Is 4% SWR used for FIRECalc for all scenarios?

[fh2000]

Hi,

From the FIRECalc result page, I see that the feedback we receive is the percent success rate. Is 4% SWR always used by FIRECalc for all scenarios, in order to calculate the percentages?

Do I calculate the various SWRs on my own (3.5%, 3.75%, 4%), then enter the Spending amount from those rates, in order to find out the success rate?

 

[Midpack]

Someone with more in-depth knowledge of FIRECALC will have to answer. But I can tell you I did the investigate tab and it used 4.72% WR for a 40 year retirement - much to my surprise.

 

[MichaelB]

Hi,

From the FIRECalc result page, I see that the feedback we receive is the percent success rate. Is 4% SWR always used by FIRECalc for all scenarios, in order to calculate the percentages?

Do I calculate the various SWRs on my own (3.5%, 3.75%, 4%), then enter the Spending amount from those rates, in order to find out the success rate?

Hi fh2000

Firecalc uses the spending rate you supply, so you test different withdrawal rates by calculating the withdrawal amount and entering it manually. You can also change other parameters to see their impact, such as different asset allocations, inflation rates or future portfolio additions / subtractions.

 

[youbet]

Hi,

Do I calculate the various SWRs on my own (3.5%, 3.75%, 4%), then enter the Spending amount from those rates, in order to find out the success rate?

Yes.

But remember that FireCalc also considers your other sources of income such as a pension or SS. Therefore a WR that seems too high to succeed may be 100% successful when backtested vs. historical data. For example, someone wants to spend $50k/yr and has a FIRE portfolio of $500k and gets zero failures. It's that $40k annual pension that does it, despite the apparent 10% WR!

 

[fh2000]

Yes.

But remember that FireCalc also considers your other sources of income such as a pension or SS. Therefore a WR that seems too high to succeed may be 100% successful when backtested vs. historical data. For example, someone wants to spend $50k/yr and has a FIRE portfolio of $500k and gets zero failures. It's that $40k annual pension that does it, despite the apparent 10% WR!

So, with this example, if the pension is included for 30 year calculation, the total asset looks to be:

Fire Port: 500K
Pension: 1.2M (40K X 30 )
Total: 1.7M

Looks like if one is sure of the entitlement, one can then use the total to calculate the SWR since this is what FIRECalc calculates. In this case, 40K/yr from a 1.7M porforlio, the SWR is about 3%.

 

[youbet]

I don't think it would be quite that simple. The $1.2M pension equivalent you calculated would not be available at the beginning to earn int, divs and CG's. That is, the $1.2M up front would be more valuable than $40k/yr for 30 yrs. And you'd have to consider whether the pension was COLA'd or not.

Per a couple FireCalc runs (default values) I just did:

If you have a $40k COLA'd pension plus a $500k FIRE portfolio, the amount you could withdraw, inflation adjusted, for 30 yrs and just achieve a 100% success rate is $57,947. Based on the $500k FIRE portfolio alone, that would be a SWR of 11.5%.

With a non-COLA'd pension and everything else held constant, the withdrawal could be $38,577 which would be an SWR of 7.7%.

It's hard to overstate the value of a COLA'd pension! That's why some of our forum members have been either delaying SS or paying back and restarting SS.

Getting back to you specific question, FireCalc used to specify the SWR (or at least the WR) of the withdrawals you specified. And I believe these figures were based on the FIRE portfolio amount exclusive of other income sources. So, for folks with pension, SS or whatever, WR's well over 4% were possible. Somewhere along the line, I noticed this feature was removed. So I look at FireCalc as a historical backtesting of a spending plan that includes FIRE portfolio withdrawals, SS, pensions and all other sources of retirement income you specify. I don't think it makes sense to try to assign a lump sum value to ongoing retirement income sources in order to determine an overall SWR.