Assumptions

[Target59]

I'm constantly playing with a spreadsheet to project when I can FIRE. (I also use FIRECALC, but like to play with the spreadsheet too.) I'm curious what people use for their assumptions. Mine are:

• Return before FIRE: 6.5%
• Return after FIRE: 5.5%
• Inflation: 3%
• SS COLA: 2%
• SS factor: 85% (figuring govt will take 15% of mine)

 

[UtahSkier]

Before fire, I used 3% as the difference between return and inflation. After fire I used 2%. Because of the market's recent performance, I am now using 1.5%.
I also discount the SS payout by 25%.

Any additional taxes are determined separately.

 

[Senator]

I'm constantly playing with a spreadsheet to project when I can FIRE. (I also use FIRECALC, but like to play with the spreadsheet too.) I'm curious what people use for their assumptions. Mine are:

• Return before FIRE: 6.5%
• Return after FIRE: 5.5%
• Inflation: 3%
• SS COLA: 2%
• SS factor: 85% (figuring govt will take 15% of mine)

That is about what i used, but I made the assumption that my expenses would be double of what I was currently spending, and my investments (rental income) would return half of what was projected. Worse case, I have 4x what I need.

I always include 10% for maintenance, 7% for management and 5% for vacancy, then halved it.

 

[Out of Steam]

Haven't gotten as sophisticated as many of you because of reliance on a traditional pension, but am using 5% as a projected return. I'm fairly conservative, and have never ventured too far from a 50% stock allocation in retirement accounts. My wife is a little less conservative and is between 55 and 60%.

As far as Social Security, I'm simply using what I would get at 62 in financial planning, even though I'd like to delay taking it to 65-67.

 

[LOL!]

I guess I never worried about projections because we were not going to cut it close anyways.

Are you trying to retire early with just a bare minimum expressed by some calculator you found on the internet?

 

[OldShooter]

A couple of thoughts:

1) SS Inflation is related to CPI, so I would state your SS inflation number as CPI-1% rather than being independent. As @UtahSkier suggests, you may want to look at market return the same way. CPI + x.x%

2) For the last 20-30 years inflation has been very benign, before that not so much. https://commons.wikimedia.org/wiki/File:Consumer_Price_Index_US_1913-2004.png Over 50 years the core CPI average is 4.1%

My conclusion is to be very paranoid about inflation and to reduce the risk by holding a bunch of TIPS. I don't think any estimate is guaranteed "safe." I certainly wouldn't use 3% though.

 

[stepford]

I assumed 0% after inflation in retirement planning, but then again I'm pretty conservative and have a 50/40/10 AA. In other words, I probably worked 3-5 years longer than I had to - and wouldn't necessarily recommend my approach to others.

 

[pb4uski]

Nominal rate of return: 6.1%
Inflation: 2.7%

 

[H2ODude]

Just figured 4% after inflation. Wish I could find those old spreadsheets from the 10 years leading to bailing out. Assumed no SS but we're now taking on DW's lower amount.

 

[ERD50]

On what basis do you assume your assumptions are any better (or worse, depending on POV) than the historical actuals that a tool like FIRECalc provides?

I don't get the point, other than just a gut check against an entry error in FIRECalc.

-ERD50

 

[W2R]

I'm constantly playing with a spreadsheet to project when I can FIRE. (I also use FIRECALC, but like to play with the spreadsheet too.) I'm curious what people use for their assumptions. Mine are:

• Return before FIRE: 6.5% 5%
• Return after FIRE: 5.5% 5%
• Inflation: 3% 3%
• SS COLA: 2% 3%
• SS factor: 85% 100%

My assumptions were not really correct, but the worst assumption was that my federal income taxes in retirement would be 25%! They have been more like 7%-8%. Also, I ran my computations with no SS and no pension just to see if I could manage, so those related assumptions were only for when I was including it.

That's OK. I tried to be pretty ultra-conservative, because that is my nature. I felt like a more middle-of-the-road answer would be easy to find elsewhere. Naturally (being a scaredy-cat) I did not rely just on my own computations or on FIRECalc or any other calculator alone. My plan worked with any and all of them.

 

[OldShooter]

... historical actuals ...

​

 

[UtahSkier]

On what basis do you assume your assumptions are any better (or worse, depending on POV) than the historical actuals that a tool like FIRECalc provides?

I don't get the point, other than just a gut check against an entry error in FIRECalc.

-ERD50

I model my financial planning in Quicken Lifetime Planner (QLP). It uses 2 user values; ROR and inflation.

I use 0 for inflation and 1.5 for ROR. This allows me to look at likely worse case portfolio values for the next 35 years.

I use firecalc to get an alternate view of my planning decisions. However, I am not a fan of using the past to plan for the future.

While I use 1.5% for real returns of my diversified portfolio, I personal expect real returns in excess of 4% over the next 35 years, with large peaks and valleys.

I have also learned that Mr market doesn't care about my opinion, so I have to be conservative in my planning.

 

[ERD50]

...
I use firecalc to get an alternate view of my planning decisions. However, I am not a fan of using the past to plan for the future.

Then how did you come up with these numbers:

... I use 0 for inflation and 1.5 for ROR. This allows me to look at likely worse case portfolio values for the next 35 years. ...

They don't look like the result of a random number generator. Might they be based on what you have observed of the past?

