Bogleheads® Chapter Series - cFIREsim Demonstration
00:00:00.000 | (upbeat music)
00:00:02.580 | - Welcome to the BogleHedge Chapter Series.
00:00:09.280 | This episode was hosted by the Chicago Virtual Chapter
00:00:12.440 | and recorded April 15, 2021.
00:00:15.600 | It features Lauren Bolin, the developer of Seafire Sim.
00:00:19.480 | BogleHedge are investors
00:00:20.600 | who follow John Bogle's investing philosophy
00:00:23.040 | for attaining financial independence.
00:00:25.600 | This recording is for informational purposes only
00:00:27.960 | and should not be construed as investment advice.
00:00:30.480 | - All right.
00:00:35.280 | Well, thank you for inviting me, Jim,
00:00:37.380 | and whoever else was involved in that email chain.
00:00:40.540 | My name is Lauren.
00:00:42.980 | I am the developer and creator of this site
00:00:46.640 | called Seafire Sim.
00:00:48.000 | Let me, I'm gonna start sharing here.
00:00:50.000 | - Yeah, I'm gonna stop sharing.
00:00:54.440 | - Which screen?
00:00:56.240 | This one.
00:00:57.080 | - Yeah.
00:00:58.400 | - Okay.
00:00:59.240 | Bear with me.
00:01:03.880 | All right, so I'm the developer and creator
00:01:06.160 | of this sort of retirement back-testing calculator
00:01:10.960 | called Seafire Sim.
00:01:12.340 | Sort of a mouthful.
00:01:14.920 | Marketing and SEO are not my thing.
00:01:19.060 | I developed this sort of in 2013,
00:01:25.040 | actually as a side project,
00:01:26.520 | and it's sort of been this passion project of mine.
00:01:30.760 | I have a very loose agenda here.
00:01:33.140 | There are a lot of things on this calculator to go over.
00:01:39.520 | I'll try to hit at least every one a little bit.
00:01:42.680 | We can go into more depth
00:01:43.920 | if people have questions on specific things.
00:01:46.400 | And always, you know,
00:01:51.000 | one of the most important things about my site
00:01:54.920 | is the first word, crowdsourced.
00:01:56.840 | I really like to take other people's input.
00:02:00.180 | When I was developing this thing,
00:02:01.920 | the whole reason I developed it
00:02:03.280 | was because of other people's input.
00:02:05.360 | And I'll get into that a little bit on the history.
00:02:08.080 | So at the end, if your question isn't answered,
00:02:11.480 | my email is at the top of the website.
00:02:15.040 | You can feel free to contact me anytime.
00:02:16.960 | Plenty of people do.
00:02:18.060 | So here's sort of a rough agenda I'm gonna go over.
00:02:24.840 | Just sort of introduce myself a little more.
00:02:26.960 | I talk about how I developed this project
00:02:30.980 | and go over a little bit of my sort of development practices,
00:02:34.700 | which I won't get too much into the tech details
00:02:38.280 | or tech nerdery,
00:02:40.000 | but I have a little bit of information out there
00:02:42.560 | if you're the kind of person that's interested.
00:02:45.600 | Then I'm gonna sort of go over basic functionality
00:02:47.560 | on the site, some of the more advanced features.
00:02:50.380 | My favorite part of the site,
00:02:52.480 | which is the different spending plans.
00:02:54.620 | And then I'm gonna go over some sort of fictional scenarios
00:02:58.400 | to show you how someone would use it given your situation,
00:03:03.400 | whether you're paying for two kids college
00:03:06.880 | at two different times,
00:03:08.220 | or maybe you're still saving for retirement,
00:03:12.000 | or maybe you're gonna have a part-time job in retirement.
00:03:15.020 | All those things can be done on this tool
00:03:17.280 | and it's kind of useful.
00:03:19.360 | Then at the end, I can talk about any sort of questions.
00:03:23.060 | So before I go anywhere,
00:03:24.700 | I guess I'll introduce myself again.
00:03:26.820 | My name is Lauren.
00:03:28.020 | I'm a software developer by trade.
00:03:30.980 | Me and my wife lived in the suburbs of DC.
00:03:35.520 | We have two kids and I've been interested
00:03:40.520 | in sort of the retire early, the fire movement,
00:03:46.260 | probably since 2008 or nine,
00:03:50.940 | when your money, your life was really the only resource.
00:03:53.920 | I was kind of really involved in the internet
00:03:56.780 | when it became more of a blogging thing
00:04:01.380 | with Mr. Money Mustache and various other people.
00:04:04.660 | And now that sort of movement is quite rampant out there.
00:04:09.540 | And I'm happy to see it.
00:04:12.100 | At some point in my life,
00:04:13.240 | I was a moderator on Mr. Money Mustache forums,
00:04:17.500 | was a moderator on the Reddit financial independence site.
00:04:21.500 | So I've been around.
00:04:23.860 | So a little bit of history about Seafire Sim.
00:04:30.740 | Really this project was born out of conversations I had
00:04:37.060 | with people on earlyretirement.org.
00:04:40.380 | So for those of you who don't know,
00:04:46.180 | I mean, I think most of you would,
00:04:48.540 | but earlyretirement.org is sort of the forum website
00:04:53.180 | that happens to be attached to a website called FireCalc.
00:04:59.600 | FireCalc, if you look at it today,
00:05:03.540 | is really a sort of retirement calculator
00:05:06.820 | that looks like it was written in the '90s.
00:05:09.660 | And I believe the data is updated yearly still.
00:05:14.840 | But the reason it hasn't been updated,
00:05:18.420 | and not to diss them honestly,
00:05:23.160 | 'cause I like their project in general,
00:05:25.100 | but the reason it hasn't been updated
00:05:26.300 | is 'cause the person sold it.
00:05:27.880 | He retired and is living on a boat as far as I know.
00:05:32.120 | So bravo to him.
00:05:34.860 | But the folks at earlyretirement.org get a lot of clicks
00:05:38.880 | for having that site up there.
00:05:40.160 | So it's good.
00:05:42.300 | But in, I'd say around 2011 or 2012,
00:05:47.300 | I was hanging around on those forums,
00:05:50.640 | and it was pretty clear
00:05:52.920 | that there were people asking for new features
00:05:56.040 | on this website.
00:05:57.080 | No one was there to make those new features.
00:06:00.840 | So it was a lot of people sort of screaming into the void.
00:06:03.680 | I was not a software developer at the time.
00:06:07.280 | I was trying to learn it.
00:06:08.640 | And I thought that, hey, this would be a great project.
00:06:12.560 | One of the things that was useful for me
00:06:16.440 | is that FireCalc outputs a CSV file at the end.
00:06:20.960 | And it's kind of a mess,
00:06:22.880 | a lot like cfire-sims-csv,
00:06:26.320 | but it's essentially a data dump
00:06:27.920 | of every single iteration of the simulation.
00:06:31.140 | So I figured if I looked at this long enough,
00:06:33.280 | I could reverse engineer it and figure out what's going on.
00:06:37.560 | And it turns out it was right.
00:06:39.840 | I think it took me a month of nights and weekends
00:06:43.460 | of just sort of going through the steps
00:06:46.260 | to figure out what was going on,
00:06:48.020 | how they were applying inflation
00:06:51.740 | and doing all the calculations.
00:06:54.420 | But I did reverse engineer it,
00:06:56.940 | and I started putting some code out there.
00:07:00.900 | I took a lot of input from folks on that forum
00:07:05.820 | and from folks on Reddit and other places during that time.
00:07:10.280 | There's a couple of people who are either on this call
00:07:12.320 | or will be listening that were a big part of that.
00:07:16.760 | I've never actually heard his name said out loud,
00:07:20.560 | but Jerome Moisand is a Boglehead in your group
00:07:25.020 | that was a big help back then.
00:07:27.720 | And there's a user named Ciamond
00:07:30.320 | that also I spoke to quite a bit about 10 years ago.
00:07:34.280 | So if you're out there, thank you for your help.
00:07:36.680 | And anyway, I put this project out there in 2013,
00:07:42.160 | and personal finance and FHIR is sort of my thing.
00:07:45.520 | And I actually used it as a way to shift my career.
