## X times salary, backwards calculation?

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highlytaxed1
Posts: 2
Joined: Sat Oct 14, 2017 9:59 am

### X times salary, backwards calculation?

Hi all:

I'm trying to determine if there is a backward applicable formula to arrive at how much retirement savings one should have. For example, if a rule of thumb is that one should have 12X annual salary to retire at 65, what is the ratio for each year EARLIER one would like to retire? If I'm going to retire at 62, or even earlier, what would that target number be?

I realize this will vary by lifestyle, spending habits, etc. I'm just wondering if there is a heuristic out there.

Thanks

The Wizard
Posts: 12435
Joined: Tue Mar 23, 2010 1:45 pm

### Re: X times salary, backwards calculation?

You likely won't find a good answer on this forum.
For instance, if my salary is \$100k but I save 30% for retirement, then what is my effective salary?

The Expenses People will be along shortly to complicate things even further...
Last edited by The Wizard on Sat Oct 14, 2017 10:44 am, edited 1 time in total.
Attempted new signature...

BogleMelon
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Joined: Mon Feb 01, 2016 11:49 am

### Re: X times salary, backwards calculation?

"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

Hyperborea
Posts: 741
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

### Re: X times salary, backwards calculation?

There is no heuristic with salary that makes any sense since as you note "this will vary by lifestyle, spending habits, etc.". This doesn't even make sense for normal retirement except in a small window. It's like drawing the tangent to a curve - it will approximate the curve for only a small range but for most of the range it will be useless.

Use investments as a multiple of expenses as a metric. You generally need somewhere between 25x to 33x of expenses depending on how young you will be retiring. I will suggest reading the excellent series on retirement withdrawal at Retire Early Now to get an idea of what this should be for you.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

NYC_Guy
Posts: 247
Joined: Fri Mar 10, 2017 2:23 pm
Location: New York

### Re: X times salary, backwards calculation?

highlytaxed1 wrote:
Sat Oct 14, 2017 10:15 am
Hi all:

I'm trying to determine if there is a backward applicable formula to arrive at how much retirement savings one should have. For example, if a rule of thumb is that one should have 12X annual salary to retire at 65, what is the ratio for each year EARLIER one would like to retire? If I'm going to retire at 62, or even earlier, what would that target number be?

I realize this will vary by lifestyle, spending habits, etc. I'm just wondering if there is a heuristic out there.

Thanks
Multiples of income often provide garbage answers. Use multiples of expenses instead. This is particularly true for professionals that may have ending income that is >20x starting income. If you want to retire under 60, I suggest net worth of 33x expenses as a good rule of thumb (but that’s all it is). Exclude your house from net worth if you are in a LCOL area. Include a big portion of your house equity if you are in a HCOL area (under the theory that you can always move to a LCOL area if needed). Others will certainly have different advice for a quick rule of thumb.

highlytaxed1
Posts: 2
Joined: Sat Oct 14, 2017 9:59 am

### Re: X times salary, backwards calculation?

Actually, I did find a heuristic formula, and as is usually the case, I complicated the question way beyond where I should have. Retirement age really has little to do with it. It's just a simple calculation of desired income and withdrawal rate. Thus:

x = desire income
y = withdrawal rate
z = principal needed.

x/y = z. If I want 96,000 annual income, and a 4% withdrawal rate seems wise, then I need 2,400,000 in principal.

96000/.04= 2,400,000.

KlangFool
Posts: 10639
Joined: Sat Oct 11, 2008 12:35 pm

### Re: X times salary, backwards calculation?

highlytaxed1 wrote:
Sat Oct 14, 2017 10:15 am
Hi all:

I'm trying to determine if there is a backward applicable formula to arrive at how much retirement savings one should have. For example, if a rule of thumb is that one should have 12X annual salary to retire at 65, what is the ratio for each year EARLIER one would like to retire? If I'm going to retire at 62, or even earlier, what would that target number be?

I realize this will vary by lifestyle, spending habits, etc. I'm just wondering if there is a heuristic out there.

Thanks
highlytaxed1,

X time salary or income is the wrong formula to use.
X times current annual expense if you aiming for Financial Independence before any pension and/or social security income.
X times retirement expense if you are aiming for retirement with pension and/or social security income.

