What exactly is the “x” in 25x?

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sailaway
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Re: What exactly is the “x” in 25x?

Post by sailaway »

ebeb wrote: Wed Sep 21, 2022 10:12 pm Does 25 mean you expect to not survive that many years after retirement and with $0 in your assets by then give and take some :shock:
The 4% rule says that 25x is very likely to last 30 years. And the same study shows that in many circumstances, it will actually grow.
dbr
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Re: What exactly is the “x” in 25x?

Post by dbr »

ebeb wrote: Wed Sep 21, 2022 10:12 pm Does 25 mean one does not expect to survive that many years after retirement and with $0 in your assets by then give and take some :shock:
This model and graphics explain how the rule is derived from historical experience and what the outcomes look like:

https://engaging-data.com/visualizing-4-rule/
JS-Elcano
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Re: What exactly is the “x” in 25x?

Post by JS-Elcano »

In my calculations it stands for annual expenses + taxes that I will need to pay. I don't subtract income I will have from SS (waiting to 70) because I view SS as an extra cushion that I can build up for possibly large expenses in old age when I may need LTC (I live alone and don't have LTCi).
dbr
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Re: What exactly is the “x” in 25x?

Post by dbr »

JS-Elcano wrote: Thu Sep 22, 2022 8:19 am In my calculations it stands for annual expenses + taxes that I will need to pay. I don't subtract income I will have from SS (waiting to 70) because I view SS as an extra cushion that I can build up for possibly large expenses in old age when I may need LTC (I live alone and don't have LTCi).
You can do that.

But the principle involved here is that 25x is just a meme for the behavior of portfolios under withdrawal. So the x is whatever you think your withdrawals from your portfolio will be. If you decide to not count SS and you have no sources of income other than withdrawals to support spending then X is indeed your spending. If you plan to support some of your spending using SS, pensions, annuities, or whatever source of income then you would logically determine what you will withdraw by subtracting that income from total spending.

If your income sources do not have the same timing as your point of retirement then you need a little more complex model of your portfolio withdrawals. Virtually any retirement spending model, such as FireCalc, allows for this to be specified. You can also enter a specific extra expense by presumed date for extra spending for LTCI. Other transitions a person might have are selling a house with resulting increase in portfolio and also increase in expenses for rent or long term care.

This is really simple and the controversy over what is X is totally baffling. On the other hand blank application of 4% safe withdrawal rate is probably too simple.
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spdoublebass
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Re: What exactly is the “x” in 25x?

Post by spdoublebass »

sailaway wrote: Wed Sep 21, 2022 10:15 pm
ebeb wrote: Wed Sep 21, 2022 10:12 pm Does 25 mean you expect to not survive that many years after retirement and with $0 in your assets by then give and take some :shock:
The 4% rule says that 25x is very likely to last 30 years. And the same study shows that in many circumstances, it will actually grow.
Just to clarify, that study also was for a 60/40 portfolio correct? So if you are 30/70, 4% might not be ok. Right?
I'm trying to think, but nothing happens
dbr
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Re: What exactly is the “x” in 25x?

Post by dbr »

spdoublebass wrote: Thu Sep 22, 2022 12:01 pm
sailaway wrote: Wed Sep 21, 2022 10:15 pm
ebeb wrote: Wed Sep 21, 2022 10:12 pm Does 25 mean you expect to not survive that many years after retirement and with $0 in your assets by then give and take some :shock:
The 4% rule says that 25x is very likely to last 30 years. And the same study shows that in many circumstances, it will actually grow.
Just to clarify, that study also was for a 60/40 portfolio correct? So if you are 30/70, 4% might not be ok. Right?
Just about any SWR study, certainly Trinity, has tables of the results for a range of asset allocations and a range of years. 60/40 and 70/30 are hardly different. 20/80 does in fact have worse prospects. If you want to look at a model that lets you set the asset allocation and the spending then you can look at FireCalc or this one that has an excellent graphic display: https://engaging-data.com/visualizing-4-rule/

Here is the original Trinity Study (Hubbard, Cooley, and Walz): https://www.aaii.com/journal/199802/feature.pdf

You want to look at Table 3.
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spdoublebass
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Re: What exactly is the “x” in 25x?

