Gyroscopic Investing

I received this older article from quite a few sources just nowadays: http://www.mrmoneymustache.com/2012/01/ ... etirement/

(He is kind of too frugal for my taste; in other words: why not focus instead on offering some value to society in the form of a successful business and generating a profit instead, but whatever)

Question: I don't quite get this graph: http://mrmoneymustache.com/wp-content/u ... 01/ere.jpg

Horizontal/vertical axes are OK, but what about the multiple curves? I lost the line there.

TennPaGa wrote:

hedgehog wrote: I received this older article from quite a few sources just nowadays: http://www.mrmoneymustache.com/2012/01/ ... etirement/

(He is kind of too frugal for my taste; in other words: why not focus instead on offering some value to society in the form of a successful business and generating a profit instead, but whatever)

Question: I don't quite get this graph: http://mrmoneymustache.com/wp-content/u ... 01/ere.jpg

Horizontal/vertical axes are OK, but what about the multiple curves? I lost the line there.

Don't know for sure, but I bet it is annual investment return.

It's annual investment return.  The basic point is that if your savings rate is high, you don't need to rely on savings compounding to reach FI.

As far as "successful business," investing in eg the s&p 500 is owning a small part of many successful businesses.

Compare to the pp where only 1/4 is in successful business and 1/4 is in non productive assets (gold) and 1/4 is in loans to the government.  Now you are going to critiCize for not offering value to society? 

Note that MMM actually rents out a house, which I consider to be a business offering value to society.

hedgehog wrote: why not focus instead on offering some value to society in the form of a successful business and generating a profit instead, but whatever

I suspect his business of demonstrating the principles of personal sovereignty and financial independence offers value to society, probably generates a tidy profit and critically does not impinge on the rights of others.

He's done a good thing for a lot of people just by describing his lifestyle and showing people how to do it. That's adding value to society to me.

Kriegsspiel wrote: He's done a good thing for a lot of people just by describing his lifestyle and showing people how to do it. That's adding value to society to me.

Also, he ended his engineering career early by starting a homebuilding business and still does handyman work on the side, often for free now that he is financially independent and doesn't need the money.

In my estimation, there are very few people who can judge MMM. He struck it rich ethically, through hard work, cleverness, an offering real services of value to others, and now in his retirement, he teaches others to do the same and is a pillar of his local community. What more could you ask for!?


But yes, the principle is that your investment returns start to matter less in the accumulation state the higher your savings rate because even very high rates of return are still dwarfed by the money you're adding. Once you're withdrawing, it starts to matter more and IMHO this is where MMM is a bit deficient in his investment advice. He's pretty non-specific but tends to advocate a stock-heavy portfolio with some bonds thrown in. He simply has so much money (more than $1 million, I believe) relative to his annual spending (about $25k/yr) that he can afford a higher volatility portfolio compared to someone with "just enough" according to a 3-5% withdrawal rate.

The kind of frugality that MMM promotes -- spending your resources wisely on things of lasting value rather than blowing them on things you don't really need or could do yourself -- is not at all incompatible with forming a successful business.  Once a full-time salary was no longer necessary to pay the bills, with the extra (and exceedingly rare) resource of time he built an impressive (and quite helpful) blog and has a carpentry gig on the side. 

His blog (and Jacob's @ earlyretirementextreme) have added quite a bit of value to my life.  That specific graph pushed me in a new direction a few years ago.  Once I realized how powerful reducing expenses was in building a self-sustaining personal financial situation, I comfortably upped my savings into the 80% range and am on course to retire from my (first) career later this year at the age of 37.    With the freedom and time to freely explore my options stress-free for the first time in my life, I plan to focus on looking for opportunities to help people and create things where profit and "paying the bills" is no longer my primary motive.  And who knows -- that could eventually become a profitable new business.  It's amazing how creative one can be when work is an option, not an obligation. 

FWIW, I also find the MMM/ERE philosophy highly compatible with the Permanent Portfolio.  Both put a philosophical premium on personal responsibility and avoiding dependence on the systems out there -- financial and corporate -- not built in our favor.  I also find the PP shares an inherently healthy perspective of "enough" where chasing the highest returns isn't necessarily the ultimate goal for long-term wealth growth and preservation.  If MMM/ERE free one from the need to work every day, the PP frees them from the need to babysit their nest egg every day or worry about the stock market at night. 

Financial freedom is a common goal we all share. 

dragoncar wrote:

TennPaGa wrote:

hedgehog wrote: I received this older article from quite a few sources just nowadays: http://www.mrmoneymustache.com/2012/01/ ... etirement/

(He is kind of too frugal for my taste; in other words: why not focus instead on offering some value to society in the form of a successful business and generating a profit instead, but whatever)

Question: I don't quite get this graph: http://mrmoneymustache.com/wp-content/u ... 01/ere.jpg

Horizontal/vertical axes are OK, but what about the multiple curves? I lost the line there.

