FIREcalc, multiple income streams, & "residuals

[Cb]

Dory, I was looking over old posts at TMF and came upon a thread from the time that you were getting your thoughts together as to how one might consider out-year changes to income requirements like pensions & SSI. At that time you referred to it as "three buckets". *Here's a reply to you from Intercst from those days:

dory36 wrote:

I made a suggestion to RhythmMan and to Swooper in my message at http://boards.fool.com/Message.asp?i...&sort=postdate , saying they could solve the problem of future pensions/SS by using two or more spreadsheets.

I started playing around with that idea for myself, and found a big bonus lurking in the details! I think this bonus will apply to many of us here, so bear with me for some details.

I figure I need three income streams.

The first is only for 10 years, until Social Security kicks in and replaces that stream. With my settings, I can achieve that safely with a whopping 8.5% withdrawal -- thus cutting in half the size of the portfolio I thought I needed for this income stream.

The second income stream is the amount I need to live on, above and beyond the amount that I'll receive from either SS or the first income stream. Standard 4% withdrawal rate, 40 years.

The third income stream is "play money". This stream lends itself to a variable withdrawal -- expensive play and international travel, for example, can follow good market years, and less costly play can follow the bad ones. Looking over the historical data in the spreadsheets, if I specify that withdrawals swing only between 3% and 10%, the long term average would be about 7% while remaining safe. Again, for planning purposes, the portfolio needed is only 60% of what I had been planning for.

This sure reinforces the rule of thumb saying cut costs first. That expensive (25x) second income stream is the one that slows us down. The first is cheap (13x) because it's short (well, for us late ERs), and the third is cheap (14x) both because it's discretionary and because the variable withdrawals prevent excess portfolio depletion during bad years.

Intercst replied: There's one additional complication you haven't factored in -- and it's a "happy" complication.

If you use the "100% safe" withdrawal rate of 8.47% for a 10 year pay out period you will likely have something left in the account at the end of 10 years, even after 10 years of inflation adjusted withdrawals. Indeed, for someone starting with $1 million and a 10 year pay out period, there is a 50/50 chance they'll have at least $690,000 left in the account at the end of 10 years. This will go a long way towards reducing the amount needed in the second "lifetime" pot.

This large terminal value of the portfolio (i.e. $690,000 after 10 years) illustrates a point the "Wise" would just as soon you didn't know. That's the reason buying an annuity from an insurance company is such a bad deal. With annuities, the insurer keeps the terminal value of the portfolio.

That's a huge windfall for the "suits."

intercst


My question - does the current version of Firecalc use a "three bucket approach" and if so, does it take advantage of the likely residual balances Intercst mentions (the "happy complication"), or does it assume the interim buckets reached a zero balance at the end of the pre-pension and/or pre-SSI periods?

Thanks,

Cb
fka RhythmMan on the TMF of Olde

[dory36]

Yes and no.

The extra entries for changes in withdrawals, SS, and so forth are to implement the "three buckets", or maybe 2 1/2 buckets.

I fiddled with variable withdrawals (3rd bucket) for quite a while before deciding I didn't have any good algorithm for computing a "standard" variable withdrawal strategy. So bucket 3 remained a fixed percentage.

The "happy complication" Intercst mentioned is only a 50-50 chance, so it is not calculated in, except as the average ending portfolio that waits out there as a bonus for the winners.