Bogle's Rule of 72

[km4hr]

The common explanation of the Rule of 72 explains how it is used to determine the number of years it takes to double one's money at a certain interest rate. Or conversely how to calculate what percentage rate will double a given amount of money in a given number of years.
Bogles book, Common Sense on Mutual Funds, describes a related but useful twist on the old rule. Bogle says the rule of 72 can be used to calculate how many years you must invest a given sum at a fixed rate before you can stop investing and then start withdrawing the same amount without depleting your capital.
Bogle gives this example. You invest $500 per month at a 6 percent (72 divided by 6), after 12 years you could regularly withdraw $500 per month and still leave your principal untouched. After 24 years, you withdraw $1500 per month. After 36 years you could withdraw $3500 per month, and still perserve principal.
The steps involved in the calculations used in the example may be obvious to some but not me. If you get it please explain.
xyz

 

[retire@40]

I'll give it a shot. To understand the monthly investment, it may be easier to understand it in terms of a lump sum investment since it's the same concept.

You invest a lump sum of $500 at 6% for 12 years, the balance at the end of year 12 is $1000. So at the end of year 12, you can take out the $500 interest and still have the original $500 investment. If you don't withdraw anything for 24 years you would have $2K (double the $1K), so you could withdraw $1500 and still have your original $500. In 36 years you would have $4K (double the $2K), so you could withdraw $3500 and still have your original $500.

You can do this calculation as a lump sum, yearly, or monthly. The concept is the same.

 

[Nords]

Fun with numbers...

Bogle gives this example. You invest $500 per month at a 6 percent (72 divided by 6), after 12 years you could regularly withdraw $500 per month and still leave your principal untouched. After 24 years, you withdraw $1500 per month.  After 36 years you could  withdraw $3500 per month, and still preserve principal.

The steps involved in the calculations used in the example may be obvious to some but not me.  If you get it please explain.

The Rule of 72 formula is technically
Time = ln(2)/[ln(1 + Rate)] and can be approximated as
Time = 0.693/Rate

Here's a derivation-- http://encyclopedia.thefreedictionary.com/Rule of 72

So the Rule of 72 is good for "regular" interest rates, but very high or very low rates need to go back to the original formula for better accuracy. (Although if you have a very high rate you may not care anymore.)

My TI-55 III calculator handbook (copyright 1977) says that the future value of a series of investments is

Future value = payment x [(1 + interest rate)^(# payments) - 1]/(interest rate)

Investing $500/month for 12 years is 144 payments and the interest rate is 6%/year or 0.5% per month so
FV = ($500) x [(1+0.005)^144 - 1]/(0.005) = $105,075.

You want your $500 back so your remaining stake is $104,575.

At 6% per year it's earning 0.5% per month, or $104,575 x 0.005 = $522.

Since you only need $500/month you can send the extra $22/month to me!

 

[johnblake]

Taylor series expansion. Cool.

How come the vast majority of the ERs on this board are engineers and technical types? We don't even make that much money. Doctors and Lawyers make more money, but don't seem to ER (or at least participate on this board.)

 

[Hyperborea]

How come the vast majority of the ERs on this board are engineers and technical types?  We don't even make that much money.  Doctors and Lawyers make more money, but don't seem to ER (or at least participate on this board.)

Hmmm, I can think of 3 possible reasons.  The first is facility with numbers that lets us (not all of us are engineers some are scientists/mathematicians) have a fighting chance to figure out the math side of this.  The second is that lawyers and doctors often start later under a heavy debt burden.  Third is that for a lot of techinical people their prime earning time is relatively limited unless they claw their way into upper management.  Doctors and lawyers can sit at the top until they retire.

Just some guesses.

 

[retire@40]

Doctors and Lawyers make more money, but don't seem to ER (or at least participate on this board.)

Doctors and Lawyers generally don't like to play with numbers which is a must when it comes to planning to ER. I think it's a right/left side of the brain thing.

