Has Firecalc ever been wrong for you? Do you trust it 90%?

[pb4uski]

I actually appreciate DLDS's posts on the subject. It isn't talked about very much otherwise, and I think it is an interesting alternative viewpoint. ....

I agree but I have trouble getting enthusiastic about sub-optimal alternatives... perhaps I am too much of a capitalist.

Let's take a hypothetical 65 yo retiree couple with a $1 million nestegg that they need $40k a year from (inflation adjusted, so a 4% WR) and expect to live to be 100 (35 year time horizon).

At one extreme they could take their million and buy a COLAed annuity that would provide $40k inflation adjusted (actually they would need $1.04 million, but what is $40k between friends). However, they would then have nothing left and would be in a pinch if some financial emergency arose.

On the other extreme, if they invest in a 60/40 portfolio, Firecalc indicates:

Here is how your portfolio would have fared in each of the 110 cycles. The lowest and highest portfolio balance at the end of your retirement was $-693,994 to $6,339,034, with an average at the end of $1,461,893. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 11 cycles failed, for a success rate of 90.0%.

For the liability matching couple, they will get their inflation-adjusted payments for their joint lives, have no source for a financial emergency and their heirs get nothing whether they die early or live long.

For the 60/40 couple, there is some risk that they might run out of money, but also a much more significant likelihood that performance is favorable and they can spend more and/or leave more to their heirs and/or charities. Also, if they don't live to 100, but only live to 90, there is $0 to $4.1 million legacy that they leave behind. There is also some risk that they might live longer than 100 or that investment performance might be poorer than ever.

I guess that as an averages player, I'm comfortable with the risk and I wouldn't recommend the other extreme to anyone, but if people choose it with their eyes wide open then fine... after all, its their money and their life.

 

[Corporateburnout]

can keep reading them and you can choose to ignore them.

Keep in mind that you responded to one of my earlier posts and not the other way around.

 

[daylatedollarshort]

At one extreme they could take their million and buy a COLAed annuity that would provide $40k inflation adjusted (actually they would need $1.04 million, but what is $40k between friends). However, they would then have nothing left and would be in a pinch if some financial emergency arose.

I don't think that would necessarily be a common liability matching approach. Liability matching does not preclude diversifying, so I doubt most households following this strategy would want to put their entire portfolio into a single private annuity. Other strategies include but are not limited to delaying SS, I-bonds, TIPS ladders, offsetting a fixed rate mortgage with a fixed income product, LTC insurance, etc.

Also, liability matching is only recommended for essential expenses - the money a retiree household needs for Medicare, food, housing, etc. The rest, the money for luxuries and non-essentials, can be invested in riskier assets depending on one's risk tolerance.

 

[pb4uski]

I understand but was trying to keep the example simple. If this couple had $1 million and needed $40k from their portfolio for essentials whether they use inflation adjusted annuities, or a combination of inflation adjusted annuities, I-bonds, TIPS ladders of whatever, they will still likely utilize their entire $1 million.

Same result if 80% of their expenses are essential so the invest $800k in liability matching assets and $200k in a more risky portfolio vs a couple who invest $800k in a 60/40 portfolio and $200k in the same more risky portfolio. It just ends up being proportional because any overfunding earns the same return.

 

[hesperus]

If "people" (whoever they are) are using any tool as a "predictor", they are making a mistake. There are no guarantees.

Those people are YOU
Of course predictions aren't about guarantees... Predictions are forecasts, estimates. I think you are confusing the word prediction with fortune telling. I'm not. I'm using the strict definition of the term. Firecalc is a tool that crunches data to forecast (ie predict) the probability that your portfolio will last x number of years. It doesn't matter what it's based on. It's still a forecast tool whether it uses historical data or meaningless garbage. If you find value in the data it gives you, then you choose to use it to infer your own probability of success. If you didn't find value in firecalc's probability forecasts (prediction), then why use it?

 

[W2R]

[...]Firecalc says I have enough? Should I trust it 90% or 80% ..

I think FIRECalc is pretty terrific. That said, I wouldn't (and didn't) base my retirement decision solely on the output of any one particular calculator. I think it's great input to the decision making process, though. I tried everything I could find before making my decision. For example I used lots of calculators, and ran my own computations and scenarios as well.

One caveat to the above: personally, if FIRECalc didn't give me a good likelihood of success, I would never, ever make the decision to ignore it and retire anyway. It is a bit more optimistic than I am because I tend to think that future market conditions may not be as good as they have been in the past. That's just my consistently worried nature shining through.

 

[ERD50]

Those people are YOU ...

You are just getting caught up in semantics. But that's OK, I'll play.

Of course predictions aren't about guarantees... Predictions are forecasts, estimates. I think you are confusing the word prediction with fortune telling. I'm not. I'm using the strict definition of the term. Firecalc is a tool that crunches data to forecast (ie predict) the probability that your portfolio will last x number of years.

