advisor calculations vs my calculations

[David1961]

That said, planning for 50-60 years out is a tall order. The range of possible outcomes is even wider than most 25-35 year retirees. Best of luck...

+1 I think this is a key point. Most retirement calculators assume 30 years out, 40 is about the max.

If your investments take a big hit during the first few years of retirement, you may have to move your spending toward the lower end.

 

[MooreBonds]

Fire your FA. Either he is lying or don't have a clue. Either way, he is (up to) no good.

I agree with "fire the FA", but I disagree with both of your sentiments. He likely isn't lying, and he also has a perfectly good idea of what's going on.

The issue is that he's using the projections based on his wrap fees and the subpar, higher expense-ratio mutual funds he has the OP in. In all likelihood, the OP will run out of money at age 80, given the projections of the expense ratios and all other fees.

 

[TwoByFour]

Have you looked at how FIRECalc works?

Yes. FIRECalc uses historical values as its input. It is not clear from the description if it fully randomizes the years or sequences the returns in the same order. I believe randomization is better since we have no idea if the pattern of returns will look the same in the future as the past.

However, FIRECalc does not account for taxes or inflation. And it only accounts for "life events" (like selling your house in 2020) as a reduction in spending, not as an addition to your investment pool.

Another RIP tool to try is the one on Fidelity.

 

[Midpack]

Yes. FIRECalc uses historical values as its input. It is not clear from the description if it fully randomizes the years or sequences the returns in the same order. I believe randomization is better since we have no idea if the pattern of returns will look the same in the future as the past.

However, FIRECalc does not account for taxes or inflation. And it only accounts for "life events" (like selling your house in 2020) as a reduction in spending, not as an addition to your investment pool.

Another RIP tool to try is the one on Fidelity.

I may be mistaken, but I don't think FIRECALC randomizes historical data at all.

I am curious why you believe Monte Carlo/randomization would be better given those tools rely on getting returns and variation of returns correct. Both are valuable but different tools, both have well known shortcomings, neither can predict the future any better than the other that I know of. It's up to the user to decide how/what safety factors/contingencies to build in compared to past history (FIRECALC) and/or Monte Carlo results show.

FIRECALC does account for inflation, and it does allow you to add the proceeds of selling a home or any other lump sum to your portfolio.

FIRECALC doesn't attempt to predict taxes, and it seems wise to keep that separate since tax rates can change in an almost infinite number of ways in the years/decades ahead.

 

[TwoByFour]

I think the main difference between the two is whether there is a correlation between the return values or whether they are independent events. A randomized Monte Carlo assumes zero correlation - the return in 2016 is completely independent of what the return was in 2015, but does choose return values based on the frequency of occurrence historically. A calculation that uses historical sequences is assuming there is in effect a correlation between the return one year and those in subsequent years.

It is an interesting question as to whether a correlation exists. Given that we have Bear and Bull market periods, there appears to be some correlation. But it really needs to be calculated.

If there is a non-zero correlation, that correlation function can be used as an input to MC to choose its values. I have no idea what other tools (such as the one on Fidelity) do in this regard.

My bad on inflation - their web site is a little vague on the topic and I interpreted it to be no inflation. I am curious if FC uses historical inflation sequences or a probability function for inflation.

I love to geek about this stuff, in case you haven't noticed.

 

[Rustward]

"A portfolio with random performance, with a mean total portfolio return of [x]% and variability (standard deviation) of [y]%. Assume an inflation rate of [z]%."

It's a selection on the "Your Portfolio" tab.

 

[urn2bfree]

Any FA charging you based on a percent of your Assets Under Management is going to encourage you to have more and more assets so he gets more and more- inherent conflict of interest. There are excellent lower cost options for advice. When I fired my advisor I saved over $10,000 a year which is that much less savings we needed as well... The drag on your portfolio plus his inherent bias are keeping you captive. Fire him for sure and get a fee based advisor or do it yourself- immediately.

 

[LongPrime]

I have a FA, primarily because he alerts me to financial products that could make me more $$ or preserve what we got. He admits that he has no idea where the markets will be. So why do I keep him? Because he keeps me from doing something stupid-which is the same reason I know and work with a lawyer, and a CPA (non-tax, whom I get an unlimited supply of cherries).

 

[LongPrime]

You know my older bro, the one who works at big bank, corp level-He needed and needs a FA.

 

[urn2bfree]

I am not saying don't have an advisor. i am saying don't pay more than you have to. There are many low cost food options that are not charging ever higher amounts for no more work like many of the AUM based thieves do.

