How is your "number" defined?

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Triple digit golfer
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How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 2:22 pm

I often see discussions about one's "number," the magic amount that once a portfolio reached, the investor can retire. How is that defined?

Assume the following example:

- I will need $50k a year in retirement in TODAY'S dollars if I were to retire today, or $40k a year in today's dollars if I were to retire once I can claim Social Security. I'll need only $30k a year in today's dollars once I am on both Social Security and Medicare.

- I currently have a $700,000 million portfolio.

- I am 35 years old.

What's my number? Wouldn't it be reduced each year? If I need $2 million to retire tomorrow, doesn't that mean if I work another 10 years I will need less, and another 20 years even less than that? So is my number $2 million? Or is it $2 million plus inflation? Or is it $2 million less an amount off each year that I continue to work? Or is it $50k needed per year divided by 4% withdrawal rate? Or would it be $50k per year divided by 3% since I am so young? At what age does that percentage increase?

My goal here is to find out what our number is and how close we are to it. Are we on track, etc.
Last edited by Triple digit golfer on Tue Jan 07, 2020 2:27 pm, edited 1 time in total.

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RickBoglehead
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Re: How is your "number" defined?

Post by RickBoglehead » Tue Jan 07, 2020 2:24 pm

Since you have $700,000 million (i.e. $700 billion dollars), you have reached your number. You've also reach enough for all of the Boglehead forum to have their numbers met, with change leftover. :twisted:

The "number" depends on when you are retiring.

If you plan on needing say $50,000 a year in today's dollars to retire today, and you're 35 years old, and you planning on living to 95, you'd need the present value of $50,000 x 60 = $3 million today.

Since you don't plan on retiring today, you pick a year you're going to retire, say 60 years old. That's 25 years from now. For the first 10 years you'll need $40,000 a year, then you'll need $30,000 a year for 25 years. But you don't need that until you're 60, 25 years from now. So you would figure the present value of that stream brought back to today.

Is that worth doing? Have you really figured out that you only need $50,000 a year to retire, in today's dollars?

At your age, I would simply be saving and investing as much as possible, and re-examine where I was say ten years from now.
Last edited by RickBoglehead on Tue Jan 07, 2020 2:30 pm, edited 1 time in total.
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Re: How is your "number" defined?

Post by sjt » Tue Jan 07, 2020 2:27 pm

- I currently have a $700,000 million portfolio.
Wish I had a $700,000 million portfolio LOL!

You can take your current portfolio, and project it out over the next few decades assuming something like 4% REAL growth. That takes the inflation aspect out of it and also avoids the confusion of back calculating the value of year 2040 dollars
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Triple digit golfer
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Re: How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 2:27 pm

Corrected the 1,000,000x mistake :)

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Re: How is your "number" defined?

Post by Amadis_of_Gaul » Tue Jan 07, 2020 2:28 pm

I think you have to a) estimate your yearly expenses, and b) anticipate how many years you will have to support yourself. If you want to get real fancy, you can apply a discount rate to each subsequent year. For myself, I plan to retire either at age 70 (or whenever there's no further point in deferring Social Security) or when illness prevents me from working, whichever comes first. I don't have a number so much as a savings rate that should be enough to keep my family and me from taking up residence under an overpass. I'll take stock of my assets and determine a spend rate when I actually retire.

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Re: How is your "number" defined?

Post by amindu » Tue Jan 07, 2020 2:28 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:22 pm

- I currently have a $700,000 million portfolio.
LOL

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Re: How is your "number" defined?

Post by Stormbringer » Tue Jan 07, 2020 2:29 pm

My number is defined as the value of the assets needed to reliably generate the inflation-adjusted income I desire in retirement.
Last edited by Stormbringer on Tue Jan 07, 2020 2:30 pm, edited 1 time in total.
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Re: How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 2:29 pm

RickBoglehead wrote:
Tue Jan 07, 2020 2:24 pm
Since you have $700,000 million (i.e. $700 billion dollars), you have reached your number. You've also reach enough for all of the Boglehead forum to have their numbers met, with change leftover. :twisted:

The "number" depends on when you are retiring.

If you plan on needing say $50,000 a year in today's dollars to retire today, and you're 35 years old, and you planning on living to 95, you'd need the present value of $50,000 x 60 = $3 million today.
Is it that simple? Take what you need in today's dollars and multiply by years expected to be drawing from it?

Is that along the lines of a 65 year old using a 4% SWR, i.e. 25 years of current expenses needed until age 90?

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Re: How is your "number" defined?

Post by amindu » Tue Jan 07, 2020 2:32 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:29 pm
RickBoglehead wrote:
Tue Jan 07, 2020 2:24 pm
Since you have $700,000 million (i.e. $700 billion dollars), you have reached your number. You've also reach enough for all of the Boglehead forum to have their numbers met, with change leftover. :twisted:

The "number" depends on when you are retiring.

