Saturday, August 4, 2018

Revolver method

In an ideal world with perfect information, a man could know the exact dollar amount he would need to retire, work to save up said amount, then retire after he accumulated that amount. Unfortunately, we don't live in "shouldland" and we have to work the best with the information we have.

This is where the skill of forecasting/projecting comes into place. However, another term for it is just "long term planning". When it comes to retiring, you need to accumulate a certain amount of stuff/wealth large enough in order to stop working.

So to begin forecasting, we start off with estimating how long you will live. Herein is step one and we notice the fundamental flaw/challenge. No one can say for certain how long you will live. The best we can do is make an estimate.

But that is okay. When we forecast, we are not trying to get an accurate number. As well, no one man would make/rely on only one forecast. To do so would be like trying to hit a bulls eye from 1000 yards away. When we get better information or a shorter timeline, we have a better chance at getting closer to the target. It is important and useful to keep updating forecasts and plans.

When estimating your lifespan, you can compare yourself to the national average and try to gauge if you are in better or worse health than the average American but an even better predictor of how long you will live is how long your parents or grandparents lived.

In my case, I project my lifespan to last another 58 years so that is my starting point.

So, a very quick way to get a retirement figure is to take the average American living expenses and multiply it by how many years you expect to live.

If the average American living expenses seems way out of line with what you spend per year, then you would need some better data. While it can be very meticulous, you can pull all of your data and get an accurate figure of how much you spend per year. The more data you get, the better. Take your average living expenses per year and multiply it by your expected remaining life span and you get a great figure for how much money you need to shoot for.

Simply by doing these exercises, you put more thought and planning into your future/retirement than probably 90% of Americans.

However, this figure we arrive at still is not for certain. The estimated variables include remaining lifespan as well as average living expenses. So many factors will affect average living expenses.

First factor that comes to mind is inflation. Old men at my church tell me that hamburgers could be purchased for nickels, dimes, or quarters back when they were young. Today, the cheapest burger I could buy costs at least 1 dollar. 

..... To be continued tommorrow

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