our retirement number

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petej
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our retirement number

Post by petej »

Dear fellow bogles,

For the purposes of retirement planning with a spouse, we thought it may be helpful to have a "number" in mind. This is more DW's way of thinking and planning, but happy to do it this way if it helps her. So, basically we're looking for: "you'll need $XXXXXXX in your retirement account to retire".

Our situation as it pertains to a savings goal number:
- 48 and 47
- start date of retirement would be 2038-2040 (I'll be 66, she 65 in 2038 - both work in sectors where we are highly likely to be asked to do part time-ish gigs/contract work thereafter but want to leave that out of the calculations.)
- longevity runs in both families, so we should have a number that expects relatively long health and old age
- one working now, one focusing on kids but coming back to work force soon. (This is a big driver to our planning needs: how ambitious to be for the re-entering spouse: high stress corporate job "because we have a long way to go to our number" or "we're going to make it - aim for work/life balance and sanity now".)
- happy to have a base goal number to work with that leaves no inheritance, no vacation homes, no big college package for the kids, just a peaceful aging out in current home. (For our planning purposes we'd then consider these things as "+" items to consider as we encounter raises/promotions/job opportunities.)

We like our current lifestyle, it isn't excessive, we look for sales, keeps us out of trouble, with the occasional splurge, get-away, or gizmo we don't need. If we had the equivalent disposable income in retirement we'd be perfectly happy. But, I've always been nervous with the "how much will you need in retirement" so showing my assumptions below:

My net take-home annually (after all with-holdings for taxes, employee paid health, retirement with-holdings): $108
- less current private middle-school tuition for kids ($20K)
- less mortgage payment (assuming paid off) ($18K)
- Supplemental health? $10K
= 2021 dollars living expenses: $80,000 post-tax dollars, or maybe round up to $100K for ease of calculation?

Can the above information produce a January 2038 target accumulated retirement savings number?
dbr
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Re: our retirement number

Post by dbr »

You can investigate some of the retirement planners such as FireCalc, CFiresim, Retirement Optimizer, iORP, the Fidelity Planner, the Vanguard Planner, the VPW planner in the Wiki, and so on. All of them run a statistics based investigation of how well your financial situation fits your intended retirement spending and try to show you consequences of various plans. All of them require you to make some estimate of what you want to spend in retirement based on figuring out what you will want to spend money on. Also all of them require you to make some estimate of how long you think you will live to compare with the estimates of when your plan might or might not run out of money. Of course if part of your income is annuitized, then that income will not run out, and that is part of the plan inputs.

I think I would advise starting with www.firecalc.com to explore how these planning tools work, what you have to know to run them, and what you can learn from them.

While these kinds of planning tools are both a little complicated and certainly give estimates with a considerable range of uncertainty, I don't think there is a very good approach to the problem that is simpler. Life is only as simple as it is.
delamer
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Re: our retirement number

Post by delamer »

You need a Social Security estimate too.

Your required portfolio will be based on:

Total Income (in addition to Social Security, any pensions, rental income, etc. if available) minus Total Expenses.

The difference (Residual Expenses) will need to come out of your portfolio.
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radiowave
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Re: our retirement number

Post by radiowave »

Here's the Vanguard Nest Egg calculator: https://retirementplans.vanguard.com/V ... gCalc.jsf

Simple but helpful for preliminary planning.
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Wiggums
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Re: our retirement number

Post by Wiggums »

petej wrote: Mon May 17, 2021 1:00 pm Dear fellow bogles,

For the purposes of retirement planning with a spouse, we thought it may be helpful to have a "number" in mind. This is more DW's way of thinking and planning, but happy to do it this way if it helps her. So, basically we're looking for: "you'll need $XXXXXXX in your retirement account to retire".

Our situation as it pertains to a savings goal number:
- 48 and 47
- start date of retirement would be 2038-2040 (I'll be 66, she 65 in 2038 - both work in sectors where we are highly likely to be asked to do part time-ish gigs/contract work thereafter but want to leave that out of the calculations.)
- longevity runs in both families, so we should have a number that expects relatively long health and old age
- one working now, one focusing on kids but coming back to work force soon. (This is a big driver to our planning needs: how ambitious to be for the re-entering spouse: high stress corporate job "because we have a long way to go to our number" or "we're going to make it - aim for work/life balance and sanity now".)
- happy to have a base goal number to work with that leaves no inheritance, no vacation homes, no big college package for the kids, just a peaceful aging out in current home. (For our planning purposes we'd then consider these things as "+" items to consider as we encounter raises/promotions/job opportunities.)

