In a 25x annual expenses savings estimate how do you…

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HomerJ
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Re: In a 25x annual expenses savings estimate how do you…

Post by HomerJ »

willthrill81 wrote: Thu Dec 02, 2021 11:12 am
HomerJ wrote: Thu Dec 02, 2021 11:05 am
willthrill81 wrote: Thu Dec 02, 2021 10:33 amIf the annuity had a 2-3% COLA, which is a feature that is widely available
I don't think it's widely available.
It's availability is high enough that ImmediateAnnuities.com offers it as a standard option.
HomerJ wrote: Thu Dec 02, 2021 11:05 am Here's the thing with the 5.25% payout he's getting.

It means he has to pull less from his other accounts, which means they will likely grow larger and off-set the inflation damage.
For this to be true, his other accounts will need to grow significantly more than inflation in order to offset the shrinking buying power of the nominal pension payout. By comparison, with a larger portfolio and no pension, the portfolio will not need to grow as much in order to maintain the same buying power.
Are you sure? I thought my math was pretty good.

Pulling less from the main pool pays for the inflation all by itself for the first 15-20 years without any extra growth.

If you can get 5.25% from an annuity or pension on 20% of your money, then you only have to pull 3.7% from the other 80%, and that saved 0.3% can pay for the inflation losses for a long time.
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willthrill81
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Re: In a 25x annual expenses savings estimate how do you…

Post by willthrill81 »

HomerJ wrote: Thu Dec 02, 2021 11:27 am
willthrill81 wrote: Thu Dec 02, 2021 11:12 am
HomerJ wrote: Thu Dec 02, 2021 11:05 am
willthrill81 wrote: Thu Dec 02, 2021 10:33 amIf the annuity had a 2-3% COLA, which is a feature that is widely available
I don't think it's widely available.
It's availability is high enough that ImmediateAnnuities.com offers it as a standard option.
HomerJ wrote: Thu Dec 02, 2021 11:05 am Here's the thing with the 5.25% payout he's getting.

It means he has to pull less from his other accounts, which means they will likely grow larger and off-set the inflation damage.
For this to be true, his other accounts will need to grow significantly more than inflation in order to offset the shrinking buying power of the nominal pension payout. By comparison, with a larger portfolio and no pension, the portfolio will not need to grow as much in order to maintain the same buying power.
Are you sure?
Yes. The nominal payout's buying power is decreasing at the rate of inflation. The portfolio must grow at the rate of inflation in order for withdrawals there to maintain their buying power and the portfolio not shrink faster than the withdrawal rate. So if the portfolio is also being used to cover the ever increasing gap between the nominal payout initial and current buying power, the portfolio must grow faster than inflation in order to maintain the same overall buying power and the portfolio not shrink faster than the withdrawal rate.

But if all the spending is coming from portfolio withdrawals, the portfolio only needs to grow at the rate of inflation in order for the portfolio to not shrink faster than the withdrawal rate.

As an example, a nominal payout's buying power will be halved in 24 years at 3% inflation (i.e., rule of 72). In order to maintain that buying power, the difference has to be funded by the portfolio. So the amount withdrawn from the portfolio will need to increase over time as a result. In order for that to not cause the portfolio to shrink too quickly, it must grow faster than the rate of inflation.
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HomerJ
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Re: In a 25x annual expenses savings estimate how do you…

Post by HomerJ »

willthrill81 wrote: Thu Dec 02, 2021 11:38 am
HomerJ wrote: Thu Dec 02, 2021 11:27 am
willthrill81 wrote: Thu Dec 02, 2021 11:12 am
HomerJ wrote: Thu Dec 02, 2021 11:05 am
willthrill81 wrote: Thu Dec 02, 2021 10:33 amIf the annuity had a 2-3% COLA, which is a feature that is widely available
I don't think it's widely available.
It's availability is high enough that ImmediateAnnuities.com offers it as a standard option.
HomerJ wrote: Thu Dec 02, 2021 11:05 am Here's the thing with the 5.25% payout he's getting.

It means he has to pull less from his other accounts, which means they will likely grow larger and off-set the inflation damage.
For this to be true, his other accounts will need to grow significantly more than inflation in order to offset the shrinking buying power of the nominal pension payout. By comparison, with a larger portfolio and no pension, the portfolio will not need to grow as much in order to maintain the same buying power.
Are you sure?
Yes. The nominal payout's buying power is decreasing at the rate of inflation. The portfolio must grow at the rate of inflation in order for withdrawals there to maintain their buying power and the portfolio not shrink faster than the withdrawal rate. So if the portfolio is also being used to cover the ever increasing gap between the nominal payout initial and current buying power, the portfolio must grow faster than inflation in order to maintain the same overall buying power and the portfolio not shrink faster than the withdrawal rate.
I think you're wrong, because of the 80/20 and the extra payout on the 20. The 80 is 4x larger than the 20, so it doesn't have to grow that much faster to make up for the 20 inflation losses.

PLUS, because of the higher payout on the 20, you pull LESS than 4% from the 80, which means you already get a bonus to the 80 growth, since it is declining less than normal

Read my example post again. I should make a new topic. Doing the math, I starting thinking maybe I do WANT an SPIA at 65 (math is even better at 70 with an even larger payout of 6%+). The big downside of course is that the money in the SPIA is GONE, and the heirs get none of it, but it does seem to help withdrawals for the retiree, even without inflation adjustments.
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Re: In a 25x annual expenses savings estimate how do you…

Post by willthrill81 »

HomerJ wrote: Thu Dec 02, 2021 11:45 am
willthrill81 wrote: Thu Dec 02, 2021 11:38 am
HomerJ wrote: Thu Dec 02, 2021 11:27 am
willthrill81 wrote: Thu Dec 02, 2021 11:12 am
HomerJ wrote: Thu Dec 02, 2021 11:05 am

I don't think it's widely available.
It's availability is high enough that ImmediateAnnuities.com offers it as a standard option.
HomerJ wrote: Thu Dec 02, 2021 11:05 am Here's the thing with the 5.25% payout he's getting.