KlangFool

KlangFool
Posts: 10639
Joined: Sat Oct 11, 2008 12:35 pm

### Re: X times salary, backwards calculation?

highlytaxed1 wrote:
Sat Oct 14, 2017 10:56 am
Actually, I did find a heuristic formula, and as is usually the case, I complicated the question way beyond where I should have. Retirement age really has little to do with it. It's just a simple calculation of desired income and withdrawal rate. Thus:

x = desire income
y = withdrawal rate
z = principal needed.

x/y = z. If I want 96,000 annual income, and a 4% withdrawal rate seems wise, then I need 2,400,000 in principal.

96000/.04= 2,400,000.
highlytaxed1,

<< Retirement age really has little to do with it. >>

That statement is not true. Withdrawal rate has to do with the retirement age. A person retired at 30 years old should have a different withdrawal rate than a person retired at 60 years old.

<<x = desire income>>

X should be the expense. It is not the income. There is a subtle but important difference.

For example, if you spend 100K by selling 100K worth of stock and the cost basis of the stock is 50K, you generate a capital gain of 50K. You may only have an income of 50K.

viewtopic.php?t=87471

KlangFool

The Wizard
Posts: 12435
Joined: Tue Mar 23, 2010 1:45 pm

### Re: X times salary, backwards calculation?

highlytaxed1 wrote:
Sat Oct 14, 2017 10:56 am
Actually, I did find a heuristic formula, and as is usually the case, I complicated the question way beyond where I should have. Retirement age really has little to do with it. It's just a simple calculation of desired income and withdrawal rate. Thus:

x = desire income
y = withdrawal rate
z = principal needed.

x/y = z. If I want 96,000 annual income, and a 4% withdrawal rate seems wise, then I need 2,400,000 in principal.

96000/.04= 2,400,000.
This is excellent and aligned with my way of thinking to some degree.
Your "expenses" might be \$70,000 while employed but your desired income after completion of employment would be somewhat higher to allow for extra spending.

That 4% withdrawal percentage is the conventional metric, but there's no allowance for SS, pension, or annuity income there.
So most folks would make an adjustment for that...
Attempted new signature...

rgs92
Posts: 2273
Joined: Mon Mar 02, 2009 8:00 pm

### Re: X times salary, backwards calculation?

I think there is no really reliable substitute for doing a Firecalc analysis (or similar projection/simulation tool).
That would be your best approach.
Good luck.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

### Re: X times salary, backwards calculation?

highlytaxed1 wrote:
Sat Oct 14, 2017 10:15 am
Hi all:

I'm trying to determine if there is a backward applicable formula to arrive at how much retirement savings one should have. For example, if a rule of thumb is that one should have 12X annual salary to retire at 65, what is the ratio for each year EARLIER one would like to retire? If I'm going to retire at 62, or even earlier, what would that target number be?

I realize this will vary by lifestyle, spending habits, etc. I'm just wondering if there is a heuristic out there.

Thanks
Salary doesn't do it because people spend different percentages of their salaries while they work for a variety of reasons that might not apply to spending in retirement.

I retired at 61, this year, and my rule of thumb is to take the portion of my portfolio I'm willing to eliminate and divide it by 30 years. Predicting returns and inflation based on the past was never my thing.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Posts: 836
Joined: Sat Apr 10, 2010 6:02 pm

### Re: X times salary, backwards calculation?

Salary does not matter. What matters is what your expenses (minus after-tax Social Security, pension, annuity or other recurring income) will be.

If your salary is 10M/year and your projected retirement expenses are \$50k/year, you can retire after less than 1 year of working at any age, even age 1.

If your salary is \$50k/year and you spend \$50k/year, you can never retire based on your earnings alone (SS will not cover your expenses and you would be spending more than your after-tax salary, so no savings for you along the way).

TravelforFun
Posts: 1552
Joined: Tue Dec 04, 2012 11:05 pm

### Re: X times salary, backwards calculation?

The Wizard wrote:
Sat Oct 14, 2017 12:19 pm
highlytaxed1 wrote:
Sat Oct 14, 2017 10:56 am
Actually, I did find a heuristic formula, and as is usually the case, I complicated the question way beyond where I should have. Retirement age really has little to do with it. It's just a simple calculation of desired income and withdrawal rate. Thus:

x = desire income
y = withdrawal rate
z = principal needed.

x/y = z. If I want 96,000 annual income, and a 4% withdrawal rate seems wise, then I need 2,400,000 in principal.

96000/.04= 2,400,000.
This is excellent and aligned with my way of thinking to some degree.
Your "expenses" might be \$70,000 while employed but your desired income after completion of employment would be somewhat higher to allow for extra spending.

