## Prefunding retirement

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
KlangFool
Posts: 28616
Joined: Sat Oct 11, 2008 12:35 pm

### Re: Prefunding retirement

B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
B4Xt3r,

If someone has high annual saving, why would the person need to save for the kid's college education? The person could pay for the college education over 4 to 5 years using the annual savings.

KlangFool
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YeWill
Posts: 43
Joined: Sat May 20, 2023 1:21 am

### Re: Prefunding retirement

B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
Solid argument. I will just change the growth rate from 5.5% to 3 or 4% real, or will need to grow the expense in the denominator to future dollars.
marcopolo
Posts: 7603
Joined: Sat Dec 03, 2016 9:22 am

### Re: Prefunding retirement

B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
It sounds like you are asking permission to lower your savings so you can spend more today.

You should think about what you will do with those dollars you are not saving anymore. I suspect some of it would go towards ramping up your lifestyle. Which is fine, but it probably changes the equation you came up with quite a bit because it increases your current spend rate. It is tough to go back to the lower spending after you get to accustomed to spending those extra dollars.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
B4Xt3r
Posts: 675
Joined: Thu Sep 29, 2016 5:56 am

### Re: Prefunding retirement

YeWill wrote: Tue May 23, 2023 9:58 pm
B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
Solid argument. I will just change the growth rate from 5.5% to 3 or 4% real, or will need to grow the expense in the denominator to future dollars.
Yeah, in order for the calculation to make sense it needs to be whatever real CAGR one wants to project.
Topic Author
B4Xt3r
Posts: 675
Joined: Thu Sep 29, 2016 5:56 am

### Re: Prefunding retirement

marcopolo wrote: Wed May 24, 2023 3:49 am
B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
It sounds like you are asking permission to lower your savings so you can spend more today.

You should think about what you will do with those dollars you are not saving anymore. I suspect some of it would go towards ramping up your lifestyle. Which is fine, but it probably changes the equation you came up with quite a bit because it increases your current spend rate. It is tough to go back to the lower spending after you get to accustomed to spending those extra dollars.
It's a large decision, which is why I put another feeler out. I guess your second comment is to recognize that the (current annual spend rate) as a projection of (future spend rate) assumes your current lifestyle is the one that the calculation is presuming you'll want that in retirement.
runner540
Posts: 1718
Joined: Sun Feb 26, 2017 4:43 pm

### Re: Prefunding retirement

B4Xt3r wrote: Sat Feb 13, 2021 1:18 pm Hi all,

When can one reasonable consider retirement “prefunded” in the sense that the future value of your present savings are roughly equal to the expected future liability of retirement?

As an example, if a 30 year old expects to retire at 65, they have potentially a 6.5x multiplier just by compounding interest. Therefore if they want to retire with 1.5 M, then they would have roughly speaking funded that 1.5 M liability with ~230k.

Using the logic above, do you think it’s reasonable to relax retirement savings some in such a situation? For example, potentially just down to a company match in a 401k?
Be sure you’re comparing apples and apples: all real or all nominal amounts and rates. Otherwise you could be very disappointed.
YeWill
Posts: 43
Joined: Sat May 20, 2023 1:21 am

### Re: Prefunding retirement

runner540 wrote: Wed May 24, 2023 8:58 am
B4Xt3r wrote: Sat Feb 13, 2021 1:18 pm Hi all,

When can one reasonable consider retirement “prefunded” in the sense that the future value of your present savings are roughly equal to the expected future liability of retirement?

As an example, if a 30 year old expects to retire at 65, they have potentially a 6.5x multiplier just by compounding interest. Therefore if they want to retire with 1.5 M, then they would have roughly speaking funded that 1.5 M liability with ~230k.

Using the logic above, do you think it’s reasonable to relax retirement savings some in such a situation? For example, potentially just down to a company match in a 401k?
Be sure you’re comparing apples and apples: all real or all nominal amounts and rates. Otherwise you could be very disappointed.
I think they answered it here. All are real.

B4Xt3r wrote: Wed May 24, 2023 4:57 am
YeWill wrote: Tue May 23, 2023 9:58 pm
B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
Solid argument. I will just change the growth rate from 5.5% to 3 or 4% real, or will need to grow the expense in the denominator to future dollars.
Yeah, in order for the calculation to make sense it needs to be whatever real CAGR one wants to project.
Posts: 4649
Joined: Mon Oct 27, 2014 12:35 pm

### Re: Prefunding retirement

B4Xt3r wrote: Tue May 23, 2023 4:28 am So it's been a couple of years and I was revisiting this topic in my mind, and thought of another way to view the topic at hand. Current savings*(1.055)^(anticipated retirement age less by current age)/(current annual spend rate). How does that compare to 25x rule?

Example calculation link https://www.wolframalpha.com/input?i=34 ... 30%29%2F75: 340k*(1.055)^(62-30)/(75k) = 25x.

Seems like for such an individual, it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities (ex., kids college). Of course, it's not a set and forget it type thing but a few years later it seems reasonable.
Paying for college is typically an issue when people are in their 50s, not when they are 30. By the time you're in your 50s, you will hopefully have a nice (by Bh standards) nest egg and a good handle on future income streams (savings+SS+pension). It's at THIS point that you can start to think about lowering savings to fund college. And the old adage is still true: you can't get a loan to fund your retirement. If you've saved well from age 21-50 (including college savings, if applicable) then there's no issue with reducing retirement savings at that point. Hopefully by age 50-55 most of your investment gains will come from growth not new contributions.

There are just too many variables over 20-30 years to simply pick a number and say yes, this will compound enough, I will be fine. If you're not fine, well... at that point it's too late.

I don't think anyone here would claim you have to live like a pauper when you're young; you should still enjoy life. But most Americans have saved far, far too little for retirement. I don't think you want to be one of them.
Juice3
Posts: 475
Joined: Sun Nov 05, 2017 6:40 am

### Re: Prefunding retirement

B4Xt3r wrote: Tue May 23, 2023 4:28 am it might be at-least not wrong to temporarily cut back on retirement savings to pursue other financial priorities
Of course in a great many of these cases "other financial priorities" means increasing your budget that thus reducing your 25x factor since increasing your nut decreases your x. Or as it is commonly put, "lifestyle creep".

This is primary reason your plan does not make sense in general. In specific cases when the added expense is certainly temporary in nature, then maybe.
SnowBog
Posts: 4097
Joined: Fri Dec 21, 2018 10:21 pm

### Re: Prefunding retirement

Admiral wrote: Wed May 24, 2023 12:02 pm There are just too many variables over 20-30 years to simply pick a number and say yes, this will compound enough, I will be fine. If you're not fine, well... at that point it's too late.

I don't think anyone here would claim you have to live like a pauper when you're young; you should still enjoy life. But most Americans have saved far, far too little for retirement. I don't think you want to be one of them.
+1

The other piece to this is what isn't saved is spent. Retirement savings is driven by expenses. Increase expenses and you need to save more. So someone lowering their savings assuming that their prior projections - which were likely based off their prior expenses - has no broken those projections when their expenses drift upward with the "extra" cash flow from saving less.

As noted, the key is finding the balance that works for your needs. Those who don't save are probably going to have less than desirable retirements. Those who save every penny and defer all "fun" until may never get to enjoy it as they could die before retirement and/or find it impossible to switch from saving to spending. Ideally, you want to be in the middle - balance saving for tomorrow with living the life you want today. Keep those aligned, and you can navigate the future ahead.