Target Number for FIRE

[Rianne]

Remember how the benefit formula works for SS. It replaces (indexed) wage income only at the rate 15 cents per dollar for the highest wage income layer. I stopped working at age 45 (10 years ago), so my SS benefit calculation has a lot of zeroes and a few very small numbers (summer jobs). But, because my average indexed monthly earnings (AIME) are just short of the 15% wage replacement range ("bend point"), most additional earnings I may have had in my career would be replaced at only 15%, not very high. I am still slated to get just over $1,700 per month in current dollars.

That is very interesting to me as DH has a few "0" we're 60 now. I was concerned about those "0." Would you mind putting some numbers to what you said. Let's say layered income:
75K - 3 years
125K - 4 years
175K - 5 years
200K - 8 years, for instance. And you say 15% replacement wage for which wage? I know $128 (or so) is the max for a year. I appreciate your knowledge on this.

 

[COcheesehead]

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?

I talked to a broker, though I am still two years out from FIRE, and got actual costs for coverage. It will change of course, but at least I am in the ball park for estimating our pre medicare insurance costs.

 

[scrabbler1]

That is very interesting to me as DH has a few "0" we're 60 now. I was concerned about those "0." Would you mind putting some numbers to what you said. Let's say layered income:
75K - 3 years
125K - 4 years
175K - 5 years
200K - 8 years, for instance. And you say 15% replacement wage for which wage? I know $128 (or so) is the max for a year. I appreciate your knowledge on this.

I would need to know which years have which wages, because each wage year is indexed to current year differently.

I created a spreadsheet back in 2008 to mimic the benefit calculation. A few years later, I downloaded the anypia program from the SS website to act as a check. I had some trouble getting it to work, but eventually I got it working. The results were very, very close, off only due to rounding difference between my spreadsheet and the program.

My spreadsheet goes up through 2008 only because my wage earnings history ends there (YAY!). I suggest you download the anypia program and enter a wage history by year.

https://www.ssa.gov/OACT/anypia/download.html

 

[Nature Lover]

OP,

Lots of really good stuff in this thread to help you. I see from your profile that you're planning to retire in 2030 by age 40. With that early a retirement, you may not want to use 4% necessarily...probably something lower 3.5% or 3%. This is due to the length of your retirement, not lower investment results. If you think investment results could be worse than historical levels, then you'd want to use an even smaller % or plan to work a little as you go, to keep more of your assets working longer.

Also, please consider carefully, the "I can retire super early because I have a very small expense level" rationale. While the math may work out in the planning stage, you need to make sure you have enough for changes/surprises that could increase your ongoing annual cost of living. Going early on the cheap may lock you into that spending level, and limit how much "living" you can do with your newfound freedom until additional income sources (like SS/deferred pensions/etc.) kick in.

The good news: This planning process is a ton of fun!

 

[pb4uski]

.... How did you calculate your target number?

Mine was based on our then current expenses adjusted for how I expected them to change in retirement. For health care, I substituted the cost of individual health insurance for what we were paying for employer sponsored health insurance and added a provision for deductibles and co-pays. It worked out that I significantly overestimated.

Also, adjust for taxes and any her obvious ones. Also include a provision for periodic car replacements, furnace and roof replacements, etc.

Then divide annualized number by 4% or 3.5% or whatever WR that you are comfortable with.

 

[FIREHacker]

OP,

Lots of really good stuff in this thread to help you. I see from your profile that you're planning to retire in 2030 by age 40. With that early a retirement, you may not want to use 4% necessarily...probably something lower 3.5% or 3%. This is due to the length of your retirement, not lower investment results. If you think investment results could be worse than historical levels, then you'd want to use an even smaller % or plan to work a little as you go, to keep more of your assets working longer.

Also, please consider carefully, the "I can retire super early because I have a very small expense level" rationale. While the math may work out in the planning stage, you need to make sure you have enough for changes/surprises that could increase your ongoing annual cost of living. Going early on the cheap may lock you into that spending level, and limit how much "living" you can do with your newfound freedom until additional income sources (like SS/deferred pensions/etc.) kick in.

The good news: This planning process is a ton of fun!