If you plan on needing say $50,000 a year in today's dollars to retire today, and you're 35 years old, and you planning on living to 95, you'd need the present value of $50,000 x 60 = $3 million today.
Is it that simple? Take what you need in today's dollars and multiply by years expected to be drawing from it?

Is that along the lines of a 65 year old using a 4% SWR, i.e. 25 years of current expenses needed until age 90?
Yes that is how most compute their number to determine what level of savings they would need to retire. It also depends on if you want to leave anything to your heirs or just consume it all. This method would enable you to leave something behind.

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Re: How is your "number" defined?

Post by RickBoglehead » Tue Jan 07, 2020 2:36 pm

For what it's worth (probably not much), I never had a number. I, and my wife, worked. We saved as much as we could, spent wisely, invested. We've both passed 60, and want to retire. I know, to the penny, our annual expenses. I've broken them down, removed our house and its costs, and added in a future retirement house and its costs. Then I've added in travel and other money, and medical insurance costs. Then I rounded up. Then I added $25,000. Then I took that number and said, "do I have 25x that number"? The answer is "yes". So, even with a zero market return (or more precisely with a return that equals inflation netting zero), we can live for 25 years spending that amount each year (which is, of course, 4%, because 25 into 100 is 4).

As soon as my wife hits the 10 year mark in Spring 2021, just over a year from now, we get to buy locked in medical benefits from the state. That's our retirement point.

With another 18 months of accumulation, we should have more than 25 years of expenses available.
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Re: How is your "number" defined?

Post by KlangFool » Tue Jan 07, 2020 2:37 pm

OP,

1) Are you aiming for Financial Independence or Retirement?

FI = you can stop working today and your portfolio can support your current annual expense forever.

Retirement = you plan to retire at a certain age. You need your portfolio to support your expenses at that age forever.

2) If you aim for FI, use current annual expense. If you plan for retirement, use retirement expenses.

3) Depending on the age that you plan for FI/retirement, choose a number from 25X to 50X. If you are younger, take 50X. If you are 60+, take 25X.

It is very simple.

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Re: How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 2:39 pm

The OP was just an example.

Our expenses are currently around $60k annually, but that does not include health insurance. We pay $14k premiums out of pocket, which is pre-tax, so call it $10k and say we need $70k a year.

So in order to retire today, ignoring future Social Security, etc., I'd need $4.2 million if I expected to draw on the money for 60 years? That seems very, very high. That is a 1.67% withdrawal rate. I would earn more than that on interest alone on a simple 100% Total Bond portfolio and never have to touch the principal, and still save some of the interest and therefore grow my investment.

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Re: How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 2:42 pm

RickBoglehead wrote:
Tue Jan 07, 2020 2:36 pm
For what it's worth (probably not much), I never had a number. I, and my wife, worked. We saved as much as we could, spent wisely, invested. We've both passed 60, and want to retire. I know, to the penny, our annual expenses. I've broken them down, removed our house and its costs, and added in a future retirement house and its costs. Then I've added in travel and other money, and medical insurance costs. Then I rounded up. Then I added $25,000. Then I took that number and said, "do I have 25x that number"? The answer is "yes". So, even with a zero market return (or more precisely with a return that equals inflation netting zero), we can live for 25 years spending that amount each year (which is, of course, 4%, because 25 into 100 is 4).

As soon as my wife hits the 10 year mark in Spring 2021, just over a year from now, we get to buy locked in medical benefits from the state. That's our retirement point.

With another 18 months of accumulation, we should have more than 25 years of expenses available.
Congratulations. Sounds like you've done an excellent job and certainly "won the game."

We are only 35 and that is essentially what we've been doing. Save as much as reasonably possible, still have a modest amount of fun. In 2018 and 2019 combined, we saved precisely 29.04% of our gross income in a mix of taxable, tax-deferred, and tax-free accounts. It would have been 5-6% higher if not for a new roof in 2018 and new HVAC system in 2019. I am hoping that number is 35%+ for the foreseeable future until we need a new (used) car. I do everything cash basis, but we are "saving" an amount each month for big purchases like cars, etc.

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Re: How is your "number" defined?

Post by KlangFool » Tue Jan 07, 2020 2:43 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:39 pm
The OP was just an example.

Our expenses are currently around $60k annually, but that does not include health insurance. We pay $14k premiums out of pocket, which is pre-tax, so call it $10k and say we need $70k a year.

So in order to retire today, ignoring future Social Security, etc., I'd need $4.2 million if I expected to draw on the money for 60 years? That seems very, very high. That is a 1.67% withdrawal rate. I would earn more than that on interest alone on a simple 100% Total Bond portfolio and never have to touch the principal, and still save some of the interest and therefore grow my investment.
Triple digit golfer,

<<we need $70k a year.>>

You are 35 years old.

<<So in order to retire today,>>

You FI today. You do not retire. I do not use the word "retire" because it has an implication of a specific age. Aka, retirement age.

