The different method of arriving at your numbers [retirement planning]

[gavinsiu]

What are the ways you arrived at your retiremet numbers? Do you use one or a combination of following:

1. A compounding calculator or spreadsheet - An example of this would be the following link. I try to use a low and median and high range because I don't have any idea of what the future will be like.
2. A historical simulator that run simulation over histroical return. An example of this would be portfolio Chart. The simulator runs through hisotry and get the min and max return.
3. A monte Carlo simulator - Example of one would be portfolio Visualizer and Empower Dashboard / Personal Capital. These give you a 10th to 90th percentile. In the case of Empower, you only get the 10th percentile and 50th percentile.

Are there other methods you have tried? Do you use a combination of the different method? When you do, do you get similiar results? If not, how do you reconcile the different? Do you for example say "my compound precent (method #1)" was too conservative/aggressive and redo them for example.

[LadyGeek]

This thread is now in the Personal Finance (Not Investing) forum (retirement planning). I also retitled the thread for clarity.

(Thanks to the member who reported the post and explained what's wrong.)

[mhc]

I used firecalc (historical returns) and the Fidelity retirement calculator (monte carlo). They give similar results. I wasn't shooting for a number but rather for likelihood of success.

These tools are great for showing the sensitivity of inputs. The huge spread of potential outcomes show that precise planning is non-sense. The longer the plan, the wider the spread. The wider the spread, the greater uncertainty.

Close in planning is more important than trying to plan what will happens in 20, 30, 40, 50 years.

[jebmke]

We had VG run a bunch of analysis (this was in 2004 -- they used to do a lot of stuff for free). Also checked with Firecalc. Ran these once in 2004 and never looked again. Retired in 2007.

[runner3081]

Cfiresim, TPAW planner, firecalc

All historical.

But, the key was really having a locked and loaded account of spending. Have been logging every single transaction for nearly 10-years now. Take that amount + inflation of roughly 3% per year, add in ACA premiums + OOP Max and that is what we will estimate for the spending number.

The rest... is all easy.

[dcabler]

What are the ways you arrived at your retiremet numbers? Do you use one or a combination of following:

1. A compounding calculator or spreadsheet - An example of this would be the following link. I try to use a low and median and high range because I don't have any idea of what the future will be like.
2. A historical simulator that run simulation over histroical return. An example of this would be portfolio Chart. The simulator runs through hisotry and get the min and max return.
3. A monte Carlo simulator - Example of one would be portfolio Visualizer and Empower Dashboard / Personal Capital. These give you a 10th to 90th percentile. In the case of Empower, you only get the 10th percentile and 50th percentile.

Are there other methods you have tried? Do you use a combination of the different method? When you do, do you get similiar results? If not, how do you reconcile the different? Do you for example say "my compound precent (method #1)" was too conservative/aggressive and redo them for example.

I arrived at my number by not using "a number" - that is I didn't use a withdrawal that is based on some multiple of expenses to arrive at my retirement readiness.

I amortize to calculate my withdrawals. As I thought I was getting closer to retirement, I would do test calculations to see what my current withdrawals would be based on current TIPS yields and an expected rate of return of stock (which I discounted by a certain percentage to account for the fact that such predictions are very inaccurate). Once the dollar withdrawal method met the cash flow I wanted in retirement, I declared victory and retired.

Ben Mathew discusses something like this in this post: viewtopic.php?p=7503271#p7503271

Cheers.

[gavinsiu]

How do you use firecalc to calculate your portfolio. I feel that it is useful for a tool to what portfolio you need vs how to get to the portfolio. It's more of a withdraw calculator than a accumulation calculator.

[KlangFool]

OP,

None of the above.

A) I am not aiming for retirement. I am aiming for Financially Independent. Aka, stop working tomorrow.

B) I use current annual expense.

C) Depending on the current age, I use 25X, 30X, 35X and so on.. I am using 30X now.

D) If my current portfolio size is 30X or more, I have reached my number.