We like our current lifestyle, it isn't excessive, we look for sales, keeps us out of trouble, with the occasional splurge, get-away, or gizmo we don't need. If we had the equivalent disposable income in retirement we'd be perfectly happy. But, I've always been nervous with the "how much will you need in retirement" so showing my assumptions below:

My net take-home annually (after all with-holdings for taxes, employee paid health, retirement with-holdings): $108
- less current private middle-school tuition for kids ($20K)
- less mortgage payment (assuming paid off) ($18K)
- Supplemental health? $10K
= 2021 dollars living expenses: $80,000 post-tax dollars, or maybe round up to $100K for ease of calculation?

Can the above information produce a January 2038 target accumulated retirement savings number?
I would definitely add a buffer (as you suggested) for expenses coming in a little higher or to cover the unknown. I retired at 56 and the insurance goes up and the coverage goes down.

A quick retirement goal would be $100k retirement expenses less social security (less any other income) times 25. So 2.5M as your first retirement goal estimate.

We are doing Roth conversions which uses some of our cash each year.
"I started with nothing and I still have most of it left."
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mhc
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Re: our retirement number

Post by mhc »

I agree that firecalc would be a good place to start.

A rough estimate would be ($100k-SS)*25 for planning purposes.

One thing I see as risky in your plans is that you are planning that both of you will be working into your mid to late 60's. There are good odds that won't happen either due to health or not being employable. I would definitely have some leaner plans in case employment ends earlier than expected.

When I hit 44, I realized I needed a plan to be out by 55.
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Topic Author
petej
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Re: our retirement number

Post by petej »

Thanks for all the responses.

So, I took firecalc (which I like because of their probability portrayals) and found:

Expenses: $100,000
Assets: $2,500,000
Years: 28

Showed a 97% chance of making it thru that period.

The more conservative estimate was:

Expenses: $120,000
Assets: $2,300,000
Years: 28

Still a 72% chance of making it.

But, how does inflation on living expenses factor into FireCalc? I'm still unsure of whether $2.3M or $2.5M are the numbers to target for 2038 because presumably our expense needs of $100K will be much higher then? Is there a calculator that builds living expense inflation into it?

[Edit, I did a NPV calculator on the $2.5m goal, using the same imputed rate that I put on my investments on a secondary sheet, and got $4.8m. So, my own translation, for a retiree today who wanted to live on ~$100K-$120K lifestyle, they'd need to have $2.5m to do that lifestyle starting today for 28 years of retirement. For somebody like me who aims to start that plan in 2038, my target number to do so is $4.8m] Does that sound right?
Last edited by petej on Mon May 17, 2021 4:45 pm, edited 1 time in total.
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Re: our retirement number

Post by RickBoglehead »

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dbr
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Re: our retirement number

Post by dbr »

FireCalc defaults to real dollars. The data set is actual performance in nominal dollars and the rate of inflation for each year to convert to real dollars. The expenses are inflated by inflation every year. On the sheets where there are extra expenses or extra income you have to check off whether fixed nominal or to be inflated (COLA'd).
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22twain
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Re: our retirement number

Post by 22twain »

petej wrote: Mon May 17, 2021 4:14 pm Thanks for all the responses.

So, I took firecalc (which I like because of their probability portrayals) and found:

Expenses: $100,000
Assets: $2,500,000
Years: 28

Showed a 97% chance of making it thru that period.

[...]

But, how does inflation on living expenses factor into FireCalc?
Those results are for the hypothetical situation in which you retire this year, with that much money, and expect your retirement to last for 28 years from now. All the results are in today's dollars.

But you're not retiring this year, but rather about 20 years from now. So set your assets to whatever you have now, and set "years" to something like 48 or 50. Then go to Firecalc's "not retired?" tab and enter the year that you expect to retire, and the amount that you will contribute per year until then. Firecalc will assume that you will increase this amount as you go along, to match inflation. It will not apply the "spending" amount until you retire; at that point it will assume your nominal spending is inflated from today's dollars. Adjust the annual contributions until you get a success rate that you're satisfied with.
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petej
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Re: our retirement number

Post by petej »

OP here.