00:07:49.560 | Now I am a software developer by trade,
00:07:53.380 | so it's great to be paid for something that you like.
00:07:56.360 | But real quick,
00:08:00.600 | going over sort of general development practices
00:08:02.920 | of how this tool work or how I work on this tool
00:08:06.000 | for any of you nerds out there.
00:08:07.720 | I host this on a platform called DigitalOcean,
00:08:11.760 | which I believe just had an IPO recently.
00:08:14.200 | So go DigitalOcean, I am not an advisor.
00:08:18.600 | Don't take my word for that.
00:08:20.240 | I sort of viewed the websites written in Python
00:08:25.520 | and a framework called Django as a MySQL database.
00:08:28.780 | And I use a lot of Docker containers.
00:08:31.600 | And of course, there's some JavaScript written in there
00:08:33.600 | for the form magic that you see.
00:08:36.260 | In the past, I've written it in PHP.
00:08:39.440 | Then I rewrote it completely in AngularJS.
00:08:42.480 | Then I rewrote it completely in Python.
00:08:44.980 | So it's gone through a few iterations.
00:08:47.280 | One of the things I know a lot of people are concerned about
00:08:51.660 | is testing.
00:08:53.220 | How do I go about testing this?
00:08:54.580 | When I add a new feature, does it change the outputs?
00:08:58.600 | This is kind of a tricky question.
00:09:01.720 | Some of the time, it does change the outputs.
00:09:06.360 | And the question is whether or not that's the intended thing.
00:09:10.980 | I talk to a lot of people when I make changes
00:09:16.640 | that actually affect the outputs.
00:09:19.000 | A very big example of this is I would say sometime in 2014,
00:09:28.960 | I'll provide a link that we can attach to this video
00:09:32.120 | or the thread in the Bogleheads forum.
00:09:35.360 | But sometime in 2014 or so,
00:09:38.720 | someone came up to me in the forums and said,
00:09:41.200 | "Hey, how do you calculate the bonds on your site?"
00:09:46.200 | And I gave them the formula that I'd been using.
00:09:52.000 | It's based on the GS10 long interest rate
00:09:54.300 | that's publicly available data
00:09:56.720 | that's gone back for 150 years.
00:09:59.960 | Someone's printing in my office.
00:10:02.180 | They came to me and they offered some information
00:10:08.160 | and we sort of hashed out the mathematical formula.
00:10:11.160 | Well, it turns out that...
00:10:12.740 | Sorry, this is really loud and bothersome.
00:10:17.240 | How many pages?
00:10:23.360 | It turns out that the FireCalc and a lot of different sites
00:10:27.320 | were calculating the bond rate incorrectly.
00:10:29.560 | We sort of went over it as a group
00:10:33.360 | and came up with a slightly different formula,
00:10:36.440 | which actually affected some of the success.
00:10:39.680 | I would say that there's probably a two or 3% difference
00:10:44.080 | in success rates between CFIR-SIM and FireCalc
00:10:48.320 | given the amount of bonds you have in it.
00:10:53.060 | So this is sort of like an interesting point in testing
00:10:56.080 | where it's just gonna be different.
00:11:00.720 | I do have lots of unit tests.
00:11:02.720 | And for those who are not software developers,
00:11:05.960 | sort of unit tests are pre-built tests
00:11:08.320 | that have predetermined outcomes.
00:11:10.880 | And every time you make a change in your software,
00:11:14.240 | you can just run them immediately and see what happens.
00:11:17.640 | If those predetermined outcomes are different,
00:11:20.640 | it will let you know.
00:11:23.040 | So I do keep an eye on that.
00:11:25.580 | Honestly, the biggest thing that I rely on is user testing.
00:11:29.520 | Almost, I would say 95% of the bugs that happen on my site
00:11:35.680 | are just UI bugs.
00:11:37.580 | I was mentioning to Jim before everyone came on
00:11:40.720 | that JavaScript is the programming language
00:11:43.640 | that lets you kind of mess around with the UI.
00:11:45.880 | That's not my day job.
00:11:47.800 | I'm not used to doing anything with JavaScript.
00:11:51.400 | So sometimes little UI bugs get in there.
00:11:54.620 | And lastly, I've mentioned this before,
00:11:58.360 | but I always take advice from users.
00:12:01.080 | I'm always looking for new features
00:12:03.840 | or quality of life things.
00:12:05.880 | I don't wanna make this thing too complicated in the end.
00:12:08.760 | So I reserve the right to shoot things down.
00:12:11.760 | But over the years, I've added a lot to the site
00:12:15.280 | based on suggestions and it's been great.
00:12:20.240 | All right, all right.
00:12:23.160 | That is basically some of the back end history of this.
00:12:28.160 | And I'm gonna go through some of the basic functionality
00:12:32.680 | on the site and see if any questions arise.
00:12:37.680 | So I'm gonna refresh this just in case.
00:12:42.320 | When you arrive here on the site,
00:12:45.200 | you're presented with what I call the giant form.
00:12:50.200 | There's a lot of inputs here.
00:12:52.400 | You can open it up depending on what you select
00:12:55.280 | for even more inputs.
00:12:56.720 | But there's sort of this basics section
00:13:02.400 | that I'll go over in the beginning.
00:13:04.160 | A little bit of the back end data is to know
00:13:10.800 | is I go off of Robert Schiller's dataset,
00:13:16.560 | which is pretty common.
00:13:18.240 | Robert Schiller's dataset has like sort of the S&P 500
00:13:22.200 | equivalent stock index for the last 170 years
00:13:28.040 | and also has the bond rates.
00:13:31.480 | And I also have a separate data source for gold.
00:13:36.480 | One thing that I would say is lacking in this program
00:13:42.440 | is historical cash data.
00:13:46.480 | I've never been able to find a good historical cash data
00:13:49.320 | that goes back all the way to 1871.
00:13:52.560 | There's quite a few that go back to 1900
00:13:54.880 | and I've never bothered to sort of jam those together.
00:14:00.520 | So that being said, I offer the ability for you
00:14:05.520 | to put in how much cash you think,
00:14:10.080 | how much growth you think cash will have in your portfolio.
00:14:14.840 | Maybe this is a lesser tended to feature
00:14:19.120 | because I don't have a lot of cash, but.
00:14:21.120 | So the basics here are sort of,
00:14:25.000 | I would say pretty common for a lot of retirement calculators
00:14:29.520 | you have a retirement year,
00:14:31.360 | you have a retirement end year,
00:14:32.760 | better known as your mortality.
00:14:34.680 | You have sort of a check here
00:14:38.400 | for what kind of data you wanna use.
00:14:40.920 | I almost always use all historical data,
00:14:43.000 | but some people like to really nitpick
00:14:46.080 | on the worst periods of history
00:14:48.360 | and see if their portfolio would have survived,
00:14:50.800 | which is useful, but I mostly like to see everything.
00:14:55.000 | And then you sort of have your portfolio value
00:14:59.000 | as it stands now, which is important.
00:15:01.640 | And then what your yearly spending is now in today's dollars.
00:15:07.160 | So I'm not gonna assume people's knowledge here,
00:15:12.920 | but everything on this page
00:15:15.120 | is essentially in today's dollars,
00:15:18.360 | which means you don't wanna inflate
00:15:22.240 | these numbers for the future.
00:15:23.880 | If you're gonna retire in 30 years
00:15:25.880 | and right now you're spending $40,000 a year,
00:15:29.040 | sure, maybe in 30 years, that's gonna be $70,000.
00:15:32.880 | Don't put that in this calculator.
00:15:34.440 | Everything is in today's dollars.
00:15:36.320 | I personally find it easier to wrap my brain around
00:15:40.160 | when everything's in today's dollars.
00:15:43.000 | And everything does get adjusted by inflation
00:15:47.840 | as you'll see on the output.
00:15:49.360 | So initial spending.
00:15:54.080 | Spending plan is something I'll go over later.
00:15:56.680 | There's quite a bit in here,
00:15:58.800 | quite a bit of complexity in there.
00:16:00.640 | But right now, this is inflation-adjusted spending,
00:16:03.400 | which will adjust this initial value up and down
00:16:08.400 | based on historical inflation,
00:16:11.240 | which is a pretty common feature
00:16:12.760 | in I think some of these calculators.
