★ Rockstar Review: cFIREsim (Early Retirement Calculator)
This is part of our Rockstar Reviews series.
Be sure to check out all previous products we’ve reviewed!
This week we partner with Mrs. BITA to review our first calculator! We’ll be doing a lot more of these in the future, and a huge thanks to her for really spending some quality time sharing the ins and outs of cFIREsim for us here today. We hope it helps!
cFIREsim – A Crowdsourced Financial Independence and Early Retirement Simulator
You plan to one day achieve financial independence and then retire early. How do you know if your plan is a good one or if it’s doomed to certain and sad failure?
Enter cFIREsim. cFIREsim asks you a few basic questions about your retirement plan (portfolio value, asset allocation, withdrawal rate, etc.) and then simulates your financial future based on how the market has performed historically.
It is a free web-based tool. You can fiddle with the various knobs and see how the changes to your portfolio, savings rate or withdrawal rate are likely to affect your retirement outcome. Hours of good, wholesome fun guaranteed!
What Exactly Does cFIREsim Simulate?
Think of cFIREsim as a time machine that allows you to see how your plan would have performed in the past. What if you had retired during the Great Depression? Or during the 70s stagflation? You can cruise through financial history and find out if you would have ended up a millionaire many times over, or died a pauper in a poorhouse.
cFIREsim uses historical data about the performance of stocks, bonds, gold, and inflation to calculate how your portfolio would have done in years past. It uses data from the year 1871 to present day to simulate portfolio performance. The basic idea is that if the future performance of the market is no worse than the worst known performance period in history, and your portfolio survives the past, then you have a good chance of flourishing in the future.
You tell cFIREsim the length of the retirement you want to simulate. Let us say that you choose a period of 30 years. cFIREsim will take your portfolio, assume that you retired in 1871 and then simulate how you would have done from 1871-1900. It will then assume that you retired in 1872 and calculate your portfolio performance from 1872-1901. It will do this for every 30 year period for which it has data available. Can your portfolio survive every 30 year period from 1871 to now? If so, odds are you are going to do A-ok in the future.
Now that we understand what the tool does, let’s dive in and take a look at it.
Input Your Data into cFIREsim
Mrs. NoMoreWork plans to retire in 2027 at the ripe old age of 45. She optimistically estimates that she will live to be 100 years old. She enters this data into cFIREsim.
Next, she needs to tell cFIREsim about the current value of her portfolio (i.e. the value of her portfolio now, in 2017). Mrs. NoMoreWork currently has $500,000 split across her 401k and Roth IRA accounts. She has an additional $250,000 in her taxable brokerage account. This gives her a total of $750,000 in savings. Her asset allocation is 75% stocks and 25% bonds.
She likes to live dangerously, so she holds no cash. She is not a fan of shiny stuff, so she owns no investments in gold. Her average expense ratio is 0.08%. And perhaps a tad unrealistically, for the sake of our simple example, she plans to save no more money between 2017 and the start of her retirement in 2027.
She pops all of this data into cFIREsim.
She sticks with the defaults for Keep Allocation Constant and Rebalance Annually. This means that she always wants to hold 75% stock and 25% bonds, all the way till the end of life and that she wants cFIREsim to rebalance her portfolio to maintain this asset allocation depending on how the markets perform in the given historical period that cFIREsim is investigating.
Now Mrs. NoMoreWork needs to tell cFIREsim how much money she plans to withdraw from her portfolio every year once her retirement begins in the year 2027.
The heroine of our story has been tracking her expenses for a few years now and knows that she needs $50,000 gross income a year to live a happy life. Mrs. NoMoreWork needs to calculate the gross amount because cFIREsim does not take taxes into account. In other words, if Mrs. NoMoreWork actually needs to spend all $50,000, she will need to withdraw a higher amount to account for the taxes that she will owe.
This is where things get tricky, because the best that one can do is to estimate taxes based on current tax brackets and rates, and there is no telling what the future may hold.
She chooses the Inflation Adjusted spending plan (there are other options too, and we will go over them later). cFIREsim uses Consumer Price Index (CPI) data for its inflation calculations. This Spending Plan keeps Mrs. NoMoreWork’s spending power constant during her 55 years of retirement (e.g. she will withdraw $50,000 in the first year, and maybe $50,740 in year two when $50,740 now buys the same number of goods that $50,000 bought the previous year).
cFIREsim has other input options too, but just these three are sufficient to run a simulation. Let us first see if Mrs. NoMoreWork is in a position to retire in 2027, and then we will investigate what else cFIREsim has on offer.
cFIREsim Simulation Results
The first thing you will see on the results page is this beautiful graph. The graph shows how Mrs. NoMoreWork’s portfolio performed during every 65 year period in history (10 years of no withdrawals plus 55 years when she does withdraw $50,000 every year).
On cFIREsim’s site, this graph is interactive. You can mouse over every simulation line and it will show you the start and end year for the simulation and the value of your portfolio wherever your mouse happens to be.
We see that on the whole Mrs. NoMoreWork’s portfolio has performed impressively. In most cases she dies with many millions to her name.
cFIREsim allows you to download the data that is used to make that pretty graph as a .csv file which you could then upload into Google Sheets or Excel, or any other software that recognizes that file format.
So if you are the kind of person who is happiest tinkering with spreadsheets and plotting your own graphs, you can have all the data from your retirement simulation handy.
cFIREsim Also Spits Out a Bunch of Statistics
I’ll show you a few of them. If I go over every one this review would be a thesis.
In all of recorded financial history, Mrs. NoMoreWork’s portfolio would have succeeded over 85% of the time! Her median ending portfolio value is over $5,000,000! That is a nice inheritance to leave her lucky progeny (or bequeath to her cats, who knows).
