
FIRECALC: What data are used for equity returns?
03222004, 06:03 AM

#1

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Join Date: Mar 2004
Posts: 5

FIRECALC: What data are used for equity returns?
I'm doing my own calculation for a 25year 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 5050 stock/bond (30year 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, longterm government bond total returns, and largecompany 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 investmentparticularly 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.)
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Re: FIRECALC: What data are used for equity return
03222004, 11:28 AM

#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.
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Re: FIRECALC: What data are used for equity return
03222004, 11:36 AM

#3

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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.
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Re: FIRECALC: What data are used for equity return
03222004, 11:54 AM

#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.
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Re: FIRECALC: What data are used for equity return
03222004, 12:07 PM

#5

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Join Date: Dec 2002
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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.
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Re: FIRECALC: What data are used for equity return
03242004, 06:14 AM

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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.
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Re: FIRECALC: What data are used for equity return
03292004, 04:34 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 redone 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 stockprice 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 notedthat 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 196286) so that I can redo my calculations using the same bond data that FIRECALC uses.
Thanks again for all your help.
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Re: FIRECALC: What data are used for equity return
03292004, 06:57 AM

#8

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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 [(4.864.44)/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/
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Re: FIRECALC: What data are used for equity return
03292004, 07:19 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.
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