confused about withdrawal rate??

[albireo13]

Using FireCalc to model retirement and am confused a little bit about withdrawal rate from nest egg, using FireCalc.

Does FC use a constant withdrawal rate each year or, does it model withdrawing only as-needed each year?

In some years it is possible that withdrawals are not needed.

Thx

 

[Out-to-Lunch]

There are a few different models allowed for spending. Click on the tab marked "Spending Models" near the top of the page.

These models all assume "smooth" consumption, however. (Either steady, or decreasing, or a constant fraction of the portfolio.)

AFAIK, the only way to get FireCalc to do what you suggest is to become a supporter, then put in a custom profile of yearly spending.

 

[audreyh1]

Firecalc Spending models

Constant Spending Power (by default) which increases by inflation each year
or
Bernicke's Reality Retirement Plan which modifies the Constant Spending Power to reduce spending annually by age at 56 and then stabilizing at 76.
Or
Percentage of Remaining Portfolio where you calculate a fixed % of the portfolio at the start of each year

Most people use Firecalc to establish a maximum safe withdrawal rate and if you withdraw less some years, you should be even safer.

 

[CRLLS]

There is no way that FC can tell if one forecasted year's withdrawal will be over or under your actual needs, just as it cannot tell what future markets will perform. It looks at the data you put in and then checks that against past market performance. It then says how well your inputs would perform in those markets in a percentage. It is not infallible.

One way to prevent from blindly over withdrawing in the future is to run FC each year and see if your anticipated investments/spending will survive. I think it is a good idea to do so because the market has one more data point, last year's performance, to add to it's knowledge base. It also has one less year your investments need to support your life.

Few, if any of us, actually withdraw the withdrawal amount that was initially input into FC. We take out what we need in any given year and use FC to give feedback as to whether we need to change our future spending habits as time goes by. At least that is how I use it.

Of course, when our RMD's hit, the taxes paid will increase our current "spending rate" by a fair amount. I don't know if, or how FC handles that. I leave a healthy buffer between our actual withdrawals now and what FC says we can safely W/D. There are too many future unknowns to simply run FC once and then say "Steady as she goes" until my final breath.

 

[Gumby]

Great explanation CRLLS. As others have posted through the years, FIREcalc gives you an idea of about how much you need to save up. It doesn't really tell you how to spend it.

 

[albireo13]

So, if I am correct FC looks at spending each year and the income (pensions, SS, etc).
If spending exceeds the incoming cash it takes the balance from the nest egg.
Correct?

In other words, if my pension, SS etc is enough to cover spending does FC then factor in taking nothing out from the nest egg?

I am just trying to better understand how FC calculates the runs.

I actually don't want to force an annual withdrawal in the simulation runs.

 

[RobbieB]

You don't need to force a withdrawal. You input your portfolio and your income and your spending and it does the rest.

If your income exceeds your spending then you're looking at the possible increases and decreases in your egg.

 

[Out-to-Lunch]

So, if I am correct FC looks at spending each year and the income (pensions, SS, etc).
If spending exceeds the incoming cash it takes the balance from the nest egg.
Correct?

In other words, if my pension, SS etc is enough to cover spending does FC then factor in taking nothing out from the nest egg?

I am just trying to better understand how FC calculates the runs.

Yes, I believe you have that correct. For examaple, Firecalc will assume more is removed from your portfolio ("nest egg") before SS kicks in than after SS starts.

 

[Gumby]

As FIRECalc notes in the explore page, spending comes from a combination of pension, social security and draws on your portfolio.

 

[The Cosmic Avenger]

To me that's the most important thing that FIREcalc has that the others don't, the spending models. In a down market I could probably get by on 50% or less of my projected budget, although I'm hoping to just pull most of my planned budget from cash/bonds to reduce SORR. But, like many of us here, I know how to pinch a penny until you could use it for baling wire!