The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: tooqk4u22 on April 13, 2016, 11:17:33 AM
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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?
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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/
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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.
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.
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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.
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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
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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.
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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.
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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.
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You can do mental gymnastics to call it anything that makes you comfortable, but I personally see it as 0% savings.
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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?
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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.
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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.
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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.
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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?
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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 :).
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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.
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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.
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.
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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.
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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).
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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.
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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.
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.
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.
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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.
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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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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.
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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.
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My savings calculator (http://www.usatoday.com/story/money/personalfinance/2016/04/10/how-retired-33-and-so-can-you/82756340/) 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.
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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.
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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
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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.
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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?
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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.
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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.
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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%.
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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.
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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
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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.
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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?
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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
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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.
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I don't think there is enough data in the example to compute the savings rate.
IMO, SWR is just that: a safe withdrawal rate. It doesn't tell me what income is coming in.
If I have $1M invested and should have a 40k "safe withdrawal" ... that tells me something about FIRE, but doesn't tell me enough for a savings rate.
If I have $40k salary, $1M invested, some of it appreciates in value and I receive $20k in dividends, my income is $60k. I spent $40k. I saved $20k. I have a 33% savings rate. BUT... there is no mention of investment income in the original question, so this isn't really computable.
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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
Ah. Okay, I am beginning to understand your thinking.
So, anything that is earned or lost from your principle also counts as positive or negative income. So
1) I have earned income of 100K, and 50K of capital gains of a 100K investment. I spent 25K of the earned income. The savings rate per your method is then 83% if we realized the gains and consumed the gains whereas most of us would say 75% savings rate + a 33% withdrawal rate from the 100K investment if we realized the gains.
- And if anything less than 50K is spent, that difference is savings to you.
2) I have earned income of 100K, and 50K of capital losses of a 100K investment. I spent 25K of the earned income. The savings rate per your method is then 50% if we realized the losses whereas most of us would say 75% savings rate + a 100% withdrawal rate from the 100K investment if we realized the losses.
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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.
you're also quoting thie study incorrectly it was done with 30 years in mind when the trinity "study" was done. still dont know what you are trying to accomplish with the semantics and special accounting you're attempting to execute.
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I will ask again one question.
If I have 1 million USD, earn 100,000 USD/year and my expenses for the year are 110,000 USD you say that my savings rate is >0?
One more: why limit yourself to SWR when you compute your income?
Why should I not say that my income it 1,100,000 USD for the year?
In this case my savings rate is quite bug although my stache is smaller.
Do you see why I don't understand/agree with your way of looking at this?
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savings rate is overstated on this site and this post just proves a large lack of fundamental understanding of what it takes to reach FIRE.
WHEN YOU HIT FIRE WHO THE F*** CARES WHAT YOUR SAVINGS RATE IS. regardless of if you're working still .
when you're not to FIRE your savings rate isnt nearly as relevant as just projecting future returns based on your stable of investments be it VTSAX or renting meth houses to children.
[MOD NOTE: Please play nice.]
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savings rate is overstated on this site and this post just proves a large lack of fundamental understanding of what it takes to reach FIRE.
WHEN YOU HIT FIRE WHO THE F*** CARES WHAT YOUR SAVINGS RATE IS. regardless of if you're working still .
when you're not to FIRE your savings rate isnt nearly as relevant as just projecting future returns based on your stable of investments be it VTSAX or renting meth houses to children.
But then he can't tell people...
Well I'm retired and financially independent and I don't have to work and my savings rate is still 30%. No you see you don't understand, I'm retired, and my stache makes money and I STILL don't spend it all. It's crazy.
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savings rate is overstated on this site and this post just proves a large lack of fundamental understanding of what it takes to reach FIRE.
WHEN YOU HIT FIRE WHO THE F*** CARES WHAT YOUR SAVINGS RATE IS. regardless of if you're working still .
when you're not to FIRE your savings rate isnt nearly as relevant as just projecting future returns based on your stable of investments be it VTSAX or renting meth houses to children.
But then he can't tell people...
Well I'm retired and financially independent and I don't have to work and my savings rate is still 30%. No you see you don't understand, I'm retired, and my stache makes money and I STILL don't spend it all. It's crazy.
touche - gloating the general public about something they dont understand b/c on here shit that stinks gets sniffed out and this rainbow turd of dreams is pretty stinky.
[MOD EDIT: Forum Rule #1.]
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I will ask again one question.
If I have 1 million USD, earn 100,000 USD/year and my expenses for the year are 110,000 USD you say that my savings rate is >0?
Nope - it would be negative. Then I ask where did the $100k come from - job? 10% WR - would clearly not be safe? Mix? But no, it $100 in and $110 out would be negative.
One more: why limit yourself to SWR when you compute your income?
Why should I not say that my income it 1,100,000 USD for the year?
In this case my savings rate is quite bug although my stache is smaller.
Do you see why I don't understand/agree with your way of looking at this?
[/quote]
Because 4% is deemed the SWR and would/should be the expected income for FIRE if you expect to your money to last - less would be even better, higher would not.
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Tooq: Once you're FIRE'd, you can think of spending less than 4% as a savings rate (i.e. if you have 1MM, and spend 30k instead of 40k, you can think of it as a 25% savings rate--10k "saved" out of 40k potential income), or as a lower WR (a 3% WR). It doesn't matter what you call it, a 25% savings rate on 4% WR, or a 3% WR, in the real world, you spent 30k of your 1MM stache. It's six of one, half a dozen of the other.
