Future Withdraw Amounts - Inflation Adjusted / Bernicke's Reality Retirement Plan

[BaseballCoach]

Hello,

My wife and I are 35 years old. We have a question about withdrawal amounts for our retirement at 55 years old. We have $500k invested in VTSAX through our retirement accounts and non-retirement accounts.

My question is about the Spending number on the "Start Here Page." I'm putting in $80,000.

Question #1:
Does the calculator calculate this $80,000 today into what $80,000 will be in 20 years?

I assume it inflation adjusts my withdrawals and deposits, but just wanted to be sure.


Also, I'm looking at using Bernicke's Reality Retirement Plan. I think we will have plenty of money at retirement based on our spending habits that we have developed over the last 10 years, but I am a little apprehensive of slowing our saving rates down. My goal is not to retire early, but to not work as hard for the coming years and still be fine at retirement.

Question #2:
Are the results (when putting in all variables and using Bernicke's Plan) the chances of success of the inflation adjusted withdrawals and deposits during the input time frame?


Thank you for your help in this situation.

 

[NW-Bound]

Answer to Question #1: Yes.

I do not understand Question #2.

Generally, FIRECalc computes everything in today's dollar. When it says it's safe for you to spend $80K now, that means 20 years from now perhaps you will need to spend $160K to maintain the same buying power, and it's OK. Your current stash of, say $2M, will have grown proportionally with inflation, and will become $4M in nominal dollars to give you that $160K withdrawal in nominal or inflated dollars.

 

[BaseballCoach]

Thank you for your help.

For Question #2 I should have explained it better. Sorry about that. See below.

I put this information in firecalc:

Spending - $80000
Portfolio - $500000
Years - 70

What year will you retire: 2035

Spending Model: Bernicke's Reality Retirement Plan (Age 35)

Your Portfolio: Total Market (75% stock / 25% bond)

All the other input information, I left alone or kept it at the default.


Then I hit "Submit."

The result was a 98.7% success rate.

This tells me that if I pull out $80,000 of inflation adjusted dollars starting in 2035 and use Bernicke's Reality Retirement Plan to structure withdrawals - that I have a 98.7% chance of having success.

Is this correct?

 

[NW-Bound]

Yes, the annual withdrawal will be adjusted upwards with inflation when you retire in 2035, such that you will have the purchasing power the same as $80K has now.

By the way, there must be some other inputs that you must have entered in order to have that 98.7% success rate, for example the amount you expect to save each year until 2035.

With no additional money added to the current $500K, I do not see the same success rate.

 

[BaseballCoach]

Thank you. I didn't change my age from the default of 48 to 35. When I did, my success rate dropped to 78%.

Thank you very much for you help. It is greatly appreciated.

 

[NW-Bound]

OK, that makes sense. The big difference is due to the Bernicke's spending profile. It assumes people start to spend less and less when they are past 56 years of age.

With the current age of 48, and the start of retirement in 2035, you will be 67 already when you retire. Bernicke says that this geezer will start his retirement with an annual expense of only $51K (and be as happy as a 56-year old with $80K). And the expense goes down further from there.

When the current age is 35, then in 2035 you will start retirement at the age of 54. You will have 2 years with $80K expense, then it tapers down from there. Overall, you will be spending much more than the 67-year old geezer, and that lowers the success rate.

PS. Hey, I am 60, and happened to retire at 56. Do I feel I am sliding down the Bernicke's spending slope? You bet.

 

[BaseballCoach]

NW Bound -

Thank you very much for all your responses. I googled some questions I had today within the forum and this post came up. I forgot I made it. It answered all my questions now. Ha!!!

An update, my wife and I are at $850k now in VTSAX. Things are rolling along smoothly. Glad to see you are following Berneke's spending pattern. I believe we will be in the same boat.

Thank you for all of your help. Take care.

 

[Dtail]

NW Bound -

Thank you very much for all your responses. I googled some questions I had today within the forum and this post came up. I forgot I made it. It answered all my questions now. Ha!!!

An update, my wife and I are at $850k now in VTSAX. Things are rolling along smoothly. Glad to see you are following Berneke's spending pattern. I believe we will be in the same boat.

Thank you for all of your help. Take care.

Nice update.
Just one thing to keep in mind. The Bernicke spending is one of the most optimistic of spending patterns used on all the financial calculators.
Not sure that the majority of ER folks start spending downward from 56 y.o. onward.

 

[RobbieB]

I started spending lots more when I retired at 59. I hope to be spending less next year when I'm 65.

 

[SnowballCamper]

The result was a 98.7% success rate.

This tells me that if I pull out $80,000 of inflation adjusted dollars starting in 2035 and use Bernicke's Reality Retirement Plan to structure withdrawals - that I have a 98.7% chance of having success.

Is this correct?

Not precisely. The 98.7% success rate refers to the percent of success among all the historical time periods as long as your plan. Say your plan is 35 years long. The calculator looks at 1983-2018 and plots a line, then 1982-2017 and plots a line, and so on for as much data as the calculator has. Then each line that doesn't go to zero is a success, and the lines that go to zero (or below) are failure.

Only when you add the assumption that future market performance is the same as past performance can you conclude that you have a 98.7% chance of success.

 

[BaseballCoach]

Thank you all for your responses.

 

[pb4uski]

.... Only when you add the assumption that future market performance is the same as past performance can you conclude that you have a 98.7% chance of success.

And so what is your better idea?

 

[OldShooter]

And so what is your better idea?

Kind of snarky for you, dear @pb4.

We live our lives by inductive reasoning; assuming that the past is a useful indicator of what to expect in the future. But even relying on the expectation that the sun will come up tomorrow morning has risks. Astronomers tell us that some day the sun will go nova, turn this ball of dirt into a crispy critter, and there will be no more dawns.

Inductive reasoning closer to home: Can you guess (without doing an internet search) who said the following?

“But in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.”
​

I think you can.

 

[SnowballCamper]

And so what is your better idea?

Yeah, umm some of you guys are real jerks. I actually answered the OPs question accurately.

If you would like to see another way to compute how much you need to retire (without a probabilistic answer) you could ask in a new thread...

 

[USGrant1962]

Nice update.
Just one thing to keep in mind. The Bernicke spending is one of the most optimistic of spending patterns used on all the financial calculators.
Not sure that the majority of ER folks start spending downward from 56 y.o. onward.

Whenever I fiddle with Bernicke in FIRECalc I subtract 10 years from my age so that the decline starts at 66, not 56. Seems more appropriate to me.

OTOH, Bernicke is based on real data of how Americans spend as they age, so it has a basis. Hardly optimistic when you consider all the pessimism built into FIRECalc. I.E., the failure cases in FC assume you are retiring into the Great Depression (stocks went down 90%!) or Stagflation (inflation hit ~14%!).

And, Bernicke in FIRECalc is still inflation adjusted.

 

[Dtail]

Whenever I fiddle with Bernicke in FIRECalc I subtract 10 years from my age so that the decline starts at 66, not 56. Seems more appropriate to me.

OTOH, Bernicke is based on real data of how Americans spend as they age, so it has a basis. Hardly optimistic when you consider all the pessimism built into FIRECalc. I.E., the failure cases in FC assume you are retiring into the Great Depression (stocks went down 90%!) or Stagflation (inflation hit ~14%!).

And, Bernicke in FIRECalc is still inflation adjusted.

Well if one uses the constant spending mode, then the max WR% with 100% success is ~3.58% for a 30 year retirement.
If one uses the Bernicke methodology starting at 66 y.o. for a 30 year retirement, then the max spending on a 1mm portfolio is 70k or 7%WR.

Is anyone starting a retirement at 66 y.o. willing to spend 7%WR yearly inflation adjusted, or am I misinterpreting it?

 

[USGrant1962]

Well if one uses the constant spending mode, then the max WR% with 100% success is ~3.58% for a 30 year retirement.
If one uses the Bernicke methodology starting at 66 y.o. for a 30 year retirement, then the max spending on a 1mm portfolio is 70k or 7%WR.

Is anyone starting a retirement at 66 y.o. willing to spend 7%WR yearly inflation adjusted, or am I misinterpreting it?

Interesting question and I just looked at it. Two things pop out.

