ER Consumption (Projected Spending Habits)

[chinaco]

An Argument: All of us would probably prefer to enjoy reaping the full rewards of our labor rather than let it expire (go unused). Stated differently, You probably value your assets less than what the assets can provide (i.e., what the money can buy). One would rather spend the money to enjoy it rather than save it. I know this is kinda philosophical. But it is also a practical issue when one retires.

One of the keys to planning for retirement is planning the spending pattern. Most of you are aware of that fact.

Now that I am planning for consumption of our assets. I am finding that it is a bit more difficult than I expected. We could take a very conservative approach and overly limit spending during retirement... but we saved it to spend it. (I am not referring to frivolous waste). Understanding spending is the key to understanding how much is needed for retirement, when one can retire, how much can be spent in retirement without exhausting one's assets, etc... And I am finding that it is not a trivial exercise!

Most planning tools I have used are very weak on planning consumption (expenses). Sure, many of them will allow someone to type in many categories, and apply a basic inflation factor... but that is about all they do. And they certainly do not accomodate the variability/probability for different economic/life scenarios.

At the end of the day, no one can completely predict/understand the future. Therefore we all will need to rely on making common sense adjustments based on the situations that arise. Probably the best that can be planned for is a range of expenditures at different phases (life stages probably tied to health and age) of retirement.

Apparently this is a gap that is being recognized by financial planners. I suspect that there will be a plethora of planning tools to hit the market soon that will help. They will probably employ techniques that are used commonly in actuarial sciences and economics.

The only tool that I have seen so far that claims to treat spending in this complex way is the ESPlanner. It is $149. It seems a small cost (investment/risk) when considering what is at stake (my retirement portfolio). Of course, if it is inaccurate or leads one to the wrong conclusions... the results are worse than wasting $149.

http://www.esplanner.com/

Now for the question: Does anyone have experience with this tool or any other advanced tools for planning/projecting consumption in retirement?

 

[dex]

I took a look at the esplanner site and it may be helpful if you are looking for all your information in one place. However, I would suggest that what you are looking for can be done with an excel spread sheet.

Using excel you will have to do all the work but you will be learning all the nuts and bolts that go into your finances both income, expense and cash flow.

For example, if you are still working you will need to understand all the mandated deductions in your paycheck and how 401Ks, IRAs and other pretax deductions affect your net income.

On the expense side tracking and projecting you expenses gives you information and thereby control over them.

Sometimes it is better to build your own model so that you can fully understand how changes in the asssumptions change your projections.

 

[OAG]

Dex: Great and inexpensive advice as most of us have Excel (or can get Open Office for FREE). It it very easy to do and as one gets into it you can go to any detail extreme you want to.

 

[2B]

I asked about it a few months ago and only one person admitted/claimed to have personally bought it and ran it.  They weren't very impressed from their post.

I have the feeling it would be more useful to people beginning the journey in aspiring to FIRE rather than the more grizzled folk already retired or just about there.  For us the moral equivalent would probably be to go with Bernicke's approach which seems to be using the same data ESPlanner does.  A key component of the approach from what I read is the drop off in consumption as one ages and that this drop off is not related to a depletion of assets.  In aggregate this drop off is far greater than the increase in medical costs.  

However, my FIL and MIL are both in a resident care facility which has significantly increased their "cost of living" by almost 100%.  It's been going on about 2 years now with no end clearly in site.  Fortunately, they have the assets to support both of their cost of living not dying for at least another decade.  Once one dies, the other one has more than enough income for eternity.

Going with Bernicke is probably the right move to maximize the use of your assets.  I say this with the presumption that LTC is to be covered by a healthy reserve of assets or well off kids happy to delay their own FIRE to pay for a great place for mom and/or dad to stay the last 10 years of their life.

I am of the opinion that most posters here are overestimating their longevity and/or their heath in their later years should they manage to beat the actuarial tables.  I am personally going to declare myself FIRE'd before reaching the 95% SWR of FIRECalc but I lack the courage to go with a "pure" Bernicke plan.  That means I will probably stay in the workforce longer than necessary and not spend as much as I could in my early years of FIRE.

As a final thought -- In most of my life the greatest risks and opportunities were not foreseen when I made my plan.

 

[chinaco]

However, I would suggest that what you are looking for can be done with an excel spread sheet.

