The FIER Calculator v1.1

A little explanation about my FIER (Financial Independence and Early Retirement) calculator.

This little spreadsheet was created, as I wanted a way to track my Increase in Net Worth, until I reached such a point that I reached that magical x25 number.

If you don’t know what the ‘x25 Rule’ is, it may be worthwhile checking out the post covering it here.

But, I decided to make it more complicated than that. Of course.

I decided I didn’t actually like the x25 rule as much as I liked. This came from the fact that not every part of your net worth will give you a 4% return on investment. Especially your home.

Despite my home making up a very large proportion of my net worth, it does not (and never will) make up a large proportion of my passive income. In fact, as it stands, it is making me 0% return on investment.

How is it different?

Most of the Financial Independence spreadsheets I have seen assume a 4% return on your net worth. As discussed above, this is not the case.

For my calculator, I wanted to be able to allocate different levels of returns depending on where the capital was invested.

For example, capital that is in the share market will, on average, on the long term, have a much higher return on investment that money that is sitting in a high interest bank account.

How it works.

Saving for retirement is all about habits, and this is how this calculator works.

With my FIER calculator, you simply enter into the assets spreadsheet, on a fortnightly basis, the amounts that are currently allocated to each of your asset ‘classes’. In here as well, you enter your expected return on that particular asset.

In the liabilities spreadsheet, enter where you owe money as well as the interest rate of each of these amounts.

From these amounts, the spreadsheet will automatically calculate the estimated passive income (from your assets) and passive loss (from your liabilities) which will be displayed in the passive income/loss tab.

The last thing you need to enter is your expenses for the fortnight. These are any expenses such as groceries, phone bills, car repairs: basically anything that isn’t interest on your debts.

The calculator takes all of these figures and:

  1. Calculates a rolling 12-month average for your passive income, earnings and your living expenses
  2. Calculates how much your savings have increased for the fortnight, and how much your savings have increased per fortnight on average over the past 12-months
  3. Based upon your average rate of saving, it calculates how long (in years) it will take for your passive income to cover your living expenses.

Why 12-months?

the truth is, I wanted to create a calculator that averaged out over a shorter time-frame (say 3-months) so you could track more recent improvement in your spending and earning habits. However, some large expenses (e.g. insurances, car rego etc.) only happen once a year and not including these may give an unrealistic view of your savings habits.

I could change my opinion on this in due course, and even as I am writing this I am sitting on the fence (for example, it may help in instilling new habits). I think in future iterations there will be a function combining the two so you can compare long-term and short-term savings habits.

How do I reach Financial Indpendence Sooner?

There are two main ways that this can be achieved, and they are easily accounted for in the FIER calculator.

  1. Save more (Spend less or earn more) – either way results in a greater increase in your net worth per fortnight and will get to to FI sooner.
  2. Invest in assets that have better returns – this is important, make your savings go to work for you by placing them in places where your returns are going to be higher that the average savings account

Because my FIER calculator makes it’s estimates by your rolling average of savings; you do not have to enter your earning into the calculator to make it work. It does all of it’s calculations based upon your savings habits and increasing Net Worth.

I have not included super in my calculations.

Although Super technically adds to your Net Worth; it’s not much good to you for early retirement when it’s sitting, inaccessible in your super account. Obviously if you want to be able to retire on the income generated from your investments, you cannot access the income from your Super Nest Egg until you reach the governments Super Maturation Age.

Sure, drawing down on your capital outside of super should be balanced out by the returns on your super fund.

With governments playing around with Super Rules, it’s not something I’d be willing to bank on. Who knows what might happen to the rules surrounding your super account in the future. I expect that the rules about who can access their super, how quickly you can draw down on these amounts, and how much it is taxed will be changed in the forseeable future and I don’t want to be reliant on it as my saving grace as I whittle away my savings outside of super.

Sure, there are arguments for and against including super in your calculations. Being the ultra-conservative pessimistic bean counter that I am who is increasingly suspecting of our governments ability to meddle with our ‘retirement nest eggs’ I just would rather be safe than sorry with my calculations.

Here it is.

v1.1 of my FIER calculator can be downloaded from here. Now, bear in mind that it is a work in progress, and I am having to relearn a crap load of excel commands as I’m building it, but more features will be added as I go.

Let me know what you think. Obviously it is a work in progress and there are plenty of limitations to the calculator (taxes for example).

But, it should prove as a good starting point.

FIER.

The x25 Retirement Rule

Members of the FIER club use an incredibly simple formula to determine how much capital we need for retirement: the ‘x25 rule’.

‘The x25 Rule’

How Does It Work?

