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How good is this formula -> Age x Networth / Yearly Expenses. >1000 you can retire?
08-19-2018, 08:13 AM
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#1
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Thinks s/he gets paid by the post
Join Date: Aug 2013
Posts: 1,969
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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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08-19-2018, 08:19 AM
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#2
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Full time employment: Posting here.
Join Date: May 2014
Posts: 973
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4% rule says that is not enough.
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08-19-2018, 08:20 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Aug 2017
Posts: 2,050
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Doesn't make any sense to me. Are you supposed to ignore social security/pensions?
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08-19-2018, 08:57 AM
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#4
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Recycles dryer sheets
Join Date: Feb 2018
Posts: 145
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By your formula, I should have retired 14 years ago.
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Person who will often put his foot in his mouth and not realize it.
2020 or bust!
Or
Perhaps 2021...2022...NVM
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08-19-2018, 09:09 AM
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#5
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Moderator
Join Date: Oct 2010
Posts: 10,656
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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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08-19-2018, 09:35 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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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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08-19-2018, 09:56 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2006
Location: Boise
Posts: 7,865
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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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"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
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08-19-2018, 09:57 AM
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#8
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Recycles dryer sheets
Join Date: Apr 2016
Location: Augusta
Posts: 348
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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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08-19-2018, 09:58 AM
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#9
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Full time employment: Posting here.
Join Date: Aug 2013
Location: New Jersey
Posts: 908
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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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08-19-2018, 10:10 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,263
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Quote:
Originally Posted by cyber888
.... What do you guys think.
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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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If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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08-19-2018, 10:22 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Dec 2015
Location: Santa Paula
Posts: 4,068
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Quote:
Originally Posted by Yarnstormer
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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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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Retired Jan 2009 Have not looked back.
AA 60/35/5 considering SS and pensions a SP annuity
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08-19-2018, 11:14 AM
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#12
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Recycles dryer sheets
Join Date: Aug 2008
Posts: 251
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Quote:
Originally Posted by LOL!
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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Ha! Alexa did it all for me.
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08-19-2018, 11:24 AM
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#13
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Thinks s/he gets paid by the post
Join Date: Dec 2016
Location: DC area
Posts: 2,479
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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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FI and Semi-ER March 24, 2017
Consulting to stay engaged
"All models are wrong, some are useful." - George Box
“There is always a well-known solution to every human problem: neat, plausible, and wrong.” - H.L. Mencken
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08-19-2018, 11:25 AM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2006
Location: Washington, DC
Posts: 11,317
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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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Idleness is fatal only to the mediocre -- Albert Camus
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08-19-2018, 11:33 AM
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#15
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,472
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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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Happily retired since 2009, at age 61. Best years of my life by far!
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08-19-2018, 01:01 PM
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#16
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Full time employment: Posting here.
Join Date: Feb 2017
Location: Severn
Posts: 947
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Quote:
Originally Posted by Souschef
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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+1
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08-19-2018, 02:58 PM
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#17
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Recycles dryer sheets
Join Date: May 2011
Posts: 325
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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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08-19-2018, 03:20 PM
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#18
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gone traveling
Join Date: Mar 2015
Posts: 3,508
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Quote:
Originally Posted by cyber888
Multiply Age x Networth, then divide by Yearly Expenses
If it is greater than 1,000, you can retire.
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Apparently my kids should have retired at 10.
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08-19-2018, 03:25 PM
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#19
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Thinks s/he gets paid by the post
Join Date: Jan 2017
Location: Hog Mountian
Posts: 2,077
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FIREcalc, baby!
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08-19-2018, 03:34 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Aug 2006
Posts: 2,433
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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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