ERE indicator

Simple living, extreme early retirement, being wealthy, ...
jacob
Site Admin
Posts: 11335
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: ERE indicator

Post by jacob » Mon Oct 17, 2016 12:43 pm

Okay, here's a parsimonious suggestion that should be both easy to calculate, hard to game, and more useful than SWR.

To compute, take each independent source(*) of dollar income and divide it by total expenses. If the number is >1, reduce to 1. Add them together.

In my case, my sources are
1) Portfolio * 0.03 (you can pick whatever here as long as it's consistent) / spending > 1
2) ERE book sales / spending > 1.
3) Blog ads / spending ~ 0.75
4) Misc sales of old books, etc. on amazon / spending ~ 0.1

Resulting in an indicator value of 1+1+0.75+0.1 = 2.85

This indicator rewards diversification over concentration because attempts to "go over 1" are not rewarded. By only measuring the demonstrated ability to generate dollar income, it also avoids potential gaming and endless debates/self-delusion about the imputed value of cooking your own dinner as well as the "well if I really would, I bet I could sell my services for $X", etc. Thus the indicator also encourages demonstrated and ongoing ability to produce market value relative to one's [market] expenses.

(*) Obviously a source of debate. For example, should a RE portfolio of two houses be counted as one source or two sources? Similarly, if you split your portfolio, do you get to count it as several independent sources. I'd say that's a discretionary choice. In the spirit of trying to become what we measure, I'd suggest not doing that.

FBeyer
Posts: 1067
Joined: Tue Oct 27, 2015 3:25 am

Re: ERE indicator

Post by FBeyer » Mon Oct 17, 2016 12:57 pm

You're making 5000$ on ads? Holy moly!
I thought catering to a bunch of cheap skates and money grubbers wold yield no money at all. I'm never going to become a businessman, I have NO idea about what people are willing to spend money on...

7Wannabe5
Posts: 5124
Joined: Fri Oct 18, 2013 9:03 am

Re: ERE indicator

Post by 7Wannabe5 » Mon Oct 17, 2016 2:45 pm

@jacob: I like the new metric. One question I would have would be how to account for expenses when you are in start-up mode in a new endeavor which you hope will tend towards either income increase or expense reduction? Some examples of what I mean might be, the purchase of a textbook which you intend to study in order to learn a skill which you hope to market, or the cost of renting an auger to sink fence-post holes in your garden from which you hope to feed yourself, or the cost of fitting out the van you will live in at savings over current rent,or the tile you purchased for your new rental real estate unit?

workathome
Posts: 1300
Joined: Sat Jun 29, 2013 3:06 pm

Re: ERE indicator

Post by workathome » Mon Oct 17, 2016 3:05 pm

I think your indicator makes sense, though some might try to argue for counting each asset class separately with regards to the portfolio, but I think you're right to count it as one because of the high levels of correlation.

So REITs you wouldn't break out separate, but an apartment building you would, right? Owning a McDonald's franchise location could be 1, but owning MCD not... etc.

Did
Posts: 667
Joined: Mon Apr 01, 2013 7:50 am

Re: ERE indicator

Post by Did » Mon Oct 17, 2016 3:39 pm

It's interesting but I'm not sure it's useful beyond a certain point. Surely at some stage looking at hobbies or activities from a commercialisation perspective becomes old and, like having enough water stored, you just get on with life without regard to more cash.

jacob
Site Admin
Posts: 11335
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: ERE indicator

Post by jacob » Mon Oct 17, 2016 5:45 pm

@7wb5 - The same way as in any SWR calculation.

BeyondtheWrap
Posts: 563
Joined: Thu Jul 22, 2010 3:38 pm
Location: NYC

Re: ERE indicator

Post by BeyondtheWrap » Mon Oct 17, 2016 9:29 pm

jacob wrote:Okay, here's a parsimonious suggestion that should be both easy to calculate, hard to game, and more useful than SWR.

To compute, take each independent source(*) of dollar income and divide it by total expenses. If the number is >1, reduce to 1. Add them together.

In my case, my sources are
1) Portfolio * 0.03 (you can pick whatever here as long as it's consistent) / spending > 1
2) ERE book sales / spending > 1.
3) Blog ads / spending ~ 0.75
4) Misc sales of old books, etc. on amazon / spending ~ 0.1

Resulting in an indicator value of 1+1+0.75+0.1 = 2.85
Interesting, so someone who FIRE'd on their investment income and no longer works would get the same score as a non-ERE-minded person who relies on a job for income.

FBeyer
Posts: 1067
Joined: Tue Oct 27, 2015 3:25 am

Re: ERE indicator

Post by FBeyer » Tue Oct 18, 2016 12:12 am

Which makes sense given that ERE strives for redundancy and systems thinking compared to other FI approaches.

