I started my journey into questions on retirement finance a little late. So late, in fact that it was well after my career which is why I have not spent much time thinking about "multipliers." These are rules of thumb for how many multiples of your spend rate one needs to have in order to retire. I've seen numbers like 25 or higher tossed around. 25 happens to be the 4% rule (1/.04) where the other, higher, multiples are more conservative reflecting our current environment or maybe younger ages. I have also seen high multiples excoriated for being too conservative and a buzz-kill on retirement planning and consumption. I disagree with the latter comment but let's ignore that debate.
Instead let's say that multiples are merely inverses of spend rates (true) and that they should probably be age and/or risk-aversion tweaked as well. Let's also aver that a conservative result is good if for no other reason that it might be a good starting point to which other considerations can then moderate it later. Let's also assume that my RH40 formula (spendrate = Age/(40-(age/3))) is useful for at least one person in the world (prev posts). Then, if all that is accepted it is easy enough to invert the RH40 rule into an age and risk-aversion adjusted "multiple."
The basic concept in its super reductive form is this:
1. A well known academic researcher in the area of personal and retirement finance systematically simulates a whole bunch of retirement scenarios that cover a broad spectrum of assumptions,
2. The guy in #1 reduces the effort put into #1 into a regression formula that explains a very high percentage of #1's results,
3. A pension expert and comes up with a rule of thumb that is easy to remember, is age adjusted, and that has at least two modes: conservative and risky. He writes an article in a Society of Actuaries newsletter that explains the economic rationale,
4. An amateur hack (me) converts #3 into an alternative single age-and-risk-adjusted rule of thumb formula by going from pretty darn conservative when youngish (say 55-60) to risk accepting when older (say 95) and then sees that the simple formula fits the curve implied by #2 for at least one conservative "success rate" assumption between the ages of 60 and 95,
5. Now invert #4 into a "multiple" rule of thumb. Assume it is pretty conservative so maybe only represents a starting point for discussion. A lot of factors might influence one's judgement on this, the availability of Social Security or other permanent income not the least of them.
The inverted rule of thumb might look like this where A is age:
Instead let's say that multiples are merely inverses of spend rates (true) and that they should probably be age and/or risk-aversion tweaked as well. Let's also aver that a conservative result is good if for no other reason that it might be a good starting point to which other considerations can then moderate it later. Let's also assume that my RH40 formula (spendrate = Age/(40-(age/3))) is useful for at least one person in the world (prev posts). Then, if all that is accepted it is easy enough to invert the RH40 rule into an age and risk-aversion adjusted "multiple."
The basic concept in its super reductive form is this:
1. A well known academic researcher in the area of personal and retirement finance systematically simulates a whole bunch of retirement scenarios that cover a broad spectrum of assumptions,
2. The guy in #1 reduces the effort put into #1 into a regression formula that explains a very high percentage of #1's results,
3. A pension expert and comes up with a rule of thumb that is easy to remember, is age adjusted, and that has at least two modes: conservative and risky. He writes an article in a Society of Actuaries newsletter that explains the economic rationale,
4. An amateur hack (me) converts #3 into an alternative single age-and-risk-adjusted rule of thumb formula by going from pretty darn conservative when youngish (say 55-60) to risk accepting when older (say 95) and then sees that the simple formula fits the curve implied by #2 for at least one conservative "success rate" assumption between the ages of 60 and 95,
5. Now invert #4 into a "multiple" rule of thumb. Assume it is pretty conservative so maybe only represents a starting point for discussion. A lot of factors might influence one's judgement on this, the availability of Social Security or other permanent income not the least of them.
The inverted rule of thumb might look like this where A is age:
RHMultiple = (40/A - 1/3) x 100
or, more accurately, it might look like this:
Multiple = Min[50, RHMultiple]
Behold: an age and risk-aversion-adjusted multiplier rule of thumb.
Postscript 7/6/17:
Reflecting on this further, I realize that this is all a little silly. If the goal is to come up with an age-based rule of thumb that is easy to remember, by creating another formula as a "multiple" version is kinda stupid. Instead of that, just remember the RH40 formula [ A / (40 - A/) ] and if you need a multiple, just invert it [ 1 / RH40 ]. Much much easier to remember.
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