Annual Withdrawal Amount Using FIRECalc

[nico08]

Hello:

This question is in regard to FIRECalc. Based on the equation used by FIRECalc, will the amount that I am able to withdraw year-to-year in retirement depend on the annual value of my investment portfolio?

For example, assume that I have a portfolio value of $1,000,000 and annual retirement expenses of $40,000. Assume FIRECalc tells me I have a high chance of success based on these numbers. Now, assume in Retirement Year 1, the portfolio has $1,000,000, so I withdrawal $40,000. Assume in Retirement Year 2, the portfolio only has $800,000 due to market fluctuation. Can I still safely withdraw $41,200 (the $40,000 plus the cost of living/inflation adjustment of $1,200) in Year 2, or would I be limited in Year 2 to withdraw $32,960 which represents $32,000 (four percent of the current value of the portfolio) and $960 (the cost of living/inflation adjustment based on the $32,000).

In other word, when using FIRECalc, can I assume that I can withdraw my established retirement expenses plus a cost of living adjustment when my investment portfolio is both underperforming and overperforming?

Thank you for your advice.

 

[gerntz]

I presume you're miss-typing $100,000 for $1,000,000 as otherwise I can't follow.

 

[donheff]

For example, assume that I have a portfolio value of $100,000 and annual retirement expenses of $40,000. Assume FIRECalc tells me I have a high chance of success based on these numbers. Now, assume in Retirement Year 1, the portfolio has $100,000, so I withdrawal $40,000. Assume in Retirement Year 2, the portfolio only has $800,000 due to market fluctuation. Can I still safely withdraw $41,200 (the $40,000 plus the cost of living/inflation adjustment of $1,200) in Year 2

Yes, (assuming $1M, not $100K) Firecalc looks at the historical record and tells you what the success would have been doing precisely what you describe over all similar time periods covered in the record. In real life, most people would continue to slavishly withdraw at the planned rate if there was a major downturn. They would scale back rather than test the possibility that their lifeline was not precedented in the historical record.

 

[nico08]

I presume you're miss-typing $100,000 for $1,000,000 as otherwise I can't follow.

Yes, I wrote $100,000 but I meant $1,000,000. I believe I fixed the error. Thank you for bringing it to my attention.

 

[DblDoc]

Yes, (assuming $1M, not $100K) Firecalc looks at the historical record and tells you what the success would have been doing precisely what you describe over all similar time periods covered in the record. In real life, most people would not continue to slavishly withdraw at the planned rate if there was a major downturn. They would scale back rather than test the possibility that their lifeline was not precedented in the historical record.

I think you meant this?

DD

 

[yakers]

The down side of the system is that if you started with $1M and took $40K but the market went well and your portfolio is now $1M+ despite the initial year withdrawal you do not get to 'reset' the withdrawal amount based on the increased portfolio, only increase is for inflation.

 

[martyb]

Thanks guys, for clearing a couple things up for me!

 

[REWahoo]

The down side of the system is that if you started with $1M and took $40K but the market went well and your portfolio is now $1M+ despite the initial year withdrawal you do not get to 'reset' the withdrawal amount based on the increased portfolio, only increase is for inflation.

Although I don't advocate doing a 'reset', I don't believe the above is accurate.

In the above situation, if another individual had a portfolio equal to the $1M+ figure, that individual should be able to use that amount as the basis for determining a SWR in the first year of retirement. The same applies to someone with a portfolio that grew during the first year of retirement even though money was withdrawn.

If we believe in the accuracy of FIRECalc there is no reason we cannot start over any year we have an increase in our portfolio - and also take the benefit of reducing the time horizon as appropriate.

YMMV...

 

[unclemick]

Although I don't advocate doing a 'reset', I don't believe the above is accurate.

In the above situation, if another individual had a portfolio equal to the $1M+ figure, that individual should be able to use that amount as the basis for determining a SWR in the first year of retirement. The same applies to someone with a portfolio that grew during the first year of retirement even though money was withdrawn.

If we believe in the accuracy of FIRECalc there is no reason we cannot start over any year we have an increase in our portfolio - and also take the benefit of reducing the time horizon as appropriate.

YMMV...

I certainly hope so - since I both decreased during downturns and increased during upturns sort of doing a hand grenade type look back. I also wasn't that acuurate about the 4% - tap dancing above and below the benchmark - using unclemick's general theory of chickenheartness punctuated with perioids of let the good times roll. I was croaking at 84.6 but now my optimism lets me go to 91.

heh heh heh -

 

[bbbamI]

I certainly hope so - since I both decreased during downturns and increased during upturns sort of doing a hand grenade type look back. I also wasn't that acuurate about the 4% - tap dancing above and below the benchmark - using unclemick's general theory of chickenheartness punctuated with perioids of let the good times roll. I was croaking at 84.6 but now my optimism lets me go to 91.

heh heh heh -

Party on down unclemick......

 

[nico08]

Although I don't advocate doing a 'reset', I don't believe the above is accurate.

In the above situation, if another individual had a portfolio equal to the $1M+ figure, that individual should be able to use that amount as the basis for determining a SWR in the first year of retirement. The same applies to someone with a portfolio that grew during the first year of retirement even though money was withdrawn.

