Early Retirement & Financial Independence Community

Early Retirement & Financial Independence Community (http://www.early-retirement.org/forums/)
-   FIRECalc support (http://www.early-retirement.org/forums/f36/)
-   -   Doesn't make sense, 2nd question (http://www.early-retirement.org/forums/f36/doesnt-make-sense-2nd-question-67514.html)

larrytbm 07-17-2013 04:25 PM

Doesn't make sense, 2nd question
 
If I enter $1 WR, set inflation at 0.0% and then select the variable option for spending, but at 100% and run the analysis, shouldn't the year-by-year spending always be the same $1? Well, it is not, on some cycles it goes up to almost $30. And if there is an explanation, then why does the spending amount always increase year over year on every cycle?

NW-Bound 07-17-2013 05:02 PM

Quote:

Originally Posted by larrytbm (Post 1338900)
...select the variable option for spending, but at 100%...

If by the above, you meant you selected the spending model of "percentage of remaining portfolio, with cut back limited to 100% of previous year" (which means no cut back allowed at all), then as your portfolio increases with time, your spending will be allowed to grow proportionally, from $1 to $30.

Moreover, in the years when your portfolio drops, the spending is not allowed to decrease. Hence, the way you set it up, the spending can only go up, but not down.

If instead you select "Constant Spending Power", then you will see that the $1 spending will stay constant.

larrytbm 07-17-2013 06:26 PM

Quote:

Originally Posted by NW-Bound (Post 1338909)
If by the above, you meant you selected the spending model of "percentage of remaining portfolio, with cut back limited to 100% of previous year" (which means no cut back allowed at all), then as your portfolio increases with time, your spending will be allowed to grow proportionally, from $1 to $30.

Moreover, in the years when your portfolio drops, the spending is not allowed to decrease. Hence, the way you set it up, the spending can only go up, but not down.

If instead you select "Constant Spending Power", then you will see that the $1 spending will stay constant.

Thank you, that makes sense. So, even though WR was initially specified as a dollar amount, in this case that amount is converted into a % and I'm forced to "spend" increases rather than reinvest, correct?

ERD50 07-17-2013 07:20 PM

Quote:

Originally Posted by larrytbm (Post 1338930)
Thank you, that makes sense. So, even though WR was initially specified as a dollar amount, in this case that amount is converted into a % and I'm forced to "spend" increases rather than reinvest, correct?

I think so. You can run this scenario link-to-firecalc (adjusted to 40,000/1,000,000 = 4% WR).

That is the 95% pf previous year on dips, but as I understand it, on up years you spend the same % as your initial start. Some fun years on that chart!

The graph of spending is interesting, the dips with that rule take a lot of lines to below 1/2 the initial spend. How many can handle that? It would be interesting to see an option for a max spend ratio over the initial. That would re-invest in good years. But the previous failures are probably long down cycles, with little upside?

-ERD50

NW-Bound 07-17-2013 07:24 PM

That's correct. You are welcome.

The idea of this spending model is that if one is lucky to see his portfolio grows beyond his expectation, he will allow himself to spend more than initially planned. His spending will grow proportionally with his stash.

At the same time, if his portfolio subsequently shrinks, he may be limited in the ability to cut back due to lifestyle creep. A cut back to 100% of previous year's spending means he is unable to cut back at all.

By the way, remember that FIRECalc computes everything in terms of the dollar at the current time, so after inflation the $30 you see at the end of the run may be a lot higher in nominal amounts.


All times are GMT -6. The time now is 07:00 AM.

Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.