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07-27-2017, 11:12 AM
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#1
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Confused about dryer sheets
Join Date: Jul 2017
Location: Gilbert
Posts: 6
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25 X Expenses
I am wondering how this is figured? Really wondering how it is done for and early retirement, is social security in say 10 to 15 years included in this amount? Or do you just figure I have 25X the day I retire or 30X whatever your comfortable with. And think ss is a bonus?
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07-27-2017, 11:28 AM
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#2
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Recycles dryer sheets
Join Date: Apr 2016
Location: Bay Area
Posts: 187
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This is the other side of the "4% rule" (e.g. you can either think of it like taking 4% of your portfolio annually to pay for expenses or you can think of it as your portfolio needs to be 25x your annual expenses - it is the same formula - you are just solving for a different part of the equation)
There have been innumerable discussions on this topic in the forum over time. Most recently: http://www.early-retirement.org/foru...ule-86504.html but also http://www.early-retirement.org/foru...j-65446-2.html, http://www.early-retirement.org/foru...ule-14135.html or any other thread by just searching "4% rule".
Personally, I think it is a very good rule of thumb but the secret is not to be robotic about it and be flexible in adjusting based on market conditions, etc.
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07-27-2017, 11:52 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Posts: 2,509
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The basic rule of thumb was for a 30 year retirement... thus it may not apply for ER. It also has expectations on how assets will be invested.
Rules of thumb are a starting place.
SS would normally be considered to reduce you need for added income... thus a lower withdraw rate after it starts.
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07-27-2017, 12:01 PM
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#4
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Confused about dryer sheets
Join Date: Jul 2017
Location: Gilbert
Posts: 6
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Thanks, we won't be retiring all that early hopefully in 3 years at 57. We almost have 25x or 4% now without counting SS I know it might change but we should get something.
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07-27-2017, 12:05 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2006
Location: Boise
Posts: 7,863
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The rule is based on research mostly starting with something called the Trinity study. Basically they found that historically, starting with 4% of the initial portfolio value and increasing that initial amount by inflation, your money would last 30 years approximately 95% of the time. This is assuming a certain investment mixes which I don't recall exactly but were probably at least 50% stocks.
The Trinity study did not say anything about Social Security. Some people, as you suggest, treat it as a bonus to be used for a looser budget or to cover increased health care expenses. Others (like me), treat it as a future income stream which can be converted into a current asset value using a net present value (NPV) function; this current asset value can then be included in the "stash" from which a 4% calculation can be made.
Many people choose to only assume a percentage of their projected Social Security benefits based on concerns over the program's financial viability. It tends to be younger people who do this. I am 48 and assume I will only receive 40% of my benefits.
Since there are risks associated with all of these things, the important thing to do is understand what the research says about the 4% rule, look at your own situation and goals and risk tolerance, and make the best choice for you (which may very well differ from the best choice for others). If you're making highly unusual choices, you may also want to have a very solid justification in your own mind for those choices.
Good luck!
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
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07-27-2017, 12:14 PM
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#6
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Recycles dryer sheets
Join Date: Aug 2013
Posts: 275
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IMHO, everyone should do their own "due diligence" to architect their RE plan that allows them to sleep at night. Nothing wrong with using "rules of thumb", RE Planning Tools, Spreadsheets, RE Forums and even (dare I say) a FA.... I set my my own requirements, assumptions and risk migrations that best fit my lifestyle and then tried to poke holes in my plan using all of the above resources. At the end of the day only you can buy off on (bless) your plan before you pull the trigger..... As far as the 25X expenses rule... well I'm 53 and DW is 51 currently we have ~50X. Our RE plan has us trending to hit 25X at age 70 and this assumes no SS benefits. Is this a conservative plan? Probably, and in some people eyes it is way too conservative... I sleep at night just fine ....
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07-27-2017, 12:15 PM
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#7
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Recycles dryer sheets
Join Date: Aug 2015
Posts: 86
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Quote:
Originally Posted by Luvmycav
I am wondering how this is figured? Really wondering how it is done for and early retirement, is social security in say 10 to 15 years included in this amount? Or do you just figure I have 25X the day I retire or 30X whatever your comfortable with. And think ss is a bonus?
