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Getting Down to Brass Tacks
Old 09-04-2019, 08:20 PM   #1
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Getting Down to Brass Tacks

I admit, I over analyze most decisions. Currently working through whether I get on the Retire in 2020 train or do OMY. As with most of you, my key concern is ensuring I have enough gas in the tank. So Iím building out three retirement cash flow scenarios (Best, Median, and Worst).
The key variables in the model are: Inflation (3.25%/3.50%/3.75%), Portfolio Return (5.0%/4.50%/4.50%), Social Security Haircut (No Reduction/10%/20%], and Yearly Spend before Taxes ($72K/$75k/$78k).

For each case, I have run through several tools (FIDO, Firecalc, Homegrown) and am solving for portfolio at our expiration date. All are fairly close for each scenario.

Question for the forum...are my inputs too aggressive/conservative? Are there other ways you finally reached your own conclusion?

My worst case exhausts the portfolio 2-4 years before expiration which is concerning. Thanks for your thoughts!
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Old 09-04-2019, 08:39 PM   #2
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Quote:
Originally Posted by TNBigfoot View Post
I admit, I over analyze most decisions. Currently working through whether I get on the Retire in 2020 train or do OMY. As with most of you, my key concern is ensuring I have enough gas in the tank. So Iím building out three retirement cash flow scenarios (Best, Median, and Worst).
The key variables in the model are: Inflation (3.25%/3.50%/3.75%), Portfolio Return (5.0%/4.50%/4.50%), Social Security Haircut (No Reduction/10%/20%], and Yearly Spend before Taxes ($72K/$75k/$78k).

For each case, I have run through several tools (FIDO, Firecalc, Homegrown) and am solving for portfolio at our expiration date. All are fairly close for each scenario.

Question for the forum...are my inputs too aggressive/conservative? Are there other ways you finally reached your own conclusion?

My worst case exhausts the portfolio 2-4 years before expiration which is concerning. Thanks for your thoughts!
Given your listed inflation parameter range, if your expected portfolio returns are meant as nominal ones, you seem a bit pessimistic; if they are meant as real ones - you are quite a bit optimistic.
Unless your targeted AA is less than 20% equities, which would be just outright silly.
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Old 09-04-2019, 08:45 PM   #3
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The key variables in the model are: Inflation (3.25%/3.50%/3.75%), Portfolio Return (5.0%/4.50%/4.50%), Social Security Haircut (No Reduction/10%/20%], and Yearly Spend before Taxes ($72K/$75k/$78k).
I think the spread on every one of your variables is far too narrow.

Over a 30+ year retirement period there is no way your values stay within those ranges.
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Old 09-04-2019, 09:47 PM   #4
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I think the spread on every one of your variables is far too narrow.

Over a 30+ year retirement period there is no way your values stay within those ranges.


These values are not meant to be the overall spread but are the average/target for each case.
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Getting Down to Brass Tacks
Old 09-05-2019, 06:34 PM   #5
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Getting Down to Brass Tacks

Quote:
Originally Posted by joeea View Post
I think the spread on every one of your variables is far too narrow.

Over a 30+ year retirement period there is no way your values stay within those ranges.


+1
Iíd just take the worst case scenario. My spreadsheet includes three levels of spending to simulate low, moderate, and high levels of discretionary spending. Offhand, they are roughly 85%, 100%, 120%.

EDIT: Also, I just use 75% of SS at FRA.
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Old 09-05-2019, 06:50 PM   #6
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My worst case exhausts the portfolio 2-4 years before expiration which is concerning. Thanks for your thoughts!
I agree with the comments above.

I’d add “expiration date” is another variable you can’t predict, we have no idea what bar you’re using. Or what probability of success you’re working with. Of how taxes will factor in over the decades ahead. There are dozens of significant variables.

This is an imprecise exercise that requires a lot of flexibility and adjustments (good or bad) during retirement. You might be able to spend more than you’re planning, but you need to be prepared to spend (much) less.

The old adage ‘using a scalpel where an axe is required’ comes to mind...
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Getting Down to Brass Tacks
Old 09-05-2019, 09:53 PM   #7
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Getting Down to Brass Tacks

Agreed. Impossible to plan for all possible scenarios over a 30+ year retirement. Most all of the factors are external and out of the retireeís hands. So you take the cards you are dealt and make the most of it.
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Old 09-06-2019, 05:31 AM   #8
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I often hear people being told that they are "good to go" when firecalc (or other) gives good success rates. I often tell them it is just a warm fuzzy.

