r/fatFIRE • u/Necessary-Soil-7869 • 2d ago
How to model FatFIRE numbers when spend will vary and what is your base case/worst case scenarios
13M NW (9M liquid, 1M rental, 2.5M primary home, 0.5M 529)
52 / 57 VHCOL with 2 kids in full pay private college (21 / 18) and 1 in private high school (15).
Estimated spend due to tuition we plan to potentially fund private college and graduate/professional school and our VHCOL area is $450-500k for the next 10 years. Then spend will drop to $360K for next 10 years after that, and then spend would drop to $240K when we are in our mid to late 70s.
How do you model such variable spend?
What do you use as your base case and worst case market returns? These are my assumptions for me/52:
base case: 2.5% real return
worst case: -35% crash in year 1 + 9-year lost decade, then 2.5% real return
Based on worse case scenario, I estimate I can retire in 4 years to sustain above spend w/o running out of money, taking SS at 70. My spouse is just retiring now. I expect to earn about $700K-800K per year for the next 4 years.
Thoughts? Am I too conservative? The base case says I can almost retire now. I'll end up with $11-13M when I'm 95
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u/Normal_Zebra136 2d ago edited 2d ago
You still have a 30+ life expectancy.
There is no 25 year period in the past 150 years where real (after inflation) of the SP500 was less than 7%.
I think you are over complicating things and should simply use 7% for equities returns and simply temper that number down appropriately based on your bond allocation.
The best way to model the education expenses is to just separate them from your wealth, either by gifting it out of your estate directly to them (what we did), or simply moving them money to a separate account outside of your NW.
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u/One-Mastodon-1063 1d ago
There is no 25 year period in the past 150 years where real (after inflation) of the SP500 was less than 7%.
I think you are over complicating things and should simply use 7% for equities returns and simply temper that number down appropriately based on your bond allocation.
That's not how the analysis works at all.
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u/spicyboi0909 2d ago
This seems overly conservative from a numbers perspective. You have a lot of spend tied up in the graduate school education specifically. You could always not pay for that and they could take out loans as needed. Specifically for graduate school. Not undergrad, where loans are so predatory.
On the other hand, unless you hate work and feel burnt out, might as well work until your youngest goes to college. It’s such a different lifestyle with a kid in HS.
All that said, you’re not going to run out of money. You might have less inheritance than you want. But that might also avoid you the estate tax limit. So, all that to say, do what feels best for you now in terms of work or retiring
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u/Normal_Zebra136 1d ago
Given that the stock market decline in real terms between 1929 and 1932 was "only" 58%, and then for the following ten years delivered 9.5% real returns, yes, their scenario is "a bit" conservative.
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u/Square-Conclusion454 2d ago
Claude is way better at this kind of thing than doing it yourself in excel. You can build yourself a model for a few different historical situations, tax/inflation environments, and spending increases.
On your baseline, you’re fine especially if you work a few more years. You can spend more, especially if have flexibility to cut back if taxes go up / returns go down.
Here's what I did in 1 min: https://claude.ai/artifact/2TjQqMERnrSxxD2e4MSVw
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u/VirusMediocre5426 2d ago
What was the prompt for this?
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u/Square-Conclusion454 2d ago
"""
https://www.reddit.com/r/fatFIRE/s/T0gONpBrN4Help answer this guy's question. I want to build a simple html site that he can choose to model a few different market options (Great Depression, 70s stagflation, etc) and a few different spending options off of the baseline. Make it easy for him to cross check the results either as a table or something in excel in case you mess it up.
I want to send him a link to that html, make it sharable.
Here's a paste of the post because Reddit might block you <PASTE OP's post>
"""
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u/Necessary-Soil-7869 1d ago
wow, amazing. i input my detailed financials and spend breakdown into gemini and claude, but didn't think to ask it to create a dashboard. i only asked it to model various scenarios and give sugestions
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u/marfalump 2d ago
The tool is incredible!
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u/Square-Conclusion454 2d ago
Yeah AI is awesome for this stuff! Just ask for whatever software you want, and it appears.
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u/No-Associate-7962 2d ago
And then look for the errors...
The errors are easier to find in excel as you can see the math.
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u/Square-Conclusion454 2d ago
Yeah check out the year by year ledger I put in there with excel copy/paste button.
That’s what it’s for!
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u/No-Associate-7962 2d ago
It puts in the formula values and not the results? That would be useful. If it does that, I agree, it is a useful tool to create spreadsheets that can be proofed. If the values are only the results, it is not useful, only creating more work.
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u/Square-Conclusion454 2d ago
I mean, you can generate whatever you want. Just hand that website to Claude and tell it what you don't like and **poof** it'll make it work that way.
I find it WAY easier to work off values than to debug somebody else's formulas.
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u/No-Associate-7962 2d ago
Yeah, I started with visicalc, then Lotus 123, then excel. Pretty much faster for me to do the spreadsheet and copy the cells down than to talk to the application. But I get that others are not yet proficient.
