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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.)

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5 Responses to “Numerology”

  1. Ryan March 7, 2014 at 12:27 pm #

    So, you use the principal on your home in your “savings rate”. Savings rate is part of the total “number”. I assume, then, that you are including the value you of your home in that number. However, your home is not liquid and cannot be liquidated without creating a homeless retiree. My question is: Is it fair to consider your home part of your savings for retirement because you will theoretically never be able to liquidate it without creating new spending?

    • Miles Dividend M.D. March 7, 2014 at 12:46 pm #


      This is a good question. I think you can spin it both ways.

      I include the principal in my savings rate with the assumption that the home will be paid off before I retire. Though The principal on my home is not liquid, once the home is paid off, this is an expense that ceases to exist.

      If you’re planning to retire before your home is paid off, the liquidity issue becomes a much bigger one I think.

      There are many expenses that are relevant to a working man and not to a retired one. Which I just may write about tonight!



      • Ryan March 7, 2014 at 1:13 pm #

        Thanks for the prompt response. I politely challenge your logic here. You say, “Though The principal on my home is not liquid, once the home is paid off, this is an expense that ceases to exist.” I argue that it is never considered an expense in any of your formulas. It is always considered savings. It is merely savings that ceases to exist, much the same way that you will stop saving for retirement once you retire. I really like the simplicity of your example but I think it flawed to include your home in your retirement planning as part of the nest egg.

  2. Miles Dividend M.D. March 7, 2014 at 1:47 pm #


    I understand your objection though I do not agree with it.

    As I said you can spin it wait either way.

    I count principle (not interest/taxes) in my savings rate because,

    1. I am gaining 1 dollar of equity (probably more) with each dollar of principle paid.

    2. Housing is an expense whether you rent or buy, so getting rid of an expense prior to retiring is value added. As opposed to say saving for my kids college.

    But I should clarify that I do not include home equity in my nest egg calculation.
    I.e. If my home were paid off and I had $600,000 invested in the market/savings I would count my nest egg as 600,000.

    I don’t think that counting principle as simple spending makes sense in figuring out your retirement needs, particularly if your home will be paid off in retirement. And I think the retirement horizon is well captured by this method. (Ie it pencils out.)

    Thanks again,


    • Ryan March 7, 2014 at 1:52 pm #

      We are on the same page. My confusion, as I stated earlier, was that I assumed you were including your home in your total number. I agree with you.

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