When we use the After Tax income to calculate the savings power and cash flow based on the 4% withdrawal rate you are by-passing the 15-18% net taxable income that needs to be considered for anyone who has an income greater than the taxable minimum.

This is a footnote, but if you are checking your assets to liabilities to get a ~25 ratio, you have to factor in the taxes or you’ll end up ~15-17% off. ]]>

@Tom – The 25 is the inverse of the standard 4% withdrawal rate. The equation then gives the number of years it takes (without interest) to reach financial independence with a 4% withdrawal rate.

]]>Not to be rude, but to the newcomer, this looks like you pulled some numbers our of thin air (to be polite) and I have nothing to rely on to understand the validity of your statements. I am not one to go on blind faith.

]]>And for example if I save 80% I could substitute such Y = 25(1 – 0.8) / 0.8 = 6.25 (correct?)… now what?

How close am I to early retirement with that?

]]>The range reported by the bankrate.com link above contains the score creditkarma.com gives me.

]]>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.

]]>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).

]]>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.

]]>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?!

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

]]>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.

]]>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?

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