What exactly is the “x” in 25x?

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sapper1371
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What exactly is the “x” in 25x?

Post by sapper1371 »

People often refer to their savings as how many years of expenses that they have saved. For example, someone might say that they hit “25x”. Is the “x” annual expenses or the annual gap that you will need your investments to cover after other income, such as SS and/or pensions?

If the goal is the look at this in terms of a SWR, then I would think that the more useful “x” would be the gap you need to cover rather than annual expenses.

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.

Another complexity is that you will probably want to delay SS and pensions so the gap will change, potentially rather significantly, during retirement.

Just curious how I should interpret this.
marcopolo
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Re: What exactly is the “x” in 25x?

Post by marcopolo »

It is the gap that needs to be covered by your portfolio.
It does get more complicated when your expenses, and other income streams change over time.
That is why it is just a rough rule of thumb.
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MathWizard
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Re: What exactly is the “x” in 25x?

Post by MathWizard »

The expenses in this are after what you plan on as income streams.

Pensions, SS benefits, income from renting property, royalties,
etc.

Your portfolio needs to cover the rest.

I interpret the x as a multiplication symbol.

25x is usually stated as 25x expenses.

Posters sometimes use shorthand.
randomguy
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Re: What exactly is the “x” in 25x?

Post by randomguy »

marcopolo wrote: Fri Jan 28, 2022 10:59 pm It is the gap that needs to be covered by your portfolio.
It does get more complicated when your expenses, and other income streams change over time.
That is why it is just a rough rule of thumb.
Taxes are the expense that is really fun to calculate as the more income you need, the more taxes you pay.
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Re: What exactly is the “x” in 25x?

Post by milktoast »

Ultimately that’s why I decided to use an ABW style spreadsheet.

You can use PV to compute present value of future income or expenses. Add that to current principal then do a PMT to figure out the spending.

If you want to model 4% SWR but account for future real income (social security) you stick in 1.25% as the expected return in the PV and PMT formula.
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Re: What exactly is the “x” in 25x?

Post by jfave33 »

It means multiply

sorry couldn't resist
chassis
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Re: What exactly is the “x” in 25x?

Post by chassis »

x is your living expenses grossed up for taxes at your total effective tax rate.

It’s very easy.

Many people over complicate the idea.

25 times “x” is the pretax net worth required to adhere to the 4% “rule”. Adhering to the 4% rule means you have “won the game” and are “golden”.

It’s very simple. Avoid chasing your tail on this.
Last edited by chassis on Sat Jan 29, 2022 3:12 am, edited 1 time in total.
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22twain
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Re: What exactly is the “x” in 25x?

Post by 22twain »

sapper1371 wrote: Fri Jan 28, 2022 10:56 pm If the goal is the look at this in terms of a SWR, then I would think that the more useful “x” would be the gap you need to cover rather than annual expenses.
Quite true, and that is in fact what is meant by most people on this forum (the experienced ones, at least).

Also, "x" includes income taxes and health insurance premiums. Some inexperienced people might overlook them because those because they're often deducted from their paychecks and not paid explicitly from their checking accounts.
It's "IRMAA" (Income Related Monthly Adjustment Amount), not "IIRMA" or "IRRMA" or "IRMMA".
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Re: What exactly is the “x” in 25x?

Post by Jack FFR1846 »

chassis wrote: Sat Jan 29, 2022 3:11 am x is your living expenses grossed up for taxes at your total effective tax rate.
I would agree with just an additional description. It's expenses you will have IN RETIREMENT. Building a spread sheet with every expected expense written out is very helpful. Likely, your taxes will be much lower but your health insurance cost will be much higher. If your plan is to travel the world, that isn't free. Include it in your retirement expenses.

And yes, it's the gap as described here. I take my expenses from my spreadsheet, subtract social security, subtract any pension and divide that into whatever my savings are and that's my number.
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Re: What exactly is the “x” in 25x?

Post by Kenkat »

I see the x as the gap that needs to be covered after you deduct any income from pensions or social security from your expenses.

So if your expenses are $70k per year, you social security and pensions are $30k per year, you need 25 x $40k or $1m to cover that gap at a 4% withdraw rate.
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Re: What exactly is the “x” in 25x?

