FIRECalc Success Rate & RE

[robnplunder]

I only pulled the trigger after FIRECalc gave me 100%. I am too old, lazy, beat up to take the 5% chance of failure. That was 3 years and 4 months ago. Given how the market performed since then, I am still in good shape.


The concern is that at age 57, there is no sign of my spending coming down a la Bernicke. If at all, the annual budget may go up. Also, once I run out of cash at hand and start drawing money from investments, my tax rate may go up and (double whammy) no longer qualify for ACA subsidy.



I recently reran firecalc to see if I can increase my budget. I concluded that I'd better not. The increase will be too close to breaking the 100% success rate.

 

[Tiger8693]

@Cocheesehead and I among others are fairly familiar with the Fidelity calculator, so fire away if you need some more insight.
Most folks who use Fido tend to use the "significantly below average" module. It is considered a 90% success rate, which for a Monte Carlo simulation more so matches up with a 95% success rate with Firecalc.

Fido says score of 89. With that score, and using "significantly below average" it has me with potential shortfall at age 83. With "below average" it shows me with potential shortfall at 94.

That's starting with $100k per year expenses (probably 40% more than actual).

This is also with DW stopping work in 2 years at 59, me a few years later at 62.

 

[Dtail]

Fido says score of 89. With that score, and using "significantly below average" it has me with potential shortfall at age 83. With "below average" it shows me with potential shortfall at 94.

That's starting with $100k per year expenses (probably 40% more than actual).

This is also with DW stopping work in 2 years at 59, me a few years later at 62.

Bolded by me - so that's probably the reason for your numbers being less than 100%. If your estimated expenses are closer to 70k yearly, why not plug in that number especially if that number does include discretionary expenses.
Some folks pad their expenses plus then add back another haircut of sorts. To me, that is using an overly conservative estimate.

 

[Tiger8693]

Bolded by me - so that's probably the reason for your numbers being less than 100%. If your estimated expenses are closer to 70k yearly, why not plug in that number especially if that number does include discretionary expenses.
Some folks pad their expenses plus then add back another haircut of sorts. To me, that is using an overly conservative estimate.

Thanks for your input Dtail!

Wasn't sure if the Fido estimate/success rate was including tax withdrawals, but think it does?

Marketwatch, using $100k has us also running out at about 94, so must be using something similar to Fido "below average" analysis.

Looking in to that I see that it is adding taxes on top of the $100k, so I can dial it back a little if want to be less conservative.

 

[COcheesehead]

Thanks for your input Dtail!

Wasn't sure if the Fido estimate/success rate was including tax withdrawals, but think it does?

Marketwatch, using $100k has us also running out at about 94, so must be using something similar to Fido "below average" analysis.

Looking in to that I see that it is adding taxes on top of the $100k, so I can dial it back a little if want to be less conservative.

Fido takes into account taxes and RMD’s. Whereas FireCalc requires you to estimate your entire spend including taxes. Which is a bit trickier.

 

[tb001]

Fido takes into account taxes and RMD’s. Whereas FireCalc requires you to estimate your entire spend including taxes. Which is a bit trickier.

How accurate have you found the taxes to be? For us, they seem much higher than if I plug our numbers in tax caster.

 

[COcheesehead]

How accurate have you found the taxes to be? For us, they seem much higher than if I plug our numbers in tax caster.

I plug in a variation of the effective tax rate that Turbo Tax gives me today. So that should be a worst case scenario.
With any of the calculators I use, I am not looking for +/- 1% precision. I am looking good is good enough.

 

[GravitySucks]

I like the Fido estimator, but do find it very pessimistic. I never seem to pay as much in taxes as it claims. Maybe it expects taxes to go up. The significantly below option should match 90% success rates but gives haircuts to my 60/40 portfolio of around 20% year one, six percent year 2 then sideways (+/- 2%) for the next 6 years or so. I don't believe that has happened 10 times in the last 100 years.

 

[COcheesehead]

I like the Fido estimator, but do find it very pessimistic. I never seem to pay as much in taxes as it claims. Maybe it expects taxes to go up. The significantly below option should match 90% success rates but gives haircuts to my 60/40 portfolio of around 20% year one, six percent year 2 then sideways (+/- 2%) for the next 6 years or so. I don't believe that has happened 10 times in the last 100 years.

