FIRE ratio 2007

[SecondCor521]

OK, I'm curious on this number.

Take your 2006 annual spending number from this thread:

http://early-retirement.org/forums/index.php?topic=11335.0

and your 1/1/2007 net worth number from this thread:

http://early-retirement.org/forums/index.php?topic=11354.0

Divide the first by the second and check the first box that applies to you.

2Cor521

 

[DRiP Guy]

[snips]

Take your 2006 annual spending

and your 1/1/2007 net worth

Divide the first by the second and check the first box that applies to you.

2Cor521

DOH, messed up your poll. I thought it was going to be spending vs annual income, so I put in "less than 50.%"

Since it is actually NW, I should have selected "less than 5%."

 

[Nords]

I'll nitpick first.

We track our spending based on our ER portfolio instead of our net worth. That way we don't have a false sense of security from counting the kid's college fund, my longboard money, or transient illiquid home equity.

But either way the result is less than 4%.

 

[Khan]

If the house value is thrown in: 1.8%

 

[SecondCor521]

IMHO home equity is the biggest bugaboo in a calculation like this, so I'm not surprised that it came up. I think most say it should be excluded from the calculations, but it can be pretty easy to go down a rat hole with this.

Personally I calculate my FIRE ratio on everything except my home - I include my mortgage payments but exclude my home value because I expect to own and live in this size house after retirement. I also include both the kids' college funds and the NPV of my contribution to their college expenses because I believe I would defer retirement to pay for their college.

I'm not sure what longboard money is or why you would exclude it, but to each his own.

My chief aim with the poll was to normalize the net worth poll according to spending and maybe give the board a sense of where people are in relation to hitting FIRE.

2Cor521

 

[haha]

I am assuming that many of the > 4% and perhaps many of the 4% represent people who are not retired, or who are perhaps not counting their pensions and possible other entitlements.

In another thread there is a card from Sam Zell emphasizing the worldwide scramble for yield that is going on, and the resulting outpouring of product made from securitizing formerly relatively illiquid income generating assets.

Many of us have had very good years on the portfolio appreciation front. (Unfortunately this does not include me to any great extent.) It might be good to remember that a better index of what we will be able to withdraw and spend over time is not what the portfolio is valued at, but how much cash flow it produces.

Ha

 

[Gone4Good]

It might be good to remember that a better index of what we will be able to withdraw and spend over time is not what the portfolio is valued at, but how much cash flow it produces.

Except for the many cases where this isn't true:

1) Zero coupon bonds withdraw > cash flow
2) Zero yield equities withdraw > cash flow
3) 4% yield equities withdraw <=> cash flow
3) Fixed rate bonds withdraw < cash flow
4) TIPS withdraw = cash flow
5) Commodities withdraw > cash flow

 

[haha]

Except for the many cases where this isn't true:

1) Zero coupon bonds withdraw > cash flow
2) Zero yield equities withdraw > cash flow
3) 4% yield equities withdraw <=> cash flow
3) Fixed rate bonds withdraw < cash flow
4) TIPS withdraw = cash flow
5) Commodities withdraw > cash flow

I think I may not have been clear enough.

1) Zeros have an accrued cash flow. IMO, it should be adjusted for experienced cpi in the year.
2) I don't consider the payout of the equity as important as the underlying FCF of the company. So even where there is no payout, as for example Berkshire, one can estimate the FCF accrued to one's own holding. In fact Warren does this for equities held by Berkshire.
3) I don't understand this one.
4) TIPS are easy- the coupon payments are what should be counted, as we are trying to deal with real returns. IF bought at a discount to par, you can adjust for that.
5) Commodities are not investments. You buy corn, you sell corn. You either make a profit or loss. The securitization of things like commodities is what Sam Zell is talking about.

Ha

 

[Linney]

Okay, I did the calculation and posted the results (6%) but it isn't really an SWR number because I used the traditional net worth calculation and included non-spendable assets, i.e. house and cars.

If I remove those non-spendable assets from the equation I come up with 10%. Not too shabby and not quite half-way there yet either for this not-so-young dreamer.