Post by KlangFool »

sapper1371 wrote: Fri Jan 28, 2022 10:56 pm

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.
sapper1371,

Are you lucky? Can you be sure that you would be fully employed continuously until you collect SS and pension?

I don't. Hence, I aim for Financial Independent. Aka, I can retire with my current annual expense. As per your example, the x would be 125K.

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Re: What exactly is the “x” in 25x?

Post by dbr »

KlangFool wrote: Sat Jan 29, 2022 10:11 am
sapper1371 wrote: Fri Jan 28, 2022 10:56 pm

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.
sapper1371,

Are you lucky? Can you be sure that you would be fully employed continuously until you collect SS and pension?

I don't. Hence, I aim for Financial Independent. Aka, I can retire with my current annual expense. As per your example, the x would be 125K.

KlangFool
This is an issue of successive approximations as one approaches retirement. KlangFool is right that counting up pensions from far out is uncertain and drops to a residual risk when you actually are signed up and getting payments. There are lots of other things that change as the years go by.

I would not go so far as to assign zero to those payments. Rather it is a question of considering how a scenario is going to work out
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HomerJ
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Re: What exactly is the “x” in 25x?

Post by HomerJ »

sapper1371 wrote: Fri Jan 28, 2022 10:56 pm People often refer to their savings as how many years of expenses that they have saved. For example, someone might say that they hit “25x”. Is the “x” annual expenses or the annual gap that you will need your investments to cover after other income, such as SS and/or pensions?

If the goal is the look at this in terms of a SWR, then I would think that the more useful “x” would be the gap you need to cover rather than annual expenses.

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.

Another complexity is that you will probably want to delay SS and pensions so the gap will change, potentially rather significantly, during retirement.

Just curious how I should interpret this.
The X IS the gap.

If your annual expenses are $125k, but your pension and SS will cover half of that, then your personal X is $62,500. Multiply by 25 and you should shoot for at least $1.5 million in your portfolio to retire.

It is true there is complexity when you retire early, say before you get SS... So you have to account for that.

Say you retired 5 years before you get SS and pension. I would just lump sum those 5 years into your portfolio.

$1.5 million plus SS and pension to get you from 65 to 95....

plus $125,000 x 5 years to get you through the first 5 years.

So $2.1 million or so to retire 5 years before SS and pension kick in.
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dbr
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Re: What exactly is the “x” in 25x?

Post by dbr »

I would add that even simple planning tools like FireCalc are designed to take into account amount and timing of income streams and project some sense of the possible outcomes. 4% rule and 25x is too simple for actual planning though a method like FireCalc essentially reflects the same method of analysis as generates the 4% observation. There are other models that do more, and all models are uncertain.
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Re: What exactly is the “x” in 25x?

Post by KyleAAA »

Just don't forget the X also includes taxes and not just your after tax spending.
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Re: What exactly is the “x” in 25x?

Post by inbox788 »

Instead of the expense side, you can also consider the income side with the assumption it's some indication of your retirement expenditure. You'll see 25x salary thrown around. Presumably, the more income you have during your working years, the more expenditures you will have in retirement, which isn't everyone. Your taxes and savings will go down, but inflation and health expenses will likely go up, and over retirement, will tend to cancel out.
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Re: What exactly is the “x” in 25x?

Post by KlangFool »

KyleAAA wrote: Sat Jan 29, 2022 12:09 pm Just don't forget the X also includes taxes and not just your after tax spending.
KyleAAA,

"It depends".

At a low expense level, the amount of taxes during retirement is essentially zero. My effective tax rate while I was working is around 5%. So, why would I pay a lot more when I am retired?

At below 50K to 60K expense level, the amount of taxes paid is near 0%.

Someone should read the following thread if they want to learn more about this subject.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

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Re: What exactly is the “x” in 25x?

Post by KlangFool »

inbox788 wrote: Sat Jan 29, 2022 12:39 pm Instead of the expense side, you can also consider the income side with the assumption it's some indication of your retirement expenditure. You'll see 25x salary thrown around. Presumably, the more income you have during your working years, the more expenditures you will have in retirement, which isn't everyone. Your taxes and savings will go down, but inflation and health expenses will likely go up, and over retirement, will tend to cancel out.
inbox788,

<< You'll see 25x salary thrown around. >>

I disagreed. And, it can be easily proven to be false.

