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Variation on 25 times expenses question.
Old 01-20-2010, 12:01 PM   #1
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Variation on 25 times expenses question.

Hi All,
I've done all the FireCalc numbers, and things are looking great. Looks like July 1st of this year is a go.
Now the rough rule of thumb is 25 times your expenses to see if you have enough saved. e.g. $40,000 expenses x 25 = $1,000,000
Could someone help me, or explain the math for my situation.
Real quick snapshot of our situation:
SO - 62 years old
Me - 52 years old
Currently have about $950,000 in retirement and taxable accounts.
Will max out 401k's and IRA's up to July this year.
House paid off.
No debt, except for the monthly charge paid in full every month.
SO SSI at 65 years old will be $20,520 per year.
My SSI at 67 years old will be $18,096 per year.
Expenses will be $51,000 per year. With $13,000 of that budgeted for health insurance.
How does one determine the total retirement funds you need right now?
Are the SSI numbers added to that total somehow?
Thanks for any help in this.
Rob
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It Isn't Rocket Science
Old 01-20-2010, 12:10 PM   #2
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It Isn't Rocket Science

Your portfolio can generate income at the 4% (ie 25X) Safe Withdrawal rate.

It looks to me that your $950k nest egg can payout (at 4%SWR) around $38k/year

Then just add in whatever other income you have.

add in the SSI for you and the SO ==> $38k + $20.52k + $18.096k = $76.616k total

subtract off any taxes (income , property etc) or bills (eg medical etc) that come due to see what your spendable income would be. If the totals don't meet your expenses/and or expectations then you will need to keep working and saving until they do. Some people like to build in a little extra in their budget - just in case.

It looks to me (absent other information) that you are in pretty good shape for a modest retirement. If you have big plans in retirement then you better keep working.
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Old 01-20-2010, 12:19 PM   #3
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Your portfolio can generate income at the 4% (ie 25X) Safe Withdrawal rate.

It looks to me that your $950k nest egg can payout (at 4%SWR) around $38k/year

Then just add in whatever other income you have.

add in the SSI for you and the SO ==> $38k + $20.52k + $18.096k = $76.616k total

subtract off any (income , property etc) taxes or bills (eg medical etc) that come due to see what your spendable income would be. If the totals don't meet your expenses/and or expectations then you will need to keep working and saving.

It looks to me (absent other information) that your are in pretty good shape.
FireCalc concurs.
I was concerned that because SSI does not start for 3 more years for my SO, and 16 years for myself, that a 5.4 withdrawal rate for the first 3 years before my SO's SSI was not acceptable.
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Old 01-20-2010, 12:32 PM   #4
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robl, you would expect to have a higher initial withdrawal rate prior to SS kicking in. The 4% SWR/25x is a rule of thumb, so having to pull out a larger % the first few years should not be an issue (based on history) if you entered all your information correctly into FIRECalc and it gives you a thumbs up.
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Old 01-20-2010, 12:48 PM   #5
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another way to compute it without using FIRECalc is to subtract your SS from your expenses (this needs to be an all inclusive expense number) starting at the latest date.
51000-20520-18096 = 12384
now to produce this amount using the 4% rule requires a portfolio of
12384 * 25 = 3096000
this leaves 950000 - 309600 = 640400 to provide your income gaps prior to ss kicking in.
3 years of 51000 = 153000
12 years of (51000-20520) = 365760
added together-> 518760 leaving you a 121640 cushion and for this to work you only need to get a real 0% return on your portfolio (which makes all the income figures real dollars) for the next 15 years. then, if you only have gotten a 0% real return for theose 15 years you will have 309600 + 121640 = 431240 to provide 12384/yr in income which is a 2.87% WR, probably quite safe.
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Old 01-20-2010, 12:54 PM   #6
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Although 25X is a rule of thumb and spending more from the portfolio now with the expectation that one will withdraw less when SS benefits start is a common response, you should also figure out NOW what you will do if the following events happen:

1. Your equities in your portfolio drop by 50% (say go back to March 9, 2009 levels).

2. Your social security benefits get taxed instead of some of them being excluded.

3. Your SS benefits get reduced.

4. One of you dies and the survivor's SS benefits are affected.

5. Your health insurance costs double in the next 5 years.

6. Your expenses end up being more than you expected.

These are things that FIRECalc won't tell you and the probability of them happening is not zero. We discussed a buffer zone of extra savings to cover some of these recently. What are your contingency plans? Do you have more than one Plan B?
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Old 01-20-2010, 02:41 PM   #7
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I like jdw's method enough that I used it myself. (In fact, I used to sit in difficult meetings at w*rk re-doing this simple calculation just because it made me feel good.)

