Are We Too Conservative with Our Numbers?

[MercyMe]

For the last few years, my spouse and I have been using several tools to figure out when we can retire - Flexible Retirement Planner, i-ORP, spreadsheets, DinkyTown, etc.

Firecalc shows a 100% success which is wonderful, and the lines all go straight across or significantly upward. So this means we could have retired several years ago or we can spend more in retirement.

But we tend to believe future returns will not be as good(?) as the past so we use very conservative estimates for other retirement planners. We are both very cautious, conservative, and risk-averse and our plan is only as good as the assumptions we make.
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Here are some of the factors we use in our plan...

Horizon Age
Online calculators and some family history tell us: 87
Our plan: 92

Social Security
Some say to count on all of it.
Our plan uses just 75% of what our SS statements claim we will get.

Lifetime Average Annual Inflation
Online sources say 2.7% to 3.3%.
Our plans uses 3.6% since premium products like vacations and health care tend to increase more.

Annual Spending
We've been tracking spending for the last 10 years and are planning to spend those same "essential spending" numbers until we die. This includes ghost costs like car depreciation, appliance replacements, and home repairs. Discretionary spending (mostly travel) is increased significantly from now until 80, and then ramps down in the slow go and no go years.

Our House
We do not include the value of our house in our retirement plan. We hope to use its value ($700k) for long term care.

Debt
We have no debt now and don't plan to take on any in the future.

Health Insurance Inflation (we're currently on ACA, and have more than two decades before we hit 65)
Online estimates are all over the place.
Our plan: 7%

Lifetime Average Return on All Investments
Vanguard recently suggested 3.8% for a 60/40 AA for the next 10 years.
Our plan uses a zero percent lifetime average return (SoR risk plays heavily in our brains, and we're using a 30/70 AA which makes us comfortable). This is, of course, a -3.6% real return.

Effective Tax Rates
We've added 15% additional to our estimated effective tax rate to account for unfavorable changes in tax law. Of course, while we are drawing from the taxable account there will be no taxes if we earn 0% as mentioned above. For the sake of planning with a pessimistic outlook, 0% return seems like a fair starting point.
__________________________

Using these numbers in various retirement planners, we appear to be fine to retire now... though we are realistically going to wait until late 2023. Keep in mind that we have had very high incomes and have saved 70% of it for retirement over the last two decades.

I'm not sure if we are being ridiculously conservative in our estimates though. What are your thoughts? How do our estimates compare to yours? Go easy on me since it's my first post.

(I will do a "Hi, I am..." post sometime soon.)

 

[Exchme]

Sounds like you are in great shape with plenty of conservatism in your analysis. When's you last day of work?

 

[joesxm3]

Your assumptions are very close to mine.

Lately I have worried about inflation and currently think your 3.5% is too low. Previously I just used a 2% real rate of return, so it adjusted based on the inflation hitting my expense number.

I am pretty conservative, but think that is the way to go.

Past six months I started to increase equity allocation to try to fight inflation. This week it is biting me in the butt.

 

[RunningBum]

Your assumptions are very close to mine.

Me too. Appropriately conservative, I'd say. If work was really draining your soul then you should retire yesterday, but otherwise the buffer is nice just in case, and if things don't go wrong you can spoil yourselves.

 

[daylatedollarshort]

When we first retired, we used a 1% real return in our calculations. The TIPS part of our portfolio is fine, but most stocks are losing money this year and the real return on our stable value fund and 1 year Treasuries these days recently -6.5% real returns (8.5% inflation - 2% nominal yield)! Hopefully the rise in interest rates will improve real returns, and eventually the stock market will bounce back, but I'm glad for the time being we've been conservative in all our assumptions. Some posters worry about leaving money on the table. My priority has been to not run out of money, and I'm happy to leave anything left over to our kids.

 

[COcheesehead]

I went into retirement with similar assumptions and thought I was being too conservative. After retiring into a pandemic, a bear market and now another bear market, being conservative is a good thing. I laddered muni’s and that pays us everything we need until we reach full retirement age for social security. We don’t need to touch equities for 10-15 years, and maybe never. Having a predictable income stream is very comforting.

 

[Montecfo]

Well, it is very conservative for this reason: you are stacking very conservative assumptions.

Understand that the 4 percent rule is ALREADY conservative. And it ALREADY contemplates SORR. Many of us still cut it back, but being conservative there buys a lot everywhere else.

