How to decide your number?

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Dandy
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Re: How to decide your number?

Post by Dandy »

There are so many variables when you try to predict what you will need 3 or more decades out and then be comfortable for another few decades. Your income, health, inflation, investment returns, interest rates, job security, taxes, health care, salary increase -- yikes. 30 years ago I figured about 2 million. When I retired a maybe $1 million would have been enough.

The real key in the early years is focusing on living below your means, saving an increasing amount, low cost well diversified portfolio etc. One of the phrases that I heard when starting out was " There are people living in your town that are making 20% less than you and are managing fine" Another was "each time you get a raise put some additional money toward automated saving/investing - you won't miss it" or Pay yourself more first. That kind of helped me reach a good number -- and a lot of luck.

When you get into your 50's you will have a better idea of what your portfolio can provide and when your need might be. Until then it is pretty much a wild guess.

That being said - life is short, health is a gift subject to being returned - so make sure to have some balance.
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Jay69
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Re: How to decide your number?

Post by Jay69 »

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
One thing funny about Bogleheads, when reading this thread and others like it many seem to think this won't be enough for 30-35 years of retirement. I would say if you did the above you would be better off than 75% of all other Americans. I have no documentation to back it but from what I have read else ware the current saving rates are no ware close enough to meet 20X-25X!
"Out of clutter, find simplicity” Albert Einstein
mptfan
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Re: How to decide your number?

Post by mptfan »

I agree that Bogleheads are a rare bunch indeed. I also have no documentation to back it up, but my sense is that there are a great many people who retire and live off of social security and maybe a modest amount of savings. Some of these people are smart enough to pay off their mortgage and have no debt in retirement, so they are able to live a comfortable and modest life in retirement and make due with what they have.

According to the most recent EBRI retirement survey, the median amount of total retirement savings is close to $50k, and only 17 percent of respondents had $250k or more in total retirement savings. If we assume an average of 50k of expenses each year, 20-25 times annual expenses would work out to 1 million to 1.25 million in savings to meet the 20-25 expenses guideline to retire. Yet it seems that the average person retires with maybe 1 or 2 times total expenses, and it is safe to say that there are only a very small percentage of households that ever reach the Boglehead goal of 20-25 times expenses, yet despite this, people continue to retire and make it work.
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Jay69
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Re: How to decide your number?

Post by Jay69 »

mptfan

I agree with what your are saying and see it first hand everyday. I know a few people who are now early to late 80's and all they have is a paid for home and SS and seem to be quite happy. It is a huge disparity from what I read here to what I see being applied in the field!

This maybe the reason why we see threads about am I spending enough while I'm young! I admit to thinking about this at times.
"Out of clutter, find simplicity” Albert Einstein
ajcp
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Re: How to decide your number?

Post by ajcp »

Jay69 wrote: I would say if you did the above you would be better off than 75% of all other Americans. I have no documentation to back it but from what I have read else ware the current saving rates are no ware close enough to meet 20X-25X!
Oh definitely. I'd actually say more like 95% and wouldn't be shocked if that was too low.
LadyIJ
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Re: How to decide your number?

Post by LadyIJ »

letsgobobby wrote: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!
I think there is a flaw here. when you say 25x current expenses - aren't you including taxes, health care, projected premiums? Of not, I think add those to your projected expenses and then calculate what you will receive for social security and pension and subtract that from expenses. The figure may turn out to be more realistic.
Dandy
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Re: How to decide your number?

Post by Dandy »

mentioned as a Rick Ferri quote

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.


1. As I have said - easier and more likely to be in the ballpark and be useful when you do it in your 50's (vs 30's) Huge unknowns. e.g. what will rents look like in 30 years? health insurance premiums, etc.
2. If you can reasonably estimate your salary you can get a decent projection of SS ( if there are no changes) Pensions ? will the company still offer them? State and Federal pensions were viewed as the gold standard - not so much anymore. Will they even provide a match to the 401k -
3. Ok you get a rough idea of expenses and a rough idea of possible income and then multiply by 20 or so. You get a number. Better than nothing - but may be a pretty soft target. You would need to revisit some of these major assumptions.

I believe if you are early in the accumulation stage the number focus should be on the target savings rate number(and the Boglehead type investing) and much less on trying to figure out the portfolio value target number you are shooting for. if you can get the savings rate to double digits early and mid teens in you late 30's or so - you should be fine.

Sounds wrong, but to me only when you are within a decade or so of retirement is it time to start getting serious about your portfolio value target number - or take the number you calculated seriously.
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Rick Ferri
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Re: How to decide your number?

Post by Rick Ferri »

I agree that my formula works best for someone who is mid- late career and has started to think about end game. Younger investors should only be concerned with developing good savings and investing habits.

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The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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TheTimeLord
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Re: How to decide your number?

Post by TheTimeLord »

Rick Ferri wrote:I agree that my formula works best for someone who is mid- late career and has started to think about end game. Younger investors should only be concerned with developing good savings and investing habits.

Rick Ferri
I totally agree with your formula but how do you best account for a retirement that begins say 10 years before you start to collect SS or pensions?
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The Wizard
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Re: How to decide your number?

Post by The Wizard »

StarbuxInvestor wrote:
Rick Ferri wrote:I agree that my formula works best for someone who is mid- late career and has started to think about end game. Younger investors should only be concerned with developing good savings and investing habits.

Rick Ferri
I totally agree with your formula but how do you best account for a retirement that begins say 10 years before you start to collect SS or pensions?
We'll see if Rick agrees, but what I'm doing is using a "bridge" of about $30K per year from investments to span the seven years to start of Social Security...
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moorso
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Re: How to decide your number?

Post by moorso »

StarbuxInvestor wrote:
Rick Ferri wrote:I agree that my formula works best for someone who is mid- late career and has started to think about end game. Younger investors should only be concerned with developing good savings and investing habits.

Rick Ferri
I totally agree with your formula but how do you best account for a retirement that begins say 10 years before you start to collect SS or pensions?
I went out to age 70 and looked at it there. Say I had total expenses of 110k at age 70, I begin taking SS at age 70 and those payments are 65K. Difference is 45k . 45K x 25 = $1,125,000 portfolio size at that time (age 70) if I want to leave something for the kids. Then you have the problem of backing up that amount to age 62 if thats when you plan to retire. My model begins at age 62 and projects out into the future so I can guess what my portfolio might be at age 70. In my particular case, the amounts at age 62 and at age 70 are very close. The real drawdown occurs in the 80's I believe.
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abuss368
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Re: How to decide your number?

Post by abuss368 »

Rick Ferri 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.
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
I agree. Why does the distribution phase appear to be so complicated?
John C. Bogle: “Simplicity is the master key to financial success."
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