Can You Help Me to Understand The FIRECalc Results That I Obtained?

[nico08]

I am confused by the results I got from FIRECalc. I kept all variables, but two, the same when I ran two scenarios. I don't understand the outcome of the spending level results based on the two variables that I altered. In the Investigate Section, I chose the option that would produce a spending level with a 95% success rate. Here are the altered variables and the 95% spending level results:

mean total portfolio return 10.7
variability (standard deviation) 15
spending level that results in 95% success rate $17,226
Based on a 80% stock and 20% bond allocation

mean total portfolio return 8.6
variability (standard deviation) 6.4
spending level that results in 95% success rate $22,475
Based on a 20% stock, 50% bond (investment grade, high yield, international) and 30% short term bonds

What I don't understand is, why should I be in an asset allocation that is more risky (Scenario A), if the less risky asset allocation produces a higher spending level with a 95% success rate (Scenario B)? Can you help me to understand why the riskier asset allocation produces a lower spending level that results in a 95% success rate? Except for the mean total portfolio return and the standard deviation of the portfolio, I kept all other variables constant. Thank you for your help.

 

[REWahoo]

Note that you can only choose one option on the "Your Portfolio" tab. When you select the random performance (Monte Carlo) option, the calculator uses your inputs for total performance and standard deviation and ignores asset allocation.

 

[nico08]

Yes, I understand I can only make one selection in the portfolio section. I chose the option that let me input my own average return and standard deviation. I used a average return and a standard deviation that matched the riskier and less risky asset allocations.

 

[obgyn65]

FIRECalc is very confusing to me. I much prefer this calculator : Merrill Edge| See Where You Stand

I am confused by the results I got from FIRECalc.

 

[lemming]

Ok first off, I don't know how or what to chose for the standard deviation so I shouldn't be in here.

Bond yields at the present are low-if you are drawing down money now it might not give you the yield it shows historically.

I always swore you could not make money in bond funds because the price went up when the yield went up so you always got the lower rate anyway.
And that bond mix with high yield and international bonds look as risky as the stock side.

Have you tried running some other mix then 80/20 or 20/80. A 55/45 mix might smooth out the variations.

 

[FIRE'd@51]

Can you help me to understand why the riskier asset allocation produces a lower spending level that results in a 95% success rate? Except for the mean total portfolio return and the standard deviation of the portfolio, I kept all other variables constant. Thank you for your help.

Presumably, the more risky allocation (scenario A) will result in a higher mean ending value of your portfolio, since it has a higher expected return with a lower payout. Sort of like comparing two stocks with the same expected returns, but one has a greater dividend yield and lower growth rate, and the other, vise-versa, which should lead to a higher mean terminal stock price for the latter.

 

[justplainbll]

Does FIREcalc provide guidelines for the selection / specification of a value for σ?

 

[ERD50]

FIRECalc is very confusing to me. I much prefer this calculator : Merrill Edge| See Where You Stand

I was curious so took a look at that calculator. I cannot recommend it at all. It has several serious faults.

A) Default is that your retirement spending is equal to your working income minus savings. That may be true, but they should guide you to the deltas. How about Health Care?

B) It looks like a static X% increase assumed for investments? What about inflation? Hard to tell w/o details. Ahh OK, I clicked the tab - they 'buy' a COLAd annuity with your funds, so I guess that is accounted for, IF you are comfortable with an annuity.

C) It just asks if you/spouse will receive SS - no question as to how much? How can they assume what you are entitled to on one year's salary?

D) It does not ask you when you collect your pension, and if it is COLA'd. This can make a 4x delta in its true value. That is HUGE.

I really don't like MonteCarlo analysis for this. I like the fact that FIRECALC captures the real historic interaction between stocks, bonds and inflation.

Id suggest that you get the numbers together and enter them in FIRECALC, and ask for help if you need it. It seems pretty simple to me, though some of the entries can be a bit confusing until you understand what they are looking for. Far better than GIGO for such an important decision.

-ERD50