1,000th post and a 'No-Fail' Retirement Formula

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TravelforFun
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1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Wed Jan 17, 2018 10:04 pm

I’m proud to submit my 1,000th post. I’m as proud doing this as when I was joining the two-comma club. That’s crazy, isn’t it? So for my one-comma post, I’ll put out this ‘no-fail’ retirement formula for all to see.

If you’re in mid 50’s and start thinking about retirement. You can calculate whether you have enough money to retire, or how much longer you have to work before you can retire, or how much you can withdraw from your investment without depleting it if you were to retire today.

P = Xn + (X-SS) ÷ 0.03

P = The size your portfolio (401K, IRA, Roth, taxable, etc..). It doesn’t include your home or rental properties

X = Your annual expenses before taxes minus passive income including dividend, rental, or other passive income. Note the ‘before-taxes’

n = Number of years before drawing SS or pension

SS = Your annual pension and / or social security benefits

Let’s look at some examples.

Example 1

Although John has rental income and stock dividends, he still needs to withdraw $100K a year frogm his investment portfolio when he retires. He plans to retire now and five years from now he would receive $40K a year from his company pension and social security. How big his portfolio would have to be to support this plan?

P = ($100K x 5) + ($100K - $40K) ÷ 0.03
P = $500K + $60K ÷ 0.03
P = $500K + $2,000K = $2.5 million

Example 2

Bob has $1 million in savings. He wants to retire now and in (2) two years, he would get social security benefits of $25K a year. How much a year could he withdraw without depleting his savings?

$1,000,000 = 2X + (X - $25,000) ÷ 0.03
Multiply both sides by 0.03
$30,000 = 0.06X + X – $25,000
$30,000 + $25,000 = 1.06X
$55,000 = 1.06X
X = $51,887

Bob could withdraw $52K a year after he retires and $27K a year after social security kicks in

Example 3

Mary is working now. She has $1.5 million invested in various accounts and when she retires, her annual needs before taxes would be $75,000. She plans to claim social security at age 67 at which time she would receive $39K a year. When can she retire?

$1,500,000 = $75,000 (n) + ($75,000 - $39,000) ÷ 0.03
$1,500,000 = $75,000n + ($36,000) ÷ 0.03
$1,500,000 = $75,000n + $1,200,000
$1,500,000 - $1,200,000 = $75,000n
$300,000 = $75,000n
N = 4 years

Mary could retire at age 67-4 = 63

Stick to this formula and your money will not run out regardless of how long you live especially if your asset contains at least 30% stocks. This formula should only be used by people who are close to retirement because it’s too conservative for younger folks.

You should also modify the formula to include special situations like this:

Example 4

Although John has rental income and stock dividends, he still needs to withdraw $100K a year from his investment portfolio when he retires. He plans to retire now and five years from now he would receive a pension of $20K a year from his company; and two years after that, he would receive $32K a year from social security. How big his portfolio would have to be to support this plan?

P = ($100K x 5) + ($100K - $20K) x 2 + ($100K - $20K - $32K) ÷ 0.03
P = $500K + $160K + $1,600K
P = $2.27 million
Last edited by TravelforFun on Fri Jan 19, 2018 9:45 pm, edited 8 times in total.

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randomizer
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by randomizer » Wed Jan 17, 2018 10:09 pm

TravelforFun wrote:
Wed Jan 17, 2018 10:04 pm
I’m proud to submit my 1,000th post. I’m as proud doing this as when I was joining the two-comma club. That’s crazy, isn’t it?
Congratulations on both milestones. If you're past two commas and you've made 1,000 posts, that works out to $1,000 per post. Pretty good deal, I'd say.
75:25 — HODL the course!

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Taylor Larimore
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Taylor Larimore » Wed Jan 17, 2018 10:26 pm

TravelforFun:

Congratulations!

Every one of your 1,000 posts was either a contribution to help others or a learning experience for yourself.

It doesn't get much better than that.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Wed Jan 17, 2018 10:33 pm

Taylor Larimore wrote:
Wed Jan 17, 2018 10:26 pm
TravelforFun:

Congratulations!

Every one of your 1,000 posts was either a contribution to help others or a learning experience for yourself.

It doesn't get much better than that.

Best wishes.
Taylor
Thank you Taylor.

flyingaway
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by flyingaway » Wed Jan 17, 2018 10:47 pm

How about the 4% rule? You are too conservative.

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Wed Jan 17, 2018 11:11 pm

flyingaway wrote:
Wed Jan 17, 2018 10:47 pm
How about the 4% rule? You are too conservative.
4% presents a possibility of failure that I can't accept. I don't want to have to cut back on my living standards when the market slides.

