A different way of calculating when to retire

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SanDiegoFIRE
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A different way of calculating when to retire

Post by SanDiegoFIRE »

Despite having a net worth that might normally be considered enough to comfortably RE, our expenses are much higher than typical as we have purposely increased our spending in ways we thought would be best for our family along the way in anticipation of increased income and savings - NOT the typical lifestyle creep that comes from mindless spending due to rapid hedonic adaptation, but definitely spending beyond the bare necessities of what could also make us happy.

This has led me to question whether I will ever know when to call it quits: will I just keep working one (or two or five) more years because of what my high income can generate in terms of improved quality of life, and subsequently increase expenses (even if for 'good things') along the way?

Last year our savings contribution (after tax income minus expenses, not including returns from existing savings) was over 15% of our total net worth at the beginning of 2014. This implies to me that the opportunity cost of retiring early would be too great, and each additional year of work would meaningfully add to our ability to fund a higher (more expensive) quality of life. My own estimation for myself is when that number is < 5% that I will feel another year of work may not really be worth it, and at that point would seriously consider retiring.

Instead of having 25x or 33x or ?x annual expenses, what is your annual savings $ as % of previous year's net worth that would definitively tell you that your time is better spent enjoying your wealth rather than continuing to increase it?
livesoft
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Re: A different way of calculating when to retire

Post by livesoft »

When one has enough, I don't think it comes down to 33X or the amount of money you have. Instead, it probably depends on how filled your BS bucket becomes.
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prudent
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Re: A different way of calculating when to retire

Post by prudent »

I don't think that works unless you have a very high income. The person who can afford to set aside $10,000 a year and has a $500,000 net worth can't really consider retiring at age 40 even though that only added 2% to net worth.

I believe you have to look at annual expenses and expected number of years in retirement no matter what. That works at all levels of income and expense.
dbr
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Re: A different way of calculating when to retire

Post by dbr »

SanDiegoFIRE wrote: Instead of having 25x or 33x or ?x annual expenses, what is your annual savings $ as % of previous year's net worth that would definitively tell you that your time is better spent enjoying your wealth rather than continuing to increase it?
Your rate of savings as a fraction of current net worth will NOT tell you how to make that decision.
randomguy
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Re: A different way of calculating when to retire

Post by randomguy »

SanDiegoFIRE wrote:Despite having a net worth that might normally be considered enough to comfortably RE, our expenses are much higher than typical as we have purposely increased our spending in ways we thought would be best for our family along the way in anticipation of increased income and savings - NOT the typical lifestyle creep that comes from mindless spending due to rapid hedonic adaptation, but definitely spending beyond the bare necessities of what could also make us happy.

This has led me to question whether I will ever know when to call it quits: will I just keep working one (or two or five) more years because of what my high income can generate in terms of improved quality of life, and subsequently increase expenses (even if for 'good things') along the way?

Last year our savings contribution (after tax income minus expenses, not including returns from existing savings) was over 15% of our total net worth at the beginning of 2014. This implies to me that the opportunity cost of retiring early would be too great, and each additional year of work would meaningfully add to our ability to fund a higher (more expensive) quality of life. My own estimation for myself is when that number is < 5% that I will feel another year of work may not really be worth it, and at that point would seriously consider retiring.

Instead of having 25x or 33x or ?x annual expenses, what is your annual savings $ as % of previous year's net worth that would definitively tell you that your time is better spent enjoying your wealth rather than continuing to increase it?
Lifestyle creep by any other name is still lifestyle creep. Spending 20k/yr on life enriching travel (or whatever) versus 20k on beanie babies still requires you to spend 20k. There is nothing wrong with it but it is important to realize what it is and decide if it is worthwhile or not.

You idea makes little sense little. If I have 1 million dollars in the bank, save 0 dollars and spend 100k, you would recommend retiring since the % saved is 0? Or would you recommend that person work another 20 years, and let the market turn that 1 million dollars into 4 million before they retire.You retire when you don't want to work anymore and your asset base is big enough to support you desired spending. There is no need to make this super complicated.
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Re: A different way of calculating when to retire

Post by joebh »

SanDiegoFIRE wrote:My own estimation for myself is when that number is < 5% that I will feel another year of work may not really be worth it, and at that point would seriously consider retiring.

Instead of having 25x or 33x or ?x annual expenses, what is your annual savings $ as % of previous year's net worth that would definitively tell you that your time is better spent enjoying your wealth rather than continuing to increase it?
What determines for you the percent of annual savings? Do you save a defined dollar amount and are then waiting until your savings grow so that this ratio just happens to come out to 5%? What if you just chose to save 5% next year - would that trigger you to retire immediately? What if a large percentage of your future income consisted of pensions, social security, and future income like inheritances or trusts? None of these are part of your previous year's net work, right?

