Define "Expenses"

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BAM55
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Define "Expenses"

Post by BAM55 »

So you read all the time that many want to have 25x, 30x, 50x, etc. of their "expenses" to retire comfortable and - more importantly - have enough money to last their retirement.

What generally does "expenses" in this example include? Is it literally the amount of money you need yearly to live - i.e. rent/mortgage, utility bills, taxes, food, etc. - or is it the desired amount of money you want to spend on a yearly basis (knowing that can change by year)?

So for example, if I need $40k per year to live in my house, pay all my bills/taxes and eat, is that the number people are referring to when they say they want 25x, 30x, etc.? Or, if I would like to maybe spend $100k per year, do I use that number? Or, somewhere in between?
jebmke
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Re: Define "Expenses"

Post by jebmke »

For me, everything that goes out, never to return.

For retirement planning you need to include everything you expect to spend in retirement.
Last edited by jebmke on Mon Nov 22, 2021 4:52 pm, edited 1 time in total.
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AnnetteLouisan
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Re: Define "Expenses"

Post by AnnetteLouisan »

All of it. Fixed expenses plus discretionary.
Tom_T
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Re: Define "Expenses"

Post by Tom_T »

25x means 25 times the annual expenses that aren't covered by some form of income. For example, if Social Security covers part of your expenses, then you would need 25 times the part that isn't covered. Example:

$60K annual expenses less $40K covered by SS = $20K remaining, times 25 = $500K
retiredjg
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Re: Define "Expenses"

Post by retiredjg »

BAM55 wrote: Mon Nov 22, 2021 4:50 pm So for example, if I need $40k per year to live in my house, pay all my bills/taxes and eat, is that the number people are referring to when they say they want 25x, 30x, etc.? Or, if I would like to maybe spend $100k per year, do I use that number? Or, somewhere in between?
Both. If you want to spend $100k a year you need to save $100k x 25 (or more). If you don't make it to that number, you will need to spend less than $100k a year and hope you are not forced to retire with less than $40k x 25.
delamer
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Re: Define "Expenses"

Post by delamer »

First, expenses in the context of “years in portfolio” should be residual expenses — total expenses minus (Social Security + pensions + annuities + other non-portfolio income).

Second, if you don’t include all expenses (necessities plus desirables), then where would the money for the desirables come from?

You either need to include them in the “years in portfolio” estimate or have a separate fund for them. Same for irregular expenses like new cars, new roofs, household maintenance, etc.

Some of it’s simple. If you want to take a $20,000 vacation every other year, then you can include $10,000 in each year’s budget for vacations. An item like a new roof is more complicated. Maybe you set up a separate fund for it and other similar expenses at the start of your retirement.
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prd1982
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Re: Define "Expenses"

Post by prd1982 »

And be sure to include state & federal income taxes, even though it isn’t money you want to spend.
AnnetteLouisan
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Re: Define "Expenses"

Post by AnnetteLouisan »

Tom_T wrote: Mon Nov 22, 2021 4:57 pm 25x means 25 times the annual expenses that aren't covered by some form of income. For example, if Social Security covers part of your expenses, then you would need 25 times the part that isn't covered. Example:

$60K annual expenses less $40K covered by SS = $20K remaining, times 25 = $500K
I think those are residual expenses.

And yes, those are what your portfolio needs to cover.
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arcticpineapplecorp.
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Re: Define "Expenses"

Post by arcticpineapplecorp. »

25X the SHORTFALL of income to meet expenses is more like it (as some have already explained, in different terms).

If your spending is $70,000 in retirement and you only get $30,000 in SS and have no pension, your shortfall is $1 million. Therefore you'd need 25X $40,000 = $1 million. Because you plan to take out 4% (4% of $1 million) is $40,000 per year (adjusted for inflation).

You can also see by this math that for every $10,000 you can reduce your shortfall of income to meet expenses in retirement you need $250,000 LESS. (25X $10,000 = $250,000).

