In reponse to a question, 5% fixed return in retirement

[Time2]

I answered a question on Quora asking about a fixed 5% return and a 3% withdrawal.
In that scenario you will have almost half you money left after 30 years.
Then I pushed it and found if you invest at 5% and withdraw 4.12% your portfolio
will last just over 30 years.
I'm not recommending this, I just found it interesting and had never run FireCalc this way.
Graph shown below.

 

[COcheesehead]

But what the money will buy over time, will decrease.

 

[pb4uski]

The problem is that the withdrawals are not inflation adjusted so not reallyealistic for a 30 year retirement. If inflation was at the Fed's 2% target then the buying power of those withdrawals would be 82%, 67% and 55% of the first year withdrawal's buying power after 10, 20 and 30 years, respectively.

 

[WhenIsItTime]

But what the money will buy over time, will decrease.

The problem is that the withdrawals are not inflation adjusted so not reallyealistic for a 30 year retirement. If inflation was at the Fed's 2% target then the buying power of those withdrawals would be 82%, 67% and 55% of the first year withdrawal's buying power after 10, 20 and 30 years, respectively.

If your return is > withdrawal but balance declining, doesn't that mean an inflation factor was considered? Otherwise, if I earn $5 and spend $3 or $4 the balance would be increasing.

 

[Time2]

The problem is that the withdrawals are not inflation adjusted so not reallyealistic for a 30 year retirement. If inflation was at the Fed's 2% target then the buying power of those withdrawals would be 82%, 67% and 55% of the first year withdrawal's buying power after 10, 20 and 30 years, respectively.

I was under the impression that the spending rate included an inflation adjustment. Does the inflation raise drop out when you use fixed portfolio?

 

[USGrant1962]

Of course it is inflation adjusted - people haven't had their coffee yet

If you make 5% and withdraw 3% (reinvesting 2%) your nominal balance goes UP every year. Only your inflation-adjusted balance goes down.

EDIT - unless OP stated the problem backwards?

 

[Rianne]

This calculator is simple but takes into account taxes and inflation. Those are estimates but all calculators are estimates b/c portfolios, inflation, and taxes change over time. You choose numbers that fit your lifestyle. I know we can keep our income in the in 12% tax bracket and spend what we need. I also estimate inflation at 3%.

https://www.financialmentor.com/calculator/best-retirement-calculator

 

[COcheesehead]

Of course it is inflation adjusted - people haven't had their coffee yet

If you make 5% and withdraw 3% (reinvesting 2%) your nominal balance goes UP every year. Only your inflation-adjusted balance goes down.

EDIT - unless OP stated the problem backwards?

You are right. I missed it being run in FireCalc. I took it as a straight 5% overtime, but the principle balance declines in FireCalc which is where the inflation protection comes from.

 

[razztazz]

What inflation rate were you using? If you just use the standard Firecalc set-up and select 000% stocks this scenario had a failure rate of 14 iterations. ie. Real-world as-it-happened inflation. The straight line (ok, slightly curvy) results indicate a flat rate of inflation, which at a 5% return would be pretty solid most of the time but perhaps a disaster at others. Just like depending on the stock market

 

[COcheesehead]

What inflation rate were you using? If you just use the standard Firecalc set-up and select 000% stocks this scenario had a failure rate of 14 iterations. ie. Real-world as-it-happened inflation. The straight line (ok, slightly curvy) results indicate a flat rate of inflation, which at a 5% return would be pretty solid most of the time but perhaps a disaster at others. Just like depending on the stock market

I think the OP stated a fixed 5% without stating an allocation used.

 

[Time2]

What inflation rate were you using? If you just use the standard Firecalc set-up and select 000% stocks this scenario had a failure rate of 14 iterations. ie. Real-world as-it-happened inflation. The straight line (ok, slightly curvy) results indicate a flat rate of inflation, which at a 5% return would be pretty solid most of the time but perhaps a disaster at others. Just like depending on the stock market

Under the spending tab, it is set at 3%, I left it at 3%.

 

[Time2]

I think the OP stated a fixed 5% without stating an allocation used.

I didn't set it, I just assumed "A portfolio with consistent growth of 5%", would be 100% invested at 5%.

 

[ERD50]

But 30 year Treasury rate is 4.63%, and you can't count on 3% inflation.

Looks to me like just an arithmetic exercise, with little real-world application.

edit/add: I ran FIRECalc with that 4.12% and historical 30 year treasuries, so we see how it does generally:

FIRECalc found that 67 cycles failed, for a success rate of 45.5%.

-ERD50

 

[COcheesehead]

I didn't set it, I just assumed "A portfolio with consistent growth of 5%", would be 100% invested at 5%.

Got it, but straight line appreciation is considered bad modeling.

 

[ERD50]

So you used the default which I believe is 75/25.

No.

Look at FIRECalc, the "Your Portfolio" tab. If the option for 5% consistent growth is chosen, it's irrelevant what the AA or investment is (what was the old line? Venezuelan Beaver Cheese futures?). It returns 5% regardless.

-ERD50

 

[COcheesehead]

No.

Look at FIRECalc, the "Your Portfolio" tab. If the option for 5% consistent growth is chosen, it's irrelevant what the AA or investment is (what was the old line? Venezuelan Beaver Cheese futures?). It returns 5% regardless.

-ERD50

My comment was deleted, but you quoted it. I referenced FireCalc and saw what the OP did.

 

[ERD50]

Got it, but straight line appreciation is considered bad modeling.

Agreed.

-ERD50