It’s stupidly simple. It’s so simple a Kardashian with a calculator could work it out.

To calculate the approximate amount of capital that you need in order to retire; simply multiply your annual living expenses by 25. This is the average amount that you would need to retire on, based on an average investment return of 4% and your current living arrangements.

Capital Required = Annual Living Expenses x 25

A message to the haters: like the ‘i before e’ rule that was drilled into us since we first learnt to spell; this ‘rule’ is more of a guideline, and it is based upon a number of assumptions; namely:

  1. Your living expenses will remain the same over time and;
  2. An average 4% return on your investment

You say, “But I know I can better returns that that, that’s a pittance”

True, and you probably will get a better return on that by investing in Lego. But us FIERies like to be ultra-conservative; and I would prefer to have too many savings and too much passive income coming in from investments than having to go dumpster diving behind doughnut king living off stale doughnuts.

So that’s where the 25x rules comes from.

What about the ‘4% Rule’?

They are different sides of the same coin, so to speak.

The 25x rule and the 4% use the same underlying maths; they just are looking at different perspectives: pre- versus post- retirement.

The 25x rule is what we strive for when we are saving for retirement. That magical number that tells us ‘when you reach this amount, you are no longer tied to your job’.

The 25x rule and the 4% use the same formula

The 4% rule comes into effect after you ceremoniously hand in your resignation. Alas, now you have to rely on the income coming from those investments you so tirelessly saved up using the x25 rule. Assuming you managed to save 25x what your living expenses were, you should be able to live off the income from your investments. That is if you maintain an investment return of 4%. Incidentally (because maths, yo!) 4% is also the amount of your capital that you can safely spend annually without reducing the amount you have invested.

Based on assumptions, if you spend more than that 4% in a year, you could be eating into your capital and there will be less capital available to earn you an income the following year. This is something we desperately want to avoid, as this capital needs to sustain us for some time.

But, hey, I’m not there yet, so let’s worry about that when it comes (hopefully sooner rather than later).

‘It’s not enough; I don’t want to live like a uni student in retirement’

Neither do I.

Share houses, living off Ramien Noodles and Vegemite on toast, whilst you sweat it out at home because you can’t afford to turn the air conditioner on. Why would you willingly choose to live like that?

As aforementioned, the 25x rule is just a guide, and just because you reach this savings goal does not mean you have to give up work. But, by gese, it gives you peace of mind.

If you expect that your living expenses will increase when you leave the workforce, you can ‘budget’ for that (insert sickening feeling in the stomach as I write the word ‘budget’, yuck, yuck, double yuck). What I mean by that is, calculate how much you expect it will cost you to live per year when you throw in the towel, and multiply it by 25. This gives you the (approximate) amount of savings you will need to fund your new lifestyle.

I like my job, and I don’t want to retire

Great! Don’t!

But when you reach that magical x25 figure, at least you will have the choice to work instead of having to go to work just to make ends meet.

FIER gives you the CHOICE to work IF you WANT to

Is it only me that sighs in relief when I imagine being in that situation?

Not only that, but in the era of ‘sometimes employment’ and the so-called ‘gig economy’, if you lose your job you know that you can maintain your current standard of living without having to sell a kidney.

*Insert another sigh of relief as I imagine such a situation

The ‘RULE’ is not Set in Stone

You are free to make your own assumptions. In addition, some investments and items that add to your net worth are likely to earn less than others (take your house for example).

Oh deary me, now I’ve put the cat among the pigeons, now that little bit is going to stir some trouble. Especially for the majority of Aussies who absolutely adore property.

‘It only goes up’ they say.

‘Always safe in bricks in mortar’ says another.

Ok, so this conversation is probably more suited to another blog post.

The truth is, your home is NOT a money making asset. Well, at least I don’t look at it that way.

Why? You ask.

Well, first of all it does not earn me money (not yet atleast, although I’ll be renting out the spare room soon). In fact, it costs you money to maintain (this is why some people actually consider it a liability instead of an asset).

In addition, I like my house. It suits my lifestyle. And I don’t plan on selling it anytime soon.

To  reiterate: Your home is NOT an income generating asset!

Obviously it can make you something, (i.e. that housemate who will tell you that they ‘actually like lumpy milk’); but if you are like most people your home is not going to make you many dollarydoos (the official currency of Australia) anytime soon. Sure, it might have risen in value: but the only way to realise these capital gains is to sell it.

dollarydoos

This also helped me realise that not all assets are created equal in terms of income generation. Thus, I will be using the x25 ‘rule’ as a guide, and a guide only.

If you decide to use it, you should too.

FIER