Assumptions

[malakito]

Hi,

For those of you with a long time to go before you retire, what are the assumptions you make? Do you document them? Do you review them with your families/spouses/SO's?

Here are mine, I'd be interested in your perspectives on them:

Once yearly raises at 3%
Continue to contribute to 401(k) and ESOP at current rates
ESOP discount works out to a 33% match on my contributions
Spending increases at 3% annually
Inflation rate of 3% annually
Education inflation rate of 3.61% annually
Stock returns of 10.7% annually
Social Security COLA is 2% annually
No inheritance
No Social Security
Spending in retirement = spending before retirement
No helping out inlaws when they get old

malakito

 

[Berkshire_Bull]

i don't have my "career" job yet so i don't have a lot of the unknowns needed to make some assumptions. I assume that I'll get real growth of 7 or8% considering a mix of stocks/ bonds/ well-chosen individual stocks/ and cash.

 

[Nords]

Other assumptions

Are your 401(k)/ESOP rates maxed out, or will they rise over the coming years as well? My spouse's permissible TSP contributions are still rising annually, and so are IRA contributions.

Speaking of IRAs, are you contributing to one?

Is that both a 3% rise in spending AND a 3% rate of inflation? Why does spending rise 3%?

Inflation has been pretty tame lately. But it can make a big difference over five or six decades of retirement if the average rate is changed from 3% to 3.5%. Not that I have a clue which will reflect reality, although I suspect they're both better than the CPI and its ilk.

I haven't checked the College Board numbers lately, but I thought that over the last decade or so college costs were rising more along the lines of 6%.

I think 6-7% before-tax equity returns are more realistic. But I'm only quoting Warren Buffett on this one. Or I could mangle Will Rogers and recommend only investing in stocks that accumulate at least 10.7% annually.

If there's no SS, then the COLA probably isn't worth much. Hey, I bet it's worthless!

I think that spending in retirement rises more often than it drops. If you're the type of person who spends money on their entertainment, then it's going to go up. If you're the kind of person who finally has time to realize all their frugal desires, then it might still go up as you spend capital to save more by the payback. (I never had time to shop for photovoltaic solar systems before I retired!) But eventually, at least a few years after retirement, it'll drop.

Good luck on not helping out the in-laws...

 

[malakito]

Are your 401(k)/ESOP rates maxed out, or will they rise over the coming years as well? My spouse's permissible TSP contributions are still rising annually, and so are IRA contributions.

Yes to all.

Speaking of IRAs, are you contributing to one?

Contributing to two (my Roth and my wife's traditional), but on an opportunistic basis. I don't assume any ongoing contributions.

Is that both a 3% rise in spending AND a 3% rate of inflation? Why does spending rise 3%?

Sorry, I wasn't clear. I assume my spending will increase at 3% per year because of inflation; in other words I assume my spending will remain essentially constant in real terms.

Inflation has been pretty tame lately. But it can make a big difference over five or six decades of retirement if the average rate is changed from 3% to 3.5%. Not that I have a clue which will reflect reality, although I suspect they're both better than the CPI and its ilk.

Yup, assumptions make a big difference, particularly assumptions about inflation and investment rate of returns; particularly over the ~20 years I have to project forward.

I haven't checked the College Board numbers lately, but I thought that over the last decade or so college costs were rising more along the lines of 6%.

Lately you hear numbers between 5 and 7%, but the longer term historical average per the College Board is the 3.61% I use. This was the number in their report last year. Every year I reshoot the college numbers by taking the College Board averages for the current year and project forward for inflation.

I think 6-7% before-tax equity returns are more realistic. But I'm only quoting Warren Buffett on this one. Or I could mangle Will Rogers and recommend only investing in stocks that accumulate at least 10.7% annually.

My philosophy is to find the longest range historical average from an unbiased and reputable source and use those numbers. As noted above, I use the College Board for college costs. The 10.7% is what I understand Ibbotson & Associates have cited historically. In 2000 I was ridiculed for having too low of an expected rate of return; now people think I'm too optimistic. I've read what Buffett and Bogle think. I think they're wrong (or possibly sandbagging in the case of Buffett).

If there's no SS, then the COLA probably isn't worth much. Hey, I bet it's worthless!

Yeah, whoops again. The SS COLA is used because I assume SS will be there over the next 15 years or so, and I include SS in my life insurance plan to the extent SS says my wife will get money if I kick the bucket. I assume no SS for retirement purposes.

I think that spending in retirement rises more often than it drops. If you're the type of person who spends money on their entertainment, then it's going to go up. If you're the kind of person who finally has time to realize all their frugal desires, then it might still go up as you spend capital to save more by the payback. (I never had time to shop for photovoltaic solar systems before I retired!) But eventually, at least a few years after retirement, it'll drop.

Good luck on not helping out the in-laws...