It is fair to expect returns to be lower than average for the next 5-10 years but if you notice a lot of air has come out of the balloon already. And your retirement planning horizon is 30 years plus.

Anyway, I do like the conservatism as long as it does not cause you to work longer than you need to.

Every year you continue to work is one less year you will have to live as you wish. It's Just Math.

In any event, welcome to the forum. Your handle is a sturdy southern phrase and also the name of a band I know.

Cheers!

 

[MercyMe]

Lately I have worried about inflation and currently think your 3.5% is too low.

Thank you.
What real rate do you use now?

 

[MercyMe]

Well, it is very conservative for this reason: you are stacking very conservative assumptions.

Understand that the 4 percent rule is ALREADY conservative. And it ALREADY contemplates SORR. Many of us still cut it back, but being conservative there buys a lot everywhere else.

It is fair to expect returns to be lower than average for the next 5-10 years but if you notice a lot of air has come out of the balloon already. And your retirement planning horizon is 30 years plus.

Anyway, I do like the conservatism as long as it does not cause you to work longer than you need to.

Every year you continue to work is one less year you will have to live as you wish. It's Just Math.

In any event, welcome to the forum. Your handle is a sturdy southern phrase and also the name of a band I know.

Cheers!

Thank you. We're not giving much attention to the 4% rule... especially since our AA is and will be 30/70... and we'll have close to 40 years in retirement. I think we just want to be conservative so we can sleep well during the next 601 nights.


MercyMe = My favorite band.

 

[joesxm3]

Thank you.
What real rate do you use now?

I just have a "back of the napkin" spreadsheet and futz with numbers.

I haven't really worked on the sheet since I got worried about inflation. I FIRED six years ago, so in for a penny in for a pound.

Depending on who you listen to (tin foil hat channel) we could be running actual inflation of 15% or more now. They are admitting 8.5% or so, which is probably understated. The big question is will it continue long term or not and can some number like 3.5% in the sheet model the long term.

I had my sheet working up to age 95 or so (30 years), but when I started to jack up the inflation rate without increasing the investment gain rate I ended up running out of money around age 85.

So, bottom line, I guess I figure unless I can figure some way to jack up the investment return to keep up with inflation I am toast. Or more realistically, will have to do some serious belt tightening at some point.

If you think there will be serious prolonged inflation, then having a job with wages that are increasing somewhat close to the inflation rate is a huge advantage. Otherwise you are stuck chasing alpha with stocks, property, gold or crypto.

[edit]

BTW - I try to shoot for a 1.5% or 2.0% withdrawal rate, not the 4% rate.

 

[FI_RElater]

....the 4% "rule" is for 30 years...

Well, it is very conservative for this reason: you are stacking very conservative assumptions.

Understand that the 4 percent rule is ALREADY conservative. And it ALREADY contemplates SORR. Many of us still cut it back, but being conservative there buys a lot everywhere else.

It is fair to expect returns to be lower than average for the next 5-10 years but if you notice a lot of air has come out of the balloon already. And your retirement planning horizon is 30 years plus.

Anyway, I do like the conservatism as long as it does not cause you to work longer than you need to.

Every year you continue to work is one less year you will have to live as you wish. It's Just Math.

In any event, welcome to the forum. Your handle is a sturdy southern phrase and also the name of a band I know.

Cheers!

The OP mentioned two decades from Medicare... so that puts them in the 40's... and with them planning for age 90-92 that's clearly almost fifty years (somewhere in the forty-something) ...which requires a much lower WR, somewhere in the 2.5-3.0% range!.

Two decades while having to navigate the ACA (presuming it actually survives that long... I know, that was supposedly already "tested"... but so was something else that has recently made news from the supreme court)... still stay ahead of inflation (in my earlier modeling anything that has inflation at or above 5% inflation for a prolonged period would cause significant problems)...while also avoiding other concerns (fire, drought, etc... in addition to health scares) ... IMO REQUIRES Conservative estimates for planning.