No, no, no. FIRECalc is a tool to analyze past data. A thermometer and log book are tools that are used to record past temperatures. But no one would claim that a thermometer can forecast (ie predict) a future temperature.

So don't say that about FIRECalc either.

Now, if you want to argue that the wording in the FIRECalc description could be read to say it is used to predict (it sorta/kinda says that, while at the same time it is saying it isn't - IMO), that's fine. I don't really care about the description. Maybe the author just didn't wordsmith that so well. I just use the tool.

FWIW, I think the comparison of the three retirees isn't well stated either. But that doesn't affect the usefulness of the tool.

It doesn't matter what it's based on. It's still a forecast tool whether it uses historical data or meaningless garbage. If you find value in the data it gives you, then you choose to use it to infer your own probability of success. If you didn't find value in firecalc's probability forecasts (prediction), then why use it?

FIRECalc provides some data. What we do with it is up to us. For me personally, I feel more comfortable with the knowledge that a 100% historically successful portfolio means I would have survived the Great Depression and the inflation of the 80's. How else would I at least get that comfort factor?

But I still don't think of that as telling me anything about my 'probability of success' for the future. We don't know what the future holds. It only tells me the probability of the past. So you are making assumptions about what people are doing, and they are not always true.

Adding one other angle - for me personally, probabilities don't matter. I am one person. My success (as measured by FIRECalc) will be binary. I either run out of money before I die (FAIL), or I have a portfolio to sustain me for life (SUCCEED). Can I be thought of a both succeeding and failing, until we open the box?

Now, I sometimes say that one does not necessarily need to have a better idea to point out faults in something. But in this case, I think it is at least worth questioning.

So what do you do to plan for retirement spending?

-ERD50

 

[harley]

Yes, I'll reiterate what I said. I would like to see how someone who used it a decade ago compares the result to where they are now. People use it to see the probability of success in the future based on past returns. How's that different than seeing how one 'fared' historically? The idea underlying firecalc is that you are using it as a probability predictor of success in the future.

From Firecalc webpage:

Look closely at the phrase "then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds." Still say they're not promoting it as a predictor??
If that doesn't promote the use of firecalc as a predictor, than what does? Get serious. The site is littered with references to using it as a predictor. Bottom line is people ARE using it as a predictor. Period.

You guys are too enamored with nitpicking semantics, that you miss the underlying point

If you had cared to read beyond making your point, you might have seen the very next few sentences from the section you quoted:

If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds.
If you accept that assumption, then just tell FIRECalc how much you have and how much you'll be spending, and FIRECalc will tell you how often your strategy would have worked throughout history. Or what you need to change to make it all work.
How can FIRECalc predict future returns from past performance?
It can't. And it doesn't try.

Now anyone can choose to use FIREcalc as a predictor of future success, but if they state on this site that they are planning to do so, I suspect the majority of the response would be "Stop! It's not a predictor. It's just a historical calculator that gives you information that you can use while you make your own decisions." That's been my experience in the dozen or so years I've been reading this site.

 

[daylatedollarshort]

I'm just curious to those of you who think this time it isn't different, what do you think of the global decline in interest rates since the 1980's? Just an anomaly or stocks will be higher to make up for lower interest rates or something else?

I see articles on interest rates trending lower and people like Bogle (and Shiller, Grantham and Arnott) predicting lower stock returns, and they seem to make pretty logical conclusions:

John Bogle says you won't make much money from stocks - MarketWatch

What factors of Bogle's prediction do you think specifically are overly pessimistic? If you don't believe that Firecalc will be 100% accurate for future results do you discount your results further, like multiply the Firecalc results by another 50% or 80% or some other number to represent the probability that the future may not be like the past?

 

[harley]

I'm just curious to those of you who think this time it isn't different, what do you think of the global decline in interest rates since the 1980's? Just an anomaly or stocks will be higher to make up for lower interest rates or something else?

I see articles on interest rates trending lower and people like Bogle (and Shiller, Grantham and Arnott) predicting lower stock returns, and they seem to make pretty logical conclusions:

John Bogle says you won't make much money from stocks - MarketWatch

What factors of Bogle's prediction do you think specifically are overly pessimistic? If you don't believe that Firecalc will be 100% accurate for future results do you discount your results further, like multiply the Firecalc results by another 50% or 80% or some other number to represent the probability that the future may not be like the past?

I always assumed the future wouldn't be like the past. In my case I chose to be overly conservative before FIREing, doing things like not counting on SS at all, and building in a lot of wiggle room in my budget. Now while I have great hopes for new technology (cold fusion, anybody?) starting another big boom time, I would never base my DW's future on it. If it was just me I might be a little more daring, but I feel a responsibility to take care of her financially, as she has taken care of me in other ways.