KlangFool

[Watty]

I ran my numbers probably half a dozen different ways to make sure that none of them said that I was doing something stupid but I was not worried if they did not give the exact same results.

It is also important to keep in mind that if a retirement calculator says that you have a 90% chance of success and a 10% chance of failure that 10% sounds scary like you might end up broke and homeless. In reality that 10% failure would usually just mean that you might need to reduce your spending some ot tap your home equity when you are older if your portfolio is declining faster than expected. If you are not planning a bare bones retirement it may not be a big deal to reduce your spending by 10 or 20 percent.

I also used FireCalc to get my success rate with increased spending to create graph to make sure that I was not on the edge of a sharp decline in success. I forget the details but I entered spending of something like $60K, $70K, $80K, and so on plot the decline in the success rate. As I recall I would have had to spend like a drunken sailor to get below an 80% success rate. Likewise once you get above about 95% success you need to decrease your spending a lot to get close to 100%

This retirement calculator is interesting in that it is one of the few which tries to factor your mortality into the retirement model. For example there might be a 90% success rate if you live to be 95 but there may also be a 90% chance that you will not actually live to be 95. The math is more complicated but that would mean that there is something like a 99% chance that you would not live long enough to "fail".

"Rich, Broke, or Dead"

https://engaging-data.com/will-money-last-retire-early/

[gavinsiu]

OP,

None of the above.

A) I am not aiming for retirement. I am aiming for Financially Independent. Aka, stop working tomorrow.

B) I use current annual expense.

C) Depending on the current age, I use 25X, 30X, 35X and so on.. I am using 30X now.

D) If my current portfolio size is 30X or more, I have reached my number.

KlangFool

Retirement an Financial Independence is in my opinion the same thing. People can retire when they reach the number but they might not do so for personal reason (like their work etc).

Do you just save as much as you can and just wait until you get to 25-35x or do you do a simple back of the envelope calc to get a sense you are saving enough? The two issue I see is that people either not save enough or they save enough but don't invest or both.

[KlangFool]

OP,

None of the above.

A) I am not aiming for retirement. I am aiming for Financially Independent. Aka, stop working tomorrow.

B) I use current annual expense.

C) Depending on the current age, I use 25X, 30X, 35X and so on.. I am using 30X now.

D) If my current portfolio size is 30X or more, I have reached my number.

KlangFool

Retirement an Financial Independence is in my opinion the same thing. People can retire when they reach the number but they might not do so for personal reason (like their work etc).

Do you just save as much as you can and just wait until you get to 25-35x or do you do a simple back of the envelope calc to get a sense you are saving enough? The two issue I see is that people either not save enough or they save enough but don't invest or both.

gavinsiu,

"Retirement an Financial Independence is in my opinion the same thing. "

I disagreed. Retirement has an assumption of certain age to retire. Financially Independence's assumption is ASAP.

"Do you just save as much as you can and just wait until you get to 25-35x or do you do a simple back of the envelope calc to get a sense you are saving enough?"

I save 1 year of expense every year when I was employed. I do not need any calculation. I am not willing to save more.

KlangFool

[capran]

We just prepared as much as we could. Saved as much as possible. Paid off houses as soon as possible, rolling proceeds into upgraded houses and paying off those. (at a time where interest rates were high. (house 1- 9.5%, house 2-6.5%, house 3- 5.5%.). Completed house prep for major items like roof, siding, windows and furnace and landscaping. Got our SS numbers from SS website, and pension numbers from state teachers. Had a good fix on what our spending was, and what our medical costs would be (which was our biggest expense before Medicare age). Had a spread sheet of both our spending as well as income, and had a goal number of savings. I pulled the plug in 2013 and DW in 2014. Even being the most conservative risk aversive "investor", we've had a very comfortable standard of living.