50X = 2% SWR is more than enough. 50X 70K = 3.5 million.

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Re: How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 2:45 pm

KlangFool wrote:
Tue Jan 07, 2020 2:37 pm
OP,

1) Are you aiming for Financial Independence or Retirement?

FI = you can stop working today and your portfolio can support your current annual expense forever.

Retirement = you plan to retire at a certain age. You need your portfolio to support your expenses at that age forever.
I'm sorry. I see no difference. Can you elaborate? When one retires, isn't one financially independent and therefore the retirement number equals the FI number?

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Re: How is your "number" defined?

Post by KlangFool » Tue Jan 07, 2020 2:51 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:45 pm
KlangFool wrote:
Tue Jan 07, 2020 2:37 pm
OP,

1) Are you aiming for Financial Independence or Retirement?

FI = you can stop working today and your portfolio can support your current annual expense forever.

Retirement = you plan to retire at a certain age. You need your portfolio to support your expenses at that age forever.
I'm sorry. I see no difference. Can you elaborate? When one retires, isn't one financially independent and therefore the retirement number equals the FI number?
Triple digit golfer,

1) A person could be FI and still choose to work. A retired person does not work. An FI person may not be retired.

2) In general, folks assume a certain age for retirement. FI has no such assumption of either work or age.

<<When one retires, isn't one financially independent and therefore the retirement number equals the FI number?>>

That is only true when the FI person retires. The FI person may not be retired.

KlangFool

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Re: How is your "number" defined?

Post by Unladen_Swallow » Tue Jan 07, 2020 2:51 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:22 pm
Wouldn't it be reduced each year? If I need $2 million to retire tomorrow, doesn't that mean if I work another 10 years I will need less, and another 20 years even less than that?
Yes. Your needs reduce the longer you work, because you have to fund fewer years in retirement. There is a wide range of a happy medium.

Although I use various ways to estimate our needs, it isn't an exact science in my opinion. I use the exacting precision of a shovel to plan for our future. A SWAG. Add a buffer to be safe, with flexibility built in so I am not completely at the mercy of unfortunate circumstances.

Many rules of thumb offer a good starting point 25X, 30X 40X etc). If retiring young (40s and 50s), extra cushion and planning is prudent.


Some food for thought (that I keep in my mind)

- expenses at 35 might not be the same at 60. As in, your desires, needs, and responsibilities might change. Just be open to the idea of adjusting your plans on the way to retirement.

- you may have to retire sooner than you like, or work longer than you like. Neither are deal breakers. Have the ability to adjust, and prioritize the most important elements of financial stability.

- Dont hang your hat on just hope and good luck, but dont be a pessimist that expects everything possible to go wrong. Dont let a perfect plan be the enemy of a good plan. Be flexible, and open to adapting and hustling if needed.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

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Re: How is your "number" defined?

Post by Jags4186 » Tue Jan 07, 2020 2:53 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:45 pm
KlangFool wrote:
Tue Jan 07, 2020 2:37 pm
OP,

1) Are you aiming for Financial Independence or Retirement?

FI = you can stop working today and your portfolio can support your current annual expense forever.

Retirement = you plan to retire at a certain age. You need your portfolio to support your expenses at that age forever.
I'm sorry. I see no difference. Can you elaborate? When one retires, isn't one financially independent and therefore the retirement number equals the FI number?
Let's say today you have $100,000 in expenses. $20,000 of that expense is mortgage. $20,000 of that expense is day care. $10,000 of that expense is student loan repayments.

In 30 years you will have a paid off house, no children in daycare, and no more student loans.

To be FI today you'd need to have a portfolio that could support $100,000 in expenses. To retire in 30 years you'd need a portfolio to support $50,000 in expenses.

That said it is very much semantics. When you are young your expenses are different than when you are old. At 40 you might have a mortgage or childcare expenses but at 70 you could have increased medical expenses, increased leisure expenses, and childcare expense :oops: .
Last edited by Jags4186 on Tue Jan 07, 2020 2:56 pm, edited 2 times in total.

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Re: How is your "number" defined?

Post by mak1277 » Tue Jan 07, 2020 2:54 pm

My "number" is based on the following:

investable assets at a level to support a 3% withdrawal rate for annual expenses
+ 3 years of expenses in cash
+ a predetermined amount saved for future college expenses for kid(s)
+ a predetermined amount saved for unanticipated future medical/emergency costs
+ a paid-off home

Now, I'm quite certain the above is radically conservative, but my wife and I are both early-40s and have a child under 5, so working an extra year or two to hit a super-conservative number isn't the end of the world. I absolutely don't plan on working a day past 45 at this point, barring some monumental change in circumstances.

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Re: How is your "number" defined?

