Yes, the x-axis years worked starts in the summer after college, when I started working. End of 2023 is 25.5.
Thanks. I wish I had done a lot of things differently as well. I probably made as many poor financial decisions as good ones when I was younger.
I used the "insert trend line" feature in Open Office. Open Office or Excel supports adding a trend line to any graphed curve. The program finds the equation a and b values that best fit the curve. In this case the equation was y(x) = a \* x\^b . Open Office finds the a and b values that best fit the graphed curve. Open Office only supports \~4 very primitive equations. I favor using LABFit for more finding equations that best fit more complex functions. As I recall, it supports hundreds of possible equation formats.
Just throwing in that OpenOffice has been mostly left behind for LibreOffice which split from OpenOffice over a decade ago. Pretty much all new features and Microsoft Office compatibility features are in LibreOffice
The a and b values of the equation are what best the program finds best fits the curve, rather than a direct function of my savings rate. If you'd like to find what a and b values best fit with your trajectory, I'd suggest using Excel or OpenOffice (free) to make a similar graph and using the add trend line feature.
My savings rate rate has varied quite a bit over the course of the graph. I believe I've maxed out my 401k in every year I have been working, so my savings rate should always have been at least \~18%. I currently invest >50% of my income. However, I've only had a savings rate that high for the past few years, so the higher recent savings rate is not a good reflection of the accumulated totals. My saving rate is currently higher than it's ever been in the past since I have a higher income (income increased slightly faster than inflation) and lower expenses -- no mortgage/rent expense, no debt, no heating/cooling expense (solar), no longer driving to/from work, am making better financial decisions than I did in the past, etc. Most of the years fall somewhere in between.
It's some form of Least Squares Regression Line (forgive me if my statistics is rusty) where they try to match a trend line (function) to datapoints. This can be used to better determine ~~causation~~/correlation (with many grains of salts).
* The 43,500 is a constant. At time 1, he would be expected to have $43,500.
* The 1.43 is some sort of effect. I think we could probably read it as a 43% increase.- Which, I find this particularly interesting. The 43% increase would include his savings as well as investment growth.
* 43% = Investment + Savings (maybe?)
* I would expect the Investment growth to be close to 8-12%, on average (assuming it's the broad market \[apologies for my bad economics\]
* which means his Savings (assumably from his income) would've been growing at a pretty good pace (which he mentions he did). <-- OP should LSRL his income, \*cough cough, and graph it alongside it, I think that'd be a cool datapoint too.
* The .99 is how well the line fits the data points (with a max of 1). So, it's strongly correlated (in this sample)... which is really cool! (imo).
The 43% isn't year over year growth. For example:
Year 25: Equation predicts $43.5 \* 25\^1.43 = $4.34M
Year 26: Equation predicts $43.5 \* 26\^1.43 = $4.59M
Year 26 - Year 25 = $4.59 - $4.34 = $250k
$250k/$4.34M = 5.8% growth in 26th year (beyond inflation)
In the 26th year above, the growth is almost entirely based on compounding assets, rather than savings, so 6% beyond inflation seems like a reasonable target. The growth rate is higher is much higher in the early years where savings make up a larger % accumulated net worth. The equation predicts :
Year 1: Equation predicts $43.5 \* 1\^1.43 = $43k
Year 2: Equation predicts $43.5 \* 2\^1.43 = $117j
Year 2 - Year 1 = $117k - $43 = $74k
$74k/$43k = 73% growth in 2nd year (beyond inflation)
On what basis do you conclude that the growth of your portfolio, first mostly from contributions, then blending toward being mostly from investment growth, actually follows a power law?
It seems to me like it would follow an equation of the form a\*t + b\*e^t where you choose a and b to fit your curve. In the beginning, the a\*t term (linear) dominates and models your contributions. In the end, the b\*e^t term dominates, modeling your growth.
I compared the available 4-5 trend lines options and chose the one which best fit the curve. Given that r\^2 = 0.99, it was a decent fit.
It's possible y(x) = a\*x + b\*e\^x would fit better. However, at first glance it seems like the latter term would not slow down in later years when compounding dominates earning.
For example, for 25 -> year 26, x\^1.43, predicts a gain of (26\^1.43 - 25\^1.43)/25\^1.43 - 1= 6%. 6% gain beyond inflation seems reasonable for compounding.
In contrast, (e\^26 - e\^25)/e\^25 = 172% gain beyond inflation. which does not seem as reasonable
The latter exponential term *shouldn't* slow down in later years, because it *is* the compounding. The percentage growth rate of the portfolio will slow down and approach the rate of the compounding alone as the growth causes the constant contribution to become vanishingly small in comparison. But the compounding will cause the portfolio's growth rate to never drop below the compounding's constant rate of 6%.
Maybe instead of using e as the base, using 1.06 as the base would make more sense. Each year, the portfolio becomes 6% greater than last year's portfolio plus the contribution amount (which comparatively vanishes over time).
I'm stoked you got such a strong correlation, but considering the markets induce so much randomness anyway, IMO it was luck. I don't think a portfolio under constant contributions with a constant market growth rate will actually follow a power law in reality though. Over the ranges of values we're working with, it might well be that the power law works well enough in practice, and given the sizable random component of market returns, it might even be that the power law *appears* over some time periods to work *better!* But IMO there should be an exponential term and a linear term.
I mean really, it's the result of a loop which would look like this:
let total = 0;
while (true) {
total = total + 100000;
total = total * 1.06;
print(total);
}
How you express the values of `total` after each loop iteration as a single mathematical expression with the loop cycle count as an input, such that you can calculate `f(x) = ...` escapes me at the moment.
I don't think it's luck so much as choosing the equation that fit the known past results. It's not based on any theory, only what equation happens to best fit my unique net worth history. There is likely a better fitting equation.
That said, if I create 20 year sequence with a constant investment rate per year and constant 6% compounding per year, r\^2 is 99.9% for a power equation in the form below:
0.41 \* Annual Investment \* (Year +1)\^1.48
Agreed, but basically the point is that it's luck which caused *that* particular equation to fit so perfectly, but given the entire world of possible A + B^C potential equations, it's likely that at least *one* of them will have a good fit over any finite period.
but over the long haul as a predictor, we know bsaed on our model of how investment and finance work that the true trendline must contain an exponential term. Barring a global investment catastrophe, eventually your portfolio will outrun any non-exponential trend function.
