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I believe I am seeing an issue in how non-COLA'd pensions are handled
Old 03-05-2010, 12:09 PM   #1
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I believe I am seeing an issue in how non-COLA'd pensions are handled

On the "Other Income/Spending tab, when I enter a pension which is non-COLA'd I have noticed that the pension gets increased by the inflatio rate each year in the Excel spreadsheet you can generate to check FIREcalc's results.

As I reflect on this, I realize that "Adjust for inflation" can mean two things:

1) You are not yet retired, and your salary (and eventual "first" pension payment" will increase with the inflation rate until you retire

2) Your pension is COLA'd and it will increase in year 2, year 3 etc.

So my question is how do I deal with that? My wife has a non-COLA'd pension of $9800 a year when she turns 65. It will be exactly $9800 in year one and every year after that. However, even if I do not tick the "adjust for inflation" box, FIRECalc seems to be increasing it every year by the inflation factor.

Likewise if there is a spending reduction (example given is mortgage paid off) that should be constant in nominal dollars every year.
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Old 03-06-2010, 01:39 PM   #2
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Originally Posted by chemist View Post
On the "Other Income/Spending tab, when I enter a pension which is non-COLA'd I have noticed that the pension gets increased by the inflatio rate each year in the Excel spreadsheet you can generate to check FIREcalc's results.
I see it. It looks like the "Inflation Adj?" check box on the "Pensions, Off Chart Spending" section of the "Other Income/Spending" tab is behaving as though the Inflation Adj box is always checked.



Guess I'm curious. Is FireCalc being maintained?

Edit to add:
It appears that all the input parameters get passed as part of the url. You can see this when click "link to this set of data" on the results page. I can see

signwd1=-&chwd1=32884&chyr1=2013

burried in the url, which might mean something like:

sign = - (the direction to change the withdrawl, or i.o.w. a pension -- but spending gets a 2B in that field, I dunno)
amount = 32884 (the amount by which to change the withdrawl)
year = 2013 (the year this becomes effective)

If you check the box you get a &wd1infl=adj or &wd2incl=adj or a &wd3infl=adj parameter depending on which of the three boxes you checked. The ampersand is probably just a delimiter used for parsing. Guessing the absence of an &inflnadj=adj is supposed to mean that that amount is not inflation adjusted, but the program seems to treat them all as adjusted for inflation.
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Old 03-06-2010, 01:57 PM   #3
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Originally Posted by Rustward View Post
Guess I'm curious. Is FireCalc being maintained?
"Under new management".
Early-Retirement.org Acquires FIRECalc
Some opinions, please, re: mortgage prepayment
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Old 03-06-2010, 02:18 PM   #4
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Yeah, understand, but...
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Some things in that SS sure seem hosed...
Old 03-07-2010, 12:31 PM   #5
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Some things in that SS sure seem hosed...

Maybe my eyes are crossed from looking at it, but it sure looks odd to me.

I did runs with a (edit)'OFF CHART SPENDING" added in year 2025, and the spreadsheet shows an inflation adjusted number whether I click 'Inflation adj?' or not. But some numbers are still different. I thought maybe there is an adjustment in some other formula, but...

The formula in COLUMN J has me going in circles:

Code:
 from CELL J55 >>> =IF(I55<>"",T54+I55,T54-SUM(C55:H55))

This is the relevant part, I think the 'IF' is for the pre-retirement phase: 

T54-SUM(C55:H55)
T54 is 'Ending Portfolio' from the previous year. It apparently is NOT inflation adjusted, as the next column is labeled 'Infl Adj End Portfolio' and has a multiplier to COLUMN B.

Column C is your inflated withdrawal; D,E, are Social Sec #1 & #2; F,G,H are the three 'Pension Income / Off Chart Spending' entries (labeled Withdrawal Change 1, Withdrawal Change 2, Withdrawal Change 3). So it is taking the ending portfolio and subtracting the SUM of these...

now, here is the weird part, I entered $40K spend, $750K portfolio (on the 'START HERE' tab), and then $40K of 'off chart spending', no inflation adjustment starting in 2025. The SS has the inflation adjusted 'spend' in COLUMN C (fine), but the 'off chart spending' is in COLUMN F, not only inflated, but as a negative number. And then it SUMS them which would seem to mean I effectively spent zero from the portfolio, but added spend means I should have twice as much (except for the off chart spending not intended to be inflation adjusted). Makes zero sense to me.

Where I get lost in all this, is that the formulas for 'Market Growth, Dividends, Fixed Income,Investment Expense' just reference numbers at the top of the sheet, which are not formulas at all ( I guess the program generates those and inserts them into this sheet). So somewhere, some adjustment is made as those numbers are different when I check/uncheck 'Inflation adj?'. But that is invisible to me, and I have not reverse engineered it, and probably won't, at least for now.

Bottom Line: What I suspect is - this spreadsheet is really an output from the program, the figures are not used in the calculations. It is a combo of formulas to demonstrate the numbers (maybe with errors), interacting with formulas generated in the code, so we can't see the whole thing. So errors here may not mean anything. I would need to do more runs to validate this.

What it means to users (even/especially those who don't care about the 'under-the-hood' stuff): Until this is validated, it may well be that entering delayed pensions and spending are not being treated as expected.

It seems correct to me to take a 'today' SS number, and increase it by inflation up to the payout date (and after). That may or may not be the case with a non-COLA pension. Your benefit could be a fixed $ amount, to be paid in the future (like mine); or your benefits are growing with inflation up to your retirement date (not likely, but possible I suppose). And it may or may not be the case with 'spending' adjustments - if you are accounting for an end to fixed mortgage payments, that is a fixed $ amount out in the future. But some spending adjustments might change with inflation. Do we need an "adjust for inflation up to this date" and an "adjust for inflation after this date" check-box?


