Welcome! We hope everyone had a very Merry Christmas! Between the holidays when we are all still digesting all the excess calories there’s probably less demand for heavy-duty safe withdrawal rats simulations, so let’s do something on a lighter note today. I have always been wondering, what is it with MMM? Mr. Money Mustache started it all, of course. Now we have Mad Money Monster, Millenial Money Man, and Miss Millenial MD. Am I forgetting anyone? Even some obscure corporation up North, Minnesota Manafucaturting & Mining, jumped on that same MMM bandwagon, no doubt to leech off Pete’s fame. Obviously their lawyers were smart enough to put the label “3M” instead of “MMM” on their little post-it notes packages, otherwise, they’d probably get a nasty letter from the lawyers in Longmont. OK, just kidding about 3M. But still, it got me thinking, if I hadn’t picked “Early Retirement Now” as the blog name what would I have picked in the MMM universe? Easy!
Mr. Millionaire Math!
That seems to convey the essence of the blog pretty nicely, don’t you think? I also got a nice project for Mr. Millionaire Math: How much (or how little) effort and how much time would it have taken to become a millionaire by now? We’ll do some (light!) number-crunching on that topic today. And I’ll throw in some last-minute, end-of-the-year smart-money moves as well…
Mr. Millionaire Math
I built a simple Google Sheet to calculate how much one would have needed to save every month to reach exactly $1,000,000 with a 100% U.S. equity portfolio by November 30, 2017, conditional on a specific starting date. (I’ll update this once we have the December 2017 wrapped up!!!). Here’s the link:
There are only two inputs: The assumed expense ratio (annualized) for your stock index fund and the time horizon in months (which pins down the starting date). Here’s an example: a 240-month accumulation phase and a 5 basis points annual expense ratio:
And the sheet spits out the main results:
The calculation is done two different ways: Once assuming a fixed dollar amount (not CPI-adjusted). Investing exactly $1,638.03 per month in a large-cap U.S. equity fund (S&P500 benchmark) every month for 240 months starting on November 30, 1997, would have gotten an investor to $1m by November 30, 2017.
That assumption of fixed dollar amounts is a bit unrealistic, of course, especially over long horizons. It’s more common to let the investment contributions grow with inflation. According to the bottom panel, starting with only $1,327.44 per month back in 1997, then doing CPI-adjustments every month one would have grown the contributions to $2,035.11 in today’s dollars and the portfolio to a nice fat $1,000,000! That’s amazing because $24k in today’s dollars is probably close to the maximum annual contribution for most folks (employee’s contribution of currently $18,000 plus employer matching).
We can also display the amounts as a function of the number of years in the accumulation phase, see table below. Over a 28-year horizon, all you needed was $1,000 in savings per month. And again, that’s in today’s dollars, so the actual nominal amounts were much lower, especially in the beginning. If you achieved a million bucks within the FIRE time frame of 10-15 years, then you probably put in somewhere in the high $2,000s to over $4,000 per month. Sounds about right!
Over a “traditional” work career of 40-45 years, you’d have needed to save only $341.53 (for a 40Y horizon) all the way down to $228.58 a month for the 45-year horizon in today’s dollars. How amazing is that? Forgive me if I’m offending some people, but it almost sounds like that folks in their 60s now who haven’t reached at least a million-dollar nest egg must have done something wrong along the way. And that’s probably a combination of:
- Not starting early enough.
- Not saving enough, i.e., not even saving the meager $200-$300.
- Not staying the course, i.e., interrupting the retirement savings to pay for new cars, vacations, etc.
- Not investing aggressively enough, i.e., letting their savings sit in low-risk, low-return savings accounts, CDs, bond funds, etc.
- Raiding retirement plans after a job change.
- Getting scared when the stock market falls and selling everything right at the bottom of the bear market.
- Buying funds with a large expense ratio drag (which might have been an issue early on before Vanguard and Fidelity came along, I’ll admit that).
- And many more reasons, did I forget anything?
So, check out the Google Sheet (you’ll need to first download your own copy to edit this, so go to Menu -> Make a Copy) and please let me know if you like the sheet!