Plus, with doctors, by the time they actually become good doctors, they are in their 40s anyway, just about the time many of us want to ER.

 

[hocus]

"Doctors and Lawyers generally don't like to play with numbers which is a must when it comes to planning to ER."

Another possible factor is that engineers are often very independent-minded. I am not saying that lawyers and doctors are not independent-minded. But engineers seem often to be more so.

(I am not an engineer. I am just making note of something that I have observed in my dealings with engineers, both on Retire Early boards and elsewhere.)

 

[Bob_Smith]

How come the vast majority of the ERs on this board are engineers and technical types?

Or you could look at it this way: Perhaps engineers and technical types don't comprise the vast majority of ERs; they simply comprise the vast majority of the people who like to discuss it. People who like to get under the hood, tinker, and analyze are more likely to enjoy this board. For example, my father-in-law retired early, but it wouldn't even occur to him to discuss it like we do here. In fact, I'm sure he wouldn't even comprehend why someone would want to do that.

That being said, I'm not and engineer or technical type, but I probably should have been because I think like one (INTJ).

 

[cute fuzzy bunny]

I have a couple of things I can offer on the "doctors/lawyers" front, as my wife works with doctors all day, and I used to sell law firms all of their software and hardware for a couple of years. Some of it is not exclusive to the specific professions, but to the category of high wage earners.

For starters, they get a lot of expensive schooling with a lot of other people who frequently come from well to do families. The nice cars, homes and so forth are programmed into them. They tend to live beyond their means and measure their success based on their "stuff". Their family friends and those they met in college or in business are also high earner/high spenders. I've seen very few doctors/lawyers who didnt live in a huge house, own several expensive cars, eat in expensive restaurants all the time, etc.

I had a great example when I went to the dentist yesterday for a routine cleaning. I'm moderately well known in the dentists office as that "young guy that retired already". I've talked to the dentist who owns the practice and he confessed that he "bought high and sold low" for many years, figuring "how hard can this investing thing be, I'm a smart guy...?". A sentiment I've heard a lot in this crowd. After failing year after year and ultimately losing half his money in the 2000 crash, he turned his money over to a 2% money manager. Those who are learned in the "four pillars" know he's stepped from the frying pan into the fire.

Anyhow, he's got this "new" dentist on board. Just came out of retirement. I'm guessing he's in his late 60's, early 70's. Nice fella, seemed to know his stuff. He comes in to start poking me in the mouth with a sharp pointy thing and says "so you're the guy that retired early, I've heard of you!". After a few minutes of talking about his retirement, he starts talking about his airplane. Gets a picture of it and shows it to me. He spent two million on it. Says he used to have two planes, one seaplane and this one. Went on about his son the nerosurgeon who just laid out $300k for a ferrari and how he used to have one. Spoke with jubilation about his country club friend who just spent a half million on some special edition ferrari. I got the feeling that he was trying to 'measure up' with me after hearing I was an ER...assuming I'm loaded and he's going to impress me with his stuff. I didnt have the heart to tell him I drive a Ford, live in a modest home, have never owned an airplane or a ferrari, and frankly dont want any of that stuff!

I suppose that he's come back out of retirement to work for another dentist says that he must have lost some change in the 2000 downturn and needed a paycheck again.

The wife says the doctors at work talk about investing all the time, which hot stock they're buying, the beating they took on something they were talking about last month.

As far as going on their own and then hiring financial planners...well...many of the doctors and lawyers I know personally are incredibly, incredibly arrogant people. The mindset is that they're very smart and can do this investing thing on their own, and if they fail, the only way someone else could possibly succeed is if they're highly paid and as a correlation to that, even smarter than they are about this investing thing. I dont want to malign these professions...I think it takes a certain amount of self confidence to do them well.

