This page is intended to be a roadmap to learning all of the skills you need to use cFIREsim effectively. I'll go over the basics, the more advanced stuff, and even some individual examples and use-cases. At first glance, cFIREsim is just one GIANT form, and is kind of scary. But behind all of that, it can be as simple or as complicated as you make it out to be. So, let’s get started!
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At the very top of the cFIREsim site there is a block of inputs labeled “The Basics”. Here are the inputs that we see in this section.
I’ve given some brief explanation into each of the inputs in the Basics section, but what HAPPENS when you hit “Run Simulation”?
On a basic level, cFIREsim is just taking stock market data (along with bond and gold data) from 1871, and steps through each year seeing what your hypothetical inputs would have resulted in. So, if you’re talking about the default values of a 30 year simulation, imagine that it’s taking the inputs and looking at all of the data from 1871 through 1901, and seeing what your spending plus the stock market changes would have resulted in each year. Then, it does it again for the data 1872 through 1902… all the way until the data of this year. For the default values, this will result in 119 separate 30 year chunks of data that it goes through, seeing if your portfolio would have survived in the past!
After the calculations are made, an output page pops up with graphs and charts. Holy smokes that’s a lot of lines! What exactly is going on here? Each one of those lines represents 1 of the aforementioned 119 “cycles” of data! This shows the trajectory of what your portfolio would have done in real dollars (Definition: Real vs. Nominal dollars). It is import to realize: EVERYTHING on this page is in inflation-adjusted dollars even if you selected options related to non-inflation-adjusted things on the input page. If you hover your mouse over any one of the lines (as shown in annotation E), you’ll see at the bottom it shows data about that line (as shown in annotation F).
Annotations from Output Graphs:
All of these same things applies for both of the charts shown. The chart on the left is the "Portfolio" chart, showing the value of your simulated portfolio over time. And the chart on the right shows your "Spending" over the course of the simulation. For this example, I am showing the default scenario, which is $40,000 per year spending, always adjusted for inflation. This is why the Spending chart remains a flat line (or a bunch of flat lines on top of each other). They're all $40,000. When we go over variable spending plans, this chart will change dramatically.
The most basic, and arguably the most important statistic, is the “Success Rate”. In cFIREsim, “success” is defined as your portfolio never reaching $0 in the time span that you provided on the form. In the case of the above chart, you can see “Success Rate: 96.67% - Failed 4 of 119 total cycles”. Out of ALL of the 30 year time chunks from 1871 to present, 4 of those chunks would have occurred in a period of stock market change and inflation that would have resulted in your portfolio running out! In later blog posts, we’ll talk a great deal about the “success” metric and how your personal risk profile matters to these calculations. But for now, let’s talk about the other items in this chart.
The “Average Portfolio at Retirement” is fairly self explanatory. On your retirement date, how much money did you have in your portfolio? Because we’re looking at the default scenario (which is retiring in the current year, with a $1,000,000 portfolio and $40,000 per year spending), we see that out of the 119 cycles, we always have $1,000,000 in our portfolio. This number will change if we set our retirement date in the future, because cFIREsim will be calculating all of the potential market gains/losses that portfolio might have between now and that future date.
Below the “Success Rate” and the “Average Portfolio at Retirement” row, we have an even bigger chart. This chart takes ALL of the portfolio and withdrawal information for all 119 cycles, and tells us the average, the median, the standard deviation, the lowest and the highest values. For the sake of keeping to “The Basics”, I will talk about the first row which talks about the averages. The first row, first column, is the “Average Ending Portfolio”. This takes all 119 cycles and averages out what the portfolio value would be after all 30 years have passed, in real dollars (insert link of definition of real vs nominal). In the next column, we have the “Average Yearly Withdrawals”. This is a pretty straight-forward number, because we chose $40,000 spending and made sure that the spending value never changed. The next column should be also just as straight-forward. The “Average Total Withdrawals” tells us the average of how much money was “spent” over the course of the entire 30 years of the simulation. Because we chose an unwavering $40,000 spend over 30 years: $40,000 x 30 = $1,200,000. In future posts, we’ll talk about spending plans that vary over time, which can greatly affect this number.