SilverElephant
Posts: 130
Joined: Mon Jul 22, 2013 12:40 pm

Re: ERE indicator

Post by SilverElephant » Tue Oct 18, 2016 12:13 am

BeyondtheWrap wrote: Interesting, so someone who FIRE'd on their investment income and no longer works would get the same score as a non-ERE-minded person who relies on a job for income.
I think that was excluded by "independent" source of income (for a moment I was wondering that myself...)

IlliniDave
Posts: 2601
Joined: Wed Apr 02, 2014 7:46 pm

Re: ERE indicator

Post by IlliniDave » Tue Oct 18, 2016 4:51 am

Hmm. Would the pure calculation exclude things like pension and SS income? Today I'd be at 2.0 (if swr=4%). If I ER'd tomorrow I'd drop to 1.0, but in 2.5 years I'd be up to about 1.92 when I start the retirement annuity, then when I take SS (assuming present promised benefit) I'd be up to 2.92. Well, a little less actually since inflation would erode the non-cola annuity somewhat. The reason I ask is it's hard to see me on the same order of magnitude as jacob for an ERE score given I'm operating almost completely within the traditional salaryman paradigm except for my having learned to disconnect my level of happiness/contentment from my financial "standard of living" more so than most of my cohort.

I'm not counting my human capital which could easily add 0.25-0.4 or so from a simple minimum wage job.

I am highly dependent on the USA remaining intact, reasonably politically stable, the perseverance of it's financial markets, and some amount of ongoing economic strength. Good or bad, I'm an optimist regarding those things.

I'm not arguing for allowing different asset classes to count independently in the formula, but I do have somewhat of a "bucket" philosophy hovering in the background of my investing philosophy. I keep a running tab on what I think I'll spend from my assets/income from assets over my retirement horizon. That amount I mentally place in a relatively conservative allocation. The rest I allocate aggressively for growth. Using simple numbers if I expect to spend from investments/investment income 40% of my ER-day balance, I put the other 60% in stocks. The 40% I might split into 25% stocks and 75% bonds/cash, leaving me at about 70/30 when everything is smushed back together (which coincidentally is the target of my current glide path). So the 40% (25% stock, 75% bonds/cash) is intended to cover my spending while the 60% (100% stocks) acts as a giant emergency fund and the seed capital for legacy. There's an amount of correlation between the buckets, but an amount of redundancy also.

The point of that proceeding paragraph is to say that although I'm unashamedly a salaryman, it's not because I'm too dim to understand the philosophies of ERE. It's mostly that I'm lazy and find it easier to adapt my current position to my future needs rather than trying to start over to build a better mouse trap.

7Wannabe5
Posts: 5124
Joined: Fri Oct 18, 2013 9:03 am

Re: ERE indicator

Post by 7Wannabe5 » Tue Oct 18, 2016 8:13 am

BeyondtheWrap said: Interesting, so someone who FIRE'd on their investment income and no longer works would get the same score as a non-ERE-minded person who relies on a job for income.
Maybe there has to be some subjectivity regarding whether or not, or to what extent, you are content with your current lot, which likely has more to do with autonomy than happiness in the moment? For instance, when Jacob was happily working full-time at his job in the realm of finance, his Indicator Value might have been closer to 3.85?

IlliniDave said: The point of that proceeding paragraph is to say that although I'm unashamedly a salaryman, it's not because I'm too dim to understand the philosophies of ERE. It's mostly that I'm lazy and find it easier to adapt my current position to my future needs rather than trying to start over to build a better mouse trap.
Right. Just like how I am too lazy, or deeply unmotivated, to go out and get a full-time salaryman job and work it for 5 years to fund an investment account towards SWR, when I am already 88.2% content with my semi-retired slacker mish-mash of current activities.

Another thought I had was that it really isn't too difficult to judge the independence of various income sources. For instance, I would rate income from retail arbitrage of toys and household goods on Amazon as being only 50% independent from income from sales of rare books on Amazon, but I would rate income from selling popular mass market paperbacks at a flea market as being 75% independent from income from sales of rare books on Amazon. Sort of like a rough formula where you are multiplying sets of (skill-tool-knowledge) through variety of markets with variety of suppliers of energy/consumable-resources-supplies/parts. So, I would think that this sort of rule of thumb could also be applied to the wide realm of financial investment activities. For instance, I would think that a person who has gained deep knowledge of the worldwide pork belly market, and actively/profitably/happily day trades in that realm to the extent of earning 50% current spending, but also has completely passive income from treasury bills that covers 100% of current spending could have a Indicator Value of nearly 1.5. If I was engaged in investing in those sort of markets, that is how I would consider my situation.

