Can FIRECalc consider discretionary expenses that can be reduced if needed?

[RioIndy]

I have played around with FIRECalc a fair amount and most of its settings.

I was wondering, it asks you what your yearly expenses are and then projects that spending model (and adjusts for inflation over time if you choose) as it draws down your portfolio over the number of years chosen.

The downside to drawing down is that you get hit HARD when you draw down during a market downturn.

But when I go through my expenses carefully, almost a 1/3 of my yearly expenses are discretionary / lifestyle spending, that I can immediately cut out if I absolutely had to.

Is there a setting where, if the markets are down, you can tell it to reduce the spending by a certain amount during that period of time?

 

[REWahoo]

The downside to drawing down is that you get hit HARD when you draw down during a market downturn.

Not if you have enough cash/bonds in your AA to fund your withdrawals for a year or few - long enough to allow the market to recover.

Edit: To address your question, have you seen the "Percentage of Remaining Portfolio" spending option? That may come close to accomplishing what you want.

 

[RioIndy]

have you seen the "Percentage of Remaining Portfolio" spending option? That may come close to accomplishing what you want.

Thanks for the response REWahoo.

EDIT: I am reading the fine print of this section once more as we speak

This would not quite work, as for example if the percentage is 4%, during good years 4% will be more than my expenses (and I would not spend more during good years), and during bad years 4% would be not enough.

And as more and more years go by, 4% should become WAY more than I need.

So during good/flat years I would continue spend the targeted amount. And during bad years I would spend less.

The purpose is obviously to see how much protection/cushion one can get by simply adjusting expenses (downwards) when needed.

 

[RioIndy]

Alright looking into that specific option a bit more. It is listed as this:

"Percentage of Remaining Portfolio: Adjust your spending depending on the value of your portfolio each year, spending the same percentage of your remaining portfolio in future years as you are spending the first year. You can soften the impact of large drops in your portfolio by setting a minimum spending in any year to no less than [YOUR VALUE HERE] percent of the previous year's spending. (Spending is reported in inflation-adjusted dollars, as with the other models, so you can evaluate future spending power.)

You can enter 95 to approximate the "95% Rule" from Work Less, Live More.
The 95% rule applies to the Annual Spending. According to the rule, each year's withdrawal is the greater of 95% of last year's withdrawal or 4% of the current portfolio as you started with. FIRECalc uses whatever percentage withdrawal you start with instead of 4%, and allows you to set a different value than 95%. An additional objective of the 95% rule is that your portfolio retains the same value at the end of the term as you started with, rather than merely remaining "in the black". The results will report how often that would have happened. "


So how this doesn't quite work because with this model, there will be years where I spend $150,000 / year ( which is many times more than I would need) and then some years where I am spending $10,000 / year, which is below my minimum possible.

What I believe would be a very useful feature would be to set a MAXIMUM and MINIMUM setting, and have them be in DOLLAR amounts.

Where any periods of time where the returns are more the the MAXIMUM, the portion above that would be re-invested. And then there would be no periods of time where I spend less than the MINIMUM.

Does this not sound like it would be handy? Would it be that difficult to implement? Hmmm I might even look around for if the source code is available and I might be able to try implementing it.

 

[REWahoo]

Thinking about your question a bit more, what type of results do you get using FIRECalc without your proposed spending adjustments? If you are getting a high percentage of success, then your proposed reduced spending during a bad market, something many of us do almost instinctively, would simply be icing on the cake.

 

[RioIndy]

I certainly agree with you REWahoo, that it should certainly be "icing on the cake" and not a critical strategy to make it work.

On another note, it seems that someone thought of this as well as I found THIS website which uses similar code to FIRECalc and has options implemented for a CEILING and FLOOR on their spending which you can set to a DOLLAR amount.

********.com Crowdsourced Financial Independence and Early Retirement Simulator/Calculator

Trying it right now.

 

[ProspectiveBum]

Just a word of warning on the variable spending option in ********: It may give your variable spending plan a success rate that is bigger than it should be.

******** only marks a run as a failure if your total portfolio goes to zero. With a variable spending plan, particularly if you have income from a pension or SS, you can get a number of years where your spending falls below your defined floor that the program still counts as a success. This doesn't seem to be a problem with other non-variable plans.

I'm actually looking at some modifications to address that, since it's an open-source project, but I haven't gotten around to it.

 

[RioIndy]

Wow I am really liking this other site as well! It also allows you to to quickly generate and then compare multiple runs through the simulation.

For the record it does give me a significantly higher success rate. With a simple inflation adjusted constant expenses both FIRECalc and ******** return ~75% success. Whereas the FLOOR and CEILING model in ******** returns 94% success.

I will try to look at bit closer at those ProspectiveBum, thanks for the word of caution.

So unless it is very flawed, I can consider that this spending habit could have a significant impact on my real life success. Though obviously one would not "pull the trigger" based on one such factor alone, it is nice to see that it would in fact have an impact, and that it could even be quite substantial.

 

[ERD50]

...

But when I go through my expenses carefully, almost a 1/3 of my yearly expenses are discretionary / lifestyle spending, that I can immediately cut out if I absolutely had to.

Is there a setting where, if the markets are down, you can tell it to reduce the spending by a certain amount during that period of time?

Well, you can simulate this to a degree.

Go in and use the "Other Income/Spending" tab, and add some "Pension Income" starting, say 4 years into retirement (that will act the same as reducing spending at that point). Then add the same amount of "Off Chart Spending", say 5 years after that. That will be the same as cutting spending by that amount for year 5 years at the 4 year point.

Now, it won't dynamically adjust to the variations in markets for each starting period, but 1966 is the 'killer' so you will be reacting to that.

I think you'll find cutting spending, even dramatically for a few years doesn't matter all that much, If you have a conservative planned WR%, most of that comes from dividends, and a down stock market calls for re-balancing, so the selling will occur ion the fixed income side. It's actually not likely at all that you would sell stocks when they are down.

-ERD50

 

[RioIndy]

Thanks ERD50, though I am flying with 97% Stock and 3% Cash. (I have very long time horizon for the vast majority of my portfolio.)

And unless I am doing something very wrong, every calculator that I use always give me significantly worse outcomes with a 60/40 stocks/bonds split compared to my 97 / 3 stocks/cash.

Truth I actually had like 5% bonds but converted them all to stocks during the last couple big dips in equities. I suppose I should reluctantly consider buying a little bit back over time though.