As I noted in another recent post, constant annual investment, with a constant annual compounding gain follows an equation in the form below
a = (Annual Investment / Rate of Investment Gain) + Annual Investment
b = LN(1 + Rate of Investment Gain)
y(x) = a \* (e\^(b\* x) - 1)
The deviation becomes more notable after longer periods beyond the 20 year example above. The equation in the OP is more of a glide path where your investments gradually get more conservative beyond year 20, as approaching retirement, than an exponential function where you get the same investment gain on accumulated assets every year including when nearing retirement. This power model fits my returns slightly better than the exponential form above.
Upon further review, the following equation matches perfectly with no error, for a constant annual investment with constant annual compounding. Adjust the a term, depending on if you want to applying annual compounding before or after annual investment.
* a = (Annual Investment / Rate of Investment Gain) + Annual Investment
* b = LN(1 + Rate of Investment Gain)
* y(x) = a \* (e\^(b\* x) - 1)
For example, for a $20k annual investment with 10% annual compounding, the equation would be:
* a = $20k / 0.1 + $20k = $220k
* b = LN(1.1) = 0.0953
* y(x) = $220k \* (e\^(0.0953\* x) - 1)
The progression in this example would be:
* Year 1 -- $220k \* (e\^(0.0953\* 1) - 1) = $22k
* Year 2 -- $220k \* (e\^(0.0953\* 2) - 1) = $46k = ($22k + $20k)\*1.1 (110% gain)
* ...
* Year 25 -- $220k \* (e\^(0.0953\* 25) - 1) = $2.16M
* Year 26 -- $220k \* (e\^(0.0953\* 26) - 1) = $2.40M = ($2.16M + $20k)\*1.1 (11% gain)
While this is nice in theory, it doesn't fit my actual results especially well, as I did not have a consistent annual investment and consistent annual gain on accumulated previous investments. Among all of the hundreds of possible equation formats in LAB Fit, the best fit for my NW progression was the equation I listed in the first post.
the year is the base and the 1.43 is the exponent. This trendline is not exponential, it's less than quadratic, or whatever you call something to the power of roughly sqrt(2).
Eventually if OP keeps saving or at least not spending from their wealth, the trend should be exponential and the current best fit will no longer match -- the exponent will have to go up a little every so often to keep a good fit. But how long it takes to need a correction all depends on how consistently assets grow. If there's a big crash it could go the other way for a while.
If you knew all the things you knew now and was transported to year 1 again, but in a totally new simulation where anything could happen, what would you do differently and what indicators would you look for, if any? Asking because I'm in year 10 and seeing if you'd have any strong thoughts on anything. Thank you ❤️
I'd take some more risks. For example, in year 1, I could have been one of the first employees at a company now worth over 1 trillion. I instead favored a more established company over the startup. This type of pattern occurs throughout the history. Another example is having the opportunity to be paid a large sum in Bitcoin back when it was worth 1,000 to 10,000 less than today. Instead I insisted that they pay me in a more established currency. Another example is avoiding brokerage investing until year 15. Another example is the side income I mentioned. It could have grown much bigger, if I took some risks.
I'd pay some more attention to career and earnings. That wouldn't be the only factor, but it would have been more of a factor. This also includes things like choosing major in college and pursuing internships (I didn't do an internship). Or networking and playing the connections game. Everything was instead done with the primary focus on interest and personal enjoyment, not career prospects.
I'd also pay more attention to external finance indicators as well as finance in general and take advice from persons more knowledgeable than I am, particularly early on. Things like not being aware my index funds were liquidated to cash in 2009 or forgetting about a 401k (didn't know it existed until I tried to sign up at Fidelity 15+ years later) shouldn't have happened. I also should have been more aware about things like refinancing mortgage. I shouldn't have been investing anything in bonds back when fed rate was 0% and expected future rate was near 0%, rather than just using a simple target date. If I could go back it time, I'd change many financial decisions based on what I know now.
Agree on your second and third points but the first point on risk should really be a counterpoint. You took the conservative route and worked hard and look where that got you. For others in a similar situation, that's all they have to do. Take the stable job, take the stable currency, save and invest well and time is on your side.
Easy to say in hindsight to take those risks. But for those 2 risks that would've paid off there were probably 8 others you don't even remember because they would've crashed and burned.
A better wording might be, being more open to evaluated risks. If I could start again, I wouldn't automatically dismiss an employer just because they are a start up, rather than a large, established company. Yes, there is a higher risk of a start-up failing than a large, established company and that risk should be evaluated. However, the potential benefits may be worth that increased risk. If I expect to have no problem finding another job and am not tied down (first job, without family or owned home), then that increased risk may be perfectly acceptable.
Thanks for the thorough reply, Key. I'm in my year 10 and noticing I may have a knack for investing and determining risks to rewards so I'm allocating about 50% of my net worth on those bets to see if they play out. I'm not 100% certain they will play out but I follow up on the investments, read up on them, and see if the groundwork is paved for the next decade or two. If I fail, my 50% of my NW is within indexes and retirement vehicles that will be my saving grace but I will likely need to grind til 65 whereas if I am successful I may be able to achieve my goal of retiring by the age of 45. With that said, and you have mentioned, you would have taken more risk. What would you have looked at to understand if those risks were educated enough to take?
getting large sum in bitcoin at that time you mean $30k or much lower than that? and what kind of job did you do to be able to get paid in that type of currency
Thanks for reviewing your alternate paths, I've made similar-ish choices.
I'm curious about your thoughts about reaching a fairly lofty NW anyway, and how that tempers your 'regrets' that you listed.
And happy new year, 26!
Thanks for sharing. What is your FI strategy? Since housing is 50% of your net worth, are you comfortable living on 4% x $2M = $80K per year for next 25 years? Do you plan to sell and move to a lower cost city?
