How do you calculate how many X expenses you have?

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tryingtogetahead
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How do you calculate how many X expenses you have?

Post by tryingtogetahead »

I do not understand how you technically and realistically calculate the amount of expenses you have. Many BHs throw around a lot of numbers but I don’t know how realistic they are because you can’t spend down your home to $0. Plus your retirement funds aren’t accessible until 59.5 if you retire early (I know there is a loophole to get around this but I’m ignoring it for the moment). DW and I have a NW of about $4.7mm and our normal expenses are roughly $110,000 per year (there have been exceptions but I am averaging). This implies we currently hold 42x expenses but this is misleading bc 750k is tied up in real estate and is not accessible without a sale. Only 2.3mm of the 4.7mm is held in a taxable account that we can spend down if we retired today. Does that mean we have 20x expenses? If we had the same exact NW and paid off our mortgage, that means we have less (even though expenses go down, the top like would drop a lot)?
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Re: How do you calculate how many X expenses you have?

Post by anon_investor »

tryingtogetahead wrote: Sun Jul 25, 2021 11:13 pm I do not understand how you technically and realistically calculate the amount of expenses you have. Many BHs throw around a lot of numbers but I don’t know how realistic they are because you can’t spend down your home to $0. Plus your retirement funds aren’t accessible until 59.5 if you retire early (I know there is a loophole to get around this but I’m ignoring it for the moment). DW and I have a NW of about $4.7mm and our normal expenses are roughly $110,000 per year (there have been exceptions but I am averaging). This implies we currently hold 42x expenses but this is misleading bc 750k is tied up in real estate and is not accessible without a sale. Only 2.3mm of the 4.7mm is held in a taxable account that we can spend down if we retired today. Does that mean we have 20x expenses? If we had the same exact NW and paid off our mortgage, that means we have less (even though expenses go down, the top like would drop a lot)?
I just count liquid investments and cash. So I would exclude real estate, personal property, 529 plans, etc.
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Re: How do you calculate how many X expenses you have?

Post by JoMoney »

You can calculate it based on whatever assets you want, but they are all available to you, just with various tax implications.
You can spend down your home through a HELOC, but that's probably not a good idea relative to not needing to realize taxable investment gains to pay the interest.
There's no "loophole" necessary to get at your retirement funds before 59.5, there's just a 10% penalty for doing so before then. There are several loopholes to avoid the 10% penalty.
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Re: How do you calculate how many X expenses you have?

Post by SnowBog »

Most people don't include illiquid assets - like homes - in X, only liquid assets.

The amount in taxable vs. retirement accounts generally* doesn't factor in... It's expected people have (or build) a plan for their retirement, including how to access retirement accounts before 59.5 (if needed).

* I think some people however apply a "discount" to their pre-tax accounts, as an offset against taxes. Personally, I do it the other way and included taxes in my expenses...

For me though, my bigger issue is figuring out X when we have future "income" such as social security, pensions, [not us, but maybe for others] rental income, etc. Our current estimates are that when we hit 70 (delayed claiming) our "income" will be roughly equal our "expenses" - so we'll have a very high X saved... But if we retire early (with no income), our X is much smaller. The reality is somewhere between the two...
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Re: How do you calculate how many X expenses you have?

Post by JS-Elcano »

tryingtogetahead wrote: Sun Jul 25, 2021 11:13 pm I do not understand how you technically and realistically calculate the amount of expenses you have. Many BHs throw around a lot of numbers but I don’t know how realistic they are because you can’t spend down your home to $0. Plus your retirement funds aren’t accessible until 59.5 if you retire early (I know there is a loophole to get around this but I’m ignoring it for the moment). DW and I have a NW of about $4.7mm and our normal expenses are roughly $110,000 per year (there have been exceptions but I am averaging). This implies we currently hold 42x expenses but this is misleading bc 750k is tied up in real estate and is not accessible without a sale. Only 2.3mm of the 4.7mm is held in a taxable account that we can spend down if we retired today. Does that mean we have 20x expenses? If we had the same exact NW and paid off our mortgage, that means we have less (even though expenses go down, the top like would drop a lot)?
I only count assets that are available to me at the point of retirement. This never includes the equity in my home because I do not intend to sell it. Since I desire to retire at 59 all my retirement accounts will be available to me for withdrawal, but that would not be the case if I wanted to retire at 50. I plan my retirement years in "financial stages": 59-65 (pre-Medicare), 66-70 (pre-SS), and 71- > 100, with different expense expectations and income streams. So, in your case, yes, if you retired now with the mortgage and without intentions to sell the house you have 20x.
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Re: How do you calculate how many X expenses you have?

Post by SnowBog »

More specifically, if $110,000 includes your taxes, healthcare, etc., my impression is you've saved roughly 35.9X.