Post by ThankYouJack » Tue Jan 07, 2020 2:59 pm

I just do 25x but I would chug some numbers into firecalc to get a feel for things. I don’t feel early retirees need to be as conservative as many on here suggest especially if you can cut expenses during down years and maintain some human capital. I imagine if one can save enough to retire by 40, then their human capital is pretty good.

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Re: How is your "number" defined?

Post by FoolMeOnce » Tue Jan 07, 2020 3:04 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:39 pm
The OP was just an example.

Our expenses are currently around $60k annually, but that does not include health insurance. We pay $14k premiums out of pocket, which is pre-tax, so call it $10k and say we need $70k a year.

So in order to retire today, ignoring future Social Security, etc., I'd need $4.2 million if I expected to draw on the money for 60 years? That seems very, very high. That is a 1.67% withdrawal rate. I would earn more than that on interest alone on a simple 100% Total Bond portfolio and never have to touch the principal, and still save some of the interest and therefore grow my investment.
I think the responses saying expenses times remaining life expectancy are odd. That's fine if you put everything in inflation protected cash equivalents. If you expect any real growth-and just about everyone here expects some over a long period-you need less. Klang's suggestion on 25x-50x is good (4%-2% withdrawal rate). As you said in your OP, expenses divided by withdrawal rate. A 2% withdrawal rate should be good even for someone in their 30s. The trickiest part is estimating your expenses over such a long time.

If you don't mind your work, want to leave a legacy, or are very risk-averse, go for more. Also, FI and even "retirement" from your current career doesn't mean you won't earn anything more over your lifetime. You might not, but you might turn a side hobby into an income stream.

I'd also suggest working long enough to eventually qualify for Medicare (10 yrs, current law).

Based on your username, you could target expenses x handicap. As you age and improve, the multiplier will go down.
Last edited by FoolMeOnce on Tue Jan 07, 2020 3:05 pm, edited 2 times in total.

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Re: How is your "number" defined?

Post by CnC » Tue Jan 07, 2020 3:04 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:39 pm
The OP was just an example.

Our expenses are currently around $60k annually, but that does not include health insurance. We pay $14k premiums out of pocket, which is pre-tax, so call it $10k and say we need $70k a year.

So in order to retire today, ignoring future Social Security, etc., I'd need $4.2 million if I expected to draw on the money for 60 years? That seems very, very high. That is a 1.67% withdrawal rate. I would earn more than that on interest alone on a simple 100% Total Bond portfolio and never have to touch the principal, and still save some of the interest and therefore grow my investment.


No these people are not giving you correct advise. Basically they are not taking into account any growth.

I take that back, they are giving you how they arrived at their "number" as you requested. The idea that you need x years of life saved up in expenses where x is years left to live is exceedingly conservative to the point of not even needing it invested.

For me it's different.
Very simple aim for 25x expenses ie if you want to spend 70,000 a year you need $1.75M.

But this is just your baseline for a typical retirement at a typical age. If you are retiring in your 40's it would probably be beneficial to try to get 30-35x expenses. If you are retiring in your 70's you probably only need 15-20x expenses.

I personally am ignoring my pension and social security. I am doing this because I want to have a considerable lump of cash to burn on trips and never worry about money again after retirement. I am also doing it because I am in a good position right now over 10x expenses in cash stocks and bonds at 34. I am doing it because I will probably hit my fi point in the next 5-10 years and I don't want to have retirement tempting me before 45.
Last edited by CnC on Tue Jan 07, 2020 3:31 pm, edited 1 time in total.

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Re: How is your "number" defined?

Post by Jack FFR1846 » Tue Jan 07, 2020 3:05 pm

KlangFool correctly separates FI (financially independent....don't HAVE to work again) from R (retired, meaning not working).

I've reached over 50X spending, so consider myself FI. I am still working, so not retired. So I'm unable to be one of the cool FIRE kids. Oh well.

I also think that just a number is a little too simple. I've put together something that others have done with a spread sheet. I have year by year breakdowns of income, spending and balances. I'm able to make future assumptions on gains with % increases in investments by year. I've inserted one time type expenses like a roof or a car or college cost. At this point, I have my income and DW's income listed. Although I take that 50X spending as a general "I'm pretty sure I am fine if I don't work anymore", my spread sheet gets more detailed. It's Exhibit A for whenever I decide I'm going to actually retire as I'll have to convince my wife. For you, it can be your way to work backwards to try to figure out if you're there yet or how far you might have to go.
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Re: How is your "number" defined?

Post by mrspock » Tue Jan 07, 2020 3:24 pm

I took my annual spending and then doubled it at a 3.5% SWR (for fat fire). I’m now close to 3x spending as I am ahead of schedule. Now I’m just “upgrading” the retirement location (to Hawaii or Florida), after that I don’t know. All savings is excluding a “housing” nest egg, which for me is pretty substantial due to my HCOL area, this forms another firewall for my retirement as I could always reduce the housing capital allocation.

TLDR it all flows from spending...

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Re: How is your "number" defined?

