% Expenses funded

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Steve
Posts: 5
Joined: Sun Mar 18, 2018 12:46 am

% Expenses funded

Post by Steve » Sat Apr 27, 2019 12:54 am

I am guessing I do not understand how the % expenses funded column in the detailed view is calculated. I am using a flexible spending policy. My expenses are lets say $100K, my after tax income is $90K, I have no withdrawals which makes my withdrawal rate 0. Over a period of 7 years with these numbers constant my % expenses funded changes anywhere from 78% to 82%. Just curious how this % is calculated so I can understand why it is fluctuating. Thanks for your help!

jimr
Posts: 558
Joined: Thu Feb 28, 2008 6:48 pm

Re: % Expenses funded

Post by jimr » Sat Apr 27, 2019 7:31 am

It's probably best to think of this output as "Percent of requested expenses that will get funded" This output is actually the simulation variable used to implement the flexible spending policy. In reality it's a number that ranges from spending policy floor (eg 80%) to spending policy max (eg 500%).

The variable starts at 100% and starting at retirement, it gets adjusted based on the performance of the portfolio each year.

Before the simulation calculates how much needs to get withdrawn from the portfolio to fund each year's expenses, the simulation logic multiplies the total expenses by this variable.

If a given year has no net expenses, the percent of expenses funded variable doesn't have any impact because multiplying zero by anything still leaves zero.

Steve
Posts: 5
Joined: Sun Mar 18, 2018 12:46 am

Re: % Expenses funded

Post by Steve » Wed May 01, 2019 12:37 am

Hi Jim, thanks for the reply. I must have a preconceived notion that I can't shake based on this column because I am still not following the logic. At one given year I need to withdraw 30k from my portfolio to fund my expected expenses. The % expenses funded is 87%. Go forward a few years and my portfolio is larger, my after tax income is larger, I don't need to withdraw any money to meet my expenses but my % expenses funded is now 78%. So what I am seeing is that a smaller portion of my expenses is now funded when I need no withdrawals, expenses are identical, income is up and portfolio is up?

jimr
Posts: 558
Joined: Thu Feb 28, 2008 6:48 pm

Re: % Expenses funded

Post by jimr » Wed May 01, 2019 6:15 am

First, you can turn off this feature if you're not comfortable with the results it's producing by setting the spending policy to stable. The flexible spending policy was inspired by research on decision rules and dynamic withdrawals done by Jonathan Guyton and William Klinger that you can read about here:
http://cornerstonewealthadvisors.com/wp ... rticle.pdf

The general idea is to have the simulation take into account the idea that if the portfolio isn't holding up too well during retirement, the retiree can adjust their spending in order to increase the odds of the plan working out.

It's tough to say exactly what might be causing the results you're seeing in the detailed view output. The spending policy algorithm adjusts the % expenses funded variable down or up very slowly as the years go on which means the variable has a lot of hysteresis. It's possible that things started out rocky for your plan and that''s why you're seeing a situation where the portfolio seems to be fine by the percent expenses funded is on the low side. Another thing that can cause this is if there are uneven cash flows in the plan, where the plan may not be very robust at the start, but a reduction of expenses or additional income that arrives later in the plan change the fortunes of the plan.

If you'd like, I'd be happy to look over your inputs to help you understand exactly what's going on. To do that, I recommend changing around the inputs to obscure the exact personals details of your plan (eg change the numbers to keep the pattern in place but protect your private information). Once you've obscured your personal financial information, you can email the .frp file to me at info@flexibleRetirementPlanner.com.

Jim

Steve
Posts: 5
Joined: Sun Mar 18, 2018 12:46 am

Re: % Expenses funded

Post by Steve » Thu May 02, 2019 1:01 am

Hi Jim, I am curious as to what these values mean and how they effect my decision making. I am not concerned about you seeing the numbers I am using in this estimation. I am running many scenarios and to you I am just an email address and my results are just numbers to you. I will save this as a practice evaluation and email it over. I hope to learn more about how that column works based on your explanation. Thanks for your help.

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