Only freedom will do

NorthernMonkey1

Hi there,


Just so I understand this properly....


In the Rate box, I enter 4%/365
in the nper box, I enter 29*365 (29 years from 36 where I am now until 65)
in the pmt box I enter 30
in the pv box I enter 0 (assuming zero current assets)
in the type box I put 1


This gives £600,000, but its £600,000 not adjusted for inflation.

edinburgher

Fair point re. inflation, I'm assuming 4% real (i.e. after inflation return).

In more general terms, everybody does not experience inflation in the same way. The 'personal rate of inflation' for a frugal person is probably far lower than that of someone with very high monthly outgoings, as they're more dependant on a range of goods and services.

As a result, the cost of living debate has largely passed me by. When food got more expensive, I learned to be more creative and when/how to buy the deals. When power got more expensive, I reduced how much power I used through a combination of technological and lifestyle changes etc.

It takes a bit of effort and I have a reasonable wage, I doubt I would have had the same experience if I earned the minimum wage.

NorthernMonkey1

Picking some very unscientific numbers, if inflation averages at 2.5% (I picked this number from thin air), then in 28 years time (1.025^28 = 2) then your £600,000 will be worth around £300,000 in today's money.

edinburgher

You must have missed my last post, assuming 4% after inflation return. Haven't ignored it, it's built in to my assumptions.

Also, are you calculating the effect of inflation on a fixed pot of money? Because the value wouldn't suddenly stand still just because FI was reached, it would be expected to continue growing over time.

NorthernMonkey1

Having not followed the markets for long, is 4% above inflation a sensible long term growth rate?


And more importantly, is that your kitty in your avatar picture?

edinburgher

The long term (i.e. all recorded time) rate for UK equities is 4.9% above inflation (I believe). I think the figures are higher for the US (over 11% for 1928-2010?) That, coupled with P2P lending, savings account tarting, and expected house price growth over the next 20 years makes me think that I'm not being overly ambitious.

As a passive investor, I don't believe that you can accurately forecast or reliably deliver increased returns on equities, but you have to stick a finger in the air when planning. The levers I can control are how long I invest for, how much risk I take on and how much I pay for my investments. The rest of it is in the lap of the gods

And more importantly, is that your kitty in your avatar picture?

That's a Pallas cat, they're not available as pets

NorthernMonkey1

and the last question for you


Are you including that which you and your company are paying into your pension as part of the £37 a day (edited for typo) you calculated you need to save?


£11-1200 a month is doable if I subtract that which is paid into my pension from this value. It's a HUUUGEE stretch if I don't

edinburgher

Are you including that which you and your company are paying into your pension as part of the £37 a month you calculated you need to save?

Of course, we're looking at net worth and total lifetime spending

Karmacat

Northern Monkey understands a lot more than me about that equation ... and knows where the boxes go too but the £37 etc, isn't that per day ... or have I *totally* missed the point in my earlier reading?

edinburgher

You're right KC, assume it was just a typo, NM talks about £1,100-1,200/mth elsewhere

I am starting to think that I've caused more harm than good by starting this topic

It was intended to be a relatively straightforward way to capture a complicated topic (net worth and how lifetime earnings can provide for your future). As a result, it blends the values of different types of assets and over? simiplifies them for the purpose of creating a ready reckoner. It was suggested so that people could have manageable milestones for their own FI journeys. This is a very goal-orientated board.

It will only work if people have an appreciation of net worth and track it (i.e. if I was able to convert everything I own into cash tomorrow, how much would I have?) Luckily this isn't too hard, it's basically the sum total of property equity, pensions, investments, cash and other assets that can readily be converted into cash (think precious metals, not collections of porcelain etc.)

*Edit: Based on NM's queries the other day, I ran some 'stress tests' on what would happen if my real rate of return was way lower than I am predicting. It can go all the way down to 1.5% and I will still meet my goal based on my 3 month rolling average :T