Firecalc and SWR

[tmm99]

Need you guy's help.

People discuss SWR of 4%, lower if you retire before mid sixties etc. But whenever I run Firecalc, even with 100% success rate, I get a spending level much higher than 4%. I must be missing something here? Below is what Firecalc shows for my hypothetical scenario with future retirement date, with over 30 years of retirement, choosing World Market allocation.

A spending level of $74,671 provided a success rate of 100.0% (103 total cycles, of which 0 failed). This spending level is 8.68% of your starting portfolio. (Your spending is assumed to come from any Social Security and pensions you entered, as well as from the portfolio.)

If I change the retirement to happen today with 40 year retirement with $1,000,000 portfolio, I get $48,887 as spending and the level is 4.89% of the starting portfolio.

I know just about all of you here run firecalc, so please shed some light on how you are approaching firecalc numbers vs the traditional SWR idea of 4%/3%.

Thank you!

 

[Midpack]

Do you have Soc Sec and/or pension(s) entered?

 

[tmm99]

Do you have Soc Sec and/or pension(s) entered?

For the 1st scenario(the paragrah within the quote in my original post), I did enter SS (there is no pension). With this scenario, the SS won't start until 5 years after rertirement.

For the 2nd one (retiring today with $1 mill, 40 year retirement -> 4.89% withdrawal from the starting portfolio), I didn't.

 

[Midpack]

For the 1st scenario(the paragrah within the quote in my original post), I did.

For the 2nd one (retiring today with $1 mill, 40 year retirement), I didn't.

I think that's your answer. The FIRECALC result is a little confusing I agree, but the result shown is spending level/portfolio where spending level = portfolio withdrawal + Soc Sec(s) + pension(s). The 3/4% WR you see mentioned often would be calculated as withdrawal/portfolio without Soc Sec and/or pensions.

Example:

If you have a $1M portfolio
with spending of $80K in year 1
and $20K Soc Sec in year 1
and $20K pension in year 1

your portfolio withdrawal would be $40K in year 1
your spending level would be 8% of your portfolio, not sure what value this number is
your (portfolio) withdrawal rate would be 4% of your portfolio - and this is the number we're usually referring to.

 

[2B]

For the 1st scenario(the paragrah within the quote in my original post), I did enter SS (there is no pension). With this scenario, the SS won't start until 5 years after rertirement.

For the 2nd one (retiring today with $1 mill, 40 year retirement -> 4.89% withdrawal from the starting portfolio), I didn't.

There are numerous option on spending model, portfolio make up and other assumptions that can change the output. I think for any of us to really help you we'd need to see the whole input screen.

The 40 year retirement is actually different from the basis used for the 4% SWR. That's based on 30 years. I've noticed that plans over 30 years can actually have a higher SWR. I think FireCalc doesn't use the cases without the given number of years. The 40 year calcs would have its last case start at 1972 where the 30 year would keep running cases through 1982. I could be wrong about this but it would be easy to check. See how many cycles there were in the 30 and 40 year runs. The 1972 to 1982 period wasn't that good for the markets.

 

[Midpack]

There are numerous option on spending model, portfolio make up and other assumptions that can change the output. I think for any of us to really help you we'd need to see the whole input screen.

I think we've already found it...

 

[2B]

I think we've already found it...

And it is? Notice he did a 40 year run without SS and got a 4.89%. I think that's what he wants to reconcile against the traditional 4%.

 

[Bikerdude]

And it is? Notice he did a 40 year run without SS and got a 4.89%. I think that's what he wants to reconcile against the traditional 4%.

He didn't mention if the 2nd run was also 100% survivable.

 

[Grainiac]

He didn't mention if the 2nd run was also 100% survivable.

Right, just out of interest I tried $1M for 40 years and let Firecalc calculate spending level with 100% success rate. The starting spending level was 3.34% for the starting portfolio.

 

[tmm99]

Right, just out of interest I tried $1M for 40 years and let Firecalc calculate spending level with 100% success rate. The starting spending level was 3.34% for the starting portfolio.

I am female BTW, although gender won't affect the firecalc
numbers, obviously.