If someone live paycheck to paycheck, then, the person does not save for retirement. Hence, it is pointless to talk about savings. So, where does the 25X salary comes from?

If someone LBYM, the person would only need to cover the expense. And, at low expense level, the taxes would be near 0%.

Gross Income = Annual Saving + Annual Expense + Taxes

It is well established in Bogleheads forum that setting the retirement target based on income is plainly wrong.

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Re: What exactly is the “x” in 25x?

Post by phxjcc »

In the somewhat myopic view of the people of Bogleheadia the “X” in 25 X is the gap between guaranteed income and the gross income stream that you Would like to have in retirement.

For most of the world, X=0 because they are going to live in their guaranteed income stream(s) and whatever meager savings they do have is going to be used for extra ordinary items.

For many (ok, some) of the greatest generation, in fact, X<0 because they actually saved money from their retirement income streams…just like they always did in their working years.
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Re: What exactly is the “x” in 25x?

Post by inbox788 »

KlangFool wrote: Sat Jan 29, 2022 12:47 pm
inbox788 wrote: Sat Jan 29, 2022 12:39 pm Instead of the expense side, you can also consider the income side with the assumption it's some indication of your retirement expenditure. You'll see 25x salary thrown around. Presumably, the more income you have during your working years, the more expenditures you will have in retirement, which isn't everyone. Your taxes and savings will go down, but inflation and health expenses will likely go up, and over retirement, will tend to cancel out.
inbox788,

<< You'll see 25x salary thrown around. >>

I disagreed. And, it can be easily proven to be false.

If someone live paycheck to paycheck, then, the person does not save for retirement. Hence, it is pointless to talk about savings. So, where does the 25X salary comes from?

If someone LBYM, the person would only need to cover the expense. And, at low expense level, the taxes would be near 0%.

Gross Income = Annual Saving + Annual Expense + Taxes

It is well established in Bogleheads forum that setting the retirement target based on income is plainly wrong.

KlangFool
I am talking about people who are able to save 25x salary or income, not zero savings or low savings rate. That's the means side of the equation, which in some ways is more fixed than the expense side. Estimating or predicting future expenses, costs and inflation is more challenging, but for many people, their current expenses are a function of their current income, and serve as a fair representation of their future expenses (if you have different or better predictors, use them) . This is why full pensions are designed around replacing 80% (or some fraction) of pre-retirement income. It's simply the other side of the coin.
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Re: What exactly is the “x” in 25x?

Post by KlangFool »

inbox788 wrote: Sat Jan 29, 2022 2:14 pm
KlangFool wrote: Sat Jan 29, 2022 12:47 pm
inbox788 wrote: Sat Jan 29, 2022 12:39 pm Instead of the expense side, you can also consider the income side with the assumption it's some indication of your retirement expenditure. You'll see 25x salary thrown around. Presumably, the more income you have during your working years, the more expenditures you will have in retirement, which isn't everyone. Your taxes and savings will go down, but inflation and health expenses will likely go up, and over retirement, will tend to cancel out.
inbox788,

<< You'll see 25x salary thrown around. >>

I disagreed. And, it can be easily proven to be false.

If someone live paycheck to paycheck, then, the person does not save for retirement. Hence, it is pointless to talk about savings. So, where does the 25X salary comes from?

If someone LBYM, the person would only need to cover the expense. And, at low expense level, the taxes would be near 0%.

Gross Income = Annual Saving + Annual Expense + Taxes

It is well established in Bogleheads forum that setting the retirement target based on income is plainly wrong.

KlangFool
I am talking about people who are able to save 25x salary or income, not zero savings or low savings rate.
inbox788,

How does that makes any sense? At very high savings rate, the person does not need 25X salary to retire.

This is simple math.

If someone saves 50% of the gross salary, the annual expense would be around 30% of the gross income. At 25 times of salary, the person would be at 83 times the annual expense. The person would be able to retire way before that.

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Re: What exactly is the “x” in 25x?