Before FIRE, it's just your portfolio changing value, up and down, and it's gradually decreasing your WR to a sustainable level, as your stache hits higher and higher multiples of your expenses. But again, there you could think of it as adding to your portfolio.
The key to go back to though, is: What's the point of an SWR?
1) Sound Impressive? There are many ways you can jack it up, to sound more impressive, if that's your goal. Then I would use your method, among others.
2) Track progress? If its point is to track progress, I wouldn't use your method (because my stache growing on its own accord increases my savings rate over time, when really I'd want to use my actual earned income and expenses to see if I was earning more, and/or spending less, over time.. not just having my stache grow due to things beyond my control).
3) Calculate time to FIRE? If you're trying to do that, I wouldn't use your method, as it's expenses and earned income that counts in that calculation (stache growth matters, but in a "guess" way--not in a "increased savings rate" way).
4) Calculate the odds of your success in FIRE? If you're trying to do that, you won't count it as savings, you'll count it as a lower SWR, as that's what historical calculations are based on.
In other words, I don't see a use for the calculation where you count it as "savings." The first one, sure, but the next three, no.
You certainly CAN look at it that way (as I said, it's six of one, half dozen of the other--25% savings rate in FIRE or 3% WR instead of 4% WR), but it's just not really useful to do so.
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I will ask again one question.
If I have 1 million USD, earn 100,000 USD/year and my expenses for the year are 110,000 USD you say that my savings rate is >0?
Nope - it would be negative. Then I ask where did the $100k come from - job? 10% WR - would clearly not be safe? Mix? But no, it $100 in and $110 out would be negative.
He's saying 100k from a job, spend 110k.
Have a 1MM portfolio you could theoretically pull 40k from, at a 4% WR.
Would you count him as having a positive savings rate? (100k job + 40k from "WR" = 140k..spent 110k.. so "saved" 30k / 140k = 21% savings rate).
You seem to be saying, if you count "income" from your stache (that is automatically reinvested, and/or just capital growth), that person earning 100k in their job and spending 110k has a savings rate of over 20%.
Most of us would say they have a negative savings rate.
That's why we don't count it that way... it's not useful to do so.
Yes, technically their portfolio should be growing faster than their deficit spending, so they aren't necessarily going deeper in the red each month, per their overall net worth (over the long run), but we still don't say they're "saving" money.
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savings rate is overstated on this site and this post just proves a large lack of fundamental understanding of what it takes to reach FIRE.
WHEN YOU HIT FIRE WHO THE F*** CARES WHAT YOUR SAVINGS RATE IS. regardless of if you're working still .
when you're not to FIRE your savings rate isnt nearly as relevant as just projecting future returns based on your stable of investments be it VTSAX or renting meth houses to children.
But then he can't tell people...
Well I'm retired and financially independent and I don't have to work and my savings rate is still 30%. No you see you don't understand, I'm retired, and my stache makes money and I STILL don't spend it all. It's crazy.
Maybe but I never indicated I was talking about me, this could be anyone of us.
savings rate is overstated on this site and this post just proves a large lack of fundamental understanding of what it takes to reach FIRE.
WHEN YOU HIT FIRE WHO THE F*** CARES WHAT YOUR SAVINGS RATE IS. regardless of if you're working still .
when you're not to FIRE your savings rate isnt nearly as relevant as just projecting future returns based on your stable of investments be it VTSAX or renting meth houses to children.
Honestly I think you may be the one that has no clue...and for the umpteenth time it is from the point of FIRE not reaching it. As for projecting future returns and estimating how to make your stache last how do you do that exactly - seems your method is to make it up out of thin air because based on your comments the 4% rule is clearly unreliable and makes no sense to you. Yes it is a target, but one that has a lot of research behind it - you may be more comfortable at 10% WR but there is nothing to indicate that it is safe or you may be more comfortable at 2% and most likely you oversaved...in fact you have because the SP500 yield is above that so it ensures that you will never run out.
For a 4% WR rate to be successful it largely relies on cap gains, interest and dividends - and then to an extent principal in some of the close to fail scenarios although most end with more money than less at the end. Based on this the 4% SWR is income.
Why is it so hard for you to comprehend that $40k income on $1mil or $4k income on $100k for that matter is not income.
Not that I want to get into defending the 4% rule but whenever anybody on this board says I am not comfortable with 4% or what happens if sequence of returns shit the bed.....all the responses are typically get a part time job, be flexible, cut spending, its not meant to be perfect....all valid by the way.
This is just another take on that to quantify your adjusted SWR assuming you believe in the trinity study (and yes I know it is only for 30 years, but beyond that it is statistically less meaningful ie if you made it 30 you are highly likely to make it forever.
All the people that cut expenses or make extra income or don't spend the full 4% SWR should factor that back in to the initial analysis to see that how the SWR dropped below 4% as a result. I am sure that we can agree that 3.5% WR is safer than 4% - so in the scenario of $40k on $1mil portfolio if a person did a combination of the three in any given year or multiple years they realize they are overdoing it and really don't need to.
But I digress, our ships will never be in the same port
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Tooq: Once you're FIRE'd, you can think of spending less than 4% as a savings rate (i.e. if you have 1MM, and spend 30k instead of 40k, you can think of it as a 25% savings rate--10k "saved" out of 40k potential income), or as a lower WR (a 3% WR). It doesn't matter what you call it, a 25% savings rate on 4% WR, or a 3% WR, in the real world, you spent 30k of your 1MM stache. It's six of one, half a dozen of the other.
