Blogger Joe Udo says 25x expenses not enough for early-retirees

[haha]

25x Expenses Isn’t Enough for Early Retirement - Retire by 40

The title of this post tells what it is about. It is about 25x annual expenses may well fall short for an early retiree.

For those who are still working out their plans, IMO this is a pretty good article about how difficult it is to look very far into the future,

I don't know anything about this guy, or his blog, or whether his wife works, or if he always flosses, but he writes well and his points make sense to me.

I got this link from a weekly summary sent out by The Finance Buff, a guy I regularly read.

Ha

 

[Big_Hitter]

"I’m extremely lucky that Mrs. RB40 likes to work. The employer sponsored health insurance saves us a ton of money. She plans to retire by 2020."

allrightythen

 

[eytonxav]

25X seems fine for a 65 yo, but I'd be scared out of my mind retiring in my 40s using that metric.

 

[Big_Hitter]

25X seems fine for a 65 yo, but I'd be scared out of my mind retiring in my 40s using that metric.

I'd be totally fine with that if I could put DW back to w*rk

 

[Another Reader]

He's sort of a happy go lucky guy that ended up in the engineering pressure cooker at Intel. As he approached the "up or out" age, he decided that "out" was the correct choice.

 

[pb4uski]

So according to the author 4% is ok for a 65 year old retiree but too much for a 40 year old retiree. IMO, somewhat of a perceptive glimpse of the obvious.... tell me something I don't already know.

 

[haha]

I'd be totally fine with that if I could put DW back to w*rk

I think this can also be a risky strategy. If a woman is good looking, and even has a job, it usually won't take her 2 weeks to find another Honey. There is a misunderstanding afoot that holds that middle aged women are in excess supply. Not true anywhere I have been, and I don't think it ever will be. My girlfriend is friend-ed on my Fitbit, and has been for 6 months or so. Recently she attached a picture, and within one day 2 of my male "friends" had asked her to friend them.

Hey baby, let's get sweaty together!

Ha

 

[scrabbler1]

I don't buy his "lifestyle inflation" claim. Why does he assume that someone without kids might have them at some point? I am childfree and have known it since I was 20 years old. That's 33 years ago and that won't ever change. And getting married won't necessarily worsen one's finances. Two people living together can live more cheaply per person than two people living separately.

 

[Totoro]

There is a misunderstanding afoot that holds that middle aged women are in excess supply. Not true anywhere I have been, and I don't think it ever will be.

Well clearly then, you haven't been everywhere. I know quite a few adult (35+ onwards) single women who really do want a (new) companion but simply cannot find them.

Not even talking about decent men here, just not-slimy men. As in: not currently married, non violent, and into monogamy. That sort of thing. Some dating stories are downright horrifying (of course I hear only one side).

As a single man qualifying that apparently high bar, I'm also very much not complaining. It's most noticeable (to me at least) in dense urban areas.

And since anecdotes aren't data: https://blog.okcupid.com/index.php/the-case-for-an-older-woman/

Snippet:

I made these calculations in the chart below, and we can see that women have more pursuers than men until age 26, but thereafter a man can expect many more potential dates than a woman of the same age. At the graph's outer edge, at age 48, men are nearly twice as sought-after as women.

 

[daylatedollarshort]

Good article. Thanks for posting, Ha. I suspect the blogger was addressing more the Reddit crowd, where many post about retiring on some pretty low savings rates - numbers that might work if the ACA stays in place, their personal inflation rates stay low, investment returns return to historical averages and there's no unexpected divorce, kids, big medical bills, family financial assistance or any big ticket financial events in one's future along those lines.

 

[dixonge]

Just because he underestimated his expenses doesn't mean the 4% SWR is wrong. And Doesn't FIREcalc have the ability to test more than 30 years out?

 

[Markola]

Just because he underestimated his expenses doesn't mean the 4% SWR is wrong. And Doesn't FIREcalc have the ability to test more than 30 years out?