I see no relationship between this percent and readiness to retire. At least it wouldn't for me. Your mileage may vary. There have been years when I have saved a high percentage of my net worth, and years when I have saved a low percentage. Neither of those factored into any retirement decisions.

For me, I compare what I will need, with what I will have. That tells me if I'm financially in a position to make the choice to retire or not. That choice is made based on other personal, non-financial factors.
Despite having a net worth that might normally be considered enough to comfortably RE, our expenses are much higher than typical as we have purposely increased our spending in ways we thought would be best for our family along the way in anticipation of increased income and savings
It only matters what your expenses are - not how your lifestyle creep has gotten you to your current and anticipated expense level. Everyone decides the lifestyle they wish to live, and how they allocate their money.

What some call "spending to make us happy", others call "mindless spending due to rapid hedonic adaptation".
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TheTimeLord
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Re: A different way of calculating when to retire

Post by TheTimeLord »

While I don't think it would be a good indicator of when to retire for everyone, I understand the issue. You are likely goal driven and once you achieve a goal you set another. I have faith there will be a time when you will get to the point where more won't matter and even if you could add another 10% unless you have something you can think of utilizing it for it won't have the same sway. Instead of thinking about retirement per se concentrate on Financial Independence and enjoying your journey and see where it takes you.
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Watty
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Re: A different way of calculating when to retire

Post by Watty »

This implies to me that the opportunity cost of retiring early would be too great, and each additional year of work would meaningfully add to our ability to fund a higher (more expensive) quality of life.
You are mixing apples and oranges when you talk about opportunity costs and the numbers in your portfolio.

It would be good to try to state things strictly in terms of what the money buys. For example if working another year means that that your portfolio will be $X dollars larger that is pretty meaningless. If you restate that in terms of what the extra money will buy you then you can make a judgement call if working another year is worth it or not.

For example if working another year would allow you to buy a vacation home, that might or might not be worth another year of your time.

You mentioned several multipliers but those are really only useful for looking at what is needed for provide for your core retirement expenses. Things like vacation homes or extensive travel are either one time expenses or things that could easily be scaled back if needed without major impact. Like a buying vacation condo instead of a vacation house, or taking a trip in the less expensive shoulder season instead of the prime vacation season.

The multipliers also don't work well because your expenses will be different at different ages. I have seen relatives that slowed down in their mid-70 even though their health was relatively good for their age. They could have afforded to spend more but things like doing more travel and buying "stuff" was more bother than it was worth so their spending was pretty low then.
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Re: A different way of calculating when to retire

Post by SpaceCowboy »

I agree with livesoft on this one. Decisions like this tend to be dominated by the qualitative hassles of work rather than the quantitative once you've achieved FI. The number that defines that should be based on your post-retirement needs, which will be different than during working years.
I think what you're trying to assess is assuming that you truly are FI, is it worth another year during prime income earning years to add say X% to your overall net worth. For most people it comes down to where they would rather spend their time. Those on the edge of FI are more likely to choose JOMY.
The whole point of achieving FI is to be able to make the decision on your own terms and not be driven by the numbers. :beer
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Re: A different way of calculating when to retire

Post by Ron »

livesoft wrote:When one has enough, I don't think it comes down to 33X or the amount of money you have. Instead, it probably depends on how filled your BS bucket becomes.
:thumbsup Amen to that!

That's exactly the "decision tool" that both my wife and me used.

My "bucket" became full in 2007 (at age 59). My wife/me were to retire at the same time, but apparently hers was not quite full, and she stayed working for another five years. At age 64, it was overflowing :mrgreen:

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fishingmn
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Re: A different way of calculating when to retire

Post by fishingmn »

You said you want to keep working to increase your level of spending in retirement. First off, there's no evidence that spending more would definitely make you happier.

And while many people decide to retire when their BS bucket is full - my wife decided to retire in early 2016 when our good friend was diagnosed with stage 4 cancer at 52. All the saving in the world won't help you if your number is called early.
stonerolled
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Re: A different way of calculating when to retire

Post by stonerolled »

livesoft wrote:When one has enough, I don't think it comes down to 33X or the amount of money you have. Instead, it probably depends on how filled your BS bucket becomes.
I can see as the net worth plus benefits line intersects with the work BS plus 'time for other things' line, then the math will become less important. the fact that someone is a boglehead and mindful of money matters sets up this inevitable collision and to be honest, I will be glad to be past it and able to stop thinking about it. I work at the state and retirement is never far from discussion. Someone is always announcing one or the legislature is trying to take it away or whatever.
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Re: A different way of calculating when to retire

Post by Independent »

SanDiegoFIRE wrote: Instead of having 25x or 33x or ?x annual expenses, what is your annual savings $ as % of previous year's net worth that would definitively tell you that your time is better spent enjoying your wealth rather than continuing to increase it?
I think there's some confusion about "annual expenses". I don't plan for "barely getting by" expenses. I plan for "what I consider comfortable lifestyle" expenses.