 

[rodi]

My question about the very premise of the question... When I run firecalc - I get a gazillion lines... Which one is the "prediction" or forecast?

Okay - I'll admit I'm being a tad snarky with that comment, but it was the first thing I thought of when I first read the subject/question. If you are asking if results are worse than historical past... that's legit... but firecalc shows you the full range.... and if you cut it close to the minimum 100% - some come VERY close to zero (no money).

I think in general this is a belt and suspenders crowd... we plan for the lowest/worst firecalc squiggly line, but hope for those lines that shoot to the mega-millions.

 

[NW-Bound]

... we plan for the lowest/worst firecalc squiggly line, but hope for those lines that shoot to the mega-millions.

Yet, people still get upset when someone, even if that is Bogle, says that the future may look like those lines that skim the zero axis, like an Exocet missile cruising 100 ft above sea level.

 

[pb4uski]

The way I figure it, if Bogle is right my kids will be more mad at him than I will be.

 

[Options]

Those people are YOU
Of course predictions aren't about guarantees... Predictions are forecasts, estimates. I think you are confusing the word prediction with fortune telling. I'm not. I'm using the strict definition of the term. Firecalc is a tool that crunches data to forecast (ie predict) the probability that your portfolio will last x number of years. It doesn't matter what it's based on. It's still a forecast tool whether it uses historical data or meaningless garbage. If you find value in the data it gives you, then you choose to use it to infer your own probability of success. If you didn't find value in firecalc's probability forecasts (prediction), then why use it?

I get what you're saying, yes it is a matter of semantics, and yes I do find value not only in Firecalc, but in other tools as well. In fact, in I find REWahoo's posts in another thread comparing his ten year results with Firecalc's most illuminating (educational?).

I find there's a lot of emotion (fear?) that goes into much of this planning because we all want it to work out (who doesn't?) and the guarantees just aren't there, no matter how many spreadsheets we concoct. Like all of life, all we can do is adapt, remain flexible, and alert. It will probably be some years before I personally can be a bit more relaxed about living off a PF, and I'm okay with that.

Gives me something to do in retirement and I find it much more interesting than doing crossword puzzles.

 

[photoguy]

Firecalc is just computing a historical mean failure rate given a portfolio and withdrawal rate. This is not a prediction.

But a historical mean is very useful in predicting what the mean rate may be in the future.

People who say firecalc is biased or optimistic really mean that taking the historical rate and using it as a prediction of the future is biased/optimistic.

I think we should be discussing how we evaluate future risk (and how it may differ from the past) and not going around in circles arguing about whether Firecalc is making a prediction or not.

 

[samclem]

(Highlight added)

. . . there are other methodologies with less risk for funding retirement that are not well advertised because they are not as profitable for the large investment companies.

I wouldn't say that annuities (a liability-matching tool) aren't advertised--quite the opposite. Anybody who seeks advice from a commission-based FA is probably going to hear about them.
The liability-matching proponents, new and old, have full access to the marketplace of ideas, they can preach as loudly as they want. Maybe they are being suppressed by a cabal of 'large investment companies." Maybe their ideas lack traction because they don't make sense for the majority of retirees. I'm happy to read their missives and evaluate them based on their worth.

 

[samclem]

I'm just curious to those of you who think this time it isn't different, what do you think of the global decline in interest rates since the 1980's? Just an anomaly or stocks will be higher to make up for lower interest rates or something else?

Since you asked--I think we're probably in for a decade of rough sledding. But I think companies will keep selling useful things, earning money, and paying dividends--I'd like to benefit from that. I think interest rates will mean revert. I think PE10 will trend back toward historical norms (= low equity price appreciation for this period). But I don't know which assets will outperform/underperform and in which order, I don't know what inflation will do, and most importantly I don't know when "normal" will resume. But I will not shackle myself and family to investments guaranteed to yield zero/near zero real return in perpetuity to avoid a decade or so of volatility. I might just as well invest it all in gold, silver, ammunition, MREs or some other "head for the hills, things will never be right again" trend.

 

[daylatedollarshort]

But I will not shackle myself and family to investments guaranteed to yield zero/near zero real return in perpetuity to avoid a decade or so of volatility. I might just as well invest it all in gold, silver, ammunition, MREs or some other "head for the hills, things will never be right again" trend.

I don't really see the link between investing for capital preservation for essential expenses, and putting ones entire portfolio in risky assets like gold and silver, and I don't really get the whole MRE and ammunition analogy at all. That seems to be the extreme opposite of liability matching. How could you match ammunition or an MRE? I don't get that.