It means he has to pull less from his other accounts, which means they will likely grow larger and off-set the inflation damage.
For this to be true, his other accounts will need to grow significantly more than inflation in order to offset the shrinking buying power of the nominal pension payout. By comparison, with a larger portfolio and no pension, the portfolio will not need to grow as much in order to maintain the same buying power.
Are you sure?
Yes. The nominal payout's buying power is decreasing at the rate of inflation. The portfolio must grow at the rate of inflation in order for withdrawals there to maintain their buying power and the portfolio not shrink faster than the withdrawal rate. So if the portfolio is also being used to cover the ever increasing gap between the nominal payout initial and current buying power, the portfolio must grow faster than inflation in order to maintain the same overall buying power and the portfolio not shrink faster than the withdrawal rate.
I think you're wrong, because of the 80/20 and the extra payout on the 20. The 80 is 4x larger than the 20, so it doesn't have to grow that much faster to make up for the 20 inflation losses.

PLUS, because of the higher payout on the 20, you pull LESS than 4% from the 80, which means you already get a bonus to the 80 growth, since it is declining less than normal

Read my example post again. I should make a new topic. Doing the math, I starting thinking maybe I do WANT an SPIA at 65 (math is even better at 70 with an even larger payout of 6%+). The big downside of course is that the money in the SPIA is GONE, and the heirs get none of it, but it does seem to help withdrawals for the retiree, even without inflation adjustments.
Perhaps a simplified example will show what I mean.

You have a nominal payout of $40k. Assuming 3% inflation, the buying power of that $40k will be halved in 24 years. The difference between the initial buying power of the $40k and its subsequent buying power will shrink (at the cumulative rate of inflation) so that the amount that needs to be withdrawn from the portfolio strictly to cover that gap goes from $0 to $20k in nominal dollars after 24 years.

Now let's look at the portfolio. For the portfolio to last 25 years at a 4% fixed withdrawal rate, the portfolio needs 0% real growth (i.e., the portfolio must grow at the rate of inflation), and we're assuming no volatility for the sake of simplification. If you withdraw more than 4%, such as to fund the gap in your pension payout's every shrinking buying power, you need more than 0% real growth in the portfolio in order for the portfolio to not be depleted before the 25 years are gone. An initially smaller withdrawal rate does not compensate for this; it only slows the 'bleed' because the amount withdrawn from the portfolio will need to grow larger and larger over time, and the amount withdrawn will grow faster than the rate of inflation.
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Re: In a 25x annual expenses savings estimate how do you…

Post by wrongfunds »

willthrill81 wrote: Thu Dec 02, 2021 11:10 am
HomerJ wrote: Thu Dec 02, 2021 11:08 am
willthrill81 wrote: Thu Dec 02, 2021 10:44 am
HomerJ wrote: Thu Dec 02, 2021 10:40 am
willthrill81 wrote: Thu Dec 02, 2021 10:31 am
The OP's overall withdrawal rate, under 4%, will be so low that there should be no 'worry about it lasting 30 years'. Permanently losing access to those funds and taking on inflation risk seem like a poor trade-off to me, but as I said already, I'm not the OP. I would rather maintain control of those assets and have a very high historic likelihood of at least keeping up with inflation.
I think his withdrawal rate is going to be 4% or higher now because he didn't include taxes.
In this post, you said that the OP's withdrawal rate based on a $4m portfolio would be 2.6%, including the $63k pension. If we add $1.2 million to the portfolio and $63k to the withdrawals, that would bring the withdrawal rate to 3.2%. Were you not including taxes in that estimate?
He didn't include taxes in the original $240k estimate, that's correct... He's now talking about $310k pull

From $5.2 million (if he cashes out the pension), that's a $238k pull (after SS) from $5.2 million or 4.6%

If he keeps the pension, that's a $175k pull (after SS and pension) from $4 million or 4.4%
Then he's got a problem one way or the other. He needs to delay retirement, reduce expenses, save more, or some combination thereof.
Speechless!!

This forum really knows how to keep a multimillionaire grounded to the reality. Where else would he get to hear the hard truth?
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Re: In a 25x annual expenses savings estimate how do you…

Post by HomerJ »

willthrill81 wrote: Thu Dec 02, 2021 11:53 am
HomerJ wrote: Thu Dec 02, 2021 11:45 am
willthrill81 wrote: Thu Dec 02, 2021 11:38 am
HomerJ wrote: Thu Dec 02, 2021 11:27 am
willthrill81 wrote: Thu Dec 02, 2021 11:12 am

It's availability is high enough that ImmediateAnnuities.com offers it as a standard option.



For this to be true, his other accounts will need to grow significantly more than inflation in order to offset the shrinking buying power of the nominal pension payout. By comparison, with a larger portfolio and no pension, the portfolio will not need to grow as much in order to maintain the same buying power.
Are you sure?
Yes. The nominal payout's buying power is decreasing at the rate of inflation. The portfolio must grow at the rate of inflation in order for withdrawals there to maintain their buying power and the portfolio not shrink faster than the withdrawal rate. So if the portfolio is also being used to cover the ever increasing gap between the nominal payout initial and current buying power, the portfolio must grow faster than inflation in order to maintain the same overall buying power and the portfolio not shrink faster than the withdrawal rate.
I think you're wrong, because of the 80/20 and the extra payout on the 20. The 80 is 4x larger than the 20, so it doesn't have to grow that much faster to make up for the 20 inflation losses.

