Author Topic: 4% Rule Question -- Today's vs. Retirement Dollars, Percent vs. Constant Number  (Read 1404 times)


  • Stubble
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Question 1:

If you are not going to have enough money to retire UNTIL your actual retirement age, do you multiply your current expenses times twenty-five -or- do you multiple how much your current expenses will be in retirement (adjusted for inflation) times twenty five?

For example:

Current Expenses Year 2016: $20,000  [This means you will need 25 x $20,000 = $500,000]

Value of $20,000 in 45 years when retiring considering 3% inflation: $75,631 [This means you will need 25 x 75,631 = $1,890,775]

That is a huge difference so I am asking this question!  haha.

I think the answer is that you if you can get $500,000 saved during the time when the value of your expenses is $20,000, then $500,000 is all you need.  BUT, if you cannot get the 500k saved while your expenses are 20k, then the goal post is going to keep moving (not because your expenses increase, but because they cost more due to inflation)?????

Question 2:

If a person would like to save an equal amount per year in order to arrive at the '25 Times' number at retirement age, how do they go about figuring out how much per year to contribute?  Would you choose an exact number that would lead you to your goal -or- would you choose a percentage of income?

For instance, using a compound interest calculator, if a person needs 1 million in order to retire, over 45 years, they would need to add a total of $2592 per year (at 8% return) = $1,000,000 are retirement age.  This would mean that the piece of your take-home pay over the years that went to retirement would actually be less and less because $2592 in 2016 is going to be worth a lot more than $2592 in 20 years.  It would be easier to save for retirement, the older you got.

Or, would you simply always put in 15% of your income or some other percentage (that would rise as your income rose).

Thank you, thank you!

p.s. I know the answer is 'save as much as you can' and 'get to FIRE as fast as possible.'  But, I ask these nuanced questions so I can more fully understand the 25X rule, etc.  Thank you.


  • Walrus Stache
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There are some assumptions in the planning.

1) Your wages will generally keep pace with inflation. 
2) The stock market has historically returned around 7% above inflation. 

So, when doing basic calculations, you can use today's dollars for most things because those two sources of income are expected to keep pace with inflation.

So, too, will most of your expenses.   One notable and important exception would be a long term fixed interest mortgage.    The Principal and Interest on the mortgage will stay the same which makes it relatively cheaper to pay off as time goes by.

If you expect to have expenses that will go up faster than inflation (medical care comes to mind), you'll need to factor that in.   Ditto if you have income that won't keep up with inflation.   For example, if you sold a house you used to own to a family member on a 30 year fixed interest loan, that money won't buy as much in 30 years.

I own some farmland and some rental properties free and clear.   The rents and expenses will go up with inflation so that's a wash.   I don't expect my community to go into a big boom and jack up real estate prices big time, so I only expect it to go up with inflation.   So, again, a wash.   If I held property in DC, San Francisco, Seattle, etc., I could expect it to go up way faster than inflation.  But even then I could basically ignore inflation and just estimate how much more it would be worth in today's dollars.

Hope that helps.  Basically, many people can ignore inflation in their calculations.


  • Stubble
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If my wage is going to go up with inflation, then I need to base the amount contributed as a percent of income?  How do you determine that percent?