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Firecalc - Limited Rewards for Frugal living Early On?
Old 11-30-2016, 12:41 AM   #1
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Firecalc - Limited Rewards for Frugal living Early On?

I entered my data into Firecalc for my lump sum assets, my future SS income, and a retirement time period (about 28 years), and got an inflation-adjusted annual spending level of about $67K.

As an experiment, I wanted to see what spending level I'd have later, if I lived frugally for the first five years of the retirement period. I used a spending level of about 18K for five years, and adjusted the other data accordingly (five fewer years of retirement, suitably adjusted lump sum).

My initial mental calculation was that I was saving about $245K by spending $18K instead of $67K each year, for five years ($49K X 5 years) and that this $245K would be divided over the remaining 23 year period for a benefit of about $10K a year, for the 23-year period. However, to my surprise, the actual improvement in per-year spending was only $5K a year, according to F-calc.

I'm sure my initial seat-of-the-pants estimate is missing something, but I don't know what. It could be the reduced benefit of long-term stock gains in the 23-year F-calc calculation.

If anyone sees a flaw in the above reasoning, please let me know.

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Old 11-30-2016, 06:04 AM   #2
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Many of us use an "equity variability factor" = 2.0%. This is because equities are always going up and down while the retiree is withdrawing.

Since we hold 60% equities, I always include: 2.0*0.6=1.2% as an additional portfolio cost.

Try this in your manual calculations and you'll see it will closely match your fire-calc numbers.

AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 11-30-2016, 12:01 PM   #3
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Less analytically and more philosophically, I would be curious what prompted your thought experiment. If you are more or less happy with your initial cash spend number, why would you think about trying to make it larger later on at the expense of less spending early in ER? We have had a number of threads here suggesting that cash burn typically goes down as we age. (I think I'm seeing that - finally - as I approach the big 7 Ohhhh.) YMMV
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Old 11-30-2016, 12:21 PM   #4
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To show how little I keep up with Firecalc, I didn't know it would tell you how much you could spend. I thought it just took your income, expenses, and other assumptions, and told you whether or not you'd run out of money using previous historical runs. Anyway, you said you
adjusted the other data accordingly (five fewer years of retirement, suitably adjusted lump sum).
I'd guess this has something to do with it. What kind of "suitable adjustment" did you make, and why did you do any of this?
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Old 11-30-2016, 12:51 PM   #5
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Remember that Firecalc will give you the worst case scenario over its historical data set.

Do a separate run with that $234K and a 23 year period with the same AA.You'll see the various paths that money could take based on historical returns & inflation.
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