Remember that all the modeling, beit firecalc or others, only has a finite amount of (higher quality) data to perform backtests/projections with... effectively only just above two independent such periods (so really not enough statistical power...and that presumes that the data there is has the same characteristics over the entire period, something that I'm not sure that we can confidently say...(after all, in the early period there were far fewer participants, more opacity, higher costs, and, for the domestic market, very limited effects by foreign investors). [for example, the 1905-6 retiree cohort isn't included in any modeling data... it had the 1907 crash immediately, insane levels of inflation in the late "teens" to about 1921, and increased costs due to the introduction of the federal income tax, and also had to survive the Great Depression at the end of the thirty years!!!]

 

[Midpack]

One persons too conservative is another persons too risky. Our planned WR is 2.5%, but that's what I need to sleep at night - and so far our actual withdrawals have been less. But there is no universal right answer.

 

[SevenUp]

Using these numbers in various retirement planners, we appear to be fine to retire now... though we are realistically going to wait until late 2023.

I'm not sure if we are being ridiculously conservative in our estimates though. What are your thoughts?

Yes, you are. Montecfo hit the high points.

See Rich, Broke or Dead? Post-Retirement FIRE Calculator: Visualizing Early Retirement Success and Longevity Risk if you haven't already.

 

[clifp]

Thank you. We're not giving much attention to the 4% rule... especially since our AA is and will be 30/70... and we'll have close to 40 years in retirement. I think we just want to be conservative so we can sleep well during the next 601 nights.


MercyMe = My favorite band.

You are being conservative in almost everything, except for inflation. It remains to be seen if this Fed and this dysfunctional congress can get back under control any time soon. I have my doubts.

We are down 15-20% from the peaks, and your bond portfolio is going to continue to get killed if inflation continues at 8%+ for a number of years, and stock may continue to go down 30% more or turn around and start going up, who knows.

I am curious why a 30/70% portfolio?

As FI_RElater said the 4% was designed for 62+-year-olds with 30 years or less of retirement. You are looking at close to 50 years.

I do want to congratulate you two; so many folks in their 40's in Mr.Mustache forum are applying the 4% rule to retiring in their 40s.

You guys aren't. I don't think you are being ridiculously conservative, and seems like you can retire whenever you want with financial piece of mind.

 

[corn18]

You are being conservative. Whether it is overly conservative is a personal issue. I don't think you are overly conservative.

When is your last day of work?

 

[arcyallen]

Understand that the 4 percent rule is ALREADY conservative. And it ALREADY contemplates SORR.

If you're talking about a 40+ year timeframe, 4% isn't very conservative. There's been more than one time in our lifetimes that it would have done horribly. Especially when one is retiring during very high valuations (which is when a lot of people are retiring). For the OP, it's even less conservative as they're talking about 30/70 split.

MercyMe: On one hand, when you're retiring this early it makes sense to build in a lot of conservative estimates. With this much time remaining the outcome of any plan has a decent chance to run wild in either direction.

On the other hand, I think the biggest danger you run is having a 30/70 portfolio. If you absolutely can't stomach more market fluctuation, so be it. But if you look at the performance of 30/70 vs, say, 50/50 or 70/30 I think you'll find you're giving up a LOT of yield for that "safety". And by safety, I mean you're setting up a portfolio that will slowly bleed out and you're just racing against the clock hoping to die before it runs dry. I get the desire to be conservative, but every "safe" investment has a price. Just know what that price is going in! And congrats on doing safe planning. It's easy to get aggressive, and it sounds like you're being smart and reasonable (and very conservative) which will set you up for some success!

 

[Montecfo]

Thank you. We're not giving much attention to the 4% rule... especially since our AA is and will be 30/70... and we'll have close to 40 years in retirement. I think we just want to be conservative so we can sleep well during the next 601 nights.


MercyMe = My favorite band.

Nice on MercyMe. Great band. Loved the movie too.

It seems to me with that AA, SORR is off the table. Stated differently, you have already addressed SORR with your AA.

But I would rethink that AA. I'm not sure it is compatible with a long retirement. Having said that, if you have enough capital 100 percent cash works.

 

[Montecfo]

The OP mentioned two decades from Medicare... so that puts them in the 40's... and with them planning for age 90-92 that's clearly almost fifty years (somewhere in the forty-something) ...which requires a much lower WR, somewhere in the 2.5-3.0% range!.

Two decades while having to navigate the ACA (presuming it actually survives that long... I know, that was supposedly already "tested"... but so was something else that has recently made news from the supreme court)... still stay ahead of inflation (in my earlier modeling anything that has inflation at or above 5% inflation for a prolonged period would cause significant problems)...while also avoiding other concerns (fire, drought, etc... in addition to health scares) ... IMO REQUIRES Conservative estimates for planning.