Post by teen persuasion » Tue Jan 07, 2020 3:26 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 2:45 pm
KlangFool wrote:
Tue Jan 07, 2020 2:37 pm
OP,

1) Are you aiming for Financial Independence or Retirement?

FI = you can stop working today and your portfolio can support your current annual expense forever.

Retirement = you plan to retire at a certain age. You need your portfolio to support your expenses at that age forever.
I'm sorry. I see no difference. Can you elaborate? When one retires, isn't one financially independent and therefore the retirement number equals the FI number?
Psst - the Internet Retirement Police really hate it when mustachians claim to be retired, but are still receiving income from fun optional hobbies or side gigs started after hitting FIRE. You apparently can't claim to be retired unless you never, ever, earn another $ doing "work". :twisted:

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Re: How is your "number" defined?

Post by willthrill81 » Tue Jan 07, 2020 3:37 pm

You can use a rule-of-thumb like 25x for a ~30 year retirement or 30-33x if you're planning on a longer retirement than 30 years.

But the more mathematically driven approach is to use the time value of money formula. For instance, if you want to withdraw an inflation-adjusted $60k annually for a planned 37 years at an assumed 2% real rate of return for your desired AA and want to end the 37 years with $500k, then you need to begin with a portfolio of $1,829,636.

Note that using this approach, future years' withdrawals will fluctuate as a result of the remaining number of years shrinking and due to changes in both the expected rate of return and new portfolio size. But like the VPW approach, you are mathematically guaranteed to not prematurely exhaust your portfolio.
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Re: How is your "number" defined?

Post by mptfan » Tue Jan 07, 2020 3:40 pm

Here is my formula assuming you plan to retire at age 62 or later... (if you plan to retire earlier, you will need a bigger buffer)

1) Determine how much you will want or need to spend each year as of the year you retire
2) Determine how much social security or pension income you will have each year
3) Subtract number 2 from number 1
4) Multiply the remainder by 20 (if you are not very conservative) or up to 25. The more conservative you are and the higher buffer you want, the higher the number.

That's your number.
Last edited by mptfan on Tue Jan 07, 2020 3:57 pm, edited 1 time in total.

MathWizard
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Re: How is your "number" defined?

Post by MathWizard » Tue Jan 07, 2020 3:50 pm

There is a new number every year.

If you want a single number,it should be the number at the year at which you will be financially independent.

For me that is at age 62, with about 1.7 million in invested assets a paid off home and no debt and expected SS benefits of 40K/yr at age 70.

I used 85 as the age at which my wife becomes a widow, and assuming she lives to 100. I used 4% real return on my portfolio.

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Re: How is your "number" defined?

Post by willthrill81 » Tue Jan 07, 2020 4:08 pm

MathWizard wrote:
Tue Jan 07, 2020 3:50 pm
For me that is at age 62, with about 1.7 million in invested assets a paid off home and no debt and expected SS benefits of 40K/yr at age 70.
Wow, that's very similar to our numbers as well. :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: How is your "number" defined?

Post by Triple digit golfer » Tue Jan 07, 2020 4:11 pm

MathWizard wrote:
Tue Jan 07, 2020 3:50 pm
There is a new number every year.

If you want a single number,it should be the number at the year at which you will be financially independent.

For me that is at age 62, with about 1.7 million in invested assets a paid off home and no debt and expected SS benefits of 40K/yr at age 70.

I used 85 as the age at which my wife becomes a widow, and assuming she lives to 100. I used 4% real return on my portfolio.
Is the $1.7 million in today's dollars?

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Third Son
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Re: How is your "number" defined?

Post by Third Son » Tue Jan 07, 2020 4:22 pm

I am retiring in 52 days-7hours-42min-.......and 23sec. I will have enough income to provide my current take home plus insurance and some to reinvest. We live a modest lifestyle with no debt. By doing the math at Fidelity we mapped it all out. That was the most important part. My favorite saying is: "Wanna make God laugh? Tell him your plans."

Thus our plans are flexible..... We can live lower than our means. Living above them would catch up to us eventually ....... :greedy

ChiKid24
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Re: How is your "number" defined?

Post by ChiKid24 » Tue Jan 07, 2020 5:37 pm

Curious on the 25-50x or 2-4% withdrawal rate and how taxes play into the picture. All assets are not created equal. Some will pay LTCG tax, some will pay ordinary income tax, some will pay no tax on Roth assets. So If my annual expenses are say $100k (using after tax money), wouldn't I need to do 25-50x on the pre-tax value, which would be higher than $100k unless I only held roth assets? Or perhaps the 2-4% withdrawal rate already accounts for the taxes? If so, that should also take into consideration the differences in tax deferred, tax advantaged, and tax-free assets.

ChiKid24
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Re: How is your "number" defined?