That 4% withdrawal percentage is the conventional metric, but there's no allowance for SS, pension, or annuity income there.
So most folks would make an adjustment for that...
To retire at any age, I suggest you use 3% instead of 4% and yes, you should take into consideration SS, pension, increasing medical costs, paid off mortgage, etc.

JBTX
Posts: 4238
Joined: Wed Jul 26, 2017 12:46 pm

### Re: X times salary, backwards calculation?

BogleMelon wrote:
Sat Oct 14, 2017 10:43 am
Try this: https://www.firecalc.com/
Interesting site, thanks for linking. Based upon this for our situation if we can get very modest growth on our portfolio over the next 5-10 years and can essentially break even cash flow wise until SS we will be in excellent shape

I assume this doesn’t take into account SS. That makes it more difficult to use for early retirement unless you just want to ignore social security and treat it as gravy.

emoore
Posts: 478
Joined: Mon Mar 04, 2013 8:16 pm

### Re: X times salary, backwards calculation?

JBTX wrote:
Sat Oct 14, 2017 3:08 pm
BogleMelon wrote:
Sat Oct 14, 2017 10:43 am
Try this: https://www.firecalc.com/
Interesting site, thanks for linking. Based upon this for our situation if we can get very modest growth on our portfolio over the next 5-10 years and can essentially break even cash flow wise until SS we will be in excellent shape

I assume this doesn’t take into account SS. That makes it more difficult to use for early retirement unless you just want to ignore social security and treat it as gravy.
It does take SS into account under the other spending tab.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

### Re: X times salary, backwards calculation?

JBTX wrote:
Sat Oct 14, 2017 3:08 pm
BogleMelon wrote:
Sat Oct 14, 2017 10:43 am
Try this: https://www.firecalc.com/
Based upon this for our situation if we can get very modest growth on our portfolio over the next 5-10 years and can essentially break even cash flow wise until SS we will be in excellent shape
Firecalc is the ultimate tool for predicting future results based on past performance. Entertaining, but not recommended for predicting how long your nest egg and asset allocation will support you. If that were all we needed no one would have any problems in retirement and all our dreams would come true.

But we have to use something...so assuming that you just keep pace with inflation is your safest bet.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

JBTX
Posts: 4238
Joined: Wed Jul 26, 2017 12:46 pm

### Re: X times salary, backwards calculation?

I did find the SS and other tabs.

It’s default retirement allocation assumption is 75% stocks and 25% bonds which seems awfully aggressive. I changed it to 60% but that didn’t change the results at all. ????

Hyperborea
Posts: 741
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

### Re: X times salary, backwards calculation?

JBTX wrote:
Sat Oct 14, 2017 4:18 pm
I did find the SS and other tabs.

It’s default retirement allocation assumption is 75% stocks and 25% bonds which seems awfully aggressive. I changed it to 60% but that didn’t change the results at all. ????
For 30 year retirements with a 4% WR an allocation from around 40% to almost 100% are pretty much equivalent as far as success rate. They will differ in other ways though - mainly volatility and expected final value. Note that success on FireCalc and most other similar calculators is that the portfolio doesn't hit zero during the time period. It may however hit zero the day after the time period.

Those 30 year periods might be fine if you are a 65 or 70 year old retiree as was the model in the original Bengen and Trinity studies. A 30 year retirement is short though for an early retiree. If a couple retires at 50 they are looking at a 40-50 year expected joint lifespan. The success rate over those time periods really starts to spread for the different allocations. Those longer retirements need a higher level of stock to provide enough returns to survive that longer time period.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

JBTX
Posts: 4238
Joined: Wed Jul 26, 2017 12:46 pm

### Re: X times salary, backwards calculation?

Hyperborea wrote:
Sat Oct 14, 2017 5:03 pm
JBTX wrote:
Sat Oct 14, 2017 4:18 pm
I did find the SS and other tabs.

It’s default retirement allocation assumption is 75% stocks and 25% bonds which seems awfully aggressive. I changed it to 60% but that didn’t change the results at all. ????
For 30 year retirements with a 4% WR an allocation from around 40% to almost 100% are pretty much equivalent as far as success rate. They will differ in other ways though - mainly volatility and expected final value. Note that success on FireCalc and most other similar calculators is that the portfolio doesn't hit zero during the time period. It may however hit zero the day after the time period.