Yes, I agree with the 3% to 4% - the difference being that a person planning a 4% spend but in some year(s) just happens spend less/make some there is a quantifiable reduction in the 4% SWR, it may not be much or it may be a lot, but if it might help someone who is tracking this realize that when an extra $10k is not needed they don't need to go back to work or cut expense because there is cushion built up from prior years....no different than if they withdrew 4% but spent 3% and put the other 1% in a savings account for a rainy day (oooh....did I say savings) but I would rather keep it invested.
Before FIRE, it's just your portfolio changing value, up and down, and it's gradually decreasing your WR to a sustainable level, as your stache hits higher and higher multiples of your expenses. But again, there you could think of it as adding to your portfolio.
But I am not talking about before FIRE.
The key to go back to though, is: What's the point of an SWR?
1) Sound Impressive? There are many ways you can jack it up, to sound more impressive, if that's your goal. Then I would use your method, among others.
2) Track progress? If its point is to track progress, I wouldn't use your method (because my stache growing on its own accord increases my savings rate over time, when really I'd want to use my actual earned income and expenses to see if I was earning more, and/or spending less, over time.. not just having my stache grow due to things beyond my control).
3) Calculate time to FIRE? If you're trying to do that, I wouldn't use your method, as it's expenses and earned income that counts in that calculation (stache growth matters, but in a "guess" way--not in a "increased savings rate" way).
4) Calculate the odds of your success in FIRE? If you're trying to do that, you won't count it as savings, you'll count it as a lower SWR, as that's what historical calculations are based on.
In other words, I don't see a use for the calculation where you count it as "savings." The first one, sure, but the next three, no.
I would say #2 because tracking progress on withdrawals so that you can figure out #4 along the way as it wouldn't be 3% up front or every year but the incremental bits along the way may have a big impact...I would have no use for #1 and #2 is not FIRE yet.
I will ask again one question.
If I have 1 million USD, earn 100,000 USD/year and my expenses for the year are 110,000 USD you say that my savings rate is >0?
Nope - it would be negative. Then I ask where did the $100k come from - job? 10% WR - would clearly not be safe? Mix? But no, it $100 in and $110 out would be negative.
He's saying 100k from a job, spend 110k. ok
Have a 1MM portfolio you could theoretically pull 40k from, at a 4% WR. yup
Would you count him as having a positive savings rate? (100k job + 40k from "WR" = 140k..spent 110k.. so "saved" 30k / 140k = 21% savings rate). only if he was FIRE, but at $110k recurring spend, I don't think he would be at least not on a Safe basis
You seem to be saying, if you count "income" from your stache (that is automatically reinvested, and/or just capital growth), that person earning 100k in their job and spending 110k has a savings rate of over 20%.
Most of us would say they have a negative savings rate. I said that above
That's why we don't count it that way... it's not useful to do so.
Yes, technically their portfolio should be growing faster than their deficit spending, so they aren't necessarily going deeper in the red each month, per their overall net worth (over the long run), but we still don't say they're "saving" money.
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Now you're talking about in FIRE only?
In the first post you were talking about while working:
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?
So are we talking about someone FiRE'd, or someone working?
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Now you're talking about in FIRE only?
In the first post you were talking about while working:
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?
So are we talking about someone FiRE'd, or someone working?
IRP alert but I was talking about someone who is FIRE'd but happens to work as indicated in the assumptions part....I know I know, people who are FIRE'd aren't allowed to work or generate any additional income.
I moved away from that and into the Bond argument because it seemed it was causing everyone to think about working and accumulating, clearly you did too.....so sorry for that.
But yes FIRE'd as indicated in the first post.
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Tooq: Once you're FIRE'd, you can think of spending less than 4% as a savings rate (i.e. if you have 1MM, and spend 30k instead of 40k, you can think of it as a 25% savings rate--10k "saved" out of 40k potential income), or as a lower WR (a 3% WR). It doesn't matter what you call it, a 25% savings rate on 4% WR, or a 3% WR, in the real world, you spent 30k of your 1MM stache. It's six of one, half a dozen of the other.
Yes, I agree with the 3% to 4% - the difference being that a person planning a 4% spend but in some year(s) just happens spend less/make some there is a quantifiable reduction in the 4% SWR, it may not be much or it may be a lot, but if it might help someone who is tracking this realize that when an extra $10k is not needed they don't need to go back to work or cut expense because there is cushion built up from prior years....no different than if they withdrew 4% but spent 3% and put the other 1% in a savings account for a rainy day (oooh....did I say savings) but I would rather keep it invested.
Before FIRE, it's just your portfolio changing value, up and down, and it's gradually decreasing your WR to a sustainable level, as your stache hits higher and higher multiples of your expenses. But again, there you could think of it as adding to your portfolio.
But I am not talking about before FIRE.
The key to go back to though, is: What's the point of an SWR?
1) Sound Impressive? There are many ways you can jack it up, to sound more impressive, if that's your goal. Then I would use your method, among others.
2) Track progress? If its point is to track progress, I wouldn't use your method (because my stache growing on its own accord increases my savings rate over time, when really I'd want to use my actual earned income and expenses to see if I was earning more, and/or spending less, over time.. not just having my stache grow due to things beyond my control).
3) Calculate time to FIRE? If you're trying to do that, I wouldn't use your method, as it's expenses and earned income that counts in that calculation (stache growth matters, but in a "guess" way--not in a "increased savings rate" way).
4) Calculate the odds of your success in FIRE? If you're trying to do that, you won't count it as savings, you'll count it as a lower SWR, as that's what historical calculations are based on.
In other words, I don't see a use for the calculation where you count it as "savings." The first one, sure, but the next three, no.
