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Subject:  Re: FIRE checker for Fools Date:  8/15/2003  3:43 PM
Author:  Eldrehad Number:  437 of 5139

What did you think of the 'stages of wealth' approach? I like the approach above as a yardstick but I think the stages give a good idea of when you will reach FIRE. Both good measurements, they just measure different things...

First, thanks for the link.

I agree that the stages of wealth approach is indeed a good measure, and will give some indication of when one will reach FIRE - and I am not yet to the point where my investment returns exceed my income, but I'm working on it.

I'd have just about an identical reservation with regard to this measure as I did with regard to the other one we discussed (the net worth = annual income crossover).

Again, with this approach as well, if you take two people who save the same percentage of their incomes, and have identicial investment returns, the person whose income grows faster will actually take longer to reach these milestones than the person whose income grows more slowly.

I guess what I'm leading toward here is the idea that I don't like any 'universal' percent savings figure - like the 'magic' 10% or 15% you hear bandied about in the financial media or many financial self-help books. Don't get me wrong, these percent figures have their purpose - and reading about them got me started along the path of saving and investing - and whatever gets you started is a good thing.

I would caution people, however, that no single measure fits all circumstances. Take the figure of investing 15% of income toward retirement as an example. Take two people, one whose income grows over time, and one whose does not.

Sure... the person whose income grows will put more and more money into savings every year, as he's saving 15% of an ever growing income - whereas the person whose income never changes always contributes the same amount.

But assuming equivalent investment returns, which one of these two investors, come retirement day, will have the larger nest egg relative to his pre-retirement income?

The person whose income never grew... that's who.

So, having a target figure of 10% or 15% or whatever % savings and investment is a great starting point... and a heck of a lot better than not saving at all... and if that will get you to your goal, that's fantastic.

But if your goal is to have a retirement fund that will spin off, for example, 80% of your pre-retirement income, and you contribute a fixed percentage of your income (say 10% or 15% or whatever) as you go along, and your income keeps rising, you might be in for a surprise.

Yes, as your income grows you'll be contributing more with this method... but in order to catch up to they guy whose income never grows (in terms of nest egg size vs. pre-retirement income) you have to actually increase not only the amount you save, but also the percentage of your income you save.



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