Early Retirement - Playing With Numbers

Ever find yourself playing with numbers when you should be sleeping?

Running the Numbers

I sure do.

I was looking at my Ally account and happened to click on the "More Details" button/link which then showed me what my daily accrued interest looks like. I mean, it's a simple calculation they're using, but for some reason I find it exciting anyway.

Daily Accrued Interest = (Available Balance X 0.0099) / 365

For me, that works out to $1.22 per day. And soon, that will be $1.36/day!

Yeah, not exactly Bill Gates numbers here. In terms of money earned per second, it's .000014 cents per second or in terms of minutes, it's .00085 cents per minute.

So that made me wonder what it would take to reach different retirement numbers at 0.99%. Easy enough, just take the amount you want to earn per year and divide it by the APY you're getting.

Playing With Numbers

$60,000 / 0.0099 = $6,060,606.06 (Yikes)

In order to earn $5,000 per month with a high interest savings account from Ally, you would need over $6 million in the bank. What a waste!

Now let's say we find an amazing CD with a 3% interest rate. Then what does it take?

$60,000 / 0.03 = $2,000,000.00

Now we're getting somewhere. That number is still really high but not impossible to reach. However, I'm not a Rockefeller. I'm going to need a higher interest rate. What happens if I invest in index funds that average just 5%?

$60,000 / 0.05  = $1,200,000.00

Okay, now we're really talking. That's just $1.2 million. Not only would I get to join the double comma (dos comas) club, but at just 5% I'd have enough money to live comfortably on in most places in the world.

Of course, it's not outside the realm of possibility to beat 5%. For example, over the past 10 years, VTSAX has averaged around 8%. Plugging that number in should get us some interesting results.

$60,000 / 0.08 = $750,000.00

No double comma club there, but now I'm at least financially independent. And this assumes no diversification, which would obviously bring the average interest rate down but we're playing with numbers here. (The total bond market index fund -- VBFMX -- has earned around 4.5% over the past 10 years). Assuming a weighted average for those two for an 80 / 20 portfolio, it would only bring the total interest rate down to 7.3.

( 80 X 8 + 20 X 4.5 ) / ( 80 + 20 ) = 7.3

$60,000 / 0.073 = $821,917.80

Not as clean a number, but perhaps leaning towards realistic. What if I want a little more money to play with? Say $100k.

$100,000 / 0.073 = $1,369,863.01 (or roughly $1.4 million)

So How Much Should I Save?

Assuming I want to reach this number before I turn 65, and assuming I'm starting from $0 at a salary of $100,000 saving just 20%, 30% or 40%, how long would it take me to get there?

20% annual savings ($20,000) invested at an average of 7.3% APY would take 25 years to get to $1.4 million. Retirement age? 57.

30% annual savings ($30,000) invested at an average of 7.3% APY would take 20.5 years to get to $1.4 million. Retirement age? 52.

40% annual savings ($40,000) invested at an average of 7.3% APY would take 17.5 years to get to $1.4 million. Retirement age? 49.5.

While we're at it, let's try the same thing while aiming for the lower number of $60,000.

20% annual savings ($20,000) invested at an average of 7.3% APY would take 19 years to get to $822k. Retirement age? 51.

30% annual savings ($30,000) invested at an average of 7.3% APY would take 15 years to get to $822k. Retirement age? 47.

40% annual savings ($40,000) invested at an average of 7.3% APY would take 12.5 years to get to $822k. Retirement age? 44.5.

Sure, I could have used one of the many calculators online for this stuff. Mr. Money Mustache has an excellent one! But sometimes it's good just to figure the math out for yourself and go through some of the scenarios.

Another thing is that all of these scenarios suppose that I'm living purely off of interest from index funds. It says nothing about dividend payouts from individual stocks or investment property income. Both are avenues I intend on pursuing just to bring that year number down to just 10 years, which is the goal I've given myself on my about page. Oh, and also -- I'm not starting from $0. I'm starting from about $100,000. If I decide to sell my house, I'll be in even better shape.

This year has been an excellent year for savings ... so far. As you know if you've been reading, a rough patch is coming. But that doesn't mean I can't maximize before then!

I should probably sleep now.

Until tomorrow!

Disclaimer: Any errors in math are totally not my fault because it's nearly 2AM where I live and will be corrected once someone inevitably points them out, at which point I will recoil in horror and existential dread because I will be so much further from my goal; meanwhile, I will sleep in blissful ignorance.

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