PLUS, because of the higher payout on the 20, you pull LESS than 4% from the 80, which means you already get a bonus to the 80 growth, since it is declining less than normal

Read my example post again. I should make a new topic. Doing the math, I starting thinking maybe I do WANT an SPIA at 65 (math is even better at 70 with an even larger payout of 6%+). The big downside of course is that the money in the SPIA is GONE, and the heirs get none of it, but it does seem to help withdrawals for the retiree, even without inflation adjustments.
Perhaps a simplified example will show what I mean.

You have a nominal payout of $40k. Assuming 3% inflation, the buying power of that $40k will be halved in 24 years. The difference between the initial buying power of the $40k and its subsequent buying power will shrink (at the cumulative rate of inflation) so that the amount that needs to be withdrawn from the portfolio strictly to cover that gap goes from $0 to $20k in nominal dollars after 24 years.

Now let's look at the portfolio. For the portfolio to last 25 years at a 4% fixed withdrawal rate, the portfolio needs 0% real growth (i.e., the portfolio must grow at the rate of inflation), and we're assuming no volatility for the sake of simplification. If you withdraw more than 4%, such as to fund the gap in your pension payout's every shrinking buying power, you need more than 0% real growth in the portfolio in order for the portfolio to not be depleted before the 25 years are gone. An initially smaller withdrawal rate does not compensate for this; it only slows the 'bleed' because the amount withdrawn from the portfolio will need to grow larger and larger over time, and the amount withdrawn will grow faster than the rate of inflation.
But you don't have to pull more than 4% to fund the gap in your pension payout.

Because the pension pays out more than 4%, you can withdraw LESS than 4% from the rest of the money, and the difference there funds the declining pension gap for the first 15-20 years without requiring any extra growth

Again, look at my numbers.

$5 million, pull 4% which $200k.

OR

$1 million SPIA, pays 5.25% or $52,500, which means you pull $147,500 from the remaining $4 million or 3.7%. The extra 0.3% of $4 million is $12,500 which will cover the shrinking pension benefit for many years.

Or ignore the whole 4 million/1 million thing.

Just look at the pension alone.

If I have $1 million, I can pull 4% or $40,000 a year.

If I get a SPIA paying 5.25%, I get $52,500 a year. But I only need $40,000 a year, so I save the extra $12,500 in my bank account, and the following year, I spend $41,200 (because of 3% inflation), and I save $11,300, and the following year I save $10,000 or so, and so on.

For the first 10 years, I have enough extra income from the SPIA higher payout to pay for inflation. And the next 10 years, I have enough saved up from the first ten years to cover inflation losses from savings.

That's just looking at the pension by itself... If had a $4 million portfolio on the side growing for 20 years, I'm pretty sure you could handle the $20,000 loss in purchasing power by year 20.
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Re: In a 25x annual expenses savings estimate how do you…

Post by iim7V7IM7 »

A couple clarifications:

The $240k/year after-tax expenses estimate was a quick back of the envelope. I looked at it in more detail and the real number looks to be about $215k/year. In reality, about $80k/year of that estimate is more likely associated with the first 10-15 years of retirement when we are likely to be more active in travel and other leisure activities.

Additionally, there is a wide range of asset outcomes when estimating 5 to 7 years from now with our current assets. Using annual contributions with the with a Monte Carlo simulation using a 50/50 portfolio plus known age 65 pension lump sum.

Retire at 65:
10th percentile - $4,513k / 25 = $181k (-$34k low)
50th percentile - $5,164k / 25 = $207k (-$8k low)
90th percentile - $5,893k / 25 = $236k (+21k high)

Retire at 67:
10th percentile - $5,029k* / 25 = $201k (-$14k low)
50th percentile - $5,920k* / 25 = $237k (+ 22k high)
90th percentile - $6,957k* / 25 = $278k (+63k high)

* still using age 65 pension lump-sum estimate. It would no doubt be higher.

So in a poor outcome scenario, we can decide either to delay retirement a few years and or lower discretionary expense target. I also wonder how the 25x rule of thumb applies when you have no children or substantial "legacy" to plan? Can one use a 20x multiplier if you do not intend to pass on a large estate to heirs?

I also wonder how one deals with higher anticipated spend say from age 65 to ages 75-80 vs. lower spend from age 80 and beyond? Our when travel and leisure may be less. Now, medical out of pocket might increase to offset (TBD).
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Re: In a 25x annual expenses savings estimate how do you…

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wrongfunds wrote: Thu Dec 02, 2021 12:35 pm
willthrill81 wrote: Thu Dec 02, 2021 11:10 am
HomerJ wrote: Thu Dec 02, 2021 11:08 am
willthrill81 wrote: Thu Dec 02, 2021 10:44 am
HomerJ wrote: Thu Dec 02, 2021 10:40 am

I think his withdrawal rate is going to be 4% or higher now because he didn't include taxes.
In this post, you said that the OP's withdrawal rate based on a $4m portfolio would be 2.6%, including the $63k pension. If we add $1.2 million to the portfolio and $63k to the withdrawals, that would bring the withdrawal rate to 3.2%. Were you not including taxes in that estimate?
He didn't include taxes in the original $240k estimate, that's correct... He's now talking about $310k pull

From $5.2 million (if he cashes out the pension), that's a $238k pull (after SS) from $5.2 million or 4.6%

If he keeps the pension, that's a $175k pull (after SS and pension) from $4 million or 4.4%
Then he's got a problem one way or the other. He needs to delay retirement, reduce expenses, save more, or some combination thereof.
Speechless!!

This forum really knows how to keep a multimillionaire grounded to the reality. Where else would he get to hear the hard truth?
Heh, why speechless? Math is math.

Spending is just as important as savings.

If you've saved $100 million, but you spend $10 million a year, you don't have enough to retire.

