How to decide your number?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
investor1
Posts: 1052
Joined: Thu Mar 15, 2012 8:15 pm

How to decide your number?

Post by investor1 »

I'm a young investor, and I have spent the past couple of years ramping up my retirement savings by max'ing my 401(k), contributing to a Roth, and investing in BH-ish funds. Sometimes I wonder if I am doing too much. Too much would be determined by a number of things such as hopeful gains, crossing my fingers that the government doesn't change the rules, etc., but right now I am interested in figuring out how much is enough. Maybe later I can put more thought into how fast I might get there.

How do you figure out what you would like to have at the time of saying adios to your co-workers?

I know my current expenses, and I know I would probably like to spend a little bit more on fun stuff. I don't currently own a house, and my plan is to have one paid off by the time I retire. I think my retirement expenses would be about the same as my current expense (after an inflation adjustment) plus a bit of extra spending money / house dough.

If I express that in today's dollars, I can look at the tax brackets and get a feel for the tax rate for that level of income. That would seem to tell me the level of income needed in today's dollars.

I think I would like to retire around the age of 60 and plan for a 30 year retirement, so I so thinking of taking that attempting to make that 4% of my portfolio. That would express the amount I need at retirement time in today's dollars. In other words:

e = expected expenses in today's dollars (example: $35k)
t = expected tax rate (example: 0.2)
r = retirement number

( e / ( 1-t ) ) / 0.04 = r (example: ( $35000 / ( 1 - 0.2 ) ) / 0.04 = $1.09M)

Of course that doesn't account for social security, so you could take a guess at your monthly SS income, multiply that by 12, and deduct that from the numerator to get:

s = expected monthly social security income (example: $2k)

( ( e / ( 1-t ) ) - ( s * 12 ) ) / 0.04 = r (example: ( ( $35000 / ( 1 - 0.2 ) ) - ( $2000 *12 ) ) / 0.04 = $494k)

Given that I am 30 and inflation tends to double the cost of life about every 30 years, I would need to double that amount to tell me which number to look for when I reach my desired retirement age.

I realize there is some guess work and finger crossing going on here, but I'd like to know if I am in the ballpark. I want to have a decent idea whether I am saving enough and having enough fun now while probably having enough to maintain my lifestyle after I retire.

What are your thoughts on how I am taking a shoot at this and how you would go about it?
Last edited by investor1 on Wed May 21, 2014 10:57 am, edited 1 time in total.
ryk1861
Posts: 70
Joined: Tue Apr 29, 2014 3:41 pm

Re: How to decide your number?

Post by ryk1861 »

Treatises, calculators, blogs, and, yes, message boards are dedicated to the answer to this question and the answer is…42!

But seriously, one simple rule of thumbs is 20-25 times your expected living expenses.

I enjoyed reading the book, The Number, (http://www.amazon.com/The-Number-What-N ... 0743270320). It was funny and insightful and changed the way I think about the rest of my life, both in monetary and non-monetary terms.
feh
Posts: 1409
Joined: Sat Dec 15, 2012 11:39 am

Re: How to decide your number?

Post by feh »

I didn't start to give serious consideration to "my number" until I was in my early 40s. I think there are just too many variables at the age of 30 to make a decent estimate.

Instead, what we did from 25-40 was to save as much as we could, without depriving ourselves. Focus on saving at least 15% of your gross. If you can, increase that percentage as your income (hopefully) grows over the years.
Andyrunner
Posts: 799
Joined: Thu May 03, 2012 9:14 am

Re: How to decide your number?

Post by Andyrunner »

feh wrote:I didn't start to give serious consideration to "my number" until I was in my early 40s. I think there are just too many variables at the age of 30 to make a decent estimate.

Instead, what we did from 25-40 was to save as much as we could, without depriving ourselves. Focus on saving at least 15% of your gross. If you can, increase that percentage as your income (hopefully) grows over the years.
+1

To many variables. You have no idea what medicare is going to look like in 30 years, general expenses, return on investments etc.

I just plan on saving as much as I can for now. I think I would have a better idea once I reach 40-45.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: How to decide your number?

Post by The Wizard »

Step one is to determine the monthly/annual income you would "like" in retirement. It's hard to know this income number until you're within 10 years of retirement, due to inflation and lifestyle development. You may wish to allow EXTRA income in retirement to allow for fun, discretionary expenses.

Once you have a desired income number, you need to figure how to fund it. If entirely self-funded, then you may need 25-30 times that amount, using a 4% SWR.
But if you have Social Security, a pension, or annuities, then you will need a smaller investment total...
Attempted new signature...
User avatar
cfs
Posts: 4154
Joined: Fri Feb 23, 2007 1:22 am
Location: ~ Mi Propio Camino ~

Re: How to decide your number?

Post by cfs »

Forget the numbers

Just save and invest as much as you can with the idea that the pension and social security is not going to be there when you retiree. If when you and your spouse retire you or both have a pension and social security, then you have won the game twice and your next move is to go to Disneyland and celebrate (personally, I would go to Knotts Berry Farm).