Those 30 year periods might be fine if you are a 65 or 70 year old retiree as was the model in the original Bengen and Trinity studies. A 30 year retirement is short though for an early retiree. If a couple retires at 50 they are looking at a 40-50 year expected joint lifespan. The success rate over those time periods really starts to spread for the different allocations. Those longer retirements need a higher level of stock to provide enough returns to survive that longer time period.
The worst case stayed the same whether 60 or 75% but the average and best case were higher in the 75% scenario.

Phineas J. Whoopee
Posts: 7691
Joined: Sun Dec 18, 2011 6:18 pm

### Re: X times salary, backwards calculation?

Here's what I did, and a couple of years later I answered some questions about it.

For the record, I think an age-based asset allocation plan will be far more practical for most investors. I offer my plan and experience implementing it to shine a contrasting light from a different direction.

PJW

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

### Re: X times salary, backwards calculation?

JBTX wrote:
Sat Oct 14, 2017 4:18 pm
I did find the SS and other tabs.

It’s default retirement allocation assumption is 75% stocks and 25% bonds which seems awfully aggressive. I changed it to 60% but that didn’t change the results at all. ????
Correct. Retirement withdrawal success is remarkable independent of asset allocation until stocks are reduced below a critical level. The reason is that volatility increases return and also increases the risk of bad sequence of return. The two seem to offset at moderate withdrawal rates. At a low enough withdrawal rate your asset allocation does not matter to risk of retirement ruin at all.

What will be different at different asset allocations is the wealth remaining when you die. You can see that in the FireCalc outputs. More stocks means greater end point wealth and greater uncertainty in end point wealth.

JBTX
Posts: 4238
Joined: Wed Jul 26, 2017 12:46 pm

### Re: X times salary, backwards calculation?

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Last edited by JBTX on Sat Aug 04, 2018 3:59 pm, edited 1 time in total.

cherijoh
Posts: 4989
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

### Re: X times salary, backwards calculation?

Ron Scott wrote:
Sat Oct 14, 2017 4:04 pm
JBTX wrote:
Sat Oct 14, 2017 3:08 pm
BogleMelon wrote:
Sat Oct 14, 2017 10:43 am
Try this: https://www.firecalc.com/
Based upon this for our situation if we can get very modest growth on our portfolio over the next 5-10 years and can essentially break even cash flow wise until SS we will be in excellent shape
Firecalc is the ultimate tool for predicting future results based on past performance. Entertaining, but not recommended for predicting how long your nest egg and asset allocation will support you. If that were all we needed no one would have any problems in retirement and all our dreams would come true.
I think your view has been skewed by too much Bogleheads if you think "no one would have any problems in retirement".

I think a lot of people would be in for an unpleasant surprise if they ran Firecalc and plugged in the size of their nest egg and used their current consumption rate (or even 70 - 80% of their current consumption rate) as a basis for retirement spending.

Hyperborea
Posts: 741
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

### Re: X times salary, backwards calculation?

JBTX wrote:
Sat Oct 14, 2017 5:51 pm
Hyperborea wrote:
Sat Oct 14, 2017 5:03 pm
JBTX wrote:
Sat Oct 14, 2017 4:18 pm
I did find the SS and other tabs.

It’s default retirement allocation assumption is 75% stocks and 25% bonds which seems awfully aggressive. I changed it to 60% but that didn’t change the results at all. ????
For 30 year retirements with a 4% WR an allocation from around 40% to almost 100% are pretty much equivalent as far as success rate. They will differ in other ways though - mainly volatility and expected final value. Note that success on FireCalc and most other similar calculators is that the portfolio doesn't hit zero during the time period. It may however hit zero the day after the time period.

Those 30 year periods might be fine if you are a 65 or 70 year old retiree as was the model in the original Bengen and Trinity studies. A 30 year retirement is short though for an early retiree. If a couple retires at 50 they are looking at a 40-50 year expected joint lifespan. The success rate over those time periods really starts to spread for the different allocations. Those longer retirements need a higher level of stock to provide enough returns to survive that longer time period.
The worst case stayed the same whether 60 or 75% but the average and best case were higher in the 75% scenario.

For 30 year retirements they did. For longer retirements they don't. The worst cases for all allocations starts to drop but lower stock allocations really drop to unsafe levels as durations increase. For a 50 year retirement (what a ~50 year old couple retiring should plan for) a 4% WR has a 90% success rate while a 50% allocation has only a 74% success rate. I don't need to have 100% but 74% is far too low and even 90% is a bit tight. I'd drop the WR some but that still works best with a higher equity allocation.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower