If the market does no worse than the great depression, 1970's stagflation, or the dotcom bust, will my money last in retirement?
The math behind retirement: The simple question of "Will my money last in retirement?" is rife with complications. Do you have a good handle on what your expenses are? What sort of investments do you have? How long might you live? Do you have any large one-time expenses in the future? What happens if you retire during a major market downturn? What happens if you retire in the worst market downturn in history?
Retirement advisors and various financial websites will often give you the most overused "Rule of thumb" in the financial world. The "4% rule", derived from the Trinity Study, states that if you have a retirement period of 30 years, you can safely withdraw 4% of your portfolio in year 1 of retirement and continually adjust that for inflation, without fear of running out of money. Critics of this study say that the financial world is a much different place than it was in the past, and that we should adjust our thinking on how much we should withdraw in retirement.
How do I know if my portfolio will last? At it's most basic level, cFIREsim uses historical stock/bond/gold/inflation data from 1871 to present, and calculates how your portfolio would have fared throughout history. If you enter a 30 year simulation period, it will run your data for every 30yr period in history. Example: cFIREsim will figure out your portfolio value, if you would have theoretically retired for the period of 1871-1900, then for the period of 1872-1901, 1873-1902, etc. It will take all of your inputs and determine whether or not the portfolio "failed" (failure is defined as going below $0 at any given point). What does this tell me? If cFIREsim says that your portfolio survived 95% of the simulation cycles, it means that if the market does no worse than the worst years in recorded stock market history, your portfolio will survive.
What can cFIREsim do? At it's core, you can enter information in the a few simple inputs and return the basic simulation. At it's most complicated, it can determine your portfolio success based on 80 individual portfolio adjustments, multiple types of inflation, multiple types of market returns, and graphically show you the results. There are many options to choose from outside of the "Basic Inputs". You can find information for each section within this FAQ.
The 4 most basic inputs that are required in cFIREsim are:
After entering those 4 numbers, hitting the "Run Simulation" button will provide the output chart and graph. The very first field on the output chart is "Success Rate". It will say something like "Failed 8 times out of 115 cycles, for a 93.04% success rate" which means that if you chose the default settings of 30 years to model, it simulated you specific retirement scenario in 115 different 30yr periods. Of those 115 cycles, there were 8 times where your portfolio got to $0 before the end of the simulation. That is considered a "failure". Whether or not a 93.04% success rate is good enough for you is an entirely personal choice.
That is a very basic tutorial on how to run cFIREsim. The rest of the FAQ is dedicated to talking about the details of each section and how to fine-tune your simulation to fit your unique situation.
The Spending Plan section is where you define your basic yearly expenses that will be taken out of your portfolio during retirement. There are MANY "withdrawal strategies" out there, and cFIREsim attempts to capture just a few of the more relevant ones. If you have a suggestion for a withdrawal strategy that should be implemented as a cFIREsim Spending Plan please visit the forums and post your idea.
Yearly Spending is your yearly default expenses that will be subtracted from your portfolio. This is required for most spending plans.
Spending Floor/Ceiling: Most spending plans vary from year to year. To prevent the simulation from going to an unreasonable level of spending, you should define a "ceiling" and "floor" for your spending. These are the maxmimum and mininum spending that you want to allow during retirement.