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Retirement Discussions / Retire Early.


Subject:  Re: Arbitration Date:  11/25/2002  2:16 PM
Author:  sozenne Number:  24 of 67

galagan says:
Here's some info about me:

Age: 32
Salary: X/year (if the threads make it clear that I need to be less vague, I will deal with that later)
Benefits: health insurance, 401(k) with partial match, term life
Net worth: 4X
Living expenses: 0.3X/year

Great idea! I think another relevant piece of info would be

taxes: ???X/year

Did you include taxes in the living expenses? What I'm getting at is how much X per year are you saving (0.7X/year would be amazing!!!)? In order to predict when one will reach FIRE, we need to know a few things, some of which we have to make educated guesses about. Off the top of my head, these include:

living expenses (post retirement phase)
rate of savings
rate of savings growth
inflation rate

With this info, we can predict how the nest egg will grow. Then we just have to pick a number for "enough" and quit our jobs. The REHP study is a great starting point, but obviously past performance is no guarantee of future results. I've seen amateur statisticians argue quite reasonably that the 100+ overlapping periods used are not statistically independent (they overlap!), so there aren't really 100+ data points, there are many fewer than that (3-5 IIRC). Not exactly the sort of stuff to make me sleep well at night.

I've seen some Monte Carlo simulators, and the worst case scenarios that you get from them are truly dismal -- never quit your job!!! The trouble with MC worst cases is you take the worst ever returns in year one, followed by the next worst ever returns in year two and on and on. The real market doesn't behave that way (there's at least some regression to the mean, for example), but then you have to build a more sophisticated MC and make some more guesses about how the market might behave, introducing more assumptions and possibilities for error.

Well, that's just what I've got off the top of my head. I'll throw it out there and see if anyone else is paying attention to this board.

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