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Fidelity RIP and Firecalc
Old 06-26-2013, 10:53 AM   #1
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Fidelity RIP and Firecalc

I have been doing more detailed retirement planning. I believe I have accurate estimates of expenses based on Quicken records over the past few years and adding in LTC insurance and many other factors. (I have expenses broken down into 30 categories and estimated how they will change over time.) I also think I have a good handle on income and the best SS strategy for our situation (DH at 70, me at 62).

However, I am questioning some of the assumptions used in Fidelity RIP and Firecalc related to rate of return of investments during retirement. Fidelity RIP does 250 market situations assuming our 50/50 asset allocation. They are showing a end portfolio of around $3.3M in todays dollars. I love the detailed cash flow summary view you can get to see exactly how they predict taxes, income, expenses, and withdrawals will be over the years. Looking at the cash flow table, I believe everything looks reasonable except the rate of return on investments seems too optimistic to me.

Fidelity says that with this AA historical returns are as follows:
Historical Performance
Best 30-Year Return (Period Ending Jun. 2000) 12.04 %
Worst 30-Year Return (Period Ending Aug. 1959) 6.19 %
Best 15 Year Return (Period Ending Jul. 1997) 15.45 %
Worst 15 Year Return (Period Ending Aug. 1944) 2.89 %
Best 5 Year Return (Period Ending Jul. 1987) 23.23 %
Worst 5 Year Return (Period Ending May 1932) -6.89 %
Best 1-Year Return (Period Ending Jun. 1933) 83.39 %
Worst 1-Year Return (Period Ending Jun. 1932) -43.05 %
Average Annual Return 8.21 %

Their estimate assumes a 90% confidence level which they classify as significantly lower than historical average.


When I use similar values in Firecalc I am getting around $3M also. However when I use values for rate of return that to me seem more reasonable, (5% total, 3% inflation or 4% total, 3% inflation) the end balance drops way down to under $1M.

Similarly, Quicken's planner also predicts success using this rate of return but when you play around with the numbers it is extremely sensitive to what you use.

How much confidence do others have in using Monte Carlo simulations vs assuming flat conservative rates of return? What inflation and rates of return are reasonable assumptions? I don't want to be too conservative but the wild variability in the results when playing with the returns is so disconcerting.
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Old 06-26-2013, 11:49 AM   #2
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I use both. For Quicken planner I use 5.5% which is the 8.7% historical average rate of return of a 60/40 portfolio in my case per Vanguard (for 1926-2012) and then I round it down to be conservative and reflect a new normal. I could argue that a 3.2% haircut is too conservative, but that is what i use. I also use a 3% inflation rate so a net 2.5% real rate of return.

I then supplement my Quicken planner with various Monte Carlo analyses (principally Financial Engines and Vanguard, but others as well).

https://retirementplans.vanguard.com...estEggCalc.jsf
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Old 06-26-2013, 12:38 PM   #3
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One thing I'd like to see these models provide for is reduced discretionary spending during "years in which the market may perform poorly". They all assume that I would continue to eat ribeye when the market is hamburger.
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Old 06-26-2013, 12:48 PM   #4
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I'd be interested in what any of these models told people 10-15 years ago versus what actually happened both in spending & investment return.

For me, they're just a general look to possible futures & with that in mind, go live my life & take another look in a year two.
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Old 06-26-2013, 02:24 PM   #5
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Like pb4uski I use FIDO RIP, FireCalc, Vanguard, and my own spreadsheet. All the "professional" models give me results that are in the same ballpark. My own spreadsheet is a little less optimistic but I'm only assuming a 1.5% real rate of return (5% return, 3.5% inflation).

You seem to have somewhere between a 1MM and 3MM cushion. In your shoes I'd be ok with ER. My cushion is much less, and I need more than the calculators are showing me to be able to sleep at night, so I'm doing OMY (or two !) to sweeten the kitty.
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Old 06-26-2013, 02:39 PM   #6
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Originally Posted by RetiringAt55 View Post
How much confidence do others have in using Monte Carlo simulations vs assuming flat conservative rates of return?
I have almost no confidence in either of those methods.

I have some confidence in what FIRECalc uses, which is actual history (unless you opt to modify it to substitute one of the two methods you mention above). If you don't understand what I'm referring to, see this: How FIRECalc works.
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Old 06-26-2013, 02:56 PM   #7
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I have almost no confidence in either of those methods.

I have some confidence in what FIRECalc uses, which is actual history (unless you opt to modify it to substitute one of the two methods you mention above). If you don't understand what I'm referring to, see this: How FIRECalc works.
Totally agree.

We know what FIRECALC is doing. Do we really know what a Monte Carlo is doing? Stocks, inflation and fixed income have some effect on each other. Does a Monte Carlo try to mimic any of this interaction? What assumptions do they make? Why not use the actual historical data?

edit/add: An example for clarity - in the 1980's inflation was in the teens and CDs paid in the teens. Would a Monte Carlo just randomize these so we have a period of high inflation and low CD rates, or vice -versa?

