FIRECalc Questions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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mjb49
Posts: 27
Joined: Sat Jan 07, 2017 2:25 pm

FIRECalc Questions

Post by mjb49 » Wed May 16, 2018 7:31 am

On the “Other Income / Spending” tab under “Pension Income” I entered inflation adjusted disability income that will stop in 32 years. I entered the disability amount in “off Chart Spending” to start in 32 years when the disability ends.

Do I enter the “off Chart Spending” in today’s dollars and check the "Inflation adj" box or the amount in estimated 2050 dollars?

On the “Your Portfolio” tab under “A portfolio with random performance…” I entered a mean total portfolio return of 6% with SD of 8% and 3% inflation. My portfolio has an asset allocation of 50/50.

I understand the limitations of forecasting and back testing. For planning purposes, are these reasonable estimates?

Thank you in advance.

Silk McCue
Posts: 1084
Joined: Thu Feb 25, 2016 7:11 pm

Re: FIRECalc Questions

Post by Silk McCue » Wed May 16, 2018 8:26 am

mjb49 wrote:
Wed May 16, 2018 7:31 am
On the “Other Income / Spending” tab under “Pension Income” I entered inflation adjusted disability income that will stop in 32 years. I entered the disability amount in “off Chart Spending” to start in 32 years when the disability ends.

Do I enter the “off Chart Spending” in today’s dollars and check the "Inflation adj" box or the amount in estimated 2050 dollars?


REPLY - Enter both values in today's dollars with inflation adj to get the desired results. This approach can also be used to offset the Social Security loss in the event of the death of a spouse. From my perspective this is important when assessing the financial impact on the remaining spouse.

On the “Your Portfolio” tab under “A portfolio with random performance…” I entered a mean total portfolio return of 6% with SD of 8% and 3% inflation. My portfolio has an asset allocation of 50/50.

I understand the limitations of forecasting and back testing. For planning purposes, are these reasonable estimates?


REPLY - As far as I am concerned they are neither reasonable nor unreasonable as no one knows the future. Personally I use the Total Market section and set the percent of equities I intend to hold. I am most interested in this approach as it provides broad historic perspective on how my scenario would have performed in real life scenarios. The beauty of this tool is that you can do both.

Thank you in advance.
Last edited by Silk McCue on Wed May 16, 2018 9:14 am, edited 1 time in total.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: FIRECalc Questions

Post by dbr » Wed May 16, 2018 8:45 am

Regarding volatility I think 8% is too low. But I don't know how the models that ask the user to guess the risk and return of his investments make any sense. The virtue of FireCalc is the methodology of using actual historical investment performance and inflation. Otar argues strongly for that approach and uses it in his Portfolio Optimizer. One might look around and see who else does that. I think CFireSim does and VPW?

If you are guessing risk and return then you need to run through a sensitivity analysis on those numbers to see how much your guess matters and if there are points where things fall off a cliff. That does help you put error bars around your results, a feature otherwise missing.

mjb49
Posts: 27
Joined: Sat Jan 07, 2017 2:25 pm

Re: FIRECalc Questions

Post by mjb49 » Wed May 16, 2018 1:55 pm

dbr wrote:
Wed May 16, 2018 8:45 am
Regarding volatility I think 8% is too low. But I don't know how the models that ask the user to guess the risk and return of his investments make any sense. The virtue of FireCalc is the methodology of using actual historical investment performance and inflation. Otar argues strongly for that approach and uses it in his Portfolio Optimizer. One might look around and see who else does that. I think CFireSim does and VPW?

The 8% SD was based on results from back testing my portfolio in Portfolio Visualizer.

If you are guessing risk and return then you need to run through a sensitivity analysis on those numbers to see how much your guess matters and if there are points where things fall off a cliff. That does help you put error bars around your results, a feature otherwise missing.

When running the PV Monte Carlo my plan works. Since the consensus seems to be future returns will not mirror the past I wanted to see how my plan worked using some of the more conservative estimates for the returns over the next decade. I plan to adjust as necessary as things progress, I just wanted to get an estimate of how it might look if the estimates of future returns turned out to be true. If this is not the best method of assessing my my plan I am open to any recommendations. I will look into learning how to run through a sensitivity analysis.

Thank you.


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