Post by ChiKid24 » Tue Jan 07, 2020 5:37 pm

Curious on the 25-50x or 2-4% withdrawal rate and how taxes play into the picture. All assets are not created equal. Some will pay LTCG tax, some will pay ordinary income tax, some will pay no tax on Roth assets. So If my annual expenses are say $100k (using after tax money), wouldn't I need to do 25-50x on the pre-tax value, which would be higher than $100k unless I only held roth assets? Or perhaps the 2-4% withdrawal rate already accounts for the taxes? If so, that should also take into consideration the differences in tax deferred, tax advantaged, and tax-free assets.

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willthrill81
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Re: How is your "number" defined?

Post by willthrill81 » Tue Jan 07, 2020 5:40 pm

ChiKid24 wrote:
Tue Jan 07, 2020 5:37 pm
Curious on the 25-50x or 2-4% withdrawal rate and how taxes play into the picture. All assets are not created equal. Some will pay LTCG tax, some will pay ordinary income tax, some will pay no tax on Roth assets. So If my annual expenses are say $100k (using after tax money), wouldn't I need to do 25-50x on the pre-tax value, which would be higher than $100k unless I only held roth assets? Or perhaps the 2-4% withdrawal rate already accounts for the taxes? If so, that should also take into consideration the differences in tax deferred, tax advantaged, and tax-free assets.
The percentages people refer to should be inclusive of income and/or LTCG taxes. So if I wanted to spend $80k, I would need to withdraw about $86.5k from tax-deferred accounts in order to cover federal income tax. And if I was using the '4% rule-of-thumb', I would need to multiply the $86.5k by 25 to get 'my number'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: How is your "number" defined?

Post by campy2010 » Tue Jan 07, 2020 6:36 pm

I spend about $40-50k today and use $100k to model my retirement spending (2.5% inflation for 30 years). I like this calculator for very general estimates on the impact of savings. Adjust the savings amount per year and see how long it will last based on different inflation-adjusted incomes. https://www.bankrate.com/calculators/re ... lator.aspx
Last edited by campy2010 on Tue Jan 07, 2020 6:45 pm, edited 1 time in total.

KlangFool
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Re: How is your "number" defined?

Post by KlangFool » Tue Jan 07, 2020 6:41 pm

ChiKid24 wrote:
Tue Jan 07, 2020 5:37 pm
Curious on the 25-50x or 2-4% withdrawal rate and how taxes play into the picture. All assets are not created equal. Some will pay LTCG tax, some will pay ordinary income tax, some will pay no tax on Roth assets. So If my annual expenses are say $100k (using after tax money), wouldn't I need to do 25-50x on the pre-tax value, which would be higher than $100k unless I only held roth assets? Or perhaps the 2-4% withdrawal rate already accounts for the taxes? If so, that should also take into consideration the differences in tax deferred, tax advantaged, and tax-free assets.
ChiKid24,

You should read this thread.

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

KlangFool

MathWizard
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Re: How is your "number" defined?

Post by MathWizard » Tue Jan 07, 2020 9:32 pm

Triple digit golfer wrote:
Tue Jan 07, 2020 4:11 pm
MathWizard wrote:
Tue Jan 07, 2020 3:50 pm
There is a new number every year.

If you want a single number,it should be the number at the year at which you will be financially independent.

For me that is at age 62, with about 1.7 million in invested assets a paid off home and no debt and expected SS benefits of 40K/yr at age 70.

I used 85 as the age at which my wife becomes a widow, and assuming she lives to 100. I used 4% real return on my portfolio.
Is the $1.7 million in today's dollars?
Yes. I do everything in real ( inflation adjusted dollars).

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AerialWombat
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Re: How is your "number" defined?

Post by AerialWombat » Tue Jan 07, 2020 9:47 pm

For me, “the number” was based on the annual expenses for my minimum desired lifestyle, and living another 15-20 years, with the portfolio just keeping up with inflation. My minimum lifestyle is a wee bit Mr. Money Mustache oriented, and I do not expect to live long enough to ever collect Social Security.

The specific factors of your family situation, health conditions, desired lifestyle, etc. should all play a part.
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Normchad
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Re: How is your "number" defined?

Post by Normchad » Tue Jan 07, 2020 10:29 pm

I actually came up with my number at age 23, almost 30 years ago. Back then, I did a bunch of calculations that I can’t recall now, and came up “I want to have $4M at age 65”. That number, for me, has held up surprising well. It is still the target I am aiming for. The only wrinkle to it, is that I might not get there at 65, or I might get there earlier. So now I spend my time thinking about would happen if I hit early, or hit late.

Having $4M at 65 still works for me. Oddly though, having $4M at 40 would not have worked. I.e. I’d still have to work. So The amount and the age really do matter together.

But, for you, since this is bogleheads..... you have 700,000 million, which is a decent start for somebody your age. But you need to pinch your pennies, and keep cutting coupons, because it will never last with an outlandish SWR of 1.5% or more.

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Re: How is your "number" defined?