I would say #2 because tracking progress on withdrawals so that you can figure out #4 along the way as it wouldn't be 3% up front or every year but the incremental bits along the way may have a big impact...I would have no use for #1 and #2 is not FIRE yet.
I will ask again one question.
If I have 1 million USD, earn 100,000 USD/year and my expenses for the year are 110,000 USD you say that my savings rate is >0?
Nope - it would be negative. Then I ask where did the $100k come from - job? 10% WR - would clearly not be safe? Mix? But no, it $100 in and $110 out would be negative.
He's saying 100k from a job, spend 110k. ok
Have a 1MM portfolio you could theoretically pull 40k from, at a 4% WR. yup
Would you count him as having a positive savings rate? (100k job + 40k from "WR" = 140k..spent 110k.. so "saved" 30k / 140k = 21% savings rate). only if he was FIRE, but at $110k recurring spend, I don't think he would be at least not on a Safe basis
You seem to be saying, if you count "income" from your stache (that is automatically reinvested, and/or just capital growth), that person earning 100k in their job and spending 110k has a savings rate of over 20%.
Most of us would say they have a negative savings rate. I said that above
That's why we don't count it that way... it's not useful to do so.
Yes, technically their portfolio should be growing faster than their deficit spending, so they aren't necessarily going deeper in the red each month, per their overall net worth (over the long run), but we still don't say they're "saving" money.
Look, I start thinking you are just trolling.
I tried to make sense of how to not quote the whole thing above but I gave up at some point.
So you say if you earn 40K from job and spend it all, with a stache of 1 mil, you have either 100% or 50% savings rate because you could have another 40K as SWR...
This for me means that if you would spend 50k you would still have a positive savings rate.
Then, when I ask if I earn 100K from job and spend 110K, with a stache of 1 mil, you say I have a negative savings rate...
Please, at least be consistent.
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Tester
Your #1 scenario
$1mil x 4% = $40k income
+ $40k job income
- $40k spend
= 50% savings rate post FIRE
Your #2 scenario:
$1mil x 4% = $40k
+ $100k job income
- $110k expense
= $32K or 21% savings*
*but this scenario probably doesn't meet FIRE criteria given size of spending to portfolio unless the spending was one time in nature and normal living/lifestyle expenses will revert back $40k.
Another scenario ignores work.
Just happen to take out $30K for three years maybe because you didnt travel as planned and save the other $10k then you could spend an extra $1200 per year for the rest of fire or some larger amounts in any single year....
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Tester
Your #1 scenario
$1mil x 4% = $40k income
+ $40k job income
- $40k spend
= 50% savings rate post FIRE
Your #2 scenario:
$1mil x 4% = $40k
+ $100k job income
- $110k expense
= $32K or 21% savings*
*but this scenario probably doesn't meet FIRE criteria given size of spending to portfolio unless the spending was one time in nature and normal living/lifestyle expenses will revert back $40k.
Another scenario ignores work.
Just happen to take out $30K for three years maybe because you didnt travel as planned and save the other $10k then you could spend an extra $1200 per year for the rest of fire or some larger amounts in any single year....
Ok, but you said that I have a negative savings rate when I put that example first time.
Now you say it is positive.
This is what I was trying to understand - do you know what you are talking about?
Do you have your theory stable?
Because if it is not then we can't get anywhere.
If you say different things for the same input then you either have a wrong theory or you did not completely define your theory.
Still trying to understand:
$1mil x 4% = $40k income
+ $40k job income
- $50k spend - modified this to $50K
= ???
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Income is a real, well defined thing. It is not SWR. Income occurs when someone writes you a rent check. Income occurs when you receive a dividend. Income occurs when you sell stock (less the basis).
SWR generally includes drawing income and principle.
I really don't think you can just treat an SWR as "income". You are mixing accounting terms with "retirement theory" terms.
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Tester
Your #1 scenario
$1mil x 4% = $40k income
+ $40k job income
- $40k spend
= 50% savings rate post FIRE
Your #2 scenario:
$1mil x 4% = $40k
+ $100k job income
- $110k expense
= $32K or 21% savings*
*but this scenario probably doesn't meet FIRE criteria given size of spending to portfolio unless the spending was one time in nature and normal living/lifestyle expenses will revert back $40k.
Another scenario ignores work.
Just happen to take out $30K for three years maybe because you didnt travel as planned and save the other $10k then you could spend an extra $1200 per year for the rest of fire or some larger amounts in any single year....
Ok, but you said that I have a negative savings rate when I put that example first time.
Now you say it is positive.
This is what I was trying to understand - do you know what you are talking about?
Do you have your theory stable?
Because if it is not then we can't get anywhere.
If you say different things for the same input then you either have a wrong theory or you did not completely define your theory.
Still trying to understand:
$1mil x 4% = $40k income
+ $40k job income
- $50k spend - modified this to $50K
= ???
When I said it was negative it was on the premise of $100k income and $110k spend....so negative, but it wasn't clear to me in your prior ask that you were asking to include the $40k on $1mil......ARS cleared that up subsequently for me.
But to your current scenario it would be 37.5%.
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You mean they're FI, but not ER'd yet?
Why does it matter if they've crossed the threshold of some "number"? You could still think of it that way before. Or after. Or while actually FIRE'd, with no job.
You can think of it that way, as I said three posts ago, but it's just not useful.
That's the main reason no one thinks of it that way.
Plus, intuitively it just doesn't make sense that if you have a portfolio you don't touch, spend more than you earn, you have a positive savings rate. You didn't save anything, you went into more debt. Going broke eventually while having a positive savings rate (by your definition) the majority of the time seems weird. The only reason why their deficit spend takes longer to catch up to them is their portfolio covering part of it, by growing. But they're not "saving" any.