Mrs. NoMoreWork could decide that an 85.37% success rate is good enough for her to sleep well at night. She figures that if her actual retirement ends up being more like the 1906-1971 cycle of doom, she will pick up some part time work and cut back on spending to prevent her portfolio being depleted.
Or maybe Mrs. NoMoreWork will decide that this success rate just doesn’t cut it. She could go back and adjust the parameters in cFIREsim to see what changes would yield a better result. She may find that cutting her spending down a little improves her chances of success. She may instead decide that she will work an extra two years before she retires. Or she could try out different asset allocations.
Let us see what happens if Mrs. NoMoreWork decided to live off of $45,000 a year instead of $50,000.
cFIREsim’s happy rainbow graph shows fewer sad lines sagging below $0, and we see that by curbing her spending by $5,000 a year Mrs. NoMoreWork’s plan now has a success rate of over 90%.
cFIREsim makes it so easy to play with all the variables and see how they affect the plan.
More About cFIREsim Input Options
Let us now take a closer look at the other ways in which cFIREsim will allow you to customize your retirement plan.
If you expect to receive a payout from social security for yourself or your spouse, you can tell cFIREsim about it. This allows you to simulate your outcomes both with and without social security. If you are one of those unicorns who will actually receive a pension (I turn an ugly shade of green at the very thought), you can tell cFIREsim about that too.
What if you plan to earn more income and pad your stash? Maybe you plan to save some more between now and your retirement year? Maybe you know you will generate some income from a side hustle after you retire. Either way, cFIREsim allows you to tweak the inputs and feed it this data.
It also allows you to account for extra spending. Maybe you plan to pay for a college education, or your son’s wedding, or buy a new car. You can plan that out and tell cFIREsim to increase your spending sporadically throughout your retirement.
Impressed yet? Well hang onto your hat, because there is more.
Remember how Mrs. NoMoreWork asked cFIREsim to simulate Inflation Adjusted spending during her retirement? Well that isn’t the only spending model that cFIREsim can simulate.
Explaining each of those models is far beyond the scope of this review, but I did want to point out that if an Inflation Adjusted spending model was not your piece of cake, there are plenty of other options on offer at the cFIREsim input buffet.
Another thing that cFIREsim allows you to tweak is your asset allocation over time. In the example above Mrs. NoMoreWork stubbornly chose to stick to a 75/25 allocation until she was on her deathbed. You don’t have to do the same. You can choose No in response to Keep Allocation Constant and then tell cFIREsim what you want your new asset allocation to be, and by which year you want your asset allocation change to be complete. cFIREsim will use what is called Glide Path allocation change to gradually simulate changing your asset allocation in the Start Year specified to get to the desired allocation by the End Year of your choice.
You can use cFIREsim without creating an account. If you do play with it a lot though, typing in all your input parameters over and over again can quickly get old. If you do create an account and sign in you can save your input parameters and then reload them as needed. You can save multiple simulation inputs for the different scenarios you may be currently investigating.
By this time it should be clear to you why cFIREsim can keep you busy for many happy hours. Retirement planning has never been this much fun.
What cFIREsim Does Not Do Well
While I am quite the cFIREsim fan, and have whiled away altogether too many hours playing with it (planning, I meant planning), it does have some serious drawbacks. Retirement planning and withdrawals during retirement are a lot more complicated than this simple tool would have you believe.
Here is a non-exhaustive list of things that cFIREsim does not take into account:
- It does not allow for any kind of tax planning. You have to do that math on your own and adjust your inputs accordingly.
- The simplistic model does not take RMDs (required minimum distributions) into account. After age 70.5 you are required to withdraw a certain minimum account from certain types of retirement accounts, and cFIREsim does not take that into account.
- It treats all your money as if it sits in one big bucket when the truth is that you will probably not be able to touch some of your money without penalty before a certain age.
- It doesn’t understand or simulate Roth conversion ladders.
- It calculates things like inflation and changes to your portfolio value only once a year, and that is not realistic.
- It assumes that you make your withdrawal once every year and cannot simulate monthly or quarterly withdrawals which is what you are more likely to do in real life.
Another major downside of cFIREsim is that the author of the software no longer appears to be actively working on it. He goes by the name bo_knows on various forums and is active on the /r/financialindependence subreddit, so you can reach out to him with specific questions or to report bugs, but I have no idea when or if any issues would be resolved. The cFIREsim forums appear to be dead.
There is a FAQ/Tutorial on the site, but it is rudimentary and does not explain all the options.
The version of cFIREsim on the site right now is a new version. My understanding is that bo_knows wrote the original software by himself and then got together with a group of developers with the goal of rewriting/enhancing the software. This new version is what you now see on the site, and it does have some enhancement but it doesn’t yet have all the capabilities of the old cFIREsim. For now, you can still access the old cFIREsim here.
cFIREsim can teach you many things about your retirement plan and about the possible long term effects of changes that you make to your plan. It is extremely comforting to know that your plan would have succeeded 90% of the time in history. It feels great to know that you would have survived the Great Depression. cFIREsim is good at making you feel more confident that early retirement isn’t a fairy tale. As long as you remember that the past is not a perfect predictor of the future, you should have a grand old time playing with cFIREsim.
You can access the calculator (for free) here: cFIREsim.com
About the author: Mrs. BITA immigrated to the U.S. at the ripe old age of 30 and is on track to retire early at the age of 42. She is the founder (grand poobah, dictator, janitor, and sole author) of www.bayalisistheanswer.com, where she blogs about financial independence, retiring early, financial how-tos and finding a purpose.
Rockstar Reviews usually include affiliate links to the services being featured. This one does not as cFIREsim is crowdsourced and doesn’t sell or charge anything. Hooray!