Another example would be that both Ego and I consider dumpsters to be a resource site. However, because our skill-tool-knowledge sets are only partially over-lapping, we could be simultaneously working the same dumpster, but pulling mostly different stuff to use for different purposes or to sell on different markets. Once Ego and I are already going to the trouble (engaging in the fun!) of working a dumpster full of interesting discards, we will of course choose to glean some items for personal use and social barter, as well as income production. For instance, I might pull 3 books I know have value, 1 DVD I am interested in watching, 1 sweater I think my daughter might like, and 10 cardboard boxes for sheet-mulching my garden. OTOH, Ego might pull 1 book on bicycle touring (which I know is not worth re-selling) he wants to read, some back-packing equipment I do not know how to value, a sweater that would fit his wife but not my daughter, and 10 cardboard boxes for shipping from the dumpster. If there existed some individual whose skill-tool-knowledge base and personal-lifestyle-preference-social-circle-consumption was a combination of mine and Ego's then that individual could glean twice as much value from the same dumpster.

So, it's like the average American might have a boat in their garage and some notion of their share of access to the national park system, which they intend to make more use of when they are retired, but there are also all sorts of other resources they don't even know that they already have that they can make use of when they are retired if they are intelligent, creative and frugal. For instance, I do not (yet!) count my share of fish in the Detroit River as a resource towards reducing my high-quality protein food budget, but that is just because I do not have even basic-competence fishing skills or tools, and I have not yet chosen to obtain and make use of them on a regular basis. But, since you do have fishing skills and you like to use them and intend to use them in your retirement, if I were you, I would add a calculation for likely expense reduction due to personal consumption of fish and providing smoked fish as Xmas presents.

jacob
Site Admin
Posts: 11335
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: ERE indicator

Post by jacob » Tue Oct 18, 2016 8:22 am

@workathome - Yes, I would classify by method. E.g. REIT, stocks, bonds, ... are just numbers/trading papers, so they're all the same one method. A RE rental is a pile of bricks that requires caretaking and one picks up rent checks ...

@Beyond - Yes, that was intentional.

@SE - No, independent just means independent from each other. I did think of excluding job income, but then there would be no way to telling the difference between no-income and job-income which is surely better.

@iDave - I would include a pension or SS are separate methods as well. All the score really indicates is the number of different methods. It doesn't say anything about "how far apart they are" because that would require a different measure. I suppose the consumer side could also be handled better. I'll see if I can come up with something there. I would very much prefer to avoid having to weight any term.

Fish
Posts: 518
Joined: Sun Jun 12, 2016 9:09 am

Re: ERE indicator

Post by Fish » Tue Oct 18, 2016 9:22 am

@Jacob: My initial reaction was such a calculation does not account for the quality of the income source since everything is equally weighted. However, pursuit of quality (security) is a reaction to perceived scarcity (which here is not intended in a pejorative sense, instead referring to the individual’s perception of the relative cost of improving security of existing income vs. starting a new income stream). Something like K-selection vs. R-selection as it pertains to income sources.

This is an improvement on SWR but I’m still not sure this is exactly what we want to be measuring. As motivation to increase diversity of income sources, it is fantastic and encourages people to move from Level 1 E-ER to Level 2 FIRE thinking. I see it as more of a tool for helping to eliminate scarcity mindset more than it is an actual indicator of ERE-ness. As such, it’s still susceptible to being gamed, particularly investments (where one can diversify into stocks, bonds, real estate, annuities…). I don’t think this is the kind of diversification we want to encourage, so maybe we just cap all investment income at 1. At this point a person is already financially independent and the emphasis should be on increasing skills, not investments.

7Wannabe5
Posts: 5124
Joined: Fri Oct 18, 2013 9:03 am

Re: ERE indicator

Post by 7Wannabe5 » Tue Oct 18, 2016 1:21 pm

@Fish: One thing I instantly liked about this metric is that it can also serve to push an individual who is severely on the rabbit/r/flaneur end of the spectrum towards the K/tortoise/salaryman side of the see-saw simply because it is a metric which more rabbits would use. Like if Jacob wrote a new book based on this metric, the forum would soon be flooded with ENTPs. IOW, it would tend towards encouraging flaneurs to push more of their activities up to the level of providing value to others (earning income), rather than just reduced costs and/or enhanced quality of life for themselves, which will tend towards forcing us to spend more time towards mastery on fewer projects. However, the denominator of spending hovering under every activity/method/verb-towards$ would continue to promote frugality as primary mission.

bryan
Posts: 1043
Joined: Sat Nov 29, 2014 2:01 am
Location: mostly Bay Area

Re: ERE indicator

Post by bryan » Tue Oct 18, 2016 2:24 pm

jacob wrote: To compute, take each independent source(*) of dollar income and divide it by total expenses. If the number is >1, reduce to 1. Add them together.

