clarification on the 25 or 35 times rule

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
bowtie
Posts: 316
Joined: Sun Jul 20, 2014 11:41 am

clarification on the 25 or 35 times rule

Post by bowtie » Thu Aug 13, 2015 5:19 pm

I was going to add to the thread (the one by dub 'how are we doing') but decided to make my own thread to get a clarification.

A poster stated that a good suggested amount to have saved at retirement time is 25 to 35 times one's estimated expenses per year in retirement. They also mentioned pension or SS. So do you mean: 25 to 35 times one's annual expenses at time of retirement LESS one's pension per year or not including it? If a pension would yield maybe 3K per month, that's 36K less taxes to subtract and then one's annual spending would be that new amount.

How are you figuring in the age of one's retirement when the suggestion is 25 to 35 times the expenses? Obviously you'd have more years in retirement the earlier you retire......

I know that there is FireCalc and Monte Carlo simulations, but this is a figure I don't recall seeing before. There is usually some arbitrary figure like '8 times your income' or something like that. As others have mentioned on here, I do find projecting one's expenses and figuring what one really needs in savings/investments is much more accurate than going by one's salary.

So it's 25 times or more, and that is whether or not you have a pension, or, you subtract the pension? (I assume it's the latter). And what age is one talking about at 25-35 times?
Thanks to anyone who wishes to clarify.....

jackholloway
Posts: 962
Joined: Mon Jul 08, 2013 3:45 pm

Re: clarification on the 25 or 35 times rule

Post by jackholloway » Thu Aug 13, 2015 5:34 pm

I would say 25x or 33x your actual expenses. This would have your pensions, etc, subtracted first. I would, though, be a bit conservative about value - not all pensions stay fully funded, and it is not clear how social security will resolve. I have chosen to use 75% of FRA social security myself, and since I am in my late 40s, I am assuming FRA will go up to perhaps 69 in the next twenty years.

You will have to make your own risk assessment.

terran
Posts: 703
Joined: Sat Jan 10, 2015 10:50 pm

Re: clarification on the 25 or 35 times rule

Post by terran » Thu Aug 13, 2015 5:48 pm

The trinity study showed that historically you could withdraw 4% of your portfolio the first year, then adjust that withdrawal for inflation and you could do this for 30 years and not run out of money even in the worst historical scenarios. 1 divided by 4% is 25, hence the 25 times rule.

If you believe returns will be lower in the future than they were in the past, or if you plan on being retired for more than 30 years then you might want to use a lower withdrawal rate. Lots of people here use 3%. 1 divided by 3% is 33, hence the 33 times rule.

You can read more at http://www.bogleheads.org/wiki/Safe_withdrawal_rates

Pensions should be subtracted from your expected expenses before applying these rules because the rule isn't about your expenses, they're about how much you should be able to safely withdraw from your portfolio. If you have 4k.month expenses, and 3k/month pension then you will need 1k/month from your portfolio. You need to remember to add taxes into your expenses.

miles monroe
Posts: 1198
Joined: Mon Jan 20, 2014 12:14 pm

Re: clarification on the 25 or 35 times rule

Post by miles monroe » Thu Aug 13, 2015 5:53 pm

25 times is the phrase schwab uses.

25 times income is the same thing as the 4% rule.

simple example. lets say you have a million dollar portfolio at retirement. 4% withdrawal will give you $40,000. and lets assume that is how much you need to retire on.

schwab would say it thusly; if you want to retire on $40,000 a year, your portfolio needs to be 25 times that amount, or one million dollars.

Valdeselad
Posts: 186
Joined: Mon Apr 26, 2010 1:42 pm

Re: clarification on the 25 or 35 times rule

Post by Valdeselad » Thu Aug 13, 2015 6:04 pm

miles monroe wrote:25 times is the phrase schwab uses.

25 times income is the same thing as the 4% rule.

simple example. lets say you have a million dollar portfolio at retirement. 4% withdrawal will give you $40,000. and lets assume that is how much you need to retire on.

schwab would say it thusly; if you want to retire on $40,000 a year, your portfolio needs to be 25 times that amount, or one million dollars.
The thing I have always found confusing about this "rule" is there is no time aspect. For example, does the '25x rule' mean you should be covered for perpetuity, or a 30 year retirement, 40 year retirement, 50 year retirement, etc...? It's very confusing IMO.

hicabob
Posts: 2690
Joined: Fri May 27, 2011 5:35 pm
Location: cruz

Re: clarification on the 25 or 35 times rule

Post by hicabob » Thu Aug 13, 2015 6:08 pm

Valdeselad wrote:
The thing I have always found confusing about this "rule" is there is no time aspect. For example, does the '25x rule' mean you should be covered for perpetuity, or a 30 year retirement, 40 year retirement, 50 year retirement, etc...? It's very confusing IMO.
Put the 25x amount into firecalc then you can see the probabilities (or educated guesstimates) of the amount lasting X number of years

miles monroe
Posts: 1198
Joined: Mon Jan 20, 2014 12:14 pm

Re: clarification on the 25 or 35 times rule

Post by miles monroe » Thu Aug 13, 2015 6:35 pm

its all just an educated guess that gives us a starting point. lot of people believe in the 4% rule and that their money has a 95% chance of lasting 30 years. but just as many will tell ya that becasue of the low fixed income rates that the 4% rule is now the 3% rule. or even less. but then again just as many will point to studies that show that if you use the 4% rule after 30 years your portfolio balance will be twice as big as it was on year 1 of retirement.

so the 4% rule is a guideline that needs to be reviwed annually. can't set it and forget it.

