Lab Rat and Assumptions

Lab Rat

One of my primary goals as the Mad Fientist is to discover interesting and innovative ways to reach financial independence sooner. Since a lot of the strategies and tactics I describe are best supported with examples, I usually find myself writing the same example setup and discussing some of the same assumptions over and over again. Rather than do that with every article, I would rather have a single post to refer to instead.

Having a single post would also allow you to challenge and discuss the assumptions in a place where future readers would be more likely to see it. For example, on the Shortest Path to Financial Independence post, people quite rightly challenged my assumption that 4% is a safe withdrawal rate for retirement accounts. When writing a new article that references the 4% withdrawal rate again, it would be beneficial if those types of comments were visible to future readers instead of being buried deep in the comments of another post.

I also think it’s important to have a consistent example scenario to work with. If I use the same scenario in each post, I will be able to quantitatively compare the benefits of the various strategies I describe.

This post will serve as a summary of all the assumptions I use in my examples and will also describe the example scenario itself. I will continue to add to this post and update it, as necessary.

Your feedback is very important so please let me know if you disagree with any of my assumptions or can think of any reasons to change the example.


Withdrawal Rate

The first assumption I’ll discuss is the 4% safe withdrawal rate. This tends to be one that is frequently contested so I’d like to reference some arguments for and against the 4% rule.

The Trinity Study
Mr. Money Mustache

Financial Mentor

I agree with both MMM and Jim that the 4% figure is actually quite conservative for early retirees (see articles above for reasons why) so I am happy to assume a 4% withdrawal rate.

Rate of Return

In all of my examples, I assume an after-inflation portfolio return of 5%. By using the real rate of return, I don’t have to factor another figure into my calculations to account for inflation. By picking a reasonably conservative figure of 5%, I can also assume this figure accounts for fees and transaction costs, without having to explicitly factor those values into the calculations.



Our lab rat is a 30-year-old male who is going to live to be 90, lucky guy.


He is currently working and makes $60,000 a year. I chose $60K mainly because 60 is a highly composite number that is evenly divisible by many other numbers (i.e. 1, 2, 3, 4, 5, 6, 10, 12, 15, 20, 30, 60) so it will work nicely with percentages.


If we assume that he is single with no children, he should be taxed $8,600 per year on his wages, for a marginal federal tax rate of 25%.

Based on his income, he will also need to pay $4,600 per year in FICA tax for Social Security and Medicare.

To make things simple, assume he lives in a state that does not collect state income tax.


He is able to happily live off of $1,400 per month, or $16,800 per year. This level of spending corresponds to a before-tax savings rate of 50% and an after-tax savings rate of around 64%.


After spending and taxes, he invests the entire surplus of $30,000 per year into a portfolio consisting of 75% stocks and 25% bonds. To limit transaction costs and management fees, he invests in a total stock market index fund and a total bond market index fund to obtain the 75/25 balance.

All investments are in taxable investment accounts.


He is starting from scratch on his path to FI at age 30 so he has no savings but no debts either. Using the assumptions described above, here is a graph* illustrating his path to FI:

It’s pretty amazing that even starting from scratch on his 30th birthday, he should be able to reach FI before he turns 41 and will leave over a million of today’s dollars to his heirs after he’s gone.

I’m looking forward to applying some of the optimizations I’ve already written about to this example scenario to see how much sooner he could reach FI.

Let me know what you think.

* The graph represents a simplified example of portfolio growth. In reality, a mixture of stocks and bonds would not produce consistent 5% growth, year after year. To see how this portfolio would have actually performed over multiple 50-year historical periods, click this link to FireCalc and then press the Submit button to generate realistic graphs using the parameters described in the article.

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48 comments for “Lab Rat and Assumptions

  1. Eric
    April 22, 2013 at 8:42 am

    Wow, that is a pretty exciting graph. This guy gets to spend $1,400 a month (that’s a pretty comfortable monthly allowance in my part of the country), and still reach financial independence in just 10 years. And this is on a relatively modest income of $60,000.

    If you don’t believe in the 4% rule, and instead only want to withdraw say 2% or 3%, what would the graph look like then?