Maybe this code needs to be 'open sourced'? ........... What, no 'can-of-worms' emoticon?

-ERD50
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Old 03-07-2010, 02:04 PM   #6
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Thanks for the feedback. I guess I will play with it some more with large pensions and see if the results change a lot with the inflation box ticked or not. Even if it is doing the correct things internally, it is somewhat disconcerting that the spreadsheets are all wrong - makes one wonder if all is really alright "under the hood".
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Old 03-07-2010, 03:33 PM   #7
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Originally Posted by ERD50 View Post
Bottom Line: What I suspect is - this spreadsheet is really an output from the program, the figures are not used in the calculations. It is a combo of formulas to demonstrate the numbers (maybe with errors), interacting with formulas generated in the code, so we can't see the whole thing. So errors here may not mean anything. I would need to do more runs to validate this.

-ERD50
I have always thought the spreadsheet was just output from something else, but I know nothing.

With "Spending Level" selected for output on the Investigate tab, the results page shows a higher spending level with a COLA pension vs a non-COLA pension, so maybe the backend code and the results page are correct and the spreadsheet is wrong. Would be nice to know. Would be even nicer to have no inconsistencies.
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Old 03-07-2010, 04:05 PM   #8
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Originally Posted by Rustward View Post
I have always thought the spreadsheet was just output from something else, but I know nothing.

With "Spending Level" selected for output on the Investigate tab, the results page shows a higher spending level with a COLA pension vs a non-COLA pension, so maybe the backend code and the results page are correct and the spreadsheet is wrong. Would be nice to know. Would be even nicer to have no inconsistencies.
Agreed - I know I've done studies before to compare COLA'd v non-COLA'd (to understand just how jealous I should be ) and the results made sense. But when I did that, I made the pension available immediately.

But I'm less certain that it handles a delayed pension or delayed 'Off Chart Spending' in the way one might expect. I even think it is reasonable for two different people to expect it to do two different things. This might be far easier to investigate by going to the "SPENDING MODELS" tab, and setting to a fixed 3% inflation:

Use the following inflation assumption: PPI, CPI, or [___] % for inflation adjustments to the historical data.

and then going to the "YOUR PORTFOLIO" tab, and setting for 3% returns (0,0,3):

A portfolio with consistent annual market growth of [___] %, fixed income returns of [___] %, and an inflation rate of [___] %


That should make everything even out, and the numbers should be far more predictible and the same for any given year... I think?

-ERD50
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Old 03-07-2010, 04:37 PM   #9
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A portfolio with consistent annual market growth of [___] %, fixed income returns of [___] %, and an inflation rate of [___] %
That selection does not work the way one would expect it to. "annual market growth of [__] %" is ignored and the whole pile is treated as fixed income.

See A portfolio with consistent annual market growth of ...

The intent might have been a "crystal ball" mode (hazardous at best, defeating one of the unique features of FireCalc, but somebody must have wanted it and there is a valid use for it), using a market growth return rate, and a fixed income return rate. For this to work, it seems that FireCalc would have to know how much of the pile is in the market and how much is in fixed income, and that input is just not there. Some might believe that data is coming from variables elsewhere on the page, but the way the "Your Portfolio" page is designed, each of the four boxes stands alone and you can select only one of them.

You make a good point about how delayed off-chart spending and pensions are handled. Is the tool going to start the delayed activity using the dollar amount you entered, or is the tool going to apply inflation to that dollar amount between now and the time the delayed activity starts? Maybe it needs yet more variables. This sounds pretty picky, but it can make a big difference. So at the very least the user needs to know exactly how the tool is going to work, and possibly have some control over it, if that can be done without overcomplicating things.
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Old 03-07-2010, 05:19 PM   #10
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That selection does not work the way one would expect it to. "annual market growth of [__] %" is ignored and the whole pile is treated as fixed income.

See A portfolio with consistent annual market growth of ...
...
Yes, I just tested and got the same results as you (your comment from that thread...):

Quote:
It appears that FireCalc completely ignores what you enter for the market growth percentage, and treats the entire starting amount like fixed income applying what you enter in "Fixed income returns of ...".
Which isn't so bad utility-wise, but it is bad that the interface does not reflect that. IOW, if you want to assume 50/50 eq/fixed, with EQ = 8% constant, and fixed = 4% constant, enter 6%. I suspect the author either meant to complete that little exercise to get the entries and code matching, or meant to drop the option from the interface, but it never happened.

It also appears that the inflation number on that entry over-rides any inflation setting on the "Spending Models" tab. Makes it tough to do what-ifs w/o understanding all these interactions.

Similarly, the "Portfolio Changes" tab is for adding/subtracting a lump sum, with inflation adjusted, no options. Good for some things, not good for others. If you plan on buying/selling something 10 years from now, and you expect the price to roughly match inflation, fine. If you want to investigate what happens if you pay off your fixed mortgage balance ten years from now, that amount is whatever your amortization table tells you, it is not affected by inflation.

The current 'owners' of FireCalc could partially fix this w/o touching any code. Just eliminate the 'market growth' entry, and change the 'fixed income returns' to 'average portfolio returns'. And maybe a text note just to say this overrides the other setting - just a web page change, no code change (unless this is tied closer to the code than I imagine).

-ERD50
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