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"25X Spending" variations
Old 04-24-2013, 02:16 PM   #1
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"25X Spending" variations

I was just watching Frontline - Retirement Gamble, and once again I heard someone use a rule of thumb much lower than the 25X annual spending that comes from the 4% SWR methodology (in green in tables below). I've heard much lower, this time is was "10 to 15 times", though I assume they're planning on Soc Sec to provide additional income. They never go on to say, unless in the fine print somewhere.

Just for giggles I built some quick tables to show how many times annual spending one would need for various durations and success rates.

FWIW...

X times annual spending required

YearsSuccess Rate
95%75%50%
40272319
35262318
30252117
25231915
20211612
15171310

same thing in portfolio $ ('000's) to support $30K/yr initial spending, inflation adjusted

YearsSuccess Rate
40$810$700$571
35$782$676$546
30$755$633$505
25$701$570$446
20$618$491$373
15$515$388$311
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Old 04-24-2013, 02:21 PM   #2
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Thanks for posting this. I have $12,000 more than 27x my annual speing. I guess I'm good once again.

I assume the 27x assumes no SSI and uses all FIRECalc defaults ?
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Old 04-24-2013, 03:09 PM   #3
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Originally Posted by Live And Learn View Post
I assume the 27x assumes no SSI and uses all FIRECalc defaults ?
Yep...
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Old 04-24-2013, 04:32 PM   #4
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Very interesting that 2 extra years of annual spendiing can lead to 10 extra years of retirment. Huge payoff.....a factor in OMY syndrome?
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Old 04-24-2013, 04:56 PM   #5
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I expect that many who propose low multipliers assume retirement at 65+, death at about 85, and accept 90%, or even 85%, success rates. That will get you down to 18 years or so. Toss in lower spending as people age, and fall backs to medicaid in the nursing home and 15x may look good to folks who couldn't pull the plug otherwise. Not for me.
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Old 04-24-2013, 07:40 PM   #6
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Thanks for posting.

With a retirement horizon of 50 years (at least for DW), no SS, pension etc to fall back on, living in a place where inflation is typically higher than the US and being paranoid aware of the damage that an adverse sequence of returns can do to a portfolio, I am uncomfortable with any approach to retirement that relies on drawing down principal to fund living expenses. Hopefully a portfolio of mostly equities and rental properties that generates enough cash flow to will see us through.
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Old 04-25-2013, 03:26 AM   #7
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I also was surprised to hear the 10-12x suggestion. Of course for many of the folks in the documentary 10x was just as crazy and expectation as 25x of the salary.

One morbidly encouraging thing is that for a 67 year old you only have a 50% chance of living more than 20 years. You combine that with 50% of 12x portfolio lasting 20 year and you 75% of not running out of your money!
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Old 04-25-2013, 06:56 AM   #8
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Per the Frontline docudrama it was 10-12x annual income NOT expenses.

IMHO the former is a meaningless rule of thumb.

Zedd
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Old 04-25-2013, 07:00 AM   #9
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Originally Posted by zedd View Post
Per the Frontline docudrama it was 10-12x annual income NOT expenses.

IMHO the former is a meaningless rule of thumb.

Zedd
Thanks, good correction.
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Target AA: 60% equity funds / 35% bond funds / 5% cash
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Old 05-01-2013, 11:30 AM   #10
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Bumping this thread.

Interesting twist on the 25x expenses theme from William Bernstein:

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension."

The worst retirement investing mistake - Sep. 4, 2012

He goes on to say:

"This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass."


zedd
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Old 05-01-2013, 12:05 PM   #11
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Quote:
Originally Posted by zedd View Post
Bumping this thread.

Interesting twist on the 25x expenses theme from William Bernstein:

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension."

The worst retirement investing mistake - Sep. 4, 2012

He goes on to say:

"This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass."


zedd
Thanks for posting this.
By assessing my own risk tolerance I ended up with a plan that follows his logic. Time will tell if it correct.
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Old 05-01-2013, 01:34 PM   #12
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Quote:
Originally Posted by zedd View Post
Bumping this thread.

Interesting twist on the 25x expenses theme from William Bernstein:

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension."

The worst retirement investing mistake - Sep. 4, 2012

He goes on to say:

"This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass."


zedd
So I can see why 25x would be applicable if you assume a TIPS portfolio vs 10 to 15x in a different asset allocation.

Of course all these projections use historical data to forecast future return, so I'd call them educated guesses. IMHO a retiree should make the shortfall between spending and income from SS, pensions etc as small as possible.
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