    Side note, I think reaching the age of 90 might be a more conservative assumption than you think. Who knows what the next 60 years of medicine can bring. Not that this has much of an impact on the graph though.

    • Debbie M
      April 22, 2013 at 11:17 am

      60K is not a relatively modest income. The average US income is closer to 45K, and most people do not make an above-average income when they are still young (though I will admit that personal finance blog readers are much more likely to do so than average).

      Sorry, you’ve just hit a pet peeve of mine since I’m pretty sure I’ll never make even 50K in my lifetime.

      I’m not just a whiner, though; I can also answer your question. To withdraw only 2%, you’d need twice as much money, so it would take twice as long to save enough (extend the pre-retirement straight line for ten more years, to almost 900K). But then the post retirement curve would be steeper (you will need a much taller graph). The 3% line would lie between the 2% and 4% lines.

      • The Mad Fientist
        April 22, 2013 at 2:03 pm

        Hi Debbie, I realize 60K per year could seem unachievable to some and modest to others but that’s the nature of anything money related. Warren Buffet would laugh at the lengths I go to to save a thousand dollars but that same $1K could change someone’s life who is unemployed and homeless. That’s why I decided to pick a number based on the reasons I mentioned in the post. I had contemplated choosing 100K, because then all the percentages would have been very nice and easy, but I figured that 60K was more achievable for a larger percentage of people.

        You’re right that someone withdrawing 2% would need twice as much savings as someone withdrawing 4% but it actually won’t take double the time to save double the money. Since the money in the portfolio will earn its own money, it will actually only take an extra 7 years to save up enough to retire when withdrawing at 2%. In the case of the 3% withdrawal rate, it will only take an additional 3 years. You’re right that in both cases the post-retirement curve is much steeper since less is being withdrawn.

        • Debbie M
          April 22, 2013 at 4:18 pm

          Mad Fientist, you never called it modest; I appreciate that. And thanks for fixing my answer!

          • The Mad Fientist
            April 22, 2013 at 9:06 pm

            I had some help…I used the spreadsheet I made when writing this post to answer Eric’s question ;)

    • The Mad Fientist
      April 22, 2013 at 1:56 pm

      Eric, $1400 per month is a comfortable allowance in my part of the country as well. Imagine how far $1400 per month could go somewhere like Southeast Asia or Central America! If you’re like me and plan on spending time in cheaper places abroad after FI, $1400 a month seems extravagant and even excessive.

      I ran the numbers for 2% and 3% withdrawal rates and here is how the graph would change…A 3% withdrawal rate only added 3 more years to his working career and a 2% withdrawal rate added just over 7 years. Obviously withdrawing less from the portfolio also greatly increased the amount of money left to his heirs in both cases.

      I hope you’re right about the future of medicine. The guy in the example has as good of a shot as any in living past 90 since he’ll spend the majority of his life doing enjoyable things rather than toiling away for decades, stressed out behind a desk.

      • May 29, 2013 at 3:01 pm

        We are currently in San Pedro, Guatemala, and it is ridiculously inexpensive here. We are renting a 1 bedroom apartment with floor to ceiling windows overlooking Lake Atitlan for only $200 a month. Others are renting more modest places here for $1 a day. It would be quite easy for somebody to live very well here on very little money

        We’ll keep exploring geographic arbitrage options in Central and South America in the coming years :-D

        • The Mad Fientist
          May 29, 2013 at 9:26 pm

          Jeremy, you got my blood pumping and mind racing with your comment. Doing some mental math with a $200 monthly rent figure is very exciting! I’m looking forward to your expenses post for May so I can see some more of your numbers in Guatemala (and hopefully some pictures of your apartment as well). Feel free to link to that article here after you write it.

          We just visited Guatemala for the first time last year and it seems like it could be a great place to settle down for a bit.

          Please keep me posted on good South/Central American geographic arbitrage destinations as you find them because I think that will be the region my wife and I go to after our time in Southeast Asia.