Post by backpacker61 »

sapper1371 wrote: Fri Jan 28, 2022 10:56 pm Another complexity is that you will probably want to delay SS and pensions so the gap will change, potentially rather significantly, during retirement.

Just curious how I should interpret this.
You are right about this. As a "rule of thumb", a first order of approximation is 25x the difference between anticipated expenses in retirement, and the guaranteed income streams (SSDI plus pension or annuity income, if applicable).

But there can be a few "breakpoints", as you point out.

age
65 - medicare eligibility; must obtain HC coverage elsewhere (likely at higher cost) before this age
70 - final age for claiming Social Security (if eligible, or somewhere between 62 and 70 depending on annuitant's choice)
72 - last age for filing for most private company pensions (actual latest date to begin receiving payments from the plan is April 1 of the year following the year annuitant reaches age 72)

Plus there can be other discontinuities in expenses, such as paying off a home mortgage, a child completing their higher education, or paying off a significant credit card balance.

The retirement income planner on the Fidelity web site can model retirement scenarios with complicated breakpoints like this, and so has "higher fidelity" than the 4% rule.

But the 4% rule is still a very good first cut rule of thumb for determining whether someone can afford to retire or not.
Last edited by backpacker61 on Sat Jan 29, 2022 2:54 pm, edited 4 times in total.
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Re: What exactly is the “x” in 25x?

Post by inbox788 »

KlangFool wrote: Sat Jan 29, 2022 2:27 pmHow does that makes any sense? At very high savings rate, the person does not need 25X salary to retire.

This is simple math.

If someone saves 50% of the gross salary, the annual expense would be around 30% of the gross income. At 25 times of salary, the person would be at 83 times the annual expense. The person would be able to retire way before that.

KlangFool
Wouldn't work for that person, but 99% of BH aren't saving at that ultra high rate, and nearly no one in the rest of the population (not without another pandemic). https://www.statista.com/statistics/246 ... -by-month/
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Re: What exactly is the “x” in 25x?

Post by backpacker61 »

phxjcc wrote: Sat Jan 29, 2022 1:35 pm For many (ok, some) of the greatest generation, in fact, X<0 because they actually saved money from their retirement income streams…just like they always did in their working years.
I think you're overestimating the number of "greatest generation" retirees that actually received a pension in retirement. Some plans required that retirees have 20 years service to receive anything; retire at 19 years and 364 days, and you got nothing (I knew of someone that left their company after 18 years service and so received nothing).

While Congress changed the laws to require graduated vesting schedules, that had the effect of increasing the cost to companies to provide the employee pensions. Since they weren't required by law to provide pensions in the first place, that was another nail in the coffin that led to companies abandoning Defined Benefit plans for Defined Contribution plans in the 1990's and beyond.
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Re: What exactly is the “x” in 25x?

Post by BIGal »

It was alway my rule of thumb at any point in my career to try to save 25x my salary by the time I chose to retire. I have been retired since age 62 about 11 years ago. The "number" at say, 50k x 25 = 1,250,000 and that x 4% results to 50k....essentially showing that in order to maintain the same amount of income over a 25 yr period of retirement you would need 1.25m in savings. People can fiddle with the SW amount and also with what percentage of your final wage you expect to need each year of retirement. 25x is nothing more than a rough estimate of where you need to be when you stop working. Unfortunately, most folks don't do the math to show that even a 1m savings will only produce 40k per year using that rule. Unless you have saved enough there is no way that your after retirement expenses can be greater than your annual salary UNLESS you shorten the period (your life expectancy) accordingly. I have yet to talk to a fellow retiree who says that their pre-retirement calculations of savings and spending are exactly on target. Better to overestimate how much you need to save as well as how much you will need for expenses. As the old saying says, "figures don't lie, but liars figure".
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Re: What exactly is the “x” in 25x?

Post by KlangFool »

inbox788 wrote: Sat Jan 29, 2022 2:39 pm
KlangFool wrote: Sat Jan 29, 2022 2:27 pmHow does that makes any sense? At very high savings rate, the person does not need 25X salary to retire.

This is simple math.

If someone saves 50% of the gross salary, the annual expense would be around 30% of the gross income. At 25 times of salary, the person would be at 83 times the annual expense. The person would be able to retire way before that.