Thank you.
~ Member of the Active Retired Force since 2014 ~
User avatar
Rick Ferri
Posts: 9265
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: How to decide your number?

Post by Rick Ferri »

Here is a simple way to find your number:

1. Calculate your total expected annual spending in retirement.
2. Subtract annual annuity income, pensions, Social Security, rental income and other non-portfolio income
3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
User avatar
matjen
Posts: 2136
Joined: Sun Nov 20, 2011 11:30 pm

Re: How to decide your number?

Post by matjen »

Rick Ferri wrote:Here is a simple way to find your number:

1. Calculate your total expected annual spending in retirement.
2. Subtract annual annuity income, pensions, Social Security, rental income and other non-portfolio income
3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.

Rick Ferri
Rick does this assume retirement at 65?
A man is rich in proportion to the number of things he can afford to let alone.
User avatar
Rick Ferri
Posts: 9265
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: How to decide your number?

Post by Rick Ferri »

No specific age. Let's call it 35 years in retirement.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: How to decide your number?

Post by steve_14 »

Rick Ferri wrote:3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.
That would be an initial withdrawal rate of 5% (X20) or 4% (X25). I might do X30 in our current low return world.
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

steve_14 wrote:
Rick Ferri wrote:3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.
That would be an initial withdrawal rate of 5% (X20) or 4% (X25). I might do X30 in our current low return world.
4% is already a conservative number that worked in past low return environments.... Anyway, the OP isn't retiring today, but probably 30 years from now... so 25x is a perfectly good "rule of thumb" to use for now.
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: How to decide your number?

Post by steve_14 »

HomerJ wrote:
steve_14 wrote:
Rick Ferri wrote:3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.
That would be an initial withdrawal rate of 5% (X20) or 4% (X25). I might do X30 in our current low return world.
4% is already a conservative number that worked in past low return environments....
The 4% SWR studies I've seen were during periods when bonds yielded 6% and stocks 10%, not 2% and ~6-7% respectively as they do now. At a 4% return and a 25% tax rate, with a 4% initial WR and 2.5% inflation, your money lasts 26 years.
User avatar
abuss368
Posts: 23109
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: How to decide your number?

Post by abuss368 »

Vanguard has recommended planning retirement to age 100 to be conservative. I would think this is good advice.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Go Blue 99
Posts: 952
Joined: Thu Oct 09, 2008 3:42 pm

Re: How to decide your number?

Post by Go Blue 99 »

Regarding all of these rules of thumb (25-30x expected annual spending)- is that based on pre-tax or post-tax dollars? In other words, if all of my retirements accts are tax-deferred, do I need to ramp up that number since I'll be losing a chunk to taxes?
SeattleCPA
Posts: 456
Joined: Fri Jul 06, 2012 7:06 pm

Re: How to decide your number?

Post by SeattleCPA »

I think an ad hoc approach like Rick Ferri describes is a great start. And ideally the dynamic programming approach (is that what they called it?) that had received some press lately would be best because you can deal with changes in consumption when you're retired.

But a while back, in an another formula-based approach to this question, I built a spreadsheet that lets you calculate a savings amount that lets you evenly allocate your income over the years you work. Here's link to the spreadsheet and the procedures and logic: income allocation spreadsheet and instructions
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

steve_14 wrote:
HomerJ wrote:
steve_14 wrote:
Rick Ferri wrote:3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.
That would be an initial withdrawal rate of 5% (X20) or 4% (X25). I might do X30 in our current low return world.
4% is already a conservative number that worked in past low return environments....
The 4% SWR studies I've seen were during periods when bonds yielded 6% and stocks 10%, not 2% and ~6-7% respectively as they do now. At a 4% return and a 25% tax rate, with a 4% initial WR and 2.5% inflation, your money lasts 26 years.
During THOSE times, you could pull 6% and not run out of the money...

The 4% SWR studies I've read about include the Great Depression and the 60s-70s where interest rates were rising, and stocks were going nowhere... 4% is the number that worked in BAD times... Most of the time, you can probably get away with 5% or more.

Image
User avatar
Rick Ferri
Posts: 9265
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: How to decide your number?

Post by Rick Ferri »

steve_14 wrote:
Rick Ferri wrote:3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.
That would be an initial withdrawal rate of 5% (X20) or 4% (X25). I might do X30 in our current low return world.
I'm assuming an investment in a balanced portfolio and earning 5%. If you only earn 4%, the withdrawal rate can be adjusted if needed - but that's not likely.

Seriously, we tend to over-think these things. It's not that complicated.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Workinghard
Posts: 372
Joined: Fri Apr 04, 2014 4:56 am

Re: How to decide your number?

Post by Workinghard »

Yikes! Even by increasing our annual spending, taking only one SS into consideration, and multiplying by 25 we're considered "ready". I feel so far from being ready. I'm not sharing this with my husband! At least I won't be as nervous with him retiring in two years. As far as my retirement, time will tell.

In the past when I was trying to calculate, I did not take Social Security into consideration. I multiplied our annual spending by 25. I like this (your) number a lot better!

matjen wrote:
Rick Ferri wrote:Here is a simple way to find your number:

1. Calculate your total expected annual spending in retirement.
2. Subtract annual annuity income, pensions, Social Security, rental income and other non-portfolio income
3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.

Rick Ferri
Rick does this assume retirement at 65?
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: How to decide your number?

Post by steve_14 »

HomerJ wrote:The 4% SWR studies I've read about include the Great Depression and the 60s-70s where interest rates were rising, and stocks were going nowhere... 4% is the number that worked in BAD times... Most of the time, you can probably get away with 5% or more.

Image
Again you've picked an exceptionally juicy set of returns there - US stocks in the 20th century. You didn't cite a source for your graph, but we can see clearly here in a recent blog post by Wade Pfau that maximum SWRs for 30 year periods over 20 countries varied from .25% to 3.68%:

http://www.advisorperspectives.com/news ... _Rates.php
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: How to decide your number?

Post by letsgobobby »

steve_14 wrote:
HomerJ wrote:The 4% SWR studies I've read about include the Great Depression and the 60s-70s where interest rates were rising, and stocks were going nowhere... 4% is the number that worked in BAD times... Most of the time, you can probably get away with 5% or more.

Image
Again you've picked an exceptionally juicy set of returns there - US stocks in the 20th century. You didn't cite a source for your graph, but we can see clearly here in a recent blog post by Wade Pfau that maximum SWRs for 30 year periods over 20 countries varied from .25% to 3.68%:

http://www.advisorperspectives.com/news ... _Rates.php
What is the 95% safe figure for a globally diversified (by market cap weight) portfolio of, say, 60% global stocks and 40% global bonds?
steve_14
Posts: 1507
Joined: Wed Jun 20, 2012 12:05 am

Re: How to decide your number?

Post by steve_14 »

letsgobobby wrote:What is the 95% safe figure for a globally diversified (by market cap weight) portfolio of, say, 60% global stocks and 40% global bonds?
Don't know, but as noted a flexible plan is probably best (which is what everyone does in practice anyway). Of course, age, health and whether you're single or a couple also factor in. If you have a Plan B (annuitize, reduce spending, tap home equity), you can take more stock risk, and thus start with a higher initial WR IMO.
Grt2bOutdoors
Posts: 23238
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: How to decide your number?

Post by Grt2bOutdoors »

My number is what is there when I get to the end of the line in my career. Until then, keep saving, keep investing, keep living and do the best you can. :)
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Paul78
Posts: 311
Joined: Sat Dec 12, 2009 11:17 am

Re: How to decide your number?

Post by Paul78 »

I do not really have a number per se. Both because of my age (25) and the fact that a million different things could happen in my life that would change my number.

What I have been doing so far and am hopefully to continue is basically

1/3 gross income- fed/state taxes, social security, medicare, insurance premiums (not deductibles or out of pocket expenses)
1/3 gross income- life. Rent, car insurance, food, entertainment, savings (emergency funds, larger saying such as for a downpayment on a house)
1/3 gross income directly to retirement accounts- 17.5k in TSP, 5.5k in Roth IRA, the rest in a taxable account

The "plan" is to work 33 years retire at 55 and hopefully has some quality life left during retirement.

I figure saving what I am currently able to live off of + my pension (fers) + whatever social security I get should be enough to get by. Hopefully...
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

steve_14 wrote:
HomerJ wrote:
steve_14 wrote:
Rick Ferri wrote:3. Multiply the amount left by 20 if you don't care to leave anything behind or 25 if you do want to leave an inheritance.
That would be an initial withdrawal rate of 5% (X20) or 4% (X25). I might do X30 in our current low return world.
4% is already a conservative number that worked in past low return environments....
The 4% SWR studies I've seen were during periods when bonds yielded 6% and stocks 10%, not 2% and ~6-7% respectively as they do now. At a 4% return and a 25% tax rate, with a 4% initial WR and 2.5% inflation, your money lasts 26 years.
Even if the 20th century U.S. returns were abnormally high, you should still understand that 4% worked during periods of 2% and 6-7%.... it doesn't require the 6% and 10% numbers like you suggested.

Remember, as long as you can match inflation, 4% SWR means your money will last 25 years.... So with inflation currently at 2%-3%, your portfolio only needs to average 3.5% or so to last 30 years.

And 30 years is a long time... Just because people are currently predicting 2% for bonds and 6%-7% for stocks for the next 5-10 years, that doesn't mean we won't see another huge bull market 10-20 years from now.
MGBGTV8
Posts: 150
Joined: Fri Jan 11, 2013 12:40 pm

Re: How to decide your number?

Post by MGBGTV8 »

Decide on a savings process, and then let the number happen.

When starting out at 23, I started contributing to my 403(b) enough to get the match. Then, as I got raises, I gradually increased my percentage of contributions, until I hit the max 9 years later. I contributed to Roth IRAs before I had access to a Roth 403(b). After I maxed the 403(b), we lost access to Roth IRAs due to income limits, so we started saving in a taxable account. In general the goal was LBYM, and save a reasonable amount. Since I paid ourselves first in the form of automatic savings, that enabled me to not worry about what we spent. we added onto our house, bought cars for fun, and for daily use that are nice, but not luxury/exotic money. We went on vacations, and eat meals out. We are dollar wise, but penny foolish!

The early goal was to save enough to have a self sustaining "endowment" to live off in retirement. It would require working until age 70, but as a white collar worker, it doesn't seem unreasonable. There were so many unknowns, but so far, I have gotten through the tech bubble and great recession, and am more less on track. It may or may not work out, but the "endowment" goal was a good one for me, since I got to start early. It also meant consciously switching from looking at investments to fantasy baseball for a while. It was hard to stick to the plan while watching each of my diversified investments go south in 2007-2009. But I kept buying regularly.

Then we had kids, and saved in 529s, and now at age 39, my wife is taking 2 years off from working to spend with our little ones. So I scaled back my 403(b) contributions because in the end, the 2-year hiatus in contributions won't matter much 20-30 years from now. In the mean time Stay focused on the big things- retirement contributions, regular savings, dont overspend on a house (try to get into a 15 year mortgage) or cars (hard to pay cash for your 1st car out of college, but pay it off, and save for the next car in advance). Balance is required though. My father died at 53, so he never retired.
feh
Posts: 1409
Joined: Sat Dec 15, 2012 11:39 am

Re: How to decide your number?

Post by feh »

MGBGTV8 wrote:Decide on a savings process, and then let the number happen.

When starting out at 23, I started contributing to my 403(b) enough to get the match. Then, as I got raises, I gradually increased my percentage of contributions, until I hit the max 9 years later. I contributed to Roth IRAs before I had access to a Roth 403(b). After I maxed the 403(b), we lost access to Roth IRAs due to income limits, so we started saving in a taxable account. In general the goal was LBYM, and save a reasonable amount. Since I paid ourselves first in the form of automatic savings, that enabled me to not worry about what we spent. we added onto our house, bought cars for fun, and for daily use that are nice, but not luxury/exotic money. We went on vacations, and eat meals out. We are dollar wise, but penny foolish!

The early goal was to save enough to have a self sustaining "endowment" to live off in retirement. It would require working until age 70, but as a white collar worker, it doesn't seem unreasonable. There were so many unknowns, but so far, I have gotten through the tech bubble and great recession, and am more less on track. It may or may not work out, but the "endowment" goal was a good one for me, since I got to start early. It also meant consciously switching from looking at investments to fantasy baseball for a while. It was hard to stick to the plan while watching each of my diversified investments go south in 2007-2009. But I kept buying regularly.

Then we had kids, and saved in 529s, and now at age 39, my wife is taking 2 years off from working to spend with our little ones. So I scaled back my 403(b) contributions because in the end, the 2-year hiatus in contributions won't matter much 20-30 years from now. In the mean time Stay focused on the big things- retirement contributions, regular savings, dont overspend on a house (try to get into a 15 year mortgage) or cars (hard to pay cash for your 1st car out of college, but pay it off, and save for the next car in advance). Balance is required though. My father died at 53, so he never retired.
I could've written this myself, it is so similar to the path we've taken.

I'll be retiring in 2 years, at age 50.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: How to decide your number?

Post by The Wizard »

Go Blue 99 wrote:Regarding all of these rules of thumb (25-30x expected annual spending)- is that based on pre-tax or post-tax dollars? In other words, if all of my retirements accts are tax-deferred, do I need to ramp up that number since I'll be losing a chunk to taxes?
You can just work with 25X your desired Gross Income in retirement.
Example: annual basic expenses of $50K, plus retirement Fun Money of $20K, plus income taxes of $10K equals desired taxable retirement income of $80K per annum...
Attempted new signature...
richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: How to decide your number?

Post by richard »

HomerJ wrote:Remember, as long as you can match inflation, 4% SWR means your money will last 25 years.... So with inflation currently at 2%-3%, your portfolio only needs to average 3.5% or so to last 30 years.

And 30 years is a long time... Just because people are currently predicting 2% for bonds and 6%-7% for stocks for the next 5-10 years, that doesn't mean we won't see another huge bull market 10-20 years from now.
Your money doesn't last 25 years at a 4% withdrawal rate and matching inflation if you get an unfavorable sequence of returns.

CPI-U inflation has been in the 1%-2% range for the past year.

The best prediction for bonds is current yield and the best prediction for stocks is e/p (or e10/p). In real terms, that's about 0.3% for intermediate bonds (10 year TIPS) and 5% for TSM (about 20 p/e). Alas, the best predictors explain less than 50% of the time variation of returns.

There's no particular reason to believe a huge bull market is more likely than a huge bear market.
Jack FFR1846
Posts: 13105
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: How to decide your number?

