FIRE Calc

[younginvestor2013]

I’ve played around with the FIRE calculator and have given thought to the preservation of capital (not depletion) and the assumptions built into the FIRE calc. I know it is some sort of complex formula that looks at multiple historical investing periods and that it “can” or “does” preserve capital depending on the withdraw amount and principal. However, it also “does not” preserve capital if your expected income is too large based on your principal. I’ve played around with it and have encountered instances where it will say “after 40 periods your ending balance is -$5,000,0000 to xxxxx etc etc” but I’ve also had it say “after 40 periods your ending balance is $11,000,000 to etc etc”.

So I am curious as to a few things:

1) The “breaking point” or withdraw rate that will support the same yearly withdraw amount, adjusted for inflation each year (which I assume to be a 3% increase each year), while preserving capital.
2) Does the FIRE calc include 3% or so increases in yearly income to account for inflation?
3) What type of returns/asset allocations is it assuming?

By running some high level numbers, I would think you’d have to withdraw less than 4% of your nest egg for yearly income if you want to adjust it for inflation each year while preserving your capital (and assumedly growing it to offset the need for more income year over year due to inflation).

So for example, you would not be successful if you had a $1m portfolio and you wanted $40K in income indefinitely into the future with COLA and without the assumption that you’re capital would be depleted ($0 net worth) at some point in the future.

Obviously there will be large variation in returns (income) year over year. But the calculator must assume a fairly aggressive equity/bond allocation if it supports a 4% withdraw rate while including yearly COLA and while also preserving capital.

 

[younginvestor2013]

Sorry I should clarify that I don't mean you would withdraw 4% a year as that would presumably be counted as "income" or "returns"

 

[W2R]

younginvestor2013, if you look at FIRECalc you will see that how inflation is dealt with, and how your assets are allocated, are part of the inputs expected from you. Did you notice the tabs? That's where you enter your inputs. Hope this helps.

 

[youbet]

I’ve played around with the FIRE calculator and have given thought to the preservation of capital (not depletion) and the assumptions built into the FIRE calc. I know it is some sort of complex formula that looks at multiple historical investing periods and that it “can” or “does” preserve capital depending on the withdraw amount and principal. However, it also “does not” preserve capital if your expected income is too large based on your principal. I’ve played around with it and have encountered instances where it will say “after 40 periods your ending balance is -$5,000,0000 to xxxxx etc etc” but I’ve also had it say “after 40 periods your ending balance is $11,000,000 to etc etc”.

So I am curious as to a few things:

1) The “breaking point” or withdraw rate that will support the same yearly withdraw amount, adjusted for inflation each year (which I assume to be a 3% increase each year), while preserving capital.
2) Does the FIRE calc include 3% or so increases in yearly income to account for inflation?
3) What type of returns/asset allocations is it assuming?

By running some high level numbers, I would think you’d have to withdraw less than 4% of your nest egg for yearly income if you want to adjust it for inflation each year while preserving your capital (and assumedly growing it to offset the need for more income year over year due to inflation).

So for example, you would not be successful if you had a $1m portfolio and you wanted $40K in income indefinitely into the future with COLA and without the assumption that you’re capital would be depleted ($0 net worth) at some point in the future.

Obviously there will be large variation in returns (income) year over year. But the calculator must assume a fairly aggressive equity/bond allocation if it supports a 4% withdraw rate while including yearly COLA and while also preserving capital.

(1) NEVER assume a constant 3% inflation rate. The order of a series of annual inflation amounts matters. 3% average inflation over a period of time that begins with inflation greater than 3% and ends with inflation less than 3%, but averages 3%, is MUCH more destructive to a portfolio than the opposite.

(2) With all respect, your questions imply you really haven't studied the directions for FireCalc in any detail as most are answered clearly there. I'd suggest you do some reading, some trial runs and other experimentation. Then, come back and post any questions you still have.

 

[Tyro]

(1) NEVER assume a constant 3% inflation rate.

+1. That's low, even for an average (see Decade Inflation Chart) and one of the variables worth modifying to test various scenarios.

Tyro