Comments on: How well are you doing on your way to early retirement?

By: Jacob

Jacob — Tue, 09 Sep 2008 01:31:53 +0000

@retiredat47 – thanks for the heads up! I started a credit history about two years ago, because I figured … why not! (And I was getting of documenting my existence with photocopies of SSN cards, etc. for everything).

According to http://www.bankrate.com/brm/fico/calc.asp my score is currently between 715 and 765. I have no idea how accurate that is as I am not paying $20 to get a “real” score. If there is anyone reading this who actually know their score, maybe they can double check the accuracy of the link above.

By: RetiredAt47

RetiredAt47 — Tue, 09 Sep 2008 01:23:15 +0000

I just found your site and am enjoying reading your posts. One comment about credit score – I used to say that it had no value to me, as I don’t intend to take on any new debt. However, in the past couple of years, I’ve seen that it is being used as part of the formula for calculating insurance premiums. Fortunately, my score is good, but I still thought that was rather sneaky.

By: Jacob

Jacob — Wed, 03 Sep 2008 14:46:09 +0000

@seafire – I think you are right wrt eq. 2. Technically expenses are not liabilities. I have just trained myself to seem them that way. I used 4% just to have some reasonable scaling in the equations. I have seen people base their early retirement on 10+% returns. That is a wee bit too high.

If I do a version 2 of this post, I’ll be sure to implement your suggestions.

It is actually scary to see that many people basing their retirement on compound interest (I find it particularly frightening that they refer to it as magic implying that they don’t have a natural feel for exponential functions, like at all). If we introduce inflation and make the investment period “unlucky” (but not unusual), like say 1963 to 1979, (or 1998-2008) market returns would be zero. Introducing inflation, there are more periods with essentially zero return. I think people ought to stop assuming that “other people” will do the work for them (even though it is nice).

By: Seafire

Seafire — Wed, 03 Sep 2008 14:26:07 +0000

I think “Current Liabilities” is misleading and implies total debt, and hence could yield infinity. “Yearly Expenses” would be more accurate. Basically you are saying that retirement becomes possible with a 4% and lower withdrawal rate.

Savings power is a bit more abstract, but it is the total number of years of savings for retirement required if you earn 0% interest. Increasing your savings rate helps you by reducing the total amount you need to save (expressed in the numerator) and by saving in larger chunks (expressed in the denominator).

The numbers are scary for a typical savings rate of 10%. Extreme early retirement doesn’t rely on compound interest, but by reducing expenses.

By: Jacob

Jacob — Wed, 03 Sep 2008 01:57:24 +0000

ARGH – I messed up. It’s corrected now.

This only works for high values of x. For complete formulae, we need to use PV and FV equations. These reduce to the above for an interest rate of 0%.

How do you guys get your current liabilities to go to zero? Do you have zero expenses? If so I’d very much like to know how you do that?!

By: catfishalex

catfishalex — Tue, 02 Sep 2008 21:47:23 +0000

I don’t understand. My savings rate is 70% of my after tax money, yet that yields a y of 58.3 much higher than the above comment, even though she saves 20%. Huh???

By: LC

LC — Tue, 02 Sep 2008 19:05:53 +0000

I agree that these are pretty misleading, especially the second equation. Right now my current ratio is 3, but in 4 years it will likely be “infinity.” It actually will probably go down before it goes up, even though I’m getting closer to the goal.

The 1st equation basically means you should be saving 30-40% of your after tax salary, which I am doing.

By: Debbie M

Debbie M — Tue, 02 Sep 2008 17:17:15 +0000

I don’t think I understand these numbers. Does savings rate equal savings amount divided by earnings? So if I save $500 out of $2500 (after taxes) each month, then my x = .2?

And if so, my Y would be 5/.8 = 6.25? That sounds much more extreme than I expected. Especially since I will be working 30 years before I retire.

Second, what if my current liabilities are zero? Then the second equation means nothing.

I liked your net worth divided by expenses ratio better.

By: D

Tue, 02 Sep 2008 15:36:07 +0000

Jacob,

I’m a little confused about the first formula…

If the savings rate is, for example, 80%, then it would be:

Y = (25*0.8)/(1-0.8) = 20/0.2 = 100

But you say numbers that are lower than 15 are good? It seems like as savings rate increases, so does Y. What am I missing?