TravelforFun

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RetiredMule
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by RetiredMule » Thu Jan 18, 2018 2:30 am

TravelForFun,

Congrats on your hitting these milestones - two-in-one 8-)

From your original post, for X as well as the values for X in the examples provided: is the inflation for expenses (X) is assumed to be compensated (or even more) by the growth in the total portfolio, P?

VAslim16
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by VAslim16 » Thu Jan 18, 2018 3:13 am

Congrats Travel on both, and thanks for the formula. According to it I need 2.53 million. Doable, but I'm along ways from it :). Thanks again and congrats.

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Kalo
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Kalo » Thu Jan 18, 2018 3:25 am

Does the formula account for people who are already in retirement but not yet drawing SS?

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by The Wizard » Thu Jan 18, 2018 4:13 am

I would delete the Xn term from right side of the equation.
If I have 5 years remaining until retirement, I'll fund those expenses from employment income, not from portfolio...
Attempted new signature...

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by The Wizard » Thu Jan 18, 2018 4:18 am

And I still prefer to model retirement cashflow streams with a spreadsheet that shows the variation year to year.
Typical example: retire at 65 but postpone SS until 70. So withdraw more from portfolio first five years, possibly with Roth conversions. Then withdraw less once SS starts...
Attempted new signature...

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 7:48 am

Kalo wrote:
Thu Jan 18, 2018 3:25 am
Does the formula account for people who are already in retirement but not yet drawing SS?

Kalo
Yes the formula would show how much you should withdraw from your portfolio each year. ‘n’ would be the number of years until you start drawing SS.

TravelforFun

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 7:50 am

The Wizard wrote:
Thu Jan 18, 2018 4:13 am
I would delete the Xn term from right side of the equation.
If I have 5 years remaining until retirement, I'll fund those expenses from employment income, not from portfolio...
If you work until the day you start drawing SS, then ‘n’ would be 0 and Xn would be 0.

TravelforFun

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 7:54 am

The Wizard wrote:
Thu Jan 18, 2018 4:18 am
And I still prefer to model retirement cashflow streams with a spreadsheet that shows the variation year to year.
Typical example: retire at 65 but postpone SS until 70. So withdraw more from portfolio first five years, possibly with Roth conversions. Then withdraw less once SS starts...
Then X would be the amount you need at 65, n would be 5, and (X-SS) would be the amount you need after 70. I’ve done the spreadsheet and the results are similar.

TravelforFun

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 7:54 am

RetiredMule wrote:
Thu Jan 18, 2018 2:30 am
TravelForFun,

Congrats on your hitting these milestones - two-in-one 8-)

From your original post, for X as well as the values for X in the examples provided: is the inflation for expenses (X) is assumed to be compensated (or even more) by the growth in the total portfolio, P?
Yes. That’s correct!

TravelforFun

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 8:00 am

VAslim16 wrote:
Thu Jan 18, 2018 3:13 am
Congrats Travel on both, and thanks for the formula. According to it I need 2.53 million. Doable, but I'm along ways from it :). Thanks again and congrats.
If you’re a long way from retirement, this formula would be too conservative for you.

TravelforFun

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1210sda
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by 1210sda » Thu Jan 18, 2018 8:27 am

TravelforFun wrote:
Wed Jan 17, 2018 10:04 pm
P = Xn + (X-SS) ÷ 0.03
Very nice for a quick estimate.

It would be less confusing to me if the formula were written:

P = Xn + ((X-SS) / 0.03)

Sorry, I don't have a divide sign on my keyboard. "/" means divide.

Unless I misread it. :confused

1210

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 8:39 am

1210sda wrote:
Thu Jan 18, 2018 8:27 am
TravelforFun wrote:
Wed Jan 17, 2018 10:04 pm
P = Xn + (X-SS) ÷ 0.03
Very nice for a quick estimate.

It would be less confusing to me if the formula were written:

P = Xn + ((X-SS) / 0.03)

Sorry, I don't have a divide sign on my keyboard. "/" means divide.

Unless I misread it. :confused

1210
You didn’t misread it but there is really no need for another set of parentheses if you follow the order of operations meaning division occurs before addition.

TravelforFun
Last edited by TravelforFun on Thu Jan 18, 2018 8:43 am, edited 1 time in total.

fourniks
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by fourniks » Thu Jan 18, 2018 8:42 am

Can you run through your math again with me for Example 4, especially line 2?