          • June 2, 2013 at 7:39 pm

            I just posted our May 2013 Expenses

            I’ll do a post specifically on our apartment, although the above post does include a picture of our view of Lake Atitlan

          • The Mad Fientist
            June 2, 2013 at 10:12 pm

            What a view! I can’t wait to see what the apartment itself looks like. Even if the apartment’s a little rough, spending $200 a month to enjoy that view definitely seems worth it!

        • sobezen
          September 23, 2014 at 4:40 pm

          Wow! I spend close to $3000 per month here in California! Thankfully I still save 30% but your expenses make me really want to move there now.

  2. Prob8
    April 22, 2013 at 9:35 am

    When talking about the 4% SWR, it’s probably worth noting the types of investments involved. A heavy bond portfolio or real estate portfolio may yield different results. Might be helpful to direct readers to the trinity study for reference.

    • The Mad Fientist
      April 22, 2013 at 2:06 pm

      Hey Prob8, good to hear from you again! You’re absolutely right that the types of investments will affect whether a 4% withdrawal rate is safe or not. I’ve updated the post to indicate that he invests 75% of his portfolio in stocks and 25% in bonds. Since his portfolio needs to last for so long, a higher percentage of stocks will increase the likelihood that it will.

      Some of the other articles I linked to discuss the Trinity Study but I agree that it makes sense to add a link directly to the study so I’ve updated the post accordingly.

      Let me know if you think there’s anything else that should be added!

  3. Nick
    April 22, 2013 at 7:47 pm

    Nice post! I would suggest adding information about the type of accounts being used (Traditional, Roth, Taxable, etc.) and about income and spending increases (if applicable). I think the example will work better and be more realistic for readers if you use $60k income, $12k taxes (federal and state – most states have state tax), $18k spending (even $1500/month), and $30k saving. This also creates a 20% effective tax rate, 50% saving rate before taxes, and makes it easy to keep the savings split between the different types of accounts given the maximums and round numbers. Let me know what you think.

    • The Mad Fientist
      April 22, 2013 at 10:26 pm

      Hey Nick, these numbers assume that all investments are in taxable accounts (I just updated the post to add this information). I plan on running some additional calculations to see how much time can be knocked off when taking advantage of retirement accounts like 401(k)s, IRAs, etc. but I figured it’d be best for the standard example to just use taxable accounts.

      Your scenario seems realistic and since you’re a financial planner, you have probably seen your share of other peoples’ numbers so thanks for the feedback.

      I like the fact that the current scenario allows FI to be reached in 10 years but your scenario has some nice round numbers that are appealing.

      I’d rather not worry about factoring state income tax into future calculations but as you said, more people likely live in states that collect income tax than those that do not so it may make sense to take state income tax into account.

      Anyone else have any opinions on this? If there’s enough of a consensus, I’ll make the change. Otherwise, I’ll just leave it as it is and will try to convince everyone to move to a state that doesn’t tax income!

  4. arebelspy
    April 23, 2013 at 9:57 am

    It’s overly simplified, but good for very basic theoretical ponderings, or for beginners to FI.

    One of the biggest flaws in this article is that it assumes constant returns, which we all know isn’t realistic. A 5% CAGR over a long time period is fine, but one’s graph wouldn’t look like that, as they wouldn’t generate 5% year after year, but rather get 14%, then -2%, then 8%, etc. etc.

    That’s why I just can’t image a better FI calculator than FIRECalc. It literally runs all of the historical scenarios and shows the year to year fluctuations. The graph may not look as pretty a your gentle slope upwards, but will be way more realistic.

    Like I said, however, this is a great place to start. If for nothing else than showing FI after a decade is completely possible in average circumstances. I’ll definitely be linking people to this.

    • The Mad Fientist
      April 23, 2013 at 12:52 pm

      Arebelspy, I completely agree. I wasn’t trying to write a “Here’s how to retire in 10 years” post or anything like that. I was simply hoping to set up an example scenario that I can use to quantitatively compare various optimizations that I write about in future articles. I just want to have a consistent example so that I can compare apples to apples across multiple posts. It just so happens that my apples are the perfect, plastic Ikea apples instead of the bumpy, misshapen ones that grow naturally on trees. I’m okay with that though because I’m mainly concerned with the differences between the apples, not the apples themselves :)

      If anyone wants to see how the scenario described in the article could play out in real life, check out FireCalc. If you click the link, all of the boxes should already be filled in with the example data described in the article so just press the submit button and FireCalc will show you the results. As Arebelspy mentioned, it uses historical data to show how the portfolio would have fared in the past so is definitely more realistic than the graph in this post.