I am also not sure about the head for the hills idea. It seems to me the low returns for stocks and interest rates prediction are coming from fairly math and logic based formulas and trends graphed by mainstream investment gurus and writers, like Bogle, Shiller, Bernake, articles in THE Economist and Bloomberg, and the other financial experts mentioned in the previous link. But I do appreciate your taking the time to answer my questions.

On the mutual fund front, I think we can agree to disagree. I agree with Zvi Bodie that the reason we never hear about I-bonds (and this could be said for TIPS, too) is that financial advisers tend to push products with the highest profitability. Mutual funds may be great investments for many, but for the risk adverse they may not always the most logical choice for 100% of a retiree household's portfolio, We sure didn't hear about anything else (even annuities) from our retirement planning session with a mutual fund rep and the many unsolicited follow up calls.

 

[hesperus]

Now, if you want to argue that the wording in the FIRECalc description could be read to say it is used to predict (it sorta/kinda says that, while at the same time it is saying it isn't - IMO), that's fine. I don't really care about the description. Maybe the author just didn't wordsmith that so well.

I think we can agree on that one, and the fact that we choose to do with the data what we wish.

 

[pb4uski]

.....On the mutual fund front, I think we can agree to disagree. I agree with Zvi Bodie that the reason we never hear about I-bonds (and this could be said for TIPS, too) is that financial advisers tend to push products with the highest profitability. Mutual funds may be great investments for many, but for the risk adverse they may not always the most logical choice for 100% of a retiree household's portfolio, We sure didn't hear about anything else (even annuities) from our retirement planning session with a mutual fund rep and the many unsolicited follow up calls.

I've looked at I-Bonds off and on and haven't found them to be particularly attractive. The current rate is 1.64%. I get 0.95% from my online savings and 5 year CDs are ~ 2.25% so 1.64% isn't particularly compelling. Plus, at best we could only buy $30k a year of I-Bonds and 1/3 of that would have to be paper through tax refunds. It just seems to be a lot of hassle and restrictions with minimal benefit. If there were no limits then I might consider them or even a ladder for 5 or so years of spending.

I think FAs tend not to push I-Bonds because of the above limitations as well as the fact that they don't get any comp on them.

BTW, it is risk averse, not risk adverse.

 

[HFWR]

In my ten plus years around here, we've discussed i-bonds and TIPs a fair amount...

 

[Andre1969]

Personally, I'm shooting for a ~95% chance of success with FireCalc. But, I ran a more aggressive scenario that gets me an ~80% chance of success.

The first cycle to fail did so around year 18, with plenty more poised to do so soon after.

It seems to me though, that you should be able to see the train wreck coming well in advance, though. The failure cycles seemed to all have one thing in common...they'd start trending downward from the get-go, dropping lower and lower after every year. So it would seem to me that if you were falling into this type of rut, it might be a good idea to reduce your spending, go back to work, or do something to stop the crash.

None of the cycles appear to be humming along just fine and then crash to nothing in just a few short years. It's taking a decade or more for them to fail.

 

[sansha]

I ran Firecalc with the standard investment option and then ran it with every other, and still got 100% with my lowest projected spending, Then I increased spending per trial till it failed, giving me an idea of my max spending - useful to know for years where I might have truly major expenses, etc. That's if I live 30 years or more - even 40 looked okay.

While my estimated spending doesn't leave me with a ritzy lifestyle, it leaves me enough. And that and leisure is a feast. Estimated included maxing out health spending to the full 6500 deductible and adding a 3K portion for major house repairs every year. In years where I don't spend much, I have the option for more optional spending,if I choose.

Perhaps its also wise to consider if the stock market and financial institutions crash to such an extent and for so long that they never recover (as they did after 2008), and Firecalc is completely off thereof, then I'll have more tangible things to worry about (food, water, possible civil unrest at the risk of being called a doomsday person). What may be intangible numbers in a portfolio may be less valuable after such a collapse than tangible things like a veggie garden, chickens and a well with a hand pump.

 

[pb4uski]

...Perhaps its also wise to consider if the stock market and financial institutions crash to such an extent and for so long that they never recover (as they did after 2008)....

For a 60/40 balanced portfolio with dividends reinvested, from peak to trough and back was about 3 years during the great recession (roughly Oct 2007 to Oct/Nov 2010)... based on Vanguard Balanced Admiral growth of $10k chart.

VBIAX Vanguard Balanced Index Adm Fund VBIAX Quote Price News

 

[sansha]

For a 60/40 balanced portfolio with dividends reinvested, from peak to trough and back was about 3 years during the great recession (roughly Oct 2007 to Oct/Nov 2010)... based on Vanguard Balanced Admiral growth of $10k chart.

VBIAX Vanguard Balanced Index Adm Fund VBIAX Quote Price News

As I said, if they crashed and *didn't* recover, as they did (recover) post 2008. Few of us are pumping our own water yet.