KlangFool
Wouldn't work for that person, but 99% of BH aren't saving at that ultra high rate, and nearly no one in the rest of the population (not without another pandemic). https://www.statista.com/statistics/246 ... -by-month/
inbox788,

I come from a culture/country/community with an average gross saving rate of 30+%. 50% is not unheard of.

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Re: What exactly is the “x” in 25x?

Post by Morik »

randomguy wrote: Fri Jan 28, 2022 11:41 pm
marcopolo wrote: Fri Jan 28, 2022 10:59 pm It is the gap that needs to be covered by your portfolio.
It does get more complicated when your expenses, and other income streams change over time.
That is why it is just a rough rule of thumb.
Taxes are the expense that is really fun to calculate as the more income you need, the more taxes you pay.
Its like the tyranny of the rocket--you add more fuel cause you want more fuel to use once in space, but every time you do, you need more and more fuel just to get it up into space.
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Re: What exactly is the “x” in 25x?

Post by montanagirl »

So, according to what I've read here, X is either the gap between fixed income and expenses, or all expenses irrespective of fixed income.

Clear as mud!
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Re: What exactly is the “x” in 25x?

Post by KlangFool »

montanagirl wrote: Sat Jan 29, 2022 3:44 pm So, according to what I've read here, X is either the gap between fixed income and expenses, or all expenses irrespective of fixed income.

Clear as mud!
montanagirl,

What is the confusion?

A) Are you aiming for retirement at certain age?

Or,

B) Are you aiming for Financial Independence?

For (A), your number is your retirement expense minus social security and pension.

For (B), your number is your current annual expense. Aka, if you reach this number, you can retire now.

It is clear and simple.

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Re: What exactly is the “x” in 25x?

Post by backpacker61 »

montanagirl wrote: Sat Jan 29, 2022 3:44 pm So, according to what I've read here, X is either the gap between fixed income and expenses, or all expenses irrespective of fixed income.

Clear as mud!
I think if someone wanted to use 25x all expenses, it would be most accurate to calculate a "Net Present Value" for their Social Security benefit and any expected pension income, then add that to their other retirement savings. Then see if that is 25x of their expected retirement expenses.

There is a section in this article that suggests that, and a simple approach for doing it.
https://www.caniretireyet.com/storage/d ... eYet-1.pdf
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Re: What exactly is the “x” in 25x?

Post by AerialWombat »

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Last edited by AerialWombat on Fri Feb 04, 2022 1:00 pm, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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Re: What exactly is the “x” in 25x?

Post by willthrill81 »

backpacker61 wrote: Sat Jan 29, 2022 2:50 pm
phxjcc wrote: Sat Jan 29, 2022 1:35 pm For many (ok, some) of the greatest generation, in fact, X<0 because they actually saved money from their retirement income streams…just like they always did in their working years.
I think you're overestimating the number of "greatest generation" retirees that actually received a pension in retirement. Some plans required that retirees have 20 years service to receive anything; retire at 19 years and 364 days, and you got nothing (I knew of someone that left their company after 18 years service and so received nothing).

While Congress changed the laws to require graduated vesting schedules, that had the effect of increasing the cost to companies to provide the employee pensions. Since they weren't required by law to provide pensions in the first place, that was another nail in the coffin that led to companies abandoning Defined Benefit plans for Defined Contribution plans in the 1990's and beyond.
It seems that the highest proportion of the private workforce that benefited from a pension was just fewer than half, as the source below from 2017 indicates.
According to the Employee Benefits Research Institute, the high-water mark of defined benefit plan coverage in the private sector probably occurred in 1980 when nearly 35 million workers were covered by defined benefit pension plans. This represented 46 percent of the private sector workforce. Since that time the overall pension coverage rate has declined. The Bureau of Labor Statistics reports fewer than 18 percent of private sector workers are currently covered by pension plans.
https://retirementlc.com/golden-age-pen ... 0workforce.
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Re: What exactly is the “x” in 25x?

Post by HomerJ »

montanagirl wrote: Sat Jan 29, 2022 3:44 pm So, according to what I've read here, X is either the gap between fixed income and expenses, or all expenses irrespective of fixed income.

