If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Needed?

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CoastLawyer2030
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If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Needed?

Post by CoastLawyer2030 »

I was listening to a FIRE podcast about semi-retirement. The host had an interesting thought: we know that every $1,000 in expenses means $25,000 in retirement savings, in order to satisfy the 25x rule. For practical purposes this has two directions: every $1,000 you cut in expenses means $25,000 less to save for retirement, and every $1,000 in splurges requires $25,000 in savings.

But the host then flipped the script. She said that this rule must apply to retirement income as well. For instance, if you earn $10,000 in retirement income, that means your FIRE number is $250,000 less. The caveat here is that this income must last forever, but she still said it was an interesting and counter-intuitive thought.

This was an interesting way to look at this that I quite frankly had never considered, even though the majority of my posts on here are about my own path to semi-retirement.

Does this math hold up? Any thoughts?
secondcor521
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by secondcor521 »

Yes, the math holds up. With some caveats.

First, there are taxes to consider. $10K in pre-tax income might only be $8K in post-tax and after-expenses spendable income. So maybe not $250K but $200K.

Second is the caveat you mentioned: it would be income that would need to last forever - and be inflation adjusted - to be comparable. If it's a COLAd pension, that fits the bill. If it's a side gig that requires effort, that may be something that you stop doing when you're older.

Another thing to keep in mind: it can't be portfolio income. Dividends and interest are already included in the studies which calculate the 4% rule, so if you were to treat dividends and interest in this way, that would be double counting them.

Personally I keep track of both my gross WR, which is my annualized WR divided by my FIRE stash, and my net WR, which adjusts for what I call "non portfolio income" or NPI, which is a combination of a miscellaneous set of a few types of inflows that meet these criteria. While each of them individually aren't that big, in aggregate they add up: my gross WR is 2.20% and my net WR is 1.13%. I consider the latter my "real" WR because the NPI is money that I can spend that I don't have to pull from my FIRE stash.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by 22twain »

This is simply an alternative way of stating the concept that in the "25X rule", X is the portion of your expenses that will be covered from your portfolio, after accounting for non-portfolio income such as Social Security or a pension.

If your estimated annual expenses in retirement are $80K, and you will have $50K in non-portfolio income, then only $30K needs to be covered by your portfolio. For a 30-year retirement, the "25X rule" says this requires an initial portfolio of $750K, not the $2000K = $2M that would be required to cover the entire $80K per year.

All of these annual figures are for the first year of retirement, with assumed annual inflation adjustments thereafter.
Last edited by 22twain on Mon Jun 10, 2024 9:50 am, edited 1 time in total.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by JBTX »

Basically yes but

- income has to cover all expenses including taxes
- 4% assumes 30 years of retirement. When one is 85 years old that percentage will be higher, assuming shorter life span.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by avalpert1 »

No, the 'math' doesn't really hold up because they entire premise is faulty. There is no such thing as a '25x rule' in the first place, of course you should account for any income you will have in retirement but that includes accounting for the nature, source and risk of said income. Nothing novel or original in that. It all ends up very dependent on your assumptions and you need to stress-test your sensitivity to those more than rely on any particular number. Really, this just sounds like rather trite content generation.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by chassis »

CoastLawyer2030 wrote: Sat Jun 08, 2024 8:45 pm Any thoughts?
Thought = don't overthink.

Use a cashflow model like the Retiree Portfolio Model (RPM), portfoliovisualizer financial goals tool, or your own home-grown spreadsheet.

It saves you from having to listen to podcasts where the script is flipped.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by SevenBridgesRoad »

My thought? Anything that helps you learn something new (or a new way of looking at something you thought you understood fully) is valuable.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by jebmke »

The fact that she thought it was counter-intuitive isn't a good sign.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by Darwin »

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Last edited by Darwin on Sun Jun 09, 2024 9:37 pm, edited 1 time in total.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by Darwin »

jebmke wrote: Sun Jun 09, 2024 8:58 am The fact that she thought it was counter-intuitive isn't a good sign.
Yeah, she basically stated the equivalent of "six one way, half dozen the other". Not that it isn't a revelation to realize that it can be seen as 4% or 25x respectively!. It was for me when I first heard it. Anyone reading the Boglehead forum much is likely to have it explained directly or indirectly in short order. Still, it's not a bad thing to explain... Every generation has to be introduced to these :idea: realizations. It helped me visualize how debt (like a mortgage) is just a mirror image of investing.
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CoastLawyer2030
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by CoastLawyer2030 »

