The Mad Fientist wrote an excellent post about how the success of the portfolio is primarily predicted by the volatility in first 10 years of withdrawals, so you’ll want to build in some flexibility in your FI plans if you choose 4% withdrawals. The results showed that 96% of the time, a portfolio with a 4% annual withdrawal rate lasted at least 30 years. The 4% rule comes from the Trinity Study, which performed a Monte Carlo analysis withdrawing different amounts from portfolios across well over a century of stock market history. The FI community makes the case for a 4% safe withdrawal rate, or SWR, and I agree this is a great starting point for your FI planning. Sounds great- but what values should you plug in? The 4% Rule Plug in an expected market rate of return, a savings rate, and a withdrawal rate, and out pops the total number of years in your working career. Here it is, the early retirement equation. R = market rate of return, after taxes and inflation N = number of years you have to work before retiring He defers to NetWorthify, which has a great calculator and ‘ behind the math‘ page, but their final equation is totally wrong! I turned to Early Retirement Extreme, but even Jacob doesn’t do the full derivation in his book.įor me, this was a “Challenge Accepted” moment! I’ll give you the final equation here, but head to the bottom of the post for the full derivation. MMM discusses the result, but not the actual math. I decided to search for the underlying equation derivation online, and as it turns out, it isn’t easy to find. Up your savings rate to 65% and you could be free in less than a decade! The concept behind it is simple: when your annual investment returns cover your expenses, you’re done- you’ve reached financial independence!īut how does this math work? What are the underlying assumptions? And how can it be independent of my salary? As an engineer, I like to fully understand the math behind charts like these before drastically changing my lifestyle. Save the recommended 10% of your income and you’ll be doing better than the majority of the United States… but you’ll still be on track for a 40 year mandatory sentence. If we take MMM’s shockingly simple math behind early retirement and flip it around, we can see the following options emerge: Working Years Why do we spend so much time thinking about where we want to work, where we want to live, the car we want to drive, and the house we want to live in, but not this more fundamental question? When they do, the popular answers are usually “You work until you are 65” or “You work until you win the lottery”. How many years do you want to work? Most people never think this way. This is the question that changed everything for me.
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