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advisor calculations vs my calculations
Old 05-16-2014, 04:58 PM   #1
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advisor calculations vs my calculations

I know most do not like FAs here but for now we still have one. I'm planning on ER June 2015. I asked our FA to run a calculation and I have run several including FIRECalc, MSN retirement calc, etc. Every time I run it everything looks great at more than anticipated spending range (which is 50-100% higher than current spending levels). Their calculations show us running out of money when DW turns 80 (currently 34) at top end of spending. Am I missing something?

Basic numbers at retirement:

Investable assets 5 mil (>95% is post-tax)
Expected inflation of 3.25%
Expected ROR of 4.5%
Spending 7500 - 10k/mo.
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Old 05-16-2014, 05:06 PM   #2
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I just made a basic run in FireCalc using these parameters:

Portfolio: $5M
Spending: $120K annually
Inflation: 3.5%
AA: 60/40
Period: 50 years

It gave me a 100% chance of success with a very healthy average ending portfolio.

I would think that at a 2.5% SWR, you'd be fine. Of course, FireCalc isn't trying to sell you anything
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Old 05-16-2014, 05:12 PM   #3
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Their calculations show us running out of money when DW turns 80 (currently 34) at top end of spending. Am I missing something?
Many FA's want to keep you dependent on their expert guidance and fear of failure is one way to do that. Pessimistic calculators help retain clients and boost fee income.

Another example of why "most do not like FAs here."
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Old 05-16-2014, 05:18 PM   #4
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Quote:
Originally Posted by Travelwanted View Post
I know most do not like FAs here but for now we still have one. I'm planning on ER June 2015. I asked our FA to run a calculation and I have run several including FIRECalc, MSN retirement calc, etc. Every time I run it everything looks great at more than anticipated spending range (which is 50-100% higher than current spending levels). Their calculations show us running out of money when DW turns 80 (currently 34) at top end of spending. Am I missing something?

Basic numbers at retirement:

Investable assets 5 mil (>95% is post-tax)
Expected inflation of 3.25%
Expected ROR of 4.5%
Spending 7500 - 10k/mo.
If you're paying an FA (that's fine BTW), ask them what assumptions they're using, show them your assumptions and output from FIRECALC and MSN, and ask him/her to explain what's different. They should view it as an opportunity to show you their services are value added. If they blow off your request or try to laugh off FIRECALC/MSN, what are you paying for? They should be providing expertise that you can't begin to provide for yourself.

That said, planning for 50-60 years out is a tall order. The range of possible outcomes is even wider than most 25-35 year retirees. Best of luck...
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Old 05-16-2014, 05:25 PM   #5
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Geeze, if FA is charging 1% on $5 million, that is $50K per year - almost equal partners in retirement.
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Old 05-16-2014, 05:32 PM   #6
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Geeze, if FA is charging 1% on $5 million, that is $50K per year - almost equal partners in retirement.
No, it's graduated down. But, yes, it is a significant amount of $$$.

And, it's pretty much what I was thinking. I will challenge them on it. I am guessing they are putting in very large amounts for college. We have 125k already in 529, but I don't want to overfund. We have already over-projected our spending level to account for shortfalls and surprises.

That actually brings up an interesting point: we are estimating expenses to go up in ER (just to be safe - not based on anything in particular). I wonder how many folks when running calculations actually pick a higher spending rate to be safe?

Thanks for your input folks.
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Old 05-16-2014, 05:37 PM   #7
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Quote:
Originally Posted by Travelwanted View Post
I know most do not like FAs here but for now we still have one. I'm planning on ER June 2015. I asked our FA to run a calculation and I have run several including FIRECalc, MSN retirement calc, etc. Every time I run it everything looks great at more than anticipated spending range (which is 50-100% higher than current spending levels). Their calculations show us running out of money when DW turns 80 (currently 34) at top end of spending. Am I missing something?

Basic numbers at retirement:

Investable assets 5 mil (>95% is post-tax)
Expected inflation of 3.25%
Expected ROR of 4.5%
Spending 7500 - 10k/mo.

Fire your FA. Either he is lying or don't have a clue. Either way, he is (up to) no good.
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Old 05-16-2014, 05:57 PM   #8
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Ask him to explain why a 2.5% WR is not safe (and that totally ignores SS BTW) when it is so much lower than the 4% commonly touted. While I concede that 4% may be a bit high in this environment, 2.5% is plenty safe.

BTW, FWIW your assumptions are much more conservative than mine. I have a 5.5% ROR (historical ROR for a 60/40 AA is ~8.7% so I have haircut it significantly) and a 3% rate of inflation.

I don't see how he could possibly think you don't have enough.

With respect to your question, our expenses are about the same overall excluding travel - we travel mor ebecause we have more free time but it is only 10%-15% higher than our pre-retirement expenses.
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Old 05-16-2014, 06:50 PM   #9
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I think I found the error. I have high confidence that the computer simulation is correct and therefore either the interpretation is incorrect or the input is incorrect in their expression.

Inflation =3.25%
ROR = 4.5%
Net ROR= 1.25%. The annualized return, less inflation factor, is less than the current spending level; Your household is on month #1 is in the hole since interest is determined at the end of year whereas you have already have been spending for the previous 12 months.

Another error is the amount of spending, whether that enjoys being static or also inflates.

And finally- the higher end of the spending is Much higher than the low end.
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Old 05-16-2014, 07:32 PM   #10
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I understand your confusion. I've also seen overly pessimistic results from FA's retirement calculators. Most calculators assume you will continue to travel, eat out, buy new clothes, etc. at the same rate when you are 90 as you do today and assume you want to die with $1M in assets.

