What’s a safe formula for assets needed to retire?

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investing1012
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What’s a safe formula for assets needed to retire?

Post by investing1012 » Sun Oct 29, 2017 12:29 pm

What is a safe formula on assets needed for retirement?

jebmke
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Re: What’s a safe formula for assets needed to retire?

Post by jebmke » Sun Oct 29, 2017 12:44 pm

The one most often cited is ~ 25 times residual annual expenses (gross expenses in retirement minus pensions/SS/other income). this is just a rule of thumb. Some are more comfortable with a higher multiple, especially if retiring "early."
When you discover that you are riding a dead horse, the best strategy is to dismount.

mega317
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Re: What’s a safe formula for assets needed to retire?

Post by mega317 » Sun Oct 29, 2017 12:55 pm

Very good question. We obviously can't be helpful to you without knowing your particulars. First of all "safe" is a particularly loaded word. Do you mean no possibility of running out of money in any possible scenario?

A starting point if you want a framework is 25x expenses. That will allow an initial 4% withdrawal which is expected to last a 30 year retirement in any (historical) market.
Some things that might increase your needs: early retirement, desire for a lower withdrawal rate for increased "safety", desire to leave an estate
Some things that might decrease your needs: pension, social security, annuities, part-time work, expectation of decreasing expenses as you age, willingness/ability to be flexible with spending in down markets

TravelforFun
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Re: What’s a safe formula for assets needed to retire?

Post by TravelforFun » Sun Oct 29, 2017 1:00 pm

Safe? 33 times (annual expenses minus annual income such as social security benefits, pension, annuities, etc.)

TravelforFun

investing1012
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Re: What’s a safe formula for assets needed to retire?

Post by investing1012 » Sun Oct 29, 2017 1:03 pm

Shouldn’t the formula have an age component? Also let’s assume no social security or pensions.

stan1
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Re: What’s a safe formula for assets needed to retire?

Post by stan1 » Sun Oct 29, 2017 1:06 pm

If age 65? 20 times annual expenses less annual income (SS, pension, dividends, gifts) is probably OK. That also assumes house is paid off and equity in house is not included in the 20 times annual expenses. Some people on this board would want more safety margin but millions of people in their 70s or 80s in this country would still be working if they met the Boglehead threshold in order to retire.

Higher multiple if you retire younger.

Wonderful if your expenses are low and you can pay almost all your expenses with SS/pension.

Longer answer: it depends.

JBTX
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Re: What’s a safe formula for assets needed to retire?

Post by JBTX » Sun Oct 29, 2017 1:06 pm

I think a 3.0% withdrawal rate (33 times expenses) (year one, then the amount increased for inflation) has successfully survived all early retirement scenarios back test prior to the Great Depression.

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cinghiale
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Re: What’s a safe formula for assets needed to retire?

Post by cinghiale » Sun Oct 29, 2017 1:11 pm

There’s probably a safe range, depending on your age at retirement and the percent of your portfolio held in stocks.

As previous posters have stated, the current wisdom falls between a conservative 3% withdrawal rate (33 times annual expenses) and William Bengen’s 4% withdrawal rate (“Bengen’s rule of thumb”) which would call for savings equal to 25 times annual expenses.
-- Cinghiale | | "We don't see things as they are; we see them as we are." Anais Nin | | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell

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CyberBob
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Re: What’s a safe formula for assets needed to retire?

Post by CyberBob » Sun Oct 29, 2017 1:16 pm

From Bill Bernstein's book If You Can:

The name of the game is to accumulate around 12 years of living expenses, which, combined with Social Security, should provide for a reasonable retirement. How did I arrive at 12 years of living expenses? The average person needs to accumulate about twenty-five years of living expenses, and I’m assuming you’ll be getting about half of that from Social Security.
Last edited by CyberBob on Sun Oct 29, 2017 1:23 pm, edited 1 time in total.

JBTX
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Re: What’s a safe formula for assets needed to retire?

Post by JBTX » Sun Oct 29, 2017 1:17 pm

stan1 wrote:
Sun Oct 29, 2017 1:06 pm
If age 65? 20 times annual expenses less annual income (SS, pension, dividends, gifts) is probably OK. That also assumes house is paid off and equity in house is not included in the 20 times annual expenses. Some people on this board would want more safety margin but millions of people in their 70s or 80s in this country would still be working if they met the Boglehead threshold in order to retire.

Higher multiple if you retire younger.

Wonderful if your expenses are low and you can pay almost all your expenses with SS/pension.