So, sure, it makes sense for any of us to trade off the utility of the additional discretionary spending I could afford if I worked one more year vs. the utility of the additional discretionary free time I have if I quit sooner.

"Expenses" isn't one number, it's derived from the trade-off above.

(Note that "savings" isn't the key number in this decision. It is "after tax total income". I'll have a lot of the same expenses if I work or if I retire, they do not get into the discussion. Only the additional income vs. the additional free time.)
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SanDiegoFIRE
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Re: A different way of calculating when to retire

Post by SanDiegoFIRE »

Perhaps I should clarify, that this applies as a secondary measure after one has theoretically hit an arbitrary number that represents 25x or whatever multiple of annual expenses one could theoretically live on in ER.

If you can meaningfully add to your nest egg by working an additional year it could tilt the scale towards working vs if the additional year only adds a very small %. This is above no beyond a reasonable margin of safety.

And in response to those who think spending more won't make you happier: fair point, but not having to worry about money at all (including how one spends it, not just how one earns it or whether one has enough to live a minimalist lifestyle) seems to me to be the ultimate luxury. Penny pinching in retirement seems like more of a drag than working an incremental amount of time and guaranteeing not having to do so.
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Re: A different way of calculating when to retire

Post by GoldenFinch »

I look at this predicament as a calculus equation. I think... hmmmmm...how much security do I want (a ridiculous amount), how much extra enjoyment stuff do I want (trips, house update junk, etc), how much "kid life quality" things do I want to FUND (college, educational experiences, artsy stuff) and factor in major living expenses and taxes. Then I look at the worst case scenario and plan for that. :shock:

We could probably retire at 58, but I think we will wait until late 60's just to be sure..... There is probably a money anxiety quotient that correlates with when you feel enough is enough.
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Re: A different way of calculating when to retire

Post by joebh »

SanDiegoFIRE wrote:If you can meaningfully add to your nest egg by working an additional year it could tilt the scale towards working vs if the additional year only adds a very small %. This is above no beyond a reasonable margin of safety.
Perhaps if you define "meaningful" as a percent of your net assets, this makes sense for you.
It doesn't for me, but your mileage may vary.

Seems like it would just lead to postponing retirement indefinitely, as long as you continue to make a good salary.
If you want to work longer, work longer and don't feel a need to justify it using a formula. When you are ready, you'll know, and you won't need yet another formula to tell you that you are ready.
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JDCarpenter
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Re: A different way of calculating when to retire

Post by JDCarpenter »

SanDiegoFIRE wrote:....

Instead of having 25x or 33x or ?x annual expenses, what is your annual savings $ as % of previous year's net worth that would definitively tell you that your time is better spent enjoying your wealth rather than continuing to increase it?
Just one anecdote. In the space of four years, we had 3 boys graduate from private "exclusive" universities (2 from "highly exclusive" that didn't give merit scholarships). By this standard, we would have gone backwards on our readiness for retirement.... In reality, the influx has been rather nice.
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Re: A different way of calculating when to retire

Post by randomguy »

SanDiegoFIRE wrote:Perhaps I should clarify, that this applies as a secondary measure after one has theoretically hit an arbitrary number that represents 25x or whatever multiple of annual expenses one could theoretically live on in ER.

If you can meaningfully add to your nest egg by working an additional year it could tilt the scale towards working vs if the additional year only adds a very small %. This is above no beyond a reasonable margin of safety.

And in response to those who think spending more won't make you happier: fair point, but not having to worry about money at all (including how one spends it, not just how one earns it or whether one has enough to live a minimalist lifestyle) seems to me to be the ultimate luxury. Penny pinching in retirement seems like more of a drag than working an incremental amount of time and guaranteeing not having to do so.
25x isn't an arbitrary number. It is conservative one that has worked 95%+ in the past. 25x doesn't mean penny pinching or a minimal spending retirement. Penny pinching in retirement is dictated by you choice of spending level not the 25x amount. The one more year is always tempting but you are trading time for money.

The general question of what value does this add? Lets say your savings rate is 0. Does that mean retiring is a no brainers since your not saving money? Not really. Your asset growth is driven both by savings, returns and withdrawals. Keeping withdrawals at 0 has a pretty big effect on the ability of your assets to grow.
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Re: A different way of calculating when to retire

Post by HomerJ »

SanDiegoFIRE wrote:This has led me to question whether I will ever know when to call it quits: will I just keep working one (or two or five) more years because of what my high income can generate in terms of improved quality of life, and subsequently increase expenses (even if for 'good things') along the way?
Nothing improves quality of life more than time, in my opinion...

