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Inflation and FIRECalc
Old 05-08-2011, 11:15 AM   #1
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Inflation and FIRECalc

I've been playing with my withdrawal spreadsheet. I've got it set up to do withdrawal calculations and then show me the results. I can change the start year to mimic retiring in a good vs. bad year (using historical data).

Anyway, here's the assumptions (not real data, but you'll get the drift):

Portfolio = 1,000,000
First year withdrawal = 35,000 or 3.5%
Withdrawals inflation adjusted
AA = 50%equity/50% bonds

I'm using 1929 as the retirement year. Obviously, no one hopes to retire at a similar time; but, plan for the worst, hope for the best.

This shows no problems (money lasts 35+ years) as long as the inflation assumption each year is less than ~3.5%. Increase the inflation assumption above that and the money won't last. I'm using one inflation number for the entire retirement, spreadsheet is getting unwieldy otherwise.

Firecalc shows 100% success for these inputs. Is it using the PPI/CPI for each year in the calcs?

Of course, it's reassuring that I get 100% success in FC . Scared me when I changed my inflation assumption in my spreadsheet to 4% and I'm eating Alpo at 85!
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Old 05-08-2011, 11:34 AM   #2
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Quote:
Originally Posted by lark_L View Post
. Is it using the PPI/CPI for each year in the calcs?
Yes, it uses actual market history and actual inflation history for each individual year - unless you make changes on the "Your Portfolio" tab.
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Old 05-08-2011, 11:52 AM   #3
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Originally Posted by lark_L View Post
Of course, it's reassuring that I get 100% success in FC . Scared me when I changed my inflation assumption in my spreadsheet to 4% and I'm eating Alpo at 85!
This is because equities do a pretty good job of staying even with or beating inflation as long as it is fairly low.

When inflation gets going equities may have higher earnings, but their PEs suffer and they tend not to stay even with inflation.

Most people who were not investing in the 70s do not understand this. Every time I read someone's assertion that "you need more equities to guard against inflation", I think, yes, maybe.
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Old 05-08-2011, 01:28 PM   #4
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Quote:
Originally Posted by lark_L View Post
I've been playing with my withdrawal spreadsheet. I've got it set up to do withdrawal calculations and then show me the results. I can change the start year to mimic retiring in a good vs. bad year (using historical data).

Anyway, here's the assumptions ...

Firecalc shows 100% success for these inputs. Is it using the PPI/CPI for each year in the calcs?

Of course, it's reassuring that I get 100% success in FC . Scared me when I changed my inflation assumption in my spreadsheet to 4% and I'm eating Alpo at 85!
Note that FireCalc has an option that creates a downloadable spreadsheet with all the detailed numbers for one start year. It's handy if you want to compare your method to FireCalc's method.
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