Also, who says one has to add the inflation rate every year? Inflation can be controlled and reversed with lifestyle choices, eg the "Move to a LCOL area" option.


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[MichaelB]

His point on "lifestyle inflation" could probably be expressed differently, but it is valid and not often discussed here.

Also, there are bound to be more gadgets we couldn’t live without. Ten years ago, I didn’t need a smart phone, but I use it constantly now. New technology isn’t cheap and it’s practically impossible to avoid them. Unless you’re willing to freeze time, lifestyle inflation will push up your annual expenses. Can you imagine retiring 20 years ago and saying no to laptops, cell phones, digital cameras, flat screen TVs, Wi-Fi, and other new innovations? My father in law can do it, but not us.

Another way to view this is to expect an overall improvement in society's standard of living, that adds to the cost of living, but is not included in the inflation rate. He gives good examples, such as smartphones and internet, but there are others that are more difficult to avoid, such as new mandatory safety features in autos.

It is easier to visualize this when we think of our own standard of living just 15 or 20 years ago, comparing it with today. This is less of an issue for a 70 year old retiree, but a 50 year old could possibly suffer a significant lag in standard of living, relative to his or her own children.

Some time ago I recall seeing this cost estimated at approximately 1% per year. IOW, assume 1% additional inflation, with no additional return. It definitely [-]does[/-] can affect the 4% withdrawal rate.

 

[Teacher Terry]

Many younger people on the MM forum also are retiring with 25x expenses. I have always thought that was a mistake. Also I knew a few people that retired fairly young and now at 60 they are sorry because they can't afford to travel, etc.

 

[nun]

25x assumes a 30 year retirement and historical returns on a 50/50 portfolio. If you use today's low bond yields you might expect to need 33x or higher. The number also increases if you expect to fund a retirement for longer than 40 years.

Anyone with significant bond holdings and retiring to day witrh a 30 years time horizon is probably optimistic using 25x (ie 4% SWR)

 

[FUEGO]

Another way to view this is to expect an overall improvement in society's standard of living, that adds to the cost of living, but is not included in the inflation rate. He gives good examples, such as smartphones and internet, but there are others that are more difficult to avoid, such as new mandatory safety features in autos.

Also, there are bound to be more gadgets we couldn’t live without. Ten years ago, I didn’t need a smart phone, but I use it constantly now. New technology isn’t cheap and it’s practically impossible to avoid them. Unless you’re willing to freeze time, lifestyle inflation will push up your annual expenses. Can you imagine retiring 20 years ago and saying no to laptops, cell phones, digital cameras, flat screen TVs, Wi-Fi, and other new innovations? My father in law can do it, but not us.

It is easier to visualize this when we think of our own standard of living just 15 or 20 years ago, comparing it with today. This is less of an issue for a 70 year old retiree, but a 50 year old could possibly suffer a significant lag in standard of living, relative to his or her own children.

Some time ago I recall seeing this cost estimated at approximately 1% per year. IOW, assume 1% additional inflation, with no additional return. It definitely [-]does[/-] can affect the 4% withdrawal rate.

Eh, not sure if I agree. My smart phone was $100 a couple years ago comes with free basic voice/data service (ie "enough" if you get on wifi when at home, work, school, etc). My laptop was <$300 and is approx. 1000x better than the laptop I had 20 years ago (and 5x cheaper in nominal dollars, probably 8x cheaper in real terms). Flat screen TVs cost less in nominal terms than a screen half the size did 25-30 years ago (still remember tv shopping with mom and dad at Sears back in early 1990s and thinking how expensive a $600 tv was to my tweenage mind).

I'll posit that we're MORE able to acquire life's tech luxuries today compared to 20-30 years ago. For $500 I can get a decent but basic laptop, a used but good smartphone, and a year of Netflix. Internet is about the same cost as a landline 20-30 years ago, but does way more (including letting you use the local phone over internet for free with a VOIP adapter and google voice/hangouts/in gmail).