[TheTimeLord]

What are the ways you arrived at your retiremet numbers? Do you use one or a combination of following:

1. A compounding calculator or spreadsheet - An example of this would be the following link. I try to use a low and median and high range because I don't have any idea of what the future will be like.
2. A historical simulator that run simulation over histroical return. An example of this would be portfolio Chart. The simulator runs through hisotry and get the min and max return.
3. A monte Carlo simulator - Example of one would be portfolio Visualizer and Empower Dashboard / Personal Capital. These give you a 10th to 90th percentile. In the case of Empower, you only get the 10th percentile and 50th percentile.

Are there other methods you have tried? Do you use a combination of the different method? When you do, do you get similiar results? If not, how do you reconcile the different? Do you for example say "my compound precent (method #1)" was too conservative/aggressive and redo them for example.

What are you trying to accomplish here? Is this an exercise in intellectual curiosity or are you having difficulty deciding on a methodology? Can you define what you mean by retirement numbers plural? Personally I enjoyed work so I kept working past what would have been "My Number" according to calculators and eventually just started doing my estimates using 0% real growth as my assumption combined with a realistic estimated lifespan and a focus on my personal priorities. That assumption led me to see some types of investments in a different light and eventually led to the portfolio construction I have today. We will see how successful or unsuccessful my plan turns out to be but I don't spend a whole lot of nights tossing and turning worrying about it.

[gavinsiu]

I ran my numbers probably half a dozen different ways to make sure that none of them said that I was doing something stupid but I was not worried if they did not give the exact same results.

It is also important to keep in mind that if a retirement calculator says that you have a 90% chance of success and a 10% chance of failure that 10% sounds scary like you might end up broke and homeless. In reality that 10% failure would usually just mean that you might need to reduce your spending some ot tap your home equity when you are older if your portfolio is declining faster than expected. If you are not planning a bare bones retirement it may not be a big deal to reduce your spending by 10 or 20 percent.

I also used FireCalc to get my success rate with increased spending to create graph to make sure that I was not on the edge of a sharp decline in success. I forget the details but I entered spending of something like $60K, $70K, $80K, and so on plot the decline in the success rate. As I recall I would have had to spend like a drunken sailor to get below an 80% success rate. Likewise once you get above about 95% success you need to decrease your spending a lot to get close to 100%

This retirement calculator is interesting in that it is one of the few which tries to factor your mortality into the retirement model. For example there might be a 90% success rate if you live to be 95 but there may also be a 90% chance that you will not actually live to be 95. The math is more complicated but that would mean that there is something like a 99% chance that you would not live long enough to "fail".

"Rich, Broke, or Dead"

https://engaging-data.com/will-money-last-retire-early/

Thanks for the link, the monte carlo. numbers are often deceptive. Many people want to have 99% or 100%, but that result in an overly conservatively large portfolio.

[gavinsiu]

What are you trying to accomplish here? Is this an exercise in intellectual curiosity or are you having difficulty deciding on a methodology? Can you define what you mean by retirement numbers plural? Personally I enjoyed work so I kept working past what would have been "My Number" according to calculators and eventually just started doing my estimates using 0% real growth as my assumption combined with a realistic estimated lifespan and a focus on my personal priorities. That assumption led me to see some types of investments in a different light and eventually led to the portfolio construction I have today. We will see how successful or unsuccessful my plan turns out to be but I don't spend a whole lot of nights tossing and turning worrying about it.

It's more intellectual excercise.

[gavinsiu]

gavinsiu,

"Retirement an Financial Independence is in my opinion the same thing. "

I disagreed. Retirement has an assumption of certain age to retire. Financially Independence's assumption is ASAP.

"Do you just save as much as you can and just wait until you get to 25-35x or do you do a simple back of the envelope calc to get a sense you are saving enough?"

I save 1 year of expense every year when I was employed. I do not need any calculation. I am not willing to save more.

KlangFool

Thanks, when my friends stop working because they have enough early like in their 40's, they tell me that they are now retired, so I never associate retirement with age. Thanks for the info.