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Old 06-26-2013, 04:23 PM   #8
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How much confidence do others have in using Monte Carlo simulations vs assuming flat conservative rates of return? What inflation and rates of return are reasonable assumptions? I don't want to be too conservative but the wild variability in the results when playing with the returns is so disconcerting.
I'm not sure what the $3 million means. Is that the average ending portfolio value, with input that results in 5-10% of ending portfolios below zero?

If so, there's no conflict between Fidelity/FireCalc and your flat rate calculation. You've just picked combinations for your flat rates that are historically worse than average.

Nobody knows the future. I'd be okay with retiring if a 4% nominal return in a 3% inflation world still left me with money at the end. (Assuming I have some flexibility built into my spending.) I used more aggressive assumptions than that back in 2006, though I'd be closer to your numbers today.
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Old 06-26-2013, 08:40 PM   #9
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What I did when I was contemplating retirement was to run a half dozen or so planners. (Quicken, Financial Engines, I-ORP, FireCalc, RIP, and a few others and an update of my Vanguard financial planners retirement plan). Each analysis suggested that I had enough (low failure rates) and many of them were close to each other. For deterministic plans, I used conservative assumptions. All things considered, I felt comfortable that we would be fine, particularly since there was some flexibility in our baseline spending needs.

At some point you just need to take a leap of faith.

My timing has been fortunate as our portfolio is 11% higher than I projected it would be at this point in time at the time I retired.
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Old 06-27-2013, 08:21 AM   #10
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We did the same as above.

I like Fidelity just because I can save a very detailed expense plan. I like I-ORP because of the detailed results analysis. Fire Calc seems to be one of the most optimistic for our situation.
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Old 06-27-2013, 09:03 AM   #11
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The $3M in today's dollars in Fidelity means the "default historical likelihood figure at 90% confidence." I assume this means they are averaging assets at end of plan in the 90% of cases in which it succeeds. Fidelity has a 29 page document that discusses its methodology. I believe they are following a similar calculation to Firecalc in that they do an analysis over time periods spanning 1926 to the current however they also incorporate a "risk premium approach through Monte Carlo simulation."

I reran it with the confidence level set to 95% and it still succeeded, with an average end balance of $2.6M.

Thank you for all the input. I ran the Vanguard calculator and it also said that we were fine with our AA.

The big question with most of the planners is the tax rate. You can enter a flat rate but I think in our case the tax rate will be very variable. Looking at the Fidelity cash flow, you can see that if I am widowed I will have low taxes until RMDs kick in, and then they go through the roof. I would be paying more in taxes than I will get in SS because of the RMDs. We plan on making a lot of Roth conversions before starting SS to try to get this down.

I guess I will just have to rerun things periodically for the next 6 years until I reach 55 and then we can decide if we can afford to "take the leap".

Another big question is if we can afford to stay in the same house. Originally we planned to move to a smaller home at retirement. However, the property taxes are still huge in our area, even for a smaller home, so it may not be worth doing right away. It may be better to stay put and then move later when one of us passes. (If I am widowed, I would probably want to move to wherever my children happen to live after college.)
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Old 06-27-2013, 10:37 AM   #12
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I have ESplanner... ....it takes a lot of input but the results are better and for me more believable compared to entering a few numbers and pushing calc.

I had to have my last years tax return and all my ss numbers dating back to 1970....Now that all my info is in a can change what the best years it would be to sell my rentals or when to take SS. It calcs out your net worth for every year until you reach 100.....and also tells you the amount you can spend each year if you plan on leaving nothing at the end.

What I like about it is all the numbers are shown in todays dollars even though they may be much higher with inflation. It makes it easier to understand.

Bob
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Old 08-18-2013, 08:07 PM   #13
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I played around with FRIP a lot and one thing that was confusing for me was that when I increased the Confidence level from 90 to 95% the ending balance increased and when I increased the inflation rate assumption from the 2.30 that seems to be the default to 3.0%, the ending balance again increased.

As mentioned, you can view the results as a spreadsheet showing the annual balances, the amount of withdraws, taxes and the net budget. I haven't looked closely though if it shows higher taxes or assumes that from age 70 1/2 on, I'm drawing on my 401k/IRA accounts.

Or if it's adjusting the tax rates dynamically based on drawing from the retirement accounts after age 70 1/2.

In fact, I couldn't find anywhere to enter the taxable rate.
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Old 08-18-2013, 08:34 PM   #14
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I played around with FRIP a lot and one thing that was confusing for me was that when I increased the Confidence level from 90 to 95% the ending balance increased and when I increased the inflation rate peaceful state of mind assumption from the 2.30 that seems to be the default to 3.0%, the ending balance again increased.

As mentioned, you can view the results as a spreadsheet showing the annual balances, the amount of withdraws, taxes and the net budget. I haven't looked closely though if it shows higher taxes or assumes that from age 70 1/2 on, I'm drawing on my 401k/IRA accounts.