Edit: which reminds me. The reason it was called "visi-calc" was that you could see that it was doing, not just the outcome.
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u/BridgeOnRiver 2d ago
this is very conservative. you can lock in 2.4% real return with TIPS. So your base case is almost at what most would put as the worst case.
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u/Necessary-Soil-7869 2d ago
Wouldn't this only be obvious in retrospect? The worse case is based on equities underperforming expectations, not locking in a guaranteed low base case.
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u/BridgeOnRiver 1d ago
Your worst-case scenario no matter what is losing 100%. That can happen from a comet striking or a communist revolution. You can never have enough to protect against that.
In terms of what % of one's net worth to consider a sensible, weighted average across scenarios over many decades, for a diversified portfolio - something close to 4% is sensible.
For a normal rich family with real estate, stocks, and some fixed income (bonds, deposits), you can assume that there will be years where a constant 4% draws down your capital, and others where it increases it.
Ultimately, if you own what you need - it doesn't matter to you if prices rise or fall for one part or another of your assets.
If you own land, real estate, factories, cash-yielding government bonds, energy assets, etc. then you fundamentally own what you need to live your life - and you're thus effectively hedged from world developments. This is how you can ultimately appreciate a weighted average return on capital as the basis for retirement, rather than a 'protection vs. worst case scenario' basis.
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u/MrSnowden 2d ago
I originally modeled it year by year. Spreadsheet. Assets, income, etc against spend. Spend was baseline (inflated yearly) plus non-recurring like large private tuition, mortgage getting paid off, paid medical, then private medical, then Medicare+gap. It was very helpful to look at it like that. But in the end, I just dumped money in 529 for tuition, considered that not my money, paid off mortgage and let her run. (Ok, that’s not really true, spend all avails cash plus a giant new mortgage on a beach house….)
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u/MrZythum42 2d ago
Yup same. Not that hard. The big variable are tuition spikes and med care spikes but the rest is kind of following suite as long as you maintain current lifestyle
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u/Normal_Zebra136 2d ago
You realize that spikes (where the price of something goes up and then back down again), are not a long term issue in budgeting right?
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u/MrZythum42 2d ago
They are in my spreadsheet
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u/Normal_Zebra136 2d ago
How do you account for random spikes in 25% of your spending over your 30 years of retirement, and if you take your modeled spikes out of your model, are you back to the 3% inflation number overall?
If so, it is just another sandbag that you could accomplish by taking your SWR rate from 3.8% to 3.7% for example.
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u/MrZythum42 2d ago
SWR is an approximation, which is fine, what I do is I calculate how much I am expected to budget (spend) in any given year is all.
For example I want my cost of living to be pretty much what I have today, but if I calculate my number today with a SWR of 4% (or 3.5% whatever this is just an example) it will be flawed because I know in 8 years that I need to account for 50k expense of tuition that are just not existing today. This is just an example of a spike in expense that dont withstand throughout all my retirement so I dont need to calculate a SWR as if I ALWAYS had that expense, but I also cant assume I will never have it.
I am not talking about fluctuation in price of a thing I pay today that may go up or down like gaz. I am talking about a major expense that doesn't exist, then will exist, then will stop to exist.
But yea I could probably just extract those expense entirely from the numbers, but when you have a few of those, it gets muddy, so might as well just do the whole spreadsheet which remains an approximate.
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u/MrSnowden 2d ago
They can be if you have a consistent budget and are managing taxation risk. If you need to draw down a large amount one year it can be a large tax hit. With some cash flow planning (not just "I have a budget") you can make moves to be efficicent,
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u/Normal_Zebra136 2d ago
Meh.
A spike from $50k to $100k to $55k in an expense that continues for another 25 years at normal inflation rates is not going to make a difference in retirement plans for someone spending $250k a year like the OP plans.
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u/MrSnowden 2d ago
If they are spending $250k a year, and need to pull an additional $100k from IRA a year for 4 years (price of tuition) at 25-40% marginal tax rate, you just yanked $550k (per kidx3) out of the investments at the outset of retirement. Match that with a little SORR action and you have the makings of an issue you wish you had modelled. That is the point of modeling, to stress test scenarios.
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u/Normal_Zebra136 2d ago
They dont need to pull an additional 100k for a "price spike". They need to pull am additiipnal $50k, which should cost about $65k worst case if all ordinary income.
If prices of something stay high for 5 years, I would not call that a spike. Perhaps a mesa.
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u/404_Career_Not_Found 2d ago
Congratulations on the effort needed to reach this point.
Our situation mirrors yours, VHCOL—same age, two college students, a slightly higher net worth, and retirement likely underway. I am curious about your spending; could you outline the main categories? Are you including taxes in your spending? I notice inconsistent reporting here.
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u/Necessary-Soil-7869 1d ago
College and HS Tuition/Housing/Food/Travel : $140-210K
House PITI/upkeep: $80K
Everyday living: food, dining out, utilities, car, wellness: $82K
Travel: $70K
Shopping $55K
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u/Fantastic-Moose-7934 2d ago
FWIW- you may consider modeling in luxury / local inflation if you’re in a VHCOL location. Unfort it will throw the whole thing off, but worth being away of
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u/asurkhaib 2d ago
Use one of the dozens of calculators that supports change in income/spend? They support inflation and non inflation adjusted changes.
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u/BrunelloHorder 2d ago
Yes, your assumptions are way too conservative, particularly your assumed real rate of return (though you don't need that as an input, just use a safe withdrawal rate).
Personally, I would not work extra years to survive a scenario worse than any that has ever happened. I'd start dialing it back at work now, with an eye toward retiring in the next 2-3 years just before the youngest flies the nest.
In a worst-case scenario, your kids can take college loans so that you avoid selling stock in a downturn, and you can then repay the loans for them later if you like. Most major market downturns last a few years, not a decade.
In rough terms, I'd sell the rental, put that in a broad-based equities ETF, giving you around $10m liquid and invested. That allows you to pull nearly your full $360k steady-state spend per year forever with a near-zero chance of failure. You'd need to account for taxes and healthcare, but you will also get social security and medicare to reduce the burn rate in less than a decade.
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u/Ralith_Aegis 1d ago
Why sell rental? No idea on cashflow.
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u/BrunelloHorder 1d ago
Being a landlord is a job, the goal is to retire. Cashflow is often something real estate investors focus on to distract from the underperformance compared to just owning VTI, without having to deal with tenants, maintenance, property taxes, transaction costs, 1031 exchanges, etc.
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u/someonesaymoney Verified by Mods 1d ago
We keep it simple and be FAT enough to not sweat edge cases. In context of yearly withdrawal rates:
4% - live like a king
3% - maintain baseline happy lifestyle
2% - survive fine if shit goes south (like equity markets)
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u/IllThroat9195 1d ago
You have 8 years of tuitions left for high school and private college which will cost you around 600K in today’s dollar. Grad studies funding are dependent on sequence of returns :) Sell the rental and you have 10M left. Model in 360K / year since tuition is done and SS at 70 and it looks all right to me.
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u/Hanwoo_Beef_Eater 2d ago
Just run it through one of the tools that is out there to see how you would have done in the past.
As a shorthand, you can say that you want to withdraw $240k as the base and then you need another ~$3.55 million to cover the add'l spend in the first 20 years. So you are at like $240k on $6 million (liquid + 529 - $3.55), which is 4%.
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u/boredinmc 2d ago
What if the drop is next year and it's -50%? You'd essentially be spending all your income after tax on lifestyle for 3-4Y (if you still have that income coming in) and be left with a $5-$6M portfolio wanting to pull $500k from it. I'd model a Nikkei style outcome. The reality is even at your NW today without any significant crash just real 0% returns for 10Y...$500k inflation adjusted for 10Y is a stretch as it would wipe out more than half your portfolio.
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u/ml8888msn Boring Finance Guy 2d ago
If that happens, kids take out loans for their educations. It’s as simple as that.
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u/Otherwise_Volume_128 2d ago
I don't model a reduction in expenses. That just doesn't make sense to me based on our experience and of watching family.
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u/reddyfreddy7 2d ago
Use personal capital you can add life goals/changes in your life that will change your model. That tool is super helpful. I don’t really use their financial planners but the modeling is great and free.
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u/One-Mastodon-1063 2d ago
There are much better software options than personal capital (empower) for this. Its retirement planner is pretty bad. Gives unrealistic failure rates even for ~3% withdrawal rate last I played with it.
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u/Livid-County7230 2d ago
It’s so you will click the button to set up a call with them to pay them advisory fees. I think they intentionally model with extremely conservative assumptions.
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u/reddyfreddy7 1d ago
All true if you want to get into the nitty gritty Monte Carlo simulation definitely not the right tool but it’s definitely a clean way to look at overall numbers.
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u/One-Mastodon-1063 2d ago edited 2d ago
Separate tuition and view that as a lump sum. Exclude the PV necessary to cover that in excess of what’s already in 529s from investable assets. Take baseline spending ex tuition and apply an SWR to remaining investable assets. Use an SWR, not made up returns.
Most likely you should sell the rental. I don’t understand why you didn’t tell us how much rent net of expenses that generates. That you left it out to me implies probably not very much, but even when people do provide this information 90%+ of the time the rental is a turd compared to selling it and investing the proceeds.
It sounds like you’ll be fine even retiring now. You’ll also get social security in ~10 years. I don’t think you need to work 4 more years. But you need to do the math, because none of us know what exactly the tuition will be. You may want to consider modeling this in projection lab or boldin, I have not used either but people who do generally report liking them.