Post by Jack FFR1846 »

feh wrote:
I could've written this myself, it is so similar to the path we've taken.

I'll be retiring in 2 years, at age 50.



Somewhat similar here too.....except the wife taking off a few years to go back to work when the youngest one started school became taking off (so far) 13 years. So as a young investor, consider that you may gain a wife and want to have kids. Maybe you find you're not able (like we did) and adopt. We did that twice and in our state, the costs are high. The cost each time almost exactly matched the MSRP of a new BMW M3. Now, figure college for those kids. At today's rates, figure $25-$50k a year. If you're young, you probably assume that social security will be like the League of Nations.....a historical remnant that your kids can read about. Count on nothing from it.

I have not yet calculated my number. I'm 57 and plan to retire in 5 years. I know my salary but have not taken an accurate reading of spending......but I know that I easily put 30%-40% into retirement savings.
Bogle: Smart Beta is stupid
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

Jack FFR1846 wrote:I have not yet calculated my number. I'm 57 and plan to retire in 5 years. I know my salary but have not taken an accurate reading of spending......but I know that I easily put 30%-40% into retirement savings.
5 years away, you might want to start planning a bit... :)

Tracking your expenses isn't too hard if you use Quicken and let it download info from your bank account and credit cards.
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

richard wrote:
HomerJ wrote:Remember, as long as you can match inflation, 4% SWR means your money will last 25 years.... So with inflation currently at 2%-3%, your portfolio only needs to average 3.5% or so to last 30 years.

And 30 years is a long time... Just because people are currently predicting 2% for bonds and 6%-7% for stocks for the next 5-10 years, that doesn't mean we won't see another huge bull market 10-20 years from now.
Your money doesn't last 25 years at a 4% withdrawal rate and matching inflation if you get an unfavorable sequence of returns.
Yes, you are correct... but it's pretty close. You don't need much of a return for 4% to last 25-30 years.

And if things go really bad the first couple years of retirement, you can probably still get part-time work, or cut back a bit...

And there's always the SPIA Plan B... If you're 15 years in, and your portfolio is cut in half, you can get a SPIA paying 8%+ with the remaining half of your money, which puts you back in the 4% withdrawal range for as long as you live.

4% is a very reasonable starting point...

Especially for someone retiring 20-30 years from now... People keep talking about how 4% is not safe in today's environment, but the OP is retiring in 20-30 years, so estimating 4% for basic planning purposes is fine. By then, we'll all know if you guys were right about 4% not working when retiring in 2014.... (Note many of you said 4% wouldn't work for people retiring in 2013 either, but I'm pretty sure with that 30% gain last year, the firecalc graphs of 2013-2043 will show they did all right)
Last edited by HomerJ on Fri May 23, 2014 9:42 am, edited 1 time in total.
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

richard wrote:There's no particular reason to believe a huge bull market is more likely than a huge bear market.
I believe over the next 30 years we will see both... and average long-term returns will again be quite good, even if short-term predictions are currently quite poor.
User avatar
TheTimeLord
Posts: 8791
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to decide your number?

Post by TheTimeLord »

HomerJ wrote:
richard wrote:There's no particular reason to believe a huge bull market is more likely than a huge bear market.
I believe over the next 30 years we will see both... and average long-term returns will again be quite good, even if short-term predictions are currently quite poor.

While I am not withdrawing any money from the markets or bonds currently, I am not investing any new money either. My conviction is a bear market is coming or at least a hard correction so my cash position keeps growing. Currently I am near 25%.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
ot1138
Posts: 146
Joined: Sun Mar 10, 2013 12:46 pm

Re: How to decide your number?

Post by ot1138 »

investor1 wrote:What are your thoughts on how I am taking a shoot at this and how you would go about it?
Start by calculating your SWR. If retiring younger, it will be lower. In my case, early 40s with wife and family, my SWR is 2.8%. For someone retiring at 65, probably around 4%.

Invert that (1/SWR) to come up with your portfolio multiplier. In my case, 1/2.8% = 35.7.

Multiply that by your annual income needs. Be sure to include taxes but keep in mind that they will be significantly lower. To do this step well, you need to track expenses for a year, create a budget, and adjust for post-retirement years. I go farther than this and use age bands, which gives me an expected annual budget for age 43-65, 65-75, and 75-death. However, the simple calculation just requires one number. In my case, the number is $110k.

$110k x 35.7 = $3,927,000

Finally, discount this for inflation based on your expected retirement age (you know how to do this already).

I also recommend Jim Otar's calculator if you want a more accurate model.
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

StarbuxInvestor wrote:
HomerJ wrote:
richard wrote:There's no particular reason to believe a huge bull market is more likely than a huge bear market.
I believe over the next 30 years we will see both... and average long-term returns will again be quite good, even if short-term predictions are currently quite poor.

