Author Topic: Can I Get Your Feedback on My Retirement Projection Assumptions?  (Read 4882 times)

Threshkin

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I am doing some intentionally simplistic retirement projections and would like feedback on my inflation and return assumptions.  I want to build a simple straight-line model to supplement the historical projections from cFIREsim.  The straight-line model is easier to explain and comprehend than the complex cFIREsim projections.

These assumptions are intended to be conservative but reasonable.  The spreadsheet they drive is intended to show the draw down rates for each of our major post-FIRE asset pools (Cash, Roth IRA, Trad IRA).

Assumptions      
  • Cash Return: 0%   Assume 0% interest on cash assets
  • Investment Return: 6%   All investment accounts, including IRAs and Open Market
  • Property Value: 4%   Over extended periods housing values tend to match inflation rates.
  • Inflation: 4%   Historical inflation amount used by many sources.
  • Rental Income 0%   Assume no increase in rental income
  • Social Security COLA 3%   Usually this matches inflation but I use a lower rate to be conservative.

Are these assumptions reasonable?  I know that in reality the numbers will vary but over time, they should even out and we have plenty of reserves to cover the most commonly cited bad scenario, a multi-year downturn at the beginning of retirement.

Thanks!

matchewed

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #1 on: July 02, 2014, 04:42:13 PM »
For investment returns it depends on you AA for your investment accounts.

Threshkin

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #2 on: July 02, 2014, 04:50:12 PM »
For investment returns it depends on you AA for your investment accounts.

Currently my asset allocation is around 96-97% equities with the balance in bonds.  I am slowly growing my bond position but I doubt it will be more than 5% before I retire in hopefully less than 12 months.  A major portion of the investment money is in a Fidelity 401k that has returned 7.9% annually since i started it 10 years ago.

For discussion purposes you can assume a 90 to 95% equity portfolio in the typical Vanguard funds recommended around here.
« Last Edit: July 02, 2014, 04:53:12 PM by Threshkin »

matchewed

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #3 on: July 02, 2014, 04:55:08 PM »
Then the assumption should be fine.

I would also look at Social Security from a standpoint of not receiving it until later or actually reducing the benefit payout.

I'm not sure how I feel about simplistic model building this late in the game (>12 month FIRE period). But then again I'm yet to be in that position. Can't hurt I guess.

*edit*

These are all long term projections correct? You're not using these sorts of numbers to make short term decisions...

gimp

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #4 on: July 02, 2014, 04:56:24 PM »
Conservative. Good. You will most likely exceed this.

Threshkin

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #5 on: July 02, 2014, 05:28:18 PM »
Then the assumption should be fine.

I would also look at Social Security from a standpoint of not receiving it until later or actually reducing the benefit payout.

I'm not sure how I feel about simplistic model building this late in the game (>12 month FIRE period). But then again I'm yet to be in that position. Can't hurt I guess.

These are all long term projections correct? You're not using these sorts of numbers to make short term decisions...

These are all long-term projections for illustration purposes only.  My SO keeps getting stuck on the question of where our money to live on will come from if I retire (I am the major earner).  I want to show her that we have ample assets to cover our expenses and where the money will come from. 

*edit*

For my SS, I took my current FRA estimated benefit from SSA (~$28,800/yr) and ran it out at a 3% COLA for 13 years (~$49,300) which puts me at age 70.  I then rounded it down to $36,000 because I suspect benefits or COLA will have been cut by then.  For my SO, I estimated her SS benefit at 50% of mine when she hits age 70.  Again, any feedback on these assumptions is greatly appreciated.

Thanks!
« Last Edit: July 02, 2014, 05:38:22 PM by Threshkin »

matchewed

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #6 on: July 02, 2014, 05:32:31 PM »
Yeah that'll work then. I'd go into it w/ the SO about some of the nuts and bolts behind your assumptions, assuming they don't have the same grasp or understanding. I can see some of the SO resistance people encounter as ignorance rather than outright disbelief with the same set of facts.

Threshkin

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #7 on: July 02, 2014, 05:43:15 PM »
Yeah that'll work then. I'd go into it w/ the SO about some of the nuts and bolts behind your assumptions, assuming they don't have the same grasp or understanding. I can see some of the SO resistance people encounter as ignorance rather than outright disbelief with the same set of facts.

