Only freedom will do

AlexLK

gallygirl wrote: »

Excel is your friend Alex :T - get the formulae right and copy and paste, it will be right forever more :T.

Surprised you're not good at maths though - don't music and maths go hand in hand?

I ought to read a manual about Excel, it would probably help.

As for the Maths, I didn't have a problem in my formative years, somehow even managed to get an A Level in the subject. However, in adulthood I seem to have forgotten how to use numbers, probably because anything to do with them was passed to Mrs. K., as did anything to do with computers.

edinburgher

I have been plootering about with spreadsheets and have struck upon a formula combination that allows an surprisingly easy insight into how ready you are for FI or retirement

The formula assumes that you already know 'your number' (i.e. the total sum or monthly budget that you need to stop working on) and that you have access to Excel (or spreadsheets with similar formula).

Feel free to play about with it, but be realistic with your assumptions!

The FV formula calculates the eventual value of a series of regular deposits when you tell it 1) the expected rate of return 2) the number of payments 3) the value of each payment and 4) the present value

Explanation here

• The rate is the amount that you expect to gain on the value of your assets over time. Ok, so this is a bit of a fudge, as most of us will have to try and take a stab at how our homes, pensions and ISAs will grow over a period of decades. I went for 4%, this would seem to be sensible
• To calculate the number of payments, write down your intended date of retirement and subtract today's date using the =today() formula. This will return the number of days until you retire.
• The value of each payment is the nominal figure that your net worth needs to grow by each day to achieve your target (write this as a negative value, i.e. -£10)
• The present value is your current net worth. Never calculated it? Shame on you Again, this should be written as a negative value, i.e. -£100,000)

Once you have a result for future value, add another formula that multiplies this result by 4% and then divides it by 12. This is the number required to provide your desired income each month in perpetuity without losing your capital (assuming a 4% growth rate).

So for me, the sums were:

Rate: 4%
Payments: 6546
Payment: -39.5
Present Value: -108333.69
Type: 1
FV: £600,095.63
Monthly: £2,000.32

Now, you can dismiss this as spreadsheet !!!!!! if you like - if you torture the statistics enough - they will tell you whatever you want to know!

On the other hand, if you choose to start a similar spreadsheet and update the variables regularly, over time it will become more and more likely to come true. As it stands, I need to grow our NW by £39.50 for the next 18 years to achieve FI, our average rate is roughly 50% higher than this at the present time.

What's your number?

Karmacat

Um, Ed, is that £39.50 per day until you reach FI time?

Amazing post, by the way! Thats definitely one to pore over one evening

turtlemoose

How do you calculate your figure for FI in the first place?

That post is wonderful btw!

edinburgher

Um, Ed, is that £39.50 per day until you reach FI time?

Yes, but it's £39.50 of net worth, not £39.50 cash. Net worth also increases 'organically' as you grow home equity, or pay off student debts and freebies from the govt. such as relief on pension contributions also make the target easier to hit.

I suppose the main problem as we approach the target will be making sure that we have enough liquidity to bridge the gap until we can retire conventionally and/or downsize. To this end, it's likely that we'll try and get a 30 year mortgage when we remortgage in 2016.

How do you calculate your figure for FI in the first place?

Dead simple. Do you keep a monthly budget spreadsheet? Our bare bones monthly budget is £1,400 (includes mortgage). I added £600/mth for some fun and multiplied it by 300.

£1,400 + £600 = £2,000 * 300 = £600,000.

We probably won't be paying a mortgage by the time we're FI, but the figure needs to stay in as the corresponding home equity remains part of our NW. We'll either need to have enough assets to pay off what's left of the mortgage. On the other side of the coin, if we pay it off, we will have reduced the expenses that need to be met by other assets.

Karmacat

Thank you! I love this, and it will also be really useful

edinburgher

and multiplied it by 300.

To revisit (boring day at work), the figure was multiplied by 300 because I think a safe withdrawal rate of 4% is reasonable (i.e. how much I can spend from my portfolio each year without exhausting it). Including our home equity in this is probably a bit of cheat (as you can't sell 4% of your house and most of the researched was based on a 50/50 portfolio of equities and bonds), but I wasn't sure how else to include it in the big picture

So I will probably have overstated the value because of that, but I have understated other things, like ignoring the state pension.

gallygirl

Need a decent night's sleep to understand it .

edinburgher

gallygirl wrote: »

Need a decent night's sleep to understand it .

Then I must be on form today GG, as I could write it and am continuing my run of terrible snooze

turtlemoose

£74.65 :eek::eek: