FIRE Planning Assumptions ?

[joesxm3]

I have not run any of the more advanced retirement calculators, but based my FIRE decision on some crude spreadsheets that I made with very conservative assumptions.

The most recent one I did took 15% off the top before starting as a fudge factor.

I assumed that the rate of expense inflation would be 5%. I would like to make a better model with different inflation rates for food, medical cost, insurance cost, taxes etc., but have not gotten around to it.

I assumed that the portfolio rate of return would be 4%, i.e. a real rate of return of negative 1%.

Having no dependents, I allow the portfolio to draw down to zero in my model. I am 59 now and with the simple calculations and these assumptions I make it into the mid 90's assuming that I keep with my LBYM lifestyle and ignoring any huge unexpected expenses.

I am curious what your opinions are on the expected rate of inflation going forward and on what you consider the expected average rate of return on your portfolio will be.

I feel that the government understates inflation, especially if you consider food and medical costs. I think the way that they factor in technological improvement leading to cost drops on electronics etc. makes their numbers lower than they should be.

I feel that the suppression of the interest rate environment will make fixed income yields in the future lower than in the past.

I feel that the current equity market valuations and support from quantitative easing will mean that the historical average return on equity will not be possible in the next ten or fifteen years.

What do you think?

Thanks.

Joe

 

[Sunset]

You can set all those values in some retirement calculators like this one.

Retirement Planning Tool - Visual Calculator

As for inflation: I estimate it will be about 3% , and gross returns 5% for stocks, and 3% for bonds.

But it's all a guess, and really just estimate what 3.5% of your money is, and that is a pretty good safe withdrawal rate.

 

[joesxm3]

You can set all those values in some retirement calculators like this one.

Retirement Planning Tool - Visual Calculator

As for inflation: I estimate it will be about 3% , and gross returns 5% for stocks, and 3% for bonds.

But it's all a guess, and really just estimate what 3.5% of your money is, and that is a pretty good safe withdrawal rate.

Those seem like reasonable assumptions.

I am finding that planning for the taxation of the returns is both interesting and challenging. I guess for now, I will just wing it on taxes. I am planning to try to keep my taxable income low before SS and either do ROTH conversions or harvest capital gains.

You are right about just dividing your portfolio by a SWR percent. That is what I pretty much relied on as I made my FIRE decision. So far I am trying to keep a pretty tight budget and seem to be close to a 2% burn rate for my fixed and variable living expenses. I imagine when I add in taxes caused by the ROTH conversions it might end up between 2.5% and 3%.

I am pretty sure that I will be OK, but I do get the feeling that despite 10 years of planning for FIRE, I am still sort of winging it.

 

[pb4uski]

I like Quicken Lifetime Planner because it is fairly intuitive, easy to use and covers a lot of bases. I think your assumptions are way too pessimistic.

I use a 5.5% earnings rate for a 60/40 portfolio (significant haircut to the historical earnings rate of 8.7%) and 3% inflation for a 2.5% real rate of return.

Five years into retirement my sense is that our personal inflation rate is near zero... as I have not yet felt a need to increase our monthly "paycheck" from our nestegg to the local credit union account that we use to pay our bills.

For taxes... do a trial return using Taxcaster or TurboTax of your income once you are retired to get an idea what your retirement tax burden will be. Most of us find it is quite a bit lower than when we were working... mine is around 7% federal and 3% state as we manage our income to the top of the 15% tax bracket by doing Roth conversions (and recharacterizations).

Also, while I like Quicken Lifetime Planner for my basic plan, I stress test it for sequence of returns risk using FireCalc.

 

[joesxm3]

pb4uski,

btw, it took me a while to realize what your name was. At first glace it seemed like some sort of Polish name.

What you say makes a lot of sense. I have been reading a lot of the threads on managing the taxable income and have been planning to track down Taxcaster and also to question the retirement account customer service guy on the mechanism for doing the recharacterizations. Having retired last month, I am over the limit for 2016, so I have until 2017 tax return to figure all of this out.

I will give FireCalc a try once the bad weather sets in.

Your remark on personal inflation rate is interesting. I definitely feel that our personal rate will be nothing like the government stated rates.

I agree that my assumptions are probably pessimistic, but if they are that is a good thing since it will mean that I have to start letting myself enjoy things more. I did break down last week and buy a 50 inch LED TV to replace my 1988 Sony 27 inch tube. Boy am I liking not having to watch movies on a six inch tall band.

I have calculated my fixed living costs (property tax, health ins, recurring bills etc.) and it comes somewhere near $22,000. I pulled the number $2000/month out of the air to shoot for on my semi-discretionary living costs (gas, food, restaurants, books, yard, tools, toys etc.). I have tracked August and September spending down to the dollar and it seems I am close to the $2000 limit. I figure if I can keep under $50K for this and next year, I can get a grip on things enough to know if that can be higher going forward or if I need to identify things to trim or become more efficient on.

 

[socca]

I don't use FIREcalc because I'm skeptical whether the last 100 years have much useful to say about what's going to happen during the next 100 years. For example, what if circumstances force senior gov't officials to stop the blind worship of growth (population, economic) and instead embrace deflation as necessary to sustain life on Earth? Right now, this seems unimaginable, but in my lifetime I've noticed that unimaginable things have an annoying way of coming to be.

 

[REWahoo]

I don't use FIREcalc because I'm skeptical whether the last 100 years have much useful to say about what's going to happen during the next 100 years.

Once again, that's not what FIRECalc attempts to do. The program makes no attempt to predict the future. What it can do is tell you how your planned annual retirement spending would have fared in the past. It is entirely up to you what you do with that information.

