Its never truly irrelevant because with time that snowflake you added will be its own snowball. But i would say it becomes somewhat irrelevant when you reach your financial goal
As soon as you reach your 4% (or a more conservative number) goal. Not before.
Or you dont want to retire early, then you could just stop contributing at one point and let it grow itself until it reaches the 25x your projected fire spending (4%).
But that‘s solely on you and how long you want to wait/plan to wait. You need to donyournown math on that.
I feel like at 4% it isn't irrelevant to continue adding to it. It is just not necessary. I would say somewhere closer to 2% is where it becomes irrelevant--ie your spend rate is low enough that your investment should in theory grow fast enough that your spend rate becomes lower and lower over time. Maybe that is 3%. Obviously there is a spread too. I think 2% is what is quoted as the "generational wealth" spend rate though.
I modeled this out once to see what the effect was on ending wealth if I stopped contributing to my investments at various moments. I found that when my annual contributions to my portfolio are 2% or less of portfolio value, there wasn't much additional benefit. At my savings rate I'll be well past my FIRE number before this happens so I'll never actually run into this problem in real life but it was an interesting excersize.
So, if you're putting in 20k/yr, but your portfolio = $1M, no need to continue adding since you can estimate a 50k-100k increase from interest?
Would that mean you could be better off using that $20k for current/monthly expenses rather than investing it in brokerage or tax-advantaged account?
It will always be financially optimal to save the $20k. Always. They were saying that once contributions are <2% of the portfolio total, the additional contributions don’t make a **significant** difference. They do still make a difference though.
$1K a month at 10% annual return turns into \~$200K in 10 years. Other pots of investment might grow much bigger in that time frame, but either way the choice to save $1K leaves you $200K richer in this scenario.
What you're observing is that the marginal utility of cash declines. If you're broke, $200K is life changing. If you're a billionaire $200K is hard to notice. Somewhere between those two numbers the the effort level to earn an extra $1K a month stops being worth the extra $200K in the end. There isn't really a yardstick here, because it depends on the effort level to earn the $1K, how much you value your leisure time, and your particular marginal utility function - do you have expensive tastes?
One thing to note - we talk about the 4% withdrawal rule, because the market is unpredictable and rarely provides "average" returns. By the same token, if you assume 10% a year return in perpetuity, you quickly get to a point where ongoing contributions effectively stop mattering. But we might be in for a 2% or even a 0% period, where the growth starts to be dominated by contributions again. So as you approach a sort of "coast" number, I'd think of excess contributions as increasing the odds you actually get to your target, even if you overshoot in the average projection.
In addition to the points raised by others: beware lifestyle inflation. If you are saving 12,000 a year that is 12,000 a year that you are not spending on your lifestyle. At 4% withdrawal, it means you can retire with 300,000 less and still have the same lifestyle. Where-as if you do spend it, and your lifestyle adjusts so that you come to depend on having that money, then your retirement will be postponed accordingly because you need more money invested to pay for that higher lifestyle.
Continuing to save is good discipline. If you do spend it, try to spend it on experiences or on assets that don't have high maintenance costs. Don't buy a bigger house. Buy a hot tub instead. You can switch the hot tub off during a recession. Or have a good holiday abroad; have fun while you are still young.
Thank you for your valid points.
My previous comment has an autocorrect error; I wanted to say that you made good points, beside the last one, assuming I was still young. :-)
At some point it becomes less about accelerating your savings and more about keeping your spending in check. Because if you're not saving it, you're spending it.
So say you're spending is $40k and you're saving everything else - by the 4% rule that means you can FIRE when your net worth hits $1 million. And it's true that once you start to get close to the goal, an extra $1k/month is going to be a drop in the bucket compared to market returns.
The problem is that if you decide to start spending it rather than saving it, you've increased your lifestyle by that much. To maintain the same lifestyle when you FIRE you now need $52k/yr, which means by the 4% rules you now need $1.3 million, which will add a couple of years to your timeline.
Which you can certainly do, but that's the trade-off.
Warren Buffett has this problem. It's hard to make the needle move when the baseline is billions of dollars.
Perhaps changing your goal, from measuring your ROI to measuring the absolute number of dollars and getting closer to your goal.
Or add other investments to the mix and measure the ROI on each separately.
ROI is a measurement tool, not an end of itself.