Again, ignore home value, so $4.7M - $750k = $3.95M. Divide that by $110k.
tryingtogetahead wrote: Sun Jul 25, 2021 11:12 pm DW and I have a NW of about $4.7mm and our normal expenses are roughly $110,000 per year (there have been exceptions but I am averaging). This implies we currently hold 42x expenses but this is misleading bc 750k is tied up in real estate and is not accessible without a sale.
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Re: How do you calculate how many X expenses you have?

Post by HomerJ »

I don't count home equity, although I know it's there if I needed it.

You have 2.3 million in taxable accounts? Isn't that enough to get you to 59.5, and then you can spend your tax-deferred money.

Just subtract your home equity from your 4.7 million... So you have around $4 million or around 36x expenses

How old are you? Sounds like your withdrawal rate, pulling $110,000 from $4 million would be around 2.75%

You can retire today.
Last edited by HomerJ on Sun Jul 25, 2021 11:40 pm, edited 1 time in total.
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Watty
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Re: How do you calculate how many X expenses you have?

Post by Watty »

You are likely overthinking this.

The "X" times expenses is pretty meaningless since you will have different expenses in different phases of retirement.
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Re: How do you calculate how many X expenses you have?

Post by SnowBog »

But to answer your question differently, X is really just a "simple" way to have a "rule of thumb" comparison. The oft cited 25X is really just the inverse of 4% SWR.

IMHO what's more important is your plan.

Maybe you plan on living very well when you retire, lots of travel, etc. - that needs to be reflected in your plan. Maybe you'll scale back in later years, that needs to be reflected in your plan.

How detailed you want to get is up to you...
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Re: How do you calculate how many X expenses you have?

Post by HomerJ »

Watty wrote: Sun Jul 25, 2021 11:39 pm You are likely overthinking this.

The "X" times expenses is pretty meaningless since you will have different expenses in different phases of retirement.
I'm confused by these two statements.

The second statement says he needs to think about it a lot more, but the first statement says he's overthinking it..

Which is it?
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Re: How do you calculate how many X expenses you have?

Post by MoonOrb »

I would only use liquid assets as others have mentioned. YMMV if you plan to sell your real estate, I guess, but I wouldn't (and don't) include home equity when I am figuring out 'x expenses.'

Right now, you have about 35x excluding your real estate equity. You also have 21x in taxable accounts. You don't say how old you are, but is 21x expenses not enough to bridge the gap to the point where you can make penalty-free withdrawals from tax advantaged accounts? There are, of course, other ways to withdraw some of those funds as has been mentioned as well.

The key for me with these calculations is trying to really figure out what X is. X has to include all taxes you'll pay, total health care expenditures, account for expensive but infrequent hits like major home repairs, car purchases, etc.
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Re: How do you calculate how many X expenses you have?

Post by JS-Elcano »

tryingtogetahead wrote: Sun Jul 25, 2021 11:12 pm I do not understand how you technically and realistically calculate the amount of expenses you have. Many BHs throw around a lot of numbers but I don’t know how realistic they are because you can’t spend down your home to $0. Plus your retirement funds aren’t accessible until 59.5 if you retire early (I know there is a loophole to get around this but I’m ignoring it for the moment). DW and I have a NW of about $4.7mm and our normal expenses are roughly $110,000 per year (there have been exceptions but I am averaging). This implies we currently hold 42x expenses but this is misleading bc 750k is tied up in real estate and is not accessible without a sale. Only 2.3mm of the 4.7mm is held in a taxable account that we can spend down if we retired today. Does that mean we have 20x expenses? If we had the same exact NW and paid off our mortgage, that means we have less (even though expenses go down, the top like would drop a lot)?
I am ~10 years away from my desired retirement age and feel that my current expenses are pretty much what they will be in retirement minus my mortgage payment plus more international travel. Since I am quite confident in my expenses now, I can plan on my retirement budget and needed funds. I feel quite comfortable with the early retirement years, but less so for the later years when I might or might not need to move into assisted living or a nursing home, or need in-home care for the longer term. There is no way my expenses in my 20s or 30s would have been useful for retirement planning.
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Re: How do you calculate how many X expenses you have?

Post by 22twain »

HomerJ wrote: Sun Jul 25, 2021 11:37 pm How old are you? Sounds like your withdrawal rate, pulling $110,000 from $4 million would be around 2.75%
To elaborate on this a bit, it's generally accepted that an initial portfolio withdrawal rate of 3% per year, with the dollar value adjusted for inflation thereafter regardless of the ups and downs of the markets (at least insofar we we've seen in the past 150 years or so in the US), can be sustained indefinitely without depleting the portfolio. Some put this rate as high as about 3.3%. These translate to a portfolio size of about 30X to 33X expenses.

To see more discussion of this, try a forum search for "perpetual withdrawal rate" or "PWR".

Whenever you start collecting Social Security, your portfolio withdrawal need will decrease, which gives you an additional safety margin.
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Re: How do you calculate how many X expenses you have?

Post by oldcomputerguy »

tryingtogetahead -- I merged your two threads asking this question into one, to keep the responses together.
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Re: How do you calculate how many X expenses you have?