You are right. I must have had some left over SS numbers still in there. Once I got home and tried fresh, with $1M, I got the same numbers you did.

So what's the deal with 4% and 3% withdrawal rate many forum members use? Is it because we may not get the social security benefits or we may want to leave more money when we die, or we may live over 100 years old, or history may not repeat itself or?

 

[pb4uski]

I think the answer is 3.34% you came up for a 40 year horizon is rounded down to 3% (this is a conservative group) and a 30 year rounds to 4%

 

[tmm99]

Thank you for your comment. I am not sure I could do 3% but I guess I won't really know until I get a little closer to retirement. Depending on what happens in the next few years, I can tighten the budget or not. I have room to do so if it's necessary.

When I was looking at firecalc numbers, I got a little giddy, but then I saw the 7.5 percent of portfolio was my spending, so I probably need to either tighten the belt or work a little longer if I want to be on the conservative side.

Thank you all for responding.

 

[pb4uski]

It is not at all unusual for WR to be higher early on (before pensions and SS start) and lower later. If you are getting 100% success rate using Firecalc and once your sources of retirement income kick in (pensions, SS, etc) your WR is 3-4% then you are probably ready.

I used a number of calculators (Firecalc, OMP, Quicken Lifetime Planner, Financial Engines, Vanguard financial planning service) and they all were different but they were all indicative that I could retire so I took the jump. If your Firecalc results are 100% then you are probably ready.

 

[ERD50]

So what's the deal with 4% and 3% withdrawal rate many forum members use? Is it because we may not get the social security benefits or we may want to leave more money when we die, or we may live over 100 years old, or history may not repeat itself or?

See Midpack's explanation earlier (see below with emph) - FIRECALC confuses the issue. We are talking about WR from the portfolio, not total spending as a % of portfolio. If you have large pensions, you can have a smaller portfolio - but the portfolio 30 year survival will still require a ~ 3-4% WR from the portfolio, regardless if that portfolio is $100,000 or $10,000,000.

-ERD50

I think that's your answer. The FIRECALC result is a little confusing I agree, but the result shown is spending level/portfolio where spending level = portfolio withdrawal + Soc Sec(s) + pension(s). The 3/4% WR you see mentioned often would be calculated as withdrawal/portfolio without Soc Sec and/or pensions.

Example:

If you have a $1M portfolio
with spending of $80K in year 1
and $20K Soc Sec in year 1
and $20K pension in year 1

your portfolio withdrawal would be $40K in year 1
your spending level would be 8% of your portfolio, not sure what value this number is
your (portfolio) withdrawal rate would be 4% of your portfolio - and this is the number we're usually referring to.

 

[Gotadimple]

ERD50,
That a good response and definition for the OP.

To muddle things a bit, here is an analysis by Wayne Pfau about the 4% rule and how effective it's been: Retirement Researcher Blog: Bill Bengen’s “How Much is Enough?”

Interestingly, he points out that asset allocation seems to be the one variable that makes the 4% WR achievable. His conclusion, however, is that the 4% rule doesn't work.

tmm99: this may be a little more than what you were looking for, but, over time this is one of the issues you need to consider.


-- Rita

 

[tmm99]

Thank you all for your posts!

ERD50 and Midpack,

Reading back Midpack's post and the explanation of ERD50, I get the picture now. Although my SS will be small (around 20K per year), evidently, it makes a big difference in WR at the beginning of my hypothetical retirement. I now feel I can target my retirement in 3 years (nothing wrong with setting goals! It's kind of fun to think about it.)

See Midpack's explanation earlier (see below with emph) - FIRECALC confuses the issue. We are talking about WR from the portfolio, not total spending as a % of portfolio. If you have large pensions, you can have a smaller portfolio - but the portfolio 30 year survival will still require a ~ 3-4% WR from the portfolio, regardless if that portfolio is $100,000 or $10,000,000.

-ERD50

It also looks like it makes a huge difference if you pick a Total Market or Mixed Portfolio. Mine started out with something similar to the FireCalc mixed portfolio, but now I am a bit cash heavy. I think it's time to revisit my asset allocation.