Longer answer: it depends.
The market has not suffered a long protracted downturn in a long time. If that continues yes odds are 5.0% will work ok. Most prefer not to bank on that.

Also millions survive just on their social security, Medicare and Medicaid for nursing home care. Why? Because they have no choice and have no material other savings. Sure, it can be done but it isn’t a lifestyle what most people here aspire to.

SimplicityNow
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Re: What’s a safe formula for assets needed to retire?

Post by SimplicityNow » Sun Oct 29, 2017 1:21 pm

Depends on

age of retirement

Expected lifespan

Single or married

Expected lifespan of spouse

Ability and willingness to decrease spending in bad years

How conservative or liberal do you want to be with your projections

Any many other variables.

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Whiggish Boffin
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Re: What’s a safe formula for assets needed to retire?

Post by Whiggish Boffin » Sun Oct 29, 2017 1:38 pm

The rule of thumb of [ assets > 25 x annual expense ] is a restatement of the Bengen 4% rule. It's not safe -- it's a rough approximation that could fail if you get bad returns early in retirement.

Bobcat2 has presented something more precise: the funded ratio (FR). Retirement fund and endowment managers have long used the FR to see if their funds are on track. Bobcat2 shows how individuals can use FR for their retirement plans.

His three-part post on FR is here:
Using Funded Ratio to drive retirement investment plans -- Part 1 of Funded Ratio series
Determining your asset allocation using Funded Ratio - Part 2 of Funded Ratio series
The Funded Ratio over the LifeCycle - Part 3 of Funded Ratio series
Summarizing in Part 2, Bobcat2 wrote:The funded ratio (FR) is a metric that can be used to monitor your retirement investment plan. It is simply the ratio of assets to liabilities, where the liabilities are the present value of your targeted retirement income stream. The easiest way to estimate the liabilities in the denominator is to price a deferred real (inflation-adjusted) life annuity that begins payments in your expected retirement year. You would like the funded ratio to be at least 1.00 at retirement. Ideally it would be between 1.10 and 1.25.

Before retirement
FR = portfolio/PV(liabilities) = portfolio/price of deferred real life annuity

In retirement
FR = portfolio/price of immediate real life annuity
FR is more difficult to figure than the Bengen 4% rule. The big task is to convert future income streams and future expenses to their present values. Bobcat2 explains how.

If the Funded Ratio will be 1.10 when you retire, you're good to go, with some margin of safety. If it'll be 0.97, save more or work longer to get over 1.0. If it'll be over 1.25, you can afford to trade rate-of-return for safety -- you might want to transfer some risky assets into lower-risk investments.

Ron Scott
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Re: What’s a safe formula for assets needed to retire?

Post by Ron Scott » Sun Oct 29, 2017 1:54 pm

OK, so it looks like you've got a few answers: 12X, 20X, 25X and 33X and "it depends".

Here's what I assume for my 61-year-old/just-retired self and the misses: Multiply my first year's spend by 30 (I plan to die at 91) and assume I can grow that amount by inflation, with an asset allocation of roughly 30% stocks and 70% bonds, not counting SS and about $40k in annual frozen pension, and taking extra precautions to be as tax efficient as possible.

This is quite conservative, deliberately so. It may be possible that the net worth is untouched.

dbr
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Re: What’s a safe formula for assets needed to retire?

Post by dbr » Sun Oct 29, 2017 3:32 pm

investing1012 wrote:
Sun Oct 29, 2017 1:03 pm
Shouldn’t the formula have an age component? Also let’s assume no social security or pensions.
Yes, age is a significant factor. The studies that generate that 4% (or 3% or whatever number one favors) look at the effect of planning for longer retirements.

But, of course having SS, pensions, or buying annuities is a huge factor in what is needed to retire. The obvious rational finance prescription for retirement is to annuitize everything. Portfolios are hugely mismatched to efficiently supplying lifetime income. Real life is more complicated than any single formula though.

Also, the relative sources if income can change during retirement for one by starting SS and pensions and for another as expenses change and for another as one changes life circumstances such as selling a home or business.

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Re: What’s a safe formula for assets needed to retire?

Post by delamer » Sun Oct 29, 2017 4:03 pm

Ron Scott wrote:
Sun Oct 29, 2017 1:54 pm
OK, so it looks like you've got a few answers: 12X, 20X, 25X and 33X and "it depends".

Here's what I assume for my 61-year-old/just-retired self and the misses: Multiply my first year's spend by 30 (I plan to die at 91) and assume I can grow that amount by inflation, with an asset allocation of roughly 30% stocks and 70% bonds, not counting SS and about $40k in annual frozen pension, and taking extra precautions to be as tax efficient as possible.