Post by spdoublebass »

dbr wrote: Thu Sep 22, 2022 12:09 pm
spdoublebass wrote: Thu Sep 22, 2022 12:01 pm
sailaway wrote: Wed Sep 21, 2022 10:15 pm
ebeb wrote: Wed Sep 21, 2022 10:12 pm Does 25 mean you expect to not survive that many years after retirement and with $0 in your assets by then give and take some :shock:
The 4% rule says that 25x is very likely to last 30 years. And the same study shows that in many circumstances, it will actually grow.
Just to clarify, that study also was for a 60/40 portfolio correct? So if you are 30/70, 4% might not be ok. Right?
Just about any SWR study, certainly Trinity, has tables of the results for a range of asset allocations and a range of years. 60/40 and 70/30 are hardly different. 20/80 does in fact have worse prospects. If you want to look at a model that lets you set the asset allocation and the spending then you can look at FireCalc or this one that has an excellent graphic display: https://engaging-data.com/visualizing-4-rule/

Here is the original Trinity Study (Hubbard, Cooley, and Walz): https://www.aaii.com/journal/199802/feature.pdf

You want to look at Table 3.
Thanks for this info!!!!!
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nigel_ht
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Re: What exactly is the “x” in 25x?

Post by nigel_ht »

HomerJ wrote: Sat Jan 29, 2022 10:20 am
sapper1371 wrote: Fri Jan 28, 2022 10:56 pm People often refer to their savings as how many years of expenses that they have saved. For example, someone might say that they hit “25x”. Is the “x” annual expenses or the annual gap that you will need your investments to cover after other income, such as SS and/or pensions?

If the goal is the look at this in terms of a SWR, then I would think that the more useful “x” would be the gap you need to cover rather than annual expenses.

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.

Another complexity is that you will probably want to delay SS and pensions so the gap will change, potentially rather significantly, during retirement.

Just curious how I should interpret this.
The X IS the gap.

If your annual expenses are $125k, but your pension and SS will cover half of that, then your personal X is $62,500. Multiply by 25 and you should shoot for at least $1.5 million in your portfolio to retire.
Nah...the rule of thumb has always been stated as "25 times your expenses" so X is either "times" or "expenses" and not "gap" depending on how folks write it.

25x has been a rough indicator that you have saved enough to be FI for 30 years @ 4% WR

33x has been a rough indicator that you have saved enough to be FI for more than 30 years @ 3% WR

Whether you include pension, ss, etc into the "Am I FI enough to retire" is a personal decision because the error bars on what your retirement expenses and income will actually be is very wide.

IMHO adding in pension and SS makes the decision process too complicated...especially for the early retiree. Did I make it to my first bend point? What is my estimated SS if I work an extra 2 years? What do I estimate to be the impact of inflation on my non-COLA pension. Almost all that stuff is decades in the future.

Save 33X your current expenses and use SS and whatever inflation ravaged pension that kicks in 30 years later as buffer. Still cautious? Add additional reserves to your FI target number.

You don't have to factor in taxes into expenses. That's deducted from gross income and nobody has any clue what the LTCG tax rate will be in 20-30 years. Deduct some percentage from your estimated gross income.

The older you retire the more concrete your planning can be because if you retire at 65 you know that SS is only 5 years away even if you wait until 70. Your pension, if any, will kick in relatively quickly and if you are retiring in Oct 2022 you know that despite 20%+ losses your numbers still work. SORR smacked you in the face and you're still good. YAY! You have a good idea what LTCG will be. You have a good idea what SS will pay out even if it gets reduced and most likely if anything changes in the program you get grandfathered into the current rules.

At age 40 or 50...everything is just surrounded by big error bars. You can probably add or remove SS and still be inside the margin of error.
sailaway
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Re: What exactly is the “x” in 25x?

Post by sailaway »

These questions are one reason some folks have a liability matching portfolio to get them to social security and a mentally separate portfolio to cover the gap after SS.

As early retirees, we have chosen to use 30 times actual expenses and then we chose to downshift, rather than walk away from income entirely.
Last edited by sailaway on Thu Sep 22, 2022 1:33 pm, edited 1 time in total.
smitcat
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Re: What exactly is the “x” in 25x?

Post by smitcat »

nigel_ht wrote: Thu Sep 22, 2022 1:05 pm
HomerJ wrote: Sat Jan 29, 2022 10:20 am
sapper1371 wrote: Fri Jan 28, 2022 10:56 pm People often refer to their savings as how many years of expenses that they have saved. For example, someone might say that they hit “25x”. Is the “x” annual expenses or the annual gap that you will need your investments to cover after other income, such as SS and/or pensions?

If the goal is the look at this in terms of a SWR, then I would think that the more useful “x” would be the gap you need to cover rather than annual expenses.

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.

Another complexity is that you will probably want to delay SS and pensions so the gap will change, potentially rather significantly, during retirement.

Just curious how I should interpret this.
The X IS the gap.

If your annual expenses are $125k, but your pension and SS will cover half of that, then your personal X is $62,500. Multiply by 25 and you should shoot for at least $1.5 million in your portfolio to retire.
Nah...the rule of thumb has always been stated as "25 times your expenses" so X is either "times" or "expenses" and not "gap" depending on how folks write it.