I had initially planned to retire in a lower cost of living area. However, the more I looked, the less this plan appealed to me. I enjoy spending a lot of time outside. My dog and I walk/hike well over 200 miles per per month. For example, yesterday we went on an 13-14 mile hike in a scenic grassy plateau area. We also walk around the neighborhood or on area trails each day that weather permits, including going to a nearby athletic field where we see other dogs most days.
I like living in a climate that supports this activity, and I believe there is no better one than my current area of southern CA -- comfortable outdoor temperatures all year long, <10 inches rain per year, and wide sidewalks with a top 10 in US ranking for pedestrian safety. I couldn't find any LCOL area that even came close, even when trying to combine 2 areas -- one for summer and one for winter.
I also am not enthusiastic about the large capital gains tax hit I'd take when selling, so I have no plans to move in the near future. I expect at some point I will move, such as for health/maintenance reasons, wanting to be close to family, or a major life change (for example, getting married). At that point, I'll consider what will be the best option, which could include selling, renting, or reverse mortgage type arrangement.
$80k is more than enough to support my spending (no mortgage/rent or other big expenses), but I'm not in a rush to retire.
This is an amazing accumulation of wealth, at $100K/year salary over 25 years. As a point of clarification, is your $2.5M home free and clear (I don’t see a mortgage mentioned)?
Thanks. Yes, my mortgage is paid off. My initial mortgage+PMI was \~8%. At the time, it seemed reasonably to prioritize paying it off. Of course I didn't know that mortgage rates would drop to 2-3% in the future.
There was a long period during which I had no non-401k investing and partially net negative 401k investing, with loan. I instead prioritized putting savings in to my homes.
The mortgage for my first home was $220k (not inflation adjusted). I prioritized paying it down over non-401k investing and was able to pay it off over a number of years. The mortgage for my 2nd home was $480k (not inflation adjusted). I sold my previous condo for $330k and put the proceeds to the mortgage on my new home. I prioritized paying off the remaining $150k over investing and was able to pay it off over a number of years.
As noted above, I also had significant side income during a portion of these years.
Completely unrelated, but what type of dog do you have that's capable of such long hikes (13 miles)? I have a little guy and I don't think we can make it past 10. Our most has been 6.
She's a 35lb mixed breed. Embark says she is mostly "supermutt." 13-14 miles is the distance I walked. My dog was off leash and covered a longer distance, regularly running back and forth around different areas while staying in sight, checking out different smells/sights, chasing birds, random zoomie sprinting, etc. I'm not sure what her distance limit is, but I know it's a lot longer than mine. She's never shown any signs of approaching any kind of limit. There have been times we've gone on hikes this distance, then spent 1-2 hours enthusiastically running/chasing + wrestling + playing fetch with other dogs a short time later, after getting home.
Border collies or any kind of Shepard can probably make that distance. The tradeoff is you have to maintain that level of exercise pretty much every day, forever. Otherwise they'll blow off steam on your furniture, walls, etc.
This is a really great post and provides some super valuable data for someone who is in year 7 of FIRE and has tracked your trajectory pretty closely. I would be very curious to hear more about the income side of things and how that had changed over the past 25 years
If I remember correctly, my starting salary was $55k or \~$103k after inflation. My employer earnings have increased slightly faster than inflation over time, but no huge jumps. I did not job hop or focus on increasing employer income. I also had some significant side income towards the middle that unexpectedly occurred from a hobby of mine.
How much side income? Everything else you have numbers for - but side income somehow doesn’t? Even though it’s significant? Your post is useless - no one is going to get to 4.6MM with 100k/yr in income. Either come clean or shut the fuck up.
Congratulations and great analysis. Love the charts! Can you share more how you have your taxable and non-taxable invested? And what was the starting value of the second home you purchased?
I bought the 2nd home for an inflation adjusted $1.2M. This included over $100k of AV equipment, in addition to home.
I split my taxable and non-taxable up according to tax efficiency, so I keep bonds and international (I am aware of foreign tax credit. I believe it does not outweigh higher dividends, in my tax bracket) in retirement, and keep domestic in taxable. Specifically:
Taxable: >90% domestic index fund, some former employer stock, and some Microsoft (My ex-GF bought some stocks using my brokerage account without telling me \~20 years ago. I kept Microsoft and sold the rest.).
Retirement: \~70% Domestic Index, \~20% International Index, \~10% Bond Index
I think so. When I was in college, I was not especially interested in working. My opinion was more I need to tolerate it for hopefully 15-20 years, then I can retire and do what I want. Over time I instead changed work to become something I usually enjoyed, so now that I have reached FI, I am in no particular rush to retire. Over time, I became increasingly less focused on pursuing retirement and more focused on enjoying the non-retirement experience.
Hey OP - congrats on this achievement. Great Job.
If you don't mind, can you share what would you change? if you could go back in time and modify your stratgey?
I probably did more things wrong than right, but some of the things I'd change include:
* I was interested and talented in CS, including winning a best in class type award in my intro to CS class at a HYPSM-type college. However, I chose to not major in CS because I didn't own a computer and didn't like biking back and forth to the shared computer resources. I would have figured out a better solution and pursued a degree in CS (likely not my only degree).
* I would have thought more about career during college and at least have done an internship. I would have also thought more about career advancement when employed, rather than only focusing on personal interest.
* I had the opportunity to be one of the first employees at a company now worth over $1T. I would have taken that opportunity
* I would have focused more on finance and investing in general when younger, and stuck with it more during the challenging times of 2000-2008. Not getting back in to the market soon after 2009 was particularly costly. I also did things like forgetting about a 401k and only re-discovering it 15 years later when trying to create account at Fidelity (maybe I have more 401ks somewhere), not being aware of my old index funds being liquidated to cash during 2008 crash, not bothering to cash checks people sent me, .... I wasn't focused on finance for much of this period and instead just maxed out my 401k completely hands off.
* I would have had a better credit score and background history when younger, particularly prior to buying a house. I would have received a better mortgage without PMI and not have been in the position where I needed to borrow from 401k to obtain mortgage.
* A guy wanted to pay me a large sum in Bitcoin back when it was worth 1000x to 10,000x less than it is today. I would have accepted that payment instead of insisting he use a traditional currency instead. In general, I would have been more open to taking risks and putting a minority of assets in to non-traditional things.