This is quite conservative, deliberately so. It may be possible that the net worth is untouched.

Yes, asset allocation is an important factor in the formula. If you want to keep you assets in CDs, you'll need a higher multiple than if you have an allocation like Ron Scott's.

And, yes, age is an important factor too. The younger you are, the greater the multiple needed.

investing1012
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Re: What’s a safe formula for assets needed to retire?

Post by investing1012 » Sun Oct 29, 2017 4:13 pm

So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?

TravelforFun
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Re: What’s a safe formula for assets needed to retire?

Post by TravelforFun » Sun Oct 29, 2017 4:24 pm

dbr wrote:
Sun Oct 29, 2017 3:32 pm
investing1012 wrote:
Sun Oct 29, 2017 1:03 pm
Shouldn’t the formula have an age component? Also let’s assume no social security or pensions.
Yes, age is a significant factor. The studies that generate that 4% (or 3% or whatever number one favors) look at the effect of planning for longer retirements.
Per Trinity Study, your money should last forever with a 3% withdrawal rate. Age doesn't matter.

TravelforFun

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Re: What’s a safe formula for assets needed to retire?

Post by mega317 » Sun Oct 29, 2017 4:34 pm

investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
That's safe, I also think it's way too conservative and not particularly helpful. I'm 35. If I had 63x expenses, or even probably 40x expenses I'd be out, except I like my job.

dbr
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Re: What’s a safe formula for assets needed to retire?

Post by dbr » Sun Oct 29, 2017 5:07 pm

TravelforFun wrote:
Sun Oct 29, 2017 4:24 pm
dbr wrote:
Sun Oct 29, 2017 3:32 pm
investing1012 wrote:
Sun Oct 29, 2017 1:03 pm
Shouldn’t the formula have an age component? Also let’s assume no social security or pensions.
Yes, age is a significant factor. The studies that generate that 4% (or 3% or whatever number one favors) look at the effect of planning for longer retirements.
Per Trinity Study, your money should last forever with a 3% withdrawal rate. Age doesn't matter.

TravelforFun
Yes, a feature of those results is an asymptotic approach to a perpetual term of withdrawal. If one goes back the other way the result is much higher withdrawal rates for shorter terms. I was not referring to the 3% rate in Trinity but handing out a sop to those who think that today the 4% of Trinity should be 3% (and I suppose some where between 3% and 2% for perpetuity). I am not an enthusiast for adjusting everything down based on some problem we perceive with current investment prospects.

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Sandtrap
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Re: What’s a safe formula for assets needed to retire?

Post by Sandtrap » Sun Oct 29, 2017 5:42 pm

mega317 wrote:
Sun Oct 29, 2017 4:34 pm
investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
That's safe, I also think it's way too conservative and not particularly helpful. I'm 35. If I had 63x expenses, or even probably 40x expenses I'd be out, except I like my job.
Maybe. Even with 40x or even 63x, at age 35, that's a long way to go before pushing up daisies. It depends on if the 40x, etc, is the only income stream, or are there others, ie: R/E, pension, SS, etc. From age 35 to 95 for example, that's 60 years of life's "black swans" both personal and financial. Also, the earlier one retires, that's less put into a pension plan, less put into SS, etc, etc. The more income streams one has in addition to the 40x, etc, the "safer" one might be in retirement. IMHO, the "funded ratio" takes a better look at retirement prospects the longer one is away from retirement. This may or may not be entirely correct. Thoughts?

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Re: What’s a safe formula for assets needed to retire?

Post by The Wizard » Sun Oct 29, 2017 6:08 pm

jebmke wrote:
Sun Oct 29, 2017 12:44 pm
The one most often cited is ~ 25 times residual annual expenses (gross expenses in retirement minus pensions/SS/other income). this is just a rule of thumb. Some are more comfortable with a higher multiple, especially if retiring "early."
I prefer Desired Income as the target.
If you want your portfolio to provide $100,000 per year, then $2.5M is needed to start.
Other Income Streams such as pensions, annuities, and SS are in addition to this...
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Johm221122
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Re: What’s a safe formula for assets needed to retire?

Post by Johm221122 » Sun Oct 29, 2017 6:20 pm

I didn't see link to wiki
/wiki/Safe_withdrawal_rates

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Re: What’s a safe formula for assets needed to retire?

Post by AlohaJoe » Sun Oct 29, 2017 6:58 pm

investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
Why would someone assume no social security. That assumption makes no sense and is a bad one to make.

investing1012
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Re: What’s a safe formula for assets needed to retire?