So something needs to be useful to overcome that intuition, and this isn't. Again, see my post three posts ago. There's a few useful things about savings rates, and this doesn't fit any.
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You mean they're FI, but not ER'd yet?
Why does it matter if they've crossed the threshold of some "number"? You could still think of it that way before. Or after. Or while actually FIRE'd, with no job.
You can think of it that way, as I said three posts ago, but it's just not useful.
That's the main reason no one thinks of it that way.
Plus, intuitively it just doesn't make sense that if you have a portfolio you don't touch, spend more than you earn, you have a positive savings rate. You didn't save anything, you went into more debt. Going broke eventually while having a positive savings rate (by your definition) the majority of the time seems weird. The only reason why their deficit spend takes longer to catch up to them is their portfolio covering part of it, by growing. But they're not "saving" any.
So something needs to be useful to overcome that intuition, and this isn't. Again, see my post three posts ago. There's a few useful things about savings rates, and this doesn't fit any.
It can be someone who is FIRE or FI but I guess if someone FIREs then goes back to work or starts a blog that makes money they will not be FIREd any more (sorry MMM - you are just a working stiff still).
First you have to accept the premise of and research behind the trinity study (I know its based on 30 years), which most who are participating in this thread must not accept it. Fine. But if you do, the research indicates that over just about any period in history (good and bad) that you can withdraw 4% of the starting principal balance each year adjusted for inflation so the 4% becomes your income (regardless if it is a mix of gains, divi, interest, principal) no different than an annuity.
If you want to make some extra money or not spend as much in any given year and just ignore it that's fine, but I like to understand the impact to what additional margin I might have along the way.
Let's say $40k is your expense, so to FIRE you need $1mil per 4% rule. Your portfolio hits $1MM but over the next two years the $1mil declines to $810k (-10% per year) but during that two years you somehow made ($80k per year (blog, job that you liked, grandma, whatever). The net $40k/year was put into a separate investment account monthly installments so at the end of two years it would be $73k. At the end of two years you say screw it I am fully FIREing and giving up all additional/side hustle income sources and at that time you have $883k portfolio - so what is the right SWR? Most would casually say it is $35k (4% to be safe), some would roll with $40k (4.5% of current) because that is their expense and why not they made more money the last two years, but in reality it could be as high as $43k (4.9% of current but correct to be 4% of $1,080,000). It would be a shame if someone hit their number, padded it further but then got scared or worked even longer to get back to 4%.
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I had thought you were inconsistent earlier because you had said income was just double counting past savings as new income and changed your tune to " no, income is just earnings". Now you flip back and you're saying income is not defined by liquidity, value, how it alters one's net worth, but some intent and that it allows you to double count past savings as new income, which if you don't spend, turns into new savings.
Can you turn led into gold too?
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Income is a real, well defined thing. It is not SWR. Income occurs when someone writes you a rent check. Income occurs when you receive a dividend. Income occurs when you sell stock (less the basis).
SWR generally includes drawing income and principle.
I really don't think you can just treat an SWR as "income". You are mixing accounting terms with "retirement theory" terms.
Thank you Spork!! I was reading this thread and my Accounting mind was hurting. hahaha
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I understand the 4% rule probably better than 95% of the ER community. I've read it, actually.
I also believe that it will hold up.
None of that has anything to do with what you're talking about.
Like I said, if someone is ER'd, has 1MM, and spends 30k, you could look at their spending two ways:
1) They have a 4% WR = 40k. They spent 30k, and saved 10k. That gives them a 25% savings rate (10k/40k).
2) They have a 3% WR = 30k.
The first one, talking about a savings rate in ER, is not useful. I talked about 4 different uses for savings rate earlier, and this fits none (except, maybe, the bragging one). There are no calculations on savings rate in FIRE, because if you have a real positive savings rate (i.e. EARNED income > spending), you'll never run out of money. There's no need to calculate anything.
There are calculations on WRs, though, and probability they last various amounts of time (or more like, how long they lasted historically, not probabilities on the future). So the second way to look at it, that the person spending 30k has a 3% WR, is useful. We can run simulations on that.
So we talk about them having a withdrawal rate. They have a spending rate, and that's it. They don't have a savings rate. And we look at, historically, how that spending rate might have lasted. The fact that they COULD probably spend more, and still have it last, is irrelevant. How much they ARE spending, and how long THAT can last is what's relevant to them.
Why would we talk about the person in ER having a savings rate? I've said we could look at it either way, but you still haven't presented a case for why we should look at it the non-intuitive way, which seems to have no practical benefit.
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I'm not sure why you're using 4%, if anything you could theoretically use your investment gains to see the net on your net worth for the year. With 1mil in investments, they go up 10%, you make 40k and spend 40k, your net is +100k. But this is a sum of terms I wouldn't associate with savings rate. IMO your net is your savings + investment gains. It looks like you're calculating your "net rate" (making up a term here) or something like that.
You can, and certainly should look at the numbers different ways, but you are trying to change the established definition of the forum:
http://www.mrmoneymustache.com/2015/01/26/calculating-net-worth/
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It can be someone who is FIRE or FI but I guess if someone FIREs then goes back to work or starts a blog that makes money they will not be FIREd any more (sorry MMM - you are just a working stiff still).
First you have to accept the premise of and research behind the trinity study (I know its based on 30 years), which most who are participating in this thread must not accept it. Fine. But if you do, the research indicates that over just about any period in history (good and bad) that you can withdraw 4% of the starting principal balance each year adjusted for inflation so the 4% becomes your income (regardless if it is a mix of gains, divi, interest, principal) no different than an annuity.