Thanks, and thanks for all your comments.

malakito

 

[sgeeeee]

. . .
Once yearly raises at 3%
Continue to contribute to 401(k) and ESOP at current rates
ESOP discount works out to a 33% match on my contributions
Spending increases at 3% annually
Inflation rate of 3% annually
Education inflation rate of 3.61% annually
Stock returns of 10.7% annually
Social Security COLA is 2% annually
No inheritance
No Social Security
Spending in retirement = spending before retirement
No helping out inlaws when they get old

Hi malakito,

Good to hear from you again.  I've been retired (mostly) for about 1.5 years, but I'll offer comments anyway.  If you want, you can treat them like Ted and either contradict them or criticize them.    

I think it is unlikely that you won't receive any social security, but I did the same thing in my planning since it represented something that I was likely to have very little control over.

spending in retirement = spending before retirement is an assumption that I think you will want to revisit as you get closer to retirement.  From some of your previous posts, I seem to recall that you are very organized with your finances.  Once you get a detailed analysis of your current spending, you can start estimating your retirement spending a little more accurately.  Go down your existing budget items and think about whether you think each item will need to be increased, decreased or remain the same in retirement.  For those items that change, try to estimate how much more or less you might spend.  

Some people spend less in retirement than before while others spend more.  

 

[John Galt]

Just briefly..............our spending (couple) has stuck
right around 25% of peak preretirement spending,
which in both cases was about equal to our (couple's)
income. No hardship at all.

There are many disasters
my ER could survive, but not having SS would come
pretty close to derailing the whole train.

John Galt

 

[yelnad]

I wouldn't trust those college board numbers. I work in and study higher education. 3 point something may be the long term average, but in the last 3 years, college costs have skyrocketed. If you are in a state like PA, you definitely need to be looking at a higher number. In any case, I would use at least 6-7% to be accurate. At my institution, a state-related public in PA, we went up about 28% in the last TWO years! I don't predict it to slow down for another couple of years. It's really skewing that long term average.

 

[brewer12345]

Ahhh, assumptions. I typically assume:

- 10% returns on my assets
- inflation at 3%
- Max out 401k and Roths
- no SS
- spending is equal to a target budget and increases at 3%
- no inheritance, piles of cash falling out of the sky, etc.
- Possibility of some continued part time work or side business after ER, but not counted in budget
- College will be completely funded (that's about as far as I have though about it)
- Assume at least one of DW and I make it to 100

Perhaps the biggest assumption I have made is that we will be living on a more modest budget after FIRE. I think this is not that hard to support, since we will probably end up moving to a far less expensive locale once I no longer need access to certain labor markets.

Thus far, we have been running ahead of expectations. Really, we are far enough away from the goal that its hard to be sure, and lots of things can change between now and then. At least I have the illusion of progress, if nothing else.

 

[Cut-Throat]

- 10% returns on my assets

Brewer - I'd use 6-7% on your assets before inflation for a more realistic figure. This is what Bogle, Berstein and Buffet are using for the coming decades.

If you get your 10% - You'll have a nice problem to deal with

 

[brewer12345]

Brewer - I'd use 6-7% on your assets before inflation for a more realistic figure. This is what Bogle, Berstein and Buffet are using for the coming decades.

If you get your 10% - You'll have a nice problem to deal with

I don't agree with Bogle/Bernstein and I think that Buffet is sending up a big puff of smoke to suit his own purposes. Plus I have historically averaged above 10%, and I started investing in 1999.

It doesn't really matter what return assumption I use now. In another 5 or 10 years, I will see how much closer I am and adjust accordingly.

 

[cute fuzzy bunny]

If you want, you can treat them like TH and either contradict them or criticize them.

I hardly ever contradict things you say, but I will say that its very wrong of you to say this.

 

[sgeeeee]

I hardly ever contradict things you say, but I will say that its very wrong of you to say this.  

TH,

You do know I'm joking when I put the big smiley face after these comments. Sometimes you seem happy to go along with the comments -- even adding some self-deprecating comments of your own. And sometimes you seem upset. I guess I can pick on someone else . . .

Any suggestions?

 

[soupcxan]

Plus I have historically averaged above 10%, and I started investing in 1999.

IMHO, I would think that any average based on returns from 1999 forward would be highly skewed, either up or down as luck/skill would have it. That and the fact that 5 years isn't a long enough sample to draw any long-term conclusions.

 

[cute fuzzy bunny]

I'm mystified as to why you think that totally tongue in cheek comment involved anger or upsettedness...?

Let me break it down for you...

You say I often contradict or criticize your comments.

I take your comment that i contradict and criticize and contradict that statement and criticize it, and I even throw a "kiss" on the end of it.

This is what we in the humor business call "irony".

In fact, I've honestly never been angry or upset at anything you've said, just a little confused sometimes...

 

[John Galt]

Hi TH! Irony, like sarcasm and satire should be left to the experts (like you and me). Folks, do not try this at home

John Galt

 

[cute fuzzy bunny]

IMHO, I would think that any average based on returns from 1999 forward would be highly skewed, either up or down as luck/skill would have it. That and the fact that 5 years isn't a long enough sample to draw any long-term conclusions.

Any analysis with a short enough time window can produce some interesting and inaccurate results.

I saw a joke thing recently that made me laugh.

A team of PhD's performed a nearly four year analysis. Using well accepted scientific tools and methodologies, they evaluated president Bush on 350 separate occasions. In every instance they found that president bush was both alive and still president. They concluded that given the overwhelming data, that Bush would not only live forever, but remain president forever.