If I could have $20 million dollars tomorrow, but I had to work 10 hours a day, 6 days a week for the rest of my life in return, I'd say no.
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HomerJ
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Re: A different way of calculating when to retire

Post by HomerJ »

fishingmn wrote:You said you want to keep working to increase your level of spending in retirement. First off, there's no evidence that spending more would definitely make you happier.

And while many people decide to retire when their BS bucket is full - my wife decided to retire in early 2016 when our good friend was diagnosed with stage 4 cancer at 52. All the saving in the world won't help you if your number is called early.
My wife's good friend died at 52 from cancer as well... Another friend died recently with a brain aneurysm at 59....

Making another 10% after I have enough means very little to me.
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HomerJ
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Re: A different way of calculating when to retire

Post by HomerJ »

SanDiegoFIRE wrote:Penny pinching in retirement seems like more of a drag than working an incremental amount of time and guaranteeing not having to do so.
I don't think many of us here are planning on quitting when we hit 25x cat food, living in a box expenses.
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Re: A different way of calculating when to retire

Post by humalupa »

I think the point the OP is that it may not make sense for you to work when your investments earn more than you do, and your ability to make a significant contribution to grow the nest egg is negligible. But yes, that only works if you've already got your 25x or more of a spending level you need to be comfortable.

Similarly, in our household, it doesn't seem worthwhile for my wife to seek employment. She is well-educated with a masters degree, but her potential earnings would add maybe 10 to 15% to our annual after-tax income. Her time is better spent taking care of our home, our family, and herself.
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Re: A different way of calculating when to retire

Post by IlliniDave »

Interesting idea, especially if "enjoying wealth" is one of the main tenets of person's retirement. Seems this criteria could eventually get you to a point where ongoing savings have minimal impact on future wealth.

For me, early retirement is more about enjoying time than money, so such a scheme would probably result in me working longer than necessary.

The other difficult parts are how to connect the process to reality (some goal for spending capacity in retirement), and how to ensure the threshold is crossed for the right reason. By the latter I mean if a person is living a high expense lifestyle and really not saving aggressively, their yearly savings could cross below the threshold prematurely. So there'd need to be a robust set of ancillary conditions to ensure the condition was applied effectively.

Again, interesting concept, but I don't see it as very practical in most situations.
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Re: A different way of calculating when to retire

Post by livesoft »

IlliniDave wrote:Interesting idea, especially if "enjoying wealth" is one of the main tenets of person's retirement.
Do folks need to be reminded that "enjoying wealth" is possible without being retired?
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Re: A different way of calculating when to retire

Post by bengal22 »

SanDiegoFIRE wrote:- NOT the typical lifestyle creep that comes from mindless spending due to rapid hedonic adaptation, but definitely spending beyond the bare necessities of what could also make us happy.[/b]
I have to admit the phrase "typical lifestyle creep that comes from mindless spending due to rapid hedonic adaptation" really caught my eye. Can "lifestyle creep" be a result of "rapid hedonic adaptation?"
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Re: A different way of calculating when to retire

Post by IlliniDave »

SanDiegoFIRE wrote: And in response to those who think spending more won't make you happier: fair point, but not having to worry about money at all (including how one spends it, not just how one earns it or whether one has enough to live a minimalist lifestyle) seems to me to be the ultimate luxury. Penny pinching in retirement seems like more of a drag than working an incremental amount of time and guaranteeing not having to do so.
That is true I suppose, in a sense, but I don't think very many people who worry enough about money that they are compelled to amass so much they don't have to worry about it ever again, ever actually get to the point where they're able to stop worrying about it.

We never know when that "incremental amount of time" is all we have left, or all the time remaining before some important door closes forever. So that ongoing sequence of "one more years" represents on ongoing gamble with ever worsening odds. So it's a matter of determining what's most important and tailoring for that. If having a lot of money ranks high, then giving up the "incremental amount of time" is a fair trade.

There are people for whom living a thrifty, low-cost lifestyle is not only not "a drag", it's also quite liberating and enjoyable. That it doesn't work for you is no reason to disparage it.
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Re: A different way of calculating when to retire

Post by IlliniDave »

livesoft wrote:
IlliniDave wrote:Interesting idea, especially if "enjoying wealth" is one of the main tenets of person's retirement.
Do folks need to be reminded that "enjoying wealth" is possible without being retired?
Not really, the OP already said he's doing that. He was positing criteria for retirement so naturally that's what people are discussing. He does have the option of enjoying his wealth and working for as long as he wants.
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