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FireCalc Questions
Old 09-04-2006, 06:39 PM   #1
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FireCalc Questions

The tool asks for how much you need or want to live on each year.* By way of explanation, a "spending averages" table is provided which has no entries for capital gains, federal or state taxes on portfolio withdrawals.* I presume that the figure I enter for needed or wanted income should also include amounts that I would prefer to keep but which must be forked over for taxes?*

Does the model provide any way to distinguish between "true" or personal inflation and official indicators of changes in the cost of living such as CPI or PPI?* *For example, my pension will be inflated by the CPI adjustment.* My personal inflation rate may be higher or lower and would have a large impact when compounded over 40 years.
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Re: FireCalc Questions
Old 09-04-2006, 08:27 PM   #2
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Re: FireCalc Questions

You'll need to increase up your annual withdrawal by whatever tax rate you anticipate in retirement.

If you expect to experience higher than historical inflation you can account for that by boosting the portfolio expense ratio by however many tenths of a % you think your personal inflation rate will be.

Cb
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Re: FireCalc Questions
Old 09-04-2006, 08:58 PM   #3
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Re: FireCalc Questions

Quote:
Originally Posted by Cb
. . .

If you expect to experience higher than historical inflation you can account for that by boosting the portfolio expense ratio by however many tenths of a % you think your personal inflation rate will be.

Cb
I don't think that will do what you want. The expense ratio reduces your hypothetical portfolio by a percentage of the whole portfolio. Inflation reduces your portfolio by a percentage of your expenses. Since the spending model is independent of the portfolio balance after the first year, you won't be tracking inflation on expenses if you use the expense ratio.

What you can do is add an expense in one of the expense blocks that starts in year 1 and continues throughout retirement. If you think your personal inflation rate is likely to run 1/2-percent higher than CPI, then make this expense equal to the product of your initial withdrawal amount x 0.005. For example, if your initial withdrawal were $40,000, then make this special expense = $40k*(0.005)=$200. Then check the box to increase this expense with inflation.

Good luck.
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Re: FireCalc Questions
Old 09-05-2006, 06:44 AM   #4
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Re: FireCalc Questions

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Originally Posted by sgeeeee
I don't think that will do what you want.* The expense ratio reduces your hypothetical portfolio by a percentage of the whole portfolio.* Inflation reduces your portfolio by a percentage of your expenses.* Since the spending model is independent of the portfolio balance after the first year, you won't be tracking inflation on expenses if you use the expense ratio.

What you can do is add an expense in one of the expense blocks that starts in year 1 and continues throughout retirement.* If you think your personal inflation rate is likely to run 1/2-percent higher than CPI, then make this expense equal to the product of your initial withdrawal amount x 0.005.* For example, if your initial withdrawal were $40,000, then make this special expense = $40k*(0.005)=$200.* Then check the box to increase this expense with inflation.* *

Good luck.
Thanks for your input.* That makes perfect sense.* It appears to me that boosting the portfolio expense ratio may still make sense as a technique to adjust for the fact that the model appears to assume tax-free compounding of funds held in taxable accounts.
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Re: FireCalc Questions
Old 09-05-2006, 06:50 AM   #5
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Re: FireCalc Questions

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Originally Posted by hellbender
Thanks for your input.* That makes perfect sense.* It appears to me that boosting the portfolio expense ratio may still make sense as a technique to adjust for the fact that the model appears to assume tax-free compounding of funds held in taxable accounts.
HB, this is obviously a shortcoming, but it is extremely difficult to madel any sort of taxation because each person's tax situation is different and the gummint keeps changing things. For the person living solely off portfolio withdrawals, taxes typically decline to very small amounts in retirement anyway.
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Re: FireCalc Questions
Old 09-05-2006, 07:15 AM   #6
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Re: FireCalc Questions

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Originally Posted by brewer12345
HB, this is obviously a shortcoming, but it is extremely difficult to madel any sort of taxation because each person's tax situation is different and the gummint keeps changing things.* For the person living solely off portfolio withdrawals, taxes typically decline to very small amounts in retirement anyway.
Yeah. . . . . my own model takes taxes into account but it gets more and more difficult to model with each passing year, what with expiring provisions, inflation adjustments, caps, sunset provisions, etc. etc.* Plus the fact that everything is up for grabs again each new session of congress.* It's a deplorable mess.* As far as my models are concerned, it may be time to chuck it all and just assume a flat rate.* From my experimentation with the advanced Firecalc model, I am left with the following impressions:*

The model does what it says it will do very well.* It's easy to use and provides meaningful results.