Clear as mud!
Looking through the thread it looks like 95% have said it's the gap.

And if you think about it for a minute, you can figure out why the gap is the right answer.
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Re: What exactly is the “x” in 25x?

Post by willthrill81 »

HomerJ wrote: Sat Jan 29, 2022 4:01 pm
montanagirl wrote: Sat Jan 29, 2022 3:44 pm So, according to what I've read here, X is either the gap between fixed income and expenses, or all expenses irrespective of fixed income.

Clear as mud!
Looking through the thread it looks like 95% have said it's the gap.

And if you think about it for a minute, you can figure out why the gap is the right answer.
Correct. If there is no gap, no portfolio is needed at all.
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Re: What exactly is the “x” in 25x?

Post by backpacker61 »

willthrill81 wrote: Sat Jan 29, 2022 4:01 pm It seems that the highest proportion of the private workforce that benefited from a pension was just fewer than half, as the source below from 2017 indicates.
There is a difference between "benefiting from a pension" and "working in a covered position".

There were many examples of people that worked in "covered positions", but never received anything. Like a fellow I knew that worked for GTE 18 years in a "covered position", but ended up not receiving any pension, because it had a "step function" vesting schedule. Anything less than 20 years, you got zero. Until Congress change the laws to require graduated vesting schedules.
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Re: What exactly is the “x” in 25x?

Post by AerialWombat »

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This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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Re: What exactly is the “x” in 25x?

Post by willthrill81 »

backpacker61 wrote: Sat Jan 29, 2022 4:09 pm
willthrill81 wrote: Sat Jan 29, 2022 4:01 pm It seems that the highest proportion of the private workforce that benefited from a pension was just fewer than half, as the source below from 2017 indicates.
There is a difference between "benefiting from a pension" and "working in a covered position".

There were many examples of people that worked in "covered positions", but never received anything. Like a fellow I knew that worked for GTE 18 years in a "covered position", but ended up not receiving any pension, because it had a "step function" vesting schedule. Anything less than 20 years, you got zero. Until Congress change the laws to require graduated vesting schedules.
I realized that someone would probably point out that difference after I stated it that way. Still, the point remains that a majority of private workforce workers has never been on track to receive a pension.
I have left the forum but occasionally check PMs.
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Re: What exactly is the “x” in 25x?

Post by Kenkat »

AerialWombat wrote: Sat Jan 29, 2022 4:10 pm
willthrill81 wrote: Sat Jan 29, 2022 4:03 pm
HomerJ wrote: Sat Jan 29, 2022 4:01 pm
montanagirl wrote: Sat Jan 29, 2022 3:44 pm So, according to what I've read here, X is either the gap between fixed income and expenses, or all expenses irrespective of fixed income.

Clear as mud!
Looking through the thread it looks like 95% have said it's the gap.

And if you think about it for a minute, you can figure out why the gap is the right answer.
Correct. If there is no gap, no portfolio is needed at all.
Precisely. This is why some of us can theoretically declare that our FIRE portfolio only needs to last until SS kicks in.
This is basically the scenario I am in. 3.5% withdraw rate for about 6 years dropping to 3% when my wife claims her social security dropping to less than 1% 5 years after that when I claim at age 70. So 25x, 4% for 30 years, etc. is pretty meaningless for my situation. It was a good goal to shoot for however.
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Re: What exactly is the “x” in 25x?

Post by zaboomafoozarg »

I'm paranoid, so for "x", I use twice as much as I've ever spent in a single year. I don't subtract SS or pension from "x", and I add on 10s of thousands of dollars for possible unexpected expenses.

I need 33x and a paid-off house before I can retire.
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Re: What exactly is the “x” in 25x?

Post by AnnetteLouisan »

I’ve been wondering this too.

I spend $40-45k a year total, plus &76k in total taxes.
I estimate my expenses in retirement will range from $50-80k/yr over a (hopefully) 30 year time frame, let’s say $100k in the last ten years to be conservative, but I have little concept of what my taxes will be in retirement.
I’ll have a small pension and ss (approx 40k each).