So in the example above if you get $30,000 from SS but lower expenses to $60,000 (no longer $70,000), you only need 25X $30,000, which is $750,000, not a million any more.

So if you can lower your expenses in retirement, you need less money to retire. The two go together. It's not just that you need more money, you might just need to lower your expenses so the money you have covers your lower expenses.

If you have a shortfall of income to meet expenses in retirement you need to make that up in 1 of three or 4 ways (or any combination of the following):
1. lower expenses til they meet your income (in this example, you'd have to find a way to live on $30,000)
2. earn enough in part time in retirement to make up the needed income to meet expenses. (if SS is $30k and expenses are $70k, you could earn $40k to make up the difference).
3. have 25X shortfall of income saved/invested
4. Don't stop working?
Last edited by arcticpineapplecorp. on Mon Nov 22, 2021 5:36 pm, edited 2 times in total.
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rob
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Re: Define "Expenses"

Post by rob »

I think it's anything outbound BUT I have variations... Time based: higher, then lower then higher based on age and then carved into two for reasonable and luxury.
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KlangFool
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Re: Define "Expenses"

Post by KlangFool »

OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

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runner3081
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Re: Define "Expenses"

Post by runner3081 »

When calculating our x number of expenses, it is every last penny spent.

We also add the cost of healthcare, post-job, into that calculation.
Whitecap
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Re: Define "Expenses"

Post by Whitecap »

Remember that “expenses” now, may/may not be the same when in retirement. How to calculate them can be a bit tricky, as some expenses go up, some go down, and inflation can affect all of them. Here is a recent thread talking about this very topic:

viewtopic.php?f=10&t=362385

Warm regards,
Whitecap
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esteen
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Re: Define "Expenses"

Post by esteen »

KlangFool wrote: Mon Nov 22, 2021 5:30 pm
Expense = anything that are not savings or taxes.
Except that in the context of a multiple of expenses for retirement (e.g. 25x or 30x, etc), you will need to include taxes as part of your expenses.
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Triple digit golfer
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Re: Define "Expenses"

Post by Triple digit golfer »

All outflows. Call it spending if that's more clear.
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Re: Define "Expenses"

Post by Triple digit golfer »

KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
prioritarian
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Re: Define "Expenses"

Post by prioritarian »

My expenses are $22-24,000/year but it would be ridiculous to plan a retirement using such a low number so I typically use ~50k (with the assumption that this would give me a buffer for any worst case scenarios). For those of us who live low consumption lifestyles (out of choice) expense-based retirement metrics make no sense.
rockstar
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Re: Define "Expenses"

Post by rockstar »

Living expenses + future expected household upkeep (about 1% of property value) + vacation + potential medical spend + expected taxes + $20k buffer in case I miss something. That's my napkin math.
Last edited by rockstar on Mon Nov 22, 2021 8:18 pm, edited 1 time in total.
delamer
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Re: Define "Expenses"

Post by delamer »

prioritarian wrote: Mon Nov 22, 2021 7:16 pm My expenses are $22-24,000/year but it would be ridiculous to plan a retirement using such a low number so I typically use ~50k (with the assumption that this would give me a buffer for any worst case scenarios). For those of us who live low consumption lifestyles (out of choice) expense-based retirement metrics make no sense.
Expenses are expenses. Regardless of the type of lifestyle you choose to lead, you need to pay your bills.

Why would you plan for doubling your expenses? Unless there is a specific cost, like health insurance, that will be new in retirement.
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Kenkat
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Re: Define "Expenses"

Post by Kenkat »

In general, they are talking about your desired spending amount. In your example, the $100k number.
Wanderingwheelz
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Re: Define "Expenses"

Post by Wanderingwheelz »

prioritarian wrote: Mon Nov 22, 2021 7:16 pm My expenses are $22-24,000/year but it would be ridiculous to plan a retirement using such a low number so I typically use ~50k (with the assumption that this would give me a buffer for any worst case scenarios). For those of us who live low consumption lifestyles (out of choice) expense-based retirement metrics make no sense.
This is my approach, also. No way I’m going to retire and live the same lifestyle we’ve lived while “LBYM“ was our mantra. We plan to make up for lost time since we haven’t had enough of it (free time) to spend as much as we’ve wanted to.