Oh yeah, I love planning this all out. I've made quite a few spreadsheets and I've used some calculators like Networthify and FIRECalc. According to Networthify, I can retire in 11.5 years. Inputting two case scenarios into FIRECalc returns 97.9% and 100% success rates if I choose to retire in 2030 AND have the plan last until I'm 90, or 62 years. I don't use this as a definitive means for reassurance, but it is nice to see.




To get my target number for FIRE, I estimated expenses in today's dollars as though I were retired NOW and multiplied by 25 for a 4% WR. Some expense categories are overestimates and I've also built in the possibility for lifestyle upgrades should I choose to or if they just end up happening. So there are a few built-in safety nets. The target number I got was $1.3-1.4 million (in 2030 dollars; $900-965k in 2018 dollars), assuming the overestimates are true and if those lifestyle upgrades happen. I've also set annual inflation at 3% for expenses.

I then built a few different scenarios that factor in market growth, income, taxes, and savings rate to get estimated NW amounts year-by-year. When this number exceeds my target number for that year, then that's when I can retire. At a constant 65% savings rate (which is my minimum savings rate at all times), the year I got was 2029-2030, and the surplus is several thousands of dollars in future dollars (seems consistent with Networthify's results). Also, this NW number actually doesn't include HSA money--just 401k and a taxable account. Nor does the scenario assume SS or any other income in the future. I'm also choosing to forego homeownership and kids as neither appeal to me.

Since the beginning of this year, I've been keeping track of all income and expenses to the penny and I will continue doing so. Overall, I feel pretty good about my numbers at this current time, though I understand things can change from here til 2030. I will adapt accordingly, if necessary.

Thanks for the responses everyone!

 

[FIREHacker]

Mine was based on our then current expenses adjusted for how I expected them to change in retirement. For health care, I substituted the cost of individual health insurance for what we were paying for employer sponsored health insurance and added a provision for deductibles and co-pays. It worked out that I significantly overestimated.

Also, adjust for taxes and any her obvious ones. Also include a provision for periodic car replacements, furnace and roof replacements, etc.

Then divide annualized number by 4% or 3.5% or whatever WR that you are comfortable with.

This is how I'm estimating my healthcare costs in retirement as well. I intentionally overestimated this cost.

 

[FIREHacker]

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.

Seems like a safe way to estimate HC is to look at some of the top costs for it today and increase that number by at least 15-20% each year. Though that number will grow fast -.-

 

[Dtail]

Seems like a safe way to estimate HC is to look at some of the top costs for it today and increase that number by at least 15-20% each year. Though that number will grow fast -.-

Not sure you will have a 100% calculator success number with increasing HC by 15-20% per year.
Fidelity's calculator currently uses 5.5% for HC.

 

[daylatedollarshort]

Insurance rates can really vary by age, state and number of insurers. In 2017 in Arizona, average premiums went up by 116% due to insurers leaving the state. I would suggest leaving a pad for big rate increases from time to time in your retirement budget and also checking out what rates are now in your state for the older years before Medicare, and budget accordingly. This year with the ACA we've spent $12 so far on health care, though who knows what the future holds for ACA plans. California now has laws limiting out of network charges at in network hospitals so that will help reduce any future hospital bills. For us it has really been a wild ride both up and down in terms of retirement health care costs.

 

[HaveEnough]

Would be some great information if a long term retiree could share what they did during 2000 and 2008 market down turns.

If your minimal expenses are tight at 4%, how did ya handle the down turns? Attempt to lower expenses? Suck it up and hope for better times?

If your minimal expenses are not tight (<3%) don't really know if the question is applicable.

We are always concerned, not sure why because our expenses are so low.

 

[karen1972]

Most people that are budgeting have a fairly good buffer built in for things like travel so one if one has 25 times a fat number, its a lot different than 25 times a "I spend this every year".

I still think too many people forget to really budget for long term replacement expenses. If your 65 and you just replaced the roof, siding, windows, etc.. sure your likely to outlive any major expenses, but if your 55 and the roof was replaced 10 years ago, then you like still have some big ticket items coming, same with car, etc. I actually just have a lump sum I put aside for such things which I consider my "reserves" and aren't counted in my budget as they are very lumpy.

I budgeted $18k for health care, which was premiums plus max out of pocket, we've been averaging $12k... currently this just keeps our WR low, if everything goes as planned, once I hit 60, any "extra" will then be spent on vacations and such.

