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    Financial Independence Daily FI discussion thread - Saturday, September 11, 2021

    September 11, 2021

    Financial Independence Daily FI discussion thread - Saturday, September 11, 2021

    Daily FI discussion thread - Saturday, September 11, 2021

    Posted: 11 Sep 2021 02:02 AM PDT

    Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply!

    Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked.

    Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts.

    submitted by /u/AutoModerator
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    When CoastFI is Rational: An Introduction to QALYs and the NPER Family.

    Posted: 11 Sep 2021 05:40 AM PDT

    Intro

    This post will make an argument for why coastFI may be a rational approach to retirement accumulation. To be clear, I am not advocating anyone adopt this framework or choose to pursue coastFI. In fact, this argument and its framework is largely an excuse to introduce the fantastic NPER family of spreadsheet functions. That being said, it's also an opportunity to explore alternative perspectives on different ways a FIRE-oriented lifestyle might be built for different needs.

    Defining coastFI

    CoastFI is often framed as having enough in your investment accounts such that no additional savings are needed to hit your goal at age 65 (arbitrarily chosen as "retirement age"). This leads to two easy critiques:

    1. If you're coasting to age 65, you're not really retiring early.
    2. If you stop saving--and thus start spending all your earnings--you will either need to save for a much bigger retirement or accept a large reduction in spending once you hit age 65.

    The answer to critique #1 is to simply lower the coast age, thereby requiring a larger savings amount. The answer to critique #2 is often addressed in one of two ways:

    1. So-called baristaFI, where you reduce your earnings (and hopefully also stress) to match your goal coastFI spending.
    2. Raise the retirement spending goal to a higher number to account for the higher level of spending, analogous to lowering the coast age above.

    My issue with solution #1 is that it is not always straightforward to reduce your income to match your coastFI spending. Not all fields of work are amenable to part-time employment and switching careers to something that offers flexible hours for lower pay may result in dissatisfaction if the wrong field is chosen.

    As a result, I think the most generalizable formulation of coastFI involves choosing a target that incorporates the fact that you will be saving less, but not necessarily zero, in order to spend more with the goal of increasing your quality of life while still working. Thankfully, spreadsheets include a few very helpful formulas for calculating such targets.

    The NPER Family

    How do you even calculate coastFI? On this sub I've seen a few very complicated formulas that treat accumulation and savings goals as an algebra problem, either taking the log or using exponents to account for compound growth. While those formulas are not wrong, there are simpler ways.

    Spreadsheet software includes the NPER family of formulas to solve all the flavors of the same problem. They all use the following variables to solve for the missing variable of interest:

    1. NPER (number of periods)
    2. RATE (compound growth rate)
    3. PMT (payment, aka contribution or outflow)
    4. PV (present value)
    5. FV (future value)

    Let's say you wanted to know how many years it would take to reach $1M if you make $80k and save $40k each year at a growth rate of 5%. Because we want to know the number of periods, we'll use the NPER formula:

    =NPER(RATE, PMT, PV, FV, [type]) =NPER(5%, -40000, 0, 1000000, 1) =16.07

    This roughly aligns with the MMM Shockingly Simple Math chart which lists 17 years to retirement at a 50% savings rate (40k out of 80k). Note a few things:

    1. The formula obeys cash flow sign convention. This means that it assumes you're paying off a loan valued at $1M, so it requires negative cash flow (PMT) from your account to pay back this loan. For the purposes of saving for retirement, think of yourself actually paying money out of your accounts as an outflow transfer of wealth (thus the negative sign). This would also be true for the present value (use a negative sign).
    2. The [type] variable is optional, and represents the PMT occurring either at the end (0) or the beginning (1) of the period. This accounts for the discrepancy between the finding above and the MMM chart, as the MMM chart assumes lump sum contributions at the end of the year (with rounding).

    Combining NPER and coastFI

    We can now use the NPER family of formulas to help solve some coastFI problems.

    What is the coastFI dollar amount to hit $1M at age 65 if I'm currently 30 and I expect a 5% return?

