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I plugged some example numbers into the early retirement calculator at Networthify: a $50,000 annual income, $15,000 of annual expenses, and a starting net worth of $100,000.

Screenshot of Networthify’s early retirement calculator

I’m confused about one of the columns in the table at the bottom: “5% return on investment.” This column seems to be calculated as

ROI = 5% × (previous year’s net worth + ½(income − expenses))

Why is this factor of 1/2 being applied to the savings amount? Is it some kind of averaging to account for the fact that the savings aren’t all present on the first day of the year?

  • 4
    I think you've answered your own question in your final sentence. People don't generally invest all of their excess income for the year before they have earned it. – user4556274 Apr 16 '17 at 15:39
  • That’s certainly true. I was thinking that the nature of this calendar (showing you several years at once) might make that irrelevant. Could you turn your comment into an answer? – bdesham Apr 17 '17 at 20:45

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