I'm having an hard time understanding where you got $240k from?

four

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DaftInvestor
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by DaftInvestor » Thu Jan 18, 2018 9:00 am

Congrats on your milestone.
The one thing your formula doesn't answer is "How much do I need to save for the next X years to hit the number I need for retirement".
As such - I will share my formulas (I assume you have already deducted and determined how much you need to withdraw per year - but if you haven't - its simply C=Expenses-SS-Pension).
Very easy to put this in a spreadsheet:
The inputs:
1) Total post-inflation return prior to retirement (r)
2) Total post-inflation return during retirement (R)
3) Number of years until retirement (n)
4) Amount invested per year up until retirement (c)
5) Number of years in retirement (N)
6) Amount spent per year in retirement (C)
7) V = Value of current portfolio

Amount Needed = (C/R)(1-(1/(1+R))^N)
Value of Past Investments = V(1+r)^n
Value of Future Investments = (c/r)(1-(1/(1+r))^n)(1+r)^n
Total Value at Retirement = (Value of Past) + (Value of Future)
Overage (or Shortage) = [Total Value at Retirement] - [Amount Needed]

I came up with this as I got tired of different retirement calculators telling me different things without understanding their hidden-math.
For "C" I do deduct out a Social-Security assumption (no pension for me). I keep all my numbers in today's dollar value for simplicity.
My math is also more complex than OPs allowing you to model different portfolio growth scenarios prior to and after retirement.
I do like the simplicity of the OPs formula though (Mine takes some time to think through but once its in excel - has a lot of power in my opinion).

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sunny_socal
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by sunny_socal » Thu Jan 18, 2018 9:54 am

DaftInvestor wrote:
Thu Jan 18, 2018 9:00 am
Congrats on your milestone.
The one thing your formula doesn't answer is "How much do I need to save for the next X years to hit the number I need for retirement".
As such - I will share my formulas (I assume you have already deducted and determined how much you need to withdraw per year - but if you haven't - its simply C=Expenses-SS-Pension).
Very easy to put this in a spreadsheet:
The inputs:
1) Total post-inflation return prior to retirement (r)
2) Total post-inflation return during retirement (R)
3) Number of years until retirement (n)
4) Amount invested per year up until retirement (c)
5) Number of years in retirement (N)
6) Amount spent per year in retirement (C)
7) V = Value of current portfolio

Amount Needed = (C/R)(1-(1/(1+R))^N)
Value of Past Investments = V(1+r)^n
Value of Future Investments = (c/r)(1-(1/(1+r))^n)(1+r)^n
Total Value at Retirement = (Value of Past) + (Value of Future)
Overage (or Shortage) = [Total Value at Retirement] - [Amount Needed]

I came up with this as I got tired of different retirement calculators telling me different things without understanding their hidden-math.
For "C" I do deduct out a Social-Security assumption (no pension for me). I keep all my numbers in today's dollar value for simplicity.
My math is also more complex than OPs allowing you to model different portfolio growth scenarios prior to and after retirement.
I do like the simplicity of the OPs formula though (Mine takes some time to think through but once its in excel - has a lot of power in my opinion).
DaftInvestor, is there a way you could post a copy of your Excel here? I would like to try it out.
Thanks

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 10:30 am

fourniks wrote:
Thu Jan 18, 2018 8:42 am
Can you run through your math again with me for Example 4, especially line 2?

I'm having an hard time understanding where you got $240k from?

four
Thanks for finding the math error. I took care of it.

TravelforFun

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DaftInvestor
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by DaftInvestor » Thu Jan 18, 2018 10:48 am

sunny_socal wrote:
Thu Jan 18, 2018 9:54 am

DaftInvestor, is there a way you could post a copy of your Excel here? I would like to try it out.
Thanks
I'll see if I can find a place to post it anonymously and then link to it (If anyone has any suggestions please chime in).

bhsince87
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by bhsince87 » Thu Jan 18, 2018 10:51 am

Hmmm. I guess I could have retired 6 years ago, then... :oops:
BH87

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 11:39 am

bhsince87 wrote:
Thu Jan 18, 2018 10:51 am
Hmmm. I guess I could have retired 6 years ago, then... :oops:
Should I offer you congratulations or condolences? You’re one of those who can but won’t. Lol.

TravelforFun

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by sunny_socal » Thu Jan 18, 2018 12:11 pm

DaftInvestor wrote:
Thu Jan 18, 2018 10:48 am
sunny_socal wrote:
Thu Jan 18, 2018 9:54 am

DaftInvestor, is there a way you could post a copy of your Excel here? I would like to try it out.
Thanks
I'll see if I can find a place to post it anonymously and then link to it (If anyone has any suggestions please chime in).
User '#Cruncher' does it by posting the actual excel code here, example:
viewtopic.php?f=2&t=236881&p=3708669&hi ... l#p3708669

bhsince87
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by bhsince87 » Thu Jan 18, 2018 12:27 pm

TravelforFun wrote:
Thu Jan 18, 2018 11:39 am
bhsince87 wrote:
Thu Jan 18, 2018 10:51 am
Hmmm. I guess I could have retired 6 years ago, then... :oops:
Should I offer you congratulations or condolences? You’re one of those who can but won’t. Lol.