I just spent 2 hours video chatting with a guy in Thailand and it didn't cost me a single penny over my normal $40/mo internet bill. What would 120 minutes of long distance low-quality voice talk time cost me in 1986? $20?

As for cars and safety features, buying used gets you relatively modern safety features for 25-33% of the price of brand new. I can't wait to buy a 2020 model year self-driving car in 2026 for $8000 or so (if we still need to buy cars; we're just as likely to pay a couple bucks to ride in an autonomous car to our destination!).

Edit: Though I do agree with the 25x may not be enough sentiment, especially if you're retiring in your 30's or 40's. 3.25-3.5% is about as high as I would go. Less if you're risk averse with high fixed income allocation.

 

[W2R]

I wouldn't recommend retiring early with just 25x expenses. Instead, I'd suggest checking to see of those expenses could be cut.

[...]getting married won't necessarily worsen one's finances. Two people living together can live more cheaply per person than two people living separately.

That CAN happen, and does for some, but for others it just doesn't seem to work that way.

I think this can also be a risky strategy. If a woman is good looking, and even has a job, it usually won't take her 2 weeks to find another Honey.

Well, my guess is that most other women are very picky about such things, like I am. I suppose some aren't.

 

[nun]

If the average retiree is looking to fund 75% of a $50k income for a 30 year retirement and gets $15k in SS the he/she will need $563k assuming 25x. A safer number might be 33x which bumps the amount up to $743k.

Unfortunately, the average retiree has somewhere around $175k saved for retirement.

 

[Gumby]

Ten years ago, I didn’t need a smart phone, but I use it constantly now.

That's a deliberate choice, Joe. You still don't "need" one. And the same applies to many of the other technological lifestyle upgrades you list.

 

[GravitySucks]

Guess I messed up again. Can someone bring me my mail C/O the van down by the river?

 

[mathjak107]

Also, who says one has to add the inflation rate every year? Inflation can be controlled and reversed with lifestyle choices, eg the "Move to a LCOL area" option.


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how much inflation effects someone is tied to the amount of discretionary income they have as they age .

typically we end up spending in a smile shape ,we spend more in the beginning of retiring , less through our middle older years and more at the end .

what we no longer buy or do pays for the increases in a lot of what we still buy and do .

but if everything in the budget is a need and not a want there is little that gets cut back .

most of these retire very early forums are based on cutting spending to a minimum and kind of living bare bones lives for the most part .

those folks will not likely have a whole lot of discretionary spending in the budget .

 

[Aerides]

The writer of the post concedes very early that his expense calculation was wrong, and he hadn't planned for the foreseeable costs associated with having a young child. So he didn't have 25x "expenses" when expenses was off by 30% (the wrong way). Doesn't matter what size nut you think you need, if your expenses aren't solid and accounting for variance.

 

[nun]

The writer of the post concedes very early that his expense calculation was wrong, and he hadn't planned for the foreseeable costs associated with having a young child. So he didn't have 25x "expenses" when expenses was off by 30% (the wrong way). Doesn't matter what size nut you think you need, if your expenses aren't solid and accounting for variance.

The systemic issue is that 25x uses historical returns and those might be a bit optimistic with the yield on 10 Year Treasuries being so low. So you might be better to use 33x......and of course do your expense planning accurately and then add a factor for unknown expenses.

 

[Corporateburnout]

That's a deliberate choice, Joe. You still don't "need" one. And the same applies to many of the other technological lifestyle upgrades you list.

+1.

One of my tennis colleagues still has no cellphone, no internet and no email. He can only be contacted on his landline.

 

[bmcgonig]

+1.

One of my tennis colleagues still has no cellphone, no internet and no email. He can only be contacted on his landline.

And his landline is probably more expensive than a monthly cost of having a cellphone with unlimited calls, texts and 1G data..


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