The OP needs to pull $300k a year. That's a lot of money (is his house paid off yet?). If that's the lifestyle he wants, fine. He may have to keep working.

If he's tired of working, he may have to take only 4 expensive trips a year instead of 5. He can decide.
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Re: In a 25x annual expenses savings estimate how do you…

Post by wrongfunds »

I just don't believe that math is NOT strong subject for OP. You don't accumulate half of 8 figures by being poor at math if you are NOT athlete or movie star :-) I think OP is enjoying you two sparring with each other and your advise to keep on working.
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Re: In a 25x annual expenses savings estimate how do you…

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wrongfunds wrote: Thu Dec 02, 2021 1:10 pm I just don't believe that math is NOT strong subject for OP. You don't accumulate half of 8 figures by being poor at math if you are NOT athlete or movie star :-) I think OP is enjoying you two sparring with each other and your advise to keep on working.
The number of "Can I retire with $5 million saved and $60,000 expenses" threads I've seen on this site refutes that. THAT math is easy.

But having mega-millions means nothing if you spend too much.

If his numbers are correct, he can retire, but it's not a slam dunk. 4.5% withdrawal rate at 65 is pretty safe, but it's not 100%.

Pretty easy solution. He retires with his current expenses, but if the market crashes next year, maybe he only takes 3 trips a year instead of 4 trips a year until the market recovers. With $240,000 in annual expenses, I'm assuming a lot of that is discretionary. I mean he's on Medicare, and I'm assuming his house is paid off or at least close to paid-off.

His tax numbers might be wrong too. Taxes are usually much lower in retirement than when working. Dividends and Capital Gains are taxed at lower rates in taxable accounts.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
wrongfunds
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Re: In a 25x annual expenses savings estimate how do you…

Post by wrongfunds »

His updated numbers are Expenses:- 215K; combined SS:- 72K; non-cola adjusted pension at age 65:- 63K
Expense needed to be supported by portfolio = 215 -72 - 63 = 80K
Needed portfolio @4.0% SWR for $80K = $2M

Please tell me how much OP has (at least $4m) and then tell me what are we arguing here? Please don't tell me "but what about taxes?" "but what if market crashed tomorrow?"

The question was answered by livesoft and Homer himself before I even made my first sarcastic comment. Why are we still going?

I give up; OP is all over with his numbers. Sometimes he says his expenses are 240, then he says they are 215; then he says that does NOT include his pension or SS and wants 215 + pension + SS or may be he does not want to count pension + SS. Then comes up with tax estimate and then says he need $300K before taxes.

May be math is HARD!
Last edited by wrongfunds on Thu Dec 02, 2021 3:12 pm, edited 1 time in total.
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Re: In a 25x annual expenses savings estimate how do you…

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HomerJ wrote: Thu Dec 02, 2021 12:40 pm If I get a SPIA paying 5.25%, I get $52,500 a year. But I only need $40,000 a year, so I save the extra $12,500 in my bank account, and the following year, I spend $41,200 (because of 3% inflation), and I save $11,300, and the following year I save $10,000 or so, and so on.

For the first 10 years, I have enough extra income from the SPIA higher payout to pay for inflation. And the next 10 years, I have enough saved up from the first ten years to cover inflation losses from savings.
Yes, you can certainly pocket the difference between the $40k and the initial payout of $52.5k a year, but as I said, that only slows down the bleed from your portfolio. After 10 years of 2% inflation, the inflation-adjusted value of the payout is just under $40k. From that point on, you have to withdraw the difference from your portfolio.

With 2% inflation and 0% real portfolio returns, the initial surplus of funds, which only lasts for the first 9 years, would be depleted by the 20th year. By the 30th year, a total $152k would have been withdrawn from the portfolio in order to cover the shortfall in the payout resulting from inflation. And by the 40th year, if longevity risk had manifested itself, net portfolio withdrawals would be $367k, adjusted for inflation. What do you think the likelihood is that the $60k you avoided withdrawing from the portfolio during the first 9 years would be enough to fund that $367k shortfall? It would take fantastic portfolio returns to do that, but if you're counting on those portfolio returns in the first place, it begs the question why you purchased a nominal SPIA in the first place.

And that's the problem with nominal SPIAs. If longevity risk manifests itself, the SPIA offers little protection due to substantially eroded buying power of the payout. That forces significant reliance on one's portfolio if longevity risks shows up. But if your portfolio does poorly, which is presumably why you bought the SPIA in the first place, you cannot rely on it either.

The only way that I can see the SPIA potentially resulting in a superior mathematical outcome is if your portfolio does very poorly during the first few years, when you're avoiding withdrawals due to the SPIA, and then does very well afterward. But you could just as easily create a 9 year TIPS ladder to fund that period, leaving the rest in stocks for that period, and then withdraw from your portfolio afterward (i.e., the rising equity glidepath). I wouldn't recommend that, but it makes more sense to me than the SPIA with no COLA.
Last edited by willthrill81 on Thu Dec 02, 2021 3:13 pm, edited 1 time in total.
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Re: In a 25x annual expenses savings estimate how do you…

Post by FlamePoint »

willthrill81 wrote: Wed Dec 01, 2021 9:53 pm
iim7V7IM7 wrote: Wed Dec 01, 2021 9:25 pm
willthrill81 wrote: Wed Dec 01, 2021 7:02 pm
iim7V7IM7 wrote: Wed Dec 01, 2021 6:16 pm
willthrill81 wrote: Wed Dec 01, 2021 5:16 pm

