can I average out my RLE?

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1year23
Posts: 28
Joined: Fri Apr 01, 2016 8:31 am

can I average out my RLE?

Post by 1year23 » Sun Aug 28, 2016 1:46 pm

Thank you in advance to anyone that answers which seems to me to be a very simple question but I have never seen specifically asked. If my RLE is for example 160K a year, and will be for the next 10 years until we take SS. Then with both my husband and I taking SS, our expenses are reduced by that amount (160-60=100). So now, if our expenses are 100K for the next 20 years we can figure that our RLE is averaged over the 30 years this way.
10 X 160 K= 1600 K
20X 100 K = 2000K
and 1600K +2000 K= 3600K
3600k divided by 30 (number years of retirement) = 120 K AVERAGE RLE and our "number" should by 25 X 120K or 3 Million

Does this make sense? Is this the "boglehead way" already?

CppCoder
Posts: 827
Joined: Sat Jan 23, 2016 9:16 pm

Re: can I average out my RLE?

Post by CppCoder » Sun Aug 28, 2016 2:04 pm

No, I don't think the math works. You are front loading the spending versus the average, so the portfolio may drop too much in the beginning to sustain itself later. This seems like a recasting of the sequence of returns problem.

cherijoh
Posts: 4932
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: does this make mathematical sense?

Post by cherijoh » Sun Aug 28, 2016 2:08 pm

1year23 wrote:Thank you in advance to anyone that answers which seems to me to be a very simple question but I have never seen specifically asked. If my RLE is for example 160K a year, and will be for the next 10 years until we take SS. Then with both my husband and I taking SS, our expenses are reduced by that amount (160-60=100). So now, if our expenses are 100K for the next 20 years we can figure that our RLE is averaged over the 30 years this way.
10 X 160 K= 1600 K
20X 100 K = 2000K
and 1600K +2000 K= 3600K
3600k divided by 30 (number years of retirement) = 120 K AVERAGE RLE and our "number" should by 25 X 120K or 3 Million

Does this make sense? Is this the "boglehead way" already?
I would approach it differently.

You need $60K/year for 10 years in your short term pot. Figure out how much that would cost using a conservative return. If you assume you can just keep up with inflation that would be $600K. But if you expect interest rates to rise then you might want a little extra.

You also need $100K/year throughout your entire retirement. If you are comfortable with a 4% safe withdrawal rate then that portion of the nest egg would be 25 x $100K = $2.5MM to cover your entire retirement. But many people either assume a lower safe withdrawal rate OR assume that they could cut back their expenses should the stock market tank. Only you know how much you really need to live on.

In addition you need to consider what happens when the first spouse passes away. You are then down to one SS payment AND you are stuck with paying taxes as a single person. Did you take taxes into consideration when you estimated your RLE?

whomever
Posts: 781
Joined: Sat Apr 21, 2012 5:21 pm

Re: can I average out my RLE?

Post by whomever » Sun Aug 28, 2016 2:19 pm

It's an approximation, like everything else about retirement planning :-)

Early expenses count for a little more. For example, imagine someone planning for a 50 year retirement. Their portfolio is $10 and earns 10% real per year, and they plan on average expenses of $1 a year. With a fixed $1 of spending every year they can live forever without any drawdown, because the $10 throws off $1 a year.

However, what if they decide to frontload their expenditures by spending $9 the first year, and 81.6 cents or so for the remaining 49 years? That averages $1 a year over the 50 years, but they are clearly going to run out of money really soon (after the first year, the portfolio will be worth $1.10, and they withdraw 81.6 cents for year two, so they will go broke in year 3). This is of course an extreme example, but you get the idea.

FWIW, I view our retirement as two phases - the pre social security (and/or pension or annuity) period, with known duration and high expenses, and the post SS phase[1] with lower drawdown but unknown duration. This also makes sense for us because we largely funded the pre-SS phase with a CD ladder.

Everyone's scenario will be different, of course.

[1]actually two phases - while we're collecting both SS benefits, and then when only one of us is collecting.

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