In my case, my sources are
1) Portfolio * 0.03 (you can pick whatever here as long as it's consistent) / spending > 1
2) ERE book sales / spending > 1.
3) Blog ads / spending ~ 0.75
4) Misc sales of old books, etc. on amazon / spending ~ 0.1

Resulting in an indicator value of 1+1+0.75+0.1 = 2.85
Interesting that it accommodates debt (so you could get like a -3). So simple.. I wonder if it really works out across the population? Do you have in mind a way to validate it's "usefulness" i.e. agreeing with the relative scores across some fabricated, varied fake personas?

jacob
Site Admin
Posts: 11335
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: ERE indicator

Post by jacob » Tue Oct 18, 2016 2:29 pm

@bryan - I'm kinda hoping that those with a journal will eventually incorporate it in their fancy graphics plots and track their number over time. This will both give us some numbers as well as some consensus/best practices for how to use it. I'm trying to keep it as simple and flexible as possible. I could make it more accurate in terms of mirroring Patero pay-offs by incorporating square-roots and logarithms, but that would destroy a lot of [mathematical] flexibility.

vezkor
Posts: 96
Joined: Tue Mar 22, 2016 9:51 am

Re: ERE indicator

Post by vezkor » Tue Oct 18, 2016 2:57 pm

Your ERE indicator should be a score out of 8760. X/8760 where x is the number of hours per year you spent doing what you wanted to do. 8760 minus x would necessarily be the number of hours you DIDN'T spend doing what you wanted to do... like working a stressful job or placating relatives.

Early Retirement Extreme.

retirement
re·tire·ment
noun
1. the action or fact of leaving one's job and ceasing to work.
"a man nearing retirement"
the period of one's life after leaving one's job and ceasing to work.
"he spent much of his retirement traveling in Europe"

work
wərk
noun
1. activity involving mental or physical effort done in order to achieve a purpose or result.
"he was tired after a day's work in the fields"
synonyms: labor, toil, slog, drudgery, exertion, effort, industry, service; More
2. mental or physical activity as a means of earning income; employment.
"I'm still looking for work"
synonyms: employment, a job, a position, a situation, a post;

I'm not part of the internet police that demands you must never work for an income ever again to be considered "retired", but I like acknowledging that there is positive, happy, I-want-to-be-doing-this work and there is negative, this sucks, I-only-do-this-for-paychecks work.

If your entire life is the first kind of work + whatever other enjoyment you design into your life, your score is 8760/8760.

In this way, ERE becomes much more of a philosophy (how do I get happy with life?) and less a collection of tactics. If you hate sleep, for example, you're not getting a perfect score! Maybe there's something in your life that needs to be redesigned to get more freedom hours in a year. Just my perspective. :)

Spartan_Warrior
Posts: 1680
Joined: Fri Dec 02, 2011 1:24 am

Re: ERE indicator

Post by Spartan_Warrior » Tue Oct 18, 2016 3:08 pm

Vezkor, I agree with you, except I would extend it from hours per year to hours per lifetime. That gives the advantage to those who manage to escape or avoid the doldrums earlier in life. Obviously either of these metrics are much less practical to accurately record than what Jacob proposed, but they are also more meaningful to me personally. (And it is something I tend to admire and respect more than the number of income sources or certainly SWR.) An "Early... Extreme" escape from work is no small factor, at least in terms of what draws me to this, but that's just my opinion, and I don't claim to see the whole elephant.

vezkor
Posts: 96
Joined: Tue Mar 22, 2016 9:51 am

Re: ERE indicator

Post by vezkor » Tue Oct 18, 2016 3:51 pm

I like that, S_W. It reminds me of my grandpa who always jokes that his goal is to outlive everyone he went to school with. So far so good! He seems very happy at 81, and I can't remember a time he wasn't smiling. He's definitely winning, in my opinion.

User avatar
Ego
Posts: 4270
Joined: Wed Nov 23, 2011 12:42 am

Re: ERE indicator

Post by Ego » Tue Oct 18, 2016 4:08 pm

Okay.... now we're getting somewhere.

-One hour of spectating/watching/video games only counts as .5 hours toward the measure.
-Activities that are know to shorten your life deduct from your count. Thirty minutes of smoking = - .5 hours
-Activities that are know to lengthen your life count as double time.
-Any time in the flow-state triples
-Sex quadruples.

What else?

Post Reply