So I guess the moral of the story is, it doesnt matter how smart you are, you arent going to win at stock picking as a part time speculation activity. Buying and selling on an emotional basis doesnt beat the market. Turning your money over to a financial planner for 1-2% a year wont help you either. Spending at or beyond your means will keep you working or even send you back to work. Growing up and maturing in an environment of big spenders handicaps you for living below your means.

As far as engineers and technical folk making up a big population of ER's here...well...thats easy...tech jobs paid pretty good in the last decade, tech people understand that other people are better at doing some things than they are, tech people are cheap, and tech people are more likely to use computers and yap amongst each other through online services.

 

[Martha]

Re doctors, lawyers and participation on this board:

1. There are several lawyers who participate on this board. I don't know about doctors. However, I am not aware of any of the lawyers who are actually retired.

2. I question whether doctors and lawyers use the Internet as much as engineer types. This is really new to me. I have trouble typing and have trouble getting computers to work right.

3. I do know doctors and lawyers who have made devastating mistakes in investing and sometimes they seem vulnerable to putting money into goofy investments and "business opportunities". However, I am a bankruptcy and "personal planning" lawyer and one who has the reputation of dealing with difficult situations. Therefore, I am the one who sees the doctor or lawyer that loses everything on the hotel development.

4. A number of the senior lawyers in my firm live conservatively, always max out their retirement accounts, don't live in especially fancy houses, and come from humble backrounds. They have plenty to retire but work far past age 65. For some, their identity as a human being is as a lawyer. That is what they are. There is no retiring from that. Some say that their work and their hobby is being a lawyer. Maybe because I had a first career before law, my identity isn't so tied up in being a lawyer. The lawyer whose father founded our firm came into the office even when he was 90 years old.

BTW, my firm just approved me going part time starting January 1. It was a lively discussion. As far as anyone can remember, in the 100 plus years of my firm, no one has ever gone part time.

Martha

 

[bow-tie]

...BTW, my firm just approved me going part time starting January 1.  It was a lively discussion.  As far as anyone can remember, in the 100 plus years of my firm, no one has ever gone part time.

Congrats on the p/t gig Martha.  I hope it works out for you.

I'm kind of a #s dork, and there are times I wish I were more technically inclined for income purposes, but nonetheless, I'm very driven to reach FI/RE.

I guess I spent to much time with my retired father, and recognized how much freedom he had, and how much I do not have, spending all this time in the 'Cubicle Prairie Dog Farm'....

I can see how those in the doctor/lawyer/etc professions get caught up in the consumption race.  Their peers are often doing the same thing, measuring themselves according to how much stuff they have.  It has to be tough being the odd man out.  I struggle with that in my work/personal environment.  I guess the struggle will make the RE work all the more rewarding...

 

[Nords]

If they're happy, it's their problem.

Is it just possible that doctors & lawyers are more happy in their work than we were, and don't feel the need to ER? I think I've finally stumbled sideways onto my true avocation, but they've been enjoying theirs for years. How in the heck could anyone persuade Warren Buffett to ER?

Has anyone gone over to Raddr's board and pointed him to this thread? I think he's a retired MD. And Bernstein is doing a fine job of simultaneously dispensing financial advice & medical care.

I don't want to spew a glittering generality, but during my military career I watched a lot of divorces. I suspect that divorce's financial devastation is one of the top 10 reasons a person can't yet ER. And what ratio of ERs have never been married, or at least didn't achieve ER until they achieved singlehood?

 

[Martha]

Re: If they're happy, it's their problem.In a 1990

Is it just possible that doctors & lawyers are more happy in their work than we were, and don't feel the need to ER?

In a 1990 study published in the Journal of Occupational Medicine, lawyers had the highest rate of depression out of a 100 studied occupations and were 4 times as likely as the general population to be depressed.

 

[unclemick]

Hmmmm - Doctors usually see sick people and Lawyers usually handle less than uplifting problems in people's lives. Not being born with the 'happy gene' - I think being an engineer was a better choice - for me.