I see people here saying they’ve got 80x current expenses, while still working with the limited free time that normally comes with it, which to me sounds familiar, but that’s not the retirement expense calculation for many of us. It’s our intent to spend nearly twice what we’ve averaged while work was our main focus.
Last edited by Wanderingwheelz on Tue Nov 23, 2021 9:11 am, edited 1 time in total.
Zeno
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Re: Define "Expenses"

Post by Zeno »

deleted
Last edited by Zeno on Wed Nov 24, 2021 8:28 am, edited 1 time in total.
KlangFool
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Re: Define "Expenses"

Post by KlangFool »

Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

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Triple digit golfer
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Re: Define "Expenses"

Post by Triple digit golfer »

KlangFool wrote: Mon Nov 22, 2021 9:15 pm
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

KlangFool
So they're a discretionary expense. If you pay them, they're an expense.

OP - taxes need to be included in your number.
nguy44
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Re: Define "Expenses"

Post by nguy44 »

jebmke wrote: Mon Nov 22, 2021 4:51 pm For me, everything that goes out, never to return.

For retirement planning you need to include everything you expect to spend in retirement.
I agree with this. Including taxes. If you have a pension, taxes are not discretionary at some level. If you have a tax deferred IRA or 401K, they definitely will not be discretionary at RMD age.

I looked at "base' vs "discretionary" as "base" being the bare minimum we need to live, discretionary being the expenses to support the lifestyle we want to live.
sycamore
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Re: Define "Expenses"

Post by sycamore »

delamer wrote: Mon Nov 22, 2021 5:05 pm First, expenses in the context of “years in portfolio” should be residual expenses — total expenses minus (Social Security + pensions + annuities + other non-portfolio income).
...
+1 to residual living expenses as calculated above.
That's how I do it.
Independent George
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Re: Define "Expenses"

Post by Independent George »

It gets a little more complicated here in that (1) most BHs plan to be mortgage-free in retirement, significantly reducing their expected outflows, (2) they also expect to both defer social security benefits and retire well before full retirement age, and (3) have significant assets at different tax buckets, so the optimal order and magnitude of withdrawal will vary.
delamer
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Re: Define "Expenses"

Post by delamer »

Independent George wrote: Mon Nov 22, 2021 10:16 pm It gets a little more complicated here in that (1) most BHs plan to be mortgage-free in retirement, significantly reducing their expected outflows, (2) they also expect to both defer social security benefits and retire well before full retirement age, and (3) have significant assets at different tax buckets, so the optimal order and magnitude of withdrawal will vary.
That’s a lot of generalizations about “most BHs.”

But, yes, retirees may have different stages of retirement with different amounts of income and expenses in each stage.
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mikeyzito22
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Re: Define "Expenses"

Post by mikeyzito22 »

rockstar wrote: Mon Nov 22, 2021 7:27 pm Living expenses + future expected household upkeep (about 1% of property value) + vacation + potential medical spend + expected taxes + $20k buffer in case I miss something. That's my napkin math.
I love this. It's like when you first start out budgeting an emergency fund but in reverse. It is accounting for unforeseen situations that could arise, giving yourself more room for the market to dive and/or your budgeting to be more flexible. :sharebeer
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tetractys
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Re: Define "Expenses"

Post by tetractys »

Funny, T-Rowe Price was saying 11x annual spending when I had a deferred comp plan there. Didn’t pay much attention to it though. IMO those numbers are more bait then reality. An individual is better of understanding their own life needs.
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CyclingDuo
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Re: Define "Expenses"

Post by CyclingDuo »

tetractys wrote: Mon Nov 22, 2021 11:46 pm Funny, T-Rowe Price was saying 11x annual spending when I had a deferred comp plan there. Didn’t pay much attention to it though. IMO those numbers are more bait then reality. An individual is better of understanding their own life needs.
Actually, T. Rowe Price says multiple of income - not multiple of expenses.

