IRR

[retire@40]

Does anyone here keep track of their IRR (Internal Rate of Return)? I'd be curious to know what the average IRR is for people who want to ER. I don't know if there is a source showing what the average IRR is for the average person in the US, but I would assume it's in the low single digits.

Here are my stats on a year by year basis:

1996: 11%
1997: 14%
1998: 15%
1999: 29%
2000: 26%
2001: 12%
2002: 8%
2003: 10%
2004: 16% (YTD)

 

[wabmester]

Are you including contributions in your IRR, or is that pure investment gains? If the latter, I'd like you to manage my money

 

[retire@40]

Are you including contributions in your IRR, or is that pure investment gains?   If the latter, I'd like you to manage my money  

It is growth of net worth (excluding home) which includes savings.  I review my net worth on a month to month basis (takes only a few minutes a month).  I have had no debt for over a decade, so I only need to adjust my list of liquid assets that I keep in Excel. And since I'm not 40 yet, I am still in the accumulation phase.

 

[Cut-Throat]

Yup, My YTD this year is about 1.7%

 

[Cut-Throat]

It is growth of net worth (excluding home) which includes savings.  I review my net worth on a month to month basis (takes only a few minutes a month).  I have had no debt for over a decade, so I only need to adjust my list of liquid assets that I keep in Excel.

Then it's not IRR! - It's net worth increase.

 

[retire@40]

Then it's not IRR!  - It's net worth increase.

I beg to differ. I define IRR as the rate at which my cash flows increase (or decrease). I consider myself an asset that produces savings just like my investments produce interest and dividend and capital gain income. Therefore everything that goes into my ER pot is considered cash flow which contributes to my IRR.

 

[soupcxan]

IRR is the discount rate where the present value is equal to the PV of the returns on those investments.
I see what you're saying, but I think it is a misnomer to call it IRR since you aren't valuing (and then discounting the value of) the time that you invest at work to generate the additional savings that go into your funds.

I think your metric is really more like CAGR than IRR.

I beg to differ.  I define IRR as the rate at which my cash flows increase (or decrease).  I consider myself an asset that produces savings just like my investments produce interest and dividend and capital gain income.  Therefore everything that goes into my ER pot is considered cash flow which contributes to my IRR.

 

[Cut-Throat]

I beg to differ.  I define IRR as the rate at which my cash flows increase (or decrease).  I consider myself an asset that produces savings just like my investments produce interest and dividend and capital gain income.  Therefore everything that goes into my ER pot is considered cash flow which contributes to my IRR.

"IRR - Internal rate of return, often called Average Annual Total Return. This is a percentage equal to the interest rate on a bank account that would give you the same total return on your investment. It takes into account money earned by the investment (interest, dividends, capital gains distributions) as well as changes in share price. Since it is an annual rate, it acts like a bank interest rate that compounds annually."

Well - here is an official definition and the one investment communities use. If you wanted to consider yourself an investment, you would first have to put a price on your head to determine what percentage of income yourself is throwing off.

Since no one I have ever talked to figures IRR this way, I would suggest you come up with a new term to refer to what you're talking about.

 

[WilliamG]

I use Quicken to track IRR.  Assume it is programmed to do this correctly.  Have data only back thru 2002 although I retired in 2000.  I re-balance,etc, on April 1 so the following are for my personal "fiscal" year beginning then:

  Stock        Bond        Total
2002    -24.3          8.1      -13.4
2003     46.8          4.3        26.8
YTD      2.5         2.6       2.5

 

[retire@40]

IRR is the discount rate where the present value is equal to the PV of the returns on those investments.
I see what you're saying, but I think it is a misnomer to call it IRR since you aren't valuing (and then discounting the value of) the time that you invest at work to generate the additional savings that go into your funds.

I think your metric is really more like CAGR than IRR.

But isn't CAGR a consistant annual rate to get from amount X to amount Y? If so, that's not what I'm calculating. I'm calculating investment growth or decreases plus cash inflows minus cash outflows. I am only using actual cash flow, not an abstract value of my time or any other non-cash items. I can't see what else to call this besides IRR.

 

[retire@40]

Since no one I have ever talked to figures IRR this way, I would suggest you come up with a new term to refer to what you're talking about.

Wow, did I just invent something new? I'll call it the retire@40 accumulation rate of return (RARR).

 

[wabmester]

retire@40, it doesn't matter what you call it or how you did it. At those growth rates, you'll be a zillionaire in no time, and as I'm sure several on this board can attest to, your savings rate is at least as important as your rate of return, if not more so.

There was something I didn't really consider when I retired. At 40, I had a net worth that I thought had a pretty good chance at outlasting me, and I was burned out, so I pulled the trigger. But if I had worked, say, 4 more years and saved 20% of my salary, I would have had a significant cushion. Not only that, but it turns out I left options on the table that would have doubled the size of that cushion.