If we believe in the accuracy of FIRECalc there is no reason we cannot start over any year we have an increase in our portfolio - and also take the benefit of reducing the time horizon as appropriate.

YMMV...

I had not considered the possibility of "redoing" a FIRECalc analysis after I had entered into retirement. If the redone analysis occurred when the investment portfolio had a considerable increase in value, plus with the reduced life expectancy, I imagine the annual withdraw rate would increase. Nothing about the "instructions for use" of FIRECalc prohibits a FIRE from engaging in a re-calculation while actively in retirement?

It would seem that if you are going to do a re-calculation during investment portfolio "good" times, then you would also need to do a re-calculation during during investment portfolio "bad" times as well. Otherwise, it would seem like you should not "tinker" with the FIRECalc analysis once you commence the draw down phase. Does that make sense to you?

 

[REWahoo]

It would seem that if you are going to do a re-calculation during investment portfolio "good" times, then you would also need to do a re-calculation during during investment portfolio "bad" times as well. Otherwise, it would seem like you should not "tinker" with the FIRECalc analysis once you commence the draw down phase. Does that make sense to you?

Remember that FIRECalc looks back at 140 or so years of history and tells you how your portfolio would have survived. That includes every "bad" time period during those years, including the Great Depression. So, if your FIRECalc run said you were good when you launched your retirement, a "reset" during bad times shouldn't be needed - if you believe the future will be no worse than the past.

"Tinkering" with FIRECalc was almost a daily exercise before I pulled the plug, but not so much after a year or two of retirement. As I said previously, I don't advocate doing a reset during good times although I know doing so is merely following the same logic as the initial FIRECalc run. And I definitely don't recommend doing a reset when your portfolio takes a big hit - had I done that in 2009 I'd probably be living in a shack down in the swamp (apologies to Unclemick...).

 

[donheff]

I had not considered the possibility of "redoing" a FIRECalc analysis after I had entered into retirement. If the redone analysis occurred when the investment portfolio had a considerable increase in value, plus with the reduced life expectancy, I imagine the annual withdraw rate would increase. Nothing about the "instructions for use" of FIRECalc prohibits a FIRE from engaging in a re-calculation while actively in retirement?

It would seem that if you are going to do a re-calculation during investment portfolio "good" times, then you would also need to do a re-calculation during during investment portfolio "bad" times as well. Otherwise, it would seem like you should not "tinker" with the FIRECalc analysis once you commence the draw down phase. Does that make sense to you?

There is no basis for concluding that you "must" recalculate when your portfolio drops just because you decide to recalculate when the portfolio is high. That would be a straight percentage of annual ending portfolio SWR -- a different approach altogether. For the standard initial SWR amount plus inflation approach, market history is market history whenever you calculate or recalculate your SWR. If you believe (as I do) that the relative valuation of the market at the time you set your SWR makes a difference in the likelihood that you are at the beginning of a bad or good scenario then resetting whenever your portfolio is up will increase your likelihood of eventually experiencing one of those scary downturns "early" in your "new" decumulation phase. That said, if Firecalc says you have a 100% survival rate, then you do -- historically

 

[rescueme]

I had not considered the possibility of "redoing" a FIRECalc analysis after I had entered into retirement.

While FIRECalc is not my estimation tool of choice (FIDO's RIP is), I ran a report every day for the years leading up to my retirement, and continue to do so every day since I retired four years ago.

Why? Mostly because it is fairly automatic. I don't have to enter anything (other than current budget/expense changes). All investment data is migrated from on-line accounts with no entry needed and budget items are retained with no constant entry required.

However, I think you will find (as others who have been in retirement for a bit) that the plan you have at retirement is not necessarily the plan you have during retirement.

Things change not only in anticipated expenses, but also in expected income. Before I retired, I expected that my income would come primarily from SS, along with portfolio withdrawals (I did not have a pension).

However since retirement, changes have been made. SS originally expected to be taken at FRA age of 66 is now delayed till age 70, primarily for the benefit of my DW, assuming I will die first. Additionally, at retirement, I was unaware of the option to file against her SS at age 66 and have (her) SS income from age 66-69 (we're the same age).

Also, due to not having a pension and wanting to have a "base level" of income, not counting on market flux from the age of 59 - when I retired, till age 70, we purchased an SPIA to give us that base level of income. While some can continue to argue for/against that option, I'll just say it works well for us, in our situation.

One last thing. My pre-retirement forecast was for both of us to retire in early 2007, both at the age of 59. As retirement approached, I had no problem giving up the workplace "world". However, as my wife approached her anticipated retirement date a few months after my retirement, she found that she was not "emotionally ready" to retire. No problem at all, since we did not make any plans that required both of us to be retired. She turns 63 later this month and after the last four years has set five different retirement dates. She now says "within a year" (whatever that means). However, her continuing to w*rk means that for four years she has not drawn against her expected expenses - paid out of her portfolio, and has gone through the 2008/09 downturn with no impact to her portfolio.

While you can plan for the future, you can't live the future. You really will not know what will happen until it's history...