TravelforFun
Well, you've got me figured out, that's for sure. I am of mixed feeling myself.

We are planning to spend about $85k max per year in retirement (up from $60k) now. When I ran your numbers the first way, assuming social security at age 70, I got the "six years ago" number.

A bit later, i re-ran it using our existing nest egg and solving for an annual expense allowance if we retired 1 year from now. That returned a number of $109k. So I guess we are set!

Your formula is very handy! Thanks!
BH87

remomnyc
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by remomnyc » Thu Jan 18, 2018 12:50 pm

Based on your formula, my expenses divided by the portfolio size is a 2.4% withdrawal rate. That is way too conservative. I think this is a result of two factors. Choosing a SS age of 70 results in more years of using a portfolio based on 0% growth and using a 3% withdrawal rate on amounts after one starts SS is too conservative if you're starting at age 70.

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Admiral » Thu Jan 18, 2018 1:15 pm

Maybe I'm a bit dense, but what are my "expenses before taxes" and how is that relevant? Seems only relevant as a percentage of pre- or after-tax income.

My mortgage is $2,500/ month and my electric bill is $100 per month. How does my tax rate change those and all of my other expenses?

In addition to that, how does the formula account for an expense (mortgage, $2,500) that I have now but that I won't have in ten years when I retire?

Lloydo
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Lloydo » Thu Jan 18, 2018 2:09 pm

Admiral wrote:
Thu Jan 18, 2018 1:15 pm
Maybe I'm a bit dense, but what are my "expenses before taxes" and how is that relevant? Seems only relevant as a percentage of pre- or after-tax income.

My mortgage is $2,500/ month and my electric bill is $100 per month. How does my tax rate change those and all of my other expenses?

In addition to that, how does the formula account for an expense (mortgage, $2,500) that I have now but that I won't have in ten years when I retire?
Good questions... 1) because taxes are an expense and using before tax makes the formula generic wrt tax bracket. 2) Model your retirement income needs to not include the mortgage if it won’t be there.

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Admiral » Thu Jan 18, 2018 2:56 pm

Lloydo wrote:
Thu Jan 18, 2018 2:09 pm
Admiral wrote:
Thu Jan 18, 2018 1:15 pm
Maybe I'm a bit dense, but what are my "expenses before taxes" and how is that relevant? Seems only relevant as a percentage of pre- or after-tax income.

My mortgage is $2,500/ month and my electric bill is $100 per month. How does my tax rate change those and all of my other expenses?

In addition to that, how does the formula account for an expense (mortgage, $2,500) that I have now but that I won't have in ten years when I retire?
Good questions... 1) because taxes are an expense and using before tax makes the formula generic wrt tax bracket. 2) Model your retirement income needs to not include the mortgage if it won’t be there.
Ah, got it, thanks.

This is an interesting mental exercise but I think would only work for someone without kids approaching college age (Travel did note that one had to be in their 50s).

In my case, the numbers showed that I could retire in 4.9 years (I am 46), mostly due to a combination of a fairly decent sized portfolio and a combination of pension and max SS that would cover all of our expenses, such that we could basically deplete our portfolio from age 51 until claiming SS.

But who would do that?

And, with no income and two kids in college, I would have to pay for their tuition from my portfolio, most of which is tax sheltered, though some is Roth. This can be done of course but is clearly not a solution that most here would advise. I suppose I could take out big loans and pay them down over time, slowly and inexorably depleting both taxable and Roth. But that is also something I don't intend to do.

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 2:57 pm

Lloydo wrote:
Thu Jan 18, 2018 2:09 pm
Admiral wrote:
Thu Jan 18, 2018 1:15 pm
Maybe I'm a bit dense, but what are my "expenses before taxes" and how is that relevant? Seems only relevant as a percentage of pre- or after-tax income.

My mortgage is $2,500/ month and my electric bill is $100 per month. How does my tax rate change those and all of my other expenses?

In addition to that, how does the formula account for an expense (mortgage, $2,500) that I have now but that I won't have in ten years when I retire?
Good questions... 1) because taxes are an expense and using before tax makes the formula generic wrt tax bracket. 2) Model your retirement income needs to not include the mortgage if it won’t be there.
Those would be my answers too.