Or if it's adjusting the tax rates dynamically based on drawing from the retirement accounts after age 70 1/2.

In fact, I couldn't find anywhere to enter the taxable rate.
I've noticed a bug in FRIP around the 90/95% confidance. The 'reports' never show anything greater than 90%. Could it be that is sending you sideways. I know it confused the heck outa me till I toggeled it back and forth comparing the result with reality. What you think is correct higher confidace yields a lower number.

I've also noticed the same thing with inflation rate. I'd always assumed that tied to bond interest rates, but I didn't verify. My Fido rep did say it would change but I didn't dig into it with him.

Good luck Fido will help you, my experience is RIP experts are a little harder to get on the phone. Once you get to the right person, no problem.


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Old 08-25-2013, 04:32 PM   #15
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Fidelity RIP lets you save the projections in a tabular form (but not output to Excel or anything, though it looks like a spreadsheet).

So for each year, they show beginning balance, expenses (or your after-tax amount you wanted), taxes, total withdrawal and the percentage that the withdrawal represents.

Played with all the inputs to have money left at age 95, in some cases, a lot of money left.

What is hard to understand though is that the average withdrawal percentage rate across several decades are all over 4%.

In some cases, when it shows the ending balance being almost depleted, the average WR is far above 4%.

That doesn't square with some of the discussions we've had about SWR and how even 4% may be too high.
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Old 08-25-2013, 05:14 PM   #16
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Fidelity RIP lets you save the projections in a tabular form (but not output to Excel or anything, though it looks like a spreadsheet).

So for each year, they show beginning balance, expenses (or your after-tax amount you wanted), taxes, total withdrawal and the percentage that the withdrawal represents.

Played with all the inputs to have money left at age 95, in some cases, a lot of money left.

What is hard to understand though is that the average withdrawal percentage rate across several decades are all over 4%.

In some cases, when it shows the ending balance being almost depleted, the average WR is far above 4%.

That doesn't square with some of the discussions we've had about SWR and how even 4% may be too high.
I haven't looked at RIP for a long time. But it seems reasonable that it is using the conventional "4% rule", which is not 4% of the portfolio value at the start of the year. It is 4% of the original portfolio value, adjusted for inflation each year regardless of portfolio performance. For bad scenarios that will easily give WR's of much greater than 4%.
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Old 08-25-2013, 05:31 PM   #17
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No it's definitely the percentage of the starting balance for a given year.

You enter an annual budget and it will calculate the inflation-adjusted figure each year (Total Expenses), then add what appears to be 15-20% tax (Tax Detail) and add them up to come up with a "Total Withdrawals."

The "% Withdrawals column" which is the next to last one to the right is definitely Total Withdrawals divided by Beginning Assets.

The budget I entered was about 3.3% of my assets. I guess it assumes the annual budget number is after-tax.

So if I want the total withdrawals to be 3.3% including taxes, I guess I would have to reduce that amount by about 20%? Or it would be more like 2.64% withdrawal after taxes?
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Old 08-26-2013, 04:57 AM   #18
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One thing I'd like to see these models provide for is reduced discretionary spending during "years in which the market may perform poorly". They all assume that I would continue to eat ribeye when the market is hamburger.
FireCalc provides this option. Go to the spending tab and choose "Percentage of Remaning Portfolio" then fill in the blank.
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Old 08-26-2013, 11:12 AM   #19
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One thing I'd like to see these models provide for is reduced discretionary spending during "years in which the market may perform poorly". They all assume that I would continue to eat ribeye when the market is hamburger.
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FireCalc provides this option. Go to the spending tab and choose "Percentage of Remaning Portfolio" then fill in the blank.
And I'd suggest LakeTravis try making some runs with that option.

I've talked about this before, and I think many people grossly overestimate the effect of substituting hamburger for rib-eye. They say it as if it is fact that of course it will help significantly, but have they really thought that through?

To get better detail, set FIRECalc for 5 years. You'll see in the bad cycles, a $1,000,000 portfolio with 4% spend drops to $430,753. How much of that $569,247 loss can you make up out of your initial $40,000 annual spend? You don't really have much leverage, do you?

I ran with that % of portfolio allowing a 20% drop per year (80 in the box), and your spending drops in half in a few years, and your portfolio is still down to $497,539. Can you really cut your spending in half by substituting a few luxuries? I can't - that's a major lifestyle change.

-ERD50
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Old 08-26-2013, 01:32 PM   #20
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I used Fido planner before, but not too seriously. Because of this thread, I re-looked at this over the weekend, and I realized that the plan is withdrawing more money than I need due to minimal distribution requirement starting at age 71, and is assuming that I am actually spending the extra money withdrawn.....

Did anybody notice that? How do I go around this? The part Fido calculates the tax implication is great, but maybe there is something I can tweak the withdrawn money somehow (save off extra in after tax or something?)? Am I missing something?
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