Using excel you will have to do all the work but you will be learning all the nuts and bolts that go into your finances both income, expense and cash flow.

I thought about that... I use Open Office at home. To do so, I would need to collect all of the historical data and build the spreadsheet. You are correct, the exercise would help me to learn all of the components of my model. But, I would need to embark on a large study effort to fully understand how to model it... It is a worthwhile exercise. But If I can purchase a reliable tool that does the modeling (at a low cost), I would probably not expend the effort. If I cannot find a tool, I will probably use excel or just write the code myself using some other language.

I am primarily trying to find out if others have tackled this problem yet. It also seems to me that the model would need to be updated each year as one progresses and more historical information is available to make possible adjustments. I do not believe the modeling exercise is a one time event. Rather it is a bit more like portfolio managment.

Going with Bernicke is probably the right move to maximize the use of your assets. I say this with the presumption that LTC is to be covered by a healthy reserve of assets or well off kids happy to delay their own FIRE to pay for a great place for mom and/or dad to stay the last 10 years of their life.

I agree with some of Bernicke's concepts. They seem to make sense and he did test the model. This is kinda what I meant by making common sense adjustments as the actual events emerge over time (i.e., manage portfolio and expenses).

Bernicke's model and rules may be an effective way to increase spending and throttle back if certain type of events occur. Ultimately, his model is a reactive approach (i.e., adjust to current reality), rather than projections. It is not bad... But it is tilted toward using a variable WR rate to regulate expenses. It does provide some insight. Regulating the WR% is part of my plan. I do believe in the concept of phases of retirement.

I am looking for more insight than Bernicke's model provides.

On the LTC issue. We have LTC insurance. Short of something happening to invalidate that migitgation technique, I am considering us having that situation covered. This is a classic " pay to offload the risk" approach. In my view, it is money well spent.


New additional Info

One part of an approach that I am considering for funding expenses is to ensure that we have a baseline of income streams apart from our basic portfolio.

I have a small pension (no COLA), DW and I have SS. We are considering taking her SS @ 62 and mine at 66.x or 70. Mainly for the benefit of having a larger COLA income stream for the surviving spouse. The final part of my plan (which is why I am interested in this modeling exercise). I am considering the purchase of an immediate annuity with part of our portfolio to cover the gap between the income streams listed and a baseline set of expenses that will be needed. I will probably purchase the annuity when interest rate look attractive after ER or around 65 - 70 age. Plus, I am considering of a reserve account (only to be used) to supplement the income streams to cover inflation. In my view the annuity is worth the cost (and less asset growth) to get the pooling of money effect to have the lifelong income stream. The SPIA would only represent a small part of our portfolio.

If I can effectively determine our base expenses, I can craft a set of income streams that match the basic need. That way we will feel more confident making discretionary spending in the early and mid years of retirement. For us that age range is 55-75.

 

[haha]

I think this whole line of inquiry is useless. Another engineer's hobby to convince him he is doing something worthwhile.

Figure out how much you can safely spend, which is a real art in itself. Then trust your natural human urges to find a way to spend every bit of that.

What you might enjoy spending your money on may be completely different from what another person might.

 

[chinaco]

I think this whole line of inquiry is useless. Another engineer's hobby to convince him he is doing something worthwhile.

Figure out how much you can safely spend, which is a real art in itself. Then trust your natural human urges to find a way to spend every bit of that.

What you might enjoy spending your money on may be completely different from what another person might.

True enough. Each person has a different slant on spending needs/wants.

When you say "line of inquiry is useless" Do you mean that it is an impossible task? Unlikely to yield insight? Or that you do not see the value in expending time on it?

My exact point is: "How much can one safely spend" and the corollary "how much might we need to spend". It occurs to me that any form of insight I gather probably puts me in a better postion than I am today. Otherwise I am likely to overreact to market bumps and tighten up too much.

Nevertheless. Personal opinions aside. I was asking if anyone had identified a tool.

AHAH

 

[haha]

True enough. Each person has a different slant on spending needs/wants.

My exact point is: "How much can one safely spend" and the corollary "how much might we need to spend". It occurs to me that any form of insight I gather probably puts me in a better postion than I am today. Otherwise I am likely to overreact to market bumps and tighten up too much.