00:16:15.160 | Here's sort of a dropdown
00:16:18.600 | for what kind of inflation type you have.
00:16:21.480 | So this is CPI, this is the historical inflation.
00:16:24.840 | You can do your own flat rate inflation
00:16:27.440 | if you really want to.
00:16:29.760 | Some people like to use this for sort of bad scenarios
00:16:33.520 | where they're like, oh, maybe inflation's gonna be 4%
00:16:36.560 | for the rest of eternity,
00:16:38.600 | or maybe it's gonna be 2%.
00:16:40.600 | I'm not sure, but I tend to use historical myself.
00:16:45.600 | Those are sort of the basic things
00:16:49.920 | that you need to run this in general.
00:16:52.640 | Everything else below here is sort of adding details
00:16:56.760 | to make it more of a fine-grained simulation.
00:17:01.760 | So like I mentioned before about cash,
00:17:06.200 | here's your portfolio area.
00:17:09.480 | Important to note that this is essentially the portfolio
00:17:13.920 | that's gonna be throughout your simulation.
00:17:18.000 | Now, you may ask, I'm gonna change my portfolio,
00:17:22.920 | maybe I'm gonna get more aggressive,
00:17:24.360 | or maybe I'm gonna get more conservative
00:17:26.800 | as I get closer to retirement.
00:17:29.000 | You can do that.
00:17:31.920 | I do have the functionality in there
00:17:34.720 | to provide what's called a glide path,
00:17:38.320 | which sort of takes your allocation at one point
00:17:40.760 | and moves it slowly to another point
00:17:43.160 | over a certain amount of years.
00:17:44.840 | So the default here is 75% equities, 25% bonds.
00:17:51.120 | I think this is a pretty standard default
00:17:54.000 | for a lot of retirement calculators.
00:17:56.920 | If you want to do those glide path type things,
00:18:01.520 | you would uncheck this, keeping the allocation constant.
00:18:06.840 | It will reveal a new panel here.
00:18:09.240 | And so in this particular situation,
00:18:13.360 | this person is retiring in 2021, which is this year.
00:18:18.360 | There are some financial gurus that seem to think
00:18:24.960 | if you start off in a conservative portfolio
00:18:29.160 | and slowly move to a more aggressive one during retirement,
00:18:34.880 | that that's a viable thing.
00:18:37.440 | So I wrote in here,
00:18:41.960 | we're starting off with a 50/50 portfolio,
00:18:49.600 | and here is the start year of the glide path,
00:18:53.200 | and here's the end year of the glide path.
00:18:55.560 | So over a 10-year span,
00:18:58.360 | it's gonna slowly ratchet it up to a 90/10 portfolio.
00:19:04.360 | I would say one of my personal to-do lists for features
00:19:09.360 | would be to add the ability to do more than one of these.
00:19:18.680 | I think it's pretty common for people
00:19:21.440 | to change their allocation
00:19:22.760 | throughout their investment careers multiple times.
00:19:26.520 | So I wish I could do this twice or three times,
00:19:30.520 | but right now you have the ability to do it once.
00:19:33.480 | For simplicity's sake, I'm gonna hide this for now,
00:19:38.120 | but this can be pretty useful
00:19:40.800 | in trying to model different risk scenarios.
00:19:44.400 | So I'm gonna click this button
00:19:46.440 | and make that thing disappear.
00:19:48.680 | You'll sort of notice that a lot of things on this website
00:19:52.080 | appear and disappear based on your inputs.
00:19:56.400 | Hopefully that that's intuitive.
00:20:00.320 | I haven't found a lot of people have a problem with that,
00:20:03.840 | so hopefully it's not too bad.
00:20:07.080 | Rebalance annually is an interesting thing.
00:20:10.240 | I don't know your own personal views,
00:20:12.960 | but I think most folks that are interested
00:20:15.440 | in planning their own retirement
00:20:17.600 | are rebalancing annually or twice annually.
00:20:21.760 | I mean, maybe people are doing it every quarter.
00:20:25.000 | I don't know.
00:20:26.040 | All this means is it's rebalancing your funds
00:20:28.440 | back to this portfolio every year based on the simulation.
00:20:33.440 | If you don't do that, it'll just let the simulation drift.
00:20:38.320 | It'll let your equities go up and up and up
00:20:41.080 | or your bonds go up and up and up
00:20:42.880 | during certain times in history,
00:20:45.320 | and it'll never rebalance.
00:20:46.840 | That's certainly an interesting thing to simulate.
00:20:50.920 | You can try it out on your own and see the effects of that.
00:20:57.600 | And lastly, one thing I haven't mentioned here is fees.
00:21:01.040 | This is essentially the average fees
00:21:06.120 | across your entire portfolio.
00:21:07.920 | I know that that's not ideal.
00:21:11.440 | People have different fees and different accounts
00:21:14.080 | because they have different funds in them.
00:21:16.200 | For the purpose of simplicity,
00:21:20.920 | I put this in here as just an overall average
00:21:24.240 | on your portfolio.
00:21:26.880 | This is like some sort of average of Vanguard funds
00:21:30.880 | that I found out there, so I put it in there.
00:21:33.960 | All right, below portfolio,
00:21:38.800 | we start getting into some of the inflows and outflows
00:21:42.760 | that you can add to your simulation.
00:21:45.280 | And starting with the most popular,
00:21:48.920 | at least in the United States here,
00:21:50.800 | I do have several people from Australia and the UK
00:21:54.040 | that visit this site and make use of other adjustment types.
00:21:59.040 | But since I'm in the US
00:22:01.840 | and I will be collecting Social Security hopefully,
00:22:04.480 | I added this.
00:22:06.480 | So we have two different Social Security fields,
00:22:11.240 | one for yourself, one for your spouse.
00:22:15.520 | By popular request, I've made it so that you can change this
00:22:22.360 | from a monthly to an annual number.
00:22:25.920 | I used to have everything annually,
00:22:27.520 | but most people think in monthly terms
00:22:30.600 | when it comes to Social Security,
00:22:32.320 | how much am I getting each month?
00:22:34.520 | So whichever you put in there,
00:22:37.120 | it will do the right thing on the backend of the simulation.
00:22:40.920 | Of course, you can model different start years.
00:22:47.880 | I know lots of people try to figure out
00:22:49.680 | whether it would be worth it to take Social Security early
00:22:52.640 | or take it at the full retirement age.
00:22:54.960 | You can certainly do different simulations
00:22:59.080 | based on start year.
00:23:00.640 | And of course, I used to not have an end year in here.
00:23:05.640 | I used to just assume, hey, this is gonna be,
00:23:09.360 | you're collecting this for the rest of your life,
00:23:11.200 | but lots of people want to model their spouse's deaths.
00:23:15.800 | So I added an end year in here
00:23:18.800 | and you can model different people's deaths
00:23:20.960 | and changing of values in here.
00:23:23.120 | So this is essentially one example
00:23:27.880 | of what I call an adjustment.
00:23:31.120 | It's sort of a general term for the inflows and outflows
00:23:35.920 | of money in your portfolio each year in the simulation.
00:23:39.440 | A pretty common theme, and I'll show you right here,
00:23:43.040 | this is the generic,
00:23:44.680 | this is the general adjustment section.
00:23:47.960 | So you can put up to,
00:23:50.000 | I believe I've allowed up to 10 adjustments in here.
00:23:53.960 | There's no reason I couldn't increase it.
00:23:55.960 | I just have kept it at 10.
00:23:57.760 | But this is essentially where you would put your pensions,
00:24:02.440 | where you would put a different spending things
00:24:06.960 | that would happen during retirement.
00:24:09.200 | Maybe you're gonna retire
00:24:10.360 | and then you're gonna start paying for your kid's college.
00:24:13.120 | So you know, my kids are gonna be in college in 2030.
00:24:17.880 | And then I've got another kid in college, 2033.
00:24:22.800 | So I would model a couple of different spending things.
00:24:28.640 | Good old in-state tuition in Virginia right now
00:24:32.560 | is roughly 15,000 a year.
