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Using FIRECalc and Need Advice
Old 04-14-2011, 12:49 PM   #1
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Using FIRECalc and Need Advice

I am trying to work through FIRECalc and I have come up with some questions. I was wondering if you could provide me with some advice in regard to those questions.

1. What do you think is a good estimate for a percentage amount to allocate for federal and state taxes in my retirement budget? For example, if I will need $54,000 a year to meet my annual expenses, what percentage amount should I add to the $54,000 to get to my total annual spending? I know a lot a variables play a role in the percentage, I am just looking for a rough estimate. Having read Work Less, Live More, the author seems to suggest a pretty low percentage amount.

2. I will have a small defined benefit pension. I wont be able to collect on it for 20 years from now. I know the monthly amount that I will receive from it (the amount will not increase based on a COLA between now and the 20 years from now when I will be able to collect). The amount will have a cost of living adjustment, but the cost of living adjustment will not start on the pension until I am eligible (based on age) to start collecting from it. So, do I select the check box in FIRECalc that would identify this pension as having an inflation adjustment?

3. If I estimate that I will need $54,000 a year today (including mortgage payment and high property tax) does that mean that if I am 40 today, when I am 60, I will need $97,530 to cover these same costs, assuming three percent average inflation? (That seems like a lot of money!)

4. In the FIRECalc area titled- How Is Your Portfolio Invested?, it asks for the % of portfolio that is in equities, versus fixed income and says research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term. What research suggests these amounts?

5. Is there somewhere that I can see an example of “real life” withdrawals using “95 % Rule” from Work Less, Live More? I did take the book out of the library , but I did not find a year-to-year example of how the 95% Rule works. Also, do you use (or plan to use) the 95 % Rule?

6. Do you use Bernicke’s Reality Retirement Plan when using FIRECalc? I understand the theory behind it, but it seems a little too optimistic for me. For me, costs always seem to rise!

7. Do you use PPI CPI or a set 3 percent to address inflation adjustments? I understand that PPI is a little more conservative, correct?

I know there are a lot of questions here, I just want to make sure that I am doing my planning correctly. Please comment on any, or all, of these questions. Thanks!
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Old 04-14-2011, 01:08 PM   #2
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I'll take a shot at addressing a few of your questions:

Quote:
Originally Posted by midnighter777 View Post
I am trying to work through FIRECalc and I have come up with some questions. I was wondering if you could provide me with some advice in regard to those questions.

1. What do you think is a good estimate for a percentage amount to allocate for federal and state taxes in my retirement budget? For example, if I will need $54,000 a year to meet my annual expenses, what percentage amount should I add to the $54,000 to get to my total annual spending? I know a lot a variables play a role in the percentage, I am just looking for a rough estimate. Having read Work Less, Live More, the author seems to suggest a pretty low percentage amount.

There are too many variables to know what the future holds for taxes other than most people believe they will increase. One thing I would suggest is to run some "what if" numbers through TurboTax or similar software to see what the average (not marginal) tax rate is today on something that will net you $54k after taxes. Then increase that average percent by whatever amount you feel is reasonable.

2. I will have a small defined benefit pension. I wont be able to collect on it for 20 years from now. I know the monthly amount that I will receive from it (the amount will not increase based on a COLA between now and the 20 years from now when I will be able to collect). The amount will have a cost of living adjustment, but the cost of living adjustment will not start on the pension until I am eligible (based on age) to start collecting from it. So, do I select the check box in FIRECalc that would identify this pension as having an inflation adjustment?

Yes.

3. If I estimate that I will need $54,000 a year today (including mortgage payment and high property tax) does that mean that if I am 40 today, when I am 60, I will need $97,530 to cover these same costs, assuming three percent average inflation? (That seems like a lot of money!)

Yes (and yes).

4. In the FIRECalc area titled- How Is Your Portfolio Invested?, it asks for the % of portfolio that is in equities, versus fixed income and says research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term. What research suggests these amounts?

FIRECalc and the Trinity Study, to name two.

See Firecalc calculator sensitivity to asset allocation
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