So much for the Millionaire Math. Let’s also just briefly mention a few last-minute smart money moves we took in the ERN family:
Smart Money Move 1: Prepare for the standard deduction next year!
With the standard deduction going up to $24,000 next year, we will no longer itemize in the 2018 tax year. That’s because we will hopefully have a mortgage for only a few more months next year before selling our apartment. So, in light of that, here’s what we did:
- Prepay the January Mortgage payment in December. Doing so, the interest charged for the mortgage payment in January already counts for the tax deduction in 2017. For us, this means an additional $1,500+ in tax deductions that we would have lost in the 2018 tax year. With a 40%+ marginal tax rate that’s about $700 in our pocket, simply for making a payment a few days earlier!
- Charitable deductions. Just like the mortgage interest, charitable donations will still be deductible under the new tax law. But donations are not effectively tax-deductible since we won’t itemize. Prepaying some of the charitable donations makes sure we get the tax-writeoff in 2017 rather than getting no deduction 2018. It’s like the IRS subsidizes our charitable mission! Of course, one way to accomplish this more elegantly is to use a Donor Advised Fund (which, I have to admit, I still haven’t done – long story!), see Physician on Fire’s excellent post on that. That way one can already pre-pay charitable deductions for multiple (all?) future years and get the full tax deduction in 2017!
- Prepay property taxes. OK, that doesn’t apply to us because even under the old tax law we couldn’t write off the property taxes due to the dreaded Alternative Minimum Tax (AMT). But if you are currently able to deduct your property taxes you might want to try to get your payment in before the end of the week!
Smart Money Move 2: Sign up for Google Project FI
We made the move from Verizon/iPhone to Google FI/Pixel 2 this month. There was a $100 incentive (expires December 31) for the Pixel 2 phone and a $20 incentive to sign up via a referral code. We now pay $35 for our two lines plus $10 per GB of LTE usage. Plus taxes and fees. We also have to pay off the two phones, but our old iPhones were acting up already and needed to be replaced anyway. So we were budgeting the $27 per phone per month whether staying with Verizon of switching to Google.
And the best part about Google: We pay only for the data we actually use. With so many free WiFi networks around us, we hardly use any data at all. In the 11 days of usage (counting Dec 16-17 as well when we already used the phones but before the official billing cycle began) we have used only 0.16 GB so far. I doubt we will ever go above 1GB in any full billing cycle, so why waste all that money on the expensive data plan with Verizon? And even better: the phone and data plan work worldwide, so that will come in handy when we do our extensive travel schedule next year after we retire, visiting the Caribbean, Europe, Asia and Australia and New Zealand. No need to shuffle around different SIM cards in different countries. It’s all included in the Google plan!
If you like to try out Google FI, we’d appreciate if you sign up using our Google FI referral link so we all get a $20 bonus. You can also use the general GoogleFI page, sign up and use the code 76T962 at checkout! Again, you get $20 and we get some extra cash to keep the lights on here at the ERN blog! Thanks in advance!
Smart Money Move 3: Tax Loss Harvesting
The end of the year is always a good time to screen our taxable investments for “under-water” tax lots. Why would anyone have tax losses after 14 monthly stock market gains in a row (counting December 2017 even with a few more trading days left – let’s hope I don’t jinx it)? Simple! We keep a number of bond funds in the Interactive Brokers account used for the options trading strategy (see this post for more details). And some of the bond fund tax lots are now underwater after the recent rise in yields (and probably also because lower marginal tax rates in 2018 make Muni bonds slightly less attractive). Tax Loss Harvesting lets us write off the roughly $1,200 in losses against ordinary income. So out with old funds and in with some new ones, of course, always making sure we buy funds with a slightly different focus and benchmark index, so we don’t violate the dreaded wash sale rule!
So much for today! We hope you enjoyed our ramblings this week (and throughout all of 2017). If you like the blog name “Mr. Millionaire Math” go ahead and use it – I haven’t trademarked it and the web address is still available, too! But make sure you give a shoutout to your old buddy ERN every once in a while!