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If I were to retire this year I'd have a decade until full age of retirement SS.
I calculated what I'd need to live on each year in today's dollars for the next decade. I included higher health care premiums and costs since I won't be on Medicare for several years. So that's part 1 of the timeline.
I have no pension or annuity.
For after age 67 I made an assumption of how much I'd get for SS benefits. I assumed I'd get at least 55% of the total amount. I calculated how much I'd need to withdraw after SS benefits to make up the difference in my expected yearly expenses.
I ran the numbers to cover a total of 40 years in retirement.
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07-27-2017, 12:46 PM
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#8
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Recycles dryer sheets
Join Date: Oct 2012
Location: Minneapolis 'burbs
Posts: 382
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Also, FIREcalc allows you to enter numbers for SS and see how that impacts your results.
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07-27-2017, 12:52 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Mar 2017
Location: New York City
Posts: 2,838
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Quote:
Originally Posted by Luvmycav
Thanks, we won't be retiring all that early hopefully in 3 years at 57. We almost have 25x or 4% now without counting SS I know it might change but we should get something.
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Your good in my opinion. You start with 4 % withdrawals, when you hit social security collecting age scale it back by that amount, I say you have 100 % chance of dying with money in the bank.
__________________
Withdrawal Rate currently zero, Pension 137 % of our spending, Wasted 5 years of my prime working extra for a safe withdrawal rate. I can live like a King for a year, or a Prince for the rest of my life. I will stay on topic, I will stay on topic, I will stay on topic
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07-27-2017, 02:36 PM
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#10
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Full time employment: Posting here.
Join Date: Dec 2015
Location: Vancouver
Posts: 915
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Everyone needs to take into consideration their level of comfort with all the risks, big and small, as nothing is guaranteed.
Personally, we don't include SS type benefits in our core calculations around generating enough income to meet our retirement goals. We consider it one of our layers of added safety. It may cause us to end up working a bit longer and potentially pay a bit more in taxes but we're ok with that trade-off.
__________________
Good Riddance. April 2022
"Yes, there's some shady stuff going down but it's fuelled by stupidity."
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07-27-2017, 03:14 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2009
Posts: 6,679
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I split my ER plan into two parts. The first was getting to age ~60 intact, using only my after-tax accounts. After age ~60, it gets a lot easier because my "reinforcements" begin to arrive. They are (a) unfettered access to my tIRA, (b) my frozen company pension, and (c) Social Security. So, if I have to dip into principal prior to age ~60 because my dividends and interest don't always cover my expenses, that is okay. Just get me to age ~60 intact and then things will only improve.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.
"I want my money working for me instead of me working for my money!"
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07-27-2017, 04:48 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,707
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We too had a "before and after" Social Security plan. We felt comfortable taking more from the stash before SS and less after SS. So far, it's working better than we had planned, but of course, YMMV.
__________________
Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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07-27-2017, 08:28 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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Quote:
Originally Posted by Luvmycav
I am wondering how this is figured? Really wondering how it is done for and early retirement, is social security in say 10 to 15 years included in this amount? Or do you just figure I have 25X the day I retire or 30X whatever your comfortable with. And think ss is a bonus?
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You've provided very few details, but I notice you want to retire at 57.
Carve out enough money to cover the gap from retirement to start of social security. The rest of your assets "should" (with all the caveats on the 4% "rule") be 25x the rest of your spending.
Example: Want to spend $40k per year. SS at 66 is $15k. Have $785k assets.
Carve out (66-57) x $15k = $135k. That will provide $15k per year for the 9 years between retirement and SS.
This leaves ($785k-$135k)= $650k.
You still need $40k - $15k = $25k every year from savings.
So the 25x says you "should" have 25 x $25k = $625k in savings.
In this example, you'd have a pretty slim cushion.
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07-27-2017, 10:05 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Mar 2017
Location: New York City
Posts: 2,838
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Quote:
Originally Posted by scrabbler1
After age ~60, it gets a lot easier because my "reinforcements" begin to arrive. .