TravelforFun

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 3:00 pm

remomnyc wrote:
Thu Jan 18, 2018 12:50 pm
Based on your formula, my expenses divided by the portfolio size is a 2.4% withdrawal rate. That is way too conservative. I think this is a result of two factors. Choosing a SS age of 70 results in more years of using a portfolio based on 0% growth and using a 3% withdrawal rate on amounts after one starts SS is too conservative if you're starting at age 70.
This is why it will work 100% of the times. No-fail.

TravelforFun

Admiral
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Admiral » Thu Jan 18, 2018 3:16 pm

TravelforFun wrote:
Thu Jan 18, 2018 3:00 pm
remomnyc wrote:
Thu Jan 18, 2018 12:50 pm
Based on your formula, my expenses divided by the portfolio size is a 2.4% withdrawal rate. That is way too conservative. I think this is a result of two factors. Choosing a SS age of 70 results in more years of using a portfolio based on 0% growth and using a 3% withdrawal rate on amounts after one starts SS is too conservative if you're starting at age 70.
This is why it will work 100% of the times. No-fail.

TravelforFun
Travel, how would you model the following scenario:
Pension pays 40k per year, and begins paying out in 12 years, at age 60 (spouse's age). SS would add 70k per year, but would not begin until age 70 (so, ten years later).

Clearly if one has expenses that will be less than 40k+70k, then one is set at age 70. However, there are the gap years. A simple answer would be gap amount x # of years before SS kicks in. But this can't really be solved using your formula if one wants to, say, retire before the pension is available.

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 3:58 pm

Admiral wrote:
Thu Jan 18, 2018 3:16 pm
TravelforFun wrote:
Thu Jan 18, 2018 3:00 pm
remomnyc wrote:
Thu Jan 18, 2018 12:50 pm
Based on your formula, my expenses divided by the portfolio size is a 2.4% withdrawal rate. That is way too conservative. I think this is a result of two factors. Choosing a SS age of 70 results in more years of using a portfolio based on 0% growth and using a 3% withdrawal rate on amounts after one starts SS is too conservative if you're starting at age 70.
This is why it will work 100% of the times. No-fail.

TravelforFun
Travel, how would you model the following scenario:
Pension pays 40k per year, and begins paying out in 12 years, at age 60 (spouse's age). SS would add 70k per year, but would not begin until age 70 (so, ten years later).

Clearly if one has expenses that will be less than 40k+70k, then one is set at age 70. However, there are the gap years. A simple answer would be gap amount x # of years before SS kicks in. But this can't really be solved using your formula if one wants to, say, retire before the pension is available.
Your situation can be modeled but the missing input is X, the pretax annual amount you need before pension and SS.

TravelforFun

Admiral
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Admiral » Thu Jan 18, 2018 4:24 pm

TravelforFun wrote:
Thu Jan 18, 2018 3:58 pm
Admiral wrote:
Thu Jan 18, 2018 3:16 pm
TravelforFun wrote:
Thu Jan 18, 2018 3:00 pm
remomnyc wrote:
Thu Jan 18, 2018 12:50 pm
Based on your formula, my expenses divided by the portfolio size is a 2.4% withdrawal rate. That is way too conservative. I think this is a result of two factors. Choosing a SS age of 70 results in more years of using a portfolio based on 0% growth and using a 3% withdrawal rate on amounts after one starts SS is too conservative if you're starting at age 70.
This is why it will work 100% of the times. No-fail.

TravelforFun
Travel, how would you model the following scenario:
Pension pays 40k per year, and begins paying out in 12 years, at age 60 (spouse's age). SS would add 70k per year, but would not begin until age 70 (so, ten years later).

Clearly if one has expenses that will be less than 40k+70k, then one is set at age 70. However, there are the gap years. A simple answer would be gap amount x # of years before SS kicks in. But this can't really be solved using your formula if one wants to, say, retire before the pension is available.
Your situation can be modeled but the missing input is X, the pretax annual amount you need before pension and SS.

TravelforFun
Say 100k for kicks and giggles (current dollars).

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Thu Jan 18, 2018 4:40 pm

Admiral wrote:
Thu Jan 18, 2018 4:24 pm
TravelforFun wrote:
Thu Jan 18, 2018 3:58 pm
Admiral wrote:
Thu Jan 18, 2018 3:16 pm
TravelforFun wrote:
Thu Jan 18, 2018 3:00 pm
remomnyc wrote:
Thu Jan 18, 2018 12:50 pm
Based on your formula, my expenses divided by the portfolio size is a 2.4% withdrawal rate. That is way too conservative. I think this is a result of two factors. Choosing a SS age of 70 results in more years of using a portfolio based on 0% growth and using a 3% withdrawal rate on amounts after one starts SS is too conservative if you're starting at age 70.
This is why it will work 100% of the times. No-fail.

