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    Shockingly Simple Math Calculations

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    Anonymous UjJx7WV
    This document presents a model for calculating savings over time based on assumptions about savings rate (r), investment return (k), and initial savings (S0). It shows how to derive a differential equation to model savings (S) as a function of time (t), and solves this equation. The model is then extended to calculate the number of years needed to save a fraction (f) of income before having enough savings to retire and withdraw a fraction (w) of savings per year. Graphs show predicted savings over time for different r values, and years until retirement for different f values.

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    Shockingly Simple Math Calculations

    Uploaded by

    Anonymous UjJx7WV
    28 views2 pages
    This document presents a model for calculating savings over time based on assumptions about savings rate (r), investment return (k), and initial savings (S0). It shows how to derive a differential equation to model savings (S) as a function of time (t), and solves this equation. The model is then extended to calculate the number of years needed to save a fraction (f) of income before having enough savings to retire and withdraw a fraction (w) of savings per year. Graphs show predicted savings over time for different r values, and years until retirement for different f values.

    Original Description:

    FI calculations

    Original Title

    shockingly_simple_math_calculations

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    This document presents a model for calculating savings over time based on assumptions about savings rate (r), investment return (k), and initial savings (S0). It shows how to derive a differential equation to model savings (S) as a function of time (t), and solves this equation. The model is then extended to calculate the number of years needed to save a fraction (f) of income before having enough savings to retire and withdraw a fraction (w) of savings per year. Graphs show predicted savings over time for different r values, and years until retirement for different f values.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    28 views2 pages

    Shockingly Simple Math Calculations

    Uploaded by

    Anonymous UjJx7WV
    This document presents a model for calculating savings over time based on assumptions about savings rate (r), investment return (k), and initial savings (S0). It shows how to derive a differential equation to model savings (S) as a function of time (t), and solves this equation. The model is then extended to calculate the number of years needed to save a fraction (f) of income before having enough savings to retire and withdraw a fraction (w) of savings per year. Graphs show predicted savings over time for different r values, and years until retirement for different f values.

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    © All Rights Reserved
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    You are on page 1of 2

    Assumptions

    • You save with an inflation-adjusted rate r (say, r = 20, 000/yr).

    • You invest your savings and they grow with an average, inflation-adjusted return k (say, k = 0.07 for
    7% growth).

    If the value of your savings at time t is S, then these assumptions can be expressed as a differential equation:
    dS
    = r + kS.
    dt
    We can solve this by integrating both sides and substituting u = r + kS and du = k dS :
    Z Z
    dS
    = dt
    x + kS
    1
    ln [r + kS] = t + c.
    k
    Where c is a constant. We can solve for c using the boundary condition that at time t = 0, your have S0
    savings. This implies c = k1 ln [r + kS0 ] . Finally, we get
    r kt
    S (t) = S0 ekt +
    
    e −1 .
    k
    Predictions for S (t) are shown for different values of r in Figure 1.

    2.5
    r = $10000/yr
    r = $20000/yr
    2.0
    savings [millions]

    r = $30000/yr
    r = $40000/yr
    1.5

    1.0

    0.5

    0.0
    0 5 10 15 20 25 30
    time [years]

    Figure 1: Predicted savings as a function of time, assuming initial savings of S0 = $20, 000, an investment
    return of k = 0.07, and different savings rates r.

    Now suppose that you save a fraction f of your income, I, every year. This means you’ll spend a fraction
    1 − f of it. After you retire, you want to withdraw a fraction w of your savings per year (i.e, w = 0.04 is a
    4% SWR). This means you can retire once you have enough money that wS = (1 − f ) I, or S = 1−f w I.

    You want to know how many years, t, you have to work until you can retire. Presuming we start with
    no savings, (i.e., S0 = 0), we just need to set r = f × I and solve for t :
    f × I kt  1−f
    e −1 = I
    k w 
    1 1−f k
    t = ln +1
    k f w
    This is plotted in Figure 2. Note that it doesn’t depend on income I, but only on the fraction of it you save,
    f.

    1
    50

    40

    years until FI
    30

    20

    10

    0
    0.0 0.2 0.4 0.6 0.8
    savings rate, f

    Figure 2: Number of years you need to save a fraction f of your income before you can safely withdraw 4%.

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