In this episode of ‘It’s a Number Game’ podcast, Adam Morris from the MSP Finance Team introduces viewers to FIRECalc, an online tool for evaluating business valuation and retirement planning.
Discover why it’s crucial to get the right valuation for your business, the risks associated with undershooting or overshooting your financial targets, and how to use historical data since 1873 for more accurate projections. Learn to set realistic spending and portfolio goals, adjust for various financial scenarios, and understand the impact of different spending models and portfolio strategies. This tool empowers you to make well-informed financial decisions based on historical evidence.
00:00 Introduction to the Podcast
00:31 Introducing the FIRECalc Tool
01:15 Understanding the Importance of Accurate Valuation
02:33 Getting Started with FIRECalc
03:19 Running Initial Scenarios
07:34 Adjusting for State Pensions and Spending Models
11:10 Exploring Portfolio Adjustments
15:56 Final Thoughts and Additional Considerations
Listen & Watch on Apple Podcasts (Spotify & YouTube coming soon)
Connect with Daniel Welling on LinkedIn by clicking here – https://www.linkedin.com/in/daniel-welling-54659715/
Connect with Adam Morris on LinkedIn by clicking here – linkedin.com/in/adamcmorris
Visit The MSP Finance Team website, simply click here – https://www.mspfinanceteam.com/
We look forward to catching up with you on the next one. Stay tuned!
Transcript;
Adam Hi there everyone. Uh, welcome to it’s a number game podcast. And today we’ve got something slightly different. This is Adam Morris from MSP finance team. And today. We’re going to work through. An online tool, which I hope you’ll find very useful.
Adam And presumably your hair, because your really interested to know. The question of how much is enough when it comes to working out. What valuation you need to get for your business? So today I am going to introduce a tool to you, which I personally have found very useful and indeed continue to use it. And play with it. And the tool is called fire calc.
Adam You may have come across it. Maybe not. Um, I think it’s relatively unknown out there. And, uh, as far as I’m aware, A lot of ifs. Um, don’t use this tool. Um, they use something else probably around. Um, cashflow cashflow analysis. Um, and maybe that’ll use Monte-Carlo calculations. Um, which we might touch on later. Uh, but this tool, this tool is a little bit different and this is why I want to bring it to your attention. And what’s, what’s the question here? Why are we. Talking about this.
Adam And I think the reason I wanted to go through it was because it’s a hugely important question to ask. And it’s also very complex. And there’s a lot of risk associated with not getting close to the right answer. So on the one hand, you don’t want to undershoot and not. Create the level of capital that you need. Uh, in your retirement. Um, or for whatever else you choose in life. Uh, but on the other hand, Um, Your business, uh, or a lot of your, um, Personal wealth is tied up in a single stock.
Adam If you like your MSP. And with that comes risk. And so, um, you know, do you, do you want to, uh, keep that business going with all of the effort required? And potentially find out you have way more than you’ll ever need and you overshoot your target. Um, and that additional money whilst it’s nice to have, doesn’t actually provide you with. Um, actual utility. I guess so, so this is why it’s important.
Adam So let’s, let’s, let’s, let’s dig in. So you can see the tool here. And in front of you and I’m just going to. Quickly, um, Get to grips with it in terms of explaining roughly what it does. And the main difference between this and other. Other tools, is it basis your. Uh, projections. On. You know, not on. Scenarios around growth rates. Um, inflation rates and things like that. Basis. Purely on what has actually happened. Since 1873, I think it is. Um, And, um, that way it’s a different way of looking at how your. Um, calculations or your projections may work out. Anyway, it’s as best explained if I actually just run a scenario. So I think what we’ll do is if you look at here, we’ve got start here.
Adam We’ve got a spending. Figure a portfolio figure, initial portfolio figure. And the years that we want to, um, spend that amount each year. And so what we’ll do is we’ll start off with a 3 million.
Adam Uh, portfolio figure.
Adam Make sure I got enough. But the right number is zeros in there. We’ll say we’re in for 40 years. And we’ll say that we’ve got a. Um, an annual spending of 150,000 say. So look, these are just a made up figures. Obviously you need to start with something that’s close to what you’re looking for. That may 150, maybe higher.