So what is my 25x…

A. 25x 80k? (Average expenses in retirement) not counting taxes

B. 25x 20k? (Residual expenses in retirement)

C. 25x 125k? (Average expenses plus taxes)

D. Other?
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Re: What exactly is the “x” in 25x?

Post by dbr »

AnnetteLouisan wrote: Sat Jan 29, 2022 5:54 pm I’ve been wondering this too.

I spend $40-45k a year total, plus &76k in total taxes.
I estimate my expenses in retirement will range from $50-80k/yr over a (hopefully) 30 year time frame, let’s say $100k in the last ten years to be conservative, but I have little concept of what my taxes will be in retirement.
I’ll have a small pension and ss (approx 40k each).

So what is my 25x…

A. 25x 80k? (Average expenses in retirement) not counting taxes

B. 25x 20k? (Residual expenses in retirement)

C. 25x 125k? (Average expenses plus taxes)

D. Other?
I think you would get a better perception of the outcomes if you enter your estimates in a retirement planning model (FireCalc is a simple example). From there you can look at different scenarios. I like adding some contingency to the expenses to see how much that affects the outcome. In models like this you can evaluate chances of a failed retirement and also estimate your wealth after time.

Taxes are not a simple estimate. There are some models that work at tax planning, but otherwise you need to sit down with a spreadsheet and estimate some things. I did a plan where the spreadsheet computes most of the usual tax costs and also inflation adjusts the tax brackets.

The farther away you are from retirement the more approximate these things get and tax rates can be changed in time.

Xx is an awfully rough concept of what is going on. Also it might be productive to reverse the process and consider what you can budget given your combination of asset and income streams rather than multiply some guess about expenses by an arbitrary number.
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Re: What exactly is the “x” in 25x?

Post by Grt2bOutdoors »

AnnetteLouisan wrote: Sat Jan 29, 2022 5:54 pm I’ve been wondering this too.

I spend $40-45k a year total, plus &76k in total taxes.
I estimate my expenses in retirement will range from $50-80k/yr over a (hopefully) 30 year time frame, let’s say $100k in the last ten years to be conservative, but I have little concept of what my taxes will be in retirement.
I’ll have a small pension and ss (approx 40k each).

So what is my 25x…

A. 25x 80k? (Average expenses in retirement) not counting taxes

B. 25x 20k? (Residual expenses in retirement)

C. 25x 125k? (Average expenses plus taxes)

D. Other?
Only on Bogleheads is a $40K annual pension considered to be "small"! A $40K pension is the equivalent of $1 million in retirement savings that you did not need to accumulate. If you are spending $40-45K now, your pension and social security have you covered by 1.8x - 2.0x. Your income taxes on $80K in retirement will likely be $10K or less.
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Re: What exactly is the “x” in 25x?

Post by AnnetteLouisan »

I have 4 scenarios in my 401k providers retirement estimator / Monte Carlo simulation program. It’s pretty encouraging.
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Re: What exactly is the “x” in 25x?

Post by inbox788 »

backpacker61 wrote: Sat Jan 29, 2022 3:56 pmI think if someone wanted to use 25x all expenses, it would be most accurate to calculate a "Net Present Value" for their Social Security benefit and any expected pension income, then add that to their other retirement savings. Then see if that is 25x of their expected retirement expenses.
How much inflation or growth is factored in the 25x, and if you have other ideas (stagflation, i.e. double digit inflation & low growth), should the adjustment be made in the 25 or the x?
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Re: What exactly is the “x” in 25x?

Post by backpacker61 »

inbox788 wrote: Sat Jan 29, 2022 6:35 pm
backpacker61 wrote: Sat Jan 29, 2022 3:56 pmI think if someone wanted to use 25x all expenses, it would be most accurate to calculate a "Net Present Value" for their Social Security benefit and any expected pension income, then add that to their other retirement savings. Then see if that is 25x of their expected retirement expenses.
How much inflation or growth is factored in the 25x, and if you have other ideas (stagflation, i.e. double digit inflation & low growth), should the adjustment be made in the 25 or the x?
'25x' is just the reciprocal of the "4% rule", which was a SWR devised for 30 year retirement scenarios after looking at rolling 30 year outcomes that began in years from 1926 to 1963 (thus ending between 1956 and 1993). So it included years with very low inflation and some years with double digit inflation, and both very good and very poor years of stock market returns.
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Re: What exactly is the “x” in 25x?

