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Target Number for FIRE
Old 06-11-2018, 09:34 PM   #1
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Target Number for FIRE

The general method I've seen for determining how much you'll need in early retirement is based on the 4% Rule. That is--take your current expenses, multiply that by 25, and that's how much you need.

Example: say my expenses in 2018 is $25k. Therefore, I'd need $625k in today's dollars.

...but for people currently working, and their employers are paying most of the health insurance, their current expenses DON'T seem to factor in the health insurance costs they would be paying if they were retired.

So wouldn't the expenses need to be treated as though I were retired in 2018? If I add the amount I would be paying for health insurance in retirement, then my expenses are now, say, $35k. Thus, I'd need $875k in today's dollars, not $625k.

Do people just ignore factoring in estimated health insurance costs since it's hard to say how much it will be in the future? I'd think having some estimate for this built in is better than none at all.

Am I missing something here?

How did you calculate your target number?
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Old 06-11-2018, 09:58 PM   #2
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A few thoughts....

The 4% rule assumes you know your TOTAL spending - including taxes and health insurance.... Not net, Not insurance paid for by an employer. Coming up with the spending number, reasonably accurately, is one of the bigger challenges in figuring out your target nest egg.

The 4% rule assumes a 30 year retirement... and only offers a historical 95% success rate. So if you are retiring in your 40's or 50's... many would consider 4% risky. I retired in my early 50's and have tried to keep my withdrawal rate below 3%. It would suck to be in your 80's and dead broke.

For me - as far as budgeting for health care... I did some "what if" calculations on the covered california site - seeing what the full price was, and seeing what premium tax credits I might qualify for.

That's an expense that increases in retirement... But in retirement taxes change. No more SS and Medicare contributions - which is a big chunk out of a w-2 paycheck. So that helped offset the increase in health insurance.
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Old 06-11-2018, 10:14 PM   #3
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Old 06-11-2018, 10:15 PM   #4
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When I was putting my ER plan together in 2007-08, my baseline for projecting expenses in ER was to make the following adjustments to my current expenses: Eliminate FICA taxes, eliminate commutation expenses, increase health insurance premiums. I was on COBRA already (didn't work enough hours per week to remain eligible for group health), so I wasn't getting any subsidized insurance. COBRA was going to expire when I began my ER.


The rest of my expenses didn't change much. Income taxes dropped a little, cash expenses went up a little. Electric bill went up a little because I was at home more, especially in the summer.
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Old 06-11-2018, 10:26 PM   #5
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I'm lucky that my employer provides credits based on time served to purchase employer health insurance after retirement. I have enough credit to purchase 4 years of insurance and 8 years of medigap coverage. I intend to retire next year at age 61 and my insurance needs are covered until age 73. I hope to live long enough for medigap coverage costs to be a complaint.

Health insurance costs are probably the most important number of my calculations for when I can retire.
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Old 06-12-2018, 04:24 AM   #6
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Quote:
Originally Posted by FIREHacker View Post
...but for people currently working, and their employers are paying most of the health insurance, their current expenses DON'T seem to factor in the health insurance costs they would be paying if they were retired.

So wouldn't the expenses need to be treated as though I were retired in 2018? If I add the amount I would be paying for health insurance in retirement, then my expenses are now, say, $35k. Thus, I'd need $875k in today's dollars, not $625k.

Do people just ignore factoring in estimated health insurance costs since it's hard to say how much it will be in the future? I'd think having some estimate for this built in is better than none at all.

Am I missing something here?

How did you calculate your target number?
You need to "calculate your targt number" based on your estimate of your expenses in retirement not your current expenses.

Your expenses may change in all sorts of ways once you retire. You may need to pay more for healthcare, but less on clothes. You may need to pay more for travel but less for commuting.

The only real way to do this is to sit down and list things out.

I have a spreadsheet where I track all current expenses by category - Mortgage, HOA dues, food, clothing, etc, etc. I show the current expenses and the expected expenses in retirement. That gives me the basis to estimate my expenses in retirement.
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Old 06-12-2018, 04:31 AM   #7
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The 4% rule assumes a 30 year retirement... and only offers a historical 95% success rate. So if you are retiring in your 40's or 50's... many would consider 4% risky.
The 4% rule also assumes past returns. Future returns are likely to be lower. It would be safer to go with 2.5-3%, which is 40-33.3 times complete and total spending. Don't forget taxes, car replacement, and occasional surprises like a new roof or furnace.
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Old 06-12-2018, 05:39 AM   #8
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The 4% rule also assumes past returns.
Including the very worst recessions and inflationary periods.

