FireCalc questions

[Safire]

I am new to FireCalc and just don't get it at all. Help me!

1. On the homepage, if you're not retired yet, do you enter anything on the "Spending" column on the FireCalc's homepage? Should it simply be 0 and current nest egg? For instance, if our current net worth is 100,000, and we spend nothing from this 100,000, do you simply enter 0 for Spending, 100,000 for Portfolio and 55 for Years (as the nest egg has to last our son until his projected life expectancy of around 85)?

2. On the "Spending Models" tab", I used CPI as the inflation assumption, rather than a flat 3%.

3. On the Other Income / Spending tab, I input 0 for SS. I don't feel comfortable relying on it, and want to calculate how long our nest egg will last without SS / SSDI for our son after us.

4. The most confusion I have is on the Not Retired Yet tab. Since H plans to work for another 20 years, and we plan NO withdrawals until then, I put in his retirement as 2041 and the amount of money we plan to contribute each year until then.

When FireCalc spit it's results out, it said:

"Because you indicated a future retirement date (2041), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 20 years of preretirement plus 35 years of retirement, or 55 years."

Why would FireCalc consider pre-retirement period when we're contributing to our nest egg, and not withdrawing, in the calculations? This really really confuses me. Also, how can I tell the calculator to show me if our nest egg will last our son an additional 55 years in retirement AFTER we're gone? He will only in his late-20s / early 30s when H retires. Given the longevity on Dad's side of the family, our son's "retirement" will be a further 55 odd years after we've exited the Planet, for his projected life expectancy of 85.

What am I missing here?

5. When I pick anything other than "Percentage of Remaining Portfolio" on the "Spending Model" tab, I get a low probability of success if I choose "Constant Spending Power". That worries me because will a constant percentage of our portfolio have the same purchasing power across my son's lifespan? For instance, will 4% of our nest egg in 2041 have the same purchasing power as 4% of the portfolio in 2065 (for instance)?

6. On the Portfolio tab, I am choosing a portfolio with random performance, with a mean total portfolio return of 7% and variability (standard deviation) of 10%. However, here, the default and only assumption of an inflation rate is a flat 3%. There is no option to pick CPI as the inflation rate which contradicts the assumption of CPI on inflation on the "Spending Models" tab". I am just really confused.

Help!

 

[silvor]

1) no. Your current spending

 

[mrfeh]

1) no. Your current spending

Actually, it should be your expected spending in retirement.

 

[chassis]

1. spending planned in retirement as previously mentioned
2. OK
3. SS will be there.
4. You did it correctly.
5. Not possible to know. It depends on your portfolio growth and inflation.
6. I enter my own inflation assumption.

Firecalc is weird indeed. It took me almost a year to be able to get something useful out of it.

 

[cathy63]

For spending, enter the amount you want to spend per year after you retire.

You're doing the right thing on the Not Retired tab. Tell Firecalc when you will retire and how much you'll save every year until then.

Why would FireCalc consider pre-retirement period when we're contributing to our nest egg, and not withdrawing, in the calculations? This really really confuses me. Also, how can I tell the calculator to show me if our nest egg will last our son an additional 55 years in retirement AFTER we're gone? He will only in his late-20s / early 30s when H retires. Given the longevity on Dad's side of the family, our son's "retirement" will be a further 55 odd years after we've exited the Planet, for his projected life expectancy of 85.

Firecalc needs to estimate what will happen to your portfolio during the next 20 years while you're saving in order to know how much you'll have when you begin withdrawing. Your portfolio is increasing not only by the amount you invest but also by the amount that those investments grow. Firecalc will use what actually happened in the past to figure out what your results would be. So for example, one scenario will start with the market conditions as they were in 1870. To figure out what you'd have after 1 year, Firecalc will take your starting portfolio plus the amount you expect to save every year and grow it by however much the market grew in 1870. Then it will take that amount and grow it by your savings and the market performance for 1871, then 1872, and repeat 17 more times. It takes that amount and then starts subtracting your spending while still applying the growth rates for the relevant year until it reaches the retirement window you gave on the home screen and that's your ending amount, hopefully it's positive, indicating that your portfolio would have lasted as long as you needed it to.

Then it starts over beginning with 1871 and calculates the next scenario, then it starts with 1872, and so on. The last scenario will be the one that ends in 2021.

It sounds like you're looking at a 20 year savings window, then a 55 year retirement, or maybe longer since you are including your son's lifetime? That's at least a 75 year window, so put 75 as the retirement duration on the home page where you enter your spending. Firecalc is not great for looking at that long of a retirement window, because it's relying on actual market data. If you're looking at a 75 year window, then the most recent scenario would start in 1946 and end in 2021, so obviously you leave out a lot of the more recent starting years. You can try to get a longer picture by doing a 35 year scenario and taking the lowest ending number and using that as the starting point for a second 35 year scenario.

 

[pb4uski]

.... 4. The most confusion I have is on the Not Retired Yet tab. Since H plans to work for another 20 years, and we plan NO withdrawals until then, I put in his retirement as 2041 and the amount of money we plan to contribute each year until then.

When FireCalc spit it's results out, it said:

"Because you indicated a future retirement date (2041), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 20 years of preretirement plus 35 years of retirement, or 55 years."

Why would FireCalc consider pre-retirement period when we're contributing to our nest egg, and not withdrawing, in the calculations? This really really confuses me. Also, how can I tell the calculator to show me if our nest egg will last our son an additional 55 years in retirement AFTER we're gone? He will only in his late-20s / early 30s when H retires. Given the longevity on Dad's side of the family, our son's "retirement" will be a further 55 odd years after we've exited the Planet, for his projected life expectancy of 85.

What am I missing here? ...

FIRECalc is doing exactly what it should do... it is growing your nestegg for 20 years with no withdrawals, and then starting withdrawals for 35 years of retirement based on the 55 years that you input for years on the Start Here tab.

How you can tell FIRECalc to expand the projection for your son would be to change the 35 years to 75 years (75 = 20 years to retirement + son's life expectancy of 85 - son's age of 30 when H retires in 20 years)... that will expand the total time horizon to 75 years... 20 years to retirement + 55 years after H retires.

Because you indicated a future retirement date (2041), the withdrawals won't start until that year. The tested period is 20 years of preretirement plus 55 years of retirement, or 75 years.

FIRECalc looked at the 76 possible 75 year periods in the available data, starting with a portfolio of $xxx,xxx and spending your specified amounts each year thereafter.