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How good is this formula -> Age x Networth / Yearly Expenses. >1000 you can retire?
Old 08-19-2018, 09:13 AM   #1
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How good is this formula -> Age x Networth / Yearly Expenses. >1000 you can retire?

I've seen this formula discussed a couple of times,which is age and expenses dependent.
The formula is based on the assumption that you want to leave nothing to anyone when you croak, not to kids or relatives - so this formula is not for everyone. It is meant only for those retirees who plan to leave no inheritance to anyone.

Multiply Age x Networth, then divide by Yearly Expenses

If it is greater than 1,000, you can retire.
Age is the average between husband and wife.

Say, your age is 55 and Networth is 1.2 million. Multiply those and you get 66,000,000. Divide 66,000,000 by say $60,000 (your yearly expenses), and you get = 1,100. Since 1,100 > 1,000, formula says you can retire.

What do you guys think.
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Old 08-19-2018, 09:19 AM   #2
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4% rule says that is not enough.
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Old 08-19-2018, 09:20 AM   #3
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Doesn't make any sense to me. Are you supposed to ignore social security/pensions?
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Old 08-19-2018, 09:57 AM   #4
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By your formula, I should have retired 14 years ago.
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Old 08-19-2018, 10:09 AM   #5
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Rules of thumb are great fodder for generating posts on this board and to get clicks, but nothing beats a "real" model of how things are likely to play out.
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Old 08-19-2018, 10:35 AM   #6
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Most people don't know how to divide and their brain locks up when you ask them to do so. Therefore, any formula with a divide cannot work.
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Old 08-19-2018, 10:56 AM   #7
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For people who can divide, it's not that bad of a rule.

Setting age to 40, it comes out to be equivalent to the 4% rule. (1000/40 = 25x expenses). I think that most think that retiring on the 4% rule at 40 is a tad aggressive.

Setting age to 60, it says you need 16.6x expenses. Seems sort of reasonable.

Setting age to 30, it says you need 33.3x expenses. Probably not enough.

I think it would be better if the formula was "Age x net worth / expenses > 1250", but that's not as aesthetically pleasing and makes the math even harder.

:shrug:
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Old 08-19-2018, 10:57 AM   #8
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How do you put a “net worth” number on a recurring income? Say you have $1000/mo income what is that equivalent to?
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Old 08-19-2018, 10:58 AM   #9
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The 4% rule of thumb is a better indicator in my opinion.
Your formula uses Net Worth, which doesn't make sense for homeowners unless you plan to sell your house and live in a van down by the lake
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Old 08-19-2018, 11:10 AM   #10
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Quote:
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.... What do you guys think.
I have never seen that forumla/rule of thumb but it is way to simple to be useful. For one, it looks at net worth rather than retirement funds.... if one's net worth is tied up in non-income producing property or an illiquid asset (perhaps a business) then that is relevant. Second it ignores other sources of retirement income like pensions and SS.... we have many people here who have retired without high net worths but they have good pensions. It also ignores any AA that the assets are invested in.... we know from history that the risk of ruin is higher with more conserative portfolios.

I think I would forget about that rule.
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Old 08-19-2018, 11:22 AM   #11
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Originally Posted by Yarnstormer View Post
How do you put a “net worth” number on a recurring income? Say you have $1000/mo income what is that equivalent to?
You can muliply it by,say, 25 to get the equivalent principal. In other words, $1000/month is $12,000 per year and is the equivalent of having $300,000 paying 4%.
I do that with my SS and pension to calculate my Asset Allocation.
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Old 08-19-2018, 12:14 PM   #12
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Most people don't know how to divide and their brain locks up when you ask them to do so. Therefore, any formula with a divide cannot work.
Ha! Alexa did it all for me.
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Old 08-19-2018, 12:24 PM   #13
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Looking at it another way, expenses = age * NW / 1000 generates an aggressive RMD-style withdrawal rate. Too aggressive IMO.
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Old 08-19-2018, 12:25 PM   #14
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I don't like it. At age 60 that would give you a 6% withdrawal. Too risky for me. If you want to age adjust I would aim for a least a 4% at 60, less before, more after. That would cause you to reset your formula to >1500
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Old 08-19-2018, 12:33 PM   #15
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I think it is way, WAY too simplistic, and so I think that (like most overly simplistic retirement computations) it is pretty much useless.

What we forget is that others may put their entire future on the line by following these extremely unjustifiable rules of thumb and ignoring other types of modeling and analysis, so in that respect I think it's pretty awful. It needs to be accompanied by an in depth, logical, mathematically literate, intelligent discussion of why it might be expected to work in every instance for every potential retiree. I don't think that is possible.

BTW, for me the result was 2878, so I guess I can retire. Oh yeah, that's right, I'm already retired.
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Old 08-19-2018, 02:01 PM   #16
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Originally Posted by Souschef View Post
You can muliply it by,say, 25 to get the equivalent principal. In other words, $1000/month is $12,000 per year and is the equivalent of having $300,000 paying 4%.
I do that with my SS and pension to calculate my Asset Allocation.
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Old 08-19-2018, 03:58 PM   #17
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My little calculator give me an error message when I multiply average age times our net worth. Can divide net worth by 1000 to begin with and the result is large.
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Old 08-19-2018, 04:20 PM   #18
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Multiply Age x Networth, then divide by Yearly Expenses

If it is greater than 1,000, you can retire.
Apparently my kids should have retired at 10.
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Old 08-19-2018, 04:25 PM   #19
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FIREcalc, baby!
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Old 08-19-2018, 04:34 PM   #20
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Re-arranging the formula, it says that your withdrawal rate should be less than your age divided by 1000
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