00:24:34.880 | So this is sort of a general thing
00:24:41.000 | that you can do with these adjustments.
00:24:43.720 | I have pension availability in here,
00:24:46.120 | any sort of income and savings, which could be,
00:24:49.960 | I mean, it could be anything.
00:24:51.320 | It could be, you've got a part-time job,
00:24:55.760 | you're renting a house out and you're a landlord.
00:24:58.600 | So this is your rent.
00:24:59.760 | You can also make this a one-time thing.
00:25:04.720 | So imagine you're gonna sell your house.
00:25:07.200 | You can uncheck this recurring box,
00:25:10.000 | which will sort of gray out the end year.
00:25:12.600 | And this particular adjustment will only happen on 2030.
00:25:17.200 | So these things, these kinds of things are pretty useful.
00:25:22.960 | Some of the inputs in here might look familiar.
00:25:30.160 | You know, amount per year, that's pretty simple.
00:25:34.760 | This label here, you know,
00:25:38.080 | I find this useful mostly because there's an ability
00:25:41.400 | to come back to your simulations later.
00:25:46.400 | So real quick, I'm just gonna run this
00:25:50.000 | and sort of ignore the output
00:25:53.640 | because I can click this link
00:25:56.040 | and it will reload the exact same things,
00:26:01.920 | exact same inputs that you entered before.
00:26:06.960 | I'll talk a little bit more about that
00:26:08.320 | when I'm on the output page.
00:26:09.640 | I apologize for jumping back and forth.
00:26:11.680 | So this label is important.
00:26:15.360 | This is also important.
00:26:18.400 | Some people have been known to mess up
00:26:20.600 | and put the wrong thing in here
00:26:21.840 | where they meant spending and they put savings.
00:26:24.160 | And they're like, why do I have so much money at retirement?
00:26:28.280 | It's like, well, you said your kid's college
00:26:30.720 | was actually a savings or income stream
00:26:33.800 | instead of a spending stream.
00:26:36.440 | So that's an interesting thing
00:26:38.840 | that you need to look out for.
00:26:40.360 | One sort of option in here
00:26:43.520 | that might be a little different for you
00:26:46.440 | is this value here.
00:26:48.000 | I wasn't really aware,
00:26:51.600 | this is where the crowdsourcing comes in.
00:26:53.840 | I wasn't really aware of this
00:26:55.080 | because I don't have a government pension.
00:26:58.560 | I know that there are other,
00:27:00.160 | my wife has a, she has a private pension.
00:27:03.960 | And actually, I think this applies to it,
00:27:05.600 | but I don't pay much attention to her pension and stuff.
00:27:09.480 | But this little checkbox essentially is for pensions.
00:27:14.480 | So a lot of pensions will have this setup
00:27:22.000 | where they'll tell you,
00:27:23.240 | hey, you're gonna get $5,000 a year
00:27:27.600 | once you start collecting your pension.
00:27:30.400 | That value is often frozen
00:27:34.160 | and it's always gonna be $5,000
00:27:36.920 | until you start collecting.
00:27:38.960 | And then only after that
00:27:41.520 | will it be adjusted for inflation.
00:27:44.200 | So if you have a pension that's like that,
00:27:47.240 | you'll wanna click this button
00:27:49.520 | and have this clicked, inflation adjusted,
00:27:52.280 | and it will stay at $5,000
00:27:55.240 | until you start collecting it.
00:27:57.640 | Now, that may seem intuitive,
00:28:01.040 | but anything on here
00:28:04.360 | that you select inflation adjusted for
00:28:07.920 | that's in the future, for instance.
00:28:10.440 | So I just unchecked this
00:28:13.160 | and this is nine years in the future.
00:28:15.960 | What's gonna happen is
00:28:18.600 | even though you're not taking this pension until 2030,
00:28:23.200 | this adjusts that value for inflation every single year.
00:28:28.120 | So nine years down the road,
00:28:29.760 | this might suddenly be $7,000.
00:28:32.800 | That wouldn't normally be a problem for a lot of things,
00:28:37.720 | but like I said,
00:28:38.680 | pensions have this knack for being frozen in time
00:28:42.040 | until you start actually taking them.
00:28:44.440 | So this is a worthwhile thing.
00:28:50.440 | I forgot to mention at the very beginning of this,
00:28:53.280 | some of the things at the top of my site.
00:28:55.320 | Fairly recently, I've started writing tutorials
00:28:59.480 | that sort of describe some of this functionality.
00:29:03.760 | So if you miss something on here
00:29:05.760 | and you don't wanna go back through the video,
00:29:10.120 | you can certainly check out this tutorial section.
00:29:11.960 | I'm gonna click here real quick.
00:29:14.120 | Right now, I sort of only have information
00:29:17.240 | about the basic section and what the output looks like,
00:29:22.040 | but I definitely have,
00:29:24.800 | I've already written articles for spending plans.
00:29:28.080 | I just haven't gotten them up yet.
00:29:30.520 | And I definitely am gonna talk more
00:29:32.640 | about some of these things.
00:29:34.480 | I'm gonna quickly scan over essentially the information
00:29:37.840 | that I'm gonna put in this demo.
00:29:41.000 | So hopefully that's helpful.
00:29:42.400 | And go back here.
00:29:46.360 | Okay, so adjustments.
00:29:49.560 | Recurrent, the recurrence button, I sort of mentioned.
00:29:54.040 | Does this occur over a span of years or is it just once?
00:29:57.880 | And then whether or not this is inflation adjusted or not
00:30:01.800 | is pretty straightforward.
00:30:03.800 | Just like above, you can choose the inflation type.
00:30:08.160 | It can either be the historical CPI
00:30:10.800 | or it can be a flat rate.
00:30:12.920 | I actually know that a lot of pensions
00:30:14.320 | have a flat rate adjustment, so that can be pretty useful.
00:30:19.160 | And let's see.
00:30:22.880 | I believe that that is essentially
00:30:28.440 | a quick scan through of all available inputs
00:30:35.520 | without touching spending plan.
00:30:37.800 | So spending plan has lots of different things
00:30:40.720 | that show up after you click the appropriate spending plan.
00:30:45.440 | And I'm gonna go over that in just a moment.
00:30:49.480 | Firstly, though, I'm going to refresh this page,
00:30:54.040 | have the default scenario,
00:30:55.560 | and we're gonna talk about the output page.
00:30:58.320 | So this is a pretty standard situation.
00:31:02.240 | In fact, I'm pretty sure this is the exact same inputs
00:31:04.640 | that FireCalc does.
00:31:06.280 | This is a 30-year scenario.
00:31:09.720 | It may look like it's 29 years,
00:31:11.680 | but it counts this year and this if you, it's 30 years.
00:31:16.680 | With a million dollars and $40,000 spending per year,
00:31:22.760 | this is the classic 4% rule.
00:31:25.480 | I'm gonna hit Enter or hit this button up here.
00:31:28.480 | And this lovely rainbow graph is what you would see
00:31:33.480 | when you hit Run Simulation.
00:31:38.040 | There's a lot going on on this page.
00:31:40.160 | I've tried really hard on this site
00:31:44.000 | to put as much information out there as I can
00:31:47.320 | without making it too confusing.
00:31:51.080 | However, I do understand that because I'm the one
00:31:54.240 | who wrote this, I know where everything is,
00:31:57.360 | and it might look a little wild
00:31:59.200 | to someone who hasn't checked it out.
00:32:01.280 | So I'm gonna go over a couple of the sections here.
00:32:04.640 | So the first thing you're gonna see
00:32:05.840 | is this really big, wild rainbow graph.
00:32:08.920 | So what this is is essentially every single simulation
00:32:15.600 | of 30-year span over the course of history, starting in 1871.
00:32:21.720 | And what I mean by that is, let me see if I can,
00:32:24.560 | I think I wrote a pretty nice graphic of this.
00:32:30.680 | Oh, no, I got rid of the graph.
00:32:32.840 | Oh, wait.
00:32:34.720 | Output tab.
00:32:35.560 | No, I got rid of the graphic.
00:32:39.640 | That's a bummer.
00:32:40.480 | So what you have to imagine is this data goes back to 1871.