If you want to make some extra money or not spend as much in any given year and just ignore it that's fine, but I like to understand the impact to what additional margin I might have along the way.
Let's say $40k is your expense, so to FIRE you need $1mil per 4% rule. Your portfolio hits $1MM but over the next two years the $1mil declines to $810k (-10% per year) but during that two years you somehow made ($80k per year (blog, job that you liked, grandma, whatever). The net $40k/year was put into a separate investment account monthly installments so at the end of two years it would be $73k. At the end of two years you say screw it I am fully FIREing and giving up all additional/side hustle income sources and at that time you have $883k portfolio - so what is the right SWR? Most would casually say it is $35k (4% to be safe), some would roll with $40k (4.5% of current) because that is their expense and why not they made more money the last two years, but in reality it could be as high as $43k (4.9% of current but correct to be 4% of $1,080,000). It would be a shame if someone hit their number, padded it further but then got scared or worked even longer to get back to 4%.
You are making this vastly, vastly, more difficult that it needs to be.
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You mean they're FI, but not ER'd yet?
Why does it matter if they've crossed the threshold of some "number"? You could still think of it that way before. Or after. Or while actually FIRE'd, with no job.
You can think of it that way, as I said three posts ago, but it's just not useful.
That's the main reason no one thinks of it that way.
Plus, intuitively it just doesn't make sense that if you have a portfolio you don't touch, spend more than you earn, you have a positive savings rate. You didn't save anything, you went into more debt. Going broke eventually while having a positive savings rate (by your definition) the majority of the time seems weird. The only reason why their deficit spend takes longer to catch up to them is their portfolio covering part of it, by growing. But they're not "saving" any.
So something needs to be useful to overcome that intuition, and this isn't. Again, see my post three posts ago. There's a few useful things about savings rates, and this doesn't fit any.
It can be someone who is FIRE or FI but I guess if someone FIREs then goes back to work or starts a blog that makes money they will not be FIREd any more (sorry MMM - you are just a working stiff still).
First you have to accept the premise of and research behind the trinity study (I know its based on 30 years), which most who are participating in this thread must not accept it. Fine. But if you do, the research indicates that over just about any period in history (good and bad) that you can withdraw 4% of the starting principal balance each year adjusted for inflation so the 4% becomes your income (regardless if it is a mix of gains, divi, interest, principal) no different than an annuity.
If you want to make some extra money or not spend as much in any given year and just ignore it that's fine, but I like to understand the impact to what additional margin I might have along the way.
Let's say $40k is your expense, so to FIRE you need $1mil per 4% rule. Your portfolio hits $1MM but over the next two years the $1mil declines to $810k (-10% per year) but during that two years you somehow made ($80k per year (blog, job that you liked, grandma, whatever). The net $40k/year was put into a separate investment account monthly installments so at the end of two years it would be $73k. At the end of two years you say screw it I am fully FIREing and giving up all additional/side hustle income sources and at that time you have $883k portfolio - so what is the right SWR? Most would casually say it is $35k (4% to be safe), some would roll with $40k (4.5% of current) because that is their expense and why not they made more money the last two years, but in reality it could be as high as $43k (4.9% of current but correct to be 4% of $1,080,000). It would be a shame if someone hit their number, padded it further but then got scared or worked even longer to get back to 4%.
I think most people here understand the 4% rule. The thing people don't understand is why you would add the 4% to your "income". As has been said multiple times, if you make 40k, and have a nest egg of $1,000,000 ($40k/year @ 4%SWR), and spend $40k in the year, you have two ways of looking at it.
1: You have a savings rate of 0% and a withdrawal rate of 0% for that year. This is the way pretty much everyone would calculate it.
2: You have a savings rate of 50%, and a WR of 4% for that year (I'm going to ignore the savings rate of 100% you alluded to in the first post, because that makes even less sense). This is the way you want us to look at it for some reason.
The first way is how pretty much everyone sees it. It tells you that you spent none of your stash, and all of your regular income. It uses standard terms that any financial person can understand pretty quickly.
The second way is not very useful for discussions because you have to describe your whole philosophy for anyone to understand it (different definition of "savings" than anyone else uses) and it gives you no new information. Up until you hit FI, savings is calculated based on earned income, not investment income. Investment income is captured in your rate of return on the investment. There's no reason to change the definition of savings/income just because you now hit FI, and make it confusing.
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Around here for the purposes of computing savings rate, I think most would say 0%. Most people don't count investment returns when figuring up FIRE stats.
However, the true, accurate, logical, rational way to compute your savings rate in the OP's scenario is to calculate the actual underlying earnings for your holdings and consider those as savings. Not the dividends, not the fluctuation in stock price - but the actual net, after tax earnings for the year (it matters not whether those earnings were reinvested in the company or paid out as dividends, except to the extent that the earnings may be subject to tax if paid by dividend, and not taxed if reinvested). The 4% SWR figure is irrelevant unless that was your exact earnings yield on all holdings.
For example, say your entire $1 million was in 23,686 shares coca cola stock (KO) on Jan 1, 2015. For the year, your earnings per share was $1.67 or $39,555. Under that scenario, your actual savings rate is 50%. You earned $40k via labor, and ~$40k via earnings you are entitled to as a coca cola shareholder. Your savings rate is 50%.
Again, it's pretty impractical to expect everyone to compute savings rate this way. Figuring up owner earnings, adding it to your earned income to arrive at total personal earnings for a given year isn't particularly useful for someone trying to map out FIRE. But as a purely intellectual exercise, it's the most accurate way to truly determine the denominator in a savings rate calculation.