Your 11x multiple of income saved at age 65 is depicted in these T. Rowe Price benchmarks...

Image

Image
https://www.troweprice.com/personal-inv ... y-now.html
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AlmstRtrd
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Re: Define "Expenses"

Post by AlmstRtrd »

By this point in an expense thread someone has usually jumped in to remind the OP that, when retired, there is no need to actually save for retirement anymore. This one is so obvious in hindsight but it's often an "ah ha!" moment for folks when they realize how much less they "spend" when they are not maxing out different retirement accounts every year.
KlangFool
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Re: Define "Expenses"

Post by KlangFool »

Triple digit golfer wrote: Mon Nov 22, 2021 9:34 pm
KlangFool wrote: Mon Nov 22, 2021 9:15 pm
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

KlangFool
So they're a discretionary expense. If you pay them, they're an expense.

OP - taxes need to be included in your number.
Triple digit golfer,

I disagreed.

When I was employed, my effective tax rate is less than 5%. If and when I retire, it will be substantially lowered. It is negligible.

OP,

The answer is highly dependent on your annual expense. For someone with annual expense at 60K at below, the answer would be no. 60K to 100K = maybe. Above 100K, the answer is yes. You need to think about taxes.

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smitcat
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Re: Define "Expenses"

Post by smitcat »

KlangFool wrote: Tue Nov 23, 2021 8:48 am
Triple digit golfer wrote: Mon Nov 22, 2021 9:34 pm
KlangFool wrote: Mon Nov 22, 2021 9:15 pm
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

KlangFool
So they're a discretionary expense. If you pay them, they're an expense.

OP - taxes need to be included in your number.
Triple digit golfer,

I disagreed.

When I was employed, my effective tax rate is less than 5%. If and when I retire, it will be substantially lowered. It is negligible.

OP,

The answer is highly dependent on your annual expense. For someone with annual expense at 60K at below, the answer would be no. 60K to 100K = maybe. Above 100K, the answer is yes. You need to think about taxes.

KlangFool
"When I was employed, my effective tax rate is less than 5%"
When you were employed your FICA alone was more than 5%.

"If and when I retire, it will be substantially lowered. It is negligible"
As you keep working past your initial goal(s) taxes will no longer be negligible when retired - you can choose to have them lower early on but they will eventually rise.

"The answer is highly dependent on your annual expense. For someone with annual expense at 60K at below, the answer would be no. 60K to 100K = maybe. Above 100K, the answer is yes. You need to think about taxes."
Actually, the answer here is not dependent upon expenses it is dependent upon income - your taxes will depend upon your portfolio/pension/SS and other taxable incomes over your future years.
Expenses that match that taxable income in retirement would be unusual.
Yes - figure out your own taxes for retirement and multiples are required to cover those as well.
balbrec2
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Re: Define "Expenses"

Post by balbrec2 »

Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Absolutely, they must be considered an expense. First line item in my budget is income taxes. Second line item is real estate taxes.
balbrec2
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Re: Define "Expenses"

Post by balbrec2 »

balbrec2 wrote: Tue Nov 23, 2021 9:09 am
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Absolutely, they must be considered an expense. First line item in my budget is income taxes. Second line item is real estate taxes.
Expense is the cost required or money spent on something.
balbrec2
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Re: Define "Expenses"

Post by balbrec2 »

KlangFool wrote: Mon Nov 22, 2021 9:15 pm
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

KlangFool
If you get to choose, why would you choose other than zero?
Wanderingwheelz
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Re: Define "Expenses"

Post by Wanderingwheelz »

delamer wrote: Mon Nov 22, 2021 10:54 pm
Independent George wrote: Mon Nov 22, 2021 10:16 pm It gets a little more complicated here in that (1) most BHs plan to be mortgage-free in retirement, significantly reducing their expected outflows, (2) they also expect to both defer social security benefits and retire well before full retirement age, and (3) have significant assets at different tax buckets, so the optimal order and magnitude of withdrawal will vary.
That’s a lot of generalizations about “most BHs.”