[TheTimeLord]

What are you trying to accomplish here? Is this an exercise in intellectual curiosity or are you having difficulty deciding on a methodology? Can you define what you mean by retirement numbers plural? Personally I enjoyed work so I kept working past what would have been "My Number" according to calculators and eventually just started doing my estimates using 0% real growth as my assumption combined with a realistic estimated lifespan and a focus on my personal priorities. That assumption led me to see some types of investments in a different light and eventually led to the portfolio construction I have today. We will see how successful or unsuccessful my plan turns out to be but I don't spend a whole lot of nights tossing and turning worrying about it.

It's more intellectual excercise.

That then begs the question to what end, especially if it is not intended to inform your decisions?

[jebmke]

What are the ways you arrived at your retiremet numbers? Do you use one or a combination of following:

1. A compounding calculator or spreadsheet - An example of this would be the following link. I try to use a low and median and high range because I don't have any idea of what the future will be like.
2. A historical simulator that run simulation over histroical return. An example of this would be portfolio Chart. The simulator runs through hisotry and get the min and max return.
3. A monte Carlo simulator - Example of one would be portfolio Visualizer and Empower Dashboard / Personal Capital. These give you a 10th to 90th percentile. In the case of Empower, you only get the 10th percentile and 50th percentile.

Are there other methods you have tried? Do you use a combination of the different method? When you do, do you get similiar results? If not, how do you reconcile the different? Do you for example say "my compound precent (method #1)" was too conservative/aggressive and redo them for example.

What are you trying to accomplish here? Is this an exercise in intellectual curiosity or are you having difficulty deciding on a methodology? Can you define what you mean by retirement numbers plural? Personally I enjoyed work so I kept working past what would have been "My Number" according to calculators and eventually just started doing my estimates using 0% real growth as my assumption combined with a realistic estimated lifespan and a focus on my personal priorities. That assumption led me to see some types of investments in a different light and eventually led to the portfolio construction I have today. We will see how successful or unsuccessful my plan turns out to be but I don't spend a whole lot of nights tossing and turning worrying about it.

We never had a number. In retrospect, I sincerely believe that if we had, life would have been less interesting. We would have foregone doing some things that we did while much younger.

[TheTimeLord]

gavinsiu,

"Retirement an Financial Independence is in my opinion the same thing. "

I disagreed. Retirement has an assumption of certain age to retire. Financially Independence's assumption is ASAP.

"Do you just save as much as you can and just wait until you get to 25-35x or do you do a simple back of the envelope calc to get a sense you are saving enough?"

I save 1 year of expense every year when I was employed. I do not need any calculation. I am not willing to save more.

KlangFool

Thanks, when my friends stop working because they have enough early like in their 40's, they tell me that they are now retired, so I never associate retirement with age. Thanks for the info.

To me in the context of Financial Independence, retirement is just one of the options Financial Independence provides. Unfortunately for many people they aren't given a choice when they retire and may not be financially independent when it occurs.

[Jack FFR1846]

I developed my own spread sheet showing annual happenings. While doing this, I realized that many of the methods for determining expenses in retirement were wildly inaccurate. I started working on my own list of retirement expenses, gathering information along the way. I continued this after retiring and it actually never became accurate until a year after retirement. The big "offs" for me were health care costs and taxes. On the health care side, I went on Medicare and DW went onto Cobra as it would cost the same as ACA and she already whittled down the deductible for the year. In total, this cost was 5 times what we paid for my workplace family plan for 3 of us. Both my sons went on their own workplace plans. In any case, you'll want to develop a retirement spending list. Oh, the second, taxes, I first assumed like many people do that retirement taxes would be low, low, low. Nope. With too much pre-tax saved, we started doing Roth conversions, pushing taxes over our "while working" levels as there's no 401k deduction when retired.

So the spread sheet has income, meaning anything coming in from interest and taxable dividends that are cashed to money coming in from a part time job. Spending became the list above for the most part. I document our investment asset level and for each year have a percentage gain box. Where this works well is that a copy/paste can make this automatic going forward as many years as you want. For non-periodic events, a one time or some number time line is added. For example, college costs, buying a new car, stopping working, taking social security, getting help for college costs from grandparents.