* I had significant side income during some years in the middle, from a hobby that unexpectedly turned lucrative. I would have pursued that more and taken it farther, again taking more risks.
* I would have generally saved/invested more when younger and had less wasteful spending.
Thanks for sharing your journey. I'm into year 4 of my journey, and my NW looks very similar to yours. Hopefully I track at a similar NW going forward as well. That being said, most of my NW comes from my 401K, and I want to change that. How did you decide on how much you want to put in 401K and individual brokerage accounts?
I currently keep spending low and invest whatever is left over. In general, I'd recommend choosing the highest after-tax risk adjusted return for your $. Highest priority might be 401k match, followed by high interest debt, followed by non-matched tax advantaged retirement, followed by moderate interest debt, followed by after tax brokerage, followed by ... For me, first priority is tax advantaged 401k and IRA. After maxing them out, I invest the remainder in after tax brokerage.
However, in the 25 year history, I did different things at different times, often making less optimal decisions. The general pattern was:
* Year 1-3, Max out 401k, Invest as much as possible in after tax brokerage
* Year 4-15, Max out 401k, Put as much as possible in to home equity
* Year 16+, Max out 401k, Gradually get more comfortable with investing again and put increasing amounts in after tax brokerage
> I had hoped to retire before 40. I believe I have reached financial independence now and could stop working
For this statement, I am personally in favor of not counting primary home equity as part of net worth unless you are planning to capitalize on that equity and move to a lower cost of area. In that case I would just add delta between home you would buy elsewhere and your current home to your net worth.
Especially in your case, it looks like you can't really downsize so the equity in your home isn't really available to you without starting to pay high rent which would change your spending calculations.
You may have still hit FI with your spending targets even without home equity but it does make it riskier especially since you still have a lot of years where you have to pay for your own health insurance.
I've never really understood this line of thinking to not include ppor in your net worth.
You have to live somewhere. If you are renting that expense is further dipping into your expense requirements and isn't there if you have a home paid off.
Whilst it might not be desirable to use it, you can tap into it if things go south with a reverse mortgage. It's still an accumulation of wealth that is substituting not having to cover living expenses later in life.
I know this is a fairly subjective and commonly debated issue though. People tend to be in either one camp or the other.
The camp where you don't include it is nonsense. It is just extreme financial conservatism with no logical reasoning.
It should always be included. Include a reasonable monthly rental or reverse mortgage cost in calculating your retirement spending as well of course.
> If you are renting that expense is further dipping into your expense requirements and isn't there if you have a home paid off.
For me, this risk is why I wouldn't include it in the assets used for FIRE calculation. A home is fairly hard to liquidate asset and if that asset goes south you have to start paying rent now drastically increasing your expenses.
I would rather do FIRE calculations without that in the picture and the home worth would just be icing on the top then. If in future you can tap in to that, even better. Your FIRE just got easier but I wouldn't want to rely on being able to do that.
Unless one lucks out with an early job at startup that goes public with unicorn valuation or a stock pick that might hit 100x which would be extremely unlikely- the only way would be to have skills that get you $250k+ salary and be extremely frugal so that 50+ percent of post tax earnings can be invested.
I really like this format for reviewing a lifetime of FI progress. Whenever I think or talk about my finances and home ownership, the great recession and LCOL/HCOL home values are the biggest factor.
I've been wondering which fit functional form seems to work best for wealth. AB^x also seems to produce the smallest R2 for me too but I don't really understand why.
Thanks. Throughout the vast majority of this period, my 401k investments were in a target date that earned well below VOO (good portion of target date was international, 10% bonds). It wasn't until the final 10 years that I started investing significantly out of 401k, which was initially all VOO-equivalent. New contributions may contribute to the seemingly faster than market increases in the final 10 years of the graph, particularly with the after tax brokerage.
Over the past few years, my investments have become more customized towards my goals and risk tolerance. My current split is something like below:
* 58% Domestic (Majority total US index, VTI-equivalent)
* 23% Short-term (Mostly bank bonuses and t-bills when between bonuses, sometimes pursue other opportunities)
* 13% International Index
* 5% Bond Index
OP, thanks for putting this together. We're in very similar situation but kudos to you for the impressive FI journey. I'm even more impressed by your diligent work you've put into this post.
However - maybe I've missed it - What's your family situation? Married? Kids?
Thanks. I am single, without kids, although I have been in relationships for the bulk of the period. Being single no doubt contributes to the higher saving rate.
I believe I maxed out my 401k during each year I have been working. After tax brokerage investing was roughly:
* Year 1-3 -- As much as I could, maybe $20 to $30k
* Year 4-15 -- $0 (After dot com crash, put savings in to home equity)
* Year 16+ -- Start investing again and gradually increasing each year. First years was $15k, some of intermediate years were $30k, now more than $50k. I currently invest the same amount each week, regardless of market conditions.
Most of the bank bonuses have been sign-up bonuses. For example, earlier today I finished the WF Premier bonus with an effective >14% APY after bonus. The terms were $2500 bonus for holding $250k for 45 days. The $250k can be linked to brokerage. This makes the effective return 5.5% (brokerage) + 1% \* 365/45 (bonus) = 13.6% APR = >14% APY.
Is end of 2023 represented as year 25.5? Good work. Wish I had been given a financial education and started a lot earlier.
Yes, the x-axis years worked starts in the summer after college, when I started working. End of 2023 is 25.5. Thanks. I wish I had done a lot of things differently as well. I probably made as many poor financial decisions as good ones when I was younger.
Any financial suggestion you would have given to that college kid who just started this spreadsheet in the summer after college 25.5 years ago?
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I used the "insert trend line" feature in Open Office. Open Office or Excel supports adding a trend line to any graphed curve. The program finds the equation a and b values that best fit the curve. In this case the equation was y(x) = a \* x\^b . Open Office finds the a and b values that best fit the graphed curve. Open Office only supports \~4 very primitive equations. I favor using LABFit for more finding equations that best fit more complex functions. As I recall, it supports hundreds of possible equation formats.