Post by AnEngineer »

A few responses say to exclude real estate, but I believe they just mean the equity in your home. If you have investment real estate, you should include that.

Keep in mind that it's retirement expenses that matter. Taxes and health insurance are likely particularly different than when working.
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Re: How do you calculate how many X expenses you have?

Post by buystoys »

I tracked our expenses for many years prior to retirement. For ease of use, I used those same numbers for the first couple of years after retirement. We were spending about the same, but the categories were different. I adjusted our budget based on the actuals for the first couple of years. We've underspent our budget most years since retirement, but I don't tighten it up as we don't need to. We still "make" more than we spend.
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Re: How do you calculate how many X expenses you have?

Post by jebmke »

I only include liquid assets.
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Re: How do you calculate how many X expenses you have?

Post by RickBoglehead »

HomerJ wrote: Sun Jul 25, 2021 11:37 pm You have 2.3 million in taxable accounts? Isn't that enough to get you to 59.5, and then you can spend your tax-deferred money.
This ^^^.
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Re: How do you calculate how many X expenses you have?

Post by LeftCoastIV »

For taxable accounts, I would take a “haircut” on your assets (or add a buffer to withdrawals, same thing) for taxes on the capital gains. It’s worth familiarizing yourself with the 0% and 15% capital gains tax brackets, to estimate your potential taxes in order to generate $110k in spendable each year. Remember that cost basis isn’t taxed, only gains.
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Re: How do you calculate how many X expenses you have?

Post by Watty »

HomerJ wrote: Sun Jul 25, 2021 11:42 pm
Watty wrote: Sun Jul 25, 2021 11:39 pm You are likely overthinking this.

The "X" times expenses is pretty meaningless since you will have different expenses in different phases of retirement.
I'm confused by these two statements.

The second statement says he needs to think about it a lot more, but the first statement says he's overthinking it..

Which is it?
I do not see there the second statement was saying that they needed to think more about it but what I was trying to say was that in the equation "Investments/yearly expenses" the yearly expenses are so variable and unpredictable that the end result is not very useful.
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Re: How do you calculate how many X expenses you have?

Post by MikeG62 »

I only include liquid assets. I do not include the real estate (home) we live in, but might include real estate if I owned rental property. I don't discount the value of our tax deferred, but rather I include income taxes in our expenses.
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Re: How do you calculate how many X expenses you have?

Post by HomerJ »

Watty wrote: Mon Jul 26, 2021 8:02 am
HomerJ wrote: Sun Jul 25, 2021 11:42 pm
Watty wrote: Sun Jul 25, 2021 11:39 pm You are likely overthinking this.

The "X" times expenses is pretty meaningless since you will have different expenses in different phases of retirement.
I'm confused by these two statements.

The second statement says he needs to think about it a lot more, but the first statement says he's overthinking it..

Which is it?
I do not see there the second statement was saying that they needed to think more about it but what I was trying to say was that in the equation "Investments/yearly expenses" the yearly expenses are so variable and unpredictable that the end result is not very useful.
I don't agree with you that yearly expenses are wildly variable and unpredictable. There's a core of expenses that very predictable if you've been tracking your bills for a couple of years. The variable expenses can be planned for as well, although those are much rougher numbers.

Can I ask you how you decided when you had enough money to retire if you had no idea how much you were spending since yearly expenses are completely unpredictable? This is a new wrinkle that probably deserves it's own thread. I don't think I've ever heard this opinion before that retirement expenses are basically impossible to predict, so why bother.. Why do you do instead?
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Re: How do you calculate how many X expenses you have?

Post by RickBoglehead »

HomerJ wrote: Mon Jul 26, 2021 8:26 am I don't agree with you that yearly expenses are wildly variable and unpredictable. There's a core of expenses that very predictable if you've been tracking your bills for a couple of years. The variable expenses can be planned for as well, although those are much rougher numbers.

Can I ask you how you decided when you had enough money to retire if you had no idea how much you were spending since yearly expenses are completely unpredictable? This is a new wrinkle that probably deserves it's own thread. I don't think I've ever heard this opinion before that retirement expenses are basically impossible to predict, so why bother.. Why do you do instead?
This ^^^

You still eat groceries in retirement, pay for medical insurance, have property taxes, pay to cut your lawn or fertilize it, ...

I took our expenses, tweaked them, then removed things like income tax (based on salaries) and replaced them with tax based on interest / dividends / capital gains. Remove mortgage payment, taxes, insurance, and then add in the retirement home planned mortgage, taxes, and insurance.

It's quite easy to construct, or destruct, expenses for retirement based on where you're at in life, unless you're 20 years away.

I think too many spend too much time doing whatifs, running models, etc. If you need X years of expenses, once you get passed that and round up and such, enough is enough.
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Re: How do you calculate how many X expenses you have?