00:32:47.600 | So it's gonna take your inputs and it's gonna go to 1871
00:32:52.600 | and put them in as a theoretical million dollars
00:32:56.560 | and a theoretical $40,000 spending.
00:32:59.600 | And it's gonna run the data from 1871 to 1901.
00:33:03.680 | And it's gonna see how your portfolio would have done.
00:33:06.720 | Then it's gonna start a new simulation in 1872
00:33:11.240 | and go to 1902 and so on and so forth
00:33:14.640 | until you get all the way to the 2020 data,
00:33:17.040 | which if I try real hard, I can find it in here.
00:33:22.040 | But this results in sort of this cool graph
00:33:28.200 | and you can kind of get a sense of what's going on here.
00:33:33.800 | There are periods of, if you hover over this,
00:33:37.120 | it sort of hovers on an entire simulation.
00:33:41.000 | So right here, it's kind of hard to see in the blues,
00:33:43.560 | but that blue line dips down really far.
00:33:47.480 | This was not a good period in time.
00:33:49.600 | In fact, this is the classic beginning
00:33:52.280 | of the stagflation period in the late '60s and early '70s.
00:33:56.440 | So what this represents is your portfolio over time.
00:34:02.120 | Now, like I mentioned before, this is today's dollars.
00:34:06.560 | So it's adjusted to make it easier on your brain
00:34:11.560 | to figure out what this is worth.
00:34:13.680 | So if you started with a million dollars,
00:34:15.440 | this is worth roughly six times as much.
00:34:18.240 | However, in nominal dollars, this is probably way more.
00:34:22.960 | I'm just gonna make a speculative guess
00:34:26.000 | and say this is like $11 million, double that or more
00:34:31.040 | in nominal dollars.
00:34:32.600 | Now, how do you figure that out?
00:34:34.880 | You could go into the CSV up here.
00:34:38.200 | I guess I will open this up.
00:34:41.800 | This is sort of stream of consciousness.
00:34:43.800 | So if you click on this button,
00:34:46.600 | you're gonna get this long named CSV file.
00:34:51.200 | I don't even have Word on here.
00:34:56.280 | I don't even have Excel on here.
00:34:59.960 | Where'd my screen go?
00:35:01.040 | All right, it's gonna load it up.
00:35:10.840 | And this is not gonna be very easy to show people,
00:35:17.520 | but this is a very long file
00:35:21.800 | and it has every year of every 30 year period
00:35:29.240 | in this simulation.
00:35:31.000 | So if you go to the top, it says the cycle start year
00:35:33.760 | is 1871.
00:35:35.720 | So this is the 30 years starting in 1871
00:35:40.720 | and it has your starting portfolio
00:35:43.840 | and has the inflation adjusted portfolio
00:35:47.280 | as the spending and the inflation adjusted spending.
00:35:50.080 | So for this particular one,
00:35:53.120 | which is the one I think I was highlighting,
00:35:55.280 | if we look at the ending portfolio,
00:35:59.280 | and this is just a quick tangent,
00:36:03.440 | ending portfolio right here,
00:36:06.040 | what was the ending portfolio of this one?
00:36:08.440 | 3.2 million and the inflation adjusted was higher.
00:36:14.960 | Gotcha.
00:36:15.800 | Anyway, this is a bit of a tangent,
00:36:22.760 | but good to know that you can look at all the numbers there.
00:36:26.400 | This here is a big ugly link
00:36:31.720 | that will allow you to get back to your same inputs.
00:36:35.320 | A lot of people ask me why I don't have a login system
00:36:41.240 | so that you can save your data.
00:36:42.960 | I have taken a hard stance on that
00:36:47.160 | because I don't want to deal with
00:36:52.440 | keeping the data anonymized, to be honest.
00:36:56.480 | Right now, as it stands,
00:36:59.120 | I have a database full of people's inputs.
00:37:01.600 | I have no idea who put them in and I'm okay with that.
00:37:04.560 | I'm not in the business of selling data.
00:37:08.520 | I don't make any money from this site.
00:37:11.160 | This is a 100% passion project
00:37:13.720 | and I want to keep it that way.
00:37:17.080 | So I anonymize the data and I put it into here as a link
00:37:20.960 | so you can get back to it rather than have a login system
00:37:23.920 | that's tied to your email.
00:37:26.080 | Maybe that makes you feel good.
00:37:27.800 | Maybe that makes you feel like this tool is clunky.
00:37:31.880 | I'm not sure.
00:37:32.800 | Okay, back to this chart.
00:37:37.360 | Real quick, as I'm scrolling through here,
00:37:40.800 | if you look below down here,
00:37:44.160 | I can't point to it while being on the screen,
00:37:46.440 | but if you look below, it says that the year is 1953,
00:37:50.640 | the cycle start year of this particular simulation was 1935.
00:37:55.000 | And at this point in time, the portfolio is 1.3 million.
00:37:58.160 | So as you go through here,
00:38:01.560 | you can kind of get a good idea of what happened in history.
00:38:04.560 | Very similar to this chart is right next to it,
00:38:10.040 | the inflation adjusted spending over all the simulations.
00:38:14.720 | Now, a lot of people get confused when they first see this
00:38:17.120 | and they say, why is it a flat line?
00:38:20.480 | Well, because you chose $40,000 as a spending point
00:38:25.480 | and because you chose it to be
00:38:28.040 | just straight up inflation adjusted,
00:38:31.360 | it's $40,000 every single year.
00:38:34.360 | And it sees that there, you see it there.
00:38:38.440 | If we choose other spending plans, which are variable,
00:38:42.480 | which we will go over in a bit,
00:38:44.080 | they definitely go wild over here.
00:38:47.720 | And we'll talk about that.
00:38:50.440 | Okay, there are a lot of numbers here
00:38:54.320 | and without getting too verbose,
00:38:55.840 | I'm gonna talk about the most important ones
00:38:58.040 | and then let you sort of figure it out after that.
00:39:02.080 | I think the most important thing is this little section here
00:39:06.480 | right below the portfolio chart.
00:39:08.800 | This is the success rate.
00:39:10.240 | Success on this tool is defined
00:39:13.920 | as you still having any money in your portfolio
00:39:18.200 | when the simulation is over or when you're gone.
00:39:22.160 | You can have $1 in your account and it will be a success.
00:39:27.080 | If you look on this chart, there are a couple of these.
00:39:30.880 | This is the very last year of this portfolio.
00:39:33.840 | It started off with a million dollars, it's down to 50,000,
00:39:37.080 | but that person made it to the end.
00:39:41.000 | That's a success.
00:39:42.840 | So out of a possible 121 different 30,000,
00:39:47.840 | 30 year periods in history,
00:39:50.400 | this particular setup would have only failed five times.
00:39:55.120 | This is essentially the definition of the 4% rule
00:40:00.520 | that is often cited.
00:40:02.480 | The 4% rule is not 100% successful, it's 95% successful,
00:40:07.480 | which for most people is good enough.
00:40:09.920 | Yeah, I'm not gonna tell you what success rate
00:40:14.000 | is desirable.
00:40:19.000 | You can look and read a lot about that topic.
00:40:22.720 | One of the recent papers
00:40:26.120 | that sort of has blown my mind recently
00:40:29.120 | is Michael Kites, a financial planner,
00:40:33.080 | has written a paper that essentially says
00:40:36.280 | that if you do a Monte Carlo simulation,
00:40:38.320 | which is different than this,
00:40:39.840 | this isn't just historical data.
00:40:41.920 | If you do a Monte Carlo simulation,
00:40:43.600 | which is randomized data,
00:40:45.200 | and you have a 50% success rate for retiring,
00:40:50.280 | that if you did that every single year, you'd be fine,
00:40:54.040 | as long as it was 50% every single year.
00:40:56.400 | Now, do I feel comfortable with 50%?
00:41:01.240 | Probably not, but that's up to you to decide.
00:41:05.160 | Some people need this to be 100%.
00:41:07.800 | It's totally however your brain works.
00:41:13.000 | This number here is sort of what your portfolio was
00:41:16.880 | at retirement for this particular scenario.
00:41:20.400 | Because I retired right now on the scenario,
00:41:24.480 | it's just exactly what you put in
00:41:26.360 | as an input for your portfolio.