 

[Brat]

My DD and her husband use a FEE BASED FA for planning purposes. Both are CPAs, she is a CFO. Their holdings are complicated with venture level stock. Not the normal situation.

 

[panhead]

The issue is that he's using the projections based on his wrap fees and the subpar, higher expense-ratio mutual funds he has the OP in. In all likelihood, the OP will run out of money at age 80, given the projections of the expense ratios and all other fees.

I believe this is the case. If you have a 2.5% WR, then the Advisor takes even 0.5% and the funds (assuming he's using funds) have about a 1% ER, you are at a 4% draw. Even if you are in stocks and ETFs with low ERs and the advisor takes 0.5% or so, you are still at a 3% WR.

 

[MBAustin]

We use an FA for a small part of our portfolio - big enough to generate enough fees for him to consider us worth keeping but small enough that feel like I get what I pay for in terms of perspectives on the markets, etc. Most importantly, if something were to happen to me, the FA would give much more help to DH in managing everything else on a fee-only basis (at least until DS gets enough financial experience to take that on, probably 5-10 years out).

 

[SilentSwirl]

I agree with "fire the FA", but I disagree with both of your sentiments. He likely isn't lying, and he also has a perfectly good idea of what's going on.

The issue is that he's using the projections based on his wrap fees and the subpar, higher expense-ratio mutual funds he has the OP in. In all likelihood, the OP will run out of money at age 80, given the projections of the expense ratios and all other fees.

...and, perhaps the FA knows something more fundamental about their client that we don't.

ISTM this topic is about a fairly young couple who could experience more than one catastrophic medical or other family event (e.g. divorce) over the course of the long period of their ER.

I hate ever agreeing with a FA, but in this instance ISTM erring on the side of caution may be the wiser course.

 

[robnplunder]

I hate ever agreeing with a FA, but in this instance ISTM erring on the side of caution may be the wiser course.

The OP's $5M in post tax investment and < $10k expense/mo (and he is not even counting SS income) can go a long way for RE. If he can't retire with $5M today, who among us can RE?

 

[Mulligan]

The OP's $5M in post tax investment and < $10k expense/mo (and he is not even counting SS income) can go a long way for RE. If he can't retire with $5M today, who among us can RE?

Well I for one would need to go back in time 4 years ago and take back my resignation letter! Congrats to Travel for a very impressive portfolio. Social Security has to be a huge backstop that isn't even being accounted for. Travel already mentioned he is being generous in yearly expenses, so it sounds like the process is being doubly conservative. Maybe I am more pessimistic about aging but as an earlier poster wrote, you just will not spend the money when aged as in the earlier retired years. Heck I'm 30 years away from 80 and I am already spending less in my 4th year of retirement than I did the first couple.


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[Travelwanted]

Well I for one would need to go back in time 4 years ago and take back my resignation letter! Congrats to Travel for a very impressive portfolio. Social Security has to be a huge backstop that isn't even being accounted for. Travel already mentioned he is being generous in yearly expenses, so it sounds like the process is being doubly conservative. Maybe I am more pessimistic about aging but as an earlier poster wrote, you just will not spend the money when aged as in the earlier retired years. Heck I'm 30 years away from 80 and I am already spending less in my 4th year of retirement than I did the first couple.


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Thanks, Mulligan. I am an OVERplanner. I plan for more expenses and no SS with lowish average returns. I cannot get safer other than simply dividing the portfolio by the number of years and assume I simply keep up with inflation. In that case it would last 41.67 years. In that scenario most of us on this board would be in trouble!

I think part of the issue is the fees. 0.78% advisory fee plus embedded fees in the MFs. Net is likely >1%. I have already opened the VG account. Now...as to moving the money over. . .working on that. Time to visit the Bogleheads for advice.

 

[Mulligan]

Thanks, Mulligan. I am an OVERplanner. I plan for more expenses and no SS with lowish average returns. I cannot get safer other than simply dividing the portfolio by the number of years and assume I simply keep up with inflation. In that case it would last 41.67 years. In that scenario most of us on this board would be in trouble!



I think part of the issue is the fees. 0.78% advisory fee plus embedded fees in the MFs. Net is likely >1%. I have already opened the VG account. Now...as to moving the money over. . .working on that. Time to visit the Bogleheads for advice.