 

[cute fuzzy bunny]

Hi TH! Irony, like sarcasm and satire should be left to the experts (like you and me). Folks, do not try this at home

John Galt

Well isnt that the funny part! I used to say "dont try this at home, I am a professional". But I'm not a professional anymore, just some poor misunderstood bum...

 

[brewer12345]

IMHO, I would think that any average based on returns from 1999 forward would be highly skewed, either up or down as luck/skill would have it. That and the fact that 5 years isn't a long enough sample to draw any long-term conclusions.

Very true. However, I intentiaonally skew my portfolio to asset classes that have historically yielded excess returns and show no sign of letting up. As a result, I tend to have somewhat less liquidity and somewhat higher volatility than an all-index portfolio, but I am perfectly comfy with that.

 

[malakito]

- Assume at least one of DW and I make it to 100

One of the assumptions I didn't mention was about longevity.

I'd like to assume a longevity equal to whatever the 95% joint life expectancy is for my wife and I at the point I retire. I still don't know what that number is but I figure it's plenty safe enough. I think overall I'll plan on a 40 year retirement (my current retirement age with all of those assumptions I listed and a few more I didn't is 57).

malakito.

 

[sgeeeee]

I'm mystified as to why you think that totally tongue in cheek comment involved anger or upsettedness...?

Let me break it down for you...

You say I often contradict or criticize your comments.

I take your comment that i contradict and criticize and contradict that statement and criticize it, and I even throw a "kiss" on the end of it.

This is what we in the humor business call "irony".

In fact, I've honestly never been angry or upset at anything you've said, just a little confused sometimes...

Oh Gosh . . . By suggesting you might be upset, I've made you angry. I'm sorry. And you've dragged poor John Galt into it too.

Relax, TH. Settle down. I'm getting worried about you. I've noticed that you seem to be getting upset and angry in your posts a lot more often lately. You seem to turn critical and condescending very quickly. But you are here among people who can help. I'm guessing you might be under some stress -- perhaps brought on by having to do all that market timing. Having to choose which investments to buy, sell or hold each day can be a burden. Or maybe after earning such a high return over the past several years you are kicking yourself for paying off the mortgage early -- thus missing out on a chance to earn a great deal of income. Don't beat yourself up, TH. It's okay if you don't make the perfect deal every time. Or maybe it's just that your diet includes too many carbs. I prefer the South Beach diet myself, but you might want to consult with wab to get yourself back to normal. Of maybe it's your dog's diet that has you out of sorts.

Whatever it is, I hope that we can help. The stakes might be higher than you think. Recently I read the results of a scientific study that showed that people who average posting more than 5 posts per day on retirement boards are 98.6% more likely to be ***** than those that don't. Be careful, please.

 

[wabmester]

I prefer the South Beach diet myself, but you might want to consult with wab to get yourself back to normal.

Hey, don't drag me into this!  I already know what TH's problem is.   He pops fish-oil capsules like they're candy.  No wonder he's a slick-tongued devilfish!

Devilfish -- get it?!  Oh, sometimes I slay myself [1].  

[1] Well, maybe not this time.

 

[sgeeeee]

. . .  I already know what TH's problem is.   He pops fish-oil capsules like they're candy.  No wonder he's a slick-tongued devilfish!

Devilfish -- get it?!  Oh, sometimes I slay myself [1].  

[1] Well, maybe not this time.

Maybe we should start a new thread titled, "What's TH's problem?" We should give everyone a chance to contribute to his rehabilitation.

 

[hocus]

Maybe we should start a new thread titled, "What's TH's problem?"

I'm in! I'm in!

(just kidding)

 

[John Galt]

I love it when TH goes ballistic, or becomes
bombastic, egomaniacal, contentious, overbearing,
insulting, condescending, or just makes dopey jokes.
Takes the pressure off me. (I amuse myself...........
think self-imposed nasal milk expulsion, mopped up with
used dryer sheets).

John Galt

 

[brewer12345]

One of the assumptions I didn't mention was about longevity.

I'd like to assume a longevity equal to whatever the 95% joint life expectancy is for my wife and I at the point I retire.  I still don't know what that number is but I figure it's plenty safe enough.  I think overall I'll plan on a 40 year retirement (my current retirement age with all of those assumptions I listed and a few more I didn't is 57).

malakito.

I am trying to be conservative with my longevity assumptions for a number of reasons. One, I thoroughly believe that SS won't be there for us, so there is no safety net in my planning.

Two, its fundamentally not cool to be running out of money when you are over, say, 80. I know how John Galt feels at his age. Try adding on 20 years and being forced to go back to work. No thanks.

Three, DW comes from a very long-lived family (grandmother passed on in her 90s, numerous other relatives way up there). My family is reasonably long-lived, but most of them take terrible care of themselves, so I don't really know what the potential longevity is. Mostly, I have to plan for the likelihood that DW will outlive me by a number of years.

Four, medical technology continually advances in its ability to patch us up and keep us going. I hae to assume that life expectancy will continue to rise.