This didn't give me a green/red light to retire. It gave me a way to see ahead to end of life predictions of money left. If it says when you're 80, you'll have negative 10 million dollars, then obviously, you're not ready to stop working. If it says at 80, you'll have 10 million dollars, then maybe it is time.

[gavinsiu]

That then begs the question to what end, especially if it is not intended to inform your decisions?

When I am helping someone else I often need to think differently. I started investing pretty much a year out of college and I try to max out my 401K. Despite some gaps, I am pretty sure I am ok. Other people, including some on the forum, have started later, which neans I have to think outside of my box.

[Hacksawdave]

gavinsiu,

"Retirement an Financial Independence is in my opinion the same thing. "

I disagreed. Retirement has an assumption of certain age to retire. Financially Independence's assumption is ASAP.

"Do you just save as much as you can and just wait until you get to 25-35x or do you do a simple back of the envelope calc to get a sense you are saving enough?"

I save 1 year of expense every year when I was employed. I do not need any calculation. I am not willing to save more.

KlangFool

Thanks, when my friends stop working because they have enough early like in their 40's, they tell me that they are now retired, so I never associate retirement with age. Thanks for the info.

Very many metrics and methods used to get there. While one metric may make sense for early years, it may become irrelevant in later years the closer one approaches the end of working.

I agree with KlangFool in that Financial Independence and retirement are two different points. One can reach FI early and then slip back temporarily or longer term due to circumstances. I reached FI at 36 but could not retire due to my early age, unvested benefits, and not enough assets. FI allowed me to focus more on the retirement point as I had no debt or obligations going forward from that point on.

From the lessons learned I accumulated from older colleagues who went through post-Y2K and GFC, I found a totally different metric than the traditional ‘big round numbers,’ charts, simulations, and even the plan sponsored graph letting me I am good though age 110. The final ‘magic number’ metric was that the portfolio produced 130% of expected expenses in a future budget at early retirement time to be viable.

[krisSA]

OP,

None of the above.

A) I am not aiming for retirement. I am aiming for Financially Independent. Aka, stop working tomorrow.

B) I use current annual expense.

C) Depending on the current age, I use 25X, 30X, 35X and so on.. I am using 30X now.

D) If my current portfolio size is 30X or more, I have reached my number.

KlangFool

I always wonder, when you say 30X, is the X equal to the actual annual expenses or expenses - Social Security? I am sure we all need to get prepared for the reduction in SS payment in the future

[TipsQuestions]

I use Excel and reasonable real estimates. I have little interest in historical data. I can't go into a bank and demand a 7% CD b/c "that was the historical average". Markets have no memory.

[KlangFool]

OP,

None of the above.

A) I am not aiming for retirement. I am aiming for Financially Independent. Aka, stop working tomorrow.

B) I use current annual expense.

C) Depending on the current age, I use 25X, 30X, 35X and so on.. I am using 30X now.

D) If my current portfolio size is 30X or more, I have reached my number.

KlangFool

I always wonder, when you say 30X, is the X equal to the actual annual expenses or expenses - Social Security? I am sure we all need to get prepared for the reduction in SS payment in the future

1) Given that I am talking about Financially Independence, that means it could be any age including before 62 years old.

2) Hence, by definition, social security is not counted.

3) There is a significant difference between Retirement and Financially Independence.

KlangFool

P.S.: IMHO, retirement is an outdated concept only useful for the lucky few. Many of us does not have the job security to ensure continual full employment until retirement age.

[finite_difference]

OP,

None of the above.

A) I am not aiming for retirement. I am aiming for Financially Independent. Aka, stop working tomorrow.

B) I use current annual expense.

C) Depending on the current age, I use 25X, 30X, 35X and so on.. I am using 30X now.

D) If my current portfolio size is 30X or more, I have reached my number.

KlangFool

+1.

30X implies a 3.33% withdrawal rate which means FI.