TravelforFun
Travel, how would you model the following scenario:
Pension pays 40k per year, and begins paying out in 12 years, at age 60 (spouse's age). SS would add 70k per year, but would not begin until age 70 (so, ten years later).

Clearly if one has expenses that will be less than 40k+70k, then one is set at age 70. However, there are the gap years. A simple answer would be gap amount x # of years before SS kicks in. But this can't really be solved using your formula if one wants to, say, retire before the pension is available.
Your situation can be modeled but the missing input is X, the pretax annual amount you need before pension and SS.

TravelforFun
Say 100k for kicks and giggles (current dollars).
Say $100K after tax = $115K before tax.

P = ($115K x 12 years) + ($115K - $40K) x 2 years
P = $1,530,000

You would need a mill and a half.

TravelforFun

Admiral
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Admiral » Thu Jan 18, 2018 6:39 pm

TravelforFun wrote:
Thu Jan 18, 2018 4:40 pm
Admiral wrote:
Thu Jan 18, 2018 4:24 pm
TravelforFun wrote:
Thu Jan 18, 2018 3:58 pm
Admiral wrote:
Thu Jan 18, 2018 3:16 pm
TravelforFun wrote:
Thu Jan 18, 2018 3:00 pm

This is why it will work 100% of the times. No-fail.

TravelforFun
Travel, how would you model the following scenario:
Pension pays 40k per year, and begins paying out in 12 years, at age 60 (spouse's age). SS would add 70k per year, but would not begin until age 70 (so, ten years later).

Clearly if one has expenses that will be less than 40k+70k, then one is set at age 70. However, there are the gap years. A simple answer would be gap amount x # of years before SS kicks in. But this can't really be solved using your formula if one wants to, say, retire before the pension is available.
Your situation can be modeled but the missing input is X, the pretax annual amount you need before pension and SS.

TravelforFun
Say 100k for kicks and giggles (current dollars).
Say $100K after tax = $115K before tax.

P = ($115K x 12 years) + ($115K - $40K) x 2 years
P = $1,530,000

You would need a mill and a half.

TravelforFun
Excellent, thanks for that additional clarification!

GCD
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by GCD » Thu Jan 18, 2018 9:46 pm

Congrats on both! Now get to work joining the two comma post club. :sharebeer

Jackson12
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Jackson12 » Fri Jan 19, 2018 12:37 am

Say we need 108,000 a year in retirement before taxes. Of that a total of $33,000 a year would come from a small pension and social security, both to be started at age 70. We are age 65. How much do we need to have in our portfolio ( how much saved ) to retire at age 70 and what would be the assumed withdrawal rate?

Do I need to provide more info?

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Fri Jan 19, 2018 12:51 am

Jackson12 wrote:
Fri Jan 19, 2018 12:37 am
Say we need 108,000 a year in retirement before taxes. Of that a total of $33,000 a year would come from a small pension and social security, both to be started at age 70. We are age 65. How much do we need to have in our portfolio ( how much saved ) to retire at age 70 and what would be the assumed withdrawal rate?

Do I need to provide more info?
Assuming you're working now and your income is taking care of your expenses. When you retire at 70, and all income is the $33K a year, you should have this amount in your portfolio:

P = ($108K - $33K) /0.03 or $2.5 million. This is based on a 3% withdrawal rate which is a very safe rate.

For every $10K reduction in your annual expenses, you can lower your portfolio by $330K.

TravelforFun

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Fri Jan 19, 2018 12:52 am

GCD wrote:
Thu Jan 18, 2018 9:46 pm
Congrats on both! Now get to work joining the two comma post club. :sharebeer
It took me 5 years to get to 1,000th post. Less than a post a day.

TravelforFun

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DaftInvestor
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by DaftInvestor » Fri Jan 19, 2018 12:11 pm

sunny_socal wrote:
Thu Jan 18, 2018 12:11 pm
DaftInvestor wrote:
Thu Jan 18, 2018 10:48 am
sunny_socal wrote:
Thu Jan 18, 2018 9:54 am

DaftInvestor, is there a way you could post a copy of your Excel here? I would like to try it out.
Thanks
I'll see if I can find a place to post it anonymously and then link to it (If anyone has any suggestions please chime in).
User '#Cruncher' does it by posting the actual excel code here, example:
viewtopic.php?f=2&t=236881&p=3708669&hi ... l#p3708669
Okay - I was trying to find a easy anonymous place to upload the spreadsheet but can't do so without signing up for something so here goes (Sorry - you won't benefit from my color coding, etc. and will have to recreate what I have):

First the inputs (in my spreadsheet I have the numbers in column F and descriptions in Column G)