Post by HomerJ »

zaboomafoozarg wrote: Sat Jan 29, 2022 5:04 pm I'm paranoid, so for "x", I use twice as much as I've ever spent in a single year. I don't subtract SS or pension from "x", and I add on 10s of thousands of dollars for possible unexpected expenses.

I need 33x and a paid-off house before I can retire.
Your kids will end up very rich. Good for them!
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: What exactly is the “x” in 25x?

Post by HomerJ »

inbox788 wrote: Sat Jan 29, 2022 6:35 pm
backpacker61 wrote: Sat Jan 29, 2022 3:56 pmI think if someone wanted to use 25x all expenses, it would be most accurate to calculate a "Net Present Value" for their Social Security benefit and any expected pension income, then add that to their other retirement savings. Then see if that is 25x of their expected retirement expenses.
How much inflation or growth is factored in the 25x, and if you have other ideas (stagflation, i.e. double digit inflation & low growth), should the adjustment be made in the 25 or the x?
Inflation is factored in.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: What exactly is the “x” in 25x?

Post by sapper1371 »

KlangFool wrote: Sat Jan 29, 2022 10:11 am
sapper1371 wrote: Fri Jan 28, 2022 10:56 pm

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.
sapper1371,

Are you lucky? Can you be sure that you would be fully employed continuously until you collect SS and pension?

I don't. Hence, I aim for Financial Independent. Aka, I can retire with my current annual expense. As per your example, the x would be 125K.

KlangFool
My pension is now frozen so the amount I assume is what I’ll get if I work for 40 more years or quit tomorrow.
Last edited by sapper1371 on Sat Jan 29, 2022 8:51 pm, edited 1 time in total.
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Re: What exactly is the “x” in 25x?

Post by KlangFool »

sapper1371 wrote: Sat Jan 29, 2022 8:48 pm
KlangFool wrote: Sat Jan 29, 2022 10:11 am
sapper1371 wrote: Fri Jan 28, 2022 10:56 pm

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.
sapper1371,

Are you lucky? Can you be sure that you would be fully employed continuously until you collect SS and pension?

I don't. Hence, I aim for Financial Independent. Aka, I can retire with my current annual expense. As per your example, the x would be 125K.

KlangFool
I guess I don’t know for sure but we are a dual income couple about 50/50 spit, both working in a stable industry and neither has ever been anywhere close to being laid off. However, I get you point. But are you saying you assume that SS will be $0?
sapper1371,

No. I am saying that I cannot guarantee that I would be employed until 62 years old. Aka, when I am eligible to withdraw social security. So, it is pointless to think about social security.

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Re: What exactly is the “x” in 25x?

Post by AnnetteLouisan »

Grt2bOutdoors wrote: Sat Jan 29, 2022 6:11 pm
AnnetteLouisan wrote: Sat Jan 29, 2022 5:54 pm I’ve been wondering this too.

I spend $40-45k a year total, plus &76k in total taxes.
I estimate my expenses in retirement will range from $50-80k/yr over a (hopefully) 30 year time frame, let’s say $100k in the last ten years to be conservative, but I have little concept of what my taxes will be in retirement.
I’ll have a small pension and ss (approx 40k each).

So what is my 25x…

A. 25x 80k? (Average expenses in retirement) not counting taxes

B. 25x 20k? (Residual expenses in retirement)

C. 25x 125k? (Average expenses plus taxes)

D. Other?
Only on Bogleheads is a $40K annual pension considered to be "small"! A $40K pension is the equivalent of $1 million in retirement savings that you did not need to accumulate. If you are spending $40-45K now, your pension and social security have you covered by 1.8x - 2.0x. Your income taxes on $80K in retirement will likely be $10K or less.
And both the pension and ss are cola’d.

I say small because I earn 300k now, so that will be quite an income drop on retirement. I know people whose pensions are code to their last salary. But ok, I’m still very grateful to have it.
Pension expectation, I should say. I have to work a few more years.
Last edited by AnnetteLouisan on Sat Jan 29, 2022 9:05 pm, edited 1 time in total.
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