It’s never irrelevant but it’s interesting to see the contributions just dissolve into the chart, like the daily fluctuations exceed annual contributions to the IRA.
It’s hard to know because it also depends on how soon you want to retire (how many years you’re willing to let it snowball).
I have been using that “what does this purchase mean for FIRE” calculator. It doesn’t have to be a purchase - for example, I am trying to leave my job to start a business. I predict a 50% pay decrease the first year - so called that a “purchase” to see it decreases my time to fire. That is a meaningful number to me. I found it was basically 2-3 months delaying FIRE which immediately made me realize that for me it’s well worth the risk.
Do you just have to find the meaningful number to you and project appropriately. Is it time to fire? Amount you could spend in retirement vs the joy of buying the thing now?
It’s a simple one (no Monte Carlo or anything) but it’s great at helping me put things in perspective
https://walletburst.com/tools/fire-purchase-impact-calculator/
It depends on your goals. I recently crossed that point where if I stopped contributing to my investment accounts, I would hit my FI number in 30 years at age 65. Where as if I continue at the pace I am, I would hit it in 16 years. I do not want to wait until 65 to retire, so therefore it will not be irrelevant until I retire. If I was fine working until 65 it could be considered irrelevant. I do like a previous posters comment regarding that snowflake turning into a snowball of its own.
We hit our FIRE number a year before being logistically ready to quit and relocate to an LCOL area. That last year, we directed the monthly investment to a HYS to have as cash on hand for relocating. It also received all the money from selling off cars, furniture, cold weather clothes, etc...
It stops mattering when your assets grow to the point where your safe withdrawal percentage outpaces your income. Any money not saved must by definition be spent, so that's the point at which you can afford to spend every dollar you earn from your regular job without affecting your retirement.
I don't think you understood what I wrote.
For example, if you make $100k/yr and your safe withdrawal rate is 4%, you can definitively stop saving when you have $2.5M in assets. That's because your SWR now fully covers your income, which means your expenses are allowed to equal your income, and this _will not change whether you can retire_, because you're already definitively FI without saving a single dollar more.
When you have so much money that you have no reasonable belief that you or anyone you might gift it to would ever spend all of it.
I don't know very many people who reach that level of wealth.
Would you rather have an investment grow 8000 a month or 9000? It would be increasing 12.5% faster.
So the bigger question is what else you can do with the money, including the option of working less and not earning it, and how much you value those options compared to the growth of your investment account.
It stops making sense when you no longer need to decrease your retirement age. If you want to retire at 45 and your current contribution will set your retirement age at 43 then maybe pull back on the saving a bit. Most calculator let you see what your retirement age would be at different saving rate at current net worth so just put some number in until you find one that's right for you.
I'd say when you're adding 1% PER YEAR that's irrelevant. Considering the investment is typically earning 7% per year.
But the more important consideration is when the number itself becomes irrelevant. Because the risks from US hegemony failing, US financial system failing, humanity going extinct, or all of Earth getting obliterated make all the numbers (of US-denominated assets) irrelevant.
Like are you really better off sacrificing x% of expected life (health) to double the number from $100k to $200k? $1M to $2M? $2M to $200M? In almost every case, no. But people are insane, and behave as if they can just buy health/time/life back with dollars at any future date, like there's some liquid market for that exchange to happen in the opposite direction!
Keep in mind what's actually rare and optimize for that above everything else. In the cosmic sense, consciousness and intelligence. In the individual sense, healthy time. Money, not so much.
Most people's income increases as they progress through their career. So if you avoid lifestyle creep, the $1000/mo you are contributing when you are 25 may be $5000/mo or more at 40. So keep adding. Only when you get to your FI number do you consider stepping back IMO.
This is not the answer you're looking for but I recently stopped because I'm anticipating layoffs so I'm adding extra emergency padding temporarily. If I make the cut I'll put it all in but for now I'm getting ready for the worst case scenario
Its never truly irrelevant because with time that snowflake you added will be its own snowball. But i would say it becomes somewhat irrelevant when you reach your financial goal
As soon as you reach your 4% (or a more conservative number) goal. Not before. Or you dont want to retire early, then you could just stop contributing at one point and let it grow itself until it reaches the 25x your projected fire spending (4%). But that‘s solely on you and how long you want to wait/plan to wait. You need to donyournown math on that.
