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Data Sources & Methodology
How our calculators work, where our data comes from, and what assumptions we make.
1. Data Sources
Stock Market Returns
Our default assumption of 7% real (inflation-adjusted) returns is based on historical S&P 500 performance. This figure is widely used in financial planning as a reasonable long-term expectation.
Primary Sources:
- NYU Stern School of Business - Professor Aswath Damodaran's historical returns data, updated annually
- Robert Shiller's Data - Yale Professor Robert Shiller's long-term stock market data going back to 1871
- S&P Dow Jones Indices - Official S&P 500 total return data
Note: Historical average nominal returns for the S&P 500 are approximately 10% annually. After adjusting for ~3% average inflation, real returns are approximately 7%.
Inflation Data
We use the Consumer Price Index (CPI) as our measure of inflation, with a default assumption of 3% annual inflation based on long-term historical averages.
Primary Source:
- U.S. Bureau of Labor Statistics (BLS) - Consumer Price Index for All Urban Consumers (CPI-U)
Historical average inflation in the U.S. has been approximately 3% since 1926. Recent decades have seen lower inflation (around 2%), though 2021-2023 saw elevated rates.
Bond Returns
Bond return assumptions are based on historical U.S. Treasury and investment-grade corporate bond performance.
Primary Sources:
- U.S. Treasury - Historical Treasury yields and rates
- Federal Reserve Economic Data (FRED) - Long-term bond return series
Historical nominal bond returns average 4-6% annually. Real returns (after inflation) are typically 1-3%.
Safe Withdrawal Rate Research
Our safe withdrawal rate calculations are grounded in peer-reviewed academic research.
Key Studies:
- Trinity Study (1998) - Cooley, Hubbard, and Walz. "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable." AAII Journal.
- William Bengen (1994) - "Determining Withdrawal Rates Using Historical Data." Journal of Financial Planning. Origin of the "4% rule."
- Wade Pfau's Research - Extensive modern analysis of safe withdrawal rates under various conditions.
Tax Data
Tax brackets and rates are updated annually based on IRS publications.
Source:
- Internal Revenue Service (IRS) - Revenue Procedures and annual inflation adjustments for tax brackets, standard deductions, and retirement contribution limits.
Our calculators use 2024 tax year data. Tax brackets are subject to change; check IRS.gov for the most current information.
2. Calculation Methodology
Compound Interest Formula
The foundation of our FIRE and investment growth calculations is the compound interest formula with regular contributions:
FV = P × (1 + r)^n + PMT × [((1 + r)^n - 1) / r]
Where:
- FV = Future Value
- P = Principal (starting amount)
- r = Interest rate per period
- n = Number of periods
- PMT = Regular contribution amount
FIRE Number Calculation
Your FIRE number is calculated based on your annual expenses and chosen safe withdrawal rate:
FIRE Number = Annual Expenses × (1 / Withdrawal Rate)
# Example: $40,000 × (1 / 0.04) = $1,000,000
The default 4% withdrawal rate is based on the Trinity Study, which found this rate sustainable over 30-year retirement periods with high probability.
Years to FIRE Calculation
We calculate years to financial independence by solving for when your projected portfolio reaches your FIRE number:
Years = ln((FIRE × r + PMT) / (P × r + PMT)) / ln(1 + r)
This formula accounts for both initial savings and regular contributions growing at your expected return rate.
Mortgage Payment Calculation
Monthly mortgage payments use the standard amortization formula:
M = P × [r(1 + r)^n] / [(1 + r)^n - 1]
Where:
- M = Monthly payment
- P = Principal loan amount
- r = Monthly interest rate (annual rate / 12)
- n = Total number of payments (years × 12)
Debt Payoff Strategies
Our debt calculator implements two common strategies:
Avalanche Method
Pay minimums on all debts, then put extra money toward the highest interest rate debt. Mathematically optimal—minimizes total interest paid.
Snowball Method
Pay minimums on all debts, then put extra money toward the smallest balance. Provides psychological wins—may increase motivation.
3. Assumptions & Limitations
Important Disclaimer
Our calculators are educational tools designed to help you explore financial scenarios. They are not a substitute for professional financial advice. All projections are estimates based on the assumptions listed below.
Constant Returns Assumption
Our basic calculators assume a constant annual return (e.g., 7%). In reality, market returns vary significantly year-to-year. Our Advanced FIRE Calculator addresses this limitation by incorporating sequence of returns risk analysis.
Simplified Tax Treatment
Tax calculations are simplified and may not account for all deductions, credits, state taxes, or complex tax situations. Capital gains, dividend taxation, and tax-loss harvesting are not fully modeled.
No Investment Fees
Basic calculations do not subtract expense ratios or trading fees. While modern index funds have very low fees (0.03-0.10%), these costs do compound over time. Consider subtracting 0.1-0.2% from your expected return to account for fees.
Inflation Assumptions
We default to 3% inflation based on historical averages. Actual inflation varies and can be significantly higher or lower in any given period. You can adjust this assumption in our calculators.
No Social Security or Pension
Our FIRE calculations don't automatically include Social Security benefits or pensions. These can significantly reduce the savings needed for retirement. We recommend treating them as a safety margin rather than relying on them in your primary plan.
Healthcare Costs
Healthcare costs, especially for early retirees without employer coverage, can be substantial and are not specifically modeled. Include estimated healthcare premiums and out-of-pocket costs in your annual expense estimate.
Past Performance Disclaimer
Historical returns are not indicative of future results. The stock market may perform better or worse than historical averages over your investment horizon. We recommend using conservative assumptions and building in a margin of safety.
4. Validation & Testing
Formula Verification
All formulas have been verified against standard financial planning textbooks and cross-checked with multiple financial calculators including those from Vanguard, Fidelity, and academic sources.
Edge Case Testing
Calculators are tested with extreme values (very high/low incomes, long time horizons, zero starting balances) to ensure mathematical stability and reasonable outputs.
User Feedback
We actively incorporate user feedback to identify and fix calculation errors or unclear assumptions. If you notice any issues, please contact us at [email protected].
Comparison with Other Tools
We regularly compare our calculator outputs with established tools to ensure consistency. Minor differences may occur due to different assumptions about compounding frequency or rounding methods.
Questions About Our Methods?
We're committed to transparency. Contact us with any questions about our calculations.
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