Post by investing1012 » Sun Oct 29, 2017 7:05 pm

Because there may be no social security by the time I retire (I’m 35)

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Re: What’s a safe formula for assets needed to retire?

Post by AlohaJoe » Sun Oct 29, 2017 7:08 pm

investing1012 wrote:
Sun Oct 29, 2017 7:05 pm
Because there may be no social security by the time I retire (I’m 35)
You are wrong. There is no chance of that. If you're going to assume crazy things in planning, why not assume US stocks will return -1% real for the next 100 years and you'll need to save 50x?

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Re: What’s a safe formula for assets needed to retire?

Post by Dottie57 » Sun Oct 29, 2017 7:09 pm

AlohaJoe wrote:
Sun Oct 29, 2017 6:58 pm
investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
Why would someone assume no social security. That assumption makes no sense and is a bad one to make.

SS is subject to the whims of law-makers.

stan1
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Re: What’s a safe formula for assets needed to retire?

Post by stan1 » Sun Oct 29, 2017 7:11 pm

investing1012 wrote:
Sun Oct 29, 2017 7:05 pm
Because there may be no social security by the time I retire (I’m 35)
I'd say 75% of expected is a safer assumption. No SS is a very conservative assumption.

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Re: What’s a safe formula for assets needed to retire?

Post by stan1 » Sun Oct 29, 2017 7:12 pm

Dottie57 wrote:
Sun Oct 29, 2017 7:09 pm
AlohaJoe wrote:
Sun Oct 29, 2017 6:58 pm
investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
Why would someone assume no social security. That assumption makes no sense and is a bad one to make.

SS is subject to the whims of law-makers.
So are tax rates and just about everything else. But let's stay off this topic or the thread will be locked.

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Re: What’s a safe formula for assets needed to retire?

Post by AlohaJoe » Sun Oct 29, 2017 7:18 pm

stan1 wrote:
Sun Oct 29, 2017 7:12 pm
Dottie57 wrote:
Sun Oct 29, 2017 7:09 pm
AlohaJoe wrote:
Sun Oct 29, 2017 6:58 pm
investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
Why would someone assume no social security. That assumption makes no sense and is a bad one to make.

SS is subject to the whims of law-makers.
So are tax rates and just about everything else.
Exactly.

So why not assume there will be a wealth tax (ie a percent of your portfolio every year) and that qualified dividends go away (they're a recent thing) and that capital gains rates are eliminated?

Don't forget you also need to assume that Medicare won't be there and you'll need to pay $50,000 a year for health insurance in your old age?

Or is there some fantasy world where Social Security collapses but Medicare doesn't....?

Plus the government could get rid of TIPS and start taxing IRA withdrawals.

I'm starting to think 100x is the only prudent number. Anything less is just being a pollyanna!

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Re: What’s a safe formula for assets needed to retire?

Post by Grt2bOutdoors » Sun Oct 29, 2017 7:26 pm

AlohaJoe wrote:
Sun Oct 29, 2017 7:18 pm
stan1 wrote:
Sun Oct 29, 2017 7:12 pm
Dottie57 wrote:
Sun Oct 29, 2017 7:09 pm
AlohaJoe wrote:
Sun Oct 29, 2017 6:58 pm
investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
Why would someone assume no social security. That assumption makes no sense and is a bad one to make.

SS is subject to the whims of law-makers.
So are tax rates and just about everything else.
Exactly.

So why not assume there will be a wealth tax (ie a percent of your portfolio every year) and that qualified dividends go away (they're a recent thing) and that capital gains rates are eliminated?

Don't forget you also need to assume that Medicare won't be there and you'll need to pay $50,000 a year for health insurance in your old age?

Or is there some fantasy world where Social Security collapses but Medicare doesn't....?

Plus the government could get rid of TIPS and start taxing IRA withdrawals.

I'm starting to think 100x is the only prudent number. Anything less is just being a pollyanna!
100x? Why stop there? No, let's make it 500x, for that 1 in 500 chance event that blows away all prior assumptions. :mrgreen:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: What’s a safe formula for assets needed to retire?

Post by bobcat2 » Sun Oct 29, 2017 7:50 pm

That TIAA-CREF example reinforces the need for goal- or liability-driven investing. …Regarding the example, it is important to decide whether the pot is a savings account or a retirement account. It is hard to have two different goals because they conflict. One calls for having principal stability, which is a Treasury bill. The other calls for standard-of-living and income stability, which is a long-term bond. You cannot have both.

If you get clients to focus on rates of return and asset mixes, it is likely to be the wrong approach. You should get people to determine their goals instead of asking them how much they want to put in real estate.