      It’s interesting to see FireCalc’s results, actually. It looks like out of 91 possible 50-year periods that FireCalc tested the portfolio over, the average remaining portfolio balance after he dies at age 90 is $1,627,934 (which isn’t very far off from the $1,302,514 that my simplistic example predicted, so 5% appears to be a good growth rate to assume). It also indicated that his portfolio would have a 85.7% chance of lasting at least 50 years, assuming he continued to withdraw an inflation-adjusted $16,800 per year. Great stuff!

      • arebelspy
        April 23, 2013 at 5:05 pm

        (Let’s see if that HTML code it tells me I can use below the comment box works.)

        I agree with that, and it makes sense to me, you just may want to add a disclaimer into the article for the layperson who sees this that it’s not meant to accurately model real life, but be an example to tweak other variables and have this constant (even if not completely realistic).

        In other words, this example is a spherical FI in a vacuum. ;)

        • arebelspy
          April 23, 2013 at 5:06 pm

          It did not work (the blockquote cite I was trying to use to quote part of your reply). Doh. Well you can still read my reply, it just looks a little goofy.

        • The Mad Fientist
          April 23, 2013 at 9:25 pm

          Sorry the blockquote didn’t work properly. I edited your comment to remove the html code, since it was incorrectly altering the styling. I also edited my previous comment to you because I realized I wrote ‘qualitatively’ instead of ‘quantitatively’.

          Adding a disclaimer is a good idea so I updated the post. I also added a link to FireCalc because it is such a fun tool to play around with and I agree that seeing a more realistic graph is helpful.

          Haha, hopefully the example’s more useful than a spherical FI in a vacuum!

          • arebelspy
            April 24, 2013 at 10:48 am

            Spherical FI in a vacuum is useful for a model!

            One just has to understand life is a little more bumpy, but that’s what makes it fun!

            The wife and I just figured a backup plan where if we fall 25% short of our FI funding goal (due to unforseen Black Swan type events), we can work 1 out of every 6 years to fund the rest!

            Those sort of projections are useful to make based on our theoretical FI, and flexibility.

            Thanks for doing the legwork on these, I think this will be very useful to refer people to.

          • The Mad Fientist
            April 24, 2013 at 9:28 pm

            Working one out of six years actually sounds like a pretty good plan, even if you don’t fall short. I imagine it would be a lot of fun to go back to work after 5 years off, especially if you knew it was only going to be for a year. I bet by the end of it you would really appreciate your freedom again!

  5. Nick
    April 23, 2013 at 12:57 pm

    I like the assumption of all taxable investments as it will allow you to show the significance of tax-deferred accounts later. It also allows you to stick with the example in your article as any contributions to pre-tax retirement accounts would change your federal tax assumption, savings amount, etc.

    I think excluding state tax will be easier, especially considering the minor impact given the annual need of $16,800…and we have time to convince others to move to a state with no income tax :)

    I say you stick with what you got and focus your time in the lab finding the optimal solution!

    • The Mad Fientist
      April 23, 2013 at 1:48 pm

      Haha, the bunsen burners are all fired up so back to the lab I go

  6. April 29, 2013 at 4:00 pm

    Awesome analysis. A person making $60K / year can reach financial freedom in 10 years … yes, absolutely. It’s mostly a matter of living below your means.

    When I worked at my first job after college, in my early 20s, I lived on $1,000/mo. Most of my friends thought it couldn’t be done. “Do your parents pay for stuff?,” they’d ask. Don’t be ridiculous, I replied.

    Even these days, with my lifestyle adjusted slightly higher, I could definitely live on $16,800 per year. Lots of blogs talk on the “how,” so I love that this post focuses on the “why.” Financial independence is a major motivator.