I see your point. If you are still working and both could and would be willing to just go on working if you discovered that your homemade spending projections were unrealistically low, then this might be useful.

I think many people here feel that quitting is a given, and they will just cram themselves into whatever shape life is there when it arrives.

I think also that there are likely to be way too many possible discontinuities to make the planning of much use. I guess what I mean by this is that I wouldn’t bother to do it, or likely bother to read it if someone did it for me for free.

Too many coin tosses between now and the future.

I guess my motto is more KISS.

Ha

 

[wabmester]

An Argument: All of us would probably prefer to enjoy reaping the full rewards of our labor rather than let it expire (go unused). Stated differently, You probably value your assets less than what the assets can provide (i.e., what the money can buy). One would rather spend the money to enjoy it rather than save it. I know this is kinda philosophical. But it is also a practical issue when one retires.

As has been pointed out, life is unpredictable. You're better off planning for an unexpected new kid, divorce, death, inheritance, disaster, or LTC than trying to plan how to ensure that you wring every last drop out of your assets.

Incomes vary, net worth varies, expenses vary. Life is a game of adaptation.

I'm in year 5 of retirement now. My net worth has grown to the point where I have a greater margin of safety than I did when I retired, but it's not a large enough margin that I'm sure I can squander it. If my margin of safety doubles, then I'll have to buy a yacht or fund an endowment or something, but I'm not there yet.

My current "problem" is that my investment *income* has grown to the point that I'll need to do some serious tax planning for this year. I think that's about as far as you can take this planning stuff in retirement.

 

[kcowan]

I think the acid test to any retirement planner is: How did you get along without it while working? Most people approach life by taking what they earn and allocating to stuff. Sometimes that stuff becomes excessive but eventually there is an equilibrium reached.

Retirement is much the same. Except the income is generally not increasing beyond inflation, and sources of expenses are substantially less:
- clothing
- child rearing
- travel to work, including the car

and these are offset by:
- travel for vacation
- hobbies
- medical

Remember that any plan is just an exercise in improved understanding of actuals. Sometimes more information does not improve decision-making. 8)

 

[Nords]

We could take a very conservative approach and overly limit spending during retirement... but we saved it to spend it. (I am not referring to frivolous waste). Understanding spending is the key to understanding how much is needed for retirement, when one can retire, how much can be spent in retirement without exhausting one's assets, etc... And I am finding that it is not a trivial exercise!

And yet here we are debating the "worth" of $150 software. I bet you've spent more of your hourly rate on this thread already.

Here's a summary of John Greaney's review of ESPlanner: "For users accustomed to personal financial planning programs like Intuit's Quicken or Microsoft Money, the ESPlanner user interface isn't as polished and user friendly. The program does what it says it does, but it takes a while to work through the very detailed and somewhat cumbersome data entry process. Overall, the program's ability to model changing financial circumstances over a lifetime along with detailed Social Security benefit and income tax analysis probably outweighs the data entry burden and relatively high purchase price."

So listen to a guy who still picks up pennies during his evening walks and whose family vouches that he can squeeze a nickel hard enough to make Jefferson whimper for mercy: Go spend the $150 and knock yourself out. The importance of the evolution is that you'll either find a bunch of holes you need to fix, or you'll reassure yourself that you have it all under control. Your "inner engineer" will get far more than $150 of entertainment value from this purchase.

If you want to spend a lot more time maximize the value of your $150 expense, then work through FIRECalc's different options and follow up with a paid version of FinancialEngines (although many 401(k) providers can get FE for free). It's also extremely detailed and will give you an idea of how good your planning has been.

I have a soft spot in my heart for FinancialEngines-- software that gives a nuclear engineer enough levers & dials to tweak to stay happy for hours. But its premise is oversimplified and its Monte Carlo implementation is perhaps too conservative-- not that it's a bad thing, but if FE is happy then you really are in good shape. I had run FE in 2000 as the market headed downward and concluded "Looks like we'll make it", which gave my spouse an additional shot of courage to resign from active duty. I ran it again on 17 Sep 2001, after the markets had re-opened from 9/11, and decided that if FE worked with those numbers then anything above that was was gravy.

So give yourself a few months weeks to plug numbers and tweak settings, and let us know wht you learn. I bet you find out that your SWR is somewhere between 3-5% and your ER spending may be variable. I bet you also learn that there are too many moving parts in this equation to be able to come up with one definite answer other than "Looks like this should work."

