it is a percentage of assets.
Agreed - that is not what I am saying.  But SWR at 4% which is what the trinity study gets to and most rely on for FIRE turns out to be your income in FIRE....so if you spend less than the actual 4% it is equivalent to saving the difference.


Quote
If I give you 5 sunflower seeds and you plant 1 and eat 4 and your planted seed grows up and produces 10 more seeds, have you saved them or gained them?

Not while accumulating, but if you have gotten to harvesting stage and your 10 produce 10 more but you only need 4 then I would argue that you have saved an excess of 6.

Trinity study is just a study, it is data, possibly a guideline, you can chose whatever SWR you want based on your own math and investment performance or balance. There are people on this forum who plan on 5-6% WR. If you save 2M, and only need 40k, then you have a 2% WR. Leaving it in there, does not make it savings, it makes it 'your nest egg', your nut, your pile, FU money, stache. It's a thing that exists, it might grow, but it does not get more 'savings' unless you contribute to it. Go look at any website related to savings. Your savings rate, is what you contribute. It asks 2 questions. How much do you already have? How much can you contribute? Your existing savings, is just that, savings... it isn't part of a savings rate, it just exists.
https://www.banking.barclaysus.com/savings-assistant.html


You have gained 6 seeds you can do with them as you please.
Plant them (into another investment)
Store them (for later)*
Eat them or sell them (withdrawal rate, realize the gain)

*You can argue this is called saving them for later, but that doesn't increase your savings rate; just like earned interest in your cash account isn't part of your savings rate.
« Last Edit: April 13, 2016, 02:29:35 PM by BackyarBQ »

boarder42

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #32 on: April 13, 2016, 02:13:04 PM »
you're just arguing semantics call it whatever you want to call it. you can FIRE if you want to still work still work who cares what the savings rate is.

arebelspy

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #33 on: April 14, 2016, 02:59:17 AM »
I think someone who earns 50k, spends 55k, but has a portfolio sitting there that they didn't touch of 200k (which, at a 4% SWR, could theoretically provide 8k) does not have a positive savings rate.

You would calculate it as apparently 5% savings.  (50k earnings + 8k potential at 4% WR - 55k spending = 3k "savings" / 50k earnings + 8k imputed from WR = 5% savings rate)

I don't think they are "saving" any, and in fact are going into debt.
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tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #34 on: April 14, 2016, 07:17:59 AM »
I think someone who earns 50k, spends 55k, but has a portfolio sitting there that they didn't touch of 200k (which, at a 4% SWR, could theoretically provide 8k) does not have a positive savings rate.

You would calculate it as apparently 5% savings.  (50k earnings + 8k potential at 4% WR - 55k spending = 3k "savings" / 50k earnings + 8k imputed from WR = 5% savings rate)

I don't think they are "saving" any, and in fact are going into debt.


So if I receive $50k of interest on a bond - that isn't income? It may not be income from a job but it is still income.

You have a bunch of rental properties that generate Net Operating Income that is used to pay debt service and the rest is yours to use as you see fit - is that not income?  Again may not be earned income from wages/job but it is still income.

boarder42

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #35 on: April 14, 2016, 07:22:46 AM »
I think someone who earns 50k, spends 55k, but has a portfolio sitting there that they didn't touch of 200k (which, at a 4% SWR, could theoretically provide 8k) does not have a positive savings rate.

You would calculate it as apparently 5% savings.  (50k earnings + 8k potential at 4% WR - 55k spending = 3k "savings" / 50k earnings + 8k imputed from WR = 5% savings rate)

I don't think they are "saving" any, and in fact are going into debt.


So if I receive $50k of interest on a bond - that isn't income? It may not be income from a job but it is still income.

You have a bunch of rental properties that generate Net Operating Income that is used to pay debt service and the rest is yours to use as you see fit - is that not income?  Again may not be earned income from wages/job but it is still income.

why do you care about what you call it ... the math is the math.  its not really "saving" anything though to "save" money you must have income from somewhere.  if i make 40k a year and spend 40k a year regardless of what i have in the bank i didnt 'save' anything my investments earned money but i didnt 'save' any money. 

but like i said whatever helps you sleep at night ... call it a purple turd colored rainbow for all i care. 