    =PV(RATE, NPER, PMT, [FV], [type]) =PV(5%, 35, 0, 1000000, 1) =-181290.29

    You'll note again the sign convention, meaning you need to have "paid in" $181,290.29 to your retirement balance to have it grow to $1M by age 65 (i.e. 35 years from now). We can confirm this using the classic compound growth formula:

    =181290.29*1.05^35 =1000000.026

    You can even nest formula families within each other. If I save 40k per year, at what dollar amount am I "halfway" to $1M by time rather than by dollars?

    =PV(RATE, NPER(RATE, PMT, PV, FV, [type])/2, PMT, [FV], [type]) =PV(5%, NPER(5%, -40000, 0, 1000000, 1)/2, -40000, 1000000, 1) =403,221.62

    For the NPER part of the PV formula, we nested an NPER calculation for getting to $1M with $40k annual contributions and divided by 2 to get half that period of time. We took that output and put it into the PV formula to end up with the dollar amount that's halfway in time to reach $1M. We can confirm this with NPER:

    =NPER(5%, -40000, -403221.62, 1000000, 1) =8.035

    Which is half the initial result of 16.07 years.

    Adjusting for Quality of Life

    This will be a short section because it's the most tenuous. There's a famous paper supporting the idea that the value of income to emotional well-being may max out at a particular threshold. There's a slew of literature supporting and challenging this finding, but overall even if there isn't an income limit above which well-being is saturated, the relationship appears roughly linear even to very high values. You can even map out what the $75k threshold translates to based on cost of living in your area (US).

    Say you make $120k per year and are trying to decide whether you want to save 80k per year and live on 40k for the rest of your life vs 60k vs 80k (or some other formulation). You can use the NPER formula to determine how many years it'd take to reach your target number (whether that's $1M, $1.5M, or $2M, respectively) and adjust those years (and all remaining life years) by some multiplier (say 0.8, 0.9, and 1.0, respectively) to account for the quality of living at those various income levels. You can then try to make a rational decision around how many years you want to live live on 40k of income (to jumpstart your retirement savings) before scaling back savings to 60k of income for more comfort, and then ultimately to 80k of late-career/retirement and see whether the added years of work (calculated via NPER for each time period) are worth your (improved quality of) time.

    I leave it as an exercise to the reader to calculate the quality-adjusted life years (QALYs) of living at various levels of income and/or optimizing QALYs over one's lifetime.

    Note: this post was written rather quickly. Excuse typos.

    submitted by /u/alcesalcesalces
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    Apps or websites that helped with financial independence?

    Posted: 11 Sep 2021 03:43 PM PDT

    Has anyone one on here used any apps or websites that helped them become more financially independent?

    submitted by /u/ascogonium
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    How worried are you about climate catastrophe? (and it's impact on FI)

    Posted: 10 Sep 2021 12:32 PM PDT

    I've been thinking lately about how the future will play out in terms of climate catastrophe, given that it seems more likely as each day passes.

    I mean, here I am slaving away at a job I couldn't give two shits about with the hope of living life 100% the way I want to... eventually. What if eventually never comes?

    What if, because of the effects of climate catastrophe on the stock market/society/money/whatever, we get to the point that it is no longer possible to be FI?

    While writing this out, I'm reminded that it's important to enjoy every day while we still have it. I guess this would be easier to do if I didn't want to escape work entirely.

    Does anyone else share concerns about this?

    submitted by /u/2006Scaper
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    Want to take out a loan but not sure.

    Posted: 11 Sep 2021 03:49 PM PDT

    I'm 22 and I've never took out a loan before but I've been thinking about it for a couple years the thing is idk if it's the right thing to do I can always do my Hw and see if I can calculate any interest fees and when I'd be able to pay it back but I just don't know what type of loan I should take out or if I should even take one out at my age I have a job also if that helps but I was wondering for the people that's more older and have better experience what was the first steps of taking a loan out and how did you become successful and not manage to screw up and get into more debt?

    submitted by /u/That-Station
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