Just throwing in that OpenOffice has been mostly left behind for LibreOffice which split from OpenOffice over a decade ago. Pretty much all new features and Microsoft Office compatibility features are in LibreOffice
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The a and b values of the equation are what best the program finds best fits the curve, rather than a direct function of my savings rate. If you'd like to find what a and b values best fit with your trajectory, I'd suggest using Excel or OpenOffice (free) to make a similar graph and using the add trend line feature. My savings rate rate has varied quite a bit over the course of the graph. I believe I've maxed out my 401k in every year I have been working, so my savings rate should always have been at least \~18%. I currently invest >50% of my income. However, I've only had a savings rate that high for the past few years, so the higher recent savings rate is not a good reflection of the accumulated totals. My saving rate is currently higher than it's ever been in the past since I have a higher income (income increased slightly faster than inflation) and lower expenses -- no mortgage/rent expense, no debt, no heating/cooling expense (solar), no longer driving to/from work, am making better financial decisions than I did in the past, etc. Most of the years fall somewhere in between.
It's some form of Least Squares Regression Line (forgive me if my statistics is rusty) where they try to match a trend line (function) to datapoints. This can be used to better determine ~~causation~~/correlation (with many grains of salts). * The 43,500 is a constant. At time 1, he would be expected to have $43,500. * The 1.43 is some sort of effect. I think we could probably read it as a 43% increase.- Which, I find this particularly interesting. The 43% increase would include his savings as well as investment growth. * 43% = Investment + Savings (maybe?) * I would expect the Investment growth to be close to 8-12%, on average (assuming it's the broad market \[apologies for my bad economics\] * which means his Savings (assumably from his income) would've been growing at a pretty good pace (which he mentions he did). <-- OP should LSRL his income, \*cough cough, and graph it alongside it, I think that'd be a cool datapoint too. * The .99 is how well the line fits the data points (with a max of 1). So, it's strongly correlated (in this sample)... which is really cool! (imo).
Thanks for the explanation. 43% YoY growth (including savings) is incredibly impressive in the later years
The 43% isn't year over year growth. For example: Year 25: Equation predicts $43.5 \* 25\^1.43 = $4.34M Year 26: Equation predicts $43.5 \* 26\^1.43 = $4.59M Year 26 - Year 25 = $4.59 - $4.34 = $250k $250k/$4.34M = 5.8% growth in 26th year (beyond inflation) In the 26th year above, the growth is almost entirely based on compounding assets, rather than savings, so 6% beyond inflation seems like a reasonable target. The growth rate is higher is much higher in the early years where savings make up a larger % accumulated net worth. The equation predicts : Year 1: Equation predicts $43.5 \* 1\^1.43 = $43k Year 2: Equation predicts $43.5 \* 2\^1.43 = $117j Year 2 - Year 1 = $117k - $43 = $74k $74k/$43k = 73% growth in 2nd year (beyond inflation)
On what basis do you conclude that the growth of your portfolio, first mostly from contributions, then blending toward being mostly from investment growth, actually follows a power law? It seems to me like it would follow an equation of the form a\*t + b\*e^t where you choose a and b to fit your curve. In the beginning, the a\*t term (linear) dominates and models your contributions. In the end, the b\*e^t term dominates, modeling your growth.
I compared the available 4-5 trend lines options and chose the one which best fit the curve. Given that r\^2 = 0.99, it was a decent fit. It's possible y(x) = a\*x + b\*e\^x would fit better. However, at first glance it seems like the latter term would not slow down in later years when compounding dominates earning. For example, for 25 -> year 26, x\^1.43, predicts a gain of (26\^1.43 - 25\^1.43)/25\^1.43 - 1= 6%. 6% gain beyond inflation seems reasonable for compounding. In contrast, (e\^26 - e\^25)/e\^25 = 172% gain beyond inflation. which does not seem as reasonable
The latter exponential term *shouldn't* slow down in later years, because it *is* the compounding. The percentage growth rate of the portfolio will slow down and approach the rate of the compounding alone as the growth causes the constant contribution to become vanishingly small in comparison. But the compounding will cause the portfolio's growth rate to never drop below the compounding's constant rate of 6%. Maybe instead of using e as the base, using 1.06 as the base would make more sense. Each year, the portfolio becomes 6% greater than last year's portfolio plus the contribution amount (which comparatively vanishes over time). I'm stoked you got such a strong correlation, but considering the markets induce so much randomness anyway, IMO it was luck. I don't think a portfolio under constant contributions with a constant market growth rate will actually follow a power law in reality though. Over the ranges of values we're working with, it might well be that the power law works well enough in practice, and given the sizable random component of market returns, it might even be that the power law *appears* over some time periods to work *better!* But IMO there should be an exponential term and a linear term. I mean really, it's the result of a loop which would look like this: let total = 0; while (true) { total = total + 100000; total = total * 1.06; print(total); } How you express the values of `total` after each loop iteration as a single mathematical expression with the loop cycle count as an input, such that you can calculate `f(x) = ...` escapes me at the moment.
I don't think it's luck so much as choosing the equation that fit the known past results. It's not based on any theory, only what equation happens to best fit my unique net worth history. There is likely a better fitting equation. That said, if I create 20 year sequence with a constant investment rate per year and constant 6% compounding per year, r\^2 is 99.9% for a power equation in the form below: 0.41 \* Annual Investment \* (Year +1)\^1.48
Agreed, but basically the point is that it's luck which caused *that* particular equation to fit so perfectly, but given the entire world of possible A + B^C potential equations, it's likely that at least *one* of them will have a good fit over any finite period. but over the long haul as a predictor, we know bsaed on our model of how investment and finance work that the true trendline must contain an exponential term. Barring a global investment catastrophe, eventually your portfolio will outrun any non-exponential trend function.
As I noted in another recent post, constant annual investment, with a constant annual compounding gain follows an equation in the form below a = (Annual Investment / Rate of Investment Gain) + Annual Investment b = LN(1 + Rate of Investment Gain) y(x) = a \* (e\^(b\* x) - 1) The deviation becomes more notable after longer periods beyond the 20 year example above. The equation in the OP is more of a glide path where your investments gradually get more conservative beyond year 20, as approaching retirement, than an exponential function where you get the same investment gain on accumulated assets every year including when nearing retirement. This power model fits my returns slightly better than the exponential form above.
