Author Topic: FI Calculation Question - Am I getting this wrong  (Read 4384 times)

moneymamma

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FI Calculation Question - Am I getting this wrong
« on: September 14, 2014, 04:12:58 PM »
Hi Everyone- I feel like I am missing something.  When I use the 25x yearly expenses assuming 4% withdrawal per year, it seems when I do it manually and assuming 3% inflation you run out of money, if you need to live on the money for 40-50 years.

Am I missing something.  Is there a spreadsheet where I can play around with various figures.

chasesfish

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Re: FI Calculation Question - Am I getting this wrong
« Reply #1 on: September 14, 2014, 04:22:22 PM »
What are you invested in for your example?  There's a bunch of models out there


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Ybserp

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Re: FI Calculation Question - Am I getting this wrong
« Reply #2 on: September 14, 2014, 04:23:58 PM »
If you are all in cash 4% withdrawal doesn't work. You need to have the money in something that grows.

moneymamma

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Re: FI Calculation Question - Am I getting this wrong
« Reply #3 on: September 14, 2014, 04:34:03 PM »
Right now I am 40 with 80% stock and 20% bonds.
20% of our money is in cash which we are putting a lump sum every month into various vanguard fund.  Annual expenses are $150K which is high but includes paying down mortgage early.  So by that we would $3.75M but we could easily cut expenses and we have a lot of money in our house which we could easily sell and move somewhere else. 

Is there somewhere I could see various scenarios.  I would like to stay at home (my husband wants to continue to work) so I want to run various scenarios.  We have good genes with grandparents still living.   So my scenarios will assume we will live to 100.


moneymamma

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Re: FI Calculation Question - Am I getting this wrong
« Reply #4 on: September 14, 2014, 04:36:43 PM »
One more thing our current expenses include $2000/month we are putting in a 529.

innkeeper77

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Re: FI Calculation Question - Am I getting this wrong
« Reply #5 on: September 14, 2014, 04:57:31 PM »
You can use something like CFireSim for running scenarios- remember that this is based off of past market performance, and does not at all guarantee future success! But it is helpful for ballparks.

http://www.cfiresim.com/input.php

For the 4% rule, that is 4% of an investment portfolio only- not your emergency funds, checking accounts, etc. Cash usually produces a negative return.

DoubleDown

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Re: FI Calculation Question - Am I getting this wrong
« Reply #6 on: September 14, 2014, 05:12:29 PM »
Hi Everyone- I feel like I am missing something.  When I use the 25x yearly expenses assuming 4% withdrawal per year, it seems when I do it manually and assuming 3% inflation you run out of money, if you need to live on the money for 40-50 years.

Am I missing something.  Is there a spreadsheet where I can play around with various figures.

The 4% SWR assumes you are getting returns from some combination of stocks and bonds that keeps your portfolio intact despite your spending, while keeping up with inflation. That figure arises out of running simulations of sample portfolios throughout many different periods in history.

If you want to think of it in a greatly simplified way: If you can get on average 7% returns through a combination of stocks and bonds, and inflation is about 3% on average (that is, eating up 3 out of the 7% in returns), then your average real return is 4%. With a 4% real return, you could withdraw 4% of your portfolio amount every year to fund your expenses, adjusted up for inflation, and leave your original portfolio amount intact.

Of course, there almost never will bean "average" year -- you might get returns of +18% one year,  -30% the next, +3%, -5%, and +10% after that. Overall though, a 7-8% average is a reasonable expectation with a mix of, say, 60/40 in stocks/bonds. Having a significantly down year right after you retire is very bad for your portfolio survival and can really destroy "average" returns over a long period.

mozar

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Re: FI Calculation Question - Am I getting this wrong
« Reply #7 on: September 14, 2014, 05:50:42 PM »
Since I just figured this out...you're assuming that the growth will cover the withdrawal. If you have ten dollars and want to withdraw one dollar once a year, the stache needs to grow by one dollar a year to be considered a safe withdrawal. You get that dollar of growth by the effect of compounding once a year as well as market returns. Based on past performance, your portfolio will last indefinitely.
There are posts here that you could search for where people post spreadsheets and formulas.
I use this http://www.investor.gov/tools/calculators/compound-interest-calculator#.VBY3hflr70s
with a 5 % interest rate (7% interest with 2%inflation)