That's how I would approach this also, but keep in mind that since the pension doesn't have a COLA, inflation will erode its value over time. If their spending remains flat in real dollars, they will have to withdraw an increasing amount from their portfolio to compensate. 3% inflation would halve the buying power of their pension in 24 years, meaning that they would be withdrawing about 3.4% of their current portfolio balance by then. That's still perfectly fine, but it's something to be kept in mind.
I still need to decide whether or not to take the non-COLA $5,323/month for my life plus up to 20-years for my significant other (we are 6 months apart in age) or a $1,187,000 lump-sum rolled into an IRA account. I still need to run the numbers, but I suspect that a lump sum may be the better way to address the inflation risk as well as provide flexibility.
The question comes down to whether you would pay $1.2 million for $63k of annual nominal income for the rest of your life. I know what I would do, but I'm not you.
I suppose it does. What would you do at age 65 (spouse. 6 months older) and why?
For starters, there's no way that I would pay $1.2 million for $63k of annual lifetime nominal income for two factors: permanent loss of access to the $1.2 million, for both you and your heirs, and inflation. Even historically mild inflation of 2% over just 10 years would bring the buying power of that initial $63k down to about $51k of today's dollars. In another 10 years of 2% inflation, it would be down to $42k in today's dollars, and if you live to age 95 and inflation averages 2%, the buying power of that $63k would be nearly halved. In other words, the longer you live, the less buying power your payout will provide. The reason most folks are interested in annuities like these is because they want lifetime income, especially to help insure longevity risk. But these annuities don't provide lifetime buying power, which is what really matters. Combine that with you permanently losing access to the $1.2 million and your heirs being left with nothing when you depart this life, and it's probably easy to see why retirees seldom buy these annuities.

Now if you could get an annuity with a 2% or 3% COLA (i.e., the payout would increase by that fixed amount regardless of inflation being higher or lower), that would be more viable. But it sounds like you have enough assets that you don't have a real need to pay a historically high price for even that. So I would recommend taking the $1.2 million and investing it in an asset allocation that's likely to provide you with the long-term growth you need and with no more volatility than what you can handle.
This is exactly what we did. Our lump sum was less ($850k), and yearly payout was a non-cola $39,372. For the reasons willthrill stated we opted for the lump sum. Combined SS allows us to meet 80% of our total expenses, and our 401k before the lump sum payout was $3.2M. The lump sum was just icing on the cake and allows us to have greater control over Roth conversions and taxes year by year.

Given our large tax deferred account I’m doing aggressive (up to top of 24% tax bracket) Roth conversions over the next 4 years and living off taxable funds. Otherwise a tax torpedo is headed our way once we turn 72.
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Re: In a 25x annual expenses savings estimate how do you…

Post by BernardShakey »

HomerJ wrote: Thu Dec 02, 2021 11:05 am
willthrill81 wrote: Thu Dec 02, 2021 10:33 amIf the annuity had a 2-3% COLA, which is a feature that is widely available
I don't think it's widely available.

Here's the thing with the 5.25% payout he's getting.

It means he has to pull less from his other accounts, which means they will likely grow larger and off-set the inflation damage.

Let's say I have $5 million. Pull 4% a year or $200,000. All invested so should grow with inflation.

Or I have $4 million and a $1 million locked up in pension paying $52,500 (5.25% payout). So now I only need to pull $147,500 from the $4 million or 3.7%.

That's $13,500 I'm NOT pulling from the $4 million because I'm pulling 3.7% instead of 4%.

That extra $13,500 will easily cover the inflation losses.

3% inflation, my $52,500 loses $1,500 in purchasing power, but the extra $13,500 I saved (that is compounding as well, hopefully higher than inflation) is far more than that. So if needed, I could pull the extra $1500 from the big pool of money, and still leave $12,000 compounding.

5 years in, I've lost $7,000 in purchasing power, but that's still less than the $13,500 I don't pull each year from the $4 million because of the 5.25% payout.

10 years in, I've now lost $13,000 in purchasing power.

So now i'm running a deficit... but I had 10 years of saving... guessing around $80,000 in raw numbers, more with growth?

15 years in, I've now lost $19,000 in purchasing power, and I'm having to pull $5,500 a year extra over the $13,500 I was saving to make for it. But that $5,500 is coming out of the $80,000+ I had extra in the big pile from only pulling 3.7% for 15 years instead of 4%.

After 15 years, the $4 million has probably grown so much that you won't care about the pension anymore anyway.

But if the $4 million HASN'T done well, then you'll be happy you have the pension instead of $5 million doing poorly.

The big caveat is that the $1 million in the pension is GONE, and the heirs will get none of it. But that's not a problem for the OP
I like this thoughtful reasoning. Would be interested in willthrill81 or others' take on the above. I'm kind of in same boat as OP in terms of size of non-COLA pension and SS, but much smaller portfolio such that I'll be looking at a 4% draw until age 70.
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Re: In a 25x annual expenses savings estimate how do you…

Post by iim7V7IM7 »

wrongfunds wrote: Thu Dec 02, 2021 2:45 pm His updated numbers are Expenses:- 215K; combined SS:- 72K; non-cola adjusted pension at age 65:- 63K
Expense needed to be supported by portfolio = 215 -72 - 63 = 80K
Needed portfolio @4.0% SWR for $80K = $2M

Please tell me how much OP has (at least $4m) and then tell me what are we arguing here? Please don't tell me "but what about taxes?" "but what if market crashed tomorrow?"

The question was answered by livesoft and Homer himself before I even made my first sarcastic comment. Why are we still going?

I give up; OP is all over with his numbers. Sometimes he says his expenses are 240, then he says they are 215; then he says that does NOT include his pension or SS and wants 215 + pension + SS or may be he does not want to count pension + SS. Then comes up with tax estimate and then says he need $300K before taxes.

