Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
FIRECALC: What data are used for equity returns?  
Old 03-22-2004, 07:03 AM   #1
Confused about dryer sheets
 
Join Date: Mar 2004
Posts: 5
FIRECALC: What data are used for equity returns?  

I'm doing my own calculation for a 25-year retirement period, using historic data for the 25 years beginning in 1962, and I get results quite different from those that FIRECALC gets.
I'm assuming a starting portfolio of $750,000, a starting withdrawal amount of $35,000, a 50-50 stock/bond (30-year treasury) mix, and (for simplicity) an expense ratio of 0. I've selected PPI for inflation (although the discrepancy exists for either inflation index).
Using the above assumptions, my analysis shows me running out of money at year 17, where FIRECALC shows me with assets of $763,049 at year 17.
I'm using Ibbotson data from the SBBI yearbook for inflation, long-term government bond total returns, and large-company stock total returns.
I'm using the following formula (where year 1 is the year 1962, and return on investment is the combined return for stocks and bonds):

ASSETS AT END OF YEAR ONE = [ ( ASSETS AT BEGINNING OF YEAR ONE minus 1/2 OF WITHDRAWAL AMOUNT FOR YEAR ONE) times RETURN ON INVESTMENT FOR YEAR ONE] minus WITHDRAWAL AMOUNT FOR YEAR ONE. And so on, for years 2 through 25.

To begin to understand why my results are different from FIRECALC's, I first need to know the source of data used in FIRECALC to reflect returns on investment--particularly data reflecting the performance of the stock market as a whole.
Thanks in advance for the help.
(P.S. I apologize if I don't acknowledge a reply immediately, as I do not access messages daily.)
__________________

__________________
fredmertz10 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: FIRECALC: What data are used for equity return
Old 03-22-2004, 12:28 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2002
Posts: 290
Re: FIRECALC: What data are used for equity return

For fredmertz10:

I believe that you have failed to include dividends.

The database for FIRECalc (and the Retire Early Safe Withdrawal Calculator) is found at Professor Robert Shiller's website.
http://www.econ.yale.edu/~shiller/

http://www.econ.yale.edu/~shiller/data.htm

FIRECalc makes a single withdrawal each year. The Retire Early Calculator makes two similar to what you have stated (using its default settings):

ASSETS AT END OF YEAR ONE = [ ( ASSETS AT BEGINNING OF YEAR ONE minus 1/2 OF WITHDRAWAL AMOUNT FOR YEAR ONE) times RETURN ON INVESTMENT FOR YEAR ONE] minus WITHDRAWAL AMOUNT FOR YEAR ONE. And so on, for years 2 through 25.

I think it is just a typo. But just in case: the second withdrawal is 1/2 of the withdrawal amount.

Have fun.

John R.
__________________

__________________
JWR1945 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-22-2004, 12:36 PM   #3
Recycles dryer sheets
 
Join Date: Dec 2002
Posts: 290
Re: FIRECALC: What data are used for equity return

Here is another difference:

In FIRECalc and the Retire Early Safe Withdrawal Calculator, fixed income investments are treated as single year trading vehicles. They have no capital gains or losses. A new interest rate is used each year, as if the old position were sold at zero cost with no capital gains or losses and replaced with new bonds at the original maturity (i.e., 30 years).

Have fun.

John R.
__________________
JWR1945 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-22-2004, 12:54 PM   #4
Confused about dryer sheets
 
Join Date: Mar 2004
Posts: 5
Re: FIRECALC: What data are used for equity return

Thanks, JWR. I'll check out the Shiller data.
__________________
fredmertz10 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-22-2004, 01:07 PM   #5
Recycles dryer sheets
 
Join Date: Dec 2002
Posts: 290
Re: FIRECALC: What data are used for equity return

I have just made a quick and dirty calculation using one of my modified versions of the Retire Early Safe Withdrawal Calculator. I set it up with an initial balance of $750000, a withdrawal rate of 4.666%, PPI, 0.00% expenses and commercial paper (not Treasuries). I looked at dividend reinvestments of both 0% and 100%. I left the other settings at their default values. For example, withdrawals are equally divided between the first of the year and the end of the year.

I read the 1962 balances.

With no dividends reinvested, the portfolio balance was positive in 1984 and negative in 1985.

With all dividends reinvested, the portfolio balance was $760668 in 1985.

Again, this was quick and dirty with differences both from what you are calculating and what FIRECalc is doing. But this does suggest that dividends are behind the differences.

Have fun.

John R.
__________________
JWR1945 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-24-2004, 07:14 AM   #6
Confused about dryer sheets
 
Join Date: Mar 2004
Posts: 5
Re: FIRECALC: What data are used for equity return

JWR--

Thanks for doing the quick and dirty calculation. I appreciate it.