SORR

 

[Dtail]

I like the Fido estimator, but do find it very pessimistic. I never seem to pay as much in taxes as it claims. Maybe it expects taxes to go up. The significantly below option should match 90% success rates but gives haircuts to my 60/40 portfolio of around 20% year one, six percent year 2 then sideways (+/- 2%) for the next 6 years or so. I don't believe that has happened 10 times in the last 100 years.

As @Cocheesehead stated SORR, plus since Fido uses a Monte Carlo simulation, they are effectively applying the large hits to the portfolio in the earlier years, especially the first year.
As far as taxes go, you can input your own taxes or have Fido calculate the taxes for you. Check out if there are any differences.

 

[Dtail]

Thanks for your input Dtail!

Wasn't sure if the Fido estimate/success rate was including tax withdrawals, but think it does?

Marketwatch, using $100k has us also running out at about 94, so must be using something similar to Fido "below average" analysis.

Looking in to that I see that it is adding taxes on top of the $100k, so I can dial it back a little if want to be less conservative.

As stated Fido includes taxes. Marketwatch as related to taxes is similar to Fido in that you can input your own percentages. Currently for me, Marketwatch produces fairly similar results as Fido.

 

[COcheesehead]

I don’t understand why people think Fido’s planner needs to be optimistic. Realistic I get and I think it does a good job of that, but why oh why should you be “sold” on retiring? You can always spend more, it’s way harder to save more once you pull the plug.

 

[Tiger8693]

I surely don't say it needs to be optimistic, pessimistic, or in between. I think it is just another tool to look at in my decision making.

 

[USGrant1962]

SORR

Not really. Historical simulators cover some terrible SORR.

There were 10 bear markets in 12 years of the Great Depression era starting in 1929, including -83%, -40%, -55%. From Jan 1966 to December 1981 the S&P 500 total return with dividends reinvested and inflation adjusted was -55%. Those are both is included in historical sims as long as they go back to 1929 or earlier.

If you are good in FIRECalc you are good in 1929 and 1966.

Monte Carlo fringe cases are SORR+SORR+SORR+SORR-ad infinitum. In other words, Monte Carlo includes the zombie apocalypse and the collapse of the Soviet Union, while historical sims do not. Some of the better MC sims include reversion to mean or bootstrapping to historical (real) data, but many are just math models with randomized expected returns.

IMO, a 95-100% success case in a historical sim is about a 90% case in MC.

 

[COcheesehead]

Not really. Historical simulators cover some terrible SORR.

There were 10 bear markets in 12 years of the Great Depression era starting in 1929, including -83%, -40%, -55%. From Jan 1966 to December 1981 the S&P 500 total return with dividends reinvested and inflation adjusted was -55%. Those are both is included in historical sims as long as they go back to 1929 or earlier.

If you are good in FIRECalc you are good in 1929 and 1966.

Monte Carlo fringe cases are SORR+SORR+SORR+SORR-ad infinitum. In other words, Monte Carlo includes the zombie apocalypse and the collapse of the Soviet Union, while historical sims do not. Some of the better MC sims include reversion to mean or bootstrapping to historical (real) data, but many are just math models with randomized expected returns.

IMO, a 95-100% success case in a historical sim is about a 90% case in MC.

So then what’s your explanation to Gravitysucks?

 

[jimbee]

^^^ I think the explanation is in your quote.

 

[Perryinva]

Why doesn’t portfolio value at the very start of Firecalc plots , begin as a single value? In the first year, the range of starting points is huge, like a few $100k. Is that just a set of extreme SORR results during the first few months of the sim?

 

[jimbee]

Why doesn’t portfolio value at the very start of Firecalc plots , begin as a single value? In the first year, the range of starting points is huge, like a few $100k. Is that just a set of extreme SORR results during the first few months of the sim?

It is the portfolio value after one year of retirement, including spending and any gain or loss.

 

[COcheesehead]

^^^ I think the explanation is in your quote.

Maybe I need another cup of coffee.

 

[jimbee]

Maybe I need another cup of coffee.

I think the paragraph on Monte Carlo analysis explains it, but I could be misunderstanding your question.

