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NPV's and FIRE
Old 12-19-2009, 02:23 PM   #1
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NPV's and FIRE

Hi all,

I've had my home-brewed Excel FIRE spreadsheet for a while and now that it looks like I'm about 4 years away from nominal FIRE, I am wanting to doublecheck a few things regarding NPV's.

At a high level view, what I do is adjust both my FIRE net worth and my expenses by certain NPVs and payments. For example, and using random made up round numbers, assume I had $1,000,000 in assets and monthly expenses of $4,000. Assume further that I had a $100,000 mortgage balance and $1,500 of my monthly expenses was mortgage interest. What I do is calculate my FIRE net worth as $1,000,000 - $100,000 = $900,000, and my monthly expenses as $4,000 - $1,500 = $2,500. I'd then calculate my withdrawal rate as $2,500 * 12 / $900,000 = 3.3%.

A couple of points here before I go any further:

1. I don't want to get into the payoff the mortgage debate, let's just assume that's what my plan calls for.
2. I know the above numbers aren't real or accurate, I just used them for demonstration purposes.
3. I also don't want to debate what a safe SWR is. Let's assume I think 4% will be safe.

Mainly I want to make sure my math and logic are sound with regards to the kinds of adjustments and calculations I am making. There are three:

1. On the asset side, I have a "Social Security NPV", which I calculate as follows:
a. I take my SS amount from my most recent PEBES.
b. I inflate that amount by my inflation rate to calculate payments in future dollar amounts.
c. I take those future amounts and only consider amounts after I reach full retirement age (per my PEBES) through age 80.
d. I multiply the amounts in (c) by my "de-rating factor" -- how much SS I actually think I might receive.
e. I take the NPV of the results of (d) discounted by the inflation rate.
I add the amount in (e) to my FIRE net worth.

2. On the liabilities side, I subtract my current mortgage balance from my FIRE net worth. I then also subtract the interest I paid this month from my monthly expenses.

3. I also adjust for a "child support NPV". I know what my child support payments will be from now until my youngest graduates from high school. I take that payment stream and calculate an NPV using my "short term savings rate" as a discount rate. I subtract that NPV from my FIRE net worth. I then also subtract my current child support payment that I paid this month from my monthly expenses.

Do these adjustments seem valid? If not, what is wrong with them? Again, I don't really want to debate what my inflation factor should be, or whether Social Security will actually be there or not, or anything like that. I just want to know if my adjustment calculation methods are reasonable.

I'm glad to provide more info if that'll help you give me feedback.

Thanks,

2Cor521
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Old 12-19-2009, 02:44 PM   #2
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I think you are pretty much on the right track as far as adjustments (though I did mine differently and less rigorously by just trying various constant inflation factors, not too swift I guess, or using historical inflation which is even worse), but to me the glaring issue is that your taxes need to come out of that SWR percentage and possibly SS, don't they? At least in my computations I always include a "fudge factor" for paying taxes.
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Old 12-19-2009, 03:27 PM   #3
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I understand your approach for your mortgage and your child-support payments. I do the same for my mortgage since it will be paid off in 10 years.

I am not sure I understand why you're adding your SS NPV to your FIRE networth. Is it because you expect to calculate your SWR against this adjusted net worth?

If so, I would be careful. The mortgage and child-support payments are straightforward and fully known. The amount of SS you get may not be since taxation of that amount is quite complex & could be subject to changes between now & when you start collecting.

Otherwise, I think you're on the right path.
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Old 12-19-2009, 09:57 PM   #4
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@W2R -- I adjust for taxes as well; since that's not an NPV calculation I don't treat them the same way.

@walkinwood -- Yes, I calculate my SWR against the adjusted net worth amount. At this point I only assume I will receive 25% of my SS benefit.

Thanks, both of you!

2Cor521
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Old 12-19-2009, 10:37 PM   #5
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2Cor521,
I think your approach works as long as you're significantly discounting SS. In my case, since the total of my pension and our expected SSs after we reach full SS age will be greater than our projected expense, we could conceivably be under water before we reach 67, and this problem wouldn't be revealed through your method. Otherwise your approach makes sense to me.
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Old 12-20-2009, 12:16 PM   #6
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Good point. I am not sure whether what you describe is the case or not for me. I did delete the entire SS NPV column from my spreadsheet and that pushed retirement out by about a year. I'll keep that point in mind.

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