Trying to get that "we need X to retire in 2038 number" with future inflation vulnerable expense estimate numbers seems difficult and prone to error.

So, I'm going to try a "multiples of income" method.

Here goes:

My original post assumption, that we live fine off just my income right now. It would be, in today's dollars, about the right retirement income. So, taking that salary ($180,000) and using the "multiples of income" rule of thumb, I'm going to taking annual wage X 13 (I've seen 10-12, but for the sake of conservatism 13). So, my base formula is My Salary X 13

So this begs the question as to what is my salary in 2038? I found that over the last 15 years I've basically had a 5.5% annual increase. This has been a choppy progression of course, several years of substantially less, then big increases. Arguably, those last 15 years have had great opportunities for increases that may not always be present. So I used a 3% per annum increase to project what my own (not DWs) would need to be in 2038 to pace with our 2021 lifestyle and that calculated to be $298,000.

That projected 2038 salary ($298K) X 13 multiples would then be $3.88M. So the target baseline retirement number for my wife and I to live like we do today in retirement that in theory would start in 2038, seems to be $3.88M. Or, for rounding, say $4m.

Does that logic and math seem sound?
kd2008
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Re: our retirement number

Post by kd2008 »

Multiples of income is a wrong and bad measure. Multiples of expenses is the right thing to do. It is more in your control. Do all numbers in today's value. A balanced portfolio keeps up with inflation whatever it maybe.

No need to worry about what your income will be in 2038. Nobody knows the future.
delamer
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Re: our retirement number

Post by delamer »

petej wrote: Tue May 18, 2021 9:22 am OP here.

Trying to get that "we need X to retire in 2038 number" with future inflation vulnerable expense estimate numbers seems difficult and prone to error.

So, I'm going to try a "multiples of income" method.

Here goes:

My original post assumption, that we live fine off just my income right now. It would be, in today's dollars, about the right retirement income. So, taking that salary ($180,000) and using the "multiples of income" rule of thumb, I'm going to taking annual wage X 13 (I've seen 10-12, but for the sake of conservatism 13). So, my base formula is My Salary X 13

So this begs the question as to what is my salary in 2038? I found that over the last 15 years I've basically had a 5.5% annual increase. This has been a choppy progression of course, several years of substantially less, then big increases. Arguably, those last 15 years have had great opportunities for increases that may not always be present. So I used a 3% per annum increase to project what my own (not DWs) would need to be in 2038 to pace with our 2021 lifestyle and that calculated to be $298,000.

That projected 2038 salary ($298K) X 13 multiples would then be $3.88M. So the target baseline retirement number for my wife and I to live like we do today in retirement that in theory would start in 2038, seems to be $3.88M. Or, for rounding, say $4m.

Does that logic and math seem sound?
This income-based method seems just as fraught with error/difficulties as trying to estimate expenses. Maybe more so, since working income and retirement spending have a questionable correlation. Our core retirement expenses (including income taxes) are about 45% of peak working income.

If you need $100,000 (in today’s dollars) to live comfortably in retirement, then subtract your expected Social Security benefit (which is stated in current dollars) from $100,000.

Say that leaves you with $65,000. Multiply by 25. That’s $1.625 million. If inflation is 3% per year until 2038, that’s about $2.7 million (in 2038 dollars) in 2038 needed to make up the difference between expenses and SS income.

There are plenty of calculators that will tell you how much you need to save to get to $2.7 million (or whatever the target turns out to be).
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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mhc
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Re: our retirement number

Post by mhc »

I do all my calculations in today dollars.

Since you are planning on retiring around FRA, then you need (expenses-SS)*25. Trying to predict inflation rates adds unnecessary complications. Your expenses in retirment presumably are different than pre-retirement. If you want $100k as a working number, then that is fine. Go to SSA and find your PIA. Let's say it is $40k/yr. Then you need ($100k-$40)*25=$1.5 million.

As you approach retirement, keep updating your expenses estimate and keep looking up your PIA. Your target number will keep changing, but that is okay.

Spending a lot of time and effort to try to predict something way out in the future is just a waste of time and can give a false sense of certainty.