While I am not withdrawing any money from the markets or bonds currently, I am not investing any new money either. My conviction is a bear market is coming or at least a hard correction so my cash position keeps growing. Currently I am near 25%.
Stealing my graph from another thread

Image

Note that in 1997, many people felt the market was overvalued and due for a crash... We did have a crash in 2000, but note the value of the Total Stock Market Index Fund never dropped below its 1997 level. So, in that case, waiting for the crash or correction, didn't even make you any more money, AND it's much harder, mentally, to watch the market go up and up while you wait for the crash. Market timing is stressful and hard. You have to guess right twice, both on the upside and the downside, and in some cases, it doesn't even offer you a CHANCE to make more money.

I would suggest this... Assume the stock market will drop 50% TOMORROW (but recover over time), and pick an Asset Allocation (AA) you can live with assuming that. Then just buy and hold and rebalance. Makes it easier to sleep at night, I think.
User avatar
TheTimeLord
Posts: 8791
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to decide your number?

Post by TheTimeLord »

HomerJ wrote:
StarbuxInvestor wrote:
HomerJ wrote:
richard wrote:There's no particular reason to believe a huge bull market is more likely than a huge bear market.
I believe over the next 30 years we will see both... and average long-term returns will again be quite good, even if short-term predictions are currently quite poor.

While I am not withdrawing any money from the markets or bonds currently, I am not investing any new money either. My conviction is a bear market is coming or at least a hard correction so my cash position keeps growing. Currently I am near 25%.
Stealing my graph from another thread

Image

Note that in 1997, many people felt the market was overvalued and due for a crash... We did have a crash in 2000, but note the value of the Total Stock Market Index Fund never dropped below its 1997 level. So, in that case, waiting for the crash or correction, didn't even make you any more money, AND it's much harder, mentally, to watch the market go up and up while you wait for the crash. Market timing is stressful and hard. You have to guess right twice, both on the upside and the downside, and in some cases, it doesn't even offer you a CHANCE to make more money.

I would suggest this... Assume the stock market will drop 50% TOMORROW (but recover over time), and pick an Asset Allocation (AA) you can live with assuming that. Then just buy and hold and rebalance. Makes it easier to sleep at night, I think.
I think the last investment I made was $20K when we pulled back earlier this year. If I am wrong then I make money with my current investments and am happy. If I am right then I am very happy. Nothing is guaranteed with the markets but I am incredible comfortable with what I am doing.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: How to decide your number?

Post by letsgobobby »

StarbuxInvestor wrote:
HomerJ wrote:
StarbuxInvestor wrote:
HomerJ wrote:
richard wrote:There's no particular reason to believe a huge bull market is more likely than a huge bear market.
I believe over the next 30 years we will see both... and average long-term returns will again be quite good, even if short-term predictions are currently quite poor.

While I am not withdrawing any money from the markets or bonds currently, I am not investing any new money either. My conviction is a bear market is coming or at least a hard correction so my cash position keeps growing. Currently I am near 25%.
Stealing my graph from another thread

Image

Note that in 1997, many people felt the market was overvalued and due for a crash... We did have a crash in 2000, but note the value of the Total Stock Market Index Fund never dropped below its 1997 level. So, in that case, waiting for the crash or correction, didn't even make you any more money, AND it's much harder, mentally, to watch the market go up and up while you wait for the crash. Market timing is stressful and hard. You have to guess right twice, both on the upside and the downside, and in some cases, it doesn't even offer you a CHANCE to make more money.

I would suggest this... Assume the stock market will drop 50% TOMORROW (but recover over time), and pick an Asset Allocation (AA) you can live with assuming that. Then just buy and hold and rebalance. Makes it easier to sleep at night, I think.
I think the last investment I made was $20K when we pulled back earlier this year. If I am wrong then I make money with my current investments and am happy. If I am right then I am very happy. Nothing is guaranteed with the markets but I am incredible comfortable with what I am doing.
Temporarily accruing 25% cash in anticipation of better investing opportunities later may turn out to be right or wrong, but either way it is clearly antithetical to the Boglehead approach which discourages market timing.

Let's say you had had this conviction at the beginning of 2013, when markets rallied 32%. And in 2014 your conviction was confirmed, and markets fell 25% (that's a historic decline though not an infrequent one). Aren't you more or less right where you would have been if you had stayed fully invested?
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: How to decide your number?

Post by letsgobobby »

OP, my goal is 25x then-current expenses. I'll let SS pay for taxes, health care, and Medicare premiums and hope things work out for the best. I'm not prepared to be a slave to work forever for some arbitrarily more secure 30x, 35x, 40x, 100x, nor am I willing to sacrifice some of the pleasures we currently enjoy in life to lower spending and make reaching those higher x values more attainable. Life is short and I've had some health scares this year which are not yet resolved and you come to realize that the moment is now. However if I reach 25x and still enjoy working I will be happy to continue to do so in some capacity.

More and more I'm also structuring a plan that lets me go part-time very soon, as early as age 45, with something like 18-20x spending, and letting our portfolio grow untouched for 20+ years and just using current income to support living expenses. No more savings - just letting the portfolio grow. I'd be more confident in that plan if stocks and bonds both sported higher yields, in which case I might also draw 1% or even 2% from the portfolio for tax management purposes, income supplementation, etc.

