Numbers Question - Can This Be Right?

[Juniper18]

Hello,

I’m trying to develop a presentation to talk to my husband about ER and I’m having a bit of difficulty with the numbers.  We currently live on about 40-50% of our net income, while the rest goes to some short and long term savings.  I don’t feel comfortable giving away exact numbers about our income, but here is our retirement savings situation: we currently have about 1 year of expenses in a retirement account, plus we add about 20% of our net income monthly to various 401ks and our Roth IRAs.  When I plug this into a compound interest calculator with an interest rate of 7% compounded once per year, I see that we will have 25 times our yearly living expenses in just 20 years.  Can this be right?  According to MMM’s graph, a savings rate of 20% should require 37 years.  Is it simply because our living expenses are low?  I really want to make sure I get this right, so any feedback would be appreciated!

[Cheddar Stacker]

The simple math post is just a guideline. It's also based on your net income (after taxes). If you are only living on 40-50% of your income (you said expenses, so it's a bit confusing the way you presented it) then you are likely saving 30-40% of your income with the rest paying taxes. Also, since you already have 1 year of expenses saved, you aren't starting from $0 which is what the simple math post implies.

Try using one or both of these calculators:

http://www.cfiresim.com/input.php
http://www.firecalc.com/

[Bob W]

It could be right given that you already have some funds saved.

You probably need to study up a bit more on the blog and forum before you make a presentation.   

So little tweaks like reducing your expenses by 20% and/or paying off your house -- and then considering increasing your investing percentage could probably get you there in 10 years or less without much stress.

I think you should post a case study with more details --- You should feel free to share your income as this is an anonymous forum and no one will be critical.  I assume you are rather high income?

There is a vast reservoir of very sophisticated and experienced posters here.   So if your presentation is geared towards improvement, it will definitely be worth your time.   Our group is better than any one financial planner you might hire for big bucks and it is all free and confidential here.

So what should be in your case study?

Income- his and hers
How much your putting in IRAs,  HSAs,  401Ks,  College savings plans etc...
How much in your nontax sheltered accounts.
Where all this money is invested.
Anticipated inheritances.

Your current net worth including where it is at and what the equity in your home is.

Then the nitty gritty -

Terms of your home loan -- %?  length,  amount left to pay?
Your monthly spending in detail --

Phone
Cable
food
Restaurants
Health
Dental
Car payments
Property taxes
Gas
Utilities
vacations
entertainment
Basically everything you spend money on.

We can help you reduce taxes,  reduce spending,  increase investing and point you on the path.

But you have to be willing to share with folks who don't know who you are. 

If you are a high income earner you may be very surprised how a few changes can cut more than a decade off your journey. 

[NumberCruncher]

We currently live on about 40-50% of our expenses, while the rest goes to some short and long term savings.

I'm confused - your expenses are 40-50% of your income? Or your base expenses (essentials) are 40-50% of your total expenses? If you save 20%, spend 50%, where's the remaining 30%? Taxes?

here is our retirement savings situation: we currently have about 1 year of expenses in a retirement account, plus we add about 20% of our net income monthly to various 401ks and our Roth IRAs.  When I plug this into a compound interest calculator with an interest rate of 7% compounded once per year, I see that we will have 25 times our yearly living expenses in just 20 years.  Can this be right?  According to MMM’s graph, a savings rate of 20% should require 37 years.  Is it simply because our living expenses are low?  I really want to make sure I get this right, so any feedback would be appreciated!

It looks like you are using 7% interest but not adjusting for inflation. If inflation is 3%, you could look at it as a real return of 4%, not 7% (meaning you'd use 4% in a simple compound interest calculator). That is a fairly conservative real return, assuming you are mostly invested in the stock market. Where the money is has a big effect on what is reasonably safe to assume!

The simple math graph also doesn't really account for tax rates shifting, either. Hard to tell how this affects your situation without knowing exact numbers, though.

Maybe try the first one here: http://mustachecalc.com/ (someone on the forums made this page)

[Juniper18]

Thanks for the feedback!

Cheddar Stacker - I meant 40-50% of our net income, sorry for the confusion, I fixed it in the OP.

Bob W. - I'm a longtime reader, I'm just terrible at math and the technical side of things.  I'd rather not post a case study as I've seen how ugly it can get!

NumberCruncher - The remaining 30% is in 529s for the kids, mortgage principle, and general savings.  We have recently increased our income significantly, so we're still figuring out just where the savings should go.  Thank you for the advice about the interest rate, I'll be sure to change that in my calculations.

[Cheddar Stacker]

The mortgage principal and other savings is all part of your savings rate. It shouldn't just be your "retirement savings" since this is all connected. So it seems your savings rate is much higher than you think.

[MDM]

Here's a quick equation - put your numbers into Excel and see what you get....

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Amount currently invested in funds you will draw upon in retirement, $
E = Total (including taxes) annual expenses in retirement (today's dollars)
i =  Real return on invested retirement funds, e.g., 3% (conservative - we hope...)
S = Annual amount invested in funds you will draw upon in retirement, $/yr
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions (e.g., 4%)

See http://forum.mrmoneymustache.com/welcome-to-the-forum/early-50s-what-should-be-my-target/ for more discussion.

Also see http://forum.mrmoneymustache.com/welcome-to-the-forum/how-did-you-figure-your-fire-date/msg642786/#msg642786.

[Juniper18]

Thanks, MDM, those are great resources!

Cheddar Stacker - We do have a higher savings rate, I'm sorry to be so vague but I'm a bit private.  Here is a little more info:  My husband became a physician last year and our income tripled.  We bought a house and made a whole bunch of not-so-mustachian purchases  (though not NEARLY as much as our consumer sukka friends/family expected).  Then the dust settled a bit and we returned to our previous level of spending plus a little bit of lifestyle creep.  I went back through our last 6 months of spending on Mint and found that we spent an average of 40% of our net income each month.  We have some automated savings which include 13% in his 401k, 8% in our Roth IRAs, 10% in our kids' 529s, 15% in a savings account (I plan to invest most of this and save some for irregular expenses such as car replacement, large home repairs, etc, so not technically all savings), and 8% in mortgage principle.  The last 6% has just been piling up (lucky us).  The retirement savings I referred to in my OP was just the first thing I entered into the calculator as a jumping off point and I wanted to make sure I wasn't making some huge error before I started calculating different scenarios.

Basically, I want to get a conversation started so that we build some goals together and avoid major lifestyle creep, ER is only one of those options. I'm a SAHM so it would really be his call if he wants to pursue ER, although I would really like that for him.  I don't want to post a case study because we would be absolutely EVISCERATED about some of our spending habits, but again, I have to have "the talk" before I make any changes, so advice about our spending would not be particularly helpful at this point.

I hope this doesn't come off as bragging (look at me!  I have a big income!).  I'm very grateful for all of the help I've received so far.

[Cheddar Stacker]

Not bragging, just explaining. No worries there. A lot of high incomes around here, and some high spenders including my family (not so much me).

Add up all those percentages. I got to 54% savings. Plus $100k+ starting point. + a doctors wage. + I didn't see anything about student loans so if you don't have plenty of med school debt you guys are golden. Even with high expenses, college savings, and some lifestyle creep you will likely be FI in 10 years. If you can use MDMs formula or another calculator and show the good Dr. how quickly you will accumulate wealth, you might be able to keep that lifestyle creep down a bit.

If you aren't comfortable sharing #'s on the forum, i'd be happy to help confidentially via a PM. No facepunches, just calculations and/or suggestions if you want them.

[mozar]

It's right because 20% of a doctors salary would be a lot of money.