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I like that line , I might steal it from time to time
__________________
Withdrawal Rate currently zero, Pension 137 % of our spending, Wasted 5 years of my prime working extra for a safe withdrawal rate. I can live like a King for a year, or a Prince for the rest of my life. I will stay on topic, I will stay on topic, I will stay on topic
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07-28-2017, 06:22 AM
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#15
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Posts: 2,509
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Quote:
Originally Posted by Luvmycav
I am wondering how this is figured? Really wondering how it is done for and early retirement, is social security in say 10 to 15 years included in this amount? Or do you just figure I have 25X the day I retire or 30X whatever your comfortable with. And think ss is a bonus?
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Quote:
Originally Posted by Independent
You've provided very few details, but I notice you want to retire at 57.
Carve out enough money to cover the gap from retirement to start of social security. The rest of your assets "should" (with all the caveats on the 4% "rule") be 25x the rest of your spending.
Example: Want to spend $40k per year. SS at 66 is $15k. Have $785k assets.
Carve out (66-57) x $15k = $135k. That will provide $15k per year for the 9 years between retirement and SS.
This leaves ($785k-$135k)= $650k.
You still need $40k - $15k = $25k every year from savings.
So the 25x says you "should" have 25 x $25k = $625k in savings.
In this example, you'd have a pretty slim cushion.
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If you use the 4% rule ... then you are planning thru about the average life expectancy plus SS? Most people on this forum may start with the 4% rule or other approximation, but follow it up with tools that can add expenses and new income streams at different times. These are calculators like Firecalc or RIP.
While I agree with Independent's general idea, I don't really do it. I've used the calculators to know I have enough (plus I plan longer than 30 years since I RE). But I use after tax $ for RE expenses. This lowers taxes and thus expenses overall. I also look at Roth conversions to lower overall taxes long term. I think it is important to understand a plan at least to these levels.. not just a quick rule of thumb. Doing the taxes wrong or withdrawing from the least optimal accounts.... or at the wrong times can be expensive.
Much of this it dependent on the individual situation. Some have most of their $ in IRAs, others after tax... some people have significant pensions... and others none.
Use firecalc and your personal numbers
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07-28-2017, 06:51 AM
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#16
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Recycles dryer sheets
Join Date: Dec 2016
Posts: 200
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I always understood the 25% rule to be of your portfolio. Are you stating that I only need 25% of what my projected budget is? If I need say $40K (after SS payments) then 25% is 1M. Is this the correct?
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07-28-2017, 07:01 AM
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#17
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Posts: 2,509
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Quote:
Originally Posted by Carol1862
I always understood the 25% rule to be of your portfolio. Are you stating that I only need 25% of what my projected budget is? If I need say $40K (after SS payments) then 25% is 1M. Is this the correct?
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I think you are mixing up X and %
25 X 40k is 1MM
1MM X 4% is 40k
40k X 25% is 10k... not 1MM
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07-28-2017, 07:15 AM
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#18
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Recycles dryer sheets
Join Date: Dec 2016
Posts: 200
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Yes I was!! I meant do I only need 25x my projected budget??
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07-28-2017, 07:31 AM
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#19
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Posts: 2,509
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Based on the Trinity study, yes. That also assumes a 30 year retirement. Make sure you budget enough for everything... LTC, health insurance and max OOP... everything including the unexpected.
That said, some have brought the idea that the "new normal" in the market my make this rule of thumb less valid.
Note that the 25X needs investment growth over the retirement. Also it is statistical.. that is you likely need less unless you hit a bad sequence of returns or sequence of expenses events (large draw down early on.
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07-28-2017, 07:50 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,707
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Quote:
Originally Posted by Carol1862
Yes I was!! I meant do I only need 25x my projected budget??
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It's not a bad idea to look up the Trinity Study or one of the commentaries on it. Seeing how it was done and seeing the tables of asset allocations vs "safe" withdrawal rates puts things into perspective in my opinion.
Almost at random, here is a brief article on the subject - there are others with more detail if you are interested. https://retirementresearcher.com/saf...trinity-study/
__________________
Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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