Everyone in this room knows what people want for retirement. It is an income. Social security gives an income. DB plans give an income. In DC plans, for some reason, we do not show people the funded ratio. We are showing them the wrong thing, and then we are saying they are making the wrong decisions. We are telling people that risk is the value of their fund, when risk is really how much income they can sustain for retirement.
Jeremy Siegel


Defined Contribution Industry Focused on‘THE WRONG METRIC’
“So instead of wealth accumulation with no specified goal, DC plans need to focus on a specified desired income goal.”

Such an approach requires the industry to adopt a different mindset for coming up with an investment goal, measuring risk and success and creating an asset allocation strategy. For example, rather than measuring risk according to the volatility of portfolio returns, Merton suggested focusing on the funded ratio to show the potential risk of an income shortfall. The funded ratio is a better indication of success than the account balance, he noted. In contrast to generic asset allocation strategies, Merton prefers a dynamic approach with customization according to age, income and the funded ratio. The focus should be on improving the funded ratio while managing income volatility, he suggested. ...

Showing the value of the account is the wrong metric. What should matter is the funded ratio. It is less complicated and provides immediate feedback on the chance of getting to your goal.
- Robert Merton
Link - http://benefitscanada.com/wp-conten ... Update.pdf


See post by Whiggish Boffin earlier in this thread for more on the funded ratio. viewtopic.php?f=1&t=231010&p=3594557&hi ... o#p3594557

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: What’s a safe formula for assets needed to retire?

Post by PDX_Traveler » Mon Oct 30, 2017 1:54 am

TravelforFun wrote:
Sun Oct 29, 2017 1:00 pm
Safe? 33 times (annual expenses minus annual income such as social security benefits, pension, annuities, etc.)

TravelforFun
Expenses has to include taxes, and those taxes have to be figured on the non-taxable (i.e., excluding SS, etc. depending on the total), correct? This seems to involve some 'circularity' or iterations - anybody have some examples of how to figure this? Thanks -

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JoMoney
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Re: What’s a safe formula for assets needed to retire?

Post by JoMoney » Mon Oct 30, 2017 2:21 am

The number I like, is desired income times life expectancy. If you've reached that number it's completely reasonable that you could invest the amount in TIPS- not necessarily that you would want to go that route, but you could.... when you get to the late stages past age 70+ the remainder could be rolled into a SPIA + Social Security and last however long you do.

http://personal.fidelity.com/products/r ... table.html


Beyond that, you're kind of on your own for how much 'risk' you're willing to accept in growth projections and amortizing that growth out over life expectancy.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

The Wizard
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Re: What’s a safe formula for assets needed to retire?

Post by The Wizard » Mon Oct 30, 2017 12:54 pm

I agree with bobcat2's discussion on retirement INCOME focus, whether with DB plans or DC plans.
So long as the bulk of your retirement income comes from pensions, annuities, and SS, then you should be in good shape going forward, with a growing portfolio.

You can certainly withdraw from your portfolio in retirement, but if you absolutely need 4-5% per year, then you're in danger on a declining balance...
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Re: What’s a safe formula for assets needed to retire?

Post by CnC » Mon Oct 30, 2017 1:08 pm

investing1012 wrote:
Sun Oct 29, 2017 1:03 pm
Shouldn’t the formula have an age component? Also let’s assume no social security or pensions.
It does have an age component.

4% rule means your income will safely last 30 years. That means if you plan to retire at 30 you can only safely project to age 60.

Somewhere between 2.5 and 3% is considered a perpetual withdrawal rate which means it will last forever.

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Re: What’s a safe formula for assets needed to retire?

Post by CnC » Mon Oct 30, 2017 1:29 pm

investing1012 wrote:
Sun Oct 29, 2017 4:13 pm
So what does everyone think of the following ((65-age) + 33)* annual expenditure

Would you call that a safe income retirement assuming no SS?
65-55+33 would mean that an average Joe who only need 70,000 a year would need over 3 million to retire.

That would last him until he is 82 assuming he hit the money under his matress. If they kept all their money in CD's making 50% the rate of inflation it would last until they hit 90.

If they put everything in bonds that matched inflation your money would last untill age 100.


But assuming such poor returns, no one would ever get to the 43x their salary in their lifetime to retire.

investing1012
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Re: What’s a safe formula for assets needed to retire?

Post by investing1012 » Mon Oct 30, 2017 2:37 pm

Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!

The Wizard
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Re: What’s a safe formula for assets needed to retire?