Post by Shamb3 » Tue Jan 07, 2020 11:33 pm

You either
Calculate your number in today's dollars and then inflate your number until you have that amount.
OR
Inflate today's Spending until it matches your retirement balance.

I figured out my probable age of retirement and what my number might be in a spread sheet.

Age | Balance | Invested | Return | Spending

I calculate return at a assumed percentage without a inflation adjustment.
I increase my spending by a assumed percentage for inflation.

Both my number and Age of retirement is just a wild guess at this point.

FoolMeOnce
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Re: How is your "number" defined?

Post by FoolMeOnce » Tue Jan 07, 2020 11:43 pm

ChiKid24 wrote:
Tue Jan 07, 2020 5:37 pm
Curious on the 25-50x or 2-4% withdrawal rate and how taxes play into the picture. All assets are not created equal. Some will pay LTCG tax, some will pay ordinary income tax, some will pay no tax on Roth assets. So If my annual expenses are say $100k (using after tax money), wouldn't I need to do 25-50x on the pre-tax value, which would be higher than $100k unless I only held roth assets? Or perhaps the 2-4% withdrawal rate already accounts for the taxes? If so, that should also take into consideration the differences in tax deferred, tax advantaged, and tax-free assets.
Include taxes in your calculation of expected expenses. Different people will calculate different taxes based on the source of their retirement income. Then calculate how much you need.

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Re: How is your "number" defined?

Post by MindBogler » Tue Jan 07, 2020 11:57 pm

My number is just a multiple of my expense. I prefer 25x minimum and 30x for early retirement.

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Re: How is your "number" defined?

Post by Clever_Username » Wed Jan 08, 2020 1:23 am

Mine is expected annual expenses (in real dollars) times 25 for my "number." The real mystery (to me at least) is what my housing costs and health care costs would be if I weren't working: I love where I live, but I would probably live in a different state if I weren't working in the one I'm in now. And I've always had health care coverage through an employer. So my number isn't super accurate, because while I can estimate housing costs in another state, I have no idea how I'd figure out health care costs absent working (I assume I can't just add my contribution + employer contribution).
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Re: How is your "number" defined?

Post by canadianbacon » Wed Jan 08, 2020 1:33 am

I consider my number to be when my VPW suggested withdrawal can cover my annual budget. My budget is 50% basics (food + bills), so I would be able to weather a bad sequence of returns. I may still build additional buffer beyond that point.

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Re: How is your "number" defined?

Post by SnowBog » Wed Jan 08, 2020 1:51 am

As others noted, the "number" is highly dependent on a number of factors (age, retirement age, life span, expenses [not covered by income], etc.). Many of these are at best, assumptions (which get better as we get older, as more of the variability gets removed)...

So I use a number of "numbers" to give me a range of figures. As I get closer, I'll better know which one is more relevant to me. Until then, they are all moving targets (which may well change many times between now and FI, as the assumptions change)...

FI according to my "projected" retirement expenses/income:

Code: Select all

=(AVG_Retirement_Expenses+AVG_Retirement_Taxes-Avg_PreSS_Retirement_Income)/SWR
FI based on prior 12 month expenses:

Code: Select all

=(AVG_Expenses_Last_12_Months+AVG_Retirement_Taxes-Avg_PreSS_Retirement_Income)/SWR
FI based on 25x expenses:

Code: Select all

=25*(AVG_Retirement_Expenses+AVG_Retirement_Taxes-Avg_PreSS_Retirement_Income)
I do the same for 35x as well...

FI based without income:

Code: Select all

=(AVG_Retirement_Expenses+AVG_Retirement_Taxes)/SWR
My version of a FAT retirement based on the MAXIMUM projected expenses/taxes with minimum income:

Code: Select all

=(MAX_Retiremet_Expenses+MAX_Retirement_Taxes-MIN_Retirement_Income)/SWR
My "average" numbers are from a cash flow projection attempting to map out income and expenses (including taxes, college, new car, etc.) over our life expectancy. To add in a healthly buffer, I'm only using my "pre-Social Security [post retirement]" income. This was also simpler/safer for "my plan" as my first 15+ years have potentially no income before pensions/SS kick in, which burns down my assets far quicker than the "average" implies.

And for each, I have a "years to FI" :

Code: Select all

=NPER(Avg_Return_Rate/4,-Savings_Annual/4,-Current_NetWorth,FI_Target,0)/4
My detailed cash flow also graphs out projected annual income/expenses and net worth. So I can "sanity check" the "years to FI" by changing my retirement date, and it "fails" if I ever have a negative net worth.

But I also double/triple sanity check against Firecalc, cFirsim, VPW, etc.

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bogglizer
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Re: How is your "number" defined?

Post by bogglizer » Wed Jan 08, 2020 1:54 am

25x times the 0% tax bracket, or $20K + $25K standard deduction, is $1.1M pre-tax saved. After that, it gets taxed at 12% until $80K + $25K standard deduction. That limit is $2.6M at 25x. So, my pre-tax target is in between those two numbers.