Adam It may be lower. Um, But a 3 million figure is probably not a crazy, um, starting point from the perspective of this particular scenario. So let’s just submit this now.
Adam And what we’ll see here is the results of this. And we can see that. We have a graph here with. Which looks crazy, but this is all of the 114 cycles. Throughout. History, uh, when we started to measure, um, the stock markets. And we can see what happened in each of those eventualities. If we invested three months, 3 million,
Adam And, um, we can see. According to this. That the outcomes ranged after 40 years from a negative 8 million to a positive 30 million. And that the average at the end of this 40 year cycle was 3 million and this is inflation adjusted. So we don’t need to worry about the 3 million. Uh, in 40 years, time being worth a lot less than that.
Adam It’s in today’s money. So that’s one of the beauties of this tool. So it makes it far, far simpler. And then there’s a key stat here, which says that fire calc found 46 cycles that failed for, for a success rate to 59%. So, um, clearly what we’re looking to do here is we’re looking to, uh, work on data that gives us a higher level of confidence. That it’s going to work. Uh, and that’s subjective.
Adam Obviously we can determine what we want. Um, in terms of that level of risk. Um, now what I’m going to do is take a straight away. To a scenario here. Which is about what our starting portfolio needs to be. So given a success rate, determine spending level for a set portfolio or portfolio for a set spending level. So if we now run this. We’re going to now get a little graph here, which starts to tell us. That if we, uh, increase our. 3 million total. Investment. Target to four and a half million. We actually arrive at a hundred percent. Success rate. For that 150,000 a year. And you can see how the success percentages drop. As our initial investment is lower. So this starts to start or starts helping us think about what kind of figure. We need to work towards. But what I’ve just shown you is the basic starting point. Now we need to get on to working through. A bit more detailed because this can make a huge amount of difference. And actually it’s quite surprising what we can achieve. Um, just by, um, adding some additional detail into this. So we’ll stick with this initial. Scenario here. But what we’ll start to do is populate some other fields. And the first thing we’re going to do is we’re going to. Add in our state pensions. Uh, I don’t know exactly what these are today, but I think they’re at about 10,000. And let’s say we’re married. And I’m going to leave those figures there. Uh, 20 37, 20 39 for when those kick in riches about whatever that is 15 years time.
Adam So that puts, um, Puts this scenario. After the age of about, uh, whatever 52, 53, something like that. Um, And, uh, we’re going to submit that.
Adam And that’s made a bit of a difference, but not a huge difference.
Adam We’re now going to go into spending models. Now this is really interesting. Actually before we do that, let’s go to portfolio. And, um, I’m just going to show you here. That you can adjust what type of portfolio you have. I’m not going to spend a lot of time on this. But we’re going to stick with a total market portfolio for this example.
Adam And we’re going to stick with a 75% equity to bond ratio. The only thing I’m going to do slightly. It’s just increased this, um, fees here because I think that’s on the low side. Um, we’re just going to pull that 0.3. Just to perhaps make that a bit more accurate. Obviously the fees that you pay for your investments can be anywhere from 0.1 to two, 2%.
Adam And, you know, they can make a huge amount of difference. In fact, that you could investigate the difference that they make. So, but we’re going to stick with, uh, stick with the total market here. And at 75% on that. Equity ratio. But let’s just submit that.
Adam And that wouldn’t have made much difference. Just that one adjustment, then it hasn’t. And now we’re going to come back to our. Spending model. And the current spending model that we’ve based this scenario on is, is based on a constant spending power. I will to spend 150,000 a year. Each year. Every year until I die. And the reality is that that’s not going to be the case.
Adam Reality is you’re going to want to spend less, as you get older and older, you know? If you’re well into your eighties, you’re not going to be spending the same amount. That you are in your sixties or fifties. You’re just not going to be. So there’s different models that we can play around here. There’s the Benicky model, which is about. Um, Adjusting your spending. Once you get to 56 or older. And that’s a great model.