Post by The Wizard » Mon Oct 30, 2017 2:44 pm

investing1012 wrote:
Mon Oct 30, 2017 2:37 pm
Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!
Take $1M and annuitize it to get your first $65,000 per year.
Then get $2M additional in the market 50/50 and withdraw 3%, $60k, per year.
You'll be fine...
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investing1012
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Re: What’s a safe formula for assets needed to retire?

Post by investing1012 » Mon Oct 30, 2017 2:47 pm

The Wizard wrote:
Mon Oct 30, 2017 2:44 pm
investing1012 wrote:
Mon Oct 30, 2017 2:37 pm
Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!
Take $1M and annuitize it to get your first $65,000 per year.
Then get $2M additional in the market 50/50 and withdraw 3%, $60k, per year.
You'll be fine...
I thought Annuities are generally not recommended.

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Re: What’s a safe formula for assets needed to retire?

Post by CnC » Mon Oct 30, 2017 3:21 pm

investing1012 wrote:
Mon Oct 30, 2017 2:47 pm
The Wizard wrote:
Mon Oct 30, 2017 2:44 pm
investing1012 wrote:
Mon Oct 30, 2017 2:37 pm
Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!
Take $1M and annuitize it to get your first $65,000 per year.
Then get $2M additional in the market 50/50 and withdraw 3%, $60k, per year.
You'll be fine...
I thought Annuities are generally not recommended.
Annuities are no less recommended than stocks or bonds. They serve a different purpose.

Annuities are of varying quality. But you can get reliable guaranteed annuties if you have a cash flow concern.

They are generally not recommended for younger investors because they can not compete with the stock market.

CnC
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Re: What’s a safe formula for assets needed to retire?

Post by CnC » Mon Oct 30, 2017 3:29 pm

investing1012 wrote:
Mon Oct 30, 2017 2:37 pm
Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!
To answer your question. Yes assuming your Asset allocation was anywhere between 60% bonds 40% stocks to 60% stocks 40% bonds there has not been one time in recorded American history that a 2.5% withdrawal rate ran out of money for any length of time.
This includes retirement the day before the stock market crash that led to the great depression.


Is it guaranteed? No, a plauge could pass through the country killing 75% of the population and completely destroying every concept of financial security. But if that happens, no amount of money would be enough.

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celia
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Re: What’s a safe formula for assets needed to retire?

Post by celia » Mon Oct 30, 2017 3:41 pm

jebmke wrote:
Sun Oct 29, 2017 12:44 pm
The one most often cited is ~ 25 times residual annual expenses (gross expenses in retirement minus pensions/SS/other income). this is just a rule of thumb. Some are more comfortable with a higher multiple, especially if retiring "early."
Investing1012, I think you are looking for a formula written out like a formula typically is. The first response is a "formula", in my opinion, and I would write it as:

Needed Assets When Starting Retirement = 25 * (annual expenses - annual pension - annual SS - annual "other" income)

Now some people could argue that "25" should be replaced by "33" or something else. Higher numbers will give you a longer retirement "life span" or more security or room for unknowns. But if all your assets were cashed out, the "25" means you could spend 1/25 (or 4%) each year, but at 25 years you would be out of money. Or, if all your assets were cashed out, the "33" means you could spend 1/33 (or 3%) each year, and last for 33 years. But since there will be inflation during that time or you might live longer than 25 or 33 more years, you need to stay invested so your money keeps growing to keep up with inflation.

If you won't have a pension (or not sure it is "secure"), you would use 0 in that position. You could argue that SS won't be there, so you would use 0 in that position. If you don't have rental income, or annuities, you will probably use 0 for "other" income.

Note that as you get closer to retirement (say, 10 years away), you will get a much better picture of what living expenses, a pension, SS might be and can adjust your needed assets accordingly. If you still can't count on any pension, SS, or other income, then your spendable assets need to be 25 times your living expenses. (Don't count the value of your real estate unless you are willing to sell it and live off the proceeds. But then your living expenses might increase if you need to rent.)

dbr
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Re: What’s a safe formula for assets needed to retire?

Post by dbr » Mon Oct 30, 2017 3:44 pm

investing1012 wrote:
Mon Oct 30, 2017 2:47 pm
The Wizard wrote:
Mon Oct 30, 2017 2:44 pm
investing1012 wrote:
Mon Oct 30, 2017 2:37 pm
Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!
Take $1M and annuitize it to get your first $65,000 per year.
Then get $2M additional in the market 50/50 and withdraw 3%, $60k, per year.
You'll be fine...
I thought Annuities are generally not recommended.
Most annuities are not recommended. Single premium immediate fixed annuities are very useful in the right circumstances. Having annuitized income, including pensions and SS is very helpful in most cases.