Post by Kenkat »

I also would only count liquid assets. If contemplating an early retirement, I would split this into two questions:

1) What will my withdraw rate be in total - expenses / liquid assets?
2) Do I have funds accessible to bridge the gap between early retirement and age 59.5?
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Re: How do you calculate how many X expenses you have?

Post by Jack FFR1846 »

There are big, non-annual expenses that don't fit well into the X expenses theory. For those retiring early, these are important to account for and I would suggest building a spread sheet with annual predictions for expenses, leaving spaces in place for these big expenses like college, buying cars and such.

If you're past that (like I am), I have a listing of expected expenses in retirement. Health insurance and travel expenses are inflated well above what I'm currently paying. Other things are pretty set and periodic.

As an example, my predicted retirement expenses will be $67,016.00. My investments spread sheet show my spendable balance to be (at this second) $3,526,850.38. My "times spending" number (on my spread sheet) is simply that $67k divided by the three and a half mil and comes out to 52.63.

My home and "things" value doesn't figure into this anywhere. If you have a mortgage or loans, then that gets lumped into your spending, because until you're out from under those debts, you need to pay them. Sure, I could consider the house value towards spending at some point in the future, but I have zero intent to leave the house to "downsize". Moving and transaction expenses, even moving to a lower cost area are so high, I'd never actually save any money (I've done the math and looked in locations I'd consider moving to).
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Re: How do you calculate how many X expenses you have?

Post by jebmke »

LeftCoastIV wrote: Mon Jul 26, 2021 7:56 am For taxable accounts, I would take a “haircut” on your assets (or add a buffer to withdrawals, same thing) for taxes on the capital gains. It’s worth familiarizing yourself with the 0% and 15% capital gains tax brackets, to estimate your potential taxes in order to generate $110k in spendable each year. Remember that cost basis isn’t taxed, only gains.
maybe; I lived off my assets for the first 10 years (before pension) and never paid any CG; I had harvested losses like crazy so they were available to use to offset gains. Now that my pension has started I don't plan to ever sell equity again.
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Re: How do you calculate how many X expenses you have?

Post by RickBoglehead »

Jack FFR1846 wrote: Mon Jul 26, 2021 9:09 am There are big, non-annual expenses that don't fit well into the X expenses theory. For those retiring early, these are important to account for and I would suggest building a spread sheet with annual predictions for expenses, leaving spaces in place for these big expenses like college, buying cars and such.

If you're past that (like I am), I have a listing of expected expenses in retirement. Health insurance and travel expenses are inflated well above what I'm currently paying. Other things are pretty set and periodic.

As an example, my predicted retirement expenses will be $67,016.00. My investments spread sheet show my spendable balance to be (at this second) $3,526,850.38. My "times spending" number (on my spread sheet) is simply that $67k divided by the three and a half mil and comes out to 52.63.
This is a great illustration of the point I was making, and that others have made, that when you reach a certain point, fine-tuning or fretting over this expense or that expense is simply a waste of time.

52.6 times expenses. That's probably 15 - 20 years more than you need. "Oh no, I spent $40,000 instead of $22,000 on travel expenses this year". So what? Now you've only got 51.47 years of expenses...

People analyze and analyze and analyze. There are changes that happen, and other things. I didn't budget to buy a car this month at all. I'm spending a large amount on a car payment, at 0.9% interest, that isn't in my budget.

If I take our budgeted retirement expenses, which include $25,000 a year for "whatever", I come up with 37 years of spending. That's a few more years then we need. And our budget has so much rounding up in it, not counting the $25,000 a year, that we'll be fine no matter what.

Edit - and I ignored Social Security (pension is for one of us only, and is paltry) in the above calculation. Social Security will pay ~ 40% of annual expenses starting at age 70 for me. So we're well into high 40 years or 50 years of expenses.
Last edited by RickBoglehead on Mon Jul 26, 2021 10:15 am, edited 1 time in total.
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Re: How do you calculate how many X expenses you have?

Post by benway »

.....
Last edited by benway on Wed Aug 03, 2022 8:06 am, edited 1 time in total.
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Re: How do you calculate how many X expenses you have?

Post by HomerJ »

benway wrote: Mon Jul 26, 2021 10:01 am How would one include Social Security and any pension into the X number?

Example scenario:
> Retiree turns 60 tomorrow and plans to retire immediately and take SS and will recieve a pension at 65.
> at age 65, it's estimated they will receive a combination of $50,000 per year in Social Security and pension.
> estimated yearly retirement expenses to age 100:
- 60-64 (4 years): $100,000/year
- 65-100 (35 years): $50,000/year (at age 65, $50,000 is coming from Social Security and pension.)
> retirement portfolio value at retirement: $2,500,000

Given the above, how would you solve for X?
I would just do two buckets

$400,000 to get you through 60-64.

Then $2,100,000 left that you will need to pull $50,000 a year from for the rest of your life...

So 42x expenses
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Re: How do you calculate how many X expenses you have?