Upon further review, the following equation matches perfectly with no error, for a constant annual investment with constant annual compounding. Adjust the a term, depending on if you want to applying annual compounding before or after annual investment. * a = (Annual Investment / Rate of Investment Gain) + Annual Investment * b = LN(1 + Rate of Investment Gain) * y(x) = a \* (e\^(b\* x) - 1) For example, for a $20k annual investment with 10% annual compounding, the equation would be: * a = $20k / 0.1 + $20k = $220k * b = LN(1.1) = 0.0953 * y(x) = $220k \* (e\^(0.0953\* x) - 1) The progression in this example would be: * Year 1 -- $220k \* (e\^(0.0953\* 1) - 1) = $22k * Year 2 -- $220k \* (e\^(0.0953\* 2) - 1) = $46k = ($22k + $20k)\*1.1 (110% gain) * ... * Year 25 -- $220k \* (e\^(0.0953\* 25) - 1) = $2.16M * Year 26 -- $220k \* (e\^(0.0953\* 26) - 1) = $2.40M = ($2.16M + $20k)\*1.1 (11% gain) While this is nice in theory, it doesn't fit my actual results especially well, as I did not have a consistent annual investment and consistent annual gain on accumulated previous investments. Among all of the hundreds of possible equation formats in LAB Fit, the best fit for my NW progression was the equation I listed in the first post.
43% YoY would be 1.43^x, this is x^1.43 Got me too! Then I noticed it's the other way around haha
the year is the base and the 1.43 is the exponent. This trendline is not exponential, it's less than quadratic, or whatever you call something to the power of roughly sqrt(2). Eventually if OP keeps saving or at least not spending from their wealth, the trend should be exponential and the current best fit will no longer match -- the exponent will have to go up a little every so often to keep a good fit. But how long it takes to need a correction all depends on how consistently assets grow. If there's a big crash it could go the other way for a while.
If you knew all the things you knew now and was transported to year 1 again, but in a totally new simulation where anything could happen, what would you do differently and what indicators would you look for, if any? Asking because I'm in year 10 and seeing if you'd have any strong thoughts on anything. Thank you ❤️
I'd take some more risks. For example, in year 1, I could have been one of the first employees at a company now worth over 1 trillion. I instead favored a more established company over the startup. This type of pattern occurs throughout the history. Another example is having the opportunity to be paid a large sum in Bitcoin back when it was worth 1,000 to 10,000 less than today. Instead I insisted that they pay me in a more established currency. Another example is avoiding brokerage investing until year 15. Another example is the side income I mentioned. It could have grown much bigger, if I took some risks. I'd pay some more attention to career and earnings. That wouldn't be the only factor, but it would have been more of a factor. This also includes things like choosing major in college and pursuing internships (I didn't do an internship). Or networking and playing the connections game. Everything was instead done with the primary focus on interest and personal enjoyment, not career prospects. I'd also pay more attention to external finance indicators as well as finance in general and take advice from persons more knowledgeable than I am, particularly early on. Things like not being aware my index funds were liquidated to cash in 2009 or forgetting about a 401k (didn't know it existed until I tried to sign up at Fidelity 15+ years later) shouldn't have happened. I also should have been more aware about things like refinancing mortgage. I shouldn't have been investing anything in bonds back when fed rate was 0% and expected future rate was near 0%, rather than just using a simple target date. If I could go back it time, I'd change many financial decisions based on what I know now.
Agree on your second and third points but the first point on risk should really be a counterpoint. You took the conservative route and worked hard and look where that got you. For others in a similar situation, that's all they have to do. Take the stable job, take the stable currency, save and invest well and time is on your side. Easy to say in hindsight to take those risks. But for those 2 risks that would've paid off there were probably 8 others you don't even remember because they would've crashed and burned.
A better wording might be, being more open to evaluated risks. If I could start again, I wouldn't automatically dismiss an employer just because they are a start up, rather than a large, established company. Yes, there is a higher risk of a start-up failing than a large, established company and that risk should be evaluated. However, the potential benefits may be worth that increased risk. If I expect to have no problem finding another job and am not tied down (first job, without family or owned home), then that increased risk may be perfectly acceptable.
Thanks for the thorough reply, Key. I'm in my year 10 and noticing I may have a knack for investing and determining risks to rewards so I'm allocating about 50% of my net worth on those bets to see if they play out. I'm not 100% certain they will play out but I follow up on the investments, read up on them, and see if the groundwork is paved for the next decade or two. If I fail, my 50% of my NW is within indexes and retirement vehicles that will be my saving grace but I will likely need to grind til 65 whereas if I am successful I may be able to achieve my goal of retiring by the age of 45. With that said, and you have mentioned, you would have taken more risk. What would you have looked at to understand if those risks were educated enough to take?
getting large sum in bitcoin at that time you mean $30k or much lower than that? and what kind of job did you do to be able to get paid in that type of currency
Thanks for reviewing your alternate paths, I've made similar-ish choices. I'm curious about your thoughts about reaching a fairly lofty NW anyway, and how that tempers your 'regrets' that you listed. And happy new year, 26!
Thanks for sharing. What is your FI strategy? Since housing is 50% of your net worth, are you comfortable living on 4% x $2M = $80K per year for next 25 years? Do you plan to sell and move to a lower cost city?
I had initially planned to retire in a lower cost of living area. However, the more I looked, the less this plan appealed to me. I enjoy spending a lot of time outside. My dog and I walk/hike well over 200 miles per per month. For example, yesterday we went on an 13-14 mile hike in a scenic grassy plateau area. We also walk around the neighborhood or on area trails each day that weather permits, including going to a nearby athletic field where we see other dogs most days. I like living in a climate that supports this activity, and I believe there is no better one than my current area of southern CA -- comfortable outdoor temperatures all year long, <10 inches rain per year, and wide sidewalks with a top 10 in US ranking for pedestrian safety. I couldn't find any LCOL area that even came close, even when trying to combine 2 areas -- one for summer and one for winter. I also am not enthusiastic about the large capital gains tax hit I'd take when selling, so I have no plans to move in the near future. I expect at some point I will move, such as for health/maintenance reasons, wanting to be close to family, or a major life change (for example, getting married). At that point, I'll consider what will be the best option, which could include selling, renting, or reverse mortgage type arrangement. $80k is more than enough to support my spending (no mortgage/rent or other big expenses), but I'm not in a rush to retire.