00:41:29.040 | Beyond that, this entire side, the left side,
00:41:35.520 | is all talking about portfolios.
00:41:38.160 | This entire right side is talking about your spending.
00:41:41.320 | I have all sorts of statistical numbers in here.
00:41:44.240 | I've got the average ending portfolio.
00:41:48.120 | I've got the average yearly withdrawals.
00:41:51.560 | I've got the average total withdrawals.
00:41:54.040 | I've got the median, the standard deviation,
00:41:56.880 | which is sort of the volatility.
00:41:58.640 | I've got the highest value, the lowest.
00:42:02.320 | And then by popular demand, I put in the lowest 10%,
00:42:06.120 | and the lowest 5%, just to see sort of
00:42:10.200 | what the slices of the statistical pie
00:42:13.880 | are here for these particular simulations.
00:42:17.160 | You'll sort of notice that a lot of these numbers
00:42:19.920 | are the same.
00:42:20.760 | That's not a bug.
00:42:23.000 | When you have very flat data, it tends to end up like that.
00:42:28.480 | Like I said before, the spending is $40,000 flat every year,
00:42:33.480 | inflation adjusted.
00:42:35.920 | So these numbers are all gonna be the same,
00:42:38.400 | just like over here.
00:42:39.840 | I'm not gonna go over this entire chart for spending,
00:42:42.040 | but I will say that I've split it up into quarters
00:42:47.040 | and the first five years.
00:42:51.280 | These are sort of very,
00:42:53.040 | these are both statistics that are very often cited
00:42:57.240 | in sort of financial planning articles,
00:43:01.920 | or people even on the Bogleheads forums will say,
00:43:06.040 | the first five years is the most dangerous part
00:43:09.040 | of retiring.
00:43:09.880 | So I've included sort of statistics on spending
00:43:15.280 | for these different time periods.
00:43:18.280 | Now, someone asked me recently, like,
00:43:21.280 | do these quarters mean only the retirement period?
00:43:25.000 | And the answer is yes.
00:43:26.320 | If I wrote that I was retiring in 2031,
00:43:29.880 | so 10 years of pre-retirement simulation,
00:43:32.600 | this information would only be including
00:43:34.960 | the retirement period.
00:43:38.200 | I'll let you look at some of these later.
00:43:40.480 | I don't wanna get too verbose on this page.
00:43:44.080 | The last thing I'll talk about is this.
00:43:46.160 | I kind of hide this a little bit because it's long
00:43:50.080 | and most people don't wanna see it,
00:43:53.400 | but if you click this show button,
00:43:56.040 | it brings up a extra chart.
00:43:58.880 | Now, these are the single years
00:44:03.280 | where the portfolio was the lowest
00:44:05.840 | out of all the simulations.
00:44:07.840 | It tells you what the portfolio was.
00:44:11.040 | Now, if you look, five of these failed.
00:44:15.360 | So of course we have five zeros,
00:44:17.920 | but look at this guy.
00:44:21.800 | I didn't see it before,
00:44:23.360 | but in a starting year of 1967,
00:44:26.720 | in year 28, it got down to $4,000.
00:44:31.320 | Actually, this makes sense because right here,
00:44:34.360 | starting year of 1967, the very next year, it goes to zero.
00:44:37.680 | These are just individual data points.
00:44:41.240 | People like to see how low it goes before failure.
00:44:45.000 | If you happen to have a simulation that has 100% success,
00:44:50.240 | it's still interesting to look
00:44:51.920 | at how low it has gone in the past.
00:44:55.040 | So keep this little section in mind
00:44:57.800 | if you're the kind of person that likes to look
00:44:59.560 | at the very edge cases of things.
00:45:02.920 | I don't usually look at this very often,
00:45:05.600 | but to each their own.
00:45:08.440 | Okay, I've gone over this.
00:45:14.560 | Another basic functionality to note is if you look up here,
00:45:18.800 | I have these two little tabs.
00:45:21.280 | When you submit the form, it doesn't refresh the page.
00:45:25.680 | It opens a little tab here and puts the information here.
00:45:29.720 | If I click back onto the Inputs tab,
00:45:32.280 | I see my same inputs that I had before.
00:45:35.760 | This is just the regular default data.
00:45:40.080 | Now, what you can do is you can do things like this.
00:45:45.080 | The retirement end year is 2050 in this case.
00:45:48.680 | Well, what if it was 2055?
00:45:50.640 | I'm gonna leave everything the same,
00:45:52.200 | but what if it was a longer period of time?
00:45:54.560 | What if I think I'm gonna live till I'm 95?
00:45:58.840 | If you notice up at the top here,
00:46:02.160 | it loaded a new tab called Sim 2.
00:46:06.000 | This shows the statistics for what I just put in.
00:46:08.600 | It failed another extra couple of times
00:46:11.800 | because it's trying to eke out
00:46:13.640 | another five years of retirement.
00:46:16.080 | But most importantly, what I wanted to show you
00:46:17.760 | is that you can click between these tabs
00:46:20.000 | and essentially have a bunch
00:46:22.680 | of different simulations out at once.
00:46:25.240 | Whichever tab you were last on,
00:46:28.080 | when you click on the Inputs tab,
00:46:30.840 | it will load the inputs for that simulation.
00:46:35.320 | It will tell you that it loaded it.
00:46:36.880 | And if you look, this is the input
00:46:39.440 | that I used for Sim Tab 2.
00:46:41.600 | If I go back to one and then go back to the inputs,
00:46:46.600 | it will load it from Sim Tab 1, which was 2050.
00:46:50.240 | It does that for everything on this page.
00:46:52.760 | So it's kind of useful if you're sort of iterating through
00:46:55.480 | and trying to find a very specific time
00:46:59.000 | that how many years you can retire or things like that.
00:47:04.000 | So this is a very useful feature.
00:47:06.200 | I personally like it.
00:47:07.520 | You can also hit this little red X,
00:47:09.680 | which I hope is intuitive, and it will make it go away.
00:47:12.600 | Let's see.
00:47:20.560 | One last thing.
00:47:23.000 | I guess I missed this.
00:47:24.400 | So I haven't gotten to do a lot of these yet,
00:47:29.400 | but if you click this button, Open Investigation Options,
00:47:34.280 | it opens this little extra spot down here.
00:47:37.520 | Once upon a time,
00:47:42.000 | this was a very popular thing on the site.
00:47:45.480 | And I can't remember if FireCalc does something similar,
00:47:50.040 | but essentially what this does,
00:47:54.520 | if you click this little slide thing,
00:47:56.920 | it's gonna look for the maximum initial yearly spending
00:48:03.160 | for this amount of success.
00:48:06.640 | This is actually a typo.
00:48:07.960 | I should just delete this
00:48:10.520 | and just say for this amount of success.
00:48:12.720 | So if you type in 95 here,
00:48:16.960 | it's gonna run the simulation many times
00:48:20.960 | to figure out what is the maximum number of spending here
00:48:25.280 | to get 95% success.
00:48:28.960 | Oh, I unchecked it right before I hit Enter.
00:48:32.120 | Let's go back.
00:48:32.960 | This one takes a little bit longer
00:48:39.400 | 'cause it actually runs multiple scenarios in a row.
00:48:45.360 | So I would not worry too much about it spinning.
00:48:49.040 | Okay, this looks a lot like the other simulations,
00:48:53.120 | but down here, I sort of write this little note
00:48:55.080 | just says investigation was complete.
00:48:57.800 | Then it tells you the maximum initial spending
00:49:01.200 | is $40,507 exactly.
00:49:05.120 | And it results in 9,504.
00:49:10.280 | I would say that this is accurate within $10 usually.
00:49:15.680 | Just the way that I'm iterating through the thing,
00:49:18.920 | it makes it really inefficient to find it down to the $1.
00:49:22.000 | I'd rather it spit out something very close.
00:49:24.920 | So if you were to put this amount back in the Inputs tab,
00:49:31.880 | it would give you the same,
00:49:37.320 | it should give you the same amount of success.
00:49:39.640 | Boom, 9,504, perfect.
00:49:44.600 | Really hoping I can make it through this demo
00:49:46.280 | without displaying a bug in real time.