Post by RickBoglehead »

benway wrote: Mon Jul 26, 2021 10:01 am How would one include Social Security and any pension into the X number?

Example scenario:
> Retiree turns 60 tomorrow and plans to retire immediately and take SS and will recieve a pension at 65.
> at age 65, it's estimated they will receive a combination of $50,000 per year in Social Security and pension.
> estimated yearly retirement expenses to age 100:
- 60-64 (4 years): $100,000/year
- 65-100 (35 years): $50,000/year (at age 65, $50,000 is coming from Social Security and pension.)
> retirement portfolio value at retirement: $2,500,000

Given the above, how would you solve for X?
Adjust the expenses for the years of Social Security and pension to be net of those.
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Re: How do you calculate how many X expenses you have?

Post by HomeStretch »

benway wrote: Mon Jul 26, 2021 10:01 am How would one include Social Security and any pension into the X number?

Example scenario:
> Retiree turns 60 tomorrow and plans to retire immediately and take SS and will recieve a pension at 65.
> at age 65, it's estimated they will receive a combination of $50,000 per year in Social Security and pension.
> estimated yearly retirement expenses to age 100:
- 60-64 (4 years): $100,000/year
- 65-100 (35 years): $50,000/year (at age 65, $50,000 is coming from Social Security and pension.)
> retirement portfolio value at retirement: $2,500,000

Given the above, how would you solve for X?
I would say the age 60 retiree has 46x saved.
4 years @ $100k (age 60-64)
42 years @ $50k net (age 65+)
46 years = $2.5 million

Looked at another way, a $50k net annual withdrawal rate starting at age 65 from the remaining portfolio at age 65 of $2.1 million (= $2.5 million - 4yrs @ $100k/yr) is ~2.4%, which should be sufficient for the portfolio to survive in perpetuity (i.e. > 46 years).

Both back of the envelope tests show that the person is financially ready to retire. Assuming the $100k/year of expenses is a solid #. Knowing your expense run rate is the key.
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Re: How do you calculate how many X expenses you have?

Post by 59Gibson »

HomerJ wrote: Mon Jul 26, 2021 10:09 am
benway wrote: Mon Jul 26, 2021 10:01 am How would one include Social Security and any pension into the X number?

Example scenario:
> Retiree turns 60 tomorrow and plans to retire immediately and take SS and will recieve a pension at 65.
> at age 65, it's estimated they will receive a combination of $50,000 per year in Social Security and pension.
> estimated yearly retirement expenses to age 100:
- 60-64 (4 years): $100,000/year
- 65-100 (35 years): $50,000/year (at age 65, $50,000 is coming from Social Security and pension.)
> retirement portfolio value at retirement: $2,500,000

Given the above, how would you solve for X?
I would just do two buckets

$400,000 to get you through 60-64.

Then $2,100,000 left that you will need to pull $50,000 a year from for the rest of your life...

So 42x expenses
This is how I look at it. 1 bucket for 46 to 70. And a bucket for around 70+. It becomes tricky accounting for SS and a wife 6 yrs. younger.
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Re: How do you calculate how many X expenses you have?

Post by afan »

For annual expenses, I simply track what we have been spending. We do not have any plans to change our lifestyle once we retire. For retirement planning, I arbitrarily increase annual expenses by 50%. Not because we plan to travel or so forth but because I expect that there will some things we start paying other people to do what we currently do for ourselves. I don't really know what they are and I use a large adjustment to allow a margin of error.

I then plan retirement as if we were not going to use our home as an investment for spending. That makes sense for us, since we plan to stay put. Recognize that many people sell their homes and move when they retire. For those people, whether they should count on spending the proceeds from the sale depends on their future housing plans. If, for example, they plan to rent, then they can use the proceeds to pay rent.

I don't use an X- expenses shortcut to project retirement. I use a more complete approach, trying to account for future income and expenses explicitly. For those who use X-expenses, it is important to remember that guidelines as to how much X you need depend on the age at which you plan to retire. The younger you are, the larger X needs to be.
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queso
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Re: How do you calculate how many X expenses you have?

Post by queso »

I didn't read all the responses, but what I do is look at my net worth minus home equity and then divide that by my average annual spending in Personal Capital for the past few years. I don't differentiate the buckets much, but that might be necessary if you are in a situation where bucket size is vastly different (i.e. 401k is huge and taxable is tiny). I will work through cash and taxable first, tap into 401k, IRA, Roth, etc. when I hit those age milestones and probably do SS at 70.
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Re: How do you calculate how many X expenses you have?

Post by Wanderingwheelz »

Jack FFR1846 wrote: Mon Jul 26, 2021 9:09 am There are big, non-annual expenses that don't fit well into the X expenses theory. For those retiring early, these are important to account for and I would suggest building a spread sheet with annual predictions for expenses, leaving spaces in place for these big expenses like college, buying cars and such.

