Author Topic: Retirement "Calculators" - MMM's vs. Pete the Planner's  (Read 2517 times)

E in DC

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Retirement "Calculators" - MMM's vs. Pete the Planner's
« on: March 23, 2017, 08:06:11 AM »
Hello out there!  I've been on a deep dive recently gaming out FIRE strategies and I've honed in on the MMM calculator and Pete the Planner's (PTP) "Power Percentage", which seems like more of a general ratio to try and maintain over time. 

They seem to follow similar guiding principles, the difference being that PTP's is much more conservative because it references gross (vs. net) income.  I'm kind of looking at them like MMM's calculator gives you an idea of the bare minimum you need to be FI, and PTP is more focused on getting you to save 'more' sooner, presumably to get to FI more quickly, and to get used to living on less. 

I guess they ultimately complement each other.

Are other folks out there familiar?  Does anyone have thoughts on this comparison either way?  Right now, I'm using the MMM calculator to track and the PTP ratio to sort of hold myself to a higher standard. 


UPDATE:

Here are links to both:

MMM - https://networthify.com/calculator/earlyretirement?income=70000&initialBalance=0&expenses=25200&annualPct=5&withdrawalRate=4

PTP Power Percentage Overview - http://www.usatoday.com/story/money/personalfinance/retirement/2017/02/25/measure-retirement-readiness-power-percentage/97847246/
« Last Edit: March 23, 2017, 08:10:57 AM by E in DC »

PathtoFIRE

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Re: Retirement "Calculators" - MMM's vs. Pete the Planner's
« Reply #1 on: March 23, 2017, 08:23:25 AM »
Pete the Planner's website appears very commercially oriented, and appears to only have podcasts to explain his Power Percentage (I can't listen at work and would rather read something quickly). His petesmoneyschool website requires you to create a login to glean any info about his Power Percentage. With a little googling, I found a usatoday article of his, and the outline is basically this:

add up any retirement savings, company match, extra long term savings, college savings, mortgage principle paydown, and other credit card and student loan debt reduction payments (monthly or yearly), and divide by your total gross income (monthly or yearly), and you get a percentage.

I think as you said, this is pretty basic stuff, and I don't see much difference between this and a MMM approach. I guess MMM's slight twist is to envision what you will actually need in FIRE, and then use that as the denominator, rather than your actual income. And has been pointed out many times, if you are using income as a denominator, especially if you have high income, you might be biased towards making fewer changes. So I'm not convinced that the Power Percentage is necessarily more conservative. Yes it will tend to give you a lower percentage than MMM's approach in many circumstances, but it also implicitly argues for keeping the status quo of spending in some respects, after all if you are spending a 100k a year, and your PP is above 35% and therefore doing an excellent job on his scale, is that person or family really more immune to financial shocks compared to someone who has actively tallied up their true needs and is measuring their financial picture against whether they can cover those or not?

E in DC

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Re: Retirement "Calculators" - MMM's vs. Pete the Planner's
« Reply #2 on: March 23, 2017, 08:55:06 AM »
Thanks for the perspective PathtoFIRE.  PTPs site is more monetized than I'd typically trust, but I do recommend his podcast.  He brings an interesting viewpoint to getting to financial independence, and he's kind of funny. 

BTW, I think I came to the same conclusion as you by virtue of writing out this post : )  Sometimes writing things out like that is helpful. 

merula

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Re: Retirement "Calculators" - MMM's vs. Pete the Planner's
« Reply #3 on: March 23, 2017, 09:08:01 AM »
The issue I see is that using gross income for almost anything is rarely useful for those who are trying to FIRE.

I calculated mine and got 48%. The thing is, I could've gotten higher had I had more debt, because he doesn't differentiate between principle and interest payments for medical debt, student loans, or any other debt besides mortgage or student loans. But paying down principle on a car loan doesn't count at all?

My goal is to retire in ~10 years. (Or maybe SWAMI? I really like my job right now. For the sake of argument, let's say I do retire.) I would anticipate that my expenses would approximately equal my investment income, but I don't expect to be making ANY of those savings payments he lists. (House will be paid off, college fully funded, no other debt, no retirement contributions, personal situation doesn't make a HDHP/HSA a viable option, etc.) So my percentage would be approximately zero. Maybe 10% if my spending was low for some reason and I reinvested returns, which would put me here:

Quote
Less than 10%, and you’re in big trouble. You’re way too dependent on your income. Relief is not on the horizon, because you’re not doing anything about it. You are consuming your entire income while not saving money and not paying on debts.

He'd be right. I'd be dependent on my (passive investment) income. There would be no relief (change) anywhere in sight. I would not be saving money (because my savings are sufficient) and not paying debts (because I don't have any).

None of that would mean that I'd actually be in trouble. In fact, my financial situation would be better than it is today because I'd never have to work again.

That's the major quibble. The minor quibble is including the employer match on the savings side of the equation but not on the income side. Which would lead to a situation of someone who was an excellent saver AND had a very generous employer match having a "power percentage" greater than 100%.

dandarc

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Re: Retirement "Calculators" - MMM's vs. Pete the Planner's
« Reply #4 on: March 23, 2017, 09:12:03 AM »
Power Percentage is just savings rate by another name.  Must be better though because the instructions take longer to say and make less obvious sense.

E in DC

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Re: Retirement "Calculators" - MMM's vs. Pete the Planner's
« Reply #5 on: March 23, 2017, 12:11:37 PM »
Great points Merula.  Once I cross that FIRE threshold, I have a feeling I'll be much less concerned about these ratios.  Don't get me wrong, I'll still be watching over my finances closely, but probably from a maintenance (vs growth) perspective.