PhysicianOnFIRE

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #36 on: April 14, 2016, 07:39:28 AM »
My savings calculator does not take into account investment gains or dividends. 

Usually, people are interested in calculating how much of their earned income is being invested, not how much of their investment gains remain invested.  Calculate however you like.

arebelspy

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #37 on: April 14, 2016, 07:53:57 AM »
I think someone who earns 50k, spends 55k, but has a portfolio sitting there that they didn't touch of 200k (which, at a 4% SWR, could theoretically provide 8k) does not have a positive savings rate.

You would calculate it as apparently 5% savings.  (50k earnings + 8k potential at 4% WR - 55k spending = 3k "savings" / 50k earnings + 8k imputed from WR = 5% savings rate)

I don't think they are "saving" any, and in fact are going into debt.


So if I receive $50k of interest on a bond - that isn't income? It may not be income from a job but it is still income.

You have a bunch of rental properties that generate Net Operating Income that is used to pay debt service and the rest is yours to use as you see fit - is that not income?  Again may not be earned income from wages/job but it is still income.

No.  My rental income was not calculated as part of my savings rate.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #38 on: April 14, 2016, 08:10:27 AM »
but like i said whatever helps you sleep at night ... call it a purple turd colored rainbow for all i care. 

https://www.youtube.com/watch?v=YbYWhdLO43Q

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #39 on: April 14, 2016, 08:11:35 AM »
I think someone who earns 50k, spends 55k, but has a portfolio sitting there that they didn't touch of 200k (which, at a 4% SWR, could theoretically provide 8k) does not have a positive savings rate.

You would calculate it as apparently 5% savings.  (50k earnings + 8k potential at 4% WR - 55k spending = 3k "savings" / 50k earnings + 8k imputed from WR = 5% savings rate)

I don't think they are "saving" any, and in fact are going into debt.


So if I receive $50k of interest on a bond - that isn't income? It may not be income from a job but it is still income.

You have a bunch of rental properties that generate Net Operating Income that is used to pay debt service and the rest is yours to use as you see fit - is that not income?  Again may not be earned income from wages/job but it is still income.

No.  My rental income was not calculated as part of my savings rate.

OK, you didn't account for it in your savings rate, but what I asked was if it is Income or not. 

boarder42

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #40 on: April 14, 2016, 08:20:17 AM »
this is one of the most convoluted questions i've ever seen - whats your end game here

lets start with the purpose of the savings rate -  in reality it comes from the Shockingly simple math post. 

what was the goal of this post.  to graphically/mathmatically demonstrate how boosting savings rate was more valuable than boosting income as far as acheiving FIRE. 

The chart only works to calculate years to retirement if youre invested in the normal total stockmarket from 0 invested.

beyond this a "savings rate" is mostly worthless.

you have to know that i save $XXXX per year, and i SPEND $XXXX per year, then you can extrapolate based on expected returns what your retirement date is

calculating your purple turd colored rainbow once you have already reached FI and continue to work and spend what you would be spending in FI accomplishes what exactly? 

JZinCO

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #41 on: April 14, 2016, 08:27:46 AM »
I think someone who earns 50k, spends 55k, but has a portfolio sitting there that they didn't touch of 200k (which, at a 4% SWR, could theoretically provide 8k) does not have a positive savings rate.

You would calculate it as apparently 5% savings.  (50k earnings + 8k potential at 4% WR - 55k spending = 3k "savings" / 50k earnings + 8k imputed from WR = 5% savings rate)

I don't think they are "saving" any, and in fact are going into debt.


So if I receive $50k of interest on a bond - that isn't income? It may not be income from a job but it is still income.

You have a bunch of rental properties that generate Net Operating Income that is used to pay debt service and the rest is yours to use as you see fit - is that not income?  Again may not be earned income from wages/job but it is still income.