Plan is to live off of pre-tax only, and give taxable, if any, to my heirs.
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Reamus294
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Re: How is your "number" defined?

Post by Reamus294 » Wed Jan 08, 2020 3:31 pm

mptfan wrote:
Tue Jan 07, 2020 3:40 pm
Here is my formula assuming you plan to retire at age 62 or later... (if you plan to retire earlier, you will need a bigger buffer)

1) Determine how much you will want or need to spend each year as of the year you retire
2) Determine how much social security or pension income you will have each year
3) Subtract number 2 from number 1
4) Multiply the remainder by 20 (if you are not very conservative) or up to 25. The more conservative you are and the higher buffer you want, the higher the number.

That's your number.
+1, except I have a target age so I know how many years of expenses I'll have and I use a SWR for #4. It is easier for me to relate to a SWR of 3-3.5% than use multiples, but I still check the multiples to check my math. It starts getting a little messy for me if I want to stop working before I can take social security, but I'm probably 15 years out from being FI, so there are a lot of unknowns. I'm conservative about my social security and any other income.

If I could estimate what taxes, insurance, and utilities would cost in 15 years, I could probably time the market too. I currently use my number a guide and a rough estimate that I try to be conservative about and will refine as I get closer. For example, I have only 7 expense buckets I am projecting, and will probably have a full blown budget 4-5 years before the target date. If I'm within 3-4 years of my target age/number at this point, I'll consider it a success. I figure if I have a plan, be flexible, enjoy life and save a lot, it will lead to my expectations being met.

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Quirkz
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Re: How is your "number" defined?

Post by Quirkz » Wed Jan 08, 2020 6:22 pm

Normchad wrote:
Tue Jan 07, 2020 10:29 pm
I actually came up with my number at age 23, almost 30 years ago. Back then, I did a bunch of calculations that I can’t recall now, and came up “I want to have $4M at age 65”. That number, for me, has held up surprising well.
I did something similar, except it was only 22 years ago. I started out imagining a "really extravagant" budget, assumed 5% annual payouts (that was the going interest rate at the time) and back calculated $10 million was my "I've got everything, right now" number.

Then I did a more realistic but comfortable plan assuming retirement at close to normal retirement age, and it hand-waved around $3 million.

In terms of age I'm halfway there, and still vaguely gunning for $3m as my retirement plan, but keeping $10m as my "quit today, never do a drop of work if I don't want to again" number. I'm vaguely on pace for the former and never expect to hit the latter, but those are "my numbers."

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willthrill81
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Re: How is your "number" defined?

Post by willthrill81 » Wed Jan 08, 2020 11:02 pm

bogglizer wrote:
Wed Jan 08, 2020 1:54 am
25x times the 0% tax bracket, or $20K + $25K standard deduction, is $1.1M pre-tax saved. After that, it gets taxed at 12% until $80K + $25K standard deduction. That limit is $2.6M at 25x. So, my pre-tax target is in between those two numbers.

Plan is to live off of pre-tax only, and give taxable, if any, to my heirs.
That was originally our plan as well. However, I figured out that starting next year, we'll be doing enough tax-deferred contributions to bring us down from the 22% bracket to the 12% bracket, and our plan is to both contribute to Roth IRAs and do Roth conversions of an old 401k rollover of mine up to the top of the 12% bracket. In our situation, I can't think of a meaningful drawback to 'locking in' funds at the 12% bracket, especially since we live in an income tax free state (and plan to from now on, but you never know what the future holds).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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VictoriaF
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Re: How is your "number" defined?

Post by VictoriaF » Thu Jan 09, 2020 10:32 am

Triple digit golfer wrote:
Tue Jan 07, 2020 2:22 pm
I often see discussions about one's "number," the magic amount that once a portfolio reached, the investor can retire. How is that defined?

Triple digit golfer,

This is not what you are asking, but still I want to give you another way to look at the "number."

The greatest risks in retirement and the greatest "known unkonws" are related to one's health and the cost of the healthcare. If you are healthy, you are flexible to live more or less frugally, in one or another place, doing some or other things. If you are not healthy, your lifestyle options are limited and your healthcare costs can skyrocket.

My retirement "number" was the point in time when I became eligible to keep the Federal Employee Health Benefit (FEHB) after leaving my Federal job. For you, the FEHB eligibility does not apply, but there will be changes in the U.S. healthcare management and costs between now and your projected retirement date. When you see that your potential healthcare expenses are capped at a reasonable level, you will be able to retire.

Another important factor, that's to some extent is up to you, is to invest in your health. Live cleanly, eat cleanly, get plenty of sleep, engage in physical activity, avoid stress. If you face trade-offs between higher earnings and better health, err in favor of health.

Money-wise, you are doing fine. Even without $700 million.

Good luck,
Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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