My SO grew up in a culture where everyone retired at the same age with essentially the same fixed income provided by the government.  As a result she is very age driven in her retirement thinking.  Her friends have the same attitudes and reinforce her belief.  The standard response I get is "You are too young to retire!"  No consideration of net worth vs. expenses comes into play.  It is all about age.

Threshkin

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #8 on: July 02, 2014, 05:48:47 PM »
These are all long term projections correct? You're not using these sorts of numbers to make short term decisions...

Actually this is a tool to help drive one major short term decision.  When I retire!

DoubleDown

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #9 on: July 03, 2014, 07:26:44 AM »
Hey Threshkin,

I did essentially the same forecasts in my decision to retire. I found it very useful to be able to see how various assets are estimated to grow in the intervening years, and to understand how much income they could be expected to provide during different periods in your life, as you've done.

Your estimates are likely overly conservative as you already know, so you'll hopefully do even better than your estimates. In my case, I've used 2-3% for inflation, and I just subtract that out of expected return rates in order to put everything into current dollars (for example, I estimate 8% return on stocks, but use 5% to adjust for inflation).

I couldn't quite tell if you are double-counting or under-counting inflation in some cases. For example, you've said you assume no increase in rental income. Does that mean you assume no increase in real dollars, counting for inflation? Or you assume no increase PLUS inflation will whittle away at it (I'm assuming it's the former)? But then with cash, you assumed 0% return (which is good), but then are you taking into account that it will be affected by inflation and have a negative real return (if you hold it long enough)?

Threshkin

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #10 on: July 03, 2014, 10:04:55 AM »
Your estimates are likely overly conservative as you already know, so you'll hopefully do even better than your estimates. In my case, I've used 2-3% for inflation, and I just subtract that out of expected return rates in order to put everything into current dollars (for example, I estimate 8% return on stocks, but use 5% to adjust for inflation).

I couldn't quite tell if you are double-counting or under-counting inflation in some cases. For example, you've said you assume no increase in rental income. Does that mean you assume no increase in real dollars, counting for inflation? Or you assume no increase PLUS inflation will whittle away at it (I'm assuming it's the former)? But then with cash, you assumed 0% return (which is good), but then are you taking into account that it will be affected by inflation and have a negative real return (if you hold it long enough)?

Thanks Doubledown.

I appreciate your comments on this.  You identified some things I was concerned about, particularly double or under counting inflation.  The model I am building tries to use actual dollars, not constant, 2014 dollars.  It is interesting and somewhat frightening to see our gross annual expenses grow from $48K/year to over $500K by year 60.

Rental income was assumed to remain unchanged in real dollars until we sell the property.  I ran two scenarios regarding the rental, the first had us keeping it for ten more years, the other sells it next year.  For other reasons we are leaning towards selling it soon so the lack of growth does not matter much.  In our area the market for properties in this price range is white hot right now plus we are seriously reconsidering the non-cash costs of owning rental properties and thinking is is really not worth our time if we do not need the cash flow.

Cash at 0% interest is based on the current, near zero interest rates available right now.  I am assuming a loss in real value in that account due to inflation.  We had been saving up to buy another rental so there is more in this account than there should be, over two years of annual expenses.  My draw down plan takes money from that account first, before any other pools are touched.  In reality most of this money will move into one of the after tax investment accounts and be spent from there.

Essentially, I keep tweaking the assumptions, trying to break the plan.  Expenses are over estimated by about 20%, I am figuring higher than normal inflation, and lower returns on investments than I have been getting over the last ten years, even including the 2008/2009 bubble.  Since I assume I will live forever, I am running a 60 year projection

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #11 on: July 03, 2014, 11:33:05 AM »
Conservative. Good. You will most likely exceed this.

+1.

A 2% real return on equities, 0% real return on real estate, -4% real return on cash, -4% real adjustment on rental income, -1% real adjustment on SS COLA.

About the only way you could be more conservative is if you cut the SS projection by 25%.

