Monday, October 11, 2010

FIRECalc Retirement Calculator: One of the Best Tools on the Market

The important question, which you think today and you would like to get an answer as close to the future reality as possible is:

"With what you have today, and what it costs you to live, can you retire and maintain the same lifestyle?"

The free online tool does not simply apply a percentage of current salary (say 70% - 85%) as an estimate for your spending, but allows you to input your own spending patterns. Vary those patterns and see what impact it has on your savings. Default settings are available, if you want to use them, or insert your own data.

If you think about that, you understand that averages don't tell you much at all. Retire in the early 1970s, starting with $750,000 and taking out $35,000 each year, and on average you'll do just fine. But that average is meaningless.

Shown here are the year-end balances of three identical portfolios. One starts in 1973 (red), another in 1974 (blue), and the third in 1975 (green). So much for relying on averages!


FIRECalc can tell you how much you would have needed to insure that you wouldn't have depleted your portfolio if things are as bad as 1973. Or 1929. Or any of the past years for which we have data.

Instead of the results of three different starting points as shown here, FIRECalc shows you the results of every starting point, since 1871. You can get a sense of just how safe or risky your retirement plan is, based on how it would have withstood every market condition we have ever faced.

FIRECalc makes a single fundamental assumption: “If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds.”

If you accept that assumption, then just tell FIRECalc how much you have and how much you'll be spending, and FIRECalc will tell you how often your strategy would have worked throughout history. Or what you need to change to make it all work.

Input tables are available for Income, Spending, Not Retired Yet, Spending Models, Your Portfolio, Portfolio Changes, and Investigate.

Without any other information, FIRECalc will assume you want to keep your annual spending about the same for as many years as you specify, you aren't planning on receiving any Social Security or pension, and your retirement portfolio is invested in a "couch potato" portfolio of 75% stock index and 25% bond funds, with a 0.18% fee to the fund. But you can change any or all of those assumptions. You can refine the spending and investment assumptions, explore the impact of some of your decisions, factor in all sorts of exceptions, and/or let FIRECalc search for savings or spending levels that will let you meet your goals. Just click on any of the tabs at the top to enter the optional information.

Each tab will take you to a description as well as the place to enter the optional information, but in short:
Start Here is this page, where you enter spending, portfolio balance, and years.
* Other Income/Spending is where you enter Social Security, pensions, and other yearly adjustments.
* Not Retired? is where you specify when the plan is to start, and how much you'll add to your portfolio until then.
* Spending Models lets you select from several approaches to spending during retirement.
* Your Portfolio allows selection of different investments.
* Portfolio Changes lets you make lump sum changes to your portfolio at some future year.
* Investigate allows you to investigate the consequences of some of the other choices you can make in planning your retirement.

All data is preserved as you go among these tabs. You don't need to click Submit until you are finished. However, you should not be concerned on your privacy as FIRECalc does not store on their servers any information you enter on the page.

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