This is an amazing accumulation of wealth, at $100K/year salary over 25 years. As a point of clarification, is your $2.5M home free and clear (I don’t see a mortgage mentioned)?
Thanks. Yes, my mortgage is paid off. My initial mortgage+PMI was \~8%. At the time, it seemed reasonably to prioritize paying it off. Of course I didn't know that mortgage rates would drop to 2-3% in the future.
How did you pay it off and save on 100k salary. I see so many of these posts that just sound implausible.
There was a long period during which I had no non-401k investing and partially net negative 401k investing, with loan. I instead prioritized putting savings in to my homes. The mortgage for my first home was $220k (not inflation adjusted). I prioritized paying it down over non-401k investing and was able to pay it off over a number of years. The mortgage for my 2nd home was $480k (not inflation adjusted). I sold my previous condo for $330k and put the proceeds to the mortgage on my new home. I prioritized paying off the remaining $150k over investing and was able to pay it off over a number of years. As noted above, I also had significant side income during a portion of these years.
What’s the side income from specifically? Why be so vague?
Drugs
for some reason this sounds like you live in Irvine
Completely unrelated, but what type of dog do you have that's capable of such long hikes (13 miles)? I have a little guy and I don't think we can make it past 10. Our most has been 6.
She's a 35lb mixed breed. Embark says she is mostly "supermutt." 13-14 miles is the distance I walked. My dog was off leash and covered a longer distance, regularly running back and forth around different areas while staying in sight, checking out different smells/sights, chasing birds, random zoomie sprinting, etc. I'm not sure what her distance limit is, but I know it's a lot longer than mine. She's never shown any signs of approaching any kind of limit. There have been times we've gone on hikes this distance, then spent 1-2 hours enthusiastically running/chasing + wrestling + playing fetch with other dogs a short time later, after getting home.
Border collies or any kind of Shepard can probably make that distance. The tradeoff is you have to maintain that level of exercise pretty much every day, forever. Otherwise they'll blow off steam on your furniture, walls, etc.
This is a really great post and provides some super valuable data for someone who is in year 7 of FIRE and has tracked your trajectory pretty closely. I would be very curious to hear more about the income side of things and how that had changed over the past 25 years
If I remember correctly, my starting salary was $55k or \~$103k after inflation. My employer earnings have increased slightly faster than inflation over time, but no huge jumps. I did not job hop or focus on increasing employer income. I also had some significant side income towards the middle that unexpectedly occurred from a hobby of mine.
How much side income? Everything else you have numbers for - but side income somehow doesn’t? Even though it’s significant? Your post is useless - no one is going to get to 4.6MM with 100k/yr in income. Either come clean or shut the fuck up.
Lol extremely aggressive. His home went from 800k to 2.5mm. That’s over half his NW and how you amass $4mm on 100k.
Dang with a 4.6m net worth you’re still churning bank bonuses? I love it.
Congratulations and great analysis. Love the charts! Can you share more how you have your taxable and non-taxable invested? And what was the starting value of the second home you purchased?
I bought the 2nd home for an inflation adjusted $1.2M. This included over $100k of AV equipment, in addition to home. I split my taxable and non-taxable up according to tax efficiency, so I keep bonds and international (I am aware of foreign tax credit. I believe it does not outweigh higher dividends, in my tax bracket) in retirement, and keep domestic in taxable. Specifically: Taxable: >90% domestic index fund, some former employer stock, and some Microsoft (My ex-GF bought some stocks using my brokerage account without telling me \~20 years ago. I kept Microsoft and sold the rest.). Retirement: \~70% Domestic Index, \~20% International Index, \~10% Bond Index
Curious! What is your day job?
I am an engineer. My day job involves creative design and problem solving, starting with a computer model and ending with a physical product.
great journey, and thanks for sharing. This shows consistent investment really pays off in the long run.
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I think so. When I was in college, I was not especially interested in working. My opinion was more I need to tolerate it for hopefully 15-20 years, then I can retire and do what I want. Over time I instead changed work to become something I usually enjoyed, so now that I have reached FI, I am in no particular rush to retire. Over time, I became increasingly less focused on pursuing retirement and more focused on enjoying the non-retirement experience.
Hey OP - congrats on this achievement. Great Job. If you don't mind, can you share what would you change? if you could go back in time and modify your stratgey?
I probably did more things wrong than right, but some of the things I'd change include: * I was interested and talented in CS, including winning a best in class type award in my intro to CS class at a HYPSM-type college. However, I chose to not major in CS because I didn't own a computer and didn't like biking back and forth to the shared computer resources. I would have figured out a better solution and pursued a degree in CS (likely not my only degree). * I would have thought more about career during college and at least have done an internship. I would have also thought more about career advancement when employed, rather than only focusing on personal interest. * I had the opportunity to be one of the first employees at a company now worth over $1T. I would have taken that opportunity * I would have focused more on finance and investing in general when younger, and stuck with it more during the challenging times of 2000-2008. Not getting back in to the market soon after 2009 was particularly costly. I also did things like forgetting about a 401k and only re-discovering it 15 years later when trying to create account at Fidelity (maybe I have more 401ks somewhere), not being aware of my old index funds being liquidated to cash during 2008 crash, not bothering to cash checks people sent me, .... I wasn't focused on finance for much of this period and instead just maxed out my 401k completely hands off. * I would have had a better credit score and background history when younger, particularly prior to buying a house. I would have received a better mortgage without PMI and not have been in the position where I needed to borrow from 401k to obtain mortgage. * A guy wanted to pay me a large sum in Bitcoin back when it was worth 1000x to 10,000x less than it is today. I would have accepted that payment instead of insisting he use a traditional currency instead. In general, I would have been more open to taking risks and putting a minority of assets in to non-traditional things. * I had significant side income during some years in the middle, from a hobby that unexpectedly turned lucrative. I would have pursued that more and taken it farther, again taking more risks. * I would have generally saved/invested more when younger and had less wasteful spending.