Code: Select all

F1  c=Amount invested each year until retirement
F2  C=Per Year Draw (How much you need to withdraw every year - expenses-SS-pensions)
F3  r=Post-inflation return on your portfolio prior to retirement
F4  R=Post-inflation return on your portfolio after retirement
F5  n=Number of years until your retirement
F6  N=Number of years you will be in retirement
F7  V=Total Value of your current retirement Portfolio
I will assume you will put all the calculations in Column B.
So the first calculation I do is Amount Needed for Retirement
which is calculated as Amount Needed = (C/R)(1-(1/(1+R))^N)

Code: Select all

B1 =(F2/F4)*(1-(1/(1+F4))^F6)
The second Calculation I do is my Value of Future Investments
which is calculated as Value of Future Investments = (c/r)(1-(1/(1+r))^n)(1+r)^n

Code: Select all

B2 =(F1/F3)*(1-(1/(1+F1))^F3)*(1+F3)^F5
The Third Calculation I do is my Value of Past Investements
which is Value of Past Investments = V(1+r)^n

Code: Select all

B3 =F7*(1+F3)^F5
And then finally I calculate whether I will be over or under what I need given all the inputs simply by taking the Total of Past and Future Investments and then subtracting what I calculated that I would need:

Code: Select all

B4 =B2+B3   (Gives Total Value of Portfolio at Retirement)
B5 =B4-B1  (Gives Amount you will be left with or (Shortage))
Let me know if something isn't clear or you have trouble entering.
I work all my inputs to see how close I can get B5 to Zero (or have an overage)
NO GUARANTEES but I have been using it awhile and relatively confident in it. If you find any errors please let me know so I don't retire prematurely :)

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DaftInvestor
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by DaftInvestor » Fri Jan 19, 2018 12:16 pm

As an example to above if I add 53,000 per year in retirement investments, will need to withdraw 120,000 per year in retirement, expect my portfolio to grow by 4% yearly before and after retirement, have 15 years until I retire, and plan to live for 30 year after I retire I have:
F1 = 53000
F2 = 120000
F3 = 0.04
F4 = 0.04
F5 = 15
F6 = 30
F7 = 1,200,000
I get:
B1=2,075,044 (What I need to retire)
B2=1,061,250 (The Value of my future investments when I retire)
B3=2,161,132 (The Value of my past investments when I retire)
B4=3,222,382 (The Total Value of my portfolio when I retire)
B5=1,147,338 (What I will be left with when I'm dead).

I realize unlike firecalc and other more sophisticated mechanisms I'm not accounting for sequence of returns, etc. But, hey, we are all just taking the best SWAGs we can.
(One thing you will notice is that if you change F4=0.02 and increase F6 to 35 you will essentially see the SWR of 4% between F2 and B1 - in this example you will notice that F2 is higher than the SWR given these inputs).

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Kalo
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by Kalo » Fri Jan 19, 2018 1:19 pm

Re the OP i have a couple of questions.

1) Where does the .03 come from in the formula? Does it represent a safe withdrawal rate? How did you choose that value?

2) How is it that this formula doesn't need to consider the portfolio's AA? Or expected return?

I did the calculation for my own situation, and the P was much lower than I would have thought (much lower than my actual portfolio value). So as an experiment, I set X equal to a value that would force P to equal my current portfolio. Then I calculated the percent of X/P, and it came out to about .0435.

Intuitively this is not that surprising to me since my SS will decrease my need to withdraw from my portfolio (or put another way, it will enhance my spending, or X in the formula). So I would have guessed that if I included SS as part of my withdrawal rate, it would be higher than the .0325 my value of X is based on.

So the result I got kind of makes sense to me, but I'm still a little confused as to how this calculation compares to SWR models. I suppose it's similar to just incorporating the SS into the SWR, but usually SWR (like Firecalc or cFireSim etc) takes into account the AA of the portfolio. I also wonder, does this model assume spending the portfolio down? Or that the portfolio balance is maintained?

Thanks,

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

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TierArtz
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TierArtz » Fri Jan 19, 2018 2:24 pm

I suggest a tweak to the OP's formula: define x as expenses before taxes AND after subtracting any passive income that will continue - such as a present day retirement or rental income.

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Fri Jan 19, 2018 2:40 pm

TierArtz wrote:
Fri Jan 19, 2018 2:24 pm
I suggest a tweak to the OP's formula: define x as expenses before taxes AND after subtracting any passive income that will continue - such as a present day retirement or rental income.
I tried to show that in Example 1 but will add your note to my definition.

TravelforFun

TravelforFun
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by TravelforFun » Fri Jan 19, 2018 2:56 pm

Kalo wrote:
Fri Jan 19, 2018 1:19 pm
Re the OP i have a couple of questions.