The biggest problem with saving less and spending more is that it makes reaching (20x, 25x, xx) that much harder!
User avatar
TheTimeLord
Posts: 8791
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to decide your number?

Post by TheTimeLord »

letsgobobby wrote: Temporarily accruing 25% cash in anticipation of better investing opportunities later may turn out to be right or wrong, but either way it is clearly antithetical to the Boglehead approach which discourages market timing.

Let's say you had had this conviction at the beginning of 2013, when markets rallied 32%. And in 2014 your conviction was confirmed, and markets fell 25% (that's a historic decline though not an infrequent one). Aren't you more or less right where you would have been if you had stayed fully invested?
But I had no such conviction and invested money in 2013. I do not disagree with the Boglehead principles at all. But everyone is in their own unique situation. If I wanted to I guess I could describe what I am doing is readjusting my AA because of a lessened risk tolerance due to asset valuations in relation to historical norms and global economic outlook.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: How to decide your number?

Post by The Wizard »

StarbuxInvestor wrote:
But I had no such conviction and invested money in 2013. I do not disagree with the Boglehead principles at all. But everyone is in their own unique situation. If I wanted to I guess I could describe what I am doing is readjusting my AA because of a lessened risk tolerance due to asset valuations in relation to historical norms and global economic outlook.
I don't see anything "wrong" with what Starbux is doing; it's his money.
And yes, we don't always know our comfortable AA ahead of time. It takes a few crashes for some to figure it out...
Attempted new signature...
hale2
Posts: 254
Joined: Sat Feb 15, 2014 5:54 pm

Re: How to decide your number?

Post by hale2 »

Starbuxinvestor,

You're not alone; I also stopped adding money recently. I did the same thing in 2007. Was I early? Sure, since the market didn't collapse until 18 months later. I used some of the funds to make extra mortgage payments (that mortgage was at 6%) and still had some funds available to take advantage of the market drop in late 2008 (again too early since it didn't bottom until March '09). I'm doing the same thing now. Worst case, my investments continue to climb so I put my funds towards reducing my mortgage. To me I'm not market timing, I'm just "rebalancing" and it helps me sleep better at night. And either way, my net worth is increasing, which is what we are all trying to accomplish anyway.
User avatar
TheTimeLord
Posts: 8791
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to decide your number?

Post by TheTimeLord »

hale2 wrote:Starbuxinvestor,

You're not alone; I also stopped adding money recently. I did the same thing in 2007. Was I early? Sure, since the market didn't collapse until 18 months later. I used some of the funds to make extra mortgage payments (that mortgage was at 6%) and still had some funds available to take advantage of the market drop in late 2008 (again too early since it didn't bottom until March '09). I'm doing the same thing now. Worst case, my investments continue to climb so I put my funds towards reducing my mortgage. To me I'm not market timing, I'm just "rebalancing" and it helps me sleep better at night. And either way, my net worth is increasing, which is what we are all trying to accomplish anyway.
Starting around 2000 I started making additional mortgage payments even though the conventional wisdom was not to pay off your mortgage. Well when the crash hit and all those gains hit disolved I ended up having a paid off house. Today since I have zero debt plus my net worth and portfolio are at all time highs so I am comfortable with market valuations a bit high, profit margins at all-time highs and the lack of a correction for over 3 years to wait for an lower entry point. If I am wrong its still okay, it is not like I am 100% out of the market.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

StarbuxInvestor wrote:Today since I have zero debt plus my net worth and portfolio are at all time highs so I am comfortable with market valuations a bit high, profit margins at all-time highs and the lack of a correction for over 3 years to wait for an lower entry point. If I am wrong its still okay, it is not like I am 100% out of the market.
Again, that lower entry point may NEVER come...

If you don't need that money in the market to achieve your goals, then no worries... Not sure why you'd ever put it in the market then if that's true... What correction point you looking for? 10%? 20%? 30%? If we see a 20%-30% drop I guarantee the newspapers and the talking heads on TV (and even half the threads on this board) are going to be screaming about how we're going to go lower.... You really going to have the nerve to put money into a market when it's dropped 30% and everyone is sure it's going to drop 50%? So then you wait for 50%, and instead market starts up again, so at -15% you pull the gun, and then it drops back to -40% and you curse yourself..

There's just a LOT of stress involved with the simple phrase "waiting for a lower entry point".

And again, if you DO need the money to make stock market like returns, then keeping it out is dangerous, because just like 1997, 17 years might go by with no "lower entry point".
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: How to decide your number?

