Already-Retired Firecalc Spending Increases?

[halo]

Hi everyone -

I just want to make sure that I am not making a fundamental mistake that I cannot see in the way I use the Firecalc calculator. So I wanted to run it by this forum so someone can tell me if I'm doing something wrong.

Let's say, for example, that I retired on January 1, 2004 with $2M, and my social security starts at $10K annually in 2009, and the calculator says that I can take 90K in 2004 and adjust that for inflation going forward for a 30-year retirement.

2004 inflation = 2.68% means I can spend up to $92,412 in 2005
2005 inflation = 3.39% means I can spend up to $95,545 in 2006
2006 inflation = 3.24% means I can spend up to $98,640 in 2007

Is this correct (obviously, only as a rough guide - not down to the last dollar)? By the way, I try to stay at least 20% or more under the maximum amount Firecalc tells me is 95% safe, just to be sure.

The calculator "options" don't allow setting your retirement date before the current year. Is there any way to use the calculator to show what your maximum spending can be in the current year if you retired in a past year?

Or does this not matter, because the (95%) safe withdrawal is based on the success rate of all the 30-year cycles from 1871 through the near-present for the parameters entered into the calculator? Does that mean that such a specific 30-year retirement will have the same success rate if it starts in the current year or in any past year? Because the success rate of all the 30-year cycles starting in 1871 are the same for the for the specific entered parameters regardless if you retired any time before the present year?

I'm just looking for confirmation that I'm not using Firecalc incorrectly and that I'm not making some stupid mistake. Again, I'm not using a caliper to measure what I'm cutting with an axe. I just want to be sure that I'm not overlooking something basic and that my thinking is not flawed or confused in a way I can't see. I don't want to regret anything later, if you know what I mean. Am I doing it right?

Thanks for your replies.

halo

 

[kcowan]

I am not an expert but here is my understanding. The inlfation assumption is just that. If actual differs from the assumption, use the assumption. So if inlfation increases to 4% from 3.5% in a given year, base your budget on a 3.5% increase. Inflation does compound so your math is correct.

I don't think FireCalc is accurate enough to distinguish the month you started, so assume it is Jan 1 of the current year or the next year. I retired in August so I started from Jan 1 the following year.

There is ample discussion elsewhere here to indicate that the accuracy of the forecast is very dependent on portfolio performance in the first couple of years of retirement.

If you run it again after 5 years of retirement, just input your new portfolio balance, new budget, and your new life expectancy. Remember that it is just a forecasting tool and no substitute for actual experience.

 

[halo]

Advanced Firecalc CPI Inflation

The 3.5% per year "inflation assumption" is only for the Basic Firecalc, right?

I'm using the Advanced Firecalc (hence my inclusion of Social Security). I've selected the CPI option in it. The "actual inflation" amounts listed in my original post are the offical CPI inflation numbers for each year.

So, since all of them are LOWER than 3.5 % each year, I'm even just a little "safer" using them instead of basic Firecalc's 3.5% per year inflation assumption, right? I just wanted to clarify this.

Thanks again,

halo

 

[kcowan]

So, since all of them are LOWER than 3.5 % each year, I'm even just a little "safer" using them instead of basic Firecalc's 3.5% per year inflation assumption, right? I just wanted to clarify this.

Thanks again,

halo

No. The lower numbers mean that your budget withdrawals will be lower and your portfolio will last longer. Using high inflation is conservative when planning out how long money will last because you will need more money to last the same time.

OTOH by limiting your actual spending to below actual CPI, you are also being conservative because your nestegg will last longer then forecast.

 

[halo]

Thanks for your reply, Keith

I was just wondering what you think of the question I asked on my original post:

Whether there is anything inherently wrong with using Advanced Firecalc as follows:

1) I retired in 2004, and I input Advanced Firecalc with data that applied to my 2004 situation (what my assets were at that time, etc.)

2) Advanced Firecalc gives me a 95% SWR spending amount for a retirement starting in 2007 (Advanced Firecalc doesn't seem to allow for retirements starting before the present year)

3) I take that 2007-starting SWR spending amount, and posit it back to 2004, then I apply the last three years of the actual CPI inflation to it (compounding inflation, of course). The result is my 2007 SWR spending amount. This is the maximum I can spend now, this year.

This seems simple, but I just want to make sure there aren't any major flaws in this methodology. Are there? Is there another (better) way to use Advanced Firecalc to determine what the present 95% SW spending amount is for a retirement that began in the past? Or am I already doing it right?

Thanks for your input again,

halo

 

[kcowan]

3) I take that 2007-starting SWR spending amount, and posit it back to 2004, then I apply the last three years of the actual CPI inflation to it (compounding inflation, of course). The result is my 2007 SWR spending amount. This is the maximum I can spend now, this year.

The logic is sound, however, your actual spending may not have followed inflation. Because the market has been buoyant since 2004, this will be conservative as long as you have not overspent those estimated numbers, e.g. if you spent $100k last year and have not changed anything, then inflation will drive you to overspend the SWR again this year. But it will also size the amount that you should cut back to be on plan.

And, of course, the CPI figures are understated. So you will likely experience higher inflation than CPI. We have been retired since 2002 and have tracked actual expenses. Here is our experience:
What has gone up more than CPI:
- groceries
- gasoline
- rent
- cable/internet
- drugs
- liquor/wine
- air travel
- cell phones
- vacation rentals
- clothing
- movies/entertainment/sports/PPV/VOD
- dental/medical
- taxis/busses

and here is what is the same or lower:
- insurance
- landline phone
- long distance
- dining out
- movie rentals
- books
- car rentals

The difference is about 8% up but we manage to budget by switching, e.g.
- using less entertainment/sharing DVD rentals with friends
- YAK for LD, PayGo for cell phones
- switching to generic drugs or OTC/prescriptions instead of OTC (drug plan) - less frequent teeth cleaning at the dentist/no fluoride rinses
- more busses instead of driving/taxis
- biking to the store
- buying airline tickets on seat sales/travelling in low periods
- home swaps
- shopping sales for clothes/buying fewer/more mix & match outfits
- asking for "seniors" discounts - many are granted without proof of age

YMMV