Are estate lawyers happier as a group than say criminal lawyers?

 

[cute fuzzy bunny]

A lot of conflicting data, including the probably not valid claim that dentists have the highest suicide rate of any profession.

There IS some validity to it though...the best study I've seen (done by the national institute of health) had the average white collar suicide rate at something like 2%, doctors at 2.7%, dentists at 3% and psychiatrists at 3.5%...or something like that...the proportions are about correct even if my recollected numbers arent.

No rocket science here...its a stressful job dealing with stressed out people in stressed out situations. Anyone borderline is going to see increased depression.

 

[John Galt]

I heard years ago that dentists had the highest
suicide rate of the professions. In fact, I knew a
dentist personally who killed himself and can't recall any
other professionals I knew personally who took the
"Hemingway exit". One of my fishing buddies is a
retired dentist and he seems quite happy and well
adjusted. But, you never know for sure.

John Galt

 

[sgeeeee]

...the best study I've seen (done by the national institute of health) had the average white collar suicide rate at something like 2%, doctors at 2.7%, dentists at 3% and psychiatrists at 3.5%...

avid retirement board posters at 4.5%, tireless readers of ***** posts at 27% . . .

 

[hocus]

Most human beings seek to have more of the right sort of "stress" in their lives. We go on rollar coasters to experience "stress." We play Monopoly to experience "stress." We run marathons to see if we can endure the "stress" of training for them and completing them.

Human beings were desgined to experience joy in overcoming stress, and most of us do. After a "stressful" day, we sleep better. My sense is that much (not all, to be sure) of the stress that doctors and lawyers experience in their jobs is the good kind of stress.

It is when professionals experience the bad kind of stress that they see negative outcomes in their personal lives. Pushing yourself to come up with just the right diagnosis in a short amount of time to save someone's life brings an experience of the good kind of stress. Having to take care what you say to a patient because talking straight may lay the groundwork for a unjustified legal action brings an experience of the bad kind of stress.

I think it is possible that engineers generally experience more of the bad kind of stress than doctors and lawyers. I don't feel confident that this is so. If it were, however, it would serve as a partial explanation of why we see a good number of engineers expressing a desire to retire early on the various Retire Early boards.

 

[John Galt]

I have faced the ups and downs of business and I even fought in the sexual revolution. However, I really maxed out my stress level by staying married most of my life

John Galt

 

[arrete]

One of my fishing buddies is a
retired dentist and he seems quite happy and well
adjusted. But, you never know for sure.

My dentist came up through life the hard way. He dropped out of high school, joined the Navy, decided that wasn't for him. Went back home to find that half the people he had hung out with were dead from overdoses, got his GED, college, and dentist school.

He works 4 days a week, because that's all the money he needs, seems to have a good time at the office, and sails his boat whenever he can. Plans to work as long as possible because he doesn't burn himself out. I don't think he'll ever commit suicide, because he's gotten ahold of his life.

Too many people allow events drive their lives instead of controlling the events.

arrete

 

[Jay_Gatsby]

Too many people allow events drive their lives instead of controlling the events.

arrete

Never a truer statement has been uttered. Not to get too far afield of the "technical" subject matter of this forum, but perhaps if people were more "calculating" in terms of planning their lives, they would encounter less negative stress, and have time for more positive stress.

My girlfriend told me the other day that I needed to put a very clear financial plan together for both the long and short term, so that I could feel comfortable spending money on things that would make my life easier/happier (e.g., a nice long vacation since I haven't taken one in 4-5 years), rather than constantly worrying about whether I've fully prepared financially myself for various contingencies (e.g., layoffs, medical issues, etc...). The fact that I'm not spending money on things that would make my life easier/happier is affecting us as a couple, since the accompanying stress bleeds over into our personal time together.

Anyone have suggestions?

 

[ESRBob]

Jay,
Definitely the girlfriend has a real point here-- you have to loosen up and live a little now.

