Author Topic: Simple math  (Read 10176 times)

gianetta

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Simple math
« on: May 07, 2013, 12:09:47 PM »
I'm new to MMM and am loving reading all of the old articles, but I'm having the same problem with one of them that I find with many finance articles and calculators.  In the standard calculators, there is an assumption that you need X% of your last salary in retirement, but that's usually a crazy-high number given that we spend a huge portion of our income on paying down debt that we won't have when we retire.  Most of the standard charts and calculators won't even give results if you think you're going to need only 35% of your current income.  In MMM's article, the percentage in question is the percentage of your take-home pay that you are saving.

It's not rocket science math, but obviously you're going to be able to retire at a lower saving rate if you need only a very small portion of your current income in retirement.  The table says that you can retire in 37 years after saving 20% of your take-home pay (actually, I think we do 20% of our gross pay...), but we should be able to retire in 10 years at that saving rate (plus about 5 years of past saving at about that rate) because we could live pretty comfortably on 20-25% of our current income if we had no debt to pay off. 

I love the article and love the table in general, but I think it needs clarification that these numbers only apply if you are spending most of the rest of your take-home pay on expenses that will continue in retirement.  I was discouraged when I first looked at the table, before I realized that the assumptions probably aren't true for a lot of people who read this site.  Maybe framing it in terms of your *spending* rate (e.g., I save ~20%, but a huge portion of the rest of it goes toward debt that will be paid off in <10 years, so my spending rate, and therefore my expenses in retirement, will be small) would make it work for more people.

Thanks so much for this site!

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

matchewed

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Re: Simple math
« Reply #1 on: May 07, 2013, 12:17:36 PM »
But paying off debt is saving. Once you're done paying off debt that money goes to savings right? Therefore it is best to calculate a savings rate.

gianetta

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Re: Simple math
« Reply #2 on: May 07, 2013, 12:46:48 PM »
Sure, and all of the information needed technically is in the table, but I was thinking of 'saving' in terms of how much I'm putting away into accounts, so the 37 years next to 20% was pretty disheartening until I realized that it didn't apply to me.

I guess as long as you get the message that spending less than you make = wealth, it's all good.  :)

Zaga

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Re: Simple math
« Reply #3 on: May 07, 2013, 04:57:53 PM »
We technically save 15% of our gross pay to 401-K's and Roths.  But once you include debt paydown, the company match, and calculate based on take home pay we actually saved 44% last year.  That is a much nicer number than the 15%!

Rich M

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Re: Simple math
« Reply #4 on: May 16, 2013, 04:45:00 PM »
Try this.  You don't have to assume a large amount you need when you retire.

http://www.smartmoney.com/retirement/planner/

SwordGuy

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Re: Simple math
« Reply #5 on: May 29, 2013, 09:55:56 AM »
Try this.  You don't have to assume a large amount you need when you retire.

http://www.smartmoney.com/retirement/planner/

Great calculator.  The only one I've seen (that's still available on the web) that doesn't assume your spouse is your age.

footenote

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Re: Simple math
« Reply #6 on: May 29, 2013, 11:18:24 AM »
Thanks Rich M - truly the most best retirement calculator I've seen!

oldtoyota

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Re: Simple math
« Reply #7 on: July 12, 2013, 01:50:53 PM »
ARS--another poster here--told me about this calculator. It's good:

http://networthify.com/calculator/earlyretirement?income=74000&initialBalance=360000&expenses=30000&annualPct=5&withdrawalRate=4

Those calculators that assume you need your most recent pay to live drive me nuts. Before I knew better, they misled me.

arebelspy

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Re: Simple math
« Reply #8 on: July 12, 2013, 04:27:27 PM »
ARS--another poster here--told me about this calculator. It's good:

It's a rough start for those that have 5+ years to go, to give them an approximate timeframe.  I'd start more careful analysis once you're under 5 years.

But for a basic "how long to FIRE" question simpler is better, and in that regard it's one of the best there is.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

oldtoyota

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Re: Simple math
« Reply #9 on: July 15, 2013, 07:41:02 AM »
ARS--another poster here--told me about this calculator. It's good:

It's a rough start for those that have 5+ years to go, to give them an approximate timeframe.  I'd start more careful analysis once you're under 5 years.