[22twain]

I always wonder, when you say 30X, is the X equal to the actual annual expenses or expenses - Social Security? I am sure we all need to get prepared for the reduction in SS payment in the future

X is the annual amount that needs to be covered by withdrawals from your portfolio. If you have a pension or SS, it covers part of your expenses and your portfolio covers the rest (= X).

Many people don't have a constant X, which makes a simple "30X" type rule problematical to apply. For example, I had one X after retirement but before Medicare or SS. I had a larger X after I switched from my former employer's health insurance (as a retirement benefit) to Medicare. Now I have a smaller X after starting SS. For situations like this, you need to use a more sophisticated analysis, or have a large enough portfolio that it's obvious that you'll be OK.

[kd2008]

OP, since this is an intellectual exercise, I would like to ask why does it have to be based on a number?

If you are calculator shopping, you might as well add ficalc.app

For us, the decisions are based on a continuum rather a binary yes YES/NO. Does one of us retire before the other? If so, what will it do to cash flow, savings rate, health insurance, periodic large expenses etc.?

What happens when mortgage is paid off? What changes when Medicare starts, SS starts, RMD starts? First for just one person, then the younger partner?

What are risks to the plan? What unexpected and uncontrollable events including a bad sequence of returns do to the plan?

What does adaptability look like when human capital is exhausted and portfolio dependence increases?

Answer these questions first. It will answer your "number question" inherently or more importantly render it meaningless.

[Jack FFR1846]

X is the annual amount that needs to be covered by withdrawals from your portfolio. If you have a pension or SS, it covers part of your expenses and your portfolio covers the rest (= X).

I would agree with this but would add that X is spending and if you have cash, consider that cash as part of your portfolio. I'm coming up on 17 months of retirement and we have only taken cash. I did hoard cash before retiring but have put much of it into investments.

[Golfaddict]

I have an old 401k with Fidelity and they have a neat planning tool that forecasts and gives you a retirement score base on your current and future contributions and your expected spend in today’s dollars. You can toggle through some different scenarios based on market predictions. The base line is significantly below average, and you can look at below average, and average which can give you a good idea if you are on track. I use that and firecalc and revisit whenever I’m curious.

[Boglenaut]

I have used all three, but put the most faith in huge year-by-year spreadsheet I wrote myself. Even then, it has serious limitations.

I like #2 and #3 conceptually, but the problem is they can't capture the level of detail required. Most are way oversimplified.

[bhwabeck3533]

Are there other methods you have tried? Do you use a combination of the different method? When you do, do you get similiar results? If not, how do you reconcile the different? Do you for example say "my compound precent (method #1)" was too conservative/aggressive and redo them for example.

No "secret sauce", just this:
* Methodical and detailed tracking of expenses, my "mother of all spreadsheets" is a multi-tab beauty which includes a compilation of monthly spend by category which informs my wife and me and defines our "guard rails"
* Marrying our expenses to our investment balances (and a few more details) drives my go-to planning tool, THE FUNDED RATIO.

My Funded Ratio spreadsheet is admired for it's simplicity:
* Annualized projections of two income streams (small monthly Pension + Social Security)
* Annualized projections of three expense streams (Essential + Taxes + Lifestyle)
* Add my Portfolio balance + Reserves (Home value) + Contingencies (Spending Shocks)

Voila -- we can sleep at night,our life's plan is fully funded because we have an FR>100%, assuming a 0% Real Discount Rate.

[Parkinglotracer]

How much do I to spend a year x25 before taxes.

[heyyou]

As previously mentioned, intense saving prior to retiring can be practice at living on your reduced future income, essentially a test drive of your next spending level. For us, that suited us well in early retirement. We were joyous to have the freedom of being away from our jobs.

I'm intentionally using a variable WD method to boost portfolio longevity after retiring at age 55. To us, that was just living within our means during early retirement. We could see next year's income slightly vary with each year's market fluctuations, so those changes were not a surprise. Now is 19th anniversary of early retirement, with the portfolio being larger than back then, which is good for the inflated costs of senior health care. Starting delayed SS was a nice income boost, I like its annual COLA increases.