I bet you can hear Jarhead laughing from here-- enjoying his life while we're talking numbers.

But if the detailed financial analysis achieves your primary purpose of sleeping better at night, and of convincing your spouse/family of the same with cool printouts extremely detailed analysis, then ESPlanner has done its job. Don't let a $150 price tag keep you from satisfying your curiosity while assuaging your fears.

 

[chinaco]

And yet here we are debating the "worth" of $150 software. I bet you've spent more of your hourly rate on this thread already.

You are correct. The $150 is trivial... I was not debating the worth of ESPlanner. I mentioned it as an example of what I was trying to describe because that was the only one I have located so far. Rather, I am seeking some feedback on tools... Picks or Pans may help me to avoid wasting time... (look before I leap). It would be very easy to invest time and energy on a dead end.

There were some endorsement letters on the ESPlanner site... But an independent review is a bit more credible (to me). The Greaney writeup will help. Thanks for the info.

 

[yakers]

I think this whole line of inquiry is useless. Another engineer's hobby to convince him he is doing something worthwhile.

Figure out how much you can safely spend, which is a real art in itself. Then trust your natural human urges to find a way to spend every bit of that.

What you might enjoy spending your money on may be completely different from what another person might.

I sort agree with HA, and I know there are more postings here, I just want to ad my perspective that it is a good idea to quantify what you can and understand what you can no or do not want to quantify. So look at your retirement assets and look at expected basic expenses. But after that its more complicated and maybe counterproductive to quantify.
I expect my wife's & my pension will cover all our 'basic' expenses. After that the market will determine how well we live. I tell her if its a good year we go to Tahiti, a bad year its Tijuana. Or we may go to Europe and the difference would be our level of accommodations. And if all else fails we have our 85 VW camper to just go on a road trip.

 

[chinaco]

... my perspective that it is a good idea to quantify what you can and understand what you can no or do not want to quantify. So look at your retirement assets and look at expected basic expenses. But after that its more complicated and maybe counterproductive to quantify...

I agree completely. That is exactly what I am endeavoring to do. Since I am really just starting to take a serious look/plan for the consumption phase (about 4 years away), I figure it is time to dig a little deeper into the subject. Up to this point I have used the rule of thumb 75% of pre-retirement expenses for planning and projected that using a basic inflation rate. I have looked at our current expenses. Pondering other expenses we will/might encounter in retirement.

Perhaps I am on the road to self-education that many on this board have already attained.

Constructive feedback is welcome. Thanks.

 

[SteveR]

I use Microsoft Money. We have entered actual expenses by (overly) detailed categories for over 10 years. This gives us a very good idea of where we may spend $$$ in ER. I use the Money Planning tools and tweak them in different ways to see how the projections change over time.

We also use Excel spread sheets to calculate the IRA distributions and cash flows so I can actually see how they change over time and will different percent increases over time. I also created a set of spreadsheets that show various What If options, Tax considerations, cash flow sources and timing, asset growth models, home equity growth, college expense planner etc. I can adjust any of them either independently or have values carry over to other sheets to see how a sale of an asset 10 years down the road might impact my cashflow or my taxes for that year, etc. I know...way too much detail but it has grown into what it is today over the past several years.

Money or Quicken are fine but I like to see the details and not just the results so the spreadsheets help me do that and act as a cross check on Money to make sure my assumptions are close.

Expenses are unique to each of us and there is no magic formula to calculate an indiviuals' expenses with sufficient detail for ER planning, in my opinion. That is why I created my own system to track and then forcast what I plan on spending in ER as well as my cashflow sources and timing to keep the checking account full. Don't forget long term expenses like cars, repairs, future "toys", trips, etc. These can be all dumped into an Emergency Expense fund or tagged as individual future needs...car in 2010, HVAC in 2011, water heater in 2012, etc. I just have an overall percent of income figure I use based on my past expense history with some slop for the unexpected expenses.

There is no substitue for your own personal expense history when estimating your ER expenses.

 

[FinanceDude]

Most tools that are "free" are "glorified asset allocation" tools that do no good for expense projections and the like.

The tools I use are expensive but do a better job. I am looking into thr ESP planner for FA's, which costs $1500 up front. Oh well, maybe a good tax writeoff??