May be I am overestimating the math skills.
$215k is total net expense needed. Social Security ($72k/year) is subtracted so that nets $143k gap to be filled by other sources of income. Whether we take the $63k/year (lifetime non-COLA pension annuity) or a $1.2M lump sum is still TBD. I forgot to subtract SSA from the prior post (my bad). I will get some tax help to better estimate a reasonable pre to post tax relationship. Hopefully, one does not need >$300k to net $215k

Thanks to all for your help.
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Re: In a 25x annual expenses savings estimate how do you…

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BernardShakey wrote: Thu Dec 02, 2021 3:34 pm I like this thoughtful reasoning. Would be interested in willthrill81 or others' take on the above.
I did so in this post.

The bottom line is that even with mild inflation, this strategy falls apart if longevity risk shows up, the risk which would presumably be the major factor influencing one to buy a SPIA in the first place.
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Re: In a 25x annual expenses savings estimate how do you…

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iim7V7IM7 wrote: Thu Dec 02, 2021 3:36 pm
wrongfunds wrote: Thu Dec 02, 2021 2:45 pm His updated numbers are Expenses:- 215K; combined SS:- 72K; non-cola adjusted pension at age 65:- 63K
Expense needed to be supported by portfolio = 215 -72 - 63 = 80K
Needed portfolio @4.0% SWR for $80K = $2M

Please tell me how much OP has (at least $4m) and then tell me what are we arguing here? Please don't tell me "but what about taxes?" "but what if market crashed tomorrow?"

The question was answered by livesoft and Homer himself before I even made my first sarcastic comment. Why are we still going?

I give up; OP is all over with his numbers. Sometimes he says his expenses are 240, then he says they are 215; then he says that does NOT include his pension or SS and wants 215 + pension + SS or may be he does not want to count pension + SS. Then comes up with tax estimate and then says he need $300K before taxes.

May be I am overestimating the math skills.
$215k is total net expense needed. Social Security ($72k/year) is subtracted so that nets $143k gap to be filled by other sources of income. Whether we take the $63k/year (lifetime non-COLA pension annuity) or a $1.2M lump sum is still TBD. I forgot to subtract SSA from the prior post (my bad). I will get some tax help to better estimate a reasonable pre to post tax relationship. Hopefully, one does not need >$300k to net $215k

Thanks to all for your help.
Simple napkin calculations; 4% of $1.2M give $48K; taking this now you subtract $48K from $143 implying you need your portfolio to support $95K per year draw. That means you need at least 2.375M in portfolio. You have over $4M in tax deferred assets. Do you think you will be running out of money by having to pay taxes?

And this forum tells you "you need to keep working". :oops:
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iim7V7IM7 wrote: Thu Dec 02, 2021 3:36 pm
wrongfunds wrote: Thu Dec 02, 2021 2:45 pm His updated numbers are Expenses:- 215K; combined SS:- 72K; non-cola adjusted pension at age 65:- 63K
Expense needed to be supported by portfolio = 215 -72 - 63 = 80K
Needed portfolio @4.0% SWR for $80K = $2M

Please tell me how much OP has (at least $4m) and then tell me what are we arguing here? Please don't tell me "but what about taxes?" "but what if market crashed tomorrow?"

The question was answered by livesoft and Homer himself before I even made my first sarcastic comment. Why are we still going?

I give up; OP is all over with his numbers. Sometimes he says his expenses are 240, then he says they are 215; then he says that does NOT include his pension or SS and wants 215 + pension + SS or may be he does not want to count pension + SS. Then comes up with tax estimate and then says he need $300K before taxes.

May be I am overestimating the math skills.
$215k is total net expense needed. Social Security ($72k/year) is subtracted so that nets $143k gap to be filled by other sources of income. Whether we take the $63k/year (lifetime non-COLA pension annuity) or a $1.2M lump sum is still TBD. I forgot to subtract SSA from the prior post (my bad). I will get some tax help to better estimate a reasonable pre to post tax relationship. Hopefully, one does not need >$300k to net $215k

Thanks to all for your help.
You can retire today if 215k net expense is needed.

Like you said, after SS you only need to pull 143k from portfolio.

4% from $4 million = $160,000, so you're ALREADY pretty much there even completely ignoring your pension. The only sticking point is taxes (you have large expenses, and it sounds like most/all your money is in tax-deferred accounts, so you need to figure out your taxes - maybe even worthwhile to talk to a tax accountant)

But with your pension, you are absolutely golden.

Take the pension and you only need $80,000 a year from your $4 million portfolio, and like I said before, you can safely pull $160,000 a year from $4 million, so you have plenty left over for taxes.
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Re: In a 25x annual expenses savings estimate how do you…

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wrongfunds wrote: Thu Dec 02, 2021 4:12 pm And this forum tells you "you need to keep working". :oops:
Like you admitted above, his numbers were all over the place.

It's not hard math. Two variables. 4% of your portfolio. And what are your expenses.

When he said he needed $175,000 after SS and pension and taxes, then his $4 million was probably enough (4% is $160,000) but not a slam dunk.

Now that his expenses are more like $120,000 a year after SS and pension and taxes, pulling $160,000 from $4 million is a slam dunk with plenty of wiggle room.

He needs to really nail down how much he is spending now, and how much he will likely spend in retirement (usually by age 65, they are pretty close to the same number - but maybe he wants to move and downsize, or upsize, or take up competitive skeet shooting now that he has more time - I don't know).