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Re: What’s a safe formula for assets needed to retire?

Post by bengal22 » Mon Oct 30, 2017 3:45 pm

I assume that if you withdraw 4% every year you will never run out of money. Makes perfect sense to me.

For me, I knew that I had enough to retire without any formula, which couldn't possibly capture every scenario or possibility. I think people just intuitively know based on emotional, physical, spiritual, and relationally when it is time to retire. I have not put this on paper but I just know that when I look at my actual expenses minus actual and/or projected income and divide that into my assets that I have plenty to retire. And that's without factoring what I will earn on my nest egg. Yes I know that nothing in the future is guaranteed but I can still put a number on what I think my investments will earn over time. And for me that should be more than what I am withdrawing to live.

I think the goal of developing a formula whereby one puts in some numbers, some projections, some fantasy perhaps is not a reality.

dbr
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Re: What’s a safe formula for assets needed to retire?

Post by dbr » Mon Oct 30, 2017 3:52 pm

bengal22 wrote:
Mon Oct 30, 2017 3:45 pm
I assume that if you withdraw 4% every year you will never run out of money. Makes perfect sense to me.
No, but the amount you can withdraw may be disappointing in that case and will be more variable than you might want. You probably know the usual study parameter is 4% of the initial portfolio value taken in real dollars every year, which is a fixed income in real dollars. The question is then how long the portfolio lasts. An inflation indexed annuity paying 4% initial solves both problems but may have other drawbacks. The annuity does have the advantage that the portfolio value is known exactly at all times; it is zero.

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celia
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Re: What’s a safe formula for assets needed to retire?

Post by celia » Mon Oct 30, 2017 3:56 pm

CnC wrote:
Mon Oct 30, 2017 3:29 pm
Is it guaranteed? No, a plauge could pass through the country killing 75% of the population and completely destroying every concept of financial security. But if that happens, no amount of money would be enough.
So, if 25% of the population inherited the 75% held by those who died, then they, on average, would quadruple their net worth? Interesting.... :D


But, I agree that all sense of money would be very different after that compared to what it is now. Anti-plague vaccines/pills would probably be the most valuable commodity, instead of dollars/euros/yen, etc.

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HomerJ
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Re: What’s a safe formula for assets needed to retire?

Post by HomerJ » Mon Oct 30, 2017 4:27 pm

CnC wrote:
Mon Oct 30, 2017 3:21 pm
Annuities are no less recommended than stocks or bonds. They serve a different purpose.
This needs to be explained.

Single Premium Immediate Annuities are generally the only GOOD annuities. Very simple. You give the insurance company a lump sum of $X and they give you $Y per year for life.

Single-page contract. Very easy.

The catch is the money is GONE. If you die two years later, it turned out to be a bad deal (but what do you care, you're dead).

They pay more the older you are, because the odds are good that you will die soon. For instance, a 75-year old man can get $9000 a year off $100,000 lump sum... That's a 9% withdrawal rate... Not a 9% return... They are returning your own money the first 11 years. But they promise to keep paying $9000 a year after that as long as you live.

The reason they do that is because 50% of the people they sell that to will probably be dead in less than 10 years, which means the insurance company will make money. But it lets you spend freely. Normally, you might not spend 9% a year, because what if you live to 95? With a SPIA, you don't have to worry about outliving the money.

But pretty much ALL OTHER ANNUITIES should be avoided. Most of them are scams, with high fees, that double as investment vehicles, but the insurance company gets most of the gains. Stay away from the rest.

As a cash flow product, SPIAs can indeed be useful.

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Re: What’s a safe formula for assets needed to retire?

Post by Mlm » Mon Oct 30, 2017 4:36 pm

HomerJ wrote:
Mon Oct 30, 2017 4:27 pm
CnC wrote:
Mon Oct 30, 2017 3:21 pm
Annuities are no less recommended than stocks or bonds. They serve a different purpose.
This needs to be explained.

Single Premium Immediate Annuities are generally the only GOOD annuities. Very simple. You give the insurance company a lump sum of $X and they give you $Y per year for life.

Single-page contract. Very easy.

The catch is the money is GONE. If you die two years later, it turned out to be a bad deal (but what do you care, you're dead).

They pay more the older you are, because the odds are good that you will die soon. For instance, a 75-year old man can get $9000 a year off $100,000 lump sum... That's a 9% withdrawal rate... Not a 9% return... They are returning your own money the first 11 years. But they promise to keep paying $9000 a year after that as long as you live.