But for a basic "how long to FIRE" question simpler is better, and in that regard it's one of the best there is.

Agreed.

In case it helps someone else just starting out, I used three calcs to get a rough picture of what my money will do over the next 5-7 years.

FIRE Calc
Investor.gov compound interest
Networthify

I've been thinking a lot about these calculators, because they are all useful.

When I first started plugging $$ into FIRE Calc, it told me I would most likely fail. It would be wonderful if this calc would provide suggestions, such as "increase savings to 40% of income, etc).

I used the investor.gov compound calc to get an idea of how my money would grow year by year assuming 5% growth, which I consider fairly conservative (but correct me if I'm wrong).

I used Networthify to get a sense of how much I need to be saving. That helped me have data for the investor.gov calc. I then plugged my revised numbers into FIRE Calc and now have a 100% chance of success.

The above is a simplified version of how I used them. I went back and forth and kept plugging away until I came up with numbers that worked out.




matchewed

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Re: Simple math
« Reply #10 on: July 15, 2013, 12:48:54 PM »
I can agree with what you said. One note of the returns is that there is no real way to get actual 5% annual growth. It will of course fluctuate and we just have to be aware of the limitations of that.

I would say even if you have that 100% success keep playing with your assumptions so you have a more realistic idea of what can happen; play with lower returns, play with higher returns, play with lower/higher savings rates and incomes, see how these factors affect your plan.

oldtoyota

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Re: Simple math
« Reply #11 on: July 22, 2013, 07:02:50 AM »
I can agree with what you said. One note of the returns is that there is no real way to get actual 5% annual growth. It will of course fluctuate and we just have to be aware of the limitations of that.

I would say even if you have that 100% success keep playing with your assumptions so you have a more realistic idea of what can happen; play with lower returns, play with higher returns, play with lower/higher savings rates and incomes, see how these factors affect your plan.

Thanks! I appreciate this.

bothpaninis

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Re: Simple math
« Reply #12 on: November 04, 2013, 06:11:42 PM »
But paying off debt is saving. Once you're done paying off debt that money goes to savings right? Therefore it is best to calculate a savings rate.

Hold up! Are you saying that when I calculate our savings rate, I should consider what we spend on our mortgage as saving, since that expense will no longer be around when we're retired?

arebelspy

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Re: Simple math
« Reply #13 on: November 04, 2013, 06:27:51 PM »
But paying off debt is saving. Once you're done paying off debt that money goes to savings right? Therefore it is best to calculate a savings rate.

Hold up! Are you saying that when I calculate our savings rate, I should consider what we spend on our mortgage as saving, since that expense will no longer be around when we're retired?

Many people count the principal part of their mortgage payment as savings.  Not the interest part, obviously.

Whether or not you will have a mortgage payment in retirement depends on the person.  I personally would, others might pay off their mortgage instead.  (I think it's risky not having a mortgage payment and having all that equity trapped, versus having a payment but having all the funds be liquid instead.  Depends on your viewpoint.)
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

oldtoyota

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Re: Simple math
« Reply #14 on: November 05, 2013, 09:50:17 AM »
But paying off debt is saving. Once you're done paying off debt that money goes to savings right? Therefore it is best to calculate a savings rate.

Hold up! Are you saying that when I calculate our savings rate, I should consider what we spend on our mortgage as saving, since that expense will no longer be around when we're retired?

Many people count the principal part of their mortgage payment as savings.  Not the interest part, obviously.

Whether or not you will have a mortgage payment in retirement depends on the person.  I personally would, others might pay off their mortgage instead.  (I think it's risky not having a mortgage payment and having all that equity trapped, versus having a payment but having all the funds be liquid instead.  Depends on your viewpoint.)

I go for an extremely conservative calculation myself. That means I assume no social security, no equity in home, and it also means principal doesn't count toward savings. I can't view principal as savings when I still need a place to live.  I know that is not for everyone, and others have different points of view. =-)  I also recognize that I might be able to retire even earlier than my current plan. That's okay. As I get closer to FIRE, I will have to review all of the finances anyway. At that time, I can decide to include or not include different pieces of data.