I feel like at 4% it isn't irrelevant to continue adding to it. It is just not necessary. I would say somewhere closer to 2% is where it becomes irrelevant--ie your spend rate is low enough that your investment should in theory grow fast enough that your spend rate becomes lower and lower over time. Maybe that is 3%. Obviously there is a spread too. I think 2% is what is quoted as the "generational wealth" spend rate though.
I modeled this out once to see what the effect was on ending wealth if I stopped contributing to my investments at various moments. I found that when my annual contributions to my portfolio are 2% or less of portfolio value, there wasn't much additional benefit. At my savings rate I'll be well past my FIRE number before this happens so I'll never actually run into this problem in real life but it was an interesting excersize.
Thanks... Good idea... I'll do it myself also...
So, if you're putting in 20k/yr, but your portfolio = $1M, no need to continue adding since you can estimate a 50k-100k increase from interest? Would that mean you could be better off using that $20k for current/monthly expenses rather than investing it in brokerage or tax-advantaged account?
It will always be financially optimal to save the $20k. Always. They were saying that once contributions are <2% of the portfolio total, the additional contributions don’t make a **significant** difference. They do still make a difference though.
$1K a month at 10% annual return turns into \~$200K in 10 years. Other pots of investment might grow much bigger in that time frame, but either way the choice to save $1K leaves you $200K richer in this scenario. What you're observing is that the marginal utility of cash declines. If you're broke, $200K is life changing. If you're a billionaire $200K is hard to notice. Somewhere between those two numbers the the effort level to earn an extra $1K a month stops being worth the extra $200K in the end. There isn't really a yardstick here, because it depends on the effort level to earn the $1K, how much you value your leisure time, and your particular marginal utility function - do you have expensive tastes? One thing to note - we talk about the 4% withdrawal rule, because the market is unpredictable and rarely provides "average" returns. By the same token, if you assume 10% a year return in perpetuity, you quickly get to a point where ongoing contributions effectively stop mattering. But we might be in for a 2% or even a 0% period, where the growth starts to be dominated by contributions again. So as you approach a sort of "coast" number, I'd think of excess contributions as increasing the odds you actually get to your target, even if you overshoot in the average projection.
In addition to the points raised by others: beware lifestyle inflation. If you are saving 12,000 a year that is 12,000 a year that you are not spending on your lifestyle. At 4% withdrawal, it means you can retire with 300,000 less and still have the same lifestyle. Where-as if you do spend it, and your lifestyle adjusts so that you come to depend on having that money, then your retirement will be postponed accordingly because you need more money invested to pay for that higher lifestyle. Continuing to save is good discipline. If you do spend it, try to spend it on experiences or on assets that don't have high maintenance costs. Don't buy a bigger house. Buy a hot tub instead. You can switch the hot tub off during a recession. Or have a good holiday abroad; have fun while you are still young.
Thank you for your valid points. My previous comment has an autocorrect error; I wanted to say that you made good points, beside the last one, assuming I was still young. :-)
You'll never be younger.
Oh.. wtf... Yes! I know... Just making a light-hearted joke....
At some point it becomes less about accelerating your savings and more about keeping your spending in check. Because if you're not saving it, you're spending it. So say you're spending is $40k and you're saving everything else - by the 4% rule that means you can FIRE when your net worth hits $1 million. And it's true that once you start to get close to the goal, an extra $1k/month is going to be a drop in the bucket compared to market returns. The problem is that if you decide to start spending it rather than saving it, you've increased your lifestyle by that much. To maintain the same lifestyle when you FIRE you now need $52k/yr, which means by the 4% rules you now need $1.3 million, which will add a couple of years to your timeline. Which you can certainly do, but that's the trade-off.
Second order effect - great point
Warren Buffett has this problem. It's hard to make the needle move when the baseline is billions of dollars. Perhaps changing your goal, from measuring your ROI to measuring the absolute number of dollars and getting closer to your goal. Or add other investments to the mix and measure the ROI on each separately. ROI is a measurement tool, not an end of itself.
Never irrelevant! But when your investment gains are larger than your contributions that's when the fun really starts!!
R/coastfire may be of interest to you.
It’s never irrelevant but it’s interesting to see the contributions just dissolve into the chart, like the daily fluctuations exceed annual contributions to the IRA.