I thoroughly enjoy their website...it keeps me on the straight and narrow path. My only advise is don't let this worry take away from your enjoyment of retirement. Anyone who can amass the amount you have and the awareness that you possess will be just fine. I am a retired pensioner who has a generous pension and continue to save $1500-$2000 a month, probably for the rest of my life. But unless I live to be in my mid 70s will never have a 7 figure portfolio. There are several posters here just like yourself, and I personally admire all of you. It's easy to allocate expenses and lifestyle from a check given to you each month. But to draw down an amount that you have spent your whole life accumulating would be very unnerving to me. But then again, I have seen my dad starting over at 40 from divorce and never making more than $50k a year in his life accumulate a million dollars, and won't turn one penny loose to spend on himself and enjoy it.


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[CaliforniaMan]

... But to draw down an amount that you have spent your whole life accumulating would be very unnerving to me. But then again, I have seen my dad starting over at 40 from divorce and never making more than $50k a year in his life accumulate a million dollars, and won't turn one penny loose to spend on himself and enjoy it.
...

No doubt your dad, like mine had, has many hard times in his mind while he clings onto that bit of security that he knows he can never get again if lost.

Into my 2nd month of retirement now and this is the hardest part for me, switching from never touching the account to actually drawing from it. I cant get it back when it is gone, it is my security. But in the end we really don't have the security we seek.

Borrowing some Neil Young lyrics, while Rock and roll may be here to stay, we are not. So better to take some chances while we still can. Better to burn out than to rust.

There's more to the picture than meets the eye. Hey hey, my my.

Sorry Neil

 

[gindie]

To the OP:

For one final check, I'd go to the website otar retirement calculator and download the free trial version of his calculator.

Jim Otar has written a very thorough book (mentioned on this site several times over the years), that describes how sequence of events is a MAJOR determining factor for your success. Basically, his calculator is an enhanced version of FIRECalc.

 

[Travelwanted]

So I wanted to report what the FA indicated about our numbers and the reason for the differences:

Apparently the numbers they run are AFTER tax numbers. FIRECalc, etc.
do not factor in taxes.

So my question on calculators: if you are running a scenario, are you assuming the number for annual spending to be AFTER-tax or PRE-tax? And I have no idea what my tax bracket will be once ER'd. Thoughts? Thanks!

 

[audreyh1]

Firecalc assumes all taxes are paid out of withdrawals. Fair enough. But it does mean you have to model what your taxes might be so you know your likely expenses.

 

[pb4uski]

So I wanted to report what the FA indicated about our numbers and the reason for the differences:

Apparently the numbers they run are AFTER tax numbers. FIRECalc, etc.
do not factor in taxes.

So my question on calculators: if you are running a scenario, are you assuming the number for annual spending to be AFTER-tax or PRE-tax? And I have no idea what my tax bracket will be once ER'd. Thoughts? Thanks!

Most calculators include taxes as an input expense (either % or $ amount), I think principally because taxes are so complicated and can vary so much.

It should be pretty easy to get a good idea of your tax bracket once you retire. Take last year's tax return, eliminate your earnings from working and make any other appropriate changes and see what the result is. You may need to do a full year retired version and then a year of retirement version. You can use TurpoTax or one of a number of tax calculatiors.

I like Income Tax Calculator - Tax-Rates.org because it also includes stat income taxes.

 

[urn2bfree]

I assume my effective tax rate in retirement will be 15%. So whatever my amount of withdrawal is I lop off 15% for state and Federal and that is how much I figure we can spend on living. I think that is probably even a bit too much of a haircut because we have a 2/3 of our money in taxable accounts so we should be able to stay close to 0% Federal taxes and our state top tax bracket is 6%...I was amazed to see how with deductions exemptions and crafty use of cap gains and return of principle one can take out close to $100000 a year and pay ZERO Federal taxes...

The "advisors" will try to convince you you will be paying 40% in taxes becuase again this will keep,you shovelling money into their hands as a larger and larger set of assets for them to skim their % off of. Again, get a flat rate pay by the hour advisor for a more accurate assessment of your situation.

 

[rodi]

Firecalc uses Gross spending.
Quicken Lifetime Planner has you input net spending (gross minus taxes and any savings or debt reduction targets you've set up.)
I believe financial engines outputs gross spending.

I did a brute force calculation on my spending. I took my gross income, subtracted out 401k contributions and other savings contributions, added in increased health care costs, subtracted out mortgage (P&I) because the plan is to pay it off lump sum when I retire. That's my spending number. I know I can live on it -because I have been living on it. I took several years average - to make sure big ticket purchases that aren't annual were accounted for.