Doublechecking something about FIREcalc. Basic question, really.

[SecondCor521]

Hi all.

If I go to FIREcalc and just hit "submit" with all the default values, I get the following verbiage:

"Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-300,739 to $4,259,606, with an average at the end of $1,405,259. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)"

What I think this means is that average ending balance of $1,405,259 is essentially the inflation adjusted ending value on average. So if I were retiring in 2020, I could think of that number to mean that I would have the equivalent purchasing power of $1,405,259 in 2020 dollars.

(Yes, the future might be different, returns might be different, inflation might be different, blah blah blah. Not the point of my question.)

Am I understanding that verbiage correctly? I think I am but want to make sure that I'm properly understanding the results of my own FIREcalc results.

Thanks.

 

[latexman]

It is the average of all 120 ending balances.

 

[SecondCor521]

It is the average of all 120 ending balances.

Right.

My question was more about the inflation adjustment aspect of it.

In other words, is that ~$1.4M in today's dollars, or in 30-years-in-the-future dollars?

 

[Dtail]

Right.

My question was more about the inflation adjustment aspect of it.

In other words, is that ~$1.4M in today's dollars, or in 30-years-in-the-future dollars?

To my understanding it is 1.4m in TODAY's dollars.

 

[pj.mask]

Yes that value should be inflation adjusted for today’s money. However there is a tab to see what they are using for inflation.
If you download the tabulated csv files I do not believe those are inflation adjusted.

 

[SecondCor521]

Thanks all!

 

[latexman]

The default inflation is the CPI (consumer price index). Since, we are actually "back testing" our strategy against history, inflation is known very precisely. That's one of the beauties of FireCalc. With future looking, predictive models, someone has to guess the inflation.

 

[MichaelB]

My question was more about the inflation adjustment aspect of it.

In other words, is that ~$1.4M in today's dollars, or in 30-years-in-the-future dollars?

I’m not an expert on FIREcalc, but it looks to me that the ending balance is in nominal, not inflation adjusted dollars. The yearly expenses are adjusted for inflation, the investment rates of return are historical, which means they are nominal.

 

[pb4uski]

^^^ No.

I would interpret

Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.

as the terminal values at the end of the projection period but in dollars as of the beginning of the retirement period. Also note that the beginning of the retirement period is defined by the input on the "Not retired" tab so the default value is 2020 but it could be later.

 

[MichaelB]

Dory designed the tool. This is his response to that question https://www.early-retirement.org/forums/f36/portfolio-end-of-year-balance-22370.html#post414227

Uhhh... no, the ending portfolio balance is expressed in terms of the dollars as of the beginning of the retirement, not the end.

So in your example, the 1930 ending portfolio balance is expressed in 1901 dollars - and learn something new.

The reason for this is simply that the only thing meaningful to someone contemplating retirement is the current spending power of their assets. It only makes sense to relate all future results to the information known to the retiree prior to his decision.

So, the 1901 retiree, with a crystal ball, would know that his spending ability would be unchanged through 1930, and would also know how big a party that his survivors could have at the end.

The previous version of FIRECalc gave terminal portfolio balances in unadjusted dollars. This was not very useful, because it really didn't tell someone thinking of retiring what their ending portfolio was really worth. That's why in the revision the dollars were all adjusted to the dollar value as of the time of retirement.

Again, the philosophy is to work with what is known just before retirement, and not to report values that have no meaning without adjustments.

This certainly isn't perfect, because someone retiring on 40,000 a year in 1915 is certainly living a vastly different lifestyle than someone retiring on 40,000 in 2006.

However, if the 1915 retiree would wind up with, say, 400,000 at the end, he would reasonably expect to be able to spend 10 times his normal annual spending on his departure party at that point, regardless of the inflation during the previous years. The same would be true for the 2006 retiree.

Hope this clarifies --

dory36

So, the response to the OP’s question is, the final number is equivalent to current purchasing power.

These questions are lots of fun because they make one think and look for answers.

 

[SecondCor521]

Thanks @MichaelB! Dory36's answer is exactly on point.