Post by letsgobobby »

StarbuxInvestor wrote:
hale2 wrote:Starbuxinvestor,

You're not alone; I also stopped adding money recently. I did the same thing in 2007. Was I early? Sure, since the market didn't collapse until 18 months later. I used some of the funds to make extra mortgage payments (that mortgage was at 6%) and still had some funds available to take advantage of the market drop in late 2008 (again too early since it didn't bottom until March '09). I'm doing the same thing now. Worst case, my investments continue to climb so I put my funds towards reducing my mortgage. To me I'm not market timing, I'm just "rebalancing" and it helps me sleep better at night. And either way, my net worth is increasing, which is what we are all trying to accomplish anyway.
Starting around 2000 I started making additional mortgage payments even though the conventional wisdom was not to pay off your mortgage. Well when the crash hit and all those gains hit disolved I ended up having a paid off house. Today since I have zero debt plus my net worth and portfolio are at all time highs so I am comfortable with market valuations a bit high, profit margins at all-time highs and the lack of a correction for over 3 years to wait for an lower entry point. If I am wrong its still okay, it is not like I am 100% out of the market.
I don't necessarily disagree with the motivation or even the action, just pointing out that Bogleheadism specifically decries such behaviors. That said I'm far from a purist, being a vocal PE10 adherent, so who am I to judge?
User avatar
TheTimeLord
Posts: 8791
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to decide your number?

Post by TheTimeLord »

HomerJ wrote:
StarbuxInvestor wrote:Today since I have zero debt plus my net worth and portfolio are at all time highs so I am comfortable with market valuations a bit high, profit margins at all-time highs and the lack of a correction for over 3 years to wait for an lower entry point. If I am wrong its still okay, it is not like I am 100% out of the market.
You really going to have the nerve to put money into a market when it's dropped 30% and everyone is sure it's going to drop 50%?

There's just a LOT of stress involved with the simple phrase "waiting for a lower entry point".

And again, if you DO need the money to make stock market like returns, then keeping it out is dangerous, because just like 1997, 17 years might go by with no "lower entry point".
Yes I will have the nerve. Won't take any more than someone rebalancing except I won't have their losses. I try not to base my life off the 13 year bull market which contained 1997. It has created a lot of overly equity aggressive investors. Oddly enough for months I have believe the market will hit 1950 before any major pullback. The need to make more money versus need not to lose money varies throughout one's financial life. Personally, I hope the market never has another losing day but looking at a 100 year chart a market without corrections or bears seems unlikely. To me the key is I have implemented something I can live with whether I am right or wrong.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
hale2
Posts: 254
Joined: Sat Feb 15, 2014 5:54 pm

Re: How to decide your number?

Post by hale2 »

StarbuxInvestor wrote:
HomerJ wrote:
StarbuxInvestor wrote:Today since I have zero debt plus my net worth and portfolio are at all time highs so I am comfortable with market valuations a bit high, profit margins at all-time highs and the lack of a correction for over 3 years to wait for an lower entry point. If I am wrong its still okay, it is not like I am 100% out of the market.
You really going to have the nerve to put money into a market when it's dropped 30% and everyone is sure it's going to drop 50%?

There's just a LOT of stress involved with the simple phrase "waiting for a lower entry point".

And again, if you DO need the money to make stock market like returns, then keeping it out is dangerous, because just like 1997, 17 years might go by with no "lower entry point".
Yes I will have the nerve. Won't take any more than someone rebalancing except I won't have their losses. I try not to base my life off the 13 year bull market which contained 1997. It has created a lot of overly equity aggressive investors. Oddly enough for months I have believe the market will hit 1950 before any major pullback. The need to make more money versus need not to lose money varies throughout one's financial life. Personally, I hope the market never has another losing day but looking at a 100 year chart a market without corrections or bears seems unlikely. To me the key is I have implemented something I can live with whether I am right or wrong.
+1
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Re: How to decide your number?

Post by letsgobobby »

were you able to do exactly that in 2001-02 and 2008-09?
User avatar
TheTimeLord
Posts: 8791
Joined: Fri Jul 26, 2013 2:05 pm

Re: How to decide your number?

Post by TheTimeLord »

letsgobobby wrote:were you able to do exactly that in 2001-02 and 2008-09?
Yeah. Although less index then. Went heavy REIT in the early 2000s and Heavy MLP last time. I started investing a couple months before Black Monday so my initial experience taught me a lot. That said I would not recommend it for very many people. I think straight down the middle Boglehead is the best choice for the vast majority.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
HomerJ
Posts: 15739
Joined: Fri Jun 06, 2008 12:50 pm

Re: How to decide your number?

Post by HomerJ »

StarbuxInvestor wrote:
letsgobobby wrote:were you able to do exactly that in 2001-02 and 2008-09?
Yeah. Although less index then. Went heavy REIT in the early 2000s and Heavy MLP last time. I started investing a couple months before Black Monday so my initial experience taught me a lot. That said I would not recommend it for very many people. I think straight down the middle Boglehead is the best choice for the vast majority.
Really?? Your recent posts in other threads have you as very risk-averse... yet you were buying MLPs during the last crash without any worries?

Sounds like you know what you're doing though... Too stressful for me... So what is your correction point? 10% drop? 20% drop? You waiting for a 30% drop?
User avatar
LadyGeek
Site Admin
Posts: 68777
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: How to decide your number?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Post Reply