    • The Mad Fientist
      May 5, 2013 at 2:43 pm

      Thanks, Paula!

      That’s funny your friends thought that living on $1,000 per month was so extreme that the only explanation for how you were able to survive was that your parents were buying you things!

  7. May 5, 2013 at 2:24 am

    I think 60k is a pretty reasonable number even for an assumption. Even if 40k is an average income for many american, you can pull in another 20k on the side if you feel so inclined. Some people think having a second job is crazy but if it gets you retired in under 10 years you’re crazy not to do it.

    • The Mad Fientist
      May 5, 2013 at 2:45 pm

      Clay, I like your idea of getting a second job to achieve FI sooner. Since I have less than two years until I reach FI, I’ve been thinking about picking up some extra work in my spare time to really supercharge my savings. When the finish line is in sight, it definitely gives you the energy and motivation to run a little faster!

  8. May 12, 2013 at 7:24 pm

    You have an astute rat in your lab for sure! Financial independence is possible anyone who can learn to squash the bug of desire by being a minimalist and the master of delayed gratification.
    Save like a mad man and let Mr. Bogle handle your money. That’s it. Love this post, Brandon!

    • The Mad Fientist
      May 14, 2013 at 9:27 pm

      Haha, yes, a very astute rat indeed!

  9. TLV
    May 16, 2013 at 10:46 am

    Does the $8600 in taxes include social security and medicare, or just federal income tax?

    • The Mad Fientist
      May 17, 2013 at 7:55 am

      Whoa! I focused so hard on optimizing the scenario, I must have inadvertently optimized away his FICA tax (which is obviously a great optimization but sadly not a legal one).

      To answer your question, the $8,600 is just his annual federal income tax burden. Social Security and Medicare add an additional ~$4,600 per year to his taxes.

      I have updated this post, the Retire Even Earlier post, and all the graphs in both of the posts to correctly include FICA tax.

      Even though this change pushed his retirement back a year, it did make the numbers much nicer to work with (after taxes and spending, he’s left with $30,000, or 50% of his gross income, to invest).

      Thanks a lot for the question!

  10. June 4, 2013 at 2:31 pm

    I wrote a post specifically about our apartment in Guatemala, hopefully it helps answer some of your questions

    • The Mad Fientist
      June 4, 2013 at 6:45 pm

      Great post, Jeremy. It looks like you have a really nice place down there!

      I must say, I was quite jealous when I was reading your article and am even more anxious now to hit the road. I have about a year and a half to wait though so I’ll just have to live vicariously through you guys until then.

  11. Justin
    July 12, 2013 at 7:03 pm

    I really like this concept, it helps that I’m a 30 year old male who actually makes a bit more than 60k a year, so this Lab Rat is an excellent inspiration. ;)

    I look forward to many future variations on the Lab Rat’s financial path.

    • The Mad Fientist
      July 12, 2013 at 10:22 pm

      Nice! I’ll definitely be using the Lab Rat example in future posts so I’m glad it matches up so well with your situation.

  12. Steve
    November 14, 2013 at 11:42 pm

    Mad Fientist, love your articles and this example. I’m actually in a very similar situation with my income level (50-60k) and current monthly spending ($1300-1500). I started a job this year and I’m not eligible for the 401k program until January ’14. I’m trying to figure out how much I should put in.

    Maxing out my 401k seems like a lot considering my income level but my spending is so low it could work. I plan to max out a traditional IRA but won’t have access to HSA. Thoughts?

    • The Mad Fientist
      November 15, 2013 at 9:33 am

      Steve, that’s great the example matches up so well with your situation (both for you, since you can easily play along, and for me, since it means I picked realistic numbers).

      If I were you, I’d go ahead and max out both your 401(k) and your Traditional IRA, if you can. Check out the Retire Even Earlier post to see why.

  13. EZ
    November 16, 2013 at 9:30 pm

    I’ve been having fun poking around on your site; got here from MMM.

    I understand why you setup your lab rat w/ a defined scenario for comparisons, but it might be fun/informative to setup another lab rat w/ a family.