I know you're alone on your side of the fence so I will hop over for a second. If one delineates their system boundary in an unconventional way than you are completely correct. let's say my system is 100% liquid cash. Then when I go buy a CD and earn 5%. It is unusual but fair to call the return of principle+interest income as you suggest. But it is okay IF and only IF your cash flow analysis called the purchase of a CD an outflow (BC it left the system of liquid cash). Hint: the outflow at time of purchase and inflow at redemption are a wash. Hence most folks broaden their system to any asset that is considered to be in their name.
We can apply the same example to paper investments or RE.
Honestly, with a few speculative plays, I've followed this accounting. When I made the investment, I considered those dollars not saved in time 0. If I earn something and get my investment back then I will call it income. I did this because it makes me understand up front the impact of losing my investment.


tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #42 on: April 14, 2016, 08:53:59 AM »
So it seems that most here agree with:

- investment returns are income, just not earned income - and most don't include them in their savings rate calcs.
- not taking a year (or more) of the 4% SWR (as per trinity and not some made up WR - notice the S missing) after FIRE level reached reduces or improves the SWR (per the study 4% is safe so anything less is safe too, anything hire may not be unsafe in the individuals mind but would not be safe per the study). 

To reduce a SWR (or WR for that matter) requires additional savings, and not taking a year of a SWR income also reduces the SWR wouldn't that mean that the SWR not taken is equivalent to saving it.   

this is one of the most convoluted questions i've ever seen - whats your end game here

lets start with the purpose of the savings rate -  in reality it comes from the Shockingly simple math post. 

The questions weren't just about the savings rate. 

what was the goal of this post.  to graphically/mathmatically demonstrate how boosting savings rate was more valuable than boosting income as far as acheiving FIRE. 

The chart only works to calculate years to retirement if youre invested in the normal total stockmarket from 0 invested.

beyond this a "savings rate" is mostly worthless.

The questions weren't about years to retirement but from once you reached fire at a 4% SWR. 

calculating your purple turd colored rainbow once you have already reached FI and continue to work and spend what you would be spending in FI accomplishes what exactly? 

Maybe I like purple turd colored rainbow - love the youtube BTW, gotta show my kids that one.....but your right it doesn't accomplish much other than a discussion (hence in the title "Thought discussion") - clearly you participated it so thanks for that. 

In this discussion everyone is focusing on the approaching FIRE (even though it wasn't part of the question) and largely that if its not :Earned" income than it must not be income - I think income is income is income, just may be that some is passive and some is active ("earned") but ok we disagree.




tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #43 on: April 14, 2016, 08:58:38 AM »
I know you're alone on your side of the fence so I will hop over for a second.

Uh oh.....

If one delineates their system boundary in an unconventional way than you are completely correct. let's say my system is 100% liquid cash. Then when I go buy a CD and earn 5%. It is unusual but fair to call the return of principle+interest income as you suggest. But it is okay IF and only IF your cash flow analysis called the purchase of a CD an outflow (BC it left the system of liquid cash). Hint: the outflow at time of purchase and inflow at redemption are a wash. Hence most folks broaden their system to any asset that is considered to be in their name.
We can apply the same example to paper investments or RE.

Yes but the return of principle is not income or additional savings, only the 5% interest is - if you spent 4% then the additional savings would be 1% - and in that case your savings rate would be 20%.


BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #44 on: April 14, 2016, 09:05:31 AM »
So it seems that most here agree with:

- investment returns are income, just not earned income - and most don't include them in their savings rate calcs.
- not taking a year (or more) of the 4% SWR (as per trinity and not some made up WR - notice the S missing) after FIRE level reached reduces or improves the SWR (per the study 4% is safe so anything less is safe too, anything hire may not be unsafe in the individuals mind but would not be safe per the study). 

To reduce a SWR (or WR for that matter) requires additional savings, and not taking a year of a SWR income also reduces the SWR wouldn't that mean that the SWR not taken is equivalent to saving it.   


