Devil’s Advocate – Antishay
Though I wholeheartedly agree with Shanti’s goals, I feel the need to counter her post and subsequent counter arguments (in video form!) about her retirement. Primarily, I am concerned with her flexible definition of retirement. Specifically she states (emphasis hers) that
I define complete financial freedom as having enough money in savings invested so as to be able to live off of the investments in perpetuity and theoretically never need to work again in my life. I would like to reach this goal by the time I’m 35, or sooner, which I think will be very possible.
Later she says
I intend to keep working well past my retirement.
Fair enough, her definition of retirement is merely the ability to never have work again. If she wants to retire by age 35 and we assume she will live to 100, she will need 65 years worth of expenses covered. From an algebraic standpoint I will define this as 65E.
The raw numbers are a bit lower. $40k net income including all side projects. Living expenses of $17k per year and $15k – $23k in disposable income (none currently saved, all debts repaid by April or May). She assumes a 10% rate of return on her money.
In four years (at $15k/year) I will have invested only $60k and earned a measly $14k in interest.
Taking a look at this in Excel, I found she is multiplying interest at the beginning of the year. Nothing wrong with this but it would require the lump sum be deposited by January 1 to accrue a full year’s worth of interest. IE, on year two she plans on making $3,000 worth of interest ($15,000 * 2 * 10%). A more conservative method would estimate interest for only the principal that is available at the beginning of the year and expect that the rest would be gradually saved up. Reality is probably a happy medium between the two.
TEN years down the road (again, assuming no more than $15k/year invested) I will have invested $150k and earned roughly $100k in interest!
Using her approach I get a total of $259,431 ($150,000 saved and $109,431 in interest). Using the more conservative approach drops it down to $239,061 – over $20k less. Crunching more numbers I determined that her target goal is retirement in 13 years with a nest egg of just under $400k. At this point she could have earned up to $32k less in interest depending on how quickly she begins earning interest.
The Numbers
So how long will this last? She estimates using 5% of it per year but says she could withdrawal up to 10%. The game at this point is her rate of return vs her rate of use. Withdrawing 5% is fine if she still makes 10% from the stock market. She can indeed survive into perpetuity. However, the market is not a sure thing as recent events have demonstrated. This is why many people begin converting to less risky assets such as bonds as they get closer to retirement.
Another issue is if she takes out more (as a percentage) than her rate of return, she will run out of money. As an example, if she took out 10% and also made 10%, she would be in debt at age 62, all else staying the same.
Conculsions
Though she does not have a rock solid financial model, I believe she will be fine since I think she has simply repurposed the word retirement to fit her needs. Other bloggers call it FU money – the ability to say anything you want to anyone even if that person gives you your paycheck. Her video entry dances around the topic and how she plans to continue working after her retirement but will not rely on steady income. In other words, she plans to be financially free at age 35 with a quarter to a half-million dollars giving her the leverage to support that idea.
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Comments
Comment from Shanti @ Antishay
Time April 10, 2008 at 11:15 pm
Ahaa – last point… I wouldn’t “be in debt” at 62 if I drew exactly hat I was earning in interest, only “out of money.” 
Comment from Shanti @ Antishay
Time April 10, 2008 at 11:11 pm
It’s interesting to hear your reactions
In the end my plan is relative, and not based in anything solid but predictions for the future, which can never be trusted 
You emphasize that my investment could be up to $32k less in that first period, but so what? When dealing with big numbers, smaller ones like that really don’t matter too much.
All the calculated figures aside, this is still assuming I only contribute $15k a year until I stop working, when in reality I think a few years down the road I will be throwing $20k to $40k into savings, and so I’ll end up with more than planned.
And working in the arbitrary numbers that we don’t know, if I buy a house – which I didn’t do a good job explaining – out of my retirement money (say, when I’m 28) and it takes out half of my savings, I will then be living without a house payment (or one that takes a year or two to pay off entirely only), and which point I’ll only have that much more to save. And although it will set me back a few years in my retirement due to lost time with compound interest, I’ll still meet my goal within a few years.
It could be said that I’m using the term “retirement” loosely, but I’m not dumb
I do intent to take a year or two off and just completely do nothing or only what I want to do. And THAT is definitely retirement.
The only reason I know I’ll work beyond that point of freedom is because I’m one of those irritatingly upbeat Type A personality people who thrives coming up with business plans and being entrepreneurial somehow. So that’s why I’ll probably work some point after the financial freedom date – because it makes me happy and that’s what retirement is for.