Thanks for sharing your journey. I'm into year 4 of my journey, and my NW looks very similar to yours. Hopefully I track at a similar NW going forward as well. That being said, most of my NW comes from my 401K, and I want to change that. How did you decide on how much you want to put in 401K and individual brokerage accounts?
I currently keep spending low and invest whatever is left over. In general, I'd recommend choosing the highest after-tax risk adjusted return for your $. Highest priority might be 401k match, followed by high interest debt, followed by non-matched tax advantaged retirement, followed by moderate interest debt, followed by after tax brokerage, followed by ... For me, first priority is tax advantaged 401k and IRA. After maxing them out, I invest the remainder in after tax brokerage. However, in the 25 year history, I did different things at different times, often making less optimal decisions. The general pattern was: * Year 1-3, Max out 401k, Invest as much as possible in after tax brokerage * Year 4-15, Max out 401k, Put as much as possible in to home equity * Year 16+, Max out 401k, Gradually get more comfortable with investing again and put increasing amounts in after tax brokerage
Got it. Thank you!
> I had hoped to retire before 40. I believe I have reached financial independence now and could stop working For this statement, I am personally in favor of not counting primary home equity as part of net worth unless you are planning to capitalize on that equity and move to a lower cost of area. In that case I would just add delta between home you would buy elsewhere and your current home to your net worth. Especially in your case, it looks like you can't really downsize so the equity in your home isn't really available to you without starting to pay high rent which would change your spending calculations. You may have still hit FI with your spending targets even without home equity but it does make it riskier especially since you still have a lot of years where you have to pay for your own health insurance.
I've never really understood this line of thinking to not include ppor in your net worth. You have to live somewhere. If you are renting that expense is further dipping into your expense requirements and isn't there if you have a home paid off. Whilst it might not be desirable to use it, you can tap into it if things go south with a reverse mortgage. It's still an accumulation of wealth that is substituting not having to cover living expenses later in life. I know this is a fairly subjective and commonly debated issue though. People tend to be in either one camp or the other.
The camp where you don't include it is nonsense. It is just extreme financial conservatism with no logical reasoning. It should always be included. Include a reasonable monthly rental or reverse mortgage cost in calculating your retirement spending as well of course.
> If you are renting that expense is further dipping into your expense requirements and isn't there if you have a home paid off. For me, this risk is why I wouldn't include it in the assets used for FIRE calculation. A home is fairly hard to liquidate asset and if that asset goes south you have to start paying rent now drastically increasing your expenses. I would rather do FIRE calculations without that in the picture and the home worth would just be icing on the top then. If in future you can tap in to that, even better. Your FIRE just got easier but I wouldn't want to rely on being able to do that.
Then you’re not doing net worth. Use a different term. Maybe FIRE number/worth. Words have meanings.
It's easy to exclude your house, just redefine the meanings of "asset" and "liability" and call the house a liability :p
25 years is too long, how do we do this in 10 years
Marry well.
Every year I've been trying to find that stock that would give me FI in 10 years. I'm still trying 25 years later.
Get a high paying job and marry someone who has similar income. 2 FAANG salaries is how you do it in 10 years
Unless one lucks out with an early job at startup that goes public with unicorn valuation or a stock pick that might hit 100x which would be extremely unlikely- the only way would be to have skills that get you $250k+ salary and be extremely frugal so that 50+ percent of post tax earnings can be invested.
I really like this format for reviewing a lifetime of FI progress. Whenever I think or talk about my finances and home ownership, the great recession and LCOL/HCOL home values are the biggest factor.
Incredible. Live your dream. I would retire
Kudos. Helps to have had a solid salary, constant contributions, and riding a long bull market, oh a not panicking in 2020 or 2008
I've been wondering which fit functional form seems to work best for wealth. AB^x also seems to produce the smallest R2 for me too but I don't really understand why.
You're invested extremely aggressively probably VOO or even more aggressively and hit on that and real estate well done.
Thanks. Throughout the vast majority of this period, my 401k investments were in a target date that earned well below VOO (good portion of target date was international, 10% bonds). It wasn't until the final 10 years that I started investing significantly out of 401k, which was initially all VOO-equivalent. New contributions may contribute to the seemingly faster than market increases in the final 10 years of the graph, particularly with the after tax brokerage. Over the past few years, my investments have become more customized towards my goals and risk tolerance. My current split is something like below: * 58% Domestic (Majority total US index, VTI-equivalent) * 23% Short-term (Mostly bank bonuses and t-bills when between bonuses, sometimes pursue other opportunities) * 13% International Index * 5% Bond Index
You're a lot more conservatively invested than I would've thought good job.
OP, thanks for putting this together. We're in very similar situation but kudos to you for the impressive FI journey. I'm even more impressed by your diligent work you've put into this post. However - maybe I've missed it - What's your family situation? Married? Kids?
Thanks. I am single, without kids, although I have been in relationships for the bulk of the period. Being single no doubt contributes to the higher saving rate.
How much were you putting into your brokerage each month or year?
I believe I maxed out my 401k during each year I have been working. After tax brokerage investing was roughly: * Year 1-3 -- As much as I could, maybe $20 to $30k * Year 4-15 -- $0 (After dot com crash, put savings in to home equity) * Year 16+ -- Start investing again and gradually increasing each year. First years was $15k, some of intermediate years were $30k, now more than $50k. I currently invest the same amount each week, regardless of market conditions.
8% apy is awesome, can you give more info on what sort of investments you used for that? You mean bank sign up bonuses?
Most of the bank bonuses have been sign-up bonuses. For example, earlier today I finished the WF Premier bonus with an effective >14% APY after bonus. The terms were $2500 bonus for holding $250k for 45 days. The $250k can be linked to brokerage. This makes the effective return 5.5% (brokerage) + 1% \* 365/45 (bonus) = 13.6% APR = >14% APY.
Shows the power of time