If you want to add margin, you can increase expenses, discount SS, or increase the multiplier.
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FrugalInvestor
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Re: our retirement number

Post by FrugalInvestor »

Watch out for health care expenses in your expenses estimates and particularly possible long-term care if you do not have long-term care insurance. We maintain a fairly significant 'slush fund' for possible long-term care.
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esteen
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Re: our retirement number

Post by esteen »

My favorite way to do this is to create a number based on multiple of expenses. Many people use 25X, as that is the oft cited 4% rule. I use 33x to simulate a 3% withdrawal rate. To do this well you want to spend some time projecting your expenses in retirement, so it won't be your expenses today times 33, it'll be your expenses today plus extra expenses you expect in retirement (healthcare, vacas, etc) minus expenses you won't be paying in retirement (maybe kid or mortgage stuff). If you have a line item budget today, it's useful to add a "retirement" column next to your current budget to project differences in a line-by-line basis.

Once you get your expected retirement expenses (in today's dollars) you can multiply that by your multiplier, for example 33, to come up with a retirement number in today's dollars. The last step is to convert that into a retirement number in future dollars. Unfortunately, we don't know what future inflation will be, so that has yet another guess. You can use something like 3%/yr, or historical inflation as a proxy. So you'd take your retirement # in today's dollars and multiply it by 1.03^18.

In the end, this is a guess with multiple inputs that could be found in accurate over time. So even though you will have a number now, I had revisit that number and the components behind it each year as part of my normal portfolio and investment policy statement review.

Hope that helps!
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Marseille07
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Re: our retirement number

Post by Marseille07 »

petej wrote: Tue May 18, 2021 9:22 am OP here.

Trying to get that "we need X to retire in 2038 number" with future inflation vulnerable expense estimate numbers seems difficult and prone to error.

So, I'm going to try a "multiples of income" method.

Here goes:

My original post assumption, that we live fine off just my income right now. It would be, in today's dollars, about the right retirement income. So, taking that salary ($180,000) and using the "multiples of income" rule of thumb, I'm going to taking annual wage X 13 (I've seen 10-12, but for the sake of conservatism 13). So, my base formula is My Salary X 13

So this begs the question as to what is my salary in 2038? I found that over the last 15 years I've basically had a 5.5% annual increase. This has been a choppy progression of course, several years of substantially less, then big increases. Arguably, those last 15 years have had great opportunities for increases that may not always be present. So I used a 3% per annum increase to project what my own (not DWs) would need to be in 2038 to pace with our 2021 lifestyle and that calculated to be $298,000.

That projected 2038 salary ($298K) X 13 multiples would then be $3.88M. So the target baseline retirement number for my wife and I to live like we do today in retirement that in theory would start in 2038, seems to be $3.88M. Or, for rounding, say $4m.

Does that logic and math seem sound?
As others already said, multiples of income is a bad idea.

Focus on your expected expenses, including medical cost, travel budget etc etc. It's also not easy to account for inflation; you sort of have to keep updating those estimates as 2038 nears. This can lead to a symptom called "one more year," but there's no good way to account for a 2038 issue in 2021.
LateFire
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Re: our retirement number

Post by LateFire »

mhc wrote: Mon May 17, 2021 2:45 pm I agree that firecalc would be a good place to start.

A rough estimate would be ($100k-SS)*25 for planning purposes.

One thing I see as risky in your plans is that you are planning that both of you will be working into your mid to late 60's. There are good odds that won't happen either due to health or not being employable. I would definitely have some leaner plans in case employment ends earlier than expected.

When I hit 44, I realized I needed a plan to be out by 55.
That is true. Most people will not be physically or mentally able to work pass 65. Unless you are a lawyer, doctor or have cushy government job, you are quite likely to get laid off in your late 50s.
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chassis
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Re: our retirement number

Post by chassis »

Get familiar with calculators. I like portfoliovisualizer and firecalc

Let’s say you have $125k in pre tax expenses. Multiply by 25 if using the “4% rule”. That gives $3.125m as your number. This ignores social security and pensions.

Go out and make it happen, Tiger! :)
ralph124cf
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Re: our retirement number

Post by ralph124cf »

You mentioned that both sides of the family were quite long lived. You also say that you are planning on a 28 year retirement. I think that you should extend your planning horizon out another 5 or ten years.

Ralph
Topic Author
petej
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Re: our retirement number

Post by petej »

OP back again.