00:49:48.920 | Okay.
00:49:53.880 | All right.
00:49:57.600 | I've gone over most of the basic stuff.
00:50:04.280 | The spending plans I've yet to go over,
00:50:07.240 | Jim or whoever else, Keith,
00:50:08.840 | I don't know if we wanna take any questions now.
00:50:12.200 | - All right, we're recording.
00:50:13.520 | - All right.
00:50:14.360 | Spending plans.
00:50:16.840 | Spending plans are my favorite part of this tool.
00:50:20.000 | Honestly, this is the thing that I mess with the most
00:50:23.400 | in terms of my own personal situation.
00:50:25.920 | And I think that it's a pretty undervalued thing.
00:50:30.840 | I am not a, I'm gonna say this a lot.
00:50:35.240 | I work for a financial firm
00:50:37.760 | and I am not, this is not part of their work.
00:50:40.680 | And I know all the legal disclaimers.
00:50:43.200 | I am not a financial planner.
00:50:44.680 | However, I know that people do not spend
00:50:49.680 | the exact amount of money
00:50:52.880 | or same amount of money every year.
00:50:55.160 | And modeling that is kind of unrealistic.
00:50:59.360 | Ideally, people are vacillating between
00:51:05.840 | a spending high and a spending low,
00:51:08.760 | and they know roughly what their average spending is.
00:51:11.440 | We can do that with these different variable spending plans.
00:51:17.840 | VPW was just asked about in the question and answer section.
00:51:22.320 | So I'm gonna go over that one first.
00:51:24.120 | So VPW is a,
00:51:29.960 | essentially a spending plan or a variable spending plan.
00:51:36.520 | Or a withdrawal plan, if you will,
00:51:38.120 | that was come up,
00:51:38.960 | that came up with on the Bogleheads forums.
00:51:41.080 | I can't remember the username off the top of my head.
00:51:47.280 | I want to say, was it long invest?
00:51:50.120 | Anyway, one of the users came up with this
00:51:53.520 | and the premise of this is pretty simple.
00:51:56.960 | Well, the premise is simple,
00:52:00.160 | but the calculations are complicated.
00:52:02.960 | The premise is that this user would look at
00:52:06.600 | sort of the standard inflation adjusted simulations.
00:52:11.440 | And they would see that a person who had a million dollars
00:52:14.760 | and spent roughly 40,000 a year
00:52:17.640 | would end up with a portfolio of $6 million at the end.
00:52:21.120 | And they thought, you know what?
00:52:24.440 | You can't take it with you.
00:52:26.120 | I wanna spend all the money.
00:52:27.720 | How can I do that in a safe way?
00:52:31.320 | And the models, basically, if you look here,
00:52:35.720 | if you go back to inflation adjusted,
00:52:38.160 | you can't just say, I'm gonna spend 60,000 a year.
00:52:42.560 | I gotta back this up.
00:52:46.360 | You can't just say, I'm gonna spend 60,000 a year
00:52:48.600 | because if you spend a flat 60,000 a year, it fails a ton.
00:52:53.400 | And it's just not sustainable, you can't do that.
00:52:57.840 | So he wanted to find a safer way
00:53:00.520 | to get as close to zero at the end of life as possible.
00:53:05.520 | What he did was take a combination
00:53:09.320 | of sort of writing his own annuity each year
00:53:14.320 | based on the end point of your simulation.
00:53:20.360 | Excuse me, talking too much.
00:53:26.840 | So he wrote out a sort of annuity formula
00:53:29.760 | and then based it on whatever future value you wanted.
00:53:34.760 | So these two values are new values when you select VPW.
00:53:39.960 | And this is sort of a rate of return
00:53:44.040 | that the aforementioned annuity is based on.
00:53:50.640 | And this future value is essentially
00:53:54.720 | what you want your portfolio to be at the very end.
00:53:58.040 | Now, this number is largely ignored in the VPW.
00:54:02.920 | I believe it has some significance to the starting point
00:54:07.920 | but it very quickly gets changed along the way.
00:54:12.920 | So just in case I changed some other things,
00:54:16.560 | I'm gonna refresh this real quick to the defaults
00:54:20.400 | then I'm gonna switch it to VPW.
00:54:23.000 | And then this is the default stuff.
00:54:24.920 | I'm just gonna run the simulation and see what happens.
00:54:27.720 | So you'll see that it says 100% success.
00:54:35.080 | Now that means that the portfolios were above zero
00:54:40.080 | when the person died.
00:54:42.560 | Now, if you look at this chart on the left,
00:54:44.880 | it looks a lot different than the other ones.
00:54:47.280 | If you look, everything is spiraling down to zero
00:54:51.400 | but it falls just short.
00:54:53.560 | So the math behind this allows you to spend it down
00:54:57.800 | so that you essentially end up with less money
00:55:00.760 | at the end of retirement.
00:55:02.160 | Now, if you look on the right here,
00:55:04.880 | this is the first time you've seen the spending graph
00:55:08.840 | become a variable graph.
00:55:10.640 | Now, if you look here, this might be sort of unfathomable.
00:55:15.080 | This is a million dollar portfolio.
00:55:19.720 | And at some point spending is getting to be
00:55:22.440 | like $200,000 in a year.
00:55:25.800 | How can that be?
00:55:27.400 | Well, I mean, it follows the market sort of gains
00:55:32.400 | for a given year.
00:55:37.200 | And every single year it's calculating
00:55:40.120 | based on the current portfolio
00:55:42.200 | and how many years you have left to live
00:55:44.600 | and the expected return rate,
00:55:47.440 | what it thinks you're gonna have at the end.
00:55:49.760 | So it keeps increasing that.
00:55:51.680 | Well, it really just varies it up and down.
00:55:55.120 | But so if you look here, it goes up and down quite a bit.
00:55:58.440 | But if you see here,
00:55:59.280 | if you look at the average spending
00:56:01.160 | for this entire simulation,
00:56:04.800 | it is quite a bit above 4%.
00:56:08.480 | But if you look on the left side of this chart,
00:56:11.720 | the average ending portfolio is 85,000.
00:56:15.880 | This is as close to zero as we can get
00:56:17.720 | without failing before your end of life.
00:56:21.800 | So this is an interesting example of something crowdsourced.
00:56:26.440 | Someone on the Bogleheads forum
00:56:29.600 | was writing the sort of thesis for this
00:56:31.640 | and you can find it out there.
00:56:32.840 | It's still a very, I think it's a very trafficked thread.
00:56:37.680 | But that person came to me in like 2015 or 2014
00:56:42.640 | and asked if I can make this happen
00:56:45.360 | as part of the website and I did.
00:56:47.320 | So it's kind of an interesting way of thinking
00:56:51.840 | about spending if you're willing to spend it all down.
00:56:56.480 | And before I move on to the next one,
00:56:58.880 | one thing to note is you can change the future value.
00:57:01.520 | If you're planning on spending more than normal,
00:57:05.760 | but you want more than just zero left at the end,
00:57:09.640 | maybe you wanna leave 200,000 to your kids or something,
00:57:14.280 | you can change this future value
00:57:16.120 | and it tries real hard to make things happen at 200,000.
00:57:20.200 | Actually, it seems to not have done that.
00:57:23.640 | I told you I was trying to make it
00:57:28.400 | through the entire video without a bug, but here we go.
00:57:31.160 | I'll have to check that out.
00:57:36.680 | So if you look, some of these portfolios,
00:57:39.240 | they actually dip down to zero.
00:57:41.320 | It looks like they're failing right before the end.
00:57:43.440 | So that's interesting.
00:57:45.560 | Anyway, we'll move on to the next one.
00:57:47.840 | All right.
00:57:52.080 | So when you have inflation adjusted,
00:57:56.760 | of course, this is the not inflation adjusted scenario.
00:58:00.760 | Essentially, it takes your spending and never changes it.
00:58:05.720 | That means over time, your actual value of your money
00:58:10.720 | is gonna go down because inflation's gonna be
00:58:13.440 | sort of reducing the value of it.
00:58:15.760 | So if you run this really quick,
00:58:17.360 | you'll see on the right side here
00:58:20.680 | that inflation really changes things.
