Numerology

Numbers are important.

They define proportion. They expose injustice. They keep score. They enable us to see how small and unnoticeable differences over a long time period can compound to become profound and palpable sums.

One of the best uses of numbers is in defining goals.

I think this has to do with our human tendency to measure everything in relative terms.

If you make $1 million a year in New York City working for a hedge fund, and all of your friends make $20 million a year, you will have a tendency to feel poor.

It’s sad and it’s ridiculous, but it’s true.

Is there an antidote to this human weakness?

I think there is. And that antidote is in defining value in a vacuum, before you get sucked into the fray.

What I propose is that we all take a deep breath, step back, and define our own personal numbers.

Now I don’t want you to close your eyes, get into a full lotus position and repeat “Oooohhhmm.” (not that there’s anything wrong with that.)

My magic number is 239847

No, what I propose is that you go back to this post and figure out the following sums.
1. Your take-home pay. (Total pay minus taxes)

2. Your savings percentage.

3. The amount of money you spend in a year. (100% – your savings percentage) X Take-home pay

4. 25 times the amount in number three.

(That’s your number.)

When you have saved that amount of money and invested it, you will have arrived.

You will be financially independent.

When you’ve reached that number, you can safely stop working.

If you enjoy your work, as I do, feel free to keep on working.

But do so knowing that you’ve arrived.

Maybe you can give some more of your money to charity?

Perhaps you’ll feel the freedom to do some soul-searching and explore ways of making your job and life even more meaningful than they already are?

The important thing is to just realize that you have arrived.

What am I talking about?

I’m talking about Monte Carlo simulation.

Monte Carlo simulation is a mathematical technique which allows you to account for thousands of possibilities, including extreme possibilities to define the probability of an outcome.

In this case, the outcome we’re interested in is the ability to retire without running out of money. Monte Carlo simulations determine that 4% is a safe withdrawal rate of an investment portfolio for a retirement of at least 30 years.

But we’re going to retire when we’re younger right? And what about unexpected inflation? And what about dwindling resources? And what about the possible collapse of our entire economic system?

Whoa,  take another deep breath.  Please think like an accountant, not like a fortuneteller.

If you want to be conservative, then change your retirement withdrawal rate to 3% and multiply your yearly spending by 33 instead of 25 in the above equation.

But that is very conservative indeed.

The important thing is that you call your shot.

That way you will know when you’ve arrived. You’ll know when you can stop the madness.

You may even be able to recognize at that point, that the ridiculous amount of money that the billionaire to your right is making has absolutely no effect on your happiness. (But that the insufficient amount of money that the impoverished man to your left is making may very well affect your happiness.)

And just a friendly reminder. The more frugal you are now, the smaller that magic number becomes, and the closer you are too your impending freedom.

(He wrote, lifting the needle off of the broken record.)