20x expenses question

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coachz
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20x expenses question

Post by coachz »

Using the save 20x expenses needed for retirement model, if my wife and I are 57 and are looking at 35 years worth of retirement, with expenses of $50,000 a year that is $1mil, how can we include Social Security income into the 20x earnings in a meaningful way? If we take it at age 66, do we just our yearly expenses at age 66, subtract SS income and multiply by 20x to find the amount we need to add? Plus that's 10 years down the road.
richard
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Re: 20x expenses question

Post by richard »

coachz wrote:Using the save 20x expenses needed for retirement model, if my wife and I are 57 and are looking at 35 years worth of retirement, with expenses of $50,000 a year that is $1mil, how can we include Social Security income into the 20x earnings in a meaningful way? If we take it at age 66, do we just our yearly expenses at age 66, subtract SS income and multiply by 20x to find the amount we need to add? Plus that's 10 years down the road.
The usual model is a 4% withdrawal rate, which equates to saving 25x annual retirement expenses. Social Security reduces your retirement expenses, so you'd calculate expenses net of Social Security and multiply by 20 or 25 as the case may be.

These calculations are just rules of thumb - approximations that may well have to be adjusted.
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LadyGeek
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Re: 20x expenses question

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).
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midareff
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Re: 20x expenses question

Post by midareff »

While another poster has noted the typical number is 25X there is significant reasoning for a larger multiple. Jim Otar, in his book "Unveiling the Retirement Myth" suggested as high as 31X. I understand the book is available on his website for about $6 as a pdf download. Highly recommended. Methinks the only thing worse than being old is old and poor.
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siamond
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Re: 20x expenses question

Post by siamond »

There are actually TWO very different 25x multipliers that we often hear about.

The first is the Bengen's 4% safe withdrawal rate. 100 * 4% = 25x. This one says that IF future (US) returns mimic the past, you can safely withdraw 4% for an indefinite time while not bringing the portfolio to zero, actually having a very solid chance of preserving it, and probably even increase it. There is also an implicit assumption of a stock-heavy portfolio, hence some level of risks. And... Please, oh, please note the "IF". 21st century returns do not appear likely to be that rosy...

The second one is the LMP concept, of accumulating 25 times your planned expenses, and then using a safe vehicle (say TIPS) to cover for your retirement expenses. This is a much more conservative line of thinking, with an implicit assumption that you retire around 65 or 70, and will not live more than 100 years. And if you use TIPS, this will deplete your portfolio, as you spend the principal as well as the interest. Very safe, but time-limited, and your kids might not get much of an inheritance if you live long enough.

Although the 2nd one is much more conservative, yes, some authors are starting to use a 30x multiplier for it... Dr Bernstein in the book he just issued (Rational Expectations) still uses 25x in most of his LMP math, but does mention the fact that using 30x might be in order. Yup, even for LMP. Because he fears negative (real) returns on bonds. Urg.
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siamond
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Re: 20x expenses question

Post by siamond »

coachz wrote:Using the save 20x expenses needed for retirement model, if my wife and I are 57 and are looking at 35 years worth of retirement, with expenses of $50,000 a year that is $1mil, how can we include Social Security income into the 20x earnings in a meaningful way? If we take it at age 66, do we just our yearly expenses at age 66, subtract SS income and multiply by 20x to find the amount we need to add? Plus that's 10 years down the road.
Now, back to your exact question...

Well first off, if you follow the LMP line of reasoning while retiring at 57 and go down the TIPS path (as opposed to an SPIA), you might be in for a really bad surprise in your 90s with no money left to spend... And if you use an SPIA, you will not find an inflation-adjusted one with decent terms that applies to you 'youngsters', I'm afraid.

Next, yes, SS is extra income besides your portfolio withdrawal. So yearly expenses == SS + safe-portfolio-withdrawals. Which means that you do have a 10-years gap if you retire now. This might not be a showstopper, but you might need to plan for some sort of part-time job in the mean time, hopefully reasonably fun... Oh, and don't forget health insurance too...
jwa
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Re: 20x expenses question

Post by jwa »

What I have read is 20 to 25 times your expenses beyond what is not covered by SS, pensions and other guaranteed sources of income. Intuitively this makes sense to me. If I have a large pension and nice SS checks to rely on that cover my expenses I probably don't need as much money. On the other hand, if I have no pension and a low SS payout that don't cover my expenses then I need a large portfolio.

I make my plans around 20 to 25 times excess expenses not covered by guaranteed income sources and luckily I have more than that. Thank you Jack Bogle!!!
letsgobobby
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Re: 20x expenses question

Post by letsgobobby »

midareff wrote: Methinks the only thing worse than being old is old and poor.
How about young and dead?

Bogleheads seem to dismiss that possibility too often.
kaudrey
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Re: 20x expenses question

Post by kaudrey »

SS reduces the amount of withdrawals you need from your portfolio.

What you need to determine are the expenses that your portfolio will need to cover.

If you expenses are $50K a year, and SS is $20K a year, your porfolio only has to cover $30K a year.

My retirement projection spreadsheet has many such adjustments over time, because I will get a pension at 57, and then my DH and I will get SS at different times (as we are 5 years apart). Each additional income source reduces portolio withdrawals.
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