 

[Mark24609]

I don’t like the 4% rule, way too high. I like 2% that way my portfolio should last into perpetuity, In the 2008 crisis my portfolio dropped 250 K and I only had 40% in the market. My portfolio has since doubled, not willing to accept that kind of risk anymore. 20% in stocks and 2% withdrawal rate,

 

[Mark24609]

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.

The interest free yield is 2.9 % (ten year treasury). At 2.9% you should never have to touch principal.

 

[marko]

Would be some great information if a long term retiree could share what they did during 2000 and 2008 market down turns.

If your minimal expenses are tight at 4%, how did ya handle the down turns? Attempt to lower expenses? Suck it up and hope for better times?

For us preparation was key. If you wait for something bad to happen and then try to react it can be a different story.

We try to have a few years worth of dividends set aside at all times. So we didn't have to suck anything up or lower expenses. We just hoped for a short term event (which it was); the bucket did get lean but not critical and then things recovered. We were/are at a SWR of 4% but had accumulated a cushion of cash before we RE'd.

 

[marko]

I don’t like the 4% rule, way too high. I like 2% that way my portfolio should last into perpetuity, In the 2008 crisis my portfolio dropped 250 K and I only had 40% in the market. My portfolio has since doubled, not willing to accept that kind of risk anymore. 20% in stocks and 2% withdrawal rate,

My take is that "almost the worst happened" in 2008 and by hanging in there my portfolio--like a lot of other people who hung on--doubled as well.

As such my risk tolerance is considerably higher than it was before 2008. If "the worst meltdown since 1929" occurred in '08, it obviously wasn't the end of the world.

Here's a 100 year chart of the Dow: Dow Jones - 100 Year Historical Chart | MacroTrends From 30 feet away the Dow's performance has been a straight upward line since Woodrow Wilson. The trick is to manage the dips.

 

[HI Bill]

20% in stocks and 2% withdrawal rate,

Unless you have a really big portfolio, inflation could potentially lower your standard of living with only 20% in stocks...or you'll be lucky, and die with a boatload of money (LOL).

 

[Mark24609]

Unless you have a really big portfolio, inflation could potentially lower your standard of living with only 20% in stocks...or you'll be lucky, and die with a boatload of money (LOL).

Maybe but my thought is to wait until Social Security kicks in for both my wife and me, and then increase the percentage

 

[COcheesehead]

Unless you have a really big portfolio, inflation could potentially lower your standard of living with only 20% in stocks...or you'll be lucky, and die with a boatload of money (LOL).

It depends on the individual’s circumstances. Firecalc tells me I can go as low as 0% equites and still hit my goals at a 100% confidence level. I still invest above that point, but keep in mind inflation is only one input. Other income streams and the amount of your expenses (WR) vs your portfolio size matter as well.

 

[JT90505]

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.

When it comes to future returns, nobody can be sure of anything. Certainly returns could be as good as they have been in the past (and I hope they are), they could be even better than they have in the past, or they could be lower. We are all making monumental decisions based on imperfect information.

If you really want to understand the risks associated with the 4% rule I would strongly suggest reading work done by Wade Pfau. There are numerous articles he has written on the internet, and his book "How much can I spend in retirement", while something of a slog, provides a detailed analysis of retirement income strategies and probabilities of success.

Two of his key points:
1) The 4% rule is covers the period when the United States was *the* ascendant world power. It was the American century. Apart from Canada, no other nation could support a 4% withdrawal rate over rolling 30 year periods with a 50/50 stock/bond allocation. So, to quote Wade, "Is US historical data sufficiently representative?". The reality is that nobody knows with certainty.
2) Currently bond yields are low and stock valuations high. Will valuations and yields revert to their mean? (I don't know) If valuations & yields do revert, consider sequence of return risk.

My own concern. The 60's were somewhat similar in that yields were relatively low and stock valuations relatively high, resulting in a horrendous investing landscape in the 70's. In 1980 the United States was the worlds largest creditor nation; by 1988 we were the the worlds largest debtor nation. I suspect this spending spree had something to do with the 80's stock market returns. Given recent decisions made by our national leaders, we will certainly find out if ever increasing deficits matter.

