New retirement model that I love

[corn18]

I have been using a retirement model that I found on bogleheads.org called Total Portfolio Allocation and Withdrawal (TPAW). At first it cornfused me, but now that I understand it, the simplicity is very elegant.

Here's a link to the TPAW thread on bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=331368

I tried out the spreadsheet and that was interesting. But where it really shined was when I adapted the simple concept to my spreadsheet. Here's what is important:

Total income - Total Expenses = Savings Required

All of the numbers must be in real dollars. If you have a non COLA pension, you have to convert it to real dollars. Social Security is already in real dollars. Most expenses are in real dollars (mortgage is not).

A simple example:

Retire @ 56
35 year retirement
Take SS @ 70
20,000 COLA pension starting at retirement age
20,000 SS starting @ 70
100,000 / year expenses

INCOME

20,000*35 = 700,000 pension income
20,000*25 = 500,000 SS income

So you have 1,200,000 of income

EXPENSES

100,000*35 = 3,500,000 of expenses

1.2M - 3.5M = 2.3M shortfall. This is how much you need to retire.

There are no assumptions to make unless you need to convert from nominal to real dollars. Then you need to pick an inflation rate (I picked 2%).

What this represents is a 0% average real return on your investments over the full length of retirement. You can pick other returns in the TPAW spreadsheet and it will run the numbers for you. But I just leave it in this simple form.

I use many models to decide if I have enough. Actually, I use all of them. This simple method matches 100% in firecalc and 97% in the Flexible Retirement Planner. I haven't done any validation outside my own personal data, but maybe I will and report back.

I mentioned this method on another forum, and they have started using it to help them decide how much they will need to retire. Thought I would share it here in its own post.

Corn

I just did a quick check in firecalc:

40,000 annual expenses
No income
1,200,000 required to retire per TPAW

If I plug that into firecalc, it spits out 100% Ps

If I plug that into the Flexible Retirement Planner, it says I need 1,200,000 for 95% Ps.

And to add, I have found that 100% Ps in firecalc is equivalent to 95% Ps in a Monte Carlo sim.

 

[Whisper66]

Thanks for sharing. Simple rules are great for bracketing where we are.

FYI - Running Firecalc with your input, I get you'd need about 1.8M saved at retirement to have a very comfortable 95% success rate. This is about 500k less than the quicker rule of thumb you are using which yields 2.3M needed. Depending on how long it takes one to save another 500k, that may be important or not in ones thinking.

 

[corn18]

Thanks for sharing. Simple rules are great for bracketing where we are.

FYI - Running Firecalc with your input, I get you'd need about 1.8M saved at retirement to have a very comfortable 95% success rate. This is about 500k less than the quicker rule of thumb you are using which yields 2.3M needed. Depending on how long it takes one to save another 500k, that may be important or not in ones thinking.

I found the same thing. The simple TPAW equation seems to be equivalent to 100% Ps in firecalc.

Do you still have the numbers plugged in to firecalc? If so, could you run it @ 100% Ps?

 

[Whisper66]

I found the same thing. The simple TPAW equation seems to be equivalent to 100% Ps in firecalc.

Do you still have the numbers plugged in to firecalc? If so, could you run it @ 100% Ps?

I get that 100% requires 2.06M.

 

[Out-to-Lunch]

I found the same thing. The simple TPAW equation seems to be equivalent to 100% Ps in firecalc.

Well, the simple TPAW equation is equivalent to a 3.33% withdrawal rate. We know that Firecalc gives 100% with a 3.7% withdrawal rate. So, yes, the TPAW amount will give 100% in Firecalc.

 

[corn18]

Well, the simple TPAW equation is equivalent to a 3.33% withdrawal rate. We know that Firecalc gives 100% with a 3.7% withdrawal rate. So, yes, the TPAW amount will give 100% in Firecalc.

Hadn't thought to look at it from the WR standpoint. Good stuff.

 

[Dtail]

Well, the simple TPAW equation is equivalent to a 3.33% withdrawal rate. We know that Firecalc gives 100% with a 3.7% withdrawal rate. So, yes, the TPAW amount will give 100% in Firecalc.

Actually IIRC, Firecalc has a 100% success rate at the maximum of 3.59%WR at their default settings.
Splitting hairs I suppose.

 

[corn18]

Where I find this model incredibly useful is when you have lumpy income and expenses. It's hard to back out a withdrawal rate with those lumps. This method makes it much easier. At least for me.

My lumpy stuff:

Pension: this goes up after age 72 by a bit because I no longer have to pay for survivor benefits.

SS: kicks in @ year 15 for me year 16 for my wife (firecalc makes this easy)

Expenses:

Mortgage goes away @ 84
Car every 5 years
Life insurance premiums are lumpy as the policies expire
Taxes vary by year
Medicare kicks in @ 65 and for my wife 4 years later
My discretionary (blow that dough) expenses vary by age (more early, less later)

I can't get all that lumpy stuff entered into firecalc (not enough inputs available). I can in the Flexible Retirement Planner. I use this TPAW equation as my sanity check. Sometimes I do something in my model that has an unintended consequence and my TPAW calculation gets all out of whack. That prompts me to look for my error.

 

[Out-to-Lunch]

Actually IIRC, Firecalc has a 100% success rate at the maximum of 3.59%WR at their default settings.
Splitting hairs I suppose.

Yes, yes you are. I changed from the default "long interest rate" to the "5-year treasury" to get the 3.7%.