00:58:23.320 | Now, what's interesting here is in the early 1800s,
00:58:26.960 | there's quite a bit of deflation.
00:58:28.880 | So even though you're not adjusting your spending here,
00:58:33.800 | your inflation adjusted value of that spending
00:58:40.840 | is going up.
00:58:42.360 | But the vast majority of sort of modern times,
00:58:45.640 | the value of that money is going down quite a bit.
00:58:49.520 | If you look at sort of the averages here,
00:58:52.200 | really you're averaging 30,
00:58:54.520 | you're averaging lower than 40,000 per year
00:58:57.600 | if you never adjust it.
00:58:58.960 | And I don't know if anyone's,
00:59:04.400 | I can't remember from our poll
00:59:05.960 | who frequents earlyretirement.org,
00:59:09.520 | but it's a common trope on early retirement
00:59:14.120 | that you don't wanna be eating cat food in retirement.
00:59:17.160 | So if your spending reduces to half of what it started,
00:59:21.040 | you might be in trouble.
00:59:22.280 | Okay, I'm gonna go back.
00:59:26.440 | What's next?
00:59:29.080 | Percent of portfolio.
00:59:30.720 | Okay, this is a pretty simple one on its surface,
00:59:37.000 | but there's some nuances that a lot of people miss.
00:59:39.840 | So percent of portfolio pops up one new field
00:59:46.360 | called the yearly spending,
00:59:48.200 | which is a percentage of the portfolio for that given year.
00:59:51.960 | So when we talk about the 4% rule,
00:59:56.640 | if you're not familiar, which I hope you are if you're here,
00:59:59.280 | but if you're not familiar for people out there,
01:00:02.320 | the 4% rule is based on a study
01:00:04.400 | where they had portfolios of people at retirement
01:00:09.400 | and starting at retirement,
01:00:16.000 | their starting spending was 4% of that portfolio value.
01:00:21.000 | Then from then on out, no matter what the portfolio did,
01:00:25.800 | you just only adjusted your spending for inflation.
01:00:29.800 | So every year wasn't 4%.
01:00:32.960 | It was just the very beginning.
01:00:34.560 | This particular spending plan, percent of portfolio,
01:00:39.280 | every single year, it's going to take your portfolio value
01:00:44.000 | and then adjust your spending based on that.
01:00:46.760 | If you start off with a million dollar portfolio
01:00:49.720 | and somehow it gets to be $2 million,
01:00:52.880 | well, 4% of $2 million is $80,000.
01:00:56.320 | And that's what it's gonna set your spending to.
01:00:59.240 | So if you run this, you'll see on the right,
01:01:02.920 | that the spending is wildly varied.
01:01:05.480 | If you would have retired in the '80s,
01:01:09.360 | your spending would have gotten up to $157,000
01:01:12.400 | by using this method.
01:01:13.600 | Now, this says here that it's 100% success rate.
01:01:20.040 | Now that is true.
01:01:23.240 | And that is true because no matter how high
01:01:25.840 | or how low your portfolio gets,
01:01:28.520 | it's gonna only take out 4%.
01:01:31.320 | So if you look here, the spending in this year
01:01:34.880 | was only $15,000.
01:01:37.200 | That's because the portfolio dropped quite a bit.
01:01:39.680 | By definition, if you're only ever taking 4%
01:01:44.640 | of the portfolio, it's almost never gonna go to zero.
01:01:47.520 | So how do we simulate these on a more realistic manner?
01:01:54.160 | If we go back here, I'm gonna introduce this other section
01:01:58.880 | of the variable spending that is very important.
01:02:01.840 | It's a concept of a spending floor and a spending ceiling.
01:02:06.840 | So, well, I'm gonna go back to the tab real quick.
01:02:09.720 | If we look here, we're trying to spend 4% of our portfolio.
01:02:14.720 | Now, if you're trying to stay within the realm
01:02:17.800 | of $40,000 inflation-adjusted spending,
01:02:22.320 | you look at this chart and you say, wow, it's really,
01:02:27.040 | I mean, it doubles or triples sometimes,
01:02:29.480 | and it goes down to the major, I'm eating cat food level.
01:02:33.600 | How do we fight against that?
01:02:36.880 | We do that with spending floors and spending ceilings.
01:02:40.320 | So the idea of a spending floor,
01:02:43.160 | and I'm gonna choose a defined spending floor value,
01:02:46.800 | is that the simulation will never allow the spending
01:02:51.240 | to go below the floor.
01:02:53.600 | So in this case, this is a 4% rule.
01:02:57.360 | I personally like to think like, hey,
01:03:00.960 | I can take a 10% haircut on my spending and be okay.
01:03:05.960 | So I'm gonna put the floor to be $36,000.
01:03:10.280 | Now, if we just run this as is without doing the ceiling,
01:03:14.440 | if you look on the right,
01:03:18.240 | you'll see some very distinct flat bottoms.
01:03:21.640 | It never goes below the $36,000 that we set,
01:03:26.200 | and that's great.
01:03:27.440 | However, it also goes out of control in these other places.
01:03:31.160 | Now, maybe you want it to go out of control.
01:03:34.880 | Maybe you wanna set a floor,
01:03:36.800 | and when your portfolio goes crazy, you can go crazy too.
01:03:41.800 | That's great.
01:03:43.160 | Some people are trying to pay more attention
01:03:45.240 | to their average ending portfolio
01:03:47.480 | to make sure that they can pass money along
01:03:49.800 | for some sort of generational wealth.
01:03:52.080 | So if we go back to the inputs again,
01:03:54.800 | what we can do is we can rein in the spending
01:03:57.720 | by setting a ceiling.
01:03:59.640 | Now, like the floor, you might've guessed,
01:04:02.200 | the ceiling makes it so the spending
01:04:05.160 | will never go above a certain amount.
01:04:07.720 | So let's say we have a $40,000 target.
01:04:12.360 | Let's go crazy and say, if in good years,
01:04:17.600 | we can spend up to $60,000, that'd be great.
01:04:20.680 | And we're gonna run that.
01:04:24.280 | Now, this might look a little wilder
01:04:26.920 | 'cause this is sort of to scale.
01:04:28.680 | So when the values went up to 157,000,
01:04:33.440 | they looked a lot more squished,
01:04:35.040 | but now they're within 24,000 of each other.
01:04:41.080 | So if you look, there's some very distinct flat tops
01:04:44.560 | and flat bottoms.
01:04:45.400 | It's bouncing around in between the spending floor
01:04:49.480 | and the spending ceiling.
01:04:50.760 | I love this feature.
01:04:53.880 | I think that it's one of the more realistic things
01:04:57.240 | that happens in retirement.
01:04:59.400 | Most people will have sort of this idea in their head
01:05:02.320 | of what they wanna spend,
01:05:03.960 | and they'll have like a sort of belt tightening amount
01:05:08.200 | in their head that they don't wanna go below.
01:05:10.360 | And then on good years, maybe they'll spend more.
01:05:14.720 | This allows you to do that.
01:05:15.920 | I really like this feature.
01:05:17.520 | So that's what that looks like.
01:05:22.760 | One of the things you can do is set the floor
01:05:26.960 | to be the value of your adjustments.
01:05:30.080 | So if your retirement is dependent
01:05:34.720 | on a lot of social security and pensions,
01:05:37.800 | and say this person has $30,000 worth of pensions
01:05:42.640 | and social security, if you can set the floor to be that,
01:05:46.960 | then it's a quick and easy way to deal with the floor.
01:05:51.960 | I don't have that same ability for the ceiling
01:05:56.440 | 'cause I think it's kind of silly to be able to select
01:05:58.600 | your adjustments as the ceiling,
01:06:01.040 | but maybe someone can convince me otherwise.
01:06:04.960 | But they're of percent value.
01:06:08.680 | Wow, it's 9.30 Eastern already.
01:06:13.040 | (upbeat music)
01:06:15.840 | (upbeat music)
01:06:18.560 | (upbeat music)
01:06:21.280 | (upbeat music)
01:06:23.920 | (upbeat music)
01:06:26.560 | (upbeat music)
01:06:29.160 | (upbeat music)
01:06:31.740 | (upbeat music)