User avatar
MikeWillRetire
Posts: 312
Joined: Fri Jun 29, 2012 12:36 pm

Re: clarification on the 25 or 35 times rule

Post by MikeWillRetire » Thu Aug 13, 2015 6:44 pm

If you retire at say 62, and you have a pension with a cola, and you apply for Social Security at the same age, then you subtract the pension and Social Security payment from your expenses. Multiply the remainder by 25, or 30 if you are very conservative. That is what you would like to have to retire at 62.
Now if you want to retire before social security, or if you want to take social security later than when you get your pension, or if your pension does not have a cola, then it is a bit more difficult to figure if you have enough money in our portfolio. That is when retirement calculators come into play.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: clarification on the 25 or 35 times rule

Post by dbr » Thu Aug 13, 2015 6:48 pm

Valdeselad wrote:
miles monroe wrote:25 times is the phrase schwab uses.

25 times income is the same thing as the 4% rule.

simple example. lets say you have a million dollar portfolio at retirement. 4% withdrawal will give you $40,000. and lets assume that is how much you need to retire on.

schwab would say it thusly; if you want to retire on $40,000 a year, your portfolio needs to be 25 times that amount, or one million dollars.
The thing I have always found confusing about this "rule" is there is no time aspect. For example, does the '25x rule' mean you should be covered for perpetuity, or a 30 year retirement, 40 year retirement, 50 year retirement, etc...? It's very confusing IMO.
It is confusing when some source tries to make something simpler than it is. FireCalc is a good program to illustrate what is at stake here. Reading the original Trinity study of Cooley, Hubbard, and Walz at Trinity University (San Antonio) is a really good introduction to the whole thought process. One big mistake is to reference the results as a "rule." Retirement studies are exactly that, reports of analysis of data that tell us something about how portfolios have behaved in the past and might behave in the future. To convert this to a plan is naive. Simulators like FireCalc, informed by the kind of methodology used in studies approach closer to a plan as there is provision for data entry of features of an actual retirement, such a income streams and expenses that stop and/or start at particular times, are or aren't inflation indexed, derive income from this, that, or the other assets, and so on. Even so a model is still just that and is approximate and makes assumptions.

To answer the direct question, the 4% number is associated with the results in Trinity for a 30 year retirement. The dependence on length of retirement gets weaker and weaker with longer retirements meaning between 40 and 50 and perpetual it is about the same anyway. Someone looking at 15 years or 20 years might see much more changed numbers.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: clarification on the 25 or 35 times rule

Post by dbr » Thu Aug 13, 2015 6:49 pm

MikeWillRetire wrote:If you retire at say 62, and you have a pension with a cola, and you apply for Social Security at the same age, then you subtract the pension and Social Security payment from your expenses. Multiply the remainder by 25, or 30 if you are very conservative. That is what you would like to have to retire at 62.
Now if you want to retire before social security, or if you want to take social security later than when you get your pension, or if your pension does not have a cola, then it is a bit more difficult to figure if you have enough money in our portfolio. That is when retirement calculators come into play.
Exactly, and not to be forgotten. For most people who have variable income streams and variable expenses the 4% "rule" logically can't be a plan.

DVMResident
Posts: 1254
Joined: Mon Aug 01, 2011 8:15 pm

Re: clarification on the 25 or 35 times rule

Post by DVMResident » Thu Aug 13, 2015 7:15 pm

Valdeselad wrote:
miles monroe wrote:25 times is the phrase schwab uses.

25 times income is the same thing as the 4% rule.

simple example. lets say you have a million dollar portfolio at retirement. 4% withdrawal will give you $40,000. and lets assume that is how much you need to retire on.

schwab would say it thusly; if you want to retire on $40,000 a year, your portfolio needs to be 25 times that amount, or one million dollars.
The thing I have always found confusing about this "rule" is there is no time aspect. For example, does the '25x rule' mean you should be covered for perpetuity, or a 30 year retirement, 40 year retirement, 50 year retirement, etc...? It's very confusing IMO.
As previously stated, the trinity study assumed 30 years of withdraws.

For multiple generational generations (endowments, family trust funds, etc.), other studies have suggested 2% withdraws to maintain inflation adjusted principle decade after decade.

WCI made a thought provoking point on his blog: only ~10% of retirees live 30 years. So, the 4% rule is overly conservative for most. Even a 55 year old early retiree has a good chance of not seeing 85 (though they have to cover the SS +/- pension gap).

Moreover, during most periods of the Trinity study, people who followed the 4% rule would actually end up with more money than when they started. Variable withdrawal rates make a lot more sense.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: clarification on the 25 or 35 times rule

Post by dbr » Thu Aug 13, 2015 7:25 pm

DVMResident wrote:
As previously stated, the trinity study assumed 30 years of withdraws.
That is so as far as the 4% result commonly presented is concerned.

I think a better perspective is not that the Trinity study assumed a 30 year retirement but rather that the authors looked at the results that would be obtained for different asset allocations and different rates of withdrawal for different lengths of time. They then calculate the probability of retirement failure for each combination within the range of conditions. Time is not an assumption but a variable parameter of the study. From that, if you look at the table for a thirty year timespan and consider success to be no more than some rate of failure, 5% would do it I think, one can see that 4% of initial portfolio value indexed by inflation is the highest rate of withdrawal that meets that success rate. You get other numbers for other spans of time and without inflation indexing or for a different choice of what one considers a sufficiently low rate of failure. There is also a dependence on how the assets are invested.

Post Reply