Don't know for sure, but I bet it is annual investment return.

It's annual investment return.  The basic point is that if your savings rate is high, you don't need to rely on savings compounding to reach FI.

Thanks, but I am still not closer to the answer to my original question. Could anyone explain it to me in more words? Many thanks.

As for the MMM blog, this was the first post I read on it and simply decided I am better off going elsewhere for my further financial education. Maybe it's just me, I'm a strange person. I already like http://markmanson.net/minimalism (he wrote somewhere he spends less traveling than when he stayed in Boston; and you don't have to be a single guy for this lifestyle, see description under this video: https://www.youtube.com/watch?v=wn9rDTZj-m4), use YNAB to watch my accounts, really, I feel I am better off utilizing my time learning more about successful businesses than how to be even more frugal - which was the takeaway for me from the MMM blog.

hedgehog wrote: Thanks, but I am still not closer to the answer to my original question. Could anyone explain it to me in more words? Many thanks.

Referring to the chart:

If your savings rate is 20%, then if your investment return is 15%/year it will take you 20 years to amass enough money to retire.  At 6% return, it will take almost 40 years.  Retirement is calculated as portfolio total x investment return rate >= spending rate pre-retirement.  This calculation works regardless of absolute spending/saving level, and assumes your pre- and post-retirement spending is the same.

Tyler wrote: Referring to the chart:

If your savings rate is 20%, then if your investment return is 15%/year it will take you 20 years to amass enough money to retire.  At 6% return, it will take almost 40 years.  Retirement is calculated as portfolio total x investment return rate >= spending rate pre-retirement.  This calculation works regardless of absolute spending/saving level, and assumes your pre- and post-retirement spending is the same.

To give a simple example: if I make $1000 a month, save $200 of it (20% savings rate), we are looking at calculations for how much time does it take to earn $800 in retirement income?

On different, investment returns, so the curves on the graph show different investment returns if I understand you now correctly, and to answer my own question

Thanks

Yep - you got it. Start at the horizontal savings rate axis. Follow your savings rate up vertically to where it intersects an investment return curve. Then project that point horizontally to the working years vertical axis. That will be the years required to earn enough money to passively fund your spending rate ($800 in your example). 

Hello,

sorry I forgot... what is the mathematical expression to calculate according to our expences and savings the years for ERE?


Thank you!

25 x annual expenses is a pretty common baseline.

frugal wrote: Hello,

sorry I forgot... what is the mathematical expression to calculate according to our expences and savings the years for ERE?

Thank you!

The specific equations behind the chart are a little complex (I'd have to look them up and I'm feeling a bit lazy.  )

But the basic idea on a personal level is to figure out exactly how much you'll spend a year in retirement and multiply it by something between 25 - 33.  The first represents a standard 4% "safe withdrawal rate" and the second a more conservative 3% one.  That's your savings goal.  Then work out how long it will take you to reach that goal.  And when it's too long, how you can cut spending to both lower the goal and accelerate your savings. 

This thread makes me want to create a total savings rate poll.

Are we all closet Mustachians?

Tyler wrote:

frugal wrote: Hello,

sorry I forgot... what is the mathematical expression to calculate according to our expences and savings the years for ERE?

Thank you!

The specific equations behind the chart are a little complex (I'd have to look them up and I'm feeling a bit lazy.  )

But the basic idea on a personal level is to figure out exactly how much you'll spend a year in retirement and multiply it by something between 25 - 33.  The first represents a standard 4% "safe withdrawal rate" and the second a more conservative 3% one.  That's your savings goal.  Then work out how long it will take you to reach that goal.  And when it's too long, how you can cut spending to both lower the goal and accelerate your savings. 

Hello,

and... if we get 0% return from the savings?

frugal wrote:

Tyler wrote:

frugal wrote: Hello,

sorry I forgot... what is the mathematical expression to calculate according to our expences and savings the years for ERE?

Thank you!

Then save ((age at death)-(current age))*annual expenses*inflation

The specific equations behind the chart are a little complex (I'd have to look them up and I'm feeling a bit lazy.  )

But the basic idea on a personal level is to figure out exactly how much you'll spend a year in retirement and multiply it by something between 25 - 33.  The first represents a standard 4% "safe withdrawal rate" and the second a more conservative 3% one.  That's your savings goal.  Then work out how long it will take you to reach that goal.  And when it's too long, how you can cut spending to both lower the goal and accelerate your savings. 

Hello,

and... if we get 0% return from the savings?

Then save ((age at death)-(current age))*(annual expenses)*(inflation metric)