I'll have to do more checking to see what's up.
__________________
fredmertz10 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-29-2004, 05:34 AM   #7
Confused about dryer sheets
 
Join Date: Mar 2004
Posts: 5
Re: FIRECALC: What data are used for equity return

JWR--

I appreciate your input. I've re-done my calculations using the Shiller data for stock returns, wtih dividends included, to produce a total return figure, as follows:

RETURN YEAR ONE = (PRICE YEAR TWO minus PRICE YEAR ONE plus DIVIDEND YEAR ONE) divided by PRICE YEAR ONE

I also corrected the typo in my formula. The correct formula is as stated in my original posting, except that it ends with "1/2 WITHDRAWAL AMOUNT FOR YEAR ONE" rather than "WITHDRAWAL AMOUNT FOR YEAR ONE."

I should note further that, in my formula, what I called "return on investment" is actually the multiplier
[1 + return]; e.g., a 5% return would be expressed as the multiplier 1.05, and a negative 5% return would be expressed as .95.

After correcting the formula, and using the same stock-price data used in FIRECALC, with dividends included, I still calculate that my money runs out in year 25, when FIRECALC says I should have $741,000 left. So, assuming I've taken proper account of dividends, there is still something causing me to get results different from FIRECALC's.

I'd like to look into the other methodological difference you noted--that for a given year FIRECALC uses an interest rate rather than a total return figure to calculate that year's gain in bond assets. If you would, I'd appreciate it if you'd tell me where I'd find the relevant interest rate data (at least for the years 1962-86) so that I can re-do my calculations using the same bond data that FIRECALC uses.

Thanks again for all your help.
__________________
fredmertz10 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-29-2004, 07:57 AM   #8
Recycles dryer sheets
 
Join Date: Dec 2002
Posts: 290
Re: FIRECALC: What data are used for equity return

This is what you need:

I recommend that you download the Retire Early Safe Withdrawal Calculator, Version 1.61, dated November 7, 2002.
http://www.retireearlyhomepage.com/re60.html

Its calculations are similar to those of FIRECalc. [It is not nearly as easy to use.] At one time, the formulas used by the two calculators were virtually identical. The Retire Early Safe Withdrawal Calculator is in an Excel Spreadsheet. This allows you to look into the details of all of the calculations, something that you cannot do with FIRECalc. It includes Professor Shiller's data and everything else that goes into calculations (such as inflation rates and bond yields). [Caution: the Retire Early Safe Withdrawal Calculator does not implement its originally intended capability for switching stock allocations according to P/E10. It was planned to have three allocations and two thresholds. It actually has two allocations and one threshold.]

This answers addresses your more immediate concerns:

For your own calculations, use:
RETURN YEAR ONE = [(PRICE YEAR TWO minus PRICE YEAR ONE) divided by PRICE YEAR] + [(DIVIDEND YEAR TWO) divided by PRICE YEAR TWO)]
instead of
RETURN YEAR ONE = (PRICE YEAR TWO minus PRICE YEAR ONE plus DIVIDEND YEAR ONE) divided by PRICE YEAR ONE

This calculates the return of stocks for specified year. It is not a gain multiplier. For example, in 1871.01 (January of 1871) the price was 4.44 (and the dividend was 0.26). In 1872.02 (January of 1872) the price was 4.86 and the dividend was 0.2633. The capital gain was [(4.86-4.44)/4.44] = 0.09459 or 9.46%. The dividend yield was [0.2633/4.86] = 0.0543 or 5.43%. The total return was (9.46%+5.43%) = 14.89%. The gain multiplier was 1.1489.

Have fun.

John R.

P.S. You can download free software for zip files from coffeecup.
http://www.coffeecup.com/software/
__________________
JWR1945 is offline   Reply With Quote
Re: FIRECALC: What data are used for equity return
Old 03-29-2004, 08:19 AM   #9
Confused about dryer sheets
 
Join Date: Mar 2004
Posts: 5
Re: FIRECALC: What data are used for equity return

Thanks, JWR, for the info and the quick reply. You've been really helpful.
__________________

__________________
fredmertz10 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
FIRECalc data dumps or saved runs for referencing during posts? Nords FIRECalc support 6 01-25-2007 07:09 AM
Firecalc update awaiting data... dory36 FIRE and Money 1 01-17-2006 04:33 PM
Historical Returns Data and Copyright BigMoneyJim FIRE and Money 4 10-06-2005 07:00 PM

 

 
All times are GMT -6. The time now is 05:43 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.