Just to make this clear... 4% SWR is a data point, on past data, that over a 30 year period, receiving 7% annualized returns, leaves 3% for inflation and 4% for your expenses. In the future, you may only get 5% returns, leaving you 2% to withdrawal without hurting your spending power against inflation. If the future provides 10% returns but has 5% yearly inflation, you can still use 5% for inflation adjusted expenses. It has nothing to do with the individuals mind/opinion, it simply has to account for the individual/households return on investments, either at the time of withdrawal or some combination of understanding their own past returns and 'expected' future returns. This is where sequence of returns risk is important. 4% isn't Safe, if for the first 10 years of retirement there is only 2% average growth and 2% inflation, your stache will just maintain it's spending power, but withdrawing it will not make it sustainable for retirement. As stated, the Trinity Study is based on a 30 year retirement. Most FIRE'd people will be enjoying over 30 years of retirement. The math needs to be individualized, not templated. The Trinity Study is just a guideline.

I agree the investment earnings are income, but not earned income. I also don't consider it income until I withdrawal it for living expenses. Leaving it alone, is just your savings, but the growth on it is not your savings rate.

BarkyardBQ

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #45 on: April 14, 2016, 09:06:56 AM »
I know you're alone on your side of the fence so I will hop over for a second.

Uh oh.....

If one delineates their system boundary in an unconventional way than you are completely correct. let's say my system is 100% liquid cash. Then when I go buy a CD and earn 5%. It is unusual but fair to call the return of principle+interest income as you suggest. But it is okay IF and only IF your cash flow analysis called the purchase of a CD an outflow (BC it left the system of liquid cash). Hint: the outflow at time of purchase and inflow at redemption are a wash. Hence most folks broaden their system to any asset that is considered to be in their name.
We can apply the same example to paper investments or RE.

Yes but the return of principle is not income or additional savings, only the 5% interest is - if you spent 4% then the additional savings would be 1% - and in that case your savings rate would be 20%.

No, the 5% is return on investment. http://www.investopedia.com/terms/r/returnoninvestment.asp

4% is realized, 1% is unrealized. http://www.investopedia.com/terms/r/realizedprofit.asp
« Last Edit: April 14, 2016, 09:20:09 AM by BackyarBQ »

ooeei

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #46 on: April 14, 2016, 09:11:13 AM »
So it seems that most here agree with:

- investment returns are income, just not earned income - and most don't include them in their savings rate calcs.
- not taking a year (or more) of the 4% SWR (as per trinity and not some made up WR - notice the S missing) after FIRE level reached reduces or improves the SWR (per the study 4% is safe so anything less is safe too, anything hire may not be unsafe in the individuals mind but would not be safe per the study). 

To reduce a SWR (or WR for that matter) requires additional savings, and not taking a year of a SWR income also reduces the SWR wouldn't that mean that the SWR not taken is equivalent to saving it.   

this is one of the most convoluted questions i've ever seen - whats your end game here

lets start with the purpose of the savings rate -  in reality it comes from the Shockingly simple math post. 

The questions weren't just about the savings rate. 

what was the goal of this post.  to graphically/mathmatically demonstrate how boosting savings rate was more valuable than boosting income as far as acheiving FIRE. 

The chart only works to calculate years to retirement if youre invested in the normal total stockmarket from 0 invested.

beyond this a "savings rate" is mostly worthless.

The questions weren't about years to retirement but from once you reached fire at a 4% SWR. 

calculating your purple turd colored rainbow once you have already reached FI and continue to work and spend what you would be spending in FI accomplishes what exactly? 

Maybe I like purple turd colored rainbow - love the youtube BTW, gotta show my kids that one.....but your right it doesn't accomplish much other than a discussion (hence in the title "Thought discussion") - clearly you participated it so thanks for that. 

In this discussion everyone is focusing on the approaching FIRE (even though it wasn't part of the question) and largely that if its not :Earned" income than it must not be income - I think income is income is income, just may be that some is passive and some is active ("earned") but ok we disagree.