The reason they do that is because 50% of the people they sell that to will probably be dead in less than 10 years, which means the insurance company will make money. But it lets you spend freely. Normally, you might not spend 9% a year, because what if you live to 95? With a SPIA, you don't have to worry about outliving the money.

But pretty much ALL OTHER ANNUITIES should be avoided. Most of them are scams, with high fees, that double as investment vehicles, but the insurance company gets most of the gains. Stay away from the rest.

As a cash flow product, SPIAs can indeed be useful.
Thanks for the summary. Do you know how SPIAs are taxed?
Reality has a way of catching up with you

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HomerJ
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Re: What’s a safe formula for assets needed to retire?

Post by HomerJ » Mon Oct 30, 2017 4:37 pm

investing1012 wrote:
Mon Oct 30, 2017 2:37 pm
Hi,

So lets assume I have annual expenditures of 120K. Would you say a safe retirement withdrawal rate of 2.5% is 4.8 million? I'm not being facetious but honestly curious at what point I could consider retiring.

Thanks!
Are you looking for 30 or so years? Or forever?

2.5% is very conservative, and very safe, yes. At least so far, in the past, which included some pretty bad times, like Great Depression, etc. You could probably retire at 25 with a 2.5% withdrawal

3% is pretty safe too.

If you're retiring at 55+, 4% is a good starting point. 4% withdrawals lasted 30 years in almost all cases in the past, including the Great Depression. It "failed" (only lasted 27 years instead of 30 years) if you retired in 65 or 66 I think. The high inflation in the late 70s, plus interest rates going up really hurt the bond component of your portfolio, and at the same time, stocks went nowhere from 1966 to 1982.

But that was the absolute worst case in the past. Almost every other period 4% withdrawals meant your money grew in leaps and bounds. 4% is already VERY conservative. For a 30-year retirement.

The difference is huge. 4% withdrawals to generate $120k a year is $3 million. 2.5% requires $4.8 million. That's a pretty big difference.

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HomerJ
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Re: What’s a safe formula for assets needed to retire?

Post by HomerJ » Mon Oct 30, 2017 4:42 pm

Mlm wrote:
Mon Oct 30, 2017 4:36 pm
HomerJ wrote:
Mon Oct 30, 2017 4:27 pm
CnC wrote:
Mon Oct 30, 2017 3:21 pm
Annuities are no less recommended than stocks or bonds. They serve a different purpose.
This needs to be explained.

Single Premium Immediate Annuities are generally the only GOOD annuities. Very simple. You give the insurance company a lump sum of $X and they give you $Y per year for life.

Single-page contract. Very easy.

The catch is the money is GONE. If you die two years later, it turned out to be a bad deal (but what do you care, you're dead).

They pay more the older you are, because the odds are good that you will die soon. For instance, a 75-year old man can get $9000 a year off $100,000 lump sum... That's a 9% withdrawal rate... Not a 9% return... They are returning your own money the first 11 years. But they promise to keep paying $9000 a year after that as long as you live.

The reason they do that is because 50% of the people they sell that to will probably be dead in less than 10 years, which means the insurance company will make money. But it lets you spend freely. Normally, you might not spend 9% a year, because what if you live to 95? With a SPIA, you don't have to worry about outliving the money.

But pretty much ALL OTHER ANNUITIES should be avoided. Most of them are scams, with high fees, that double as investment vehicles, but the insurance company gets most of the gains. Stay away from the rest.

As a cash flow product, SPIAs can indeed be useful.
Thanks for the summary. Do you know how SPIAs are taxed?
Found this on the web.
When you buy a non-qualified immediate annuity, the income you receive is based on your age, your gender, and the amount of your purchase. As money is paid to you, it is divided into two buckets: interest and principal. The interest is taxed as ordinary income, but the principal is tax-free because it is a return of your initial investment, assuming it was submitted with after-tax funds. The amount of principal returned in each payment is determined by the same factors that the annuity company uses to calculate how much income you'll receive; it assumes that the principal will be returned to you equally over the payout period.

When you request a quote from an annuity company, it will provide an illustration that shows the percentage of each payment that is tax free.
So, in the example above, the 75 year old man might get $9000 a year, with $6500 being tax-free, and $2500 being considered income (and taxable).

After 15 years though, all the principal (the original $100,000 lump sum) will have been returned to the investor, and the full $9000 each year after that will be fully taxable as income.

Edit: I'm assuming above that you bought the SPIA with money that had already been taxed, like from your checking account, or a taxable Vanguard account. If you bought the SPIA above with IRA or tax-deferred money, then the entire payment would be taxable from the start.

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