I'm also currently pondering the differences between my FA's calculations using and my own. Both of us are using Morningstar. I entered my current portfolio of individual stocks and funds. In Portfolio View, I click on "My Performance". It shows one year trailing returns of 6.72 percent. My FA says the actual performance was 12.62%. Her guess was that Morningstar isn't capturing the dividend payouts. "Many positions are paying dividends, capital gains. I think perhaps you are capturing the growth of the assets but not the income being paid out." She offered to research this for me but I'm reluctant to get too deeply into this as I'm in the process of moving my portfolio to Vanguard. Can anyone tell me if Morningstar leaves out dividends in calculating your portfolio's performance?
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Old 05-16-2014, 07:40 PM   #11
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I think LongPrime has the answer. If your assumption is that you will only earn 1.25% over the inflation rate, then you can't withdraw 2.4% and last forever.

My simple, static interest, calculation says that you run out of money during the 56th year.
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Old 05-16-2014, 10:33 PM   #12
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Another way of looking at the problem is as an investment case -- if the $5 mln is the investment, and spending is $120K (in investment terms, this is the cash flow back to you) inflated at 3.5% over 50 years, the internal rate of return is 4.12% -- in other words that is the minimum return needed to have the "project" "work". Over 60 years the IRR jumps to 4.69%. Obviously IRR calculations don't take sequence of returns into account etc. etc. but I find it is a useful way of evaluating my own strategies and assumptions -- just the way a Board would look at the CEOs latest crazy idea.
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Old 05-16-2014, 10:58 PM   #13
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The number of periods assuming a $5m pv, 1.25% real rate of return and $120k annual payment is 58 years so DW should run out of money when she is 92 (34+58) based on those assumptions.

However, as I said before, your assumptions are ultra conservative. If you increase the real rate of return to 1.5% she runs out of money at 98 and if you increase it to 2.0% she runs out at 120.

I use a 2.5% real rate of return in my plan and that is after haircutting historical ROR by over 3% (from 8.7% to 5.5%).

Plus, if you dump the FA and DIY you return automatically increases, probably by enough to extend her from 92 to way beyond 100 - so dump the FA and the math works.
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Old 05-16-2014, 11:16 PM   #14
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Just a note here on a retirement calculation. Any calculation that has a hope of accounting for historical variability in financial planning uses a technique called Monte Carlo. It is really the only way to get a handle on how random events will affect an outcome. Monte Carlo calculations are widely used in physics, and I spent my graduate student life running them. But they are ideal also for investment planning.

There are many inputs to such a calculation and sometimes small changes can dramatically affect the outcome. For instance:
- is the calculation using an average value for inflation, or historical values?
- does the calculation fold in taxes? How accurate is it in apportioning short-term cap gains, long-term cap gains, and dividend income from each other?
- does it account for the state you live in and the tax requirements of that state?
- Is the calculation accounting for SS income?
- Is the calculation accounting for allocation between bonds and equities. Each has different historical rates of return as well as tax implications.

There are lots of other variables but you get the idea. It is very difficult to compare the results of 2 different RIPs (retirement income planners)
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Old 05-17-2014, 05:25 AM   #15
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Great thoughts...thanks for everyone's input.

Frankly, my assumptions are ultra-conservative for ROR and high for spending (1.5-2x current levels). So, clearly any increased ROR or slight drop in spending easily attains our goals. Just don't wont DW to run out of $$$ long after I am gone.

And, as for the FA: they have added a lot of value advising on more than just investments thus far. However, any future money will start going to Vanguard funds. Perhaps the missing link in this is their fee! Ha!
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Old 05-17-2014, 06:22 AM   #16
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Just a note here on a retirement calculation. Any calculation that has a hope of accounting for historical variability in financial planning uses a technique called Monte Carlo.
Have you looked at how FIRECalc works?
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Old 05-17-2014, 06:54 AM   #17
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Just a note here on a retirement calculation. Any calculation that has a hope of accounting for historical variability in financial planning uses a technique called Monte Carlo. ....
Stud,

If you read around here a bit you'll find that most regulars are quite familiar with sequence of returns and stochastic planning, including Monte Carlo.
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Old 05-17-2014, 07:05 AM   #18
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What matters is the accuracy of your estimate of expenses. If you are even in the ballpark you seem as safe as anyone could reasonably plan for. Maybe your FA is using some insane yardstick like replacement of 70-80% of current income. If that is the case, run for the exit. Sounds like you should run for the exit in any event, those fees could cover any college expenses you haven't accounted for.
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Old 05-17-2014, 07:23 AM   #19
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I already use this calculator to run Montecarlo simulations:

Crowdsourced Financial Independence and Early Retirement Simulator/Calculator
(Has multiple options for calculating for different variables.)

and get a 93-97% success rate.

And, as noted, we told them our monthly spending to project.

Every other output is 100%. I think it must be the FA fees or college expenses:
they project 50k/year per child. But DW and I both got academic scholarships so I doubt we will really need to fund 100%. Who really knows... But I think they assume 100% funding plus max spending/mo. Not going to happen so. . . .I will proceed as planned:

June, 2015.
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Old 05-17-2014, 08:30 AM   #20
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Every other output is 100%. I think it must be the FA fees or college expenses:
they project 50k/year per child. But DW and I both got academic scholarships so I doubt we will really need to fund 100%. Who really knows... But I think they assume 100% funding plus max spending/mo. Not going to happen so. . . .I will proceed as planned:

June, 2015.
How many kids do you have? Set aside $200k x kids - $125k already saved from your portfolio. Unless you have a huge managerie it seems you should still be able to afford a starting SWR of $120k.
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