Wednesday, February 5, 2020

Published February 05, 2020 by with 0 comment

Is Investing Worth It?

I tried to capture how I think about money in a simple tool.
A common dilemma I hit is 'will I enjoy this money now more, or should I invest it to get more later?' A key factor in those decisions is exactly how much the money will be worth in the future.

I tend to think of it in terms of retirement salary. What monthly income will I get 20 years from now from \$5000 today?

To determine this, I wrote a FIRE calculator. If you aren't familiar, FIRE stands for 'Financial Independence, Retire Early'. The basic logic for this calculator is:
• take investment inputs
• take S&P 500 and inflation data
• apply investment inputs to every period in the S&P 500 historical data
• multiply the resulting balance by the withdrawal rate to get a monthly income
This gives you a distribution of results that exactly matches the historical distribution. The tool is below:

Current Amount (\$)
Yearly Deposit (\$)
Years to Retirement
Inflation Ajusted?

To interpret this...the median line is the median historical performance. 50% one spans 25% to 75%. 25% of historical periods performed better than the top of the 50% region. 25% of historical periods performed worse than the bottom of the 50% region.

As an example, try starting with \$10,000 and investing \$10,000/year for 20 years and checking 'Inflation Adjusted?'. You get a median of ~\$1200/month. What that means is that if you made this investment using every possible historical starting point, you'd end up with ~\$360,000 in real (inflation-adjusted) dollars. A 4% withdrawal rate from \$360,000 gives you 0.04*(1/12)*360,000 or ~\$1200/month.

50% of all historical periods yielded monthly equivalents of \$820 to \$1800/month.

How do I actually use this?

Consider this reasonable situation...
• I dislike my current house
• It will cost me ~\$4,000 over the next two years to move
• Is it worth it?
Assuming I retire in 20 years, that \$4,000 now is worth ~\$53/month in retirement. I can then decide if my happiness from the better living situation is worth \$53/month in perpetuity.

One more use...

Imagine you're considering an annuity. The terms are:
• invest \$1,000,000 now
• wait 10 years