If you're past that (like I am), I have a listing of expected expenses in retirement. Health insurance and travel expenses are inflated well above what I'm currently paying. Other things are pretty set and periodic.

As an example, my predicted retirement expenses will be $67,016.00. My investments spread sheet show my spendable balance to be (at this second) $3,526,850.38. My "times spending" number (on my spread sheet) is simply that $67k divided by the three and a half mil and comes out to 52.63.

My home and "things" value doesn't figure into this anywhere. If you have a mortgage or loans, then that gets lumped into your spending, because until you're out from under those debts, you need to pay them. Sure, I could consider the house value towards spending at some point in the future, but I have zero intent to leave the house to "downsize". Moving and transaction expenses, even moving to a lower cost area are so high, I'd never actually save any money (I've done the math and looked in locations I'd consider moving to).
If you dined our one less time for breakfast in retirement you could round down your retirement expenses to $67,000.00 for simplicity’s sake. Just tossing out an idea from the 3 Fund cheap seats. :sharebeer
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Re: How do you calculate how many X expenses you have?

Post by invest4 »

RickBoglehead wrote: Mon Jul 26, 2021 8:35 am I think too many spend too much time doing whatifs, running models, etc. If you need X years of expenses, once you get passed that and round up and such, enough is enough.
Generally agreed (too many what ifs, models, etc.). For myself, I simply chose a desired income @ 25x to define a reasonable goal at retirement (100K per year / $2.5M). I track expenses annually, but do not get too much in the weeds in doing so...a reasonable approximation with readily available information is good enough for us. Otherwise, we continue to live beneath our means, saving what we reasonably can / makes sense to us while still enjoying life (thank you wife for helping me to remember the importance of including the last part). As long as we remain on track, it should be fine. If life throws a curveball (ex: job loss) or expense needs appear to be consistently much higher than expected...particularly after kids are on their own and expenses should be more consistent, we will adjust accordingly. YMMV.

In regard to OP, I would keep in mind the assets in real-estate, but would not include them per se as part of my retirement planning (income needed to meet your expense needs). Otherwise, develop something reasonable for your situation and keep moving positively forward.

Best wishes.
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Re: How do you calculate how many X expenses you have?

Post by LeftCoastIV »

afan wrote: Mon Jul 26, 2021 11:55 am For annual expenses, I simply track what we have been spending. We do not have any plans to change our lifestyle once we retire. For retirement planning, I arbitrarily increase annual expenses by 50%. Not because we plan to travel or so forth but because I expect that there will some things we start paying other people to do what we currently do for ourselves. I don't really know what they are and I use a large adjustment to allow a margin of error.
At least for us, moving off of an employer-sponsored health care to our own plan will likely increase costs, potentially substantially. This assumes retirement before Medicare. Your arbitrary 50% buffer may be large enough to include that variable as well though.
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Re: How do you calculate how many X expenses you have?

Post by Harry Livermore »

invest4 wrote: Mon Jul 26, 2021 12:45 pm
Generally agreed (too many what ifs, models, etc.). For myself, I simply chose a desired income @ 25x to define a reasonable goal at retirement (100K per year / $2.5M). I track expenses annually, but do not get too much in the weeds in doing so...a reasonable approximation with readily available information is good enough for us. Otherwise, we continue to live beneath our means, saving what we reasonably can / makes sense to us while still enjoying life (thank you wife for helping me to remember the importance of including the last part). As long as we remain on track, it should be fine. If life throws a curveball (ex: job loss) or expense needs appear to be consistently much higher than expected...particularly after kids are on their own and expenses should be more consistent, we will adjust accordingly. YMMV.

In regard to OP, I would keep in mind the assets in real-estate, but would not include them per se as part of my retirement planning (income needed to meet your expense needs). Otherwise, develop something reasonable for your situation and keep moving positively forward.

Best wishes.
Excellent post and good summary.
Net worth and spendable liquid investments are two different things and, while both can (and should) be calculated, it's helpful to center retirement spending and budgeting around liquid only.
OP, I keep a (fairly) simple 4-page spreadsheet that lists individual assets (funds, ETFs, stocks, bonds, CDs, cash) and individual debt (mortgages etc.) which calculates net worth for any given moment. I include business assets at a de minimis value. I update on Saturday mornings. There are lines that show net worth including everything, net worth minus business assets and primary home, etc. There are lines that show liquid amounts in taxable, tax-deferred, and tax-free, as well as college funds.
For the purposes of your question, I have:
I have a section that sums ONLY the liquid investments (minus college funds), and calculates what a 3% annual draw would be at that moment.
I have a section that sums social security and pensions, date that each starts, and calculates what the annual payout is.
I have a section that sums current real estate rents, and sums for annual gross rents.
At the top of the first page, those three sections sum to show me what a possible "retirement income stream" might be. I list the current IRMAA limit as a benchmark (but have not really thought that through yet since I'm only 55, and don't yet calculate the tax-free versus taxable amount of income)
The value of our home is never included in the income calculation, but is shown as part of our net worth, which are two distinctly different things.
The value of our rental properties is included in both net worth and income calculation; they are both worth something right now as cash, and also worth something as income. If either or both were sold, the resulting cash would be invested in some manner, moved into the liquid investments, and thus into the income calculation via a different path.
If we chose to sell our home (only counted in net worth but not income) and rent housing, we would invest the proceeds from our home, and in that case, net worth would not change, nor might the annual draw (caveat below) but we would suddenly have 45x expenses available (for example) Caveat on the last statement: we would probably have to increase our draw slightly to sufficiently fund rent, of course.
Hope that all makes sense.
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Re: How do you calculate how many X expenses you have?

