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25 times guidline
Old 01-20-2006, 10:47 AM   #1
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25 times guidline

Would like opinions on weather 25 times money needed will last 33 years. If I need $70000 and have 1750000 would my principal be there after 33 years? Has anyone retired and used this?
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Re: 25 times guidline
Old 01-20-2006, 12:16 PM   #2
 
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Re: 25 times guidline

Yes, that is bascially the 4% withdrawal rate, which a lot of folks subscribe to here. This assumes that you have your 1.75 Million invested in a well diversified portfolio of stocks, bonds cash.

Try out the FireCalc calculator on this site. - It pit's your plan against the past 125 years or so of U.S. Market history.
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Re: 25 times guidline
Old 01-20-2006, 12:20 PM   #3
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Re: 25 times guidline

Running your numbers through the FIRE calculator it looks like you would be in good shape. I ran it using a 50/50 balanced portfolio.

I have also heard people use 10 times your pre-retirement gross income as a rule of thumb. I wouldn't base your plans on a quick rule of thumb however. Work up a budget of your future needs and run it through FIRE.
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Re: 25 times guidline
Old 01-20-2006, 11:59 PM   #4
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Re: 25 times guidline

BZZZT! You two missed the phrase "would my principal be there". FIREcalc's strategy / the 4% rule doesn't strive to preserve principal, although in most but the worst cases you'll have a fair amount of principal left. In FIREcalc you can show the detailed results to get an idea historically how much portfolio would be left. Offhand I don't have a feel for what the distribution on the terminal balance is.

I think many retirees and retiree wannabe's here plan to consume principal during retirement. The 4% rule is an attempt to mitigate the chances of busting the portfolio based on historical returns sequences.

The holy grail for many is to spend your last penny as you're dying or to have your last checks bounce post-mortem, but due to the unpredictability of longevity and investment returns we have to play it safer.

If you want your principal preserved then you're on a live-off-the-dividends strategy which may require a different investment mix for preservation of capital and a more steady income stream.

EDIT: The 25x rule is based on the 4% rule.
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Re: 25 times guidline
Old 01-21-2006, 08:39 AM   #5
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Re: 25 times guidline

Another interesting corrollary to the 25x rule. If you're early in the accumulation phase (say, in your 20's), every dollar you spend could turn into 25 by the time you retire at a traditional age in your 60's.

Granted after inflation adjusting, thats not as eye popping, but...

Couple of my wifes cousins are in construction and worked on her house with me last year. Always got a frappaccino and an egg sandwich from the store up the corner in the morning. Asked me one morning about investing. Nothing made them go "huh?" more than telling them about their $125 breakfast...
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Re: 25 times guidline
Old 01-21-2006, 04:44 PM   #6
 
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Re: 25 times guidline

Quote:
BZZZT! You two missed the phrase "would my principal be there". FIREcalc's strategy / the 4% rule doesn't strive to preserve principal, although in most but the worst cases you'll have a fair amount of principal left.
You're right BMJ - I missed it. The reason I missed it, is that I won't care if my Principal is there any longer
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Re: 25 times guidline
Old 01-21-2006, 11:40 PM   #7
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Re: 25 times guidline

Quote:
Originally Posted by BigMoneyJim
If you want your principal preserved then you're on a live-off-the-dividends strategy which may require a different investment mix for preservation of capital and a more steady income stream.
It may also require assets more like 33x than 25x... which means an additional 30% in the retirement portfolio and xx more years of working.

I'll risk the 25x & 4% solutions!
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Re: 25 times guidline
Old 01-22-2006, 08:06 AM   #8
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Re: 25 times guidline

Nords

Agree with you - the media has 'rediscovered dividends' one more time, wall street is feeding the ducks, the market performance since yr 2000, the div tax cut - AND the plain old dividend availible on those companies I might want to add to the Norwegian widow's portfolio give your SWAG great credibility in today's environment. Just looking at my stuff(without a precise calc) puts 33X as a realistic no. if just taking div.'s.

Hence - I'm struggling, trying to be contrarion -* looking hard at the div growth side of current div/div growth. Unfortunately div growth is the squishy no. of the two.

Gives me something to putz with - between cruising, watching football and picking a kayak for spring.

The next area - perhaps to dabble - is overseas div stocks. Still have Glaxo(Brit) and UBS(Swit.) Dummy me dumped my BP and took a profit.

At the young end of ER and if you planned to leave principle untouched - I'd be in screaming agreement with the 33X at a 30 or more year span.

Marked to market - current yield for me - a tad over 3% - close to your 33X no.

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Re: 25 times guidline
Old 01-22-2006, 09:32 AM   #9
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Re: 25 times guidline

I think as long you can obtain a return 4% above inflation every year.

The following Excel formula will produce a present value of $1.75 mil:
PV(4%,33,70000, 1750000)
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Re: 25 times guidline
Old 01-22-2006, 12:04 PM   #10
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Re: 25 times guidline

Yes, 25 times the money needed will last 33 years. With care, you should be able to make it last indefinitely. You can expect to have added to principal at year 33.

Here is how:

TIPS at 2.0% interest can provide 4.0% (plus inflation) for 35 years before running out of money.

You should be able to extend this indefinitely by purchasing high quality, high dividend stocks within a decade. The dividend yield of such stocks would only have to rise to 5.1%.

(NOTE: This corresponds to an S&P500 dividend yield of 2.9%. High quality, high dividend stocks have about 70% higher yields than the S&P500 index. The ishares exchange traded fund DVY currently yields 2.99% as opposed to 1.74% for the S&P500.)

You would never have to sell any shares. Most likely, your dividend checks would grow even faster than inflation.

Have fun.

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