The image I have is of someone very young trying to get to FI and saying that they will get there a little faster by never taking a vacation and saving all that extra time and money.

Ludicrous -- really. The human being isn't designed for all work and no play. And if by sheer force of will you are able to pull it off, you are likely to find yourself washed up into ER as an empty husk: financially ready, but friendless, dull and possibly in very poor health. Depression would just be the start -- alienation and misanthropy would be real risks.

ER is about loving life and trying to enjoy it to the max. That doesn't start the day you finally hit 'your Number'. It starts today.

You may have lots of good ways to have fun and a rich enjoyable life without spending a lot of money -- that is a good thing! So I am not saying the girlfriend is right if she is urging you to have a really expensive vacation -- you could blow lots of money and be miserable. But you need to take vacations and mini-vacations and make time for her and for yourself all along the way.

By urging you to make a budget, she may me trying to use your language and M.O. -- "if it isn't in the budget it isn't going to happen" -- to tell you that you need to make time for yourself and for her and that sometimes that will mean spending a bit of money.

What about camping in a state park? Kayaking on a nearby lake or river? Watching a minor league baseball game? Going on a winery tour. All are pretty cheap and let you have some quality time together. I don't know what you and she would like to do, but you'd better find something.

Good Luck!

ESRBob

 

[Jay_Gatsby]

Both of you are definitely right on target with your advice. I went into "defense mode" during the dot-bomb era and the following two years (e.g., 2001-2004) and haven't been able to break the habit of saving.

I just turned 34 and have been working at a "mega" law firm for the past four and a half years. During that time, I busted my tail to make partner, which has required a substantial time commitment (i.e. 60 hours a week in the office, week-in-week-out normally, with occasional 100 hour weeks), along with extracurricular professional activities. Unfortunately, I recently found out that despite my sacrifices (and having allowed the firm to make approximately $1,500,000 in profit off of my back), I'm not going to make it, and have been given a few months to find a new job (this is how it works in mega law firms, and I could start a whole thread explaining why). Needless to say, I'm a bit depressed, and have been driven even further into "defense mode".

With all that said, I recently had lunch with a lawyer I used to work with at a much smaller firm (a 7-lawyer firm), and he mentioned that he was planning on going out on his own and would be interested in forming a firm with me. At first I was a bit wary based upon the risks, but have come around over the past couple of days into thinking that it might actually be a pretty good idea. I'd make decent coin as a "base" (thereby giving me a safety net) and get a percentage of the fees generated by the clients I bring into the firm. With the money I've already saved over the past four years, I'm probably protected enough financially to take the risk.

Once I make a career decision (or find another job), I'm planning on taking the girlfriend on a long vacation. The vacation will likely give me perspective on my workaholic lifestyle, and help me prioritize what's important to me.

 

[Martha]

Jay, I am sorry that the mega firm didn't work out. I never liked the model they use and IMHO your better off not selling your whole life to THE FIRM.

Boutique practices can be nice. Very small firms seem to work best when they are highly specialized. Also consider midsize firms with cultures that appeal to you.

Balance is everything.

 

[windedhare]

My girlfriend told me the other day that I needed to put a very clear financial plan together for both the long and short term, so that I could feel comfortable spending money on things that would make my life easier/happier (e.g., a nice long vacation since I haven't taken one in 4-5 years), rather than constantly worrying about whether I've fully prepared financially myself for various contingencies (e.g., layoffs, medical issues, etc...).  The fact that I'm not spending money on things that would make my life easier/happier is affecting us as a couple, since the accompanying stress bleeds over into our personal time together.

Anyone have suggestions?

I agree with the others and gf.

As hard as you have been working, you gotta earmark some fun money. If a little fun money can prevent a "quarter/mid-life crisis" you may look at it as an investment.

Don't go overboard, but you also gotta remember to enjoy life. Tomorrow is not promised. Take care.