Remember that all the modeling, beit firecalc or others, only has a finite amount of (higher quality) data to perform backtests/projections with... effectively only just above two independent such periods (so really not enough statistical power...and that presumes that the data there is has the same characteristics over the entire period, something that I'm not sure that we can confidently say...(after all, in the early period there were far fewer participants, more opacity, higher costs, and, for the domestic market, very limited effects by foreign investors). [for example, the 1905-6 retiree cohort isn't included in any modeling data... it had the 1907 crash immediately, insane levels of inflation in the late "teens" to about 1921, and increased costs due to the introduction of the federal income tax, and also had to survive the Great Depression at the end of the thirty years!!!]

I agree with everything you said. But if they are projecting using FiREcalc, it contemplates SORR.

And with arcyallen, to similar effect.

And I was not suggesting the OP use 4pct per se. Just suggesting that setting a conservative withdrawal rate for a long retirement and then also agonizing over SORR is double counting. All the withdrawal rate research which is back tested contemplates SORR. Now that may not be adequate for someone, but I think you move into the realm of emotion rather quickly. That also may not be a bad thing in that we have to sleep well at night, but it is what it is.

I was not suggesting the OP not be conservative. But if you set every variable to a conservative value, the cumulative effect of those variables should also be considered with some sensitivity analysis.

 

[Phroig]

I assume you’ve run your numbers recently, after the market declines. (BTW, is the 70 in bond funds?) You obviously have enough if the numbers work out with a zero nominal rate of return. You can easily do better than 0% with risk-free treasuries and CDs; any return at all provides cushion.
I’m very risk averse, so I continue working for the health insurance. I’ve several more years until Medicare, and am not comfortable assuming that I can count on ACA insurance to be available for that entire period. I can retire in a few years with health insurance, well before I get to 65.

 

[GravitySucks]

You are being conservative in almost everything, except for inflation.



I am curious why a 30/70% portfolio?



As FI_RElater said the 4% was designed for 62+-year-olds with 30 years or less of retirement. You are looking at close to 50 years.



You guys aren't. I don't think you are being ridiculously conservative, and seems like you can retire whenever you want with financial piece of mind.

+1

It appears the higher equity portfolios survive longer retirement periods.

https://images.app.goo.gl/znYrgcJBUcDwGgEo9

For 40 years 30/70 looks riskier than 50/50.

 

[COcheesehead]

+1

It appears the higher equity portfolios survive longer retirement periods.

https://images.app.goo.gl/znYrgcJBUcDwGgEo9

For 40 years 30/70 looks riskier than 50/50.

Or looked at another way, lower withdrawal rates survive equally as well.

 

[Sojourner]

...I think the biggest danger you run is having a 30/70 portfolio. If you absolutely can't stomach more market fluctuation, so be it. But if you look at the performance of 30/70 vs, say, 50/50 or 70/30 I think you'll find you're giving up a LOT of yield for that "safety".

+1

Relying on a 30/70 portfolio is a huge risk over a 40+ year retirement, especially when OP seems worried about higher-than-usual inflation. Of course, it could all work out fine if OP has a net worth of, say, 50x annual spending. But unless I missed it, OP didn't share any of those numbers with us (net worth, annual spending, or the ratio thereof), so it's hard to say what the risk of being so bond-heavy actually is.

 

[Montecfo]

Or looked at another way, lower withdrawal rates survive equally as well.

Agreed. And stated yet another way, a very low allocation to equity may not buy you what you think you are purchasing.

 

[Phroig]

OP said things work out with a zero return. AA also reflects risk preferences. Some folks in MercyMe’s situation might justifiably decide that they don’t need a high expected return, so why take on more risk?

Edit: I just did some math. With a 3.6% inflation rate and a zero nominal return, you need 90x for a 40 year retirement and 140x for 50 years. That is a lot.

 

[24601NoMore]

Lifetime Average Return on All Investments
Vanguard recently suggested 3.8% for a 60/40 AA for the next 10 years.

Yiikes. Hard to see how anyone would want to take equity or fixed income risk if that's anywhere near the actual returns that wind up being achieved over the next 10 years.

There are MYGAs today paying more than that, and the return is guaranteed.