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Expenses as an Output
Old 09-16-2015, 03:12 PM   #1
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Expenses as an Output

Many times people will list out their portfolio balances, pensions, age and risk tolerance and ask if they are all set to retire. The common answer here is it depends on your expenses.

This might be true if you want to calculate something like the probability of success.

However, if you already know what probability you want (say 100%) a better answer to the poster would be your situation would provide about X amount per year.

To me the expenses or spending I will have is a result of my inputs not the other way around.
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Old 09-16-2015, 03:21 PM   #2
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I say a good measure would be total current assets plus present value of any future income streams, divided by annual spend rate. That would give an apples to apples comparison value. Doesn't cover age and longevity aspects or expected ror differences, but it's a starting point.

You could switch the denominator to expected years "remaining in the model" and that might be a way to compare.
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Old 09-16-2015, 03:22 PM   #3
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I spent many hours playing with Excel spreadsheets modeling this in the years prior to ER!
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Old 09-16-2015, 03:27 PM   #4
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Originally Posted by RetireAge50 View Post
Many times people will list out their portfolio balances, pensions, age and risk tolerance and ask if they are all set to retire. The common answer here is it depends on your expenses.

This might be true if you want to calculate something like the probability of success.

However, if you already know what probability you want (say 100%) a better answer to the poster would be your situation would provide about X amount per year.

To me the expenses or spending I will have is a result of my inputs not the other way around.
Prior to retirement I played around a lot with firecalc and other calculators to see what my max "spending" I could have and still get 100%. The spend ends up being higher than my planned spending rate... so that gives me some reassurance.

Some calculators give the spending as an output... IIRC Financial Engines does that.
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Old 09-16-2015, 03:30 PM   #5
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I'd say probability of success would be pretty important to everyone, even those who don't know to ask. While a newly interested potential retiree might think 100% probability is the only sensible choice, once they see the difference in assets required for 100% vs 95% (or lower) for X annual expenses, they might reconsider. And 100% probability is based on past history, it's not a guarantee of success, as some assume. If for example my desired probability of success is 200% and yours is 75%, that would be a critical disclosure.

Figuring assets required from projected expenses or expenses from assets is 'six of one, half dozen of the other' - nothing wrong with asking either way, the relationship is the same.

And there are many other variables/uncertainties anyway.
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Old 09-16-2015, 03:41 PM   #6
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Figuring assets required from projected expenses or expenses from assets is 'six of one, half dozen of the other' - nothing wrong with asking either way, the relationship is the same.

And there are many other variables/uncertainties anyway.
Agree. In fact I suspect most people go back and forth as the actual portfolio results change over time, thus allowing for changes in expenditures over time.

It may be easier to change expenditure levels than asset requirements for most people I think. Certainly once you have retired.
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Old 09-16-2015, 03:48 PM   #7
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Even when a retirement calculator like FIRECalc says that one has 100% probability, he must reflect on the methodology to know what that means.

The US stock market performance history is only 144 year long (1871-2015). And that is not very long compared to a retiree's expectation for 30 or 40 years of retirement.

As Bernstein pointed out, a 97% probability of success for a 40-year retirement means 3% failure or roughly one failure in a 40-year period out of 1200 years (40/1200 = 0.033). How do we know what the US or the world looks like in the next 1000 years? Or how something like what happened in the past would not recur in the next 40 years?

See: The Retirement Calculator from Hell, Part III.
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Expenses as an Output
Old 09-16-2015, 04:19 PM   #8
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Expenses as an Output

I agree the tools calculating risk (or success level) have limitations and the future might throw a curve ball anyway. I think it is agood idea to use multiple tools and some of your own spreadsheets to calculate your risk.

I also agree it is 6 one way half dozen the other way, that is, enter risk and output spending or vice versa. However this relationship only exists at a single point in time.The next day all the inputs have changed so unless you also adjust your spending it is no longer equal. In other words based on the ever changing inputs the spending also needs to be changed to keep your risk level constant.
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Old 09-16-2015, 04:42 PM   #9
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Once again, I'll make the case that such planning tools as FIRECalc are more useful (at least to me) in planning how big a stash I will (would in my case) need to feel comfortable that I am FI. After retirement, I have played it more by ear than anything else. If the stash were to take a hit, I would lower my WDR even though FIRECalc would suggest I don't need to. If the stash has a great run for a year or two, I might feel comfortable splurging, even though my original FIRECalc run suggested not to do so. I do think it's good to run FIRECalc (or similar) each year just as a sanity check. While I have a general understanding of how such calculators work, I would never trust them to make my decisions for me - with the possible exception of when it would be (relatively) safe to pull the plug.