 

[socca]

[FIRECalc] makes no attempt to predict the future.

I'm glad that FIRECalc makes no predictive claims. My point was that I'm not much interested in what it has to say about portfolio performance against past market conditions.

 

[RobbieB]

If you want predictions you have to visit Madame Zolma.

 

[sengsational]

I don't use FIREcalc because I'm skeptical whether the last 100 years have much useful to say about what's going to happen during the next 100 years.

I'm absolutely certain: This time it's going to be different. We'll react faster, but otherwise the principles that guided the last 100 years will still be in effect.

 

[rodi]

Before I pulled the plug I ran every calculator I could get my hands on. The 3 that I found the most useful for fleshing out my plan were: firecalc, fidelity RIP (changed name - but you can find it on the fidelity site) and Quicken lifetime planner.

All approach retirement planning differently. With the fidelity calculator you can set inflation rates differently for different expenses (eg healthcare might inflate more than groceries...) QLP is very deterministic (vs based on past market results) but you can play around with inflation and returns to see what it does to your plan. It also allows modelling some things that are less usual for most - but were important to me - like paying for kids college after you retire.... so a big lumpy expense over several years. Firecalc has great inputs for pensions, SS, etc coming online at different points in your retirement.

Like you - I took a chunk off the top of my investment total before running the calculators... just to add a safety factor.

But the real key, I think, is to remain flexible if things change.

 

[RobbieB]

Absolutely.

I don't have any budgets and don't track my spending and I can tell you if the market goes down 50% I won't be spending as much as I do now.

 

[racy]

...I took 15% off the top before starting as a fudge factor. ...I assumed that the rate of expense inflation would be 5%. ...
I assumed that the portfolio rate of return would be 4%, i.e. a real rate of return of negative 1%.... I am curious what your opinions are on the expected rate of inflation going forward and on what you consider the expected average rate of return on your portfolio will be...What do you think?...

I also play around with spreadsheets. Assumptions I'm using lately are, as follows:
* The average market decline of the worst 5 years is 33%. Since my allocation is 50/50, I assumed a 16.5% haircut in the first year of retirement.
* For inflation, the Fed target is 2%, historic is 3.18%, so I used 3.2%.
* I calculated that Social Security would increase 3% (near inflation, but a tad less).
* Averaging various sources, I put my 50/50 portfolio's growth at 4.7%, or 1.5% real.

I think I'm being conservative, but I'd rather plan for 100 mph winds than average winds.

 

[COcheesehead]

I like Quicken Lifetime Planner because it is fairly intuitive, easy to use and covers a lot of bases. I think your assumptions are way too pessimistic.

I use a 5.5% earnings rate for a 60/40 portfolio (significant haircut to the historical earnings rate of 8.7%) and 3% inflation for a 2.5% real rate of return.

Five years into retirement my sense is that our personal inflation rate is near zero... as I have not yet felt a need to increase our monthly "paycheck" from our nestegg to the local credit union account that we use to pay our bills.

For taxes... do a trial return using Taxcaster or TurboTax of your income once you are retired to get an idea what your retirement tax burden will be. Most of us find it is quite a bit lower than when we were working... mine is around 7% federal and 3% state as we manage our income to the top of the 15% tax bracket by doing Roth conversions (and recharacterizations).

Also, while I like Quicken Lifetime Planner for my basic plan, I stress test it for sequence of returns risk using FireCalc.

8.7% for a 60/40 sounds high. The apps/planners I use show about 7.6% for that AA.

 

[traineeinvestor]

I used FIREcalc and some other online calculators but the most important tool was my own spreadsheet tacking historical expenses.

When plugging in the numbers, I made a number of assumptions and adjustments:

1. I arbitrarily increased projected post-FIRE expenses by 20% - spending hasn't move much although there is some shuffling between categories

2. I assumed both our part time post-FIRE jobs would last a year and after that we would have no employment income at all - three years in, mine is still running and, after collecting a nice redundancy package, DW has decided she wants to work full time and will start a new job at the end of October

3. I made no allowance for our daughters eventually dropping off the payroll - it's at least 10 years away, but I'm assuming I will fund each of them through their first university degree at a reasonably priced university

4. I assumed that the real rate of return on my investments will be about the long run rate of personal inflation and, if we put most of our money in risk assets, we should have some sort of hedge against inflation

5. I planned on the basis that we would spend most-all of the net-of-everything income from our investments (dividends, interest and rents)

6. I assumed our nest egg has to last indefinitely - given DWs age, gender and genetics, she has a good chance of making it to a hundred and the difference between 50-60 years and forever on the spreadsheets/retirement calculators was not meaningful

7. I planned on the basis we would not prepay our home mortgage or any of our investment mortgages early - with interest rates below the rate of inflation and below the local stock market yield, this was a no-brainer for us

All of this should be overly conservative and required a higher level of net worth than more realistic assumptions but I would much rather front end load an extra year or two of working at a high income than be scrambling for a minimum wage job when I'm in my seventies.

In spite of some mixed market returns over the first three years of my retirement, the assumptions have served us well and I am more confident in the durability of our retirement planning as each day goes by.

 

[MooreBonds]

If you want predictions you have to visit Madame Zolma.

Aha! So THAT'S it! And here all along I was wasting my time with Zoltar.....hey, wait a minute, the machine's been unplugged all this time...

 

[walkinwood]

You are missing an important point - the biggest risk factor for portfolio survival is a bad sequence of returns.

That's why Firecalc is a good tool to use. It will tell you how your portfolio would have fared during the great depression and during the stagflation 70s.

 

[flyingaway]

In my opinion, FIRECalc is just the 4% rule.