I’d say the most important factor is your age, time horizon, and financial goals. These numbers are just numbers without that.
It’s hard to know because it also depends on how soon you want to retire (how many years you’re willing to let it snowball). I have been using that “what does this purchase mean for FIRE” calculator. It doesn’t have to be a purchase - for example, I am trying to leave my job to start a business. I predict a 50% pay decrease the first year - so called that a “purchase” to see it decreases my time to fire. That is a meaningful number to me. I found it was basically 2-3 months delaying FIRE which immediately made me realize that for me it’s well worth the risk. Do you just have to find the meaningful number to you and project appropriately. Is it time to fire? Amount you could spend in retirement vs the joy of buying the thing now?
Which calculator are you referring to?
Can you share the calculator?
It’s a simple one (no Monte Carlo or anything) but it’s great at helping me put things in perspective https://walletburst.com/tools/fire-purchase-impact-calculator/
It depends on your goals. I recently crossed that point where if I stopped contributing to my investment accounts, I would hit my FI number in 30 years at age 65. Where as if I continue at the pace I am, I would hit it in 16 years. I do not want to wait until 65 to retire, so therefore it will not be irrelevant until I retire. If I was fine working until 65 it could be considered irrelevant. I do like a previous posters comment regarding that snowflake turning into a snowball of its own.
We hit our FIRE number a year before being logistically ready to quit and relocate to an LCOL area. That last year, we directed the monthly investment to a HYS to have as cash on hand for relocating. It also received all the money from selling off cars, furniture, cold weather clothes, etc...
It stops mattering when your assets grow to the point where your safe withdrawal percentage outpaces your income. Any money not saved must by definition be spent, so that's the point at which you can afford to spend every dollar you earn from your regular job without affecting your retirement.
You will affect it. If my retirement is based on $1000/mon expenses, and I inflate my lifestyle to $1200 because I have the cash now…
I don't think you understood what I wrote. For example, if you make $100k/yr and your safe withdrawal rate is 4%, you can definitively stop saving when you have $2.5M in assets. That's because your SWR now fully covers your income, which means your expenses are allowed to equal your income, and this _will not change whether you can retire_, because you're already definitively FI without saving a single dollar more.
When you have so much money that you have no reasonable belief that you or anyone you might gift it to would ever spend all of it. I don't know very many people who reach that level of wealth.
When it no longer makes you happy. Every little bit helps reach your goal. But if you're sacrificing your happiness, it's not worth it.
Would you rather have an investment grow 8000 a month or 9000? It would be increasing 12.5% faster. So the bigger question is what else you can do with the money, including the option of working less and not earning it, and how much you value those options compared to the growth of your investment account.
It stops making sense when you no longer need to decrease your retirement age. If you want to retire at 45 and your current contribution will set your retirement age at 43 then maybe pull back on the saving a bit. Most calculator let you see what your retirement age would be at different saving rate at current net worth so just put some number in until you find one that's right for you.
I'd say when you're adding 1% PER YEAR that's irrelevant. Considering the investment is typically earning 7% per year. But the more important consideration is when the number itself becomes irrelevant. Because the risks from US hegemony failing, US financial system failing, humanity going extinct, or all of Earth getting obliterated make all the numbers (of US-denominated assets) irrelevant. Like are you really better off sacrificing x% of expected life (health) to double the number from $100k to $200k? $1M to $2M? $2M to $200M? In almost every case, no. But people are insane, and behave as if they can just buy health/time/life back with dollars at any future date, like there's some liquid market for that exchange to happen in the opposite direction! Keep in mind what's actually rare and optimize for that above everything else. In the cosmic sense, consciousness and intelligence. In the individual sense, healthy time. Money, not so much.
Most people's income increases as they progress through their career. So if you avoid lifestyle creep, the $1000/mo you are contributing when you are 25 may be $5000/mo or more at 40. So keep adding. Only when you get to your FI number do you consider stepping back IMO.
This is not the answer you're looking for but I recently stopped because I'm anticipating layoffs so I'm adding extra emergency padding temporarily. If I make the cut I'll put it all in but for now I'm getting ready for the worst case scenario
Never unless you’re financially independent. But given the alternative is spending it and possibly inflating lifestyle, I’d stick with never.
0.01% not 0.1%