1) Where does the .03 come from in the formula? Does it represent a safe withdrawal rate? How did you choose that value?

2) How is it that this formula doesn't need to consider the portfolio's AA? Or expected return?

3) I also wonder, does this model assume spending the portfolio down? Or that the portfolio balance is maintained?

Thanks,

Kalo
1) .03 is the 3% withdrawal rate. This is my safe withdrawal rate, not 4%.

2) I mentioned your AA should be at least 30% stocks, and if it is, your portfolio should be able to make a 3% real return over a long period of time and hence, could support a 3% withdrawal rate forever.

3) Balance would be maintained if your real return was 3%, but more likely, it the balance should grow over time.

TravelforFun

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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by bhsince87 » Thu Feb 22, 2018 10:37 am

TravelforFun wrote:
Wed Jan 17, 2018 10:04 pm
I’m proud to submit my 1,000th post. I’m as proud doing this as when I was joining the two-comma club. That’s crazy, isn’t it? So for my one-comma post, I’ll put out this ‘no-fail’ retirement formula for all to see.

If you’re in mid 50’s and start thinking about retirement. You can calculate whether you have enough money to retire, or how much longer you have to work before you can retire, or how much you can withdraw from your investment without depleting it if you were to retire today.

P = Xn + (X-SS) ÷ 0.03

P = The size your portfolio (401K, IRA, Roth, taxable, etc..). It doesn’t include your home or rental properties

X = Your annual expenses before taxes minus passive income including dividend, rental, or other passive income. Note the ‘before-taxes’

n = Number of years before drawing SS or pension

SS = Your annual pension and / or social security benefits

Let’s look at some examples.

Example 1

Although John has rental income and stock dividends, he still needs to withdraw $100K a year frogm his investment portfolio when he retires. He plans to retire now and five years from now he would receive $40K a year from his company pension and social security. How big his portfolio would have to be to support this plan?

P = ($100K x 5) + ($100K - $40K) ÷ 0.03
P = $500K + $60K ÷ 0.03
P = $500K + $2,000K = $2.5 million

Example 2

Bob has $1 million in savings. He wants to retire now and in (2) two years, he would get social security benefits of $25K a year. How much a year could he withdraw without depleting his savings?

$1,000,000 = 2X + (X - $25,000) ÷ 0.03
Multiply both sides by 0.03
$30,000 = 0.06X + X – $25,000
$30,000 + $25,000 = 1.06X
$55,000 = 1.06X
X = $51,887

Bob could withdraw $52K a year after he retires and $27K a year after social security kicks in

Example 3

Mary is working now. She has $1.5 million invested in various accounts and when she retires, her annual needs before taxes would be $75,000. She plans to claim social security at age 67 at which time she would receive $39K a year. When can she retire?

$1,500,000 = $75,000 (n) + ($75,000 - $39,000) ÷ 0.03
$1,500,000 = $75,000n + ($36,000) ÷ 0.03
$1,500,000 = $75,000n + $1,200,000
$1,500,000 - $1,200,000 = $75,000n
$300,000 = $75,000n
N = 4 years

Mary could retire at age 67-4 = 63

Stick to this formula and your money will not run out regardless of how long you live especially if your asset contains at least 30% stocks. This formula should only be used by people who are close to retirement because it’s too conservative for younger folks.

You should also modify the formula to include special situations like this:

Example 4

Although John has rental income and stock dividends, he still needs to withdraw $100K a year from his investment portfolio when he retires. He plans to retire now and five years from now he would receive a pension of $20K a year from his company; and two years after that, he would receive $32K a year from social security. How big his portfolio would have to be to support this plan?

P = ($100K x 5) + ($100K - $20K) x 2 + ($100K - $20K - $32K) ÷ 0.03
P = $500K + $160K + $1,600K
P = $2.27 million
I was just going back through this calculation based on new numbers for me, and I noticed something I missed before. For the "annual expenses minus passive income", you include dividends in the income category.

Does this include dividends and INTEREST from the portfolio itself? And if so, is that why the safe rate is 3% versus 4% for other methods?

Thanks again for all your work on this!
BH87

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bottlecap
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Re: 1,000th post and a 'No-Fail' Retirement Formula

Post by bottlecap » Thu Feb 22, 2018 10:57 am

I didn't see this post before, but the "formula" as applied in Example 3 only works if your current portfolio is more than what you will need to withdraw after you take SS divided by 3, no? Otherwise, your figure is negative.

I also have no idea what "expenses before taxes" are. I've heard of income before taxes, but not expenses before taxes. Any ideas?

JT

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