SWR milestone record - Most important factors? / Recap of the progress towards ERE

[fips]

The SWR milestone record thread started on Fri, 27 Jul 2012.

The mutual understanding of the save withdrawal rate (SWR) should be something like:
Average monthly expenses * 12 / FI Assets = SWR

I am in awe by you fellow ERE-ers' progress!

True, the market has increased by about +100% since mid 2012 (there are also older numbers in the thread), but I am still amazed by the acceleration of the average drops in the SWR year on year by most forum members. I am nowhere near that.

What would you consider to have the most influence in your progress towards (financial) ERE (as measured in the SWR)?

Probably the general answer would be 1) decreased (or at least not increased) spending while 2) letting compounding effect work its magic.
But maybe my question could also be rephrased more specifically as "what changes after conciously deciding to go for early FI most accelerated your lowering in the SWR"?

[George the original one]

It's the three levers, in no particular order:
- saving rate (increase saving rate/decrease expenses)
- earnings rate (increase earnings)
- investment return (investments doing better)

Savings rate directly affects SWR because if you need less, then your SWR has just dropped. This is the one that ERE folks tend to focus on.

Earnings rate indirectly affects savings rate. The effect of higher earnings is felt more when your earnings are low because a 10% boost in after-tax earnings when your savings rate is 10% effectively doubles your savings rate. But when your savings rate is 50% and you get a 10% boost in after-tax earnings, it's only a 20% boost in your savings rate. Bogleheads try to focus on this and end up in the diminishing returns trap.

In the early years (say first 5-7), investment return matters very little. As you approach your ideal SWR, then the annual gains are huge (and losses are scary!).

[jacob]

To add:

In the late years, and particularly if you're in a runaway mode and your SWR is 1-2% or less, investment returns matters more than anything else. They'll be comparable or higher to what you could make in most "day jobs". Preservation of principal becomes a real factor because there's likely no way you can easily make up for losses with labor.---It could take years of work.

[wolf]

The most influence in my progress towards (financial) ERE (as measured in the SWR) is decreased spending/expenses, by increasing efficiency and reducing waste. Since starting my journey towards ERE I haven't seen huge compounding effect on investments, because I went into the market step-by-step in the last few years. Probably I am going to answer your question differently in 5-7 years when I have reached a FI/FF state and when I am "all in" with my investements.

[IlliniDave]

From where I started my ER journey, lowering ongoing spending had the biggest influence. For my back-of-the-envelope musings I use 3%, and that means that $1 a month of spending requires $400 be accumulated to support it. So dropping $1,000 a month in spending meant $400,000 less I had to accumulate, dropping $2,000 meant $800,000 less I needed, etc. Since the peak of my wastrel days I've lowered what I had to accumulate by ~$1M or more! And reduction in spending is proportional to SWR.

I wasn't thinking in these terms when I was younger, but I would say that out of the gate savings rate (what you set aside to invest) is probably the biggest factor in your control, although there will typically be a lag before you feel like you are gaining ground. It takes a while for compounding to work. In my first year of saving I might have accumulated on month's worth of living expenses. So my SWR at the time would have been astronomical. In the second year I probably cut it in half, but it was still huge. In the "midcourse" there is a period where the annual drops in SWR are still noticeable and you're getting into the ballpark of your target. Then near the end SWR change as a function of accumulation begins to slow (it moves like 1/x) and if there is still room to significantly lower your spending (future spending, really) that can begin to dominate. Along the way investment returns have the potential to increasingly contribute (depending I suppose on how one invests) but the results are not always predictable and it is a double edged sword.

[fips]

So, not surprisingly, reducing expenses initially has the highest impact and the importance of non-investment income is gradually replaced by investment income, with the caveat that input factors that you can control beat those that you can control less.

[jacob]

Yes .. consider a medium savings rate at 50%. This means you save 1 year's expenses for 1 year worked. Now if you get really really good returns at 10% ROI, it still takes ~7 years to double that 1 to 2 years of saving via compound interest. Then you have 2 years. But to become FI, you need over 30 of them. Of course over 7 years, you'd be saving 1 every year, but after 7 years only one will have doubled. On average, they're roughly halfway there, so you have about 11 years of savings after 7 years of work at 50%.

Thus compound interest is really only for people looking to work closer to two decades and also if and only if ROIs are pretty high. If they're not then the whole "getting rich via the magic compound interest"-plan fails because too little was saved. This is what is happening to various pension funds now.

[Seppia]

As others have said:

1- reducing the big expenses: If you are just starting, you probably live in a too big apartment, have too many cars and use them too much, and spend much more than you could on eating/drinking

2- making more money: an additional $100 in salary doesn't have the same effect as $100 of permanently eliminated expenses, but it definitely helps

3- rate of return: it starts to noticeably matter only once you have multiple years of expenses saved/invested

This is what is happening to various pension funds now.

Calpers looks to be in particularly awful shape, but so are many others.
I'm in italy now, and I am not sure the situation is THAT much better in the public funds here in Europe.
They for sure are based on more conservative calculations, but our demographics are SO bad (Italy's especially so) that I am starting to think my assumption of "assume you will never get a pension" is more realistic than overly safe.

[2Birds1Stone]

Savings rate, which directly impacts spending and thus SWR calculations.

My saving rate jumped from 20-40% in 2011-2014 to ~75% 2015-2017.

I am now sitting at 15X annual expenses, and have roughly 3-4 more years of work planned at current savings rate till FI.