@22twain, I tried what you suggested. Here's what I put in firecalc

1.) main tab:
expenses: $100,000 (presumably 2021 dollars)
current assets: $750,000
years: 45 (17 working, 28 retired)

2.) Not retired yet tab
start year: 2038
still making deposits?: 32K
(this was confusing to me, I currently put away $32,000 a year, but of course that will go up in nominal dollars each year as inflation/wages go up, so I'm assuming firecalc accounts for this)

Results looked a little rosy to me, rosier than I'd have thought:

Because you indicated a future retirement date (2038), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 17 years of preretirement plus 28 years of retirement, or 45 years.

FIRECalc looked at the 106 possible 45 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 106 cycles. The lowest and highest portfolio balance at the end of your retirement was $237,533 to $20,386,636, with an average at the end of $4,972,554. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)


Does this sound right?
dbr
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Re: our retirement number

Post by dbr »

petej wrote: Wed May 19, 2021 3:57 pm OP back again.

@22twain, I tried what you suggested. Here's what I put in firecalc

--snip--

Does this sound right?
That result would be pretty typical. 17 years of contributions at your rate plus the compounded return can produce a lot of money. It also produces, along with the volatility during retirement, a huge range in outcome. But all of them are safe in the sense that none of the scenarios runs out of money before 28 years retired.

It might be interesting to vary the asset allocation and also to vary the spending requirement and observe the effects.

Note a problem with FireCalc and any other calculator that uses historic periods data is that the data set is the years from1872 to 1975, which is some distance away from more recent history and takes away use of a significant chunk of the data set. A fix for that can be to use one of the Monte Carlo models. Those, of course, are afflicted with the problem of deciding what assumptions to make about the statistical characteristics of the asset returns. I don't think there is any other method to capture all the things going on in this problem.
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22twain
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Re: our retirement number

Post by 22twain »

petej wrote: Wed May 19, 2021 3:57 pm 2.) Not retired yet tab
start year: 2038
still making deposits?: 32K
(this was confusing to me, I currently put away $32,000 a year, but of course that will go up in nominal dollars each year as inflation/wages go up, so I'm assuming firecalc accounts for this)
Correct. As it notes on that tab:
(Enter values in 2021 dollars; FIRECalc will assume future savings will keep up with inflation.)
dbr wrote: Wed May 19, 2021 4:39 pm the data set is the years from 1872 to 1975
... for the OP's situation, which is 17 years of continued savings, followed by 28 years of retirement, for a total of 45 years. The final "scenario" considered in Firecalc's analysis is that the OP's (hypothetical) starting point was in 1975, followed by a "savings period" from 1975 to 1992 and a retirement from 1992 to 2020.
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invest4
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Re: our retirement number

Post by invest4 »

Estimated expenses ($100K) x Estimated Retirement (25 or 30 years for example) = Done.

If you like spending time with calculators, simulations, scenarios and the like, knock yourself out (I enjoy it). However, I believe this approach is plenty "good enough" to help guide your planning for the future. Life happens in the meantime and you will adjust accordingly.
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22twain
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Re: our retirement number

Post by 22twain »

invest4 wrote: Thu May 20, 2021 3:48 am Estimated expenses ($100K) x Estimated Retirement (25 or 30 years for example) = Done.
That gives a range of $2.5M to $3M, which is right in the "scrum" of Firecalc results at year 17.

That's in today's dollars. To get a goal in 2038 dollars, you need to predict the cumulative inflation until then. 3% per year compounded for 17 years gives 65% (1.03^17 = 1.65), for an inflated target of about $4.1M to $5M.

Every few years (maybe every Presidential inauguration year), re-evaluate your "number" in today's dollars and in 2038 dollars, maybe adjusting your expectations for inflation. And adjust your contributions for the inflation that has actually occurred, if necessary.
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petej
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Re: our retirement number

Post by petej »

Just a big thanks to you all.

I like that firecalc does roughly compare to the income multiples method - that I did about mid-thread above.

Firecalc and twain22s summary above roughly put me in the $4m-$5m range to live like we do now starting retirement in 2038-2040. My future modeling of today's wage growth to inflation * the income multiples landed on $3.9m.

So, with those outcomes I will share with DW that we should be aiming for roughly $4.5m in the year 2038-2040, of course all that assuming no rampant inflation and general historical GDP growth and asset value growth.

Thanks all!
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