In the bar chart below I use 2%, 5% and 8% annual real returns. But of course, over any given decade, returns can be much higher or lower than that. Over the very long-haul, equities returned 6.7% even after inflation, see our post on the history of equity returns. Slightly more complicated math: What if we use different returns?ĥ% real returns isn’t necessarily a bad assumption. That’s exactly the sweet spot: it’s still a manageable savings rate for many FIRE planners and a surprisingly short time horizon to FI! Time to FI as a function of the savings rate. Qualitatively, I get pretty much the same results, even slightly shorter savings horizons than MMM (by a fraction of a year) because regular monthly savings get you to FI a little faster! For savings rates around 5-15%, it will take many decades to reach FI but at around 50-65% savings rates, we can cut down the accumulation phase to somewhere between 10 and 16 years.
As I have written before, we should view the 4% number merely as a rule of thumb, rather than a scientific constant! And, of course, I am fully aware that a 4% withdrawal rate might not work for everybody and all the time. Just like MMM, I use 25 times annual consumption as the FI target.
Like MMM, I use a 5% real (inflation-adjusted) annual return but I use monthly contributions, while MMM uses annual contributions. Just to warm up, let’s quickly replicate the results from the MMM blog post. Let’s get the computer warmed up and start calculating… the initial CAPE ratio when starting to save) matter? So, in typical Big ERN fashion, I take an ostensibly simple problem and make it more complicated! bond weights) on the path to early retirement? How much does the equity valuation regime (e.g. That got me thinking: Is the math really that simple? How sensitive is the savings horizon to different rates of returns? What happens if we use historical returns instead of one specific expected return assumption? How important is the asset allocation (stock vs. That’s because for every additional dollar we save we reduce the time to FI in two ways: 1) we grow the portfolio faster when we save more and 2) we reduce the savings target in retirement by consuming less. It details how frugality is able to slash the time it takes to reach Financial Independence (FI). Money Mustache articles is the “Shockingly Simple Math” post.
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