I understand the decision not to try to address taxation with any rigor.* I think it would be a good idea for the model instructions to more directly address the model limitations which result from this decision.* It is especially important for users to understand that amounts required to pay taxes must be included in their spending needs.* Currently the Firecalc instructions are positively misleading by first, not mentioning this fact and second, by referring users to a place where spending needs can be calculated which specifically omits taxes.

I believe the capability of differentiating between government inflation and real (or personal) inflation is worth discussing in the instructions if not actually adding the capability to the tool.

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Re: FireCalc Questions
Old 09-05-2006, 07:35 AM   #7
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Re: FireCalc Questions

Again, we come to the same problem with inflation that we have with taxes: it is so individually variable that it is almost impossible to model in a generic sense. I don't really have a good solution for that one. I would point out that the model allows you to use PPI instead of CPI (PPI tends to show inflation upticks sooner and more dramatically than CPI). Its also worth remembering that inflation indexes miss a very important way that individuals cope with high inflation: they change what, where and how much they buy to reduce the effects of inflation. In contrast, the indexes are (more) static baskets that do change very quickly.

On taxes: I think you see less discussion for a couple of reasons. First, anything written would be in danger of being outdated very quickly. Second, and far more importantly, taxes aren't even close to the top expense for most Er'd folks. Number one is usually medical insurance, by a long shot.
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Re: FireCalc Questions
Old 09-05-2006, 07:59 AM   #8
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Re: FireCalc Questions

Yeah . . .* the model would seem to give more accurate results for those who maintain high equity allocations (minimizes taxes until sale and withdrawal).* My situation is very different.* For me the model will give very rosy responses only.* For example, since my pension is inflation adjusted and I can live on a percentage of it, the model says that I need never make a withdrawal from my portfolio.* In fact, if I tell the model that I have only saved $1 in my entire life and never invest a cent in equities, it tells me that my retirement is sound for 40 years and that I will die a millionaire.


In my own projections, I asssume that my personal inflation rate will exceed the government's estimates. I don't really believe this but in projecting 40 years, conservatism is the rule.* I also assume that medical/health inflation rates will be much higher than the CPI.* I further assume a high-tax, high-inflation environment.
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Re: FireCalc Questions
Old 09-05-2006, 08:10 AM   #9
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Re: FireCalc Questions

You'll have to forgive me for saying this (back to work after a three day weekend), but I think you are purposely trying to find a way for your retirement to fail. Why not posit a direct hit meteor strike in the town where you live?
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Re: FireCalc Questions
Old 09-05-2006, 08:24 AM   #10
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Re: FireCalc Questions

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Originally Posted by brewer12345
You'll have to forgive me for saying this (back to work after a three day weekend), but I think you are purposely trying to find a way for your retirement to fail.* Why not posit a direct hit meteor strike in the town where you live?
No apologies required.* I am in complete agreement.* I further recommend that anyone planning for retirement, and especially those opting for early retirement, purposely try to find a way (within reason) for their plan to fail.* It is extremely important to understand the factors (beyond asset allocation and volatility in the equities markets) which can destroy a retirement plan.* *Afterwards they should plan to deal with such factors while they can.* If you don't fail your own plan, the world may do it for you.*

Investigating the meteorite scenario is unnecessary.* That would solve all my problems with no further planning required.* :
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Re: FireCalc Questions
Old 09-05-2006, 10:57 AM   #11
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Re: FireCalc Questions

Quote:
Originally Posted by hellbender
For me the model will give very rosy responses only. For example, since my pension is inflation adjusted and I can live on a percentage of it, the model says that I need never make a withdrawal from my portfolio.
It sounds like you are over complicating things. No model is going to tell you what will happen in reality - it is a model. I have a COLAd pension as well. I just figure out what the pension won't cover - those are the expenses I model in Firecalc. I over estimate food and travel expenses by a long shot since I know I will be able to cut those back in a crunch.

If you are worried about personal inflation, try it with high expenses, try it higher still and keep working until you have enough to be fairly comfortable. To paraphrase Tom Cruise in Risky Business, "at some point you just have to say what the F***. " Remember, the meteor strike others mentioned could happen while you are working - not just after RE.
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