One issue is actually getting the 0% real return, not so easy over the short run if you are heavily into equities. So I think it makes sense to fund the SS Gap with stuff that's highly likely to get at least that 0%. To me, that means CDs, short term bonds, and TIPS. I did a survey on this a year ago, and about half the respondents indicated a separate bucket for the SS Gap, but I didn't ask exactly how it was invested.

And, as LOL points out. You need to figure out your expense risk cushion. I thought we had 2x what we'd need, but we had some of that bad stuff happen and I'm glad we had the cushion.
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Old 01-20-2010, 02:49 PM   #8
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BTW, your health insurance premiums will probably go down at age 65 with Medicare. If there is no reform forthcoming from Washington, historic annual increases are about 11%. With reform, it will probably go down with Medicare unless there is means-testing and you don't make the cut (you likely would make the cut). Just speculating.
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Old 01-20-2010, 03:05 PM   #9
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I'm new here and enjoy reading some of the posts. I've been looking a many retirement statistics and it appears that the vast majority of Americans retire with way less than $250,000 of net worth. Some have pensions, but most do not (or very little monthly income). In fact, EBRI and others say retirees need 10 times their final salaries to have the same standard of living as when they worked (I realize, if one retires early, one needs a little more; but not 25 times). Also, senior surveys reveal that, as a group, they are no less happy than other age groups. Any thoughts on this?
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Old 01-20-2010, 03:21 PM   #10
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Sure there are thoughts:

If folks do not retire early, but wait until they are eligible to receive SS benefits to retire, and if those benefits cover most of their expenses, then there is no problem with having a nest egg of $0. That is, the vast majority of low-income Americans with a job will have no problems retiring and living off of SS. This is especially true if they were diligent enough to pay off the mortgage along the way or if they live in a single-wide.

The folks in this forum are trying to retire early. They do not want to wait to age 67 to retire.

Since higher income folks cannot support their lifestyle with just SS payments, they need some more dough. But probably less than 10% of folks fall into that category. The vast majority of Americans do not need much extra.
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Old 01-20-2010, 03:59 PM   #11
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@ral3210: there are plenty of thoughts on this (like what LOL said), but also be careful with the numbers you mention: 10 times incomes could be the same or even more than 25 times expenses (e.g. someone making $100k with expenses of $40k would get you the same $1M with both "guesstimates").

@Independent: as I recall TIPS only give you %0 real growth in tax-deferred, not taxable accounts (even with "regular" inflation), since you have to pay taxes every year on that "nominal" increase that is supposed to protect you against inflation.
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Old 01-20-2010, 07:18 PM   #12
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You are correct. I think all fixed income assets have a similar problem - you pay tax on that part of the interest that only offsets inflation. I guess that taxes are another complexity to add to LOL's list.
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Old 01-20-2010, 07:55 PM   #13
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@Independent: as I recall TIPS only give you %0 real growth in tax-deferred, not taxable accounts (even with "regular" inflation), since you have to pay taxes every year on that "nominal" increase that is supposed to protect you against inflation.
actually that depends on the inflation rate as TIPS pay something over the real rate, so if that something covers your taxes you get 0% real. so to get the 0% real for the whole 15 years buy the appropriate size and duration TIPS, 15 in all, each of size necessary for a given year's income short fall and the last 1 could be for the remaining portfolio and 15 years in duration which will give you the portfolio size needed for the real payout i mentioned in my previous post. doing this would maintain the real value of all your years of spending and the future portfolio and wouldnt be affected by stock market variations.
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Old 01-22-2010, 09:28 PM   #14
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I don't think you're going to have enough income in later yrs to live on that $950k and the other Income per needing a starting w/$51k yr age 52-90 = 38 yrs , you're going to need at least double your last 5 yrs and hoping no one needs nursing home care along the way...

I'd feel alot more comfortable with $1.5 Mil or more myself and Having LT Care coverage..

or Invest that $ into at least a 20/80 bal portfolio..
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Old 01-22-2010, 10:02 PM   #15
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I don't think you're going to have enough income in later yrs to live on that $950k and the other Income per needing a starting w/$51k yr age 52-90 = 38 yrs
you dont think a 2.87% WR starting when he is 67 yo is safe enough?

firedreamer was right $1 million is still the sweet spot
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Old 01-22-2010, 10:54 PM   #16
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Originally Posted by ral3210 View Post
I'm new here and enjoy reading some of the posts. I've been looking a many retirement statistics and it appears that the vast majority of Americans retire with way less than $250,000 of net worth. Some have pensions, but most do not (or very little monthly income). In fact, EBRI and others say retirees need 10 times their final salaries to have the same standard of living as when they worked (I realize, if one retires early, one needs a little more; but not 25 times). Also, senior surveys reveal that, as a group, they are no less happy than other age groups. Any thoughts on this?
Sure. These folks are not early retirees. Retiring several years before you are eligible for medicare and can draw social security makes a huge difference.

