Not sure if this is the right/best thread, but seemed the best. I appreciate the efforts to keep things simple, and so 25x your annual spending is a great starting point. But so many people, in fact the vast majority, are going to have sources of income beyond their investments. The FI community is likely to have folks with rental income, residuals from previous work, perhaps a pension, and certainly a majority (in the US) are going to have social security. We need to explain to everyone, including and especially newcomers, that your investments need to cover 25x of your remaining expenses that aren't covered by other income sources. If your annual expenses are $80K, but you're going to get $20K in social security and $10K in rental income, you only need to cover $50K annually from investments; hence you need only 25x $50K. Of course it's even more nuanced than that because some income sources like social security or a pension might only kick in later in your retirement. But Choose FI is a place where people come because they are equally as or even more scared of running out of time as they are of running out of money. I want us to make sure people aren't spending years working to earn and save money they don't need because they aren't calculating correctly. Can we just add a second half of the sentence: Calculate your projected annual expenses for the years you'll be in retirement, subtract your anticipated income from sources like social security, pension, rental income, etc., then save and invest to reach 25x of the remaining amount.
New to Retirement Withdrawal Strategies?
Read our Complete Retirement Withdrawal Strategies Guide →Calculating your FI number, can we please be more nuanced?
Replies (5)
zvarcx
1 year ago
I think the "25x annual spending" is a great rule of thumb because it's so simple. Like you said, this is targeting people new to FI. Those of us who've been on the journey for years have discovered the nuance that comes with the "4% rule of thumb." I don't think that there's a large overlap between people new to FI and those who have $10k in net rental income; for that small sliver in the venn diagram, I think those people would quickly discover how nuance plays a role in cash flow, and add a new dimension to their current retirement projections. Likewise, only 10% of Americans currently working in the private sector participate in an employer pension plan[1]; trying to optimize for edge cases here leads to complexity. The implicit assumption here is that most newcomers don't have real estate, don't have their own business, and are just starting with a small retirement portfolio, nothing at all, or perhaps a mountain of debt (student loans, medical bills, consumer credit, etc.).
The reason I think the 25x calculation is so powerful is that it immediately paints a picture of what that goal post / milestone looks like. It is trying to create that light bulb moment - "wow, it really is possible" and "I don't have to work until I die" - which the kind of pivotal shift in preconceived notions and mental models that I believe this rule aims to achieve. Most newcomers have years, maybe decades, ahead of them before retirement. This is the window in which those newcomers learn more, get more invested (hehe) in the journey, and learn more to eventually become FI experts. For the same reason we don't dive into sequence of returns risk immediately, or dive right into tax optimization strategies, we're trying to gently bring people rather than scare them off; too much data can be overwhelming for newcomers, and I don't want to see people throw their hands up in frustration and think "The Wall Street companies are right! This is too hard for any one person!"
The most common follow up question I've heard from those new to FI is "how long does it take to get there?" This is due to explaining the 4% rule and how it comes from the Trinity Study and a safe withdrawal rate. This is another ballpark question, with ballpark answers that fall in the range of years rather than minutes - there's an implicit understanding that this isn't accurate to the day, and outside factors can influence the timeline. It will be up to the newcomers to determine what to pursue, both in terms of discussion and ideas, but also with increasing their savings rate. As the topic starts from a nebulous concept and gets defined details into a concrete plan, it's at that time where nuance with pensions, withdrawal strategies, and other details come into play. I'd point to the enduring popularity of Mr. Money Mustache's "The Shockingly Simple Math Behind Early Retirement" article[2], even though it was published a decade ago, resonates so strongly with people new to FI.
Perhaps a simpler addendum might work?
"To calculate your FI number, multiply your yearly expenses by 25. But personal finance is personal, so adjust accordingly."
[1] https://scholarship.law.georgetown.edu/legal/50/
[2] https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
BostonFI
1 year ago
Jonathan commented yesterday in the main feed that they are planning a more in-depth FI calculator/survey with the kinds of nuances you describe. It sounds like they have lots of developments in the works for this new platform 🥳
kindaFI
1 year ago
I agree your sentiments and also with @TannerW. Unfortunately, the whole subject is simply more nuanced than a sentence or two can really capture. The 25x is really a starting point to begin the conversation. After that you can consider other reliable sources of lifetime income and/or adjustments (30x, 33x, portfolio allocations, variable withdrawals) to try to compensate for sequence-of-return risk in long periods of independence. I think simple 25x calculators likely do need to list the underlying assumptions and include comments about what the user should consider in their own situation.
TannerW
1 year ago
I think the 25x is a good starting point as something to aim for, but anyone looking into retiring early should do a lot of research and thinking into variable withdrawal strategies. With a long retirement, sequence of returns can be especially damaging, so having flexibility in withdrawals is a must in my opinion.