But, yes, retirees may have different stages of retirement with different amounts of income and expenses in each stage.
I definitely agree that description is pretty accurate of most Bogleheads, especially if one takes into consideration those who post the most on Bogleheads. That alone may make it seem more the case than it actually is.
KlangFool
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Re: Define "Expenses"

Post by KlangFool »

balbrec2 wrote: Tue Nov 23, 2021 9:15 am
KlangFool wrote: Mon Nov 22, 2021 9:15 pm
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

KlangFool
If you get to choose, why would you choose other than zero?
Because, sometimes, it is a good deal to pay some taxes at 10%.

I "tax managed" my portfolio to generate the best long-term after-tax return. It has nothing to do with my annual expense.

For example, if someone has 1 million in the tax-deferred account, the choice is

A) Pay some taxes at 10% now.

Versus

B) Pay more taxes at 20+% in the future

(A) is better than (B).

KlangFool
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balbrec2
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Re: Define "Expenses"

Post by balbrec2 »

AlmstRtrd wrote: Tue Nov 23, 2021 6:57 am By this point in an expense thread someone has usually jumped in to remind the OP that, when retired, there is no need to actually save for retirement anymore. This one is so obvious in hindsight but it's often an "ah ha!" moment for folks when they realize how much less they "spend" when they are not maxing out different retirement accounts every year.
Also, if no earned income, no SS deduction, which is another 6.2%.
KlangFool
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Re: Define "Expenses"

Post by KlangFool »

balbrec2 wrote: Tue Nov 23, 2021 9:22 am
AlmstRtrd wrote: Tue Nov 23, 2021 6:57 am By this point in an expense thread someone has usually jumped in to remind the OP that, when retired, there is no need to actually save for retirement anymore. This one is so obvious in hindsight but it's often an "ah ha!" moment for folks when they realize how much less they "spend" when they are not maxing out different retirement accounts every year.
Also, if no earned income, no SS deduction, which is another 6.2%.
But, that is not so obvious to folks that group taxes into the expense. As opposed to separating them.

KlangFool
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Wanderingwheelz
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Re: Define "Expenses"

Post by Wanderingwheelz »

balbrec2 wrote: Tue Nov 23, 2021 9:15 am
KlangFool wrote: Mon Nov 22, 2021 9:15 pm
Triple digit golfer wrote: Mon Nov 22, 2021 7:00 pm
KlangFool wrote: Mon Nov 22, 2021 5:30 pm OP,

Gross Income = Annual savings + Annual Expense + Taxes

Annual Expense = Gross Income - Annual Savings - Taxes

Expense = anything that are not savings or taxes.

KlangFool
This is an interesting take. Why do you feel that taxes are not an expense? For someone living off their portfolio, they need to be included in the calculation.
Triple digit golfer,

Because I get to decide how much taxes to pay each year when I retire. It could be zero if I choose to.

KlangFool
If you get to choose, why would you choose other than zero?
One good reason might be selling stocks to buy food. How much food to buy, quality, whether to dine out often, order take-In, how much to tip, etc. will have an effect on how much capital gains tax you pay. (Not knowing what’s the tax law will be years from now regarding capital gains, of course.)
Triple digit golfer
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Re: Define "Expenses"

Post by Triple digit golfer »

I don't understand why this is being made complicated.

Let's go about it another way.

Is McDonald's considered an expense?
Of course.
If you don't go to McDonald's, then it's not an expense. But you would never say it's not considered an expense.

Are taxes considered an expense?
Of course.
If you don't pay taxes, then they're not an expense.

To say they're not an expense is different than saying they're not a personal expense for you.