In my own case, and why I was asking the question, is I am starting to get to the point where I think I need to start preparing my three adult offspring for their potential inheritance sometime down the road.

So I went through an exercise where I got my life expectancy from the SSA and plugged all my current data into FIREcalc and looked at that average leftover amount so I could say, "On average (subject to wide variation) I'll die in 30 years and on average (subject to wide variation) you'll receive $X."

And I wanted $X to be in today's dollars so they would understand it in the way dory36 describes - as 2020 US dollar spending power, which is obviously much more relatable than 2050 or 2080 US dollar spending power.

So I'm glad that the tool works the way dory36 describes for the reasons that dory36 describes.

...

Secondarily, it turns out that unless I spend more or Asteroid 202X hits, they'll get to have quite a party. Which may help me spend a little more, which is something I struggle with. I love my kids and want them to have a great life like any other parent, but the amounts involved are approaching an order of magnitude more than a number they would think would be a boatload. And that order of magnitude more than a boatload would be on top of what they'll manage to earn and save and invest on their own - and they're all currently on good tracks to do just fine on their own.

I struggle because the math says there's this semi-ridiculous amount of future wealth on that results page that - again, asteroid or economic collapse or incredible stupidity aside - appears to be real and I do believe the math but seems like it can't be *that* much. Maybe I can't grok exponential growth and/or I'm stuck in the frugal rut that, like many others, got me here.

So as I sit in my house and, among other thoughts, look out at my driveway at my 27 year old car waiting for a $100 alternator from an online auto parts store that will arrive in a few days (cheapest shipping, not fastest) to replace the original one, I just think. And think.

Although I think I'll enjoy replacing the alternator myself because I'll learn something, I'll be self sufficient, I'll make progress taking care of my property, and I'll get to do a project with my DS20. Oh, and I'll get $34 back less shipping costs for returning the core.

So in the case of the alternator, spending the money to have someone else fix it would be a waste and counterproductive, but I think there may be other areas in my life where spending the money might not be counterproductive. Hmm.

Thanks again to all.

 

[latexman]

So, if one put $30,000 in Spending under Start Here tab, and 2025 in "What year will you retire?" under Not Retired? tab, all the output is still in 2020 dollars, right? I understand the 30 "Years" will be 5 years working and 25 years retired. Output is always today's $'s not when you retire.

Reason I ask is, the "all values are in terms of the dollars as of the beginning of the retirement period." in the last post of the linked thread.

I think Dory indicated he adopted that wording somewhere.

 

[Dtail]

So, if one put $30,000 in Spending under Start Here tab, and 2025 in "What year will you retire?" under Not Retired? tab, all the output is still in 2020 dollars, right? I understand the 30 "Years" will be 5 years working and 25 years retired. Output is always today's $'s not when you retire.

Reason I ask is, the "all values are in terms of the dollars as of the beginning of the retirement period." in the last post of the linked thread.

I think Dory indicated he adopted that wording somewhere.

That's an interesting question.
My interpretation is that it represents monies still in 2020 dollars expressed at the start of the 2025 retirement.

 

[Out-to-Lunch]

T
So as I sit in my house and, among other thoughts, look out at my driveway at my 27 year old car waiting for a $100 alternator from an online auto parts store that will arrive in a few days (cheapest shipping, not fastest) to replace the original one, I just think. And think.

Man, your car is two years older than mine! I must be a real spendthrift!

But, seriously, thanks for an interesting and thought-provoking post...

 

[SecondCor521]

Man, your car is two years older than mine! I must be a real spendthrift!

But, seriously, thanks for an interesting and thought-provoking post...

Thanks. It's a nice car. I am the third owner after my father and the matriarch of an Idaho political family, and it only has 188K miles on it, so it's probably good for another decade if I take care of it and can find parts.

And you're welcome. Glad to see someone read my musings

 

[latexman]

That's an interesting question. My interpretation is that it represents monies still in 2020 dollars expressed at the start of the 2025 retirement.

Yes, I believe you are right. I just ran the case and opened the "single year" 1960 cycle spreadsheet. The "Infl Adj End Portfolio" balances are 2020 $'s.

Thanks!