Regarding OP, there may be a way to force FIRECalc to give an output, but I would just do successive approximations using several proposed "outputs" and seeing when the % success rate is one I'm comfortable with. YMMV
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Old 09-16-2015, 07:26 PM   #10
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Once again, I'll make the case that such planning tools as FIRECalc are more useful (at least to me) in planning how big a stash I will (would in my case) need to feel comfortable that I am FI. After retirement, I have played it more by ear than anything else...
Yes, FIRECalc and any other calculators are useful as a guide, but one should stay "lean, mean" or "mobile and hostile" like Uncle Mick likes to say.

The tools all extrapolate from the past, and we all rely on the future resembling that past. If a Roman, a Portuguese, or a Spaniard ran their "FIRECalc" during the peak of their respective empires, they would feel pretty good. More recently, I have seen several articles pointing out that the SWR for a European in the last century was very low and not our taken-for-granted 4% WR. One can run his own spreadsheet, but how do you model these huge socio-political shifts that happened in the past?

And then, you can have as much money as Steve Jobs, and your retirement may be cut short by a serious illness anyway. The chance of a 65-year old man living past 82, or another 17 years, is only 50/50!

Relax. Be happy if you are drawing 3 to 4% like Bernstein said. Of course, if I were a 30-year old ER with more years to live I would be more concerned, but at my age, heck, I can be nonchalant about all this exact WR business. I have got more serious things to worry about.
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Old 09-16-2015, 08:14 PM   #11
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Originally Posted by RetireAge50 View Post
Many times people will list out their portfolio balances, pensions, age and risk tolerance and ask if they are all set to retire. The common answer here is it depends on your expenses.

This might be true if you want to calculate something like the probability of success.

However, if you already know what probability you want (say 100%) a better answer to the poster would be your situation would provide about X amount per year.

To me the expenses or spending I will have is a result of my inputs not the other way around.
Maybe this was in another reply, but I did not see it in a quick read. FIRECalc can give you exactly what you are asking for:

On the 'Investigate' Tab -

Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level

Search for settings that will get a success rate of as close to [xxx] % as possible (usually within 1%) by changing...

[ ] Spending Level or [ ] Starting portfolio value


So enter 100%, and check 'Spending Level'

-ERD50
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Old 09-16-2015, 10:35 PM   #12
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However, if you already know what probability you want (say 100%) a better answer to the poster would be your situation would provide about X amount per year.

To me the expenses or spending I will have is a result of my inputs not the other way around.
I think this touches on something important. Some people say that they are spending $X before retirement and maybe they then take out clearly work related expenses they won't have (transportation costs, work clothes, etc) and savings they won't be making any more and figure the new taxes and are done.

For basically everything else (assuming any kids are already gone) they assume they will spend the same (maybe adding some for travel).

So, if the possibility of success is 90% they work until it gets to whatever percentage chance they want.

But -- there is another option.

Change your lifestyle. Some people say they don't want to reduce their standard of living in retirement. I will say that when DH retired and I went very part-time we did reduce our standard of living. We downsized the house (much less expensive). But, we did little things as well. We don't eat out as often as we used to. We don't take vacations that are as expensive and so on.

We are not unhappy. These are minor things to us and for DH to be able to retire when he did and for me to semi-retire...it was worth it to eat out one less time a week.

So, yes, I did figure everything from the standpoint of matching spending to what we could spend and still feel we had a good chance of success. Now, obviously this is within an acceptable range to us. That is, it is less than we spent before but it is a level of spending that is acceptable to us.
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Old 09-17-2015, 10:36 AM   #13
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This is interesting. I probably have said this many times but my retirement spending was determined by the size of my portfolio, not the other way around. This would likely be fairly unusual.
Also, how many people adjusted their spending in 2008-2009? We certainly did.
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Old 09-17-2015, 01:29 PM   #14
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This is interesting. I probably have said this many times but my retirement spending was determined by the size of my portfolio, not the other way around. This would likely be fairly unusual.
Also, how many people adjusted their spending in 2008-2009? We certainly did.
This is basically my plan as well, at least to set an upper bound on spending.