25x has been a rough indicator that you have saved enough to be FI for 30 years @ 4% WR

33x has been a rough indicator that you have saved enough to be FI for more than 30 years @ 3% WR

Whether you include pension, ss, etc into the "Am I FI enough to retire" is a personal decision because the error bars on what your retirement expenses and income will actually be is very wide.

IMHO adding in pension and SS makes the decision process too complicated...especially for the early retiree. Did I make it to my first bend point? What is my estimated SS if I work an extra 2 years? What do I estimate to be the impact of inflation on my non-COLA pension. Almost all that stuff is decades in the future.

Save 33X your current expenses and use SS and whatever inflation ravaged pension that kicks in 30 years later as buffer. Still cautious? Add additional reserves to your FI target number.

You don't have to factor in taxes into expenses. That's deducted from gross income and nobody has any clue what the LTCG tax rate will be in 20-30 years. Deduct some percentage from your estimated gross income.

The older you retire the more concrete your planning can be because if you retire at 65 you know that SS is only 5 years away even if you wait until 70. Your pension, if any, will kick in relatively quickly and if you are retiring in Oct 2022 you know that despite 20%+ losses your numbers still work. SORR smacked you in the face and you're still good. YAY! You have a good idea what LTCG will be. You have a good idea what SS will pay out even if it gets reduced and most likely if anything changes in the program you get grandfathered into the current rules.

At age 40 or 50...everything is just surrounded by big error bars. You can probably add or remove SS and still be inside the margin of error.
"Whether you include pension, ss, etc into the "Am I FI enough to retire" is a personal decision because the error bars on what your retirement expenses and income will actually be is very wide"
25X is after SS and pensions are taken into account, it is what is needed from the portfolio.
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HomerJ
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Re: What exactly is the “x” in 25x?

Post by HomerJ »

nigel_ht wrote: Thu Sep 22, 2022 1:05 pm
HomerJ wrote: Sat Jan 29, 2022 10:20 am
sapper1371 wrote: Fri Jan 28, 2022 10:56 pm People often refer to their savings as how many years of expenses that they have saved. For example, someone might say that they hit “25x”. Is the “x” annual expenses or the annual gap that you will need your investments to cover after other income, such as SS and/or pensions?

If the goal is the look at this in terms of a SWR, then I would think that the more useful “x” would be the gap you need to cover rather than annual expenses.

The difference could be huge. For example, my annual expenses are about $125k but I expect that SS and pensions will cover about half that. Therefore, my “x” could vary by a factor of 2 depending on the definition.

Another complexity is that you will probably want to delay SS and pensions so the gap will change, potentially rather significantly, during retirement.

Just curious how I should interpret this.
The X IS the gap.

If your annual expenses are $125k, but your pension and SS will cover half of that, then your personal X is $62,500. Multiply by 25 and you should shoot for at least $1.5 million in your portfolio to retire.
Nah...the rule of thumb has always been stated as "25 times your expenses" so X is either "times" or "expenses" and not "gap" depending on how folks write it.

25x has been a rough indicator that you have saved enough to be FI for 30 years @ 4% WR

33x has been a rough indicator that you have saved enough to be FI for more than 30 years @ 3% WR

Whether you include pension, ss, etc into the "Am I FI enough to retire" is a personal decision because the error bars on what your retirement expenses and income will actually be is very wide.

IMHO adding in pension and SS makes the decision process too complicated...especially for the early retiree. Did I make it to my first bend point? What is my estimated SS if I work an extra 2 years? What do I estimate to be the impact of inflation on my non-COLA pension. Almost all that stuff is decades in the future.

Save 33X your current expenses and use SS and whatever inflation ravaged pension that kicks in 30 years later as buffer. Still cautious? Add additional reserves to your FI target number.
Ignoring SS would be a huge mistake for most people. Maybe not for someone retiring at 40, but most everyone else.

SS is a huge part of retirement income for the majority of people.

For instance, our retirement expenses will be around $80,000. Ignoring $40,000 in SS would change our retirement plans drastically.
The older you retire the more concrete your planning can be because if you retire at 65 you know that SS is only 5 years away even if you wait until 70. Your pension, if any, will kick in relatively quickly and if you are retiring in Oct 2022 you know that despite 20%+ losses your numbers still work. SORR smacked you in the face and you're still good. YAY! You have a good idea what LTCG will be. You have a good idea what SS will pay out even if it gets reduced and most likely if anything changes in the program you get grandfathered into the current rules.

At age 40 or 50...everything is just surrounded by big error bars. You can probably add or remove SS and still be inside the margin of error.
I agree it's easier when you are older and closer to SS... Retiring at 40, one should probably not even factor in SS, since your money has to last 25-30 years before you even get SS.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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