-ERD50

 

[Danmar]

Once retired, assumptions are not too important. You eventually base your spending based on actuals.

 

[UtahSkier]

Then how did you come up with these numbers:



They don't look like the result of a random number generator. Might they be based on what you have observed of the past?

-ERD50

Certainly. it is a wild guess.

However, Firecalc uses past market fluctuations or patterns, to give people some kind of confidence about their portfolio's future performance.

The past patterns are immutable. However, I can change my real return forecast on a daily, weekly, monthly, yearly, or semi-decade basis. I am not bound by history.

But despite the market's recent upward performance, I expect equites to continue dramatic price increases.

 

[UtahSkier]

Once retired, assumptions are not too important. You eventually base your spending based on actuals.

Interesting.

Before I retired, my assumptions were less important as I had a lot of income flexibility. Now that I am unemployable and living 100% off my portfolio, I have fewer income choices.

My assumptions about the future help guide my decisions today. What my portfolio does, what live style changes I might make in the future and how long DW and I might live are all important assumptions I make about how much of the portfolio to consume in the next year.

Overall, I expect there is a trade off of sorts. If I want to spend 2% of my portfolio, I can get by with less planning. However, If I want to spend 5% of my portfolio, I need a better view of the future.

 

[youbet]

I need a better view of the future.

Google is your friend. Just Google up "future equity returns," "future interest rates," "future rates of personal inflation," "future SS adjustments," etc. and plug the answers into your calculations. They're on the Internet, so they must be true and accurate, right?

While you're at it, Google up your personal life span. Knowing how long to plan for will help a lot.

 

[youbet]

I'm constantly playing with a spreadsheet to project when I can FIRE. (I also use FIRECALC, but like to play with the spreadsheet too.) I'm curious what people use for their assumptions. Mine are:

• Return before FIRE: 6.5%
• Return after FIRE: 5.5%
• Inflation: 3%
• SS COLA: 2%
• SS factor: 85% (figuring govt will take 15% of mine)

Be careful, using average rates of return, average inflation rates, etc., is always a big mistake. Sequence of returns easily overrides averages and must be taken into account.

 

[UtahSkier]

Be careful, using average rates of return, average inflation rates, etc., is always a big mistake. Sequence of returns easily overrides averages and must be taken into account.

Agreed! Sequence of return risk is one of my top concerns for managing my portfolio. I find it impossible to model or predict.

I take a few precautionary steps and simply monitor the situation.

 

[Montecfo]

Be careful, using average rates of return, average inflation rates, etc., is always a big mistake. Sequence of returns easily overrides averages and must be taken into account.

Sure. But firecalc does this, does it not?

We do not know what returns will be for a decade, much less any single year within that decade. So IMHO you need a cash/bond allocation which allows you to ride out a bad market, not sell equities into it.

Hope for the best, plan for the worst. But trying to guess which years will be bad and in what sequence seems unnecessary.

Other views welcome.

 

[Perryinva]

+1. Isn’t that the whole point of something like FIRECALC? Each iteration is based on a historical sequence of returns, to specifically mimic those SOR risks. Otherwise you may as well assume zero ROI, “just to be sure”, and never invest. ER takes risk, and really early ER, like many here have done is riskier still, and I’m sure the amount of NW that would have allowed me to retire in my early 50s or less and not worry about it is beyond my investment and comfort level. I’m not as ultra conservative in determining my investment income estimate because I will be 62 when I pull the plug in 2 years, so my years of use are far less, coupled with pensions and ample SS. Better to plan high with the ability to cut back than to cut it close and make painful decisions. Thankfully my retirement is a move towards something not specifically to escape my career.

 

[Independent]

I'm constantly playing with a spreadsheet to project when I can FIRE. (I also use FIRECALC, but like to play with the spreadsheet too.) I'm curious what people use for their assumptions. Mine are:

• Return before FIRE: [-]6.5[/-] 3.5%
• Return after FIRE: [-]5.5[/-] 2.5%
• Inflation: [-]3[/-] 0%
• SS COLA: [-]2[/-] 0%
• SS factor: 85% (figuring govt will take 15% of mine)

This gives numbers that are easier to read.

 

[Danmar]

Interesting.

Before I retired, my assumptions were less important as I had a lot of income flexibility. Now that I am unemployable and living 100% off my portfolio, I have fewer income choices.

My assumptions about the future help guide my decisions today. What my portfolio does, what live style changes I might make in the future and how long DW and I might live are all important assumptions I make about how much of the portfolio to consume in the next year.

Overall, I expect there is a trade off of sorts. If I want to spend 2% of my portfolio, I can get by with less planning. However, If I want to spend 5% of my portfolio, I need a better view of the future.

Ok but do you really want to base your spending on assumptions of the future? Sure, if your assumptions are based on very recent history and don’t go out too far, we may be splitting hairs re definition. But generally, I like to spend divs after I get them and liquidate stock that has already run up in value. I just don’t have much confidence in market assumptions. I guess what I’m saying is that sequence of return risk is the “biggy” ” and only the actual experience will be relevant.

Expected age at death, is a little more predictable, at least in aggregate, but for most people not usually a critical variable component of their financial plan(at least if they are in reasonable health).

 

[Ronstar]

I only made assumptions beginning around 2008 (before I retired).

I assumed
5% yearly return rate
3% yearly increase in expenses