If you can make it work with those numbers, you should end with way more than you'll ever need.
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dude

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #12 on: July 03, 2014, 11:50:28 AM »
For my SS, I took my current FRA estimated benefit from SSA (~$28,800/yr) and ran it out at a 3% COLA for 13 years (~$49,300) which puts me at age 70.  I then rounded it down to $36,000 because I suspect benefits or COLA will have been cut by then.  For my SO, I estimated her SS benefit at 50% of mine when she hits age 70.  Again, any feedback on these assumptions is greatly appreciated.

Thanks!

How old are you/how many years have you worked?  Your estimated SSA benefit is based on a 35-year work history, and it assumes you will continue to make the same money you are now (or more accurately, the same OASDI contribution) until your chosen age of retirement/collection, whether it be early at age 62, or full retirement at 67 (for those born after 1960).  This is important because if you've worked 35 years already, and your first, say, decade of work was for low wages, this projection assumes that those low-earning years will drop off and be replaced by future higher-earning years based on your current salary.  The same goes for early retirees -- if you retire at age 45 with only 20 years of work history, you get big, fat zeroes for 15 of your 35 years used to calculate your benefit.

You can go to the SSA website and plug actual numbers in (using their history for past years, your assumptions for future years) and specifying the age at which you will retire.  This will give you a better estimate.

I can tell you that when I did this for myself, my estimated benefit at age 62 dropped $111/month ($1332/yr) from the SSA's projected number.  Also the longer you wait to collect, i.e., full retirement age or age 70, the larger that gap becomes.

Threshkin

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #13 on: July 03, 2014, 02:17:07 PM »
For my SS, I took my current FRA estimated benefit from SSA (~$28,800/yr) and ran it out at a 3% COLA for 13 years (~$49,300) which puts me at age 70.  I then rounded it down to $36,000 because I suspect benefits or COLA will have been cut by then.  For my SO, I estimated her SS benefit at 50% of mine when she hits age 70.  Again, any feedback on these assumptions is greatly appreciated.

Thanks!

How old are you/how many years have you worked?  Your estimated SSA benefit is based on a 35-year work history, and it assumes you will continue to make the same money you are now (or more accurately, the same OASDI contribution) until your chosen age of retirement/collection, whether it be early at age 62, or full retirement at 67 (for those born after 1960).  This is important because if you've worked 35 years already, and your first, say, decade of work was for low wages, this projection assumes that those low-earning years will drop off and be replaced by future higher-earning years based on your current salary.  The same goes for early retirees -- if you retire at age 45 with only 20 years of work history, you get big, fat zeroes for 15 of your 35 years used to calculate your benefit.

You can go to the SSA website and plug actual numbers in (using their history for past years, your assumptions for future years) and specifying the age at which you will retire.  This will give you a better estimate.

I can tell you that when I did this for myself, my estimated benefit at age 62 dropped $111/month ($1332/yr) from the SSA's projected number.  Also the longer you wait to collect, i.e., full retirement age or age 70, the larger that gap becomes.

Thanks Dude.  I am a little worried about this.  I got the paper form for calculating SS benefits, filled it in and got one answer.  Later I used the on-line from and god a very different (much lower) answer.  I was planning to schedule an appointment at our local SS office to try to figure this out.  When I asked about this discrepancy through their on-line Q&A system I got a very guarded answer that essentially told me nothing.  In the short term I think I will cut the SS benefit significantly (50%) and see what happens.

Threshkin

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Thanks you all for your help!!!! 

I reviewed the numbers with my very conservative SO last weekend and she was impressed and convinced.  I was able to turn skepticism into whole hearted enthusiasm!

She is fully on board with the plan and started taking action immediately.  We are freeing up assets and positioning ourselves for the tax implications of selling off non-performing assets.

The magical moment happened when I showed her that  once SS and RMW kick in at 70.5 our fixed income will exceed our expenses by an ever increasing margin.  Every time she challenged me on a point, I had an answer ready that always erred on conservative side.

She also appreciated the effort I put into analyzing the non-financial aspects of retirement.  A balanced approach is important.

Your input and feedback was a critical component in developing and validating my our plan.

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Re: Can I Get Your Feedback on My Retirement Projection Assumptions?
« Reply #15 on: July 22, 2014, 06:02:00 PM »
Very cool! Congratulations - you made it ( with room to spare)!