He gave us the numbers, we gave him the correct answers based on those numbers.
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Re: In a 25x annual expenses savings estimate how do you…

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HomerJ wrote: Thu Dec 02, 2021 4:15 pm Take the pension and you only need $80,000 a year from your $4 million portfolio, and like I said before, you can safely pull $160,000 a year from $4 million, so you have plenty left over for taxes.
Apart from the issues on the nominal pension created by decades of inflation, I just don't see a need for a SPIA here at all, even one with a COLA. If the OP pulls $143k ($80k + $63k) from a $5.2m portfolio, that's only a 2.75% withdrawal rate. That's already below the historic perpetual withdrawal rate. Taking the pension rather than the lump sum is basically paying for (IMHO, very poor) insurance when you don't have a need for the insurance at all. The OP can keep his $1.2 million, have a near certainty of seeing it grow over the course of his hopefully very long retirement, retain full control of the funds, and his heirs/charity will be that much better off when he's gone.
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willthrill81 wrote: Thu Dec 02, 2021 4:24 pm
HomerJ wrote: Thu Dec 02, 2021 4:15 pm Take the pension and you only need $80,000 a year from your $4 million portfolio, and like I said before, you can safely pull $160,000 a year from $4 million, so you have plenty left over for taxes.
Apart from the issues on the nominal pension created by decades of inflation, I just don't see a need for a SPIA here at all, even one with a COLA. If the OP pulls $143k ($80k + $63k) from a $5.2m portfolio, that's only a 2.75% withdrawal rate. That's already below the historic perpetual withdrawal rate. Taking the pension rather than the lump sum is basically paying for (IMHO, very poor) insurance when you don't have a need for the insurance at all. The OP can keep his $1.2 million, have a near certainty of seeing it grow over the course of his hopefully very long retirement, retain full control of the funds, and his heirs/charity will be that much better off when he's gone.
Yes, that's fine too...

After SS, he needs to pull $143k. Fine, cash out the pension.

$5.2 million x 4% = $208,000... plenty of room there to spend the $143k, and have enough to pay the taxes.

He's good to go with $215,000 expenses - $72,000 SS = $143,000 pull
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Re: In a 25x annual expenses savings estimate how do you…

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One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP. For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR. The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different. We have to account for the taxes on the pension+ssa+swr and not just swr which we sort of do if we subtract pension and ssa from the expense number.

To put it differently, somebody who still has the same portfolio but has real expenses of $95K per year and has no pension nor ssa (or very meager) would be paying peanuts in taxes compared to OP.

In retrospect, that is obvious but it gets overlooked in napkin math. Would taxation be different on whether he took the pension or lumpsum? Only if his expenses were to go down, then that pension sort of becomes forced virtual RMD, correct? If he needs the money, then it makes no difference.

Am I making any sense?
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Re: In a 25x annual expenses savings estimate how do you…

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willthrill81 wrote: Thu Dec 02, 2021 3:36 pm
BernardShakey wrote: Thu Dec 02, 2021 3:34 pm I like this thoughtful reasoning. Would be interested in willthrill81 or others' take on the above.
I did so in this post.

The bottom line is that even with mild inflation, this strategy falls apart if longevity risk shows up, the risk which would presumably be the major factor influencing one to buy a SPIA in the first place.
Thanks, missed that. Isn't HomerJ's point that you build up a savings in the first 10 years since you are withdrawing less from your portfolio than if you had taken the lump sum, and that more than offsets any loss to inflation. That savings then covers the inflation losses for the next 10 years. And with even just a little growth over those 20 years you have a little more to cover further inflation.

I've always thought taking the annuity payments was the better choice because with the lump sum you cannot go out and buy an annuity on the street that matches the company's monthly (even non-COLA'd) payment amount. And now as interest rates rise (?), that lump sum payment amount will decline such that when you take it, it will buy even less of an annuity payment. Right ?
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Re: In a 25x annual expenses savings estimate how do you…

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wrongfunds wrote: Thu Dec 02, 2021 4:35 pm One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP. For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR. The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different. We have to account for the taxes on the pension+ssa+swr and not just swr which we sort of do if we subtract pension and ssa from the expense number.

To put it differently, somebody who still has the same portfolio but has real expenses of $95K per year and has no pension nor ssa (or very meager) would be paying peanuts in taxes compared to OP.

In retrospect, that is obvious but it gets overlooked in napkin math. Would taxation be different on whether he took the pension or lumpsum? Only if his expenses were to go down, then that pension sort of becomes forced virtual RMD, correct? If he needs the money, then it makes no difference.

Am I making any sense?
Yes, it's a very good point.
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Re: In a 25x annual expenses savings estimate how do you…

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BernardShakey wrote: Thu Dec 02, 2021 4:47 pm
willthrill81 wrote: Thu Dec 02, 2021 3:36 pm
BernardShakey wrote: Thu Dec 02, 2021 3:34 pm I like this thoughtful reasoning. Would be interested in willthrill81 or others' take on the above.
I did so in this post.

The bottom line is that even with mild inflation, this strategy falls apart if longevity risk shows up, the risk which would presumably be the major factor influencing one to buy a SPIA in the first place.
Thanks, missed that. Isn't HomerJ's point that you build up a savings in the first 10 years since you are withdrawing less from your portfolio than if you had taken the lump sum, and that more than offsets any loss to inflation. That savings then covers the inflation losses for the next 10 years. And with even just a little growth over those 20 years you have a little more to cover further inflation.
It isn't much 'savings'. In the example I showed above, it was only $60k in the first 9 years, assuming 2% inflation. That isn't enough to cover the shortfall if longevity risk shows up and you live more than 30 years, even if you get great returns on that $60k. In other words, if the longevity risk you bought the SPIA for shows up, you're almost certainly worse off with the SPIA versus an invested portfolio.
BernardShakey wrote: Thu Dec 02, 2021 4:47 pm I've always thought taking the annuity payments was the better choice because with the lump sum you cannot go out and buy an annuity on the street that matches the company's monthly (even non-COLA'd) payment amount.
But in this case, you could get an annuity on the open market every bit as good as what the OP could get.
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Re: In a 25x annual expenses savings estimate how do you…

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HomerJ wrote: Thu Dec 02, 2021 5:05 pm
wrongfunds wrote: Thu Dec 02, 2021 4:35 pm One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP. For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR. The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different. We have to account for the taxes on the pension+ssa+swr and not just swr which we sort of do if we subtract pension and ssa from the expense number.