So, here's my rambling point: there's nothing special about 40, but there is something special about having enough that you can live to 120 without having to worry about money.

If you already have the discipline to save, don't discount the added value a few more years of salary can give you.

 

[retire@40]

There was something I didn't really consider when I retired.   At 40, I had a net worth that I thought had a pretty good chance at outlasting me, and I was burned out, so I pulled the trigger.   But if I had worked, say, 4 more years and saved 20% of my salary, I would have had a significant cushion.   Not only that, but it turns out I left options on the table that would have doubled the size of that cushion.

So, here's my rambling point: there's nothing special about 40, but there is something special about having enough that you can live to 120 without having to worry about money.

If you already have the discipline to save, don't discount the added value a few more years of salary can give you.

Point well taken. I partly retired now in my mid 30's, and will be reducing my workload to only 5 or 6 hours a week at 40. I have noticed that even going to 20 hours a week on average now, work is well below my stress tolerance. I expect cutting my workload at 40 to less than half of what it is now, it will be even easier and "almost" like a paid hobby. I expect to earn 50% of my required living expenses($40K) at 40 with my self-employed income, and if I don't get sick of working those few hours a week, I will continue doing so until I do. Plus, I like the idea of having "some" earned income to be able to keep maxing out my Roth IRA and my wife's Roth IRA and being able to deduct expenses available to the self-employed.

 

[Nords]

IRR is a formula, not a user-defined function.

It is growth of net worth (excluding home) which includes savings.

Isn't this how the Beardstown Ladies imploded?

 

[Cut-Throat]

Re: IRR is a formula, not a user-defined function.

Isn't this how the Beardstown Ladies imploded?

Well, it was certainly how they managed to 'outperform' everyone else. - Until someone looked at their calculations.

 

[dm]

I keep track of my increase in net worth year to year. Here is mine for comparison.

98 16.3%
99 25.6%
00 2.7%
01 13%
02 13.2%
03 25.9%
YTD 16.3%

I plan on ER next spring. My house will be paid for at that time and give me alittle more cushion. My income from my job is currently about 5% of my net worth

 

[John Galt]

Wow dm! My net worth was going up each year
even though I was not working. Seems to have
leveled off now. This is okay if I can hold it steady.
Not sure yet...................

John Galt

 

[dm]

Thanks John. My net worth is up 180% overall since I started keeping track in 98. I started setting goals back then. I read somewhere that it was important to write down your goals in order to achive them.

2000 kind of threw me off some. To many tech stocks. I guess it was a learning experience. I got lucky on some vacant lots I picked up a few years ago and sold them for a very nice profit. It moved my ER date up some.

I plan on ER on my 48th birthday. Not as early as some, but the best I can do.

Like many, it's the price of health care in the future that has me worried.

 

[John Galt]

Yeah that pesky "cost of health care/insurance".
The early retiree's bugbear.

When my affairs were more complex than now, I
would complusively figure my net worth in every idle
moment. I'll bet hundreds of cocktail napkins and place mats went to their grave with my financial
life emblazoned. Every so often I considered if this
harmless past time had gone too far (remember the
fate of the "hand model" in a Seinfeld episode?).
However, this constant massaging and running
what--ifs with the numbers occasionally produced
some pleasant "Aha!" moments.

John Galt

 

[dm]

I am still planning to save and increase my net worth in retirement. Just not as much. At least for a few years. I still have one son in college and one at home. I told the one in college that I would pay the tuition and books, he takes care of the room and board.

Hopefully in a few years they will be on their own and my expenses will go down.

I don't plan on changing my spending habits much. Ive always lived below my means. My father retired when he was 57. He was self employed. I've told him many times not to worry about me and I would be happy if he spent every last dime he had. He said the problem was he had everything he wanted and he can do everything he enjoys now. And unless he had a date for when he was checking out, he just feels more comfortable with a little cushion.

 

[John Galt]

My Dad is just the same. He has "enough" for his needs
and a small cushion. Does what he wants and spends very little. I would never encourage him to
"spend every last dime". I may need that money

John Galt

 

[dm]

I heard somewhere that dying pennyless was financial planning at its best.

 

[cute fuzzy bunny]

How about dying $42 million in debt, owing $5M in taxes, with no estate, no heirs and no survivors to slap a bill on?

 

[WilliamG]

I'm sure those of you who use Vanguard look at their statistics on performance. Just looked at mine and it has been updated as of Sep 30. 5 year performance (Vanguard funds only, but that is 90% of our holdings) was over 6%. Pretty tickled since that includes the 2000-2002 pain. I was fortunate in retiring March, 2000 and setting up a balanced portfolio then after being too heavy in stocks. Also, spreading to REITs, small and international didn't hurt. Really look forward to their number for 5 years in March, since I think that was about the top of the bubble. Unfortunately, you can't vary the timeframe on Vanguard's return chart to a chosen date.