Please confirm my understanding of FIRECalc

[freddyw]

I just wanted to get feedback/confirmation from the ER forum that I am interpreting the information from FIRECalc properly.

When I use the "INVESTIGATE" section to see what initial spending level is recommended that provides a 95% success rate over a 30 yr. term, the initial spending amount recommended by FIRECalc exceeds 5% of the initial portfolio value. This seems counter intuitive to the Trinity Study's recommendation of never exceeding 4% SWR for a 30 year term using a 50/50 AA.

I understand that FIRECalc incorporates future income streams such as pensions and Social Security into the algorithm but I wanted to make sure I was correctly interpretting the results and could initially spend what's recommended by FIRECalc and feel assured that I still fall within the 95% success rate? Am I misinterpreting what FIRECalc is saying?

 

[clifp]

Probably not. Social security and future pension will reduce the needs of your portfolio to generate earnings and will allow you to withdraw more than 4% especially if you are retiring at a normal age in your mid 60s and 30 year period is more than adequate, rather than a early retirement.

 

[REWahoo]

freddyw, you can find info on how FIRECalc works here: FIRECalc: Why another retirement calculator?

It is quite normal to start with an initial withdrawal amount larger than 4% if you retire prior to the start of SS and/or pension income.

 

[Alan]

freddyw, you can find info on how FIRECalc works here: FIRECalc: Why another retirement calculator?

It is quite normal to start with an initial withdrawal amount larger than 4% if you retire prior to the start of SS and/or pension income.

+1

 

[Midpack]

You've probably gotten your answer from the above, but IMO the FIRECALC result statement when you include pensions, annuities and or Soc Sec and solve for spending is poorly worded (example below).

The posts above are true, but if you start Soc Sec and withdrawals at the same time, the result statement is misleading. For a loose example, if you enter Soc Sec (COLA'd) such that it provides for half your spending and you use the "determine spending level" - and FIRECALC reports "spending level is 6% of your starting portfolio" - it's actually withdrawing 3% from your portfolio, and the balance of spending is coming from Soc Sec. The example below includes $15K Soc Sec now, so withdrawals would actually be $29,813 in the first year on a $750K portfolio, or 4.0% from the portfolio, NOT 5.98%.

The first time I used it I had the same reaction (WTH?). You're not the first, nor will you will be the last with the current wording.

A spending level of $44,813 provided a success rate of 95.5% (111 total cycles, of which 5 failed). This spending level is 5.98% of your starting portfolio. (Your spending is assumed to come from any Social Security and pensions you entered, as well as from the portfolio.)

 

[freddyw]

Thanks MidPack for your example, it helped make sense of the wording issue you referenced within FIRECALc. I agree with you, the way FIRECALc states how much you can initially spend gives the inference that it's giving you the % of your initial portfolio and not potential SS or pension dollars included in the % calculation. The example you provided helped in my understanding since all available income sources (social security of $15K along with $29K investment $) occured in the initial year. Most helpful in understanding how the SWR could be greater than 4% of initial portfolio and have a 95% success rate if other income streams occur down the road and not in the initial retirement year.

 

[youbet]

Thanks MidPack for your example, it helped make sense of the wording issue you referenced within FIRECALc. I agree with you, the way FIRECALc states how much you can initially spend gives the inference that it's giving you the % of your initial portfolio and not potential SS or pension dollars included in the % calculation. The example you provided helped in my understanding since all available income sources (social security of $15K along with $29K investment $) occured in the initial year. Most helpful in understanding how the SWR could be greater than 4% of initial portfolio and have a 95% success rate if other income streams occur down the road and not in the initial retirement year.

Sometimes the devil is in the details. Note that FireCalc did not give a SWR greater than 4%. FireCalc gave a spending level greater than 4%. Spending level = SWR + other sources such as SS, pension, etc.

The FireCalc wording isn't really incorrect. But you do have to pay close attention to the exact terminology used. It was a head scratcher for me too......

 

[Midpack]

Sometimes the devil is in the details. Note that FireCalc did not give a SWR greater than 4%. FireCalc gave a spending level greater than 4%. Spending level = SWR + other sources such as SS, pension, etc.

The FireCalc wording isn't really incorrect. But you do have to pay close attention to the exact terminology used. It was a head scratcher for me too......

We're picking nits, but I said "poorly worded." When you input a portfolio amount and pension/annuity/Soc Sec income, do you want to know
a) what % of my portfolio would I be withdrawing (I'd say yes) - in the example below the withdrawal is 4.0% (reasonable)
b) what % of my portfolio would my withdrawal PLUS pension/annuity/Soc Sec income spending be (somewhat meaningless) - in the example below the withdrawal is 5.98% (yikes).

However, as others have pointed out above, if pension/annuity/Soc Sec income begin later, initial withdrawals would indeed be relatively large to start, and lower when other income kicks in.

I only point this out because WE consistently tell newbies "have you tried FIRECALC?" so I hope the results are easy for them to understand. I suspect most people are thrown the first time they see that result, I know I had to stop and figure out why, and other members have asked this question before. OTOH, I doubt newbies start right off solving for spending level/portfolio value - so maybe my concern is unfounded.

A spending level of $44,813 provided a success rate of 95.5% (111 total cycles, of which 5 failed). This spending level is 5.98% of your starting portfolio. (Your spending is assumed to come from any Social Security and pensions you entered, as well as from the portfolio.)

 

[youbet]

The improvement I'd like to see FireCalc make would be to give a glossary of key terms early in the instructions and warn users that differences like WR vs. spending level are absolutely key to understanding whats going on.

Warning about interchanging the terms "SWR" and "spending" is not nit picking.

I find the way FireCalc handles the spending vs. portfolio value relationship to be useful but admit it took it took some thought to understand why it's done the way it is.

I don't know if you ever used the earlier version of FireCalc but I thought the output graphs and the instructions were better than today's version. I especially miss the graph which showed ending portfolio value vs. beginning year. It was really an eye-opener into visualizing retiring into a recession or into inflation. That graph was the first place I came to grips with the fact that retiring into the 1970's - 1980's inflation was tougher on retirees than retiring into the Great Depression.