Post by hvaclorax »

OP,
Put your numbers into the iORP Calculator. I think you’ll see that you are fine. Another way to look at this would be to calculate essential spending. To me that would be the bottom line. I suspect that your numbers would cover that quite easily. On top of essential spending is discretionary fund. That gets a bit more difficult to predict. Some people start with a healthy travel budget.
On the other side of savings is investment return. My big worry was sequence of returns risk where the market dropped or high inflation occurs for many years. Those numbers are also unpredictable so, healthy starting point suck as yours is advised. As others have said above your starting point is quite healthy. I wouldn’t have any concerns with retirement today.
Respectfully HVAC
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Re: How do you calculate how many X expenses you have?

Post by JackoC »

JoMoney wrote: Sun Jul 25, 2021 11:22 pm You can calculate it based on whatever assets you want, but they are all available to you, just with various tax implications.
You can spend down your home through a HELOC, but that's probably not a good idea relative to not needing to realize taxable investment gains to pay the interest.
There's no "loophole" necessary to get at your retirement funds before 59.5, there's just a 10% penalty for doing so before then. There are several loopholes to avoid the 10% penalty.
I agree especially with the first statement, since people *will* 'count' and 'not count' whatever they want regardless of logical arguments to the contrary of their particular method. :happy

On a house you live in, it is one of your assets as a matter of fact, it's not an opinion. The main twist with regard to your own house is if $110k expenses is in a *paid off* house, then expenses after selling the house would be more since you'd have to rent. But that doesn't mean 'the house is not an asset' and as you say HELOC or moreover reverse mortgage could provide real $'s to a person who owns that house not available to a person who doesn't own it. It defies common sense to ignore that difference. And it would be entirely ridiculous not to count rental properties you own. They are less *liquid* than your stocks and bonds, not valueless or why would you have paid for them?

The more relevant issue since, the 'my house is not an asset' fallacy at least tends to go in a conservative direction, is tax. If the $110k is spending after tax (the simplest way to project it into retirement) then the value of tax deferred accounts has be discounted for the taxes you'll pay on withdrawals, and if you'd liquidate taxable assets you have to consider tax on capital gains. That's uncertain because future, but it seems on this forum there's a lot of 'my house doesn't count' vs. counting IRA/401k's at full face value and ignoring cap gains on liquidation of stocks in taxable. I think it would be better to be more realistic about both, house is indeed an asset, but 401k and appreciated taxable assets aren't really worth nominal market value unless you're of modest enough means to expect negligible income taxes in retirement. Somebody with several $mil cannot generally expect that.
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Re: How do you calculate how many X expenses you have?

Post by dbr »

HomerJ wrote: Sun Jul 25, 2021 11:42 pm
Watty wrote: Sun Jul 25, 2021 11:39 pm You are likely overthinking this.

The "X" times expenses is pretty meaningless since you will have different expenses in different phases of retirement.
I'm confused by these two statements.

The second statement says he needs to think about it a lot more, but the first statement says he's overthinking it..

Which is it?
Yes, simple minded indices like that are both overthought and underthought. Perhaps the better term for overthought is working too hard to make something more simple than it really is. It actually takes a lot of confabulation to oversimplify things and still believe in it.
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Re: How do you calculate how many X expenses you have?

Post by SmileyFace »

As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
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Re: How do you calculate how many X expenses you have?

Post by dbr »

SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
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Re: How do you calculate how many X expenses you have?

Post by SmileyFace »

dbr wrote: Tue Oct 05, 2021 10:35 am
SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
I know people do it - but I am not one of them. I don't want spending down my home as part of my plan so it is excluded from all my plans and calculations.
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Re: How do you calculate how many X expenses you have?

Post by HomerJ »

dbr wrote: Tue Oct 05, 2021 10:35 am
SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
Yes it is possible to access some of the wealth in your home by down-sizing or a reverse-mortgage. I consider that my last safety net.

It's not like we completely ignore the value of a paid-off house. Our expenses are lower without a mortgage or rent payments, so it's value gets reflected there.

To rent my house might cost $3000 a month. Instead I own it, free and clear, but still have to pay property tax and insurance and HOA and maintenance, which is about $1000 a month. So my expenses are $2000 a month lower. That's $24,000 a year I'm not spending... which with the 4% "rule" is equal to $600,000...