Taxes are 100% an expense. You would never consider a $100,000 annual withdrawal on a $2.5 million portfolio to be 4%, then have to pay $10,000 in taxes and still consider it 4%. It would be 4.4%.

One could always argue that there are ways to mitigate or minimize expenses, and taxes are no exception. But if they're incurred, they're an expense. Don't make it confusing.
KlangFool
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Re: Define "Expenses"

Post by KlangFool »

Triple digit golfer wrote: Tue Nov 23, 2021 9:31 am
You would never consider a $100,000 annual withdrawal on a $2.5 million portfolio to be 4%, then have to pay $10,000 in taxes and still consider it 4%. It would be 4.4%.
Triple digit golfer,

But, you do not have to withdraw 100K on a 2.5 million portfolio. Especially if your annual expense is low enough. You could Roth convert at your standard deduction and pay 0% taxes.

What is the point calling 0% taxes as an expense? It only matters if you are an accountant.

As I had said before, if someone's annual expense is high enough like 100K per year, they may not have a choice. But, that limitation does not exists for others with a lowered annual expense.

KlangFool
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dbr
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Re: Define "Expenses"

Post by dbr »

BAM55 wrote: Mon Nov 22, 2021 4:50 pm So you read all the time that many want to have 25x, 30x, 50x, etc. of their "expenses" to retire comfortable and - more importantly - have enough money to last their retirement.
Those numbers do not refer to what one spends but rather to how large a portfolio one needs to support portfolio withdrawals safely. "x" is the planned annual withdrawal, usually taken to be inflation indexed. The analysis is about how portfolios last under withdrawal. 25x is just a way of stating the 4% safe withdrawal rule. Larger numbers suggest withdrawing at a lower rate for excessive safety or to increase the wealth to be passed on to heirs or for a longer retirement than the oft cited 30 years.

Actual spending is supported by withdrawals together with all the other income streams one has such as Social Security, pensions, annuities, business (such as real estate) and so on.

Yx is also an oversimplified concept. An actual retirement plan involving investments is not more simple than the level of some sort of retirement spending model that takes account of all factors including various income streams, variable spending, uncertain investment returns, and inflation.
Triple digit golfer
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Re: Define "Expenses"

Post by Triple digit golfer »

KlangFool wrote: Tue Nov 23, 2021 9:38 am
Triple digit golfer wrote: Tue Nov 23, 2021 9:31 am
You would never consider a $100,000 annual withdrawal on a $2.5 million portfolio to be 4%, then have to pay $10,000 in taxes and still consider it 4%. It would be 4.4%.
Triple digit golfer,

But, you do not have to withdraw 100K on a 2.5 million portfolio. Especially if your annual expense is low enough. You could Roth convert at your standard deduction and pay 0% taxes.

What is the point calling 0% taxes as an expense? It only matters if you are an accountant.

As I had said before, if someone's annual expense is high enough like 100K per year, they may not have a choice. But, that limitation does not exists for others with a lowered annual expense.

KlangFool
Taxes are an expense. If one has no taxes, one will infer that one doesn't have a tax expense.

Saying that it's not an expense is highly misleading, especially considering the context of the OP.
KlangFool
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Re: Define "Expenses"

Post by KlangFool »

Triple digit golfer wrote: Tue Nov 23, 2021 10:24 am
KlangFool wrote: Tue Nov 23, 2021 9:38 am
Triple digit golfer wrote: Tue Nov 23, 2021 9:31 am
You would never consider a $100,000 annual withdrawal on a $2.5 million portfolio to be 4%, then have to pay $10,000 in taxes and still consider it 4%. It would be 4.4%.
Triple digit golfer,

But, you do not have to withdraw 100K on a 2.5 million portfolio. Especially if your annual expense is low enough. You could Roth convert at your standard deduction and pay 0% taxes.

What is the point calling 0% taxes as an expense? It only matters if you are an accountant.

As I had said before, if someone's annual expense is high enough like 100K per year, they may not have a choice. But, that limitation does not exists for others with a lowered annual expense.