Yeah, your numbers add up, they just rely on different assumptions than "normal" when using the common terms/strategies. This means they will be inherently confusing if you tell them to other people.  Investment "income" is usually captured in a separate "investment return rate" as everyone knows that varies year to year and it is dependent on your asset class.  Regular earned income is usually categorized as "income" and is more stable than investment returns, although it depends on your industry.  Adding in the SWR as your income instead of investment returns muddles the waters even more.

If it helps you with your planning/analysis, have at it.  In discussions with others, be prepared to do some explaining about your definitions of terms and assumptions.  Combining earned income and investment SWR (but not investment returns) doesn't give me any more info than I already have with the base numbers, so I don't see much use in it. 

Generally:  Savings rate = (earned income - spending)/earned income 

Your definition 1 (100% rate in first post):  Savings rate = (earned income + safe withdrawal rate x invested assets - spending)/(earned income)

Your definition 2 (50% rate in first post):  Savings rate = (earned income + safe withdrawal rate x invested assets - spending)/(earned income + safe withdrawal rate x invested assets)

Since your definition is different from usual, it's going to be confusing in discussions with others.  Definition 1 is even more confusing because safe withdrawal rate x assets is included in the savings portion, but not the income portion.
« Last Edit: April 14, 2016, 09:15:03 AM by ooeei »

JZinCO

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #47 on: April 14, 2016, 09:22:50 AM »
I know you're alone on your side of the fence so I will hop over for a second.

Uh oh.....

If one delineates their system boundary in an unconventional way than you are completely correct. let's say my system is 100% liquid cash. Then when I go buy a CD and earn 5%. It is unusual but fair to call the return of principle+interest income as you suggest. But it is okay IF and only IF your cash flow analysis called the purchase of a CD an outflow (BC it left the system of liquid cash). Hint: the outflow at time of purchase and inflow at redemption are a wash. Hence most folks broaden their system to any asset that is considered to be in their name.
We can apply the same example to paper investments or RE.

Yes but the return of principle is not income or additional savings, only the 5% interest is - if you spent 4% then the additional savings would be 1% - and in that case your savings rate would be 20%.
Don't worry now I'm back over the fence because you are inconsistent.
Did I misunderstand you when you said all withdrawal from retirement accounts was income and rental income was all income?

Again if you considered the purchase of real estate as a cash outflow and the rental income as a cash inflow than I am with you. But you are now saying that income is only income if the cash inflow exceeds the initial cash outflow (i.e. the ROI).
So if your cash outflow for real estate is 100 and you receive 10 for rent, then you don't get to claim income (i.e. ROI) until the 11th rental period?
And the initial purchase was not an outflow and each rental payment was not an inflow on your books (see bold).. Don't you care about liquidity?

Do you run a business? How do you do your personal or business cash flow statements? Is every current expenditure discounted by future expected payments?
« Last Edit: April 14, 2016, 09:33:20 AM by JZinCO »

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #48 on: April 14, 2016, 10:44:37 AM »
No, the 5% is return on investment. http://www.investopedia.com/terms/r/returnoninvestment.asp

4% is realized, 1% is unrealized. http://www.investopedia.com/terms/r/realizedprofit.asp

Yup, I agree with those definitions but as usual you put it out there against something that I did not say. 

See below - and the 5% is realized in the bond example not 4% - the full amount is paid out. 

Yes but the return of principle is not income or additional savings, only the 5% interest is - if you spent 4% then the additional savings would be 1% - and in that case your savings rate would be 20%.
Don't worry now I'm back over the fence because you are inconsistent.
Did I misunderstand you when you said all withdrawal from retirement accounts was income and rental income was all income?

Again if you considered the purchase of real estate as a cash outflow and the rental income as a cash inflow than I am with you. But you are now saying that income is only income if the cash inflow exceeds the initial cash outflow (i.e. the ROI).
So if your cash outflow for real estate is 100 and you receive 10 for rent, then you don't get to claim income (i.e. ROI) until the 11th rental period?
And the initial purchase was not an outflow and each rental payment was not an inflow on your books (see bold).. Don't you care about liquidity?