I know someone who was told they were good to go by their FA and they were. They had just started taking RMD's on the older ones IRA. The younger (healthier) one died and the surviving one was left filing taxes as a single filer which shot the taxes much higher than ever planned.

... your inflation rate is ignoring the history of the 70's. But remember that during the 70's other rates were higher too.

The advantages of firecalc, RIP and the like is they model some major down drafts that can rip apart your plan.
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Old 09-06-2019, 06:09 AM   #9
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I know someone who was told they were good to go by their FA and they were. They had just started taking RMD's on the older ones IRA. The younger (healthier) one died and the surviving one was left filing taxes as a single filer which shot the taxes much higher than ever planned.

... your inflation rate is ignoring the history of the 70's. But remember that during the 70's other rates were higher too.

The advantages of firecalc, RIP and the like is they model some major down drafts that can rip apart your plan.

A good example (sadly) that you canít plan on everything

One issue I have with the FIDO planner is the fixed inflation rate. When I discussed with my FA there, the answer was that when inflation rate increases, the portfolio return typically tracks along. Not sure if I buy that.
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Old 09-06-2019, 06:38 AM   #10
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It does seem that you are trying to cut if close. Why bother?

Just add a 25% contingency amount to your portfolio and you are good to go.
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Old 09-06-2019, 06:46 AM   #11
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When you are retired, you can adjust your spend rate according to market conditions and your retirement assets. If your retirement assets are low near the end of your life, you would likely adjust your spend years earlier so you don't run out of money.
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Old 09-06-2019, 06:49 AM   #12
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These values are not meant to be the overall spread but are the average/target for each case.
You need to analyze those variables over the past years and see what rolling averages have looked like. IMHO, your choices are too narrow.
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Old 09-06-2019, 06:52 AM   #13
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I know someone who was told they were good to go by their FA and they were. They had just started taking RMD's on the older ones IRA. The younger (healthier) one died and the surviving one was left filing taxes as a single filer which shot the taxes much higher than ever planned.
Did the tax rate actually turn the survivor from "good to go" to "not good"?
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Old 09-06-2019, 06:52 AM   #14
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I'm working over the same type of calculations.

I like your approach, but would make the high/medium/low spread wider. In my case, I'm using a spend threshold of +/- 20%, and return numbers of 3 to 6%. My median spend number is equivalent to the past three year average (w*rking). I'm also planning for a decrease in spend when I reach 80.

My model allows for input of growth and withdrawal percentages, as well as absolute withdrawal numbers. At the end of the day, the only number we have some reliable ability to control is spend -- a down year in the market, spend less, an up year in the market, spend more. We have never lived on a true budget, just saved 25% and pretty much spent the rest.
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Old 09-06-2019, 07:12 AM   #15
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Another illustration - look at your (narrow) range of variables, and then the actual historical variation FIRECALC pic below. Over the course of the typical retirement, there’s simply a lot of variation. And that doesn’t account for longevity variation.

Again, a high success rate “axe” plan uses (generous) safety factors based on your risk tolerance and includes the flexibility to adjust spending throughout retirement among other things. The “scalpel” approach isn’t likely to resemble what actually unfolds. Changing four of many variables over a narrow range is an academic exercise.
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Old 09-06-2019, 07:18 AM   #16
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Originally Posted by TNBigfoot View Post
I admit, I over analyze most decisions. Currently working through whether I get on the Retire in 2020 train or do OMY. As with most of you, my key concern is ensuring I have enough gas in the tank. So I’m building out three retirement cash flow scenarios (Best, Median, and Worst).
The key variables in the model are: Inflation (3.25%/3.50%/3.75%), Portfolio Return (5.0%/4.50%/4.50%), Social Security Haircut (No Reduction/10%/20%], and Yearly Spend before Taxes ($72K/$75k/$78k). ... Thanks for your thoughts!
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Originally Posted by bingybear View Post
... your inflation rate is ignoring the history of the 70's. But remember that during the 70's other rates were higher too.