1. FIRECalc reduces your spending immediately if you are 56 or older. "If you indicate you are 56 or older, then the spending will be reduced immediately." Which is just weird. Even though it says you spend 7% at 66, if you look at the default graph it starts out at 2.72%. So Bernicke is kind of broken in FIRECalc for anyone who retires after it kicks in. Bottom line is that FIRECalc is an Early Retirement calculator and is not designed for later retirements.

2. Regardless, you should expect under Bernicke to start higher than the 4% rule because you trend down over 20 years with your terminal spending being only ~50% of your starting spending (inflation adjusted).

So I would be very careful using Bernicke in FIRECalc if you're retirement date is after 55 (or 65 if you subtract 10 like I do). But again, it is based on real data of how American's spend as they age.

And all that does not even consider having SS as a floor.

 

[Gumby]

Can you guess (without doing an internet search) who said the following?

“But in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.”
​

I think you can.

Captain Smith of the RMS Titanic, who really did go down with the ship.

 

[USGrant1962]

To further clarify, in the case you postulated it reduces your 3.58% to 2.72% - a 23% reduction. So even if you put in to start at $40K on a $1M portfolio, it starts you at about $30K. This is a flaw in FIRECalc in my opinion, but the instructions are clear an correct.

 

[pb4uski]

..... Inductive reasoning closer to home: Can you guess (without doing an internet search) who said the following?

“But in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.”
​

I think you can.

I did... and I got it right.

 

[pb4uski]

Yeah, umm some of you guys are real jerks. I actually answered the OPs question accurately.

If you would like to see another way to compute how much you need to retire (without a probabilistic answer) you could ask in a new thread...

Still waiting for an answer. The point was that's the best we got, so unless you got a better idea I don't get the criticism.

 

[BaseballCoach]

Whenever I fiddle with Bernicke in FIRECalc I subtract 10 years from my age so that the decline starts at 66, not 56. Seems more appropriate to me.

OTOH, Bernicke is based on real data of how Americans spend as they age, so it has a basis. Hardly optimistic when you consider all the pessimism built into FIRECalc. I.E., the failure cases in FC assume you are retiring into the Great Depression (stocks went down 90%!) or Stagflation (inflation hit ~14%!).

And, Bernicke in FIRECalc is still inflation adjusted.

Thank you. So all I change is my age on the Bernicke page of firecalc. I'm 38, so I would put in 28. Then all other numbers and inputs are the same. Is this correct? Thanks again.

 

[USGrant1962]

Thank you. So all I change is my age on the Bernicke page of firecalc. I'm 38, so I would put in 28. Then all other numbers and inputs are the same. Is this correct? Thanks again.

Yup, that's what I do. But I don't "plan" based on Bernicke, rather I use it as another datapoint to see how I'm doing. Each of the options in FIRECalc is valid within their assumptions, and each should be considered in answering the fundamental FIRE question - "am I comfortable that I can live off my portfolio (including SS and pensions)?".

What FIRECalc/Trinity suggest is that if you could have retired through the Great Depression and The Great Stagflation, you can retire today. To me that's the bottom line. If you think the near future (see SORR) is likely to be worse than those, just keep working to fund the federal deficit and SS trust fund! But I wouldn't recommend it.

 

[Dtail]

Interesting question and I just looked at it. Two things pop out.

1. FIRECalc reduces your spending immediately if you are 56 or older. "If you indicate you are 56 or older, then the spending will be reduced immediately." Which is just weird. Even though it says you spend 7% at 66, if you look at the default graph it starts out at 2.72%. So Bernicke is kind of broken in FIRECalc for anyone who retires after it kicks in. Bottom line is that FIRECalc is an Early Retirement calculator and is not designed for later retirements.

2. Regardless, you should expect under Bernicke to start higher than the 4% rule because you trend down over 20 years with your terminal spending being only ~50% of your starting spending (inflation adjusted).

So I would be very careful using Bernicke in FIRECalc if you're retirement date is after 55 (or 65 if you subtract 10 like I do). But again, it is based on real data of how American's spend as they age.

And all that does not even consider having SS as a floor.

Your explanation makes more sense. I didn't delve further, but was thinking theoretically along those lines that something is amiss/different with Bernicke if one retires after 56 y.o.
Thanks for the research.