Darwin wrote: Sun Jun 09, 2024 9:28 pm
jebmke wrote: Sun Jun 09, 2024 8:58 am The fact that she thought it was counter-intuitive isn't a good sign.
Yeah, she basically stated the equivalent of "six one way, half dozen the other". Not that it isn't a revelation to realize that it can be seen as 4% or 25x respectively!. It was for me when I first heard it. Anyone reading the Boglehead forum much is likely to have it explained directly or indirectly in short order. Still, it's not a bad thing to explain... Every generation has to be introduced to these :idea: realizations. It helped me visualize how debt (like a mortgage) is just a mirror image of investing.
Can you extrapolate on this?
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CoastLawyer2030
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by CoastLawyer2030 »

avalpert1 wrote: Sat Jun 08, 2024 9:45 pm There is no such thing as a '25x rule' in the first place
Why do you say this?
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by livesoft »

Math is hard for some folks.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by jebmke »

CoastLawyer2030 wrote: Mon Jun 10, 2024 8:24 am
avalpert1 wrote: Sat Jun 08, 2024 9:45 pm There is no such thing as a '25x rule' in the first place
Why do you say this?
probably objects to the term "rule" -- to most it is simply a metric, albeit crude, to measure the sustainability and durability of a pile of money.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by Wanderingwheelz »

CoastLawyer2030 wrote: Mon Jun 10, 2024 8:23 am
Darwin wrote: Sun Jun 09, 2024 9:28 pm
jebmke wrote: Sun Jun 09, 2024 8:58 am The fact that she thought it was counter-intuitive isn't a good sign.
Yeah, she basically stated the equivalent of "six one way, half dozen the other". Not that it isn't a revelation to realize that it can be seen as 4% or 25x respectively!. It was for me when I first heard it. Anyone reading the Boglehead forum much is likely to have it explained directly or indirectly in short order. Still, it's not a bad thing to explain... Every generation has to be introduced to these :idea: realizations. It helped me visualize how debt (like a mortgage) is just a mirror image of investing.
Can you extrapolate on this?
My interpretation is that collecting interest makes you an investor, and paying interest makes you a customer (fair to assume the person on the other side of the transaction is the investor).
Being wrong compounds forever.
avalpert1
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by avalpert1 »

CoastLawyer2030 wrote: Mon Jun 10, 2024 8:24 am
avalpert1 wrote: Sat Jun 08, 2024 9:45 pm There is no such thing as a '25x rule' in the first place
Why do you say this?
Because there is no rule grounded in economics, finance, or even historical data that tells you if you have 25x your expenses you are set... it is particularly misapplied when thought of as a 'rule' in the context of early retirement.
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Re: If Every $1k in Annual Expense = $25k for Retirement Savings, Doesn't $1k Retirement Income = -$25k in Savings Neede

Post by Darwin »

CoastLawyer2030 wrote: Mon Jun 10, 2024 8:23 am
Darwin wrote: Sun Jun 09, 2024 9:28 pm
jebmke wrote: Sun Jun 09, 2024 8:58 am The fact that she thought it was counter-intuitive isn't a good sign.
Yeah, she basically stated the equivalent of "six one way, half dozen the other". Not that it isn't a revelation to realize that it can be seen as 4% or 25x respectively!. It was for me when I first heard it. Anyone reading the Boglehead forum much is likely to have it explained directly or indirectly in short order. Still, it's not a bad thing to explain... Every generation has to be introduced to these :idea: realizations. It helped me visualize how debt (like a mortgage) is just a mirror image of investing.
Can you extrapolate on this?
Sure.
The 4% rule is that for every $100,000 you have at the moment of retirement, it (historically) was safe to assume that you could take 4% and still have a high likelihood of that 30-year withdrawal rate without having to eat cat food in your latter years (4% rule). So for every $100,000 savings in year 1 of retirement you'd have a reasonable $4000 yearly income stream, adjusted annually based on overall inflation. Yikes for most folks, once they do the math.
The inverse of this mathematically is that for every $4000 desired for retirement income ($4000 x 25) you'd need $100,000 in reasonably invested savings (25x rule). This is based on "boring Bogle" investing, not high-risk gambling which seems in vogue recently.
Some have suggested we should be more pessimistic (3.6-3.8) due to darkening future horizons, but I'll stick to the original example and let you decide.
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