If looking at a 30 year retirement, and one is happy w/ 95% success rate, the 4% rule is as valid today as it ever was.
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Old 06-12-2018, 05:57 AM   #9
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Including the very worst recessions and inflationary periods.

If looking at a 30 year retirement, and one is happy w/ 95% success rate, the 4% rule is as valid today as it ever was.
+1 the 4% is effectively based on a very bad sequence of returns so if one thinks future returns will be lower (how do they know this and why are they so sure about it?) then it is unlikely to make a big difference.
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Old 06-12-2018, 06:03 AM   #10
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Don't forget taxes. The 4% rule references withdrawing 4% from the portfolio every year, not spending 4%, once taxes are taken out of a 4% withdrawal (assuming some > 0% tax rate, which maybe isn't the case) some amount less than 4% is left for expenses.
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Old 06-12-2018, 06:04 AM   #11
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Future returns are likely to be lower.
I keep seeing this on this forum. I'm not sure why this is an assumption. IMO returns could just as likely be as good as they've been in the past.

If you want to look at a 3-5 year snapshot in time, well ok. But over 10 or 15 year average, I'm not sure what crystal ball says this is 'likely'.

This is a question, not a challenge.

As noted, this should not change the 4% aspect as it already considers worst case scenarios.
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Old 06-12-2018, 06:18 AM   #12
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Also remember to take into account any likely changes in your retirement income. For example, if you ER in your 50s (or earlier), you won't be able to access income streams such as Social Security or a pension. But later on, you will have them (maybe discounted) so they can offset your expenses and reduce the need to rely on your savings.


In my ER plan, I split it into two parts. The first (and far more important) part was getting from age 45 to age ~60 intact. I could use only my non-retirement savings. After age ~60, I could begin tapping into my "reinforcements" which include my frozen company pension, unfettered access to my rollover IRA, and SS.
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Old 06-12-2018, 06:30 AM   #13
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As others have said, knowing your expenses is key. Planned expenses for me that increased after ER at a rate greater than inflation were home owners insurance, medical insurance, dental insurance, umbrella insurance (seeing a trend?).

My annual budget is built using health care premiums plus my max out of pocket for medical. Comes to about $25k. I don't qualify for any subsidy. Thankfully I have not spent $25k in a year. What does not get spent goes back to savings/investment or covers an overage elsewhere in the budget.

Property tax has been at or near my inflation rate. For what it's worth, my model has a 3.64% annual inflation assumption. It seems both high and precise. I cannot find the reference I used to come up with that number, but I did have a good reason to use it at the time. Even with that, we are predicting the future, so don't let the precision make it appear any smarter than a guess.

Home maintenance has been higher than in the past. My house is 11 years old and has been having some normal age issues. I planned for this.

Dental costs have been higher than planned and unexpected (although I should have known better). Teeth, it turns out, wear out. Kids ortho care is costly as well.

Gifts - friends kids weddings, HS and college graduations, baby showers, etc. have been higher than in the past and were unexpected. Again, I should have known better.

Charity increased unexpectedly - with more time to work for causes I believe in, I find that I give more to these causes as well.

College visits were an unexpected expense. We visited many schools with kid 1, and will likely do same with kid 2. Airfare, hotel, rental cars, all add up.

The bad news is that not too much decreased. Less gas since no commute. I never had a big dry cleaning bill. Where I worked we had to pack lunches so no big savings there. Cell phone bill dropped as kid 1 was moved to her own plan at age 18.
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Old 06-12-2018, 06:32 AM   #14
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I'd also recommend looking at your NET expenses, after any income streams you may be able to plan for (including pension, SS, dividends, etc). Calculate your 25-40X total from that number.

Covering a big part of our planned expenses via incoming income has reduced the number I need to multiple by 25-40 considerably. We don't have a pension and I plan to ER in my mid 50s, so I needed to cover a good chunk of expenses via dividends from divvy paying stocks, CDs, etc. (I also want to avoid burning down our retirement 'kitty' if at all possible but may have to dip into it $20K or so a year for the next 10 years till we're both on Medicare especially due to the unpredictability of HC).

Of course, YMMV because none of us know what will happen to any of the programs we need to count on. SS may get cut by 21% in 2034 (more paying out than taking in). ACA may get changed. The big shocker to me the other day was that Medicare is apparently in worse shape than SS.