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Around here for the purposes of computing savings rate, I think most would say 0%. Most people don't count investment returns when figuring up FIRE stats.
However, the true, accurate, logical, rational way to compute your savings rate in the OP's scenario is to calculate the actual underlying earnings for your holdings and consider those as savings. Not the dividends, not the fluctuation in stock price - but the actual net, after tax earnings for the year (it matters not whether those earnings were reinvested in the company or paid out as dividends, except to the extent that the earnings may be subject to tax if paid by dividend, and not taxed if reinvested). The 4% SWR figure is irrelevant unless that was your exact earnings yield on all holdings.
For example, say your entire $1 million was in 23,686 shares coca cola stock (KO) on Jan 1, 2015. For the year, your earnings per share was $1.67 or $39,555. Under that scenario, your actual savings rate is 50%. You earned $40k via labor, and ~$40k via earnings you are entitled to as a coca cola shareholder. Your savings rate is 50%.
Again, it's pretty impractical to expect everyone to compute savings rate this way. Figuring up owner earnings, adding it to your earned income to arrive at total personal earnings for a given year isn't particularly useful for someone trying to map out FIRE. But as a purely intellectual exercise, it's the most accurate way to truly determine the denominator in a savings rate calculation.
Mine OP was meant as an intellectual question (ie Thought Question in the title) that however impractical or unconventional it may be (and possibly not intellectual at all) to look at it a different way and clearly it got everyone fired up (haha) and everybody poo-poo'd it due to lack of convention, literal meanings of words and having no real point, to focused on what it means to be income or just the savings rate aspect but not the SWR aspect - but that is ok as they took the time to disagree endlessly and its fun and cool to have different sides. I guess I am just thick but I still see the 4% SWR as my income in FIRE.
Buuuutt...I like your view, that is an interesting if not impractical way to look at it as well, but a pretty accurate/neat way too. If it was a stock and bond portfolio you would have to include the interest from the bonds too but yes...your individual share of the each companies net income would be your actual earnings in retirement or any other time for that matter. Vanguard provides an average PE for its funds so it is rather easy to determine your share of the underlying earnings.
Vanguard Total Market
Price/Share = $106
PE = 21.9
EPS = $4.84
EPS Yield = 4.56%
That earnings yield seems a little scary especially in context of a 4% SWR and when the historical average is closer to 6%.
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Tooq,
Let's say I don't own any stocks.
I own one rental property, worth 1MM. It provides 40k in rental income (net all expenses, taxes, and putting away reserves for vacancies and future capital expenses).
My expenses are 40k per year.
1) I receive 40k in rental income. I spend 40k The house does not appreciate that year. What is my "savings rate"?
2) I receive 40k in rental income. I spend 40k The house appreciated 4%, or 40k, that year. What is my "savings rate"?
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Tooq,
Let's say I don't own any stocks.
I own one rental property, worth 1MM. It provides 40k in rental income (net all expenses, taxes, and putting away reserves for vacancies and future capital expenses).
My expenses are 40k per year.
1) I receive 40k in rental income. I spend 40k The house does not appreciate that year. What is my "savings rate"?
2) I receive 40k in rental income. I spend 40k The house appreciated 4%, or 40k, that year. What is my "savings rate"?
0% for both.
For income in FIRE I believe a 4% WR (the safe rate per trinity) IS the income but no higher than 4% as that has not been proven to be safe (i.e I am not making up my own number, it's a well researched statistically proven number to be safe and reliable). As i know you know, the 4% rule ignores whether or not the portfolio appreciates or depreciates - the withdrawals are simply 4% of the initial portfolio adjusted for inflation ($1mil portfolio turns into 2mil you still take out 40k. If it turns into 50k you still take out 40k) - that is why is view as the income in FIRE - I am well aware of accounting and other terminology but I am not taking a technical/literal view and instead the practical view.....call it whatever you want but it is the defacto income in FIRE. So additional income has to come from somewhere else to be a surplus.
Ignoring that there is no research for 4% rule for real estate, both your scenarios are 0% but if you made an extra 20k from blog/job/inheritance/stripping (basically any other source other than your real estate) it would be 33% for both. Act as your own property manager and that would be additional income to you.
The point isn't just about the savings rate or just about the SWR like you have indicated...yes taking 30K instead of 40k is a 3%SWR but that is only the case if that is the permanent WR which is not what I am talking about.
I am trying to convey or discuss (not successfully I might add) the relation between a post FIRE surplus (4% + other income - expenses) and the Safe WR whereas little surpluses at points in time have the effect of lowering the SWR permanently or allows you to balance it out more with higher spending either permanently or one time.
I saw a post that was something along the lines of how many times do I have to fire before I fire because the market goes up and down. And I say only once - the 1st time Youth hit your number - with the added benefit of if you happened to wait longer to start your withdrawal even if no additional income is saved and your portfolio is down 20% then the SWR is lowering a bit each day that passes.
In summary I view my income in FIRE to practically be 4%.
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0% for both.
Correct
For income in FIRE I believe a 4% WR (the safe rate per trinity) IS the income but no higher than 4% as that has not been proven to be safe
And that's where you have it wrong.
If you have it in stocks and receive a 4% dividend, then yes, the 4% is income.
If you have it in stocks and sell at a loss to cover your expenses, you might have negative income. And: That's probably fine. It's statistically safe. But it is NOT income.
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0% for both.
