Creating an FI Calculator — Burning down your FI goals
Updated: Feb 28, 2020
One of the concepts I deal with at work is the Agile methodology of software development. It’s one of most popular approaches to software development in use at tech companies these days.
For those uninitiated, think of it as breaking up your work into what is usually set as 2-week blocks. Your team/dept at work will decide what to focus on doing, planning and communicating accordingly, so that everyone is in-sync and works toward a shared goal.
Each task will be given an estimated point-value, and a graph, called the burndown chart like the above will then be plotted out. This graph adds up all the points for every task we’ve committed to in the next 2 weeks.
The idea is that as each task gets completed, the point-value associated with that task will be subtracted, giving us the remaining point-value for ‘what’s left to be done’. As the team hammers at away more tasks, the trend-line goes down until we run out of points (meaning all work completed) or the two week deadline is up.
The burndown chart is great for a few reasons:
it breaks down a huge block of work into smaller, discrete tasks,
it allows me to think through the work required for each task thoroughly,
it gives me a clear end goal to achieve (i.e. clear all tasks)
there is a sense of accomplishment as each task gets completed
What I love most about the burndown chart, though, is this:
It provides a snapshot as to whether our progress is going as planned, and if not, informs us of this ahead of time so that we can re-prioritize and refine our goals iteratively.
So what does this has to do with our FI goals?
For the income investors, most of us would already have a target in mind we want to achieve in order to attain financial independence. That’s great! The question, though, is this: based on our current investing model (i.e. how much to invest per month, etc), will we achieve FI before we ‘retire’?
I recently read an interesting article that talks about how compound interest takes off in flight after your first $100k. But what piqued my interest the most is how the tables in that article show the number of years it takes for each subsequent $100k to be achieved.
What I noticed is that, assuming that you’ve already achieved $100,000, and if you continue to save $10,000 annually at 3%, you’ll take 30 years to achieve $700,000 net worth.
While that doesn’t sound like a small figure (and it isn’t), the not-so-good news is that if you’re 30 years old now, you’ll only achieve this goal around 60 years old.
Going back to the question a few paragraphs above, I then wondered: based on what I’m currently doing, how would I know if I’ll be able to achieve my goal by target? Am I even doing things correctly? Because I don’t want to find out at 50 years’ old that I won’t be able to retire until 80!
That’s where our burndown chart comes in. Of course, the de-facto burndown chart wouldn’t be able to tell us all the information we need… in fact, it may not even be useful (after all, most fianance-related charts like to show things moving UP, not DOWN!).
We’ll need to use both in concert to create something that’s useful for us.
After dinner today I created a very simple excel spreadsheet which allows you to calculate this.
Let’s consider this scenario: with a starting portfolio value of $40,000, and if I intend to contribute an annual average of $24,000 (i.e. $2k monthly), how many more years do I need to work before I can get a passive income of $5,000 (in today’s value)?
Annual average inflation: 3%
Average dividend yield: 5%
The answer? 33 years. That makes I’ll be able to retire with a monthly dividend of $7623.17 (in future value) by the time I am 66 years old. Not too shabby, but I’ll have to do something to bring down the retirement age! Ideally I’d like to stop work by 50 latest, so that I can have a decade or two to just enjoy life without imposing on others.
Of course there are a lot of ifs assumed (and some not even taken into account) in the formulas used, but that gives us at least a very very rough sense of what to expect of things to come. A very very rough sense is always better than no sense! And hopefully, a rude shock and a call into action.
It’d be well worth your time to experiment and play with the variables, to find a good balance between reality and the ideal.
Best-case scenario, the numbers should give us a sense of comfort that what we’re doing is correct. Worst-case scenario, we get a loud wake-up call to actually start doing something to make the calculations a lot more decent.
It’s also a good time to reflect on what you really want. For instance, do I really need $5,000 in monthly dividends to sustain my expenses? If I can manage my own expectations to live with lesser, then I will reach financial independence earlier.
It will always be part of an ongoing conversation either interally (with yourself) or with your spouse (who can also be contributing toward this plan).
I find that burning down my FI goals in such a manner helps me concretely and continually review and refine my plan.
You can download the latest copy of the calculator by clicking here.
Let me know if you spot any issues or have a more accurate formula to suggest. Have fun!