 

[youbet]

The concern is that at age 57, there is no sign of my spending coming down a la Bernicke.

Bernicke's position that spending will decrease over time and age is likely correct for many folks. But Bernicke is NOT saying it will be correct for ALL of us.

Descriptive and predictive statistics can be wonderful tools. But Bernicke is sharp enough to understand that while spending may decrease "on average," and anecdotal examples of individuals experiencing decreased spending are common, the numbers say that a good sized chunk of us will not decrease spending, or may even have spending increase, with age.

Speaking of anecdotal examples, DW and I are experiencing spending increasing as we go through our 70's. We're healthy enough to still enjoy outdoorsy activities, travel, entertainment and living in comfortable surroundings. But our energy and ambition for do-it-yourself, money saving chores is diminishing fast! I just spent $1,100 for the lawn service to do some things we'd have done ourselves a few years ago. And the house needs a little freshening this year and we're not even considering a do-it-yourself approach to painting, cleaning, etc. anymore. We'll use professional fishing guides on a couple of fishing trips which could double our expenses of being "Up Nort" chasing walleyes this spring and fall compared to past years. It goes on and on. There's a long list of things we still enjoy and have the energy to do but don't feel like handling on a do-it-yourself basis anymore.

We suspect some potentially escalating health issues, and just plain ole getting old, will take the fun out of some of this stuff one of these days and expenses might indeed decline. But not yet.

It would be a real bummer for us to drop our fishing trips off the activity list because we can't afford to increase our budget to allow $2k/yr for fishing guides to do the heavy lifting going forward!

 

[GravitySucks]

I'm not looking for an explanation or need to be sold. I'm just stating Fido seems more pessimistic than history indicates. And yes I understand that the front loading of all the bad times is what SORR is made of. Guess the 90 mc is 95 historical is the most valid comment on Fido's tool. Still makes it overly pessimistic.

 

[big-papa]

I'm shooting for a 100% success rate, but that's with a spending level that is 2x my annual expenses (e.g., 50% discretionary spending for travel). So, I'm projecting retirement at 50X my annual expenses saved. However, the actual plan is to spend at a 4.4% WR for the first 10 or so years so that I can travel, assuming no really bad SORR takes place. If they do, I'll deplete the cash bucket first, and if after 3 years, nothing's recovered, will cut spending, as I suspect many will.

Or use VPW.

Yep, I'm a big fan of variable withdrawal methods such as VPW, fixed % of portfolio, PMT calculations, etc.

I neither want to be in danger of running out of money prematurely nor am I interested in leaving a large bequest. That said, there is no free lunch - with variable methods, SORR turns into a risk of having some years with very low withdrawals as the tradeoff against running out of money with fixed real withdrawals. And low withdrawals are somewhat mitigated by Social Security, pensions (if you're lucky), SPIAs.

I use FireCalc, RIP, etc. only as a "am I ready to retire" guide to see if the projected withdrawals are in the ballpark, of what I think I need to live on. Another method to do that is to calculate your "funding ratio" which looks at the NPV of all future cash flows vs NPV of expenses.

 

[Perryinva]

Why does everyone say FIDO is pessimistic? It is only pessimistic if you choose “significantly below average” return as the base. By definition that is pessimistic. Or the high failure scenario. Even “below average” I find pretty positive. “Average” is insanely positive.

 

[youbet]

Why does everyone say FIDO is pessimistic? It is only pessimistic if you choose “significantly below average” return as the base. By definition that is pessimistic. Or the high failure scenario. Even “below average” I find pretty positive. “Average” is insanely positive.

Excellent point Perryinva and I agree with you completely! And it's not just choosing Fido's "significantly below average" option. It's not taking the trouble to understand the test you're running and the descriptive statistics of the output data.

It is sooooo important when testing scenarios to fully understand the algorithms being used. You know, historical data vs. average returns/inflation vs Monte Carlo, etc. Possibly, some folks are losing track of this.

Many here tend to be belt + suspender + duct tape types. Grossly exaggerate expenses. Underestimate income streams or omit some (like SS) entirely. Then pick a test model which assumes draconian financial circumstances. Apparently, they enjoy working and will do most anything to show they need OMY and then OMY and then OMY.......