KlangFool
Taxes are an expense. If one has no taxes, one will infer that one doesn't have a tax expense.

Saying that it's not an expense is highly misleading, especially considering the context of the OP.
Triple digit golfer,

<< especially considering the context of the OP.>>

<< if I need $40k per year to live in my house, pay all my bills/taxes and eat,>>

As in 40K per year of expense? It is too insignificant to matter.

KlangFool
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Triple digit golfer
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Re: Define "Expenses"

Post by Triple digit golfer »

KlangFool wrote: Tue Nov 23, 2021 10:29 am
Triple digit golfer wrote: Tue Nov 23, 2021 10:24 am
KlangFool wrote: Tue Nov 23, 2021 9:38 am
Triple digit golfer wrote: Tue Nov 23, 2021 9:31 am
You would never consider a $100,000 annual withdrawal on a $2.5 million portfolio to be 4%, then have to pay $10,000 in taxes and still consider it 4%. It would be 4.4%.
Triple digit golfer,

But, you do not have to withdraw 100K on a 2.5 million portfolio. Especially if your annual expense is low enough. You could Roth convert at your standard deduction and pay 0% taxes.

What is the point calling 0% taxes as an expense? It only matters if you are an accountant.

As I had said before, if someone's annual expense is high enough like 100K per year, they may not have a choice. But, that limitation does not exists for others with a lowered annual expense.

KlangFool
Taxes are an expense. If one has no taxes, one will infer that one doesn't have a tax expense.

Saying that it's not an expense is highly misleading, especially considering the context of the OP.
Triple digit golfer,

<< especially considering the context of the OP.>>

<< if I need $40k per year to live in my house, pay all my bills/taxes and eat,>>

As in 40K per year of expense? It is too insignificant to matter.

KlangFool
Read the first post. Taxes would definitely be included.
delamer
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Re: Define "Expenses"

Post by delamer »

Wanderingwheelz wrote: Tue Nov 23, 2021 9:18 am
delamer wrote: Mon Nov 22, 2021 10:54 pm
Independent George wrote: Mon Nov 22, 2021 10:16 pm It gets a little more complicated here in that (1) most BHs plan to be mortgage-free in retirement, significantly reducing their expected outflows, (2) they also expect to both defer social security benefits and retire well before full retirement age, and (3) have significant assets at different tax buckets, so the optimal order and magnitude of withdrawal will vary.
That’s a lot of generalizations about “most BHs.”

But, yes, retirees may have different stages of retirement with different amounts of income and expenses in each stage.
I definitely agree that description is pretty accurate of most Bogleheads, especially if one takes into consideration those who post the most on Bogleheads. That alone may make it seem more the case than it actually is.
I’d agree that it’s an accurate description for many Bogleheads.

But to say most is pushing it.

I’m sure I’m influenced by the fact that I don’t meet all those criteria.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
Tamales
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Re: Define "Expenses"

Post by Tamales »

OP: it's just a multiplier derived from some aspect of a person's retirement readiness calculations. As the thread responses show (and other past threads like it), people use or interpret it in a few slightly different ways, sometimes specific to their individual circumstances or sometimes referenced to the way it was used in some paper or book. Some people even use several such multipliers to account for differences between their necessary and discretionary expenses.

So the moral of the story is the person using it has to define how they are using it.
A person shouldn't just drop a "30x" number into a post and believe there is a universally-understood interpretation of it. They have to explain their assumptions used in calculating it and how they're using it.

A 15x number may be a useful target for some, while others may want to use 25x, 40x, 60x, or whatever, to account for special circumstances in their personal finances or retirement planning assumptions. There isn't a single magic number of "something-x" that is right for everyone because any such multiplier is based on assumptions that may not be appropriate for a given person.

No matter what multiplier a person may choose to use, there is always going to be the possibility of "significant financial events" (which includes living too long) that were not accurately accounted for. So you don't want to fall into a "false precision" trap when using such a multiplier. It could turn out to be wrong in a big way.
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