Do you run a business? How do you do your personal or business cash flow statements? Is every current expenditure discounted by future expected payments?

I don't see how I am being inconsistent - in that example you save and buy a bond that pays 5% in perpetuity.  While accumulating that bond it is a cash out flow and savings.

But once the bond is purchased, there is no need to sell the bond (principle) so there is no return of investment at that time but there is a 5% return on investment.  You only need 4% to cover your expenses - so what is the remaining 1%.....is it not income or additional savings (it has been realized afterall)....does it just not exist because you didn't spend it and just disappears, what is it then....at that point in time the 5% is your income (not earned income) and the 1% is savings. 

Again this is all from the point of FIRE

tooqk4u22

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Re: Is this like a 100% savings rate? (Thought question)
« Reply #49 on: April 14, 2016, 10:54:53 AM »
So it seems that most here agree with:

- investment returns are income, just not earned income - and most don't include them in their savings rate calcs.
- not taking a year (or more) of the 4% SWR (as per trinity and not some made up WR - notice the S missing) after FIRE level reached reduces or improves the SWR (per the study 4% is safe so anything less is safe too, anything hire may not be unsafe in the individuals mind but would not be safe per the study). 

To reduce a SWR (or WR for that matter) requires additional savings, and not taking a year of a SWR income also reduces the SWR wouldn't that mean that the SWR not taken is equivalent to saving it.   


Just to make this clear... 4% SWR is a data point, on past data, that over a 30 year period, receiving 7% annualized returns, leaves 3% for inflation and 4% for your expenses. In the future, you may only get 5% returns, leaving you 2% to withdrawal without hurting your spending power against inflation. If the future provides 10% returns but has 5% yearly inflation, you can still use 5% for inflation adjusted expenses. It has nothing to do with the individuals mind/opinion, it simply has to account for the individual/households return on investments, either at the time of withdrawal or some combination of understanding their own past returns and 'expected' future returns. This is where sequence of returns risk is important. 4% isn't Safe, if for the first 10 years of retirement there is only 2% average growth and 2% inflation, your stache will just maintain it's spending power, but withdrawing it will not make it sustainable for retirement. As stated, the Trinity Study is based on a 30 year retirement. Most FIRE'd people will be enjoying over 30 years of retirement. The math needs to be individualized, not templated. The Trinity Study is just a guideline.

I agree the investment earnings are income, but not earned income. I also don't consider it income until I withdrawal it for living expenses. Leaving it alone, is just your savings, but the growth on it is not your savings rate.

I don't know how to make it more clear to you - no it is not JUST a data point.  It is a data point that has been study, analyzed and tested and statistically proven to be safe over almost any period hence the S for SAFE in SWR and not just a WR - but yes sequence of return risk is the greatest one and nothing is guaranteed - "historical performance is no guarantee of future performance" but to a large degree most, and I mean the vast majority, use this data point and all its history/studying/analysis as a target for FIRE - will it be applied hard and fast with no adjustments across the board - fuck no but very few are saying that they will take 5-6-or more % WR and more likely goes lower than the 4% - this only applies to paper FIRE'ees (stocks and bonds). Property investors like AREs may have higher rates because they bought cheap rentals at the down turn and locked in higher cash on cash returns and then realized some appreciation along the way. Beyond the 4% rule it is risk tolerance that decides higher WR but the further above it you go the less SAFE it becomes historically.

And also the 4% rule assumes that when the market is up 30% you will still only take out 4% of the original amount, same is true if the market is down 30%.  So the volatility of returns year to year are irrelevant unless you feel the 4% rule is invalid because the future will be drastically worse than the past and if that's the case change all the numbers to 3% instead of 4% to rule out even sequence of return risk historically because 3% never failed.

« Last Edit: April 14, 2016, 10:58:00 AM by tooqk4u22 »