Which is about how much I paid for my house, coincidently.

So, in my case, at least, it looks like I'm capturing nearly the full value of the house by reducing my retirement expenses.

And I still have the $600,000 safety net sitting there if someday we need that money.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
dbr
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Re: How do you calculate how many X expenses you have?

Post by dbr »

SmileyFace wrote: Tue Oct 05, 2021 11:18 am
dbr wrote: Tue Oct 05, 2021 10:35 am
SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
I know people do it - but I am not one of them. I don't want spending down my home as part of my plan so it is excluded from all my plans and calculations.
It isn't part of a plan; it is an alternative plan for when a person might to choose to relocate, live in a different sort of accommodation, etc. It isn't about spending down your home but rather making positive choices regarding lifestyle.
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Re: How do you calculate how many X expenses you have?

Post by SmileyFace »

dbr wrote: Tue Oct 05, 2021 1:30 pm
SmileyFace wrote: Tue Oct 05, 2021 11:18 am
dbr wrote: Tue Oct 05, 2021 10:35 am
SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
I know people do it - but I am not one of them. I don't want spending down my home as part of my plan so it is excluded from all my plans and calculations.
It isn't part of a plan; it is an alternative plan for when a person might to choose to relocate, live in a different sort of accommodation, etc. It isn't about spending down your home but rather making positive choices regarding lifestyle.
So if it isn't part of a plan why should the OP include it as an asset in his Xexpenses equation? I am not saying it isn't worth something - to Homer's point since my house is paid for it currently represents reduced expenses for me - adding it into my networth would essentially be doublecounting my draw-down equation in some regards.
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Re: How do you calculate how many X expenses you have?

Post by dbr »

SmileyFace wrote: Tue Oct 05, 2021 1:34 pm
dbr wrote: Tue Oct 05, 2021 1:30 pm
SmileyFace wrote: Tue Oct 05, 2021 11:18 am
dbr wrote: Tue Oct 05, 2021 10:35 am
SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
I know people do it - but I am not one of them. I don't want spending down my home as part of my plan so it is excluded from all my plans and calculations.
It isn't part of a plan; it is an alternative plan for when a person might to choose to relocate, live in a different sort of accommodation, etc. It isn't about spending down your home but rather making positive choices regarding lifestyle.
So if it isn't part of a plan why should the OP include it as an asset in his Xexpenses equation? I am not saying it isn't worth something - to Homer's point since my house is paid for it currently represents reduced expenses for me - adding it into my networth would essentially be doublecounting my draw-down equation in some regards.
Because people can have more than one plan depending on what they might choose to do. I should have said not necessarily part of one single plan or of the first plan. I don't know what fraction of retirees die in the home they bought and lived in when in their career. I suspect it might be half and half. Most members of my family retired to different accommodations in retirement than they lived in while employed. Some of these were different owned homes and some have been rentals. It can even happen that the new home is more expensive than the one sold.
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Re: How do you calculate how many X expenses you have?

Post by JackoC »

dbr wrote: Tue Oct 05, 2021 10:35 am
SmileyFace wrote: Tue Oct 05, 2021 10:25 am As others have stated - I only include my retirement investment accounts in calcualtions - not my NW. I don't plan on spending down my home, cars, 529 account, etc while in retirement so why would I include those?
I don't even bother tracking my NW the way a lot of folks here seem to do - doesn't mean much to me.
Lots of people spend down their home by either downsizing, moving to a rental, or at end of life using a facility -- all more or less by intention. It is significant to recognize the reserve of wealth in a home without necessarily trying to incorporate that in a portfolio. The actual mechanics are that one writes out an alternate scenario where the home is sold for liquid assets and the annual expenses are adjusted to include rent and delete homeowning expenses.
I would and do incorporate it in portfolio. Mainly because our house has increased in value a lot, and there's no law of the universe that what goes up can't go down. 'My house isn't an asset' would present a distorted and overly optimistic view of my risk, and it's not surprising it can cause various problems because it's simply a wrong concept. Although a wrong concept which doesn't make much difference either way if your house is a small enough % of your portfolio and/or small enough absolute $ amount. And it's not as bad a mistake generally as another common one here: talking about basically meaningless gross 401k/IRA account balances or gross taxable appreciated asset values without deducting the taxes due if/when you liquidate them (same for capital gains tax on house where applicable).

Otherwise I agree, the home asset might be liquidated over your remaining life or might go to your heirs, charity or the state depending, though that's also like any given mutual fund share which likewise might or might not be liquidated in your remaining life.

The difference is just the really not *so* complicated fact that you consume part of the return on the asset of an owned home as owner imputed rent. Factor that in and everything falls into place with the house correctly viewed as an asset.
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Re: How do you calculate how many X expenses you have?

Post by cshell2 »

I only include retirement accounts in my calculation. No checking or regular savings or kid's college funds or home equity or value of beanie baby collections...
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