So yes, you are right that future returns could be as good as they have been in the past. But after reading Wade Pfau's book I feel the need to hedge my bets. All the best...

 

[marko]

When it comes to future returns, nobody can be sure of anything. Certainly returns could be as good as they have been in the past (and I hope they are), they could be even better than they have in the past, or they could be lower. We are all making monumental decisions based on imperfect information.

If you really want to understand the risks associated with the 4% rule I would strongly suggest reading work done by Wade Pfau. There are numerous articles he has written on the internet, and his book "How much can I spend in retirement", while something of a slog, provides a detailed analysis of retirement income strategies and probabilities of success.

Two of his key points:
1) The 4% rule is covers the period when the United States was *the* ascendant world power. It was the American century. Apart from Canada, no other nation could support a 4% withdrawal rate over rolling 30 year periods with a 50/50 stock/bond allocation. So, to quote Wade, "Is US historical data sufficiently representative?". The reality is that nobody knows with certainty.
2) Currently bond yields are low and stock valuations high. Will valuations and yields revert to their mean? (I don't know) If valuations & yields do revert, consider sequence of return risk.

My own concern. The 60's were somewhat similar in that yields were relatively low and stock valuations relatively high, resulting in a horrendous investing landscape in the 70's. In 1980 the United States was the worlds largest creditor nation; by 1988 we were the the worlds largest debtor nation. I suspect this spending spree had something to do with the 80's stock market returns. Given recent decisions made by our national leaders, we will certainly find out if ever increasing deficits matter.

So yes, you are right that future returns could be as good as they have been in the past. But after reading Wade Pfau's book I feel the need to hedge my bets. All the best...

Honored to be your first reply on this forum.

My comment was simply questioning the assumption that lower returns were 'likely'. I've read a good amount of the work by Pfau, but thanks.

 

[pb4uski]

I'm skeptical. A claim that future returns will be lower plays right into Pfau's spin promoting annuities. Corporate ROEs are healthy and productivity is on the rise and I don't see that changing.

 

[copyright1997reloaded]

Unless you have a really big portfolio, inflation could potentially lower your standard of living with only 20% in stocks...or you'll be lucky, and die with a boatload of money (LOL).

+1 on this.

Thread after thread here on ER show people thinking that they can simply play it safe by doing 0% or 20% in stocks and the rest in fixed for a long period of time.

Firecalc shows:
4% 75 equity /25 fixed 30-year: 94.9% success rate
4% 50/50 30-year: 94.9%
4% 25/75 30-year: 80.3%
4% 20/80 30-year: 72.6% More than 1/4 of the scenarios fail
4% 0/100 30-year: 42.7% NOT GOOD

But, they then say that instead of using 4% they will lose a lower number. So let's look at 3%
3% 75/25 30-year: 100% success rate
3% 50/50 30-year: 100%
3% 25/75 30-year: 100%
3% 20/80 30-year: 100%
3% 0/100 30-year: 88% Again, you have better than a one in 10 chance of being wiped out in a given 30 year period.

How about 2.5%
2.5% 0/100 30-year: 100%
2.6%?
2.6 % 0/100 30-year: 98%
So to get to a 100% success ratio for 30 years, you need to reduce the SWR to under 2.6% of the starting portfolio.

For longer periods, the impact of "de-risking" is even worse:
4% 75/25 40-year: 85%
4% 50/50 40-year: 73.8%
4% 25/75 40-year: 43%
4% 0/100 40-year: 15.9% success rate

3.0% 0/100 40-year: 64.5%
2.5% 0/100 40-year: 86.9%
2.4% 0/100 40-year: 86.9%
2.3% 0/100 40-year: 86.9%
2.2% 0/100 40-year: 93.2%
2.1% 0/100 40-year: 97.2%
2.0% 0/100 40-year: 98.1%

In summary, the cost of playing it safe and not taking market risk is very large especially as one goes longer in the number of years.

 

[REWahoo]

I'm skeptical. A claim that future returns will be lower plays right into Pfau's spin promoting annuities.

+1

I find it difficult to take Pfau's findings seriously knowing who is paying his tab.

 

[Dtail]

+1

I find it difficult to take Pfau's findings seriously knowing who is paying his tab.

Pfau's findings use to "scare" me a little, until the emphasis on annuities became more frequent.