Correct
For income in FIRE I believe a 4% WR (the safe rate per trinity) IS the income but no higher than 4% as that has not been proven to be safe
And that's where you have it wrong.
If you have it in stocks and receive a 4% dividend, then yes, the 4% is income.
If you have it in stocks and sell at a loss to cover your expenses, you might have negative income. And: That's probably fine. It's statistically safe. But it is NOT income.
Once again you are taking a very literal definition, I KNOW THIS DEFINITION. Practically speaking though, if I have 40k deposited into my account every year without fail and I am relying on that to cover my expenses in perpetuity then PRACTICALLY speaking that IS my income....I don't give a crap what it is comprised of. The fact is even by your definition the 4% rule is mainly comprised of real income (dividends, interest, and gains) and not as much from principal - just for the fact of covering withdrawal, inflation and many scenarios end up with more than you started.
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0% for both.
Correct
For income in FIRE I believe a 4% WR (the safe rate per trinity) IS the income but no higher than 4% as that has not been proven to be safe
And that's where you have it wrong.
If you have it in stocks and receive a 4% dividend, then yes, the 4% is income.
If you have it in stocks and sell at a loss to cover your expenses, you might have negative income. And: That's probably fine. It's statistically safe. But it is NOT income.
Once again you are taking a very literal definition, I KNOW THIS DEFINITION. Practically speaking though, if I have 40k deposited into my account every year without fail and I am relying on that to cover my expenses in perpetuity then PRACTICALLY speaking that IS my income....I don't give a crap what it is comprised of. The fact is even by your definition the 4% rule is mainly comprised of real income (dividends, interest, and gains) and not as much from principal - just for the fact of covering withdrawal, inflation and many scenarios end up with more than you started.
It's practically income in the same way that taking $500 out of savings to buy a TV is income.
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For income in FIRE I believe a 4% WR (the safe rate per trinity) IS the income but no higher than 4% as that has not been proven to be safe
4.1% WR isn't "safe"?
How about 3.9%? It's a little safer than 4%
4% was chosen because it was round.
4% was only safe 95% of the time, historically, I'm the U.S.
Don't get me wrong, I'm not arguing against the 4% rule. I think it holds up. I'm saying your criteria for choosing that as the threshold is arbitrary, and saying "no higher" doesn't have any reasoning other than authorities have told you that number. 4.5% is pretty safe, historically. Why not that?
I believe a 4.5% WR will hold up just fine, personally.
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How about this scenario.
I make $40k. I spend $40k. My portfolio is at $999,999.
I'm not FI at a 4% WR yet.
You would say my savings rate is 0%. The next day, the market ticks up by 0.0001%, and my portfolio is $1MM. Whoo, FI! I haven't quit yet though.
You'd say my savings rate is suddenly 50%? Even though nothing changed about my income, or spending, just that my portfolio went up 0.0001% ($1/1MM)? I crossed the magic threshold, so I'm FI, but why does that suddenly change my savings rate?
I could have withdrawn $39,999 before, and counted that as "savings" under a 4% rule. I think viewing it that way is silly and not useful, but it can be done. But you're arguing that only after FIRE, and only if you're earning other income.
Those distinctions seem as arbitrary as the one in my last post.
In other words, besides the weirdness and lack of usefulness, there's at least 3 arbitrary things in your criteria I see no reason for.
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How about this scenario.
I make $40k. I spend $40k. My portfolio is at $999,999.
I'm not FI at a 4% WR yet.
You would say my savings rate is 0%. The next day, the market ticks up by 0.0001%, and my portfolio is $1MM. Whoo, FI! I haven't quit yet though.
Interesting discussion here, much of it probably without any single "right" answer. But the above comment highlights one concern of mine in all this.
If we are talking about a portfolio of assets which rise and fall with various markets, how do we ever know when we have reached that magic figure? Certainly not on the day it reaches the figure for the first time ever, potentially to retreat for another year or three.
Personally I would be looking towards a range of required income levels and a range of portfolio values and only be happy when the two were comfortably overlapping. (I would probably also be working on a 3% WR and only happy when my annual return on investments had shown a couple of years where it met my annual outgoings - but I accept that I am at the more conservative end of the sample here!)
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If we are talking about a portfolio of assets which rise and fall with various markets, how do we ever know when we have reached that magic figure? Certainly not on the day it reaches the figure for the first time ever, potentially to retreat for another year or three.
Sometimes you just have the pull the pin. The SWR was arrived at by looking at all the worst case scenarios in the past. If you think the future will be worse than the past (which it might be) then you should do as you suggest and wait for some period of time after you've reached your target amount.
If you think the future will be no worse than the past, then the magic figure is indeed on the first your portfolio reaches that number.
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How about this scenario.
I make $40k. I spend $40k. My portfolio is at $999,999.
I'm not FI at a 4% WR yet.
You would say my savings rate is 0%. The next day, the market ticks up by 0.0001%, and my portfolio is $1MM. Whoo, FI! I haven't quit yet though.
Interesting discussion here, much of it probably without any single "right" answer. But the above comment highlights one concern of mine in all this.
If we are talking about a portfolio of assets which rise and fall with various markets, how do we ever know when we have reached that magic figure? Certainly not on the day it reaches the figure for the first time ever, potentially to retreat for another year or three.
Personally I would be looking towards a range of required income levels and a range of portfolio values and only be happy when the two were comfortably overlapping. (I would probably also be working on a 3% WR and only happy when my annual return on investments had shown a couple of years where it met my annual outgoings - but I accept that I am at the more conservative end of the sample here!)
It's the day you quit. Doesn't matter if it falls immediately, that's taken into account, historically.