25X "historically", when one could count on SS and Medicare was good. Nowdays..I literally have no idea what multiplier is going to be "safe" for me to ER - which WAS going to be this year until it hit me that I may wake up one day with no real option on HC (ie: if the ACA goes away) or if SS does indeed find it's only able to pay .79 of every dollar promised in 2034. Yikes. Tough to pick a multiplier number with so many unknowns that could change from what our parents could rely on (SS & Medicare). HC is the big X-factor nowdays also.
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Old 06-12-2018, 08:11 AM   #15
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Calculating target spending is the key here like everyone else mentioned. I maintain 3 sets of target spending numbers! And, yes, I have a history of my spending broken down by categories for a decade.
1. Treat current cash outflow as expenses (After tax income - savings). This is to account for any expenses that are being ignored in current expense total. Kind of catch all number.
2. Manually forecast the expenses per each category (based on current expenses) to what it would be in the retirement. This is most accurate but sometime I don't trust my forecast.
3. Add/Remove additional expanse/"income" in retirement to the current gross income. e.g. healthcare, taxes, 401k/IRA/HSA contributions, other savings, etc. Formula: Gross income - savings (after tax and pretax) + additional medical premium. This more of some funny math but gives me additional data point.
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Old 06-12-2018, 08:27 AM   #16
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How did you calculate your target number?
We use Quicken to track income and spending so for us it was easy to go back and look at expenditures for the last 10-15 years as a starting point.

First we made known adjustments, For example (your mileage may vary):
- College expenses - subtract completely
- Home expenses - subtract those that were "once it a lifetime" thins (e.g. renovations)
- Taxes - subtract state/local taxes as they will be different (hopefully less)
- Charity and gifts - subtract completely (but add back in as below)
- Medical - subtract premiums (but add back in as below)
This result gave us what we actually spent to live on.

Then we adjusted relevant categories. For example:
- Taxes - modeled our expected income in a tax package to get an estimate of retirement state/local taxes
- Charity and gifts - estimate our charitable giving based on retirement income. Estimate gifts based on expected future events (e.g. family graduations).
- Medical - Our Megacorp provides estimates of medical premium options for retirees, so used one that most closely match our current coverage, as well as ACA estimates.


After adjusting the relevant categories, and adding a "fudge factor", we had our retirement expense estimate. Then we used tools like Firecalc to see how well our expected income would cover them. Using the "rule of thumb" our savings/investments are at 19X expenses. However, with SS and pension income, the tools showed this was more than adequate (in fact even without the pension and just SS we could be well below 19X expenses and still be okay).


A lot of work, and perhaps only for math nerds like me, but worth it to gain a better understanding of how we are positioned for FIRE.
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Old 06-12-2018, 09:06 AM   #17
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Consider retiring at 45 or 50. SS requires 35 years of income above (I think $5000, not sure). So if you have 15 years of "0" don't think SS will be much help. Granted if income is $500K and SS is taken out, might be ok.

My DSI makes greater than $300K, sometimes more, but no SS as she is a real estate agent. They have a hard time FIRE as they save very little. This spend mentality is out of my reality. I keep track of every penny going out and coming in.
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Old 06-12-2018, 09:33 AM   #18
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Consider retiring at 45 or 50. SS requires 35 years of income above (I think $5000, not sure). So if you have 15 years of "0" don't think SS will be much help. Granted if income is $500K and SS is taken out, might be ok.

My DSI makes greater than $300K, sometimes more, but no SS as she is a real estate agent. They have a hard time FIRE as they save very little. This spend mentality is out of my reality. I keep track of every penny going out and coming in.
+1 It "costs" me 5 minutes daily to keep track.
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Old 06-12-2018, 09:40 AM   #19
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My target number was age 50. Expenses can be adjusted so to me they are an output not part of the planning.
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Old 06-12-2018, 09:44 AM   #20
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I use 3 sets of numbers for expenses in retirement:

1. Emergency Fund living ($75k/year): this is what I would spend if I lost my job today and cut everything back to make my EF last as long as possible.

2. Live at my current lifestyle ($105k / year)

3. Live high on the hog ($135k / year)

I can retire now using #1. I can retire @ 55 in 3 years using #2. I'd need to work another 3 years to hit #3.

So it is just a matter of choosing my lifestyle in retirement.
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