To put it differently, somebody who still has the same portfolio but has real expenses of $95K per year and has no pension nor ssa (or very meager) would be paying peanuts in taxes compared to OP.

In retrospect, that is obvious but it gets overlooked in napkin math. Would taxation be different on whether he took the pension or lumpsum? Only if his expenses were to go down, then that pension sort of becomes forced virtual RMD, correct? If he needs the money, then it makes no difference.

Am I making any sense?
Yes, it's a very good point.
Would it be outrageous to take the lump sump but immediately start doing very aggressive Roth conversion using that money? Or that still does NOT work if OP's real expenses are indeed $215K then the conversion happens at very high tax cost?
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Re: In a 25x annual expenses savings estimate how do you…

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As we see with the most recently released I Bond/inflation numbers, it seems assuming 2-4% inflation is a risk and makes the lump sum the much more attractive option.
Interesting to me that one with over $5 million isn't F.I. yet we have less than $1 million and are F.I. And ten years younger at that.
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Re: In a 25x annual expenses savings estimate how do you…

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chipperd wrote: Thu Dec 02, 2021 5:24 pm Interesting to me that one with over $5 million isn't F.I. yet we have less than $1 million and are F.I. And ten years younger at that.
He spends more than you. Simple as that.
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Re: In a 25x annual expenses savings estimate how do you…

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HomerJ wrote: Thu Dec 02, 2021 5:34 pm
chipperd wrote: Thu Dec 02, 2021 5:24 pm Interesting to me that one with over $5 million isn't F.I. yet we have less than $1 million and are F.I. And ten years younger at that.
He spends more than you. Simple as that.
And who is claiming he is NOT FI?
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Re: In a 25x annual expenses savings estimate how do you…

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wrongfunds wrote: Thu Dec 02, 2021 4:35 pm One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP. For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR. The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different. We have to account for the taxes on the pension+ssa+swr and not just swr which we sort of do if we subtract pension and ssa from the expense number.

To put it differently, somebody who still has the same portfolio but has real expenses of $95K per year and has no pension nor ssa (or very meager) would be paying peanuts in taxes compared to OP.

In retrospect, that is obvious but it gets overlooked in napkin math. Would taxation be different on whether he took the pension or lumpsum? Only if his expenses were to go down, then that pension sort of becomes forced virtual RMD, correct? If he needs the money, then it makes no difference.

Am I making any sense?
"One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP."
A great observation and absolutely correct.

"For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR."
SWR is a rough calculation on what you can safely draw from the portfolio - that would include all expenses including taxes, health insurance, and everything else on one's list.
"The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different.
Taxes are based on taxable income from the portfolio and all other taxable sources not expenses/draw - these should not be confused.
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Re: In a 25x annual expenses savings estimate how do you…

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smitcat wrote: Thu Dec 02, 2021 6:17 pm
wrongfunds wrote: Thu Dec 02, 2021 4:35 pm One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP. For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR. The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different. We have to account for the taxes on the pension+ssa+swr and not just swr which we sort of do if we subtract pension and ssa from the expense number.

To put it differently, somebody who still has the same portfolio but has real expenses of $95K per year and has no pension nor ssa (or very meager) would be paying peanuts in taxes compared to OP.

In retrospect, that is obvious but it gets overlooked in napkin math. Would taxation be different on whether he took the pension or lumpsum? Only if his expenses were to go down, then that pension sort of becomes forced virtual RMD, correct? If he needs the money, then it makes no difference.

Am I making any sense?
"One of the interesting thing that came out of this saga is that napkin calculations for taxes do get little bit tricky for OP."
A great observation and absolutely correct.

"For example, if OP really has his actual expenses as $215K, then he does need to gross a much larger number than the one based on the portfolio SWR."
SWR is a rough calculation on what you can safely draw from the portfolio - that would include all expenses including taxes, health insurance, and everything else on one's list.
"The taxes on being able to spend 215K vs drawing only 80K from portfolio will be hugely different.
Taxes are based on taxable income from the portfolio and all other taxable sources not expenses/draw - these should not be confused.
If you want to be really pedantic about it SWR is a rough calculation of what maximum amount one can safely draw from the portfolio - what you do with that money is irrelevant. You can use it for your needed expenses or pay taxes or you can take the stack of bills and light it up on fire. Taxes you pay depend upon not just that SWR amount but lots of other things as you mentioned.

The point was we glibly subtract SS+Pension from the expense side without considering the tax bite in the napkin calculation. For OP with significant pension+SS, it becomes little bit more involved.
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Re: In a 25x annual expenses savings estimate how do you…

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wrongfunds wrote: Thu Dec 02, 2021 6:17 pm
HomerJ wrote: Thu Dec 02, 2021 5:34 pm
chipperd wrote: Thu Dec 02, 2021 5:24 pm Interesting to me that one with over $5 million isn't F.I. yet we have less than $1 million and are F.I. And ten years younger at that.
He spends more than you. Simple as that.
And who is claiming he is NOT FI?
Settle with the CAPS.
The OP did initially but then I see he later corrected his spending needs.
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Re: In a 25x annual expenses savings estimate how do you…

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HomerJ wrote: Thu Dec 02, 2021 5:34 pm
chipperd wrote: Thu Dec 02, 2021 5:24 pm Interesting to me that one with over $5 million isn't F.I. yet we have less than $1 million and are F.I. And ten years younger at that.
He spends more than you. Simple as that.
That simple choice is what is interesting to me; the decision to choose stuff over time and autonomy.
Budgets, from gov't, non profit, corp down to the personal are value statements. Literally what an entity or individual values.
Interesting from that standpoint to me, but perhaps not if one only looks at spending as numbers.
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