    The effects of saving in tax-deferred accounts when you have kids makes an amazing difference in your taxes, especially due to refundable credits like EITC & CTC. I’ve gotten DH to max his 401k and contribute to his HSA to lower our AGI so we capture more EITC. Then our state matches the federal EITC at 30% and CTC at 33%!

    For example, a dollar put in the HSA: .21 phaseout of EITC + .063 state match of EITC + .0765 FICA + .10 fed tax + .04 state tax, = .4895 increase in our tax refunds.

    I’ve been using the refunds to fund Roth IRAs for both of us. In our situation, there is no benefit to the traditional IRA; we are at 0 taxable income, and the way EITC is computed, a tIRA would lower AGI, but not line 7 wages (EITC runs the numbers using both figures, and awards you the LOWER result). Unfortunately, this formula makes using the Roth pipeline problematic while you have kids (conversions to Roth would raise your AGI, lowering your EITC). I’m still working on optimizing that portion of our path to FIRE.

    • The Mad Fientist
      November 17, 2013 at 10:26 am

      Hey EZ, welcome!

      The reason I decided on an individual rather than a family is because I wanted to make the numbers easier to deal with but I completely agree that going with a family scenario would have made the tax-avoidance possibilities even greater.

      I am actually thinking of starting a new “real-time” Lab Rat scenario where I start from $0 and describe monthly what I would actually do each month (where I would invest, how I would harvest tax losses/gains, etc.). Would that be something you’d be interested in?

      If I decide to do that, I’ll likely let you guys decide (using a survey or something) what type of Lab Rat to use for the scenario (i.e. single/married, income levels, spending levels, kids/no kids, etc.).

      I’d be interested in hearing what you decide on doing after you’ve had a chance to optimize that portion of your FIRE journey so please let me know!

  14. EZ
    November 17, 2013 at 1:44 pm

    I like the idea of a “real-time” Lab Rat scenario – I think it would be a great example for me to show my post-college and in-college kids to nudge them along.

    Ultimately, I’d love to see multiple scenarios. We are a little late to join the FIRE party, and I’ve found that an individual will travel thru many different scenarios, and some will even overlap.

    We’re currently working on FIRE while putting successive kids thru college. One done, two in, two more to go. The things that worked well for optimizing Financial Aid for the oldest have little bearing on what will work well when #5 gets to that age and the others have left the nest. Lots and lots of moving parts.

    • The Mad Fientist
      November 17, 2013 at 6:42 pm

      That definitely does sound like a lot of moving parts!

      I’ll start thinking about how I could do multiple real-time scenarios because I agree that could be really valuable. I just worry that if I have too many scenarios to deal with, I’ll get bogged down managing the finances of a bunch of fake people and won’t have time to manage my own!

  15. Michael
    May 19, 2014 at 12:14 am

    I’m interested to know how the withdrawal order of your funds would affect taxes. For example after I’m allowed to, should I withdraw from a Roth as slowly as possible or as quickly as possible? My gut says as slowly as possible, but I would like to see numbers. There’s lots of different combinations of account vehicles; and it also depends on your other techniques too, like the tax loss/gain harvesting, IRA conversions, and so on and so forth.

    (This is something I’d like to be able to do for myself, but it will probably take me a while to set up numbers. If I beat you to it, I’ll let you know what I discover.)

    • The Mad Fientist
      May 20, 2014 at 8:23 am

      Hey Michael, I’ve actually been thinking about writing a post on withdrawal order so maybe I’ll do that soon.

      I’d say you should withdraw from the Roth as slowly as possible. The money in your Roth is the most valuable because not only can it grow tax free but it can be taken out of the Roth tax free as well.

  16. June 14, 2015 at 1:39 pm

    What about cFireSim? Any thoughts on using one vs the other?

  17. Tip
    August 14, 2016 at 7:38 pm

    Thanks for the great info! Quick question, when calculating net savings rate, how do you factor in your 401k contributions since they are pretax? I always get confused in calculating our savings rate since we do some pretax and some post tax savings.
    Thanks again!

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