Frankly, unless my portfolio takes a serious hit or some kind of health related disaster strikes, I doubt if I will be coming close to that upper bound most years. My assumption is that retirement will not expand my lifestyle much more than salary increases have. Living below my means would be a hard habit for me to break, which I am not keen to do anyway.
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Old 09-17-2015, 07:59 PM   #15
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That ts what we do. Tangible net assets are known and we project our monthly spend to a yearly amount and then calculate how many assets are needed at 4% to keep us whole. So far we have a nice buffer.

Even in exceptional spending years we have maintained a buffer.
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Old 09-17-2015, 09:31 PM   #16
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As Bernstein pointed out, a 97% probability of success for a 40-year retirement means 3% failure or roughly one failure in a 40-year period out of 1200 years (40/1200 = 0.033). How do we know what the US or the world looks like in the next 1000 years?
...
Hey, you have some secret longevity elixir that we should know about?
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Old 09-17-2015, 09:49 PM   #17
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No, I don't. But if you want to get near 100% probability for a 40-year retirement, that's about as long as it takes to get a meaningful stock market history.

Hence, there is no need to worry about the difference between success rate of 100% and 97%, or even 90% for that matter for the geezers among us.

As I mentioned, the chance of a 65-yr old man living past 82 is only 50/50. And that's only a short 17 years. Life's too short to worry about things that we cannot know about nor control, while the chance of the Grim Reaper coming for us is 50%!

I often mention that I have that lowly class C RV as housing of last resort, if the unimaginable happens. That taken care of, I party.


PS. Even if you have 1000 years of stock market history, is there any guaranty that the next 100 years will be the same? The Roman Empire lasted far longer than the Portuguese, Spanish, and British Empires, but still was only for 500 years. What happened to the Romans who ran FIRECalc on year 499?
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Old 09-17-2015, 10:18 PM   #18
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But -- there is another option.

Change your lifestyle. Some people say they don't want to reduce their standard of living in retirement. I will say that when DH retired and I went very part-time we did reduce our standard of living. We downsized the house (much less expensive). But, we did little things as well. We don't eat out as often as we used to. We don't take vacations that are as expensive and so on.

We are not unhappy. These are minor things to us and for DH to be able to retire when he did and for me to semi-retire...it was worth it to eat out one less time a week.

So, yes, I did figure everything from the standpoint of matching spending to what we could spend and still feel we had a good chance of success. Now, obviously this is within an acceptable range to us. That is, it is less than we spent before but it is a level of spending that is acceptable to us.
We also dropped our expenses quite a bit to retire, but we were not very smart spenders before so some of our expenses we could adjust and simply spend less than we used to spend for the same good or services. Tonight we went to one of DH's favorite restaurants but with a Taco Thursday and happy hour special so it was only about 1/3 the price of what we used to spend for the same dinner out on a Friday night after work.

Then we picked up a pair of jeans DH wanted that were $60 at Macy's, $40 on Amazon but I was able to buy them for $15 out of pocket by finding a lower price online and deal stacking. We don't have as much income as we used to but on the flip side we find with more free time to bargain hunt we do not need to spend as much either.
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Old 09-17-2015, 11:31 PM   #19
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Obviously spending and portfolio are connected and to be successful in retirement there must be feedback between the two. We surely don't retire until our spending can be supported by our retirement income sources and if we want to retire earlier we tighten our belts a bit. Feed back between outgoings and income streams is vital and if you remember what Mr. Mcawber said you will be successful.
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Old 09-18-2015, 08:51 AM   #20
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Obviously spending and portfolio are connected and to be successful in retirement there must be feedback between the two. We surely don't retire until our spending can be supported by our retirement income sources and if we want to retire earlier we tighten our belts a bit. Feed back between outgoings and income streams is vital and if you remember what Mr. Mcawber said you will be successful.
That's basically what it comes down to.
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