The 25 times comes from portfolio survival studies for 30 years where inflation is taken into account. We're not saying 25 times their final salaries, we're saying 25X living expenses which includes taxes. 30 years is probably a minimal portfolio survival period to consider for an early retiree - at least if you are retiring 55 or earlier.

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Old 01-23-2010, 12:30 AM   #17
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Originally Posted by LOL! View Post
Sure there are thoughts:

If folks do not retire early, but wait until they are eligible to receive SS benefits to retire, and if those benefits cover most of their expenses, then there is no problem with having a nest egg of $0. That is, the vast majority of low-income Americans with a job will have no problems retiring and living off of SS. This is especially true if they were diligent enough to pay off the mortgage along the way or if they live in a single-wide.

The folks in this forum are trying to retire early. They do not want to wait to age 67 to retire.

Since higher income folks cannot support their lifestyle with just SS payments, they need some more dough. But probably less than 10% of folks fall into that category. The vast majority of Americans do not need much extra.
I just have a thought, if most of the people depends on SS to retire (almost 90%), then why people on this forum are fearing reduction in SS payments. I think no politician likes to take a decision which affects his/her voters so much negatively. But on the other hand there will be some sort of war between generations and politicians may bet on younger generation side. But I think younger generation will loose because of sentimental reasons, remember recent posts on elder care.
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Old 01-23-2010, 04:42 AM   #18
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I just have a thought, if most of the people depends on SS to retire (almost 90%), then why people on this forum are fearing reduction in SS payments. I think no politician likes to take a decision which affects his/her voters so much negatively. But on the other hand there will be some sort of war between generations and politicians may bet on younger generation side. But I think younger generation will loose because of sentimental reasons, remember recent posts on elder care.
I think people here expect SS payments to be reduced because it seems pretty clear there isn't enough money to pay everyone what they've been promised. In the early days of SS, there were a lot more working-age people paying in for every retiree drawing benefits than there are now, and there are more now than there will be in the future. People also live longer in retirement nowadays than they did in the past. I've read that the ratio by mid-21st century will be only something like two people paying in for each retiree. If it gets to that point, I don't think I can count on sentimental reasons to make a working couple willing to pay high enough taxes to support me as well as themselves, especially since they'll probably expect their SS payment to be smaller than mine and that they'll have to wait longer for it than I did.
The potential solutions to the dilemma at that point are not attractive: reduce benefits, increase taxes and/or print the money and pay the "same" benefits in dollars that have shrunk in purchasing power. IMO, reducing the benefits of people who have some other source of retirement income (which probably includes most people on this forum) by means testing or by making more of the SS benefit taxable, is a definite possibility. To a politician, "print the money" means you can claim not to have reduced SS benefits, and since the rise in tax revenue will come at least partly from "bracket creep" rather than a change in the tax rates you may also be able to say you didn't raise taxes. I think it's the line of least resistance, and may well be the method chosen.
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Old 01-23-2010, 08:21 AM   #19
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IMO? Retiring at age 65? sure, but Earlier at age 52? I doubt it..
Your 2.8% WR now is one thing, but double it in 20 yrs and then add 50% to that in 10 yr later..
not to mention so many bad things can and usually do haappen for such a long lenght of time ( 52- 95 = 43 yrs potential) if you're real lucky.. (tic)

and who's to say.. Divorce can really do a number on one's Finances.. I know of 2 guys working at Wal Mart in their 70's..

I'd be Downsizing things now, cut expenses by 25% and invest it in a 20/80 to 35/65 portfolio..

And regardless what Early age one retires, the Age in bonds doesn't apply.. I go with have to have the same % as being 65 or 65% or more in bonds regardless if I'm 50 or 65 and if The bonds won't get the job done? I have to have More $, not More equities..

butt, that's just the way I went before retiring Early..( age 55) w/ only about a $30k yr Overhead to worry about.

Since once you Do retire early and stay "out of the Working loop" for a few yrs? It's all but impossible to get back in and get up and running again..And surely Not going to be Hired either..you're too old..

;-)
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Old 01-23-2010, 09:51 AM   #20
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IMO? Retiring at age 65? sure, but Earlier at age 52? I doubt it..
Your 2.8% WR now is one thing, but double it in 20 yrs and then add 50% to that in 10 yr later..
not to mention so many bad things can and usually do haappen for such a long lenght of time ( 52- 95 = 43 yrs potential) if you're real lucky.. (tic)
Where do you get the idea that the WR will double in 20 years and 50% in another 10. Withdrawal rates that low mean that your portfolio should have little problem keeping with up with inflation over that time period as long as you are not 100% fixed income.

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