The advantages of firecalc, RIP and the like is they model some major down drafts that can rip apart your plan.
You are under-analyzing this one. Any analysis with static, average inputs does not reflect real life.

What I suggest is to use FIRECalc, starting with the defaults - that will use historic values, and will report the actual historic variation and interaction of returns of stocks/bonds and inflation. Straight-line math and Monte Carlo do not do this. I don't trust them. And you will see some 'scary dips' in your portfolio - can you handle those?

Isn't that better than some guy saying "well, it usually happens like this or that"? Try FIRECalc, using history, not Monte Carlo, and report back please.

-ERD50
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Old 09-06-2019, 08:00 AM   #17
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My worst case exhausts the portfolio 2-4 years before expiration which is concerning. Thanks for your thoughts!
As long as your mental facilities remain intact, you would probably notice that your plans need adjustment LONG before you reach those final 2-4 years, and hopefully you could adjust your spending accordingly. It seems unlikely that any members of this forum would one day realize they ran out of money and wished that they had done something sooner. So if that's your worst-case scenario, it doesn't seem that bad.
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Old 09-06-2019, 08:42 AM   #18
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Originally Posted by TNBigfoot View Post
I admit, I over analyze most decisions. Currently working through whether I get on the Retire in 2020 train or do OMY. As with most of you, my key concern is ensuring I have enough gas in the tank. So Iím building out three retirement cash flow scenarios (Best, Median, and Worst).
The key variables in the model are: Inflation (3.25%/3.50%/3.75%), Portfolio Return (5.0%/4.50%/4.50%), Social Security Haircut (No Reduction/10%/20%], and Yearly Spend before Taxes ($72K/$75k/$78k).

For each case, I have run through several tools (FIDO, Firecalc, Homegrown) and am solving for portfolio at our expiration date. All are fairly close for each scenario.

Question for the forum...are my inputs too aggressive/conservative? Are there other ways you finally reached your own conclusion?

My worst case exhausts the portfolio 2-4 years before expiration which is concerning. Thanks for your thoughts!
WAY too narrow ranges... to the point of being rounding errors.

The 2034 SS cut is anywhere from 23% to 19% depending on which article you read. If you want to compare scenarios 0% (no cut), 25% (the 2034 cut), an 50% (future means testing for SS = half... or nada depending on your assets).
Inflation: In the 70's it averaged 7%. The 80's averaged 5.5%, 2000's averaged 2.6%
Portfolio return within 0.50% over 30 years??
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Old 09-06-2019, 09:31 AM   #19
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The key variables in the model are: Inflation (3.25%/3.50%/3.75%), Portfolio Return (5.0%/4.50%/4.50%), Social Security Haircut (No Reduction/10%/20%], and Yearly Spend before Taxes ($72K/$75k/$78k) ... are my inputs too aggressive/conservative? ... My worst case exhausts the portfolio 2-4 years before expiration which is concerning.
I'm using a 3.2% inflation rate in my calculations. I read somewhere that was the historical "average", but know that it can be much higher in some years, and lower in other years.

I'm assuming a 25% reduction for SS Benefits, based on the wording on my SS statements. Also remember your benefits may be lower than the current estimates if you retire early (less time paid in).

"Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits."

My investments have averaged 8-10% over the last 30 years, some years higher, some lower. I'm assuming a 6% return with an 8% standard deviation in my calculations.

I use the "Flexible Retirement Planner" for most of my calculations, with an occasional second opinion from FireCalc once I have a good handle on my inputs. I find FireCalc is generally a little more optimistic than FRP.

My wife's pension and our SS have cost of living adjustments to account for inflation to some degree. Those will easily cover our living expenses, so our portfolio mainly just needs to last until we can both start SS. Our portfolio will drop to it's lowest level when I'm about 69 years old, just before my wife starts SS. From there it will grow as long as needed till we die (or to cover unplanned expenses). I assume we'll both live to 95 for my calculations.

Finally, if you're married, remember to account for when one of you dies and you lose one of those SS incomes.
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Old 09-06-2019, 10:25 AM   #20
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2 things I have found.

(1) We spend much less in retirement than when working. It was surprising.

(2) Seeing everything on one page makes it much easier.
https://www.personalcapital.com/
The link above was probably the one thing that helped me the most.
And its free. Plug everything in & check it over the weeks, months & years.

Other than that, I got nothin....
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