Adam I liked that very much. There was also percentage of remaining portfolio. Which you can work on. Um, but let’s have a look at this Benecchi retirement model and let’s say we’re 55 today.
Adam And we could submit that.
Adam And what we can see now. Is because we’re willing to. Spend. Less than one 50. A lot less. And we’ll come onto that in a second. When we’re a lot older. The amount we need now has reduced significantly from over 4 million. To 2.8 million. At a hundred percent. Um, risk. Um, in fact, it drops down to just over 2.3 million, just under 2.3 million. Uh, sorry. 2.3 million at about 83% risk. So there’s kind of a huge difference there. And. We can also go into portfolio changes.
Adam This is something else we might want to look at. So, for example, we might say. We’ve got an inheritance coming away. So let’s just say the 300,000. Coming in as an inheritance and perhaps that’s coming in. 20. 30. That’s safe. So we can submit that. Um, And do you know what though? Maybe. Maybe we want to also. Add in a sub. Subtraction. Four. Uh, some large payment that we’re putting in, let’s say we’re going to put in a hundred thousand.
Adam Because we want to help our kids get on the property ladder or something like that.
Adam So maybe that’s maybe that’s going in there. Say 20, 30, 20, 28. Uh, so we’ll just put that in these, aren’t gonna make a huge amount of difference, but it’s important to plug in some of these larger numbers that you have plans for. Um, So, where does that leave us? About two and a half billion at a hundred percent. And if we come back to our investigation model, And we go back to our, how. The the, the standard, uh, display the results of their time and plan. And submit that. You’ll now see this graph here, which describes the Benecchi. Um, Year by year spending plan and how at 55, we’re spending 150,000, but actually. 20 years, time or 75. We’re going to be spending somewhere around it’s about 70,000. And, um, you might look at that and you might go, ah, actually that’s absolutely fine. Um, But it’s what is interesting here is we’ve got a hundred percent. Uh, success rate. And. Um, we can play around. With that, with that level of risk. The other thing I quite like to do and it’s up. Completely up to you, of course.
Adam But on your portfolio, on your rub before portfolio changes, we might, you might want to think about. Um, equity release, perhaps you’ve got quite a lot of assets, quite a lot of money tied up in the value of your home. So, um, you might want to add an adjustment in there. Let’s just say it’s, um, 500,000 as a. I see you’re missing your home’s worth a million today. So we might say. Actually, um, if things get tight on willing to. Uh, take out 500,000 in equity release. And I might do that in 2042. It’s just submit that and see what happens. Um, And now we can see that.
Adam We saw it off with 3 million, but actually. It just keeps, keeps growing and growing. Um, and you can see here. The impact of putting in that half a million. It’s around that date. So we’ve got an opportunity to hear now to increase the level of incomes significantly because we’re overshooting right now, Rover shooting. So if you go back here, And we go back to our start here. Let’s say you want to increase.
Adam We’ll start off with 200,000 on this model.
Adam I
Adam submit that.
Adam And now that we can see. That we are out of the 114 cycles. We had four cycles of failed. Which gives us a 96.5. Percent. Success rate. But we’re starting off by spending 200,000. And in fact, even when we are into our. Uh, seventies, we are now at something like 90,000 of income. Considerably different. Um, so this is considerably different from the initial scenario. Where we were look where we were investing 3 million. And looking at 150. And we had a low success rate. And now we’re at 95%. When we’re starting to spend 200,000. And if we come back to the.
Adam Investigation piece.
Adam And we, again, click on that starting portfolio.
Adam We can see here. Uh, these numbers correlating. Um, and that fact where. We’re looking at 2.9. As a total for that level of success.
Adam So I hope. That has been useful for you and would. You can have a play with this and you can start to. Triangulate into Mo. What might work for you based on historical data of what has actually happened. Um, there’s one further thing you can do with this, which is quite useful. Let’s say you’re not currently. Uh, planning to sell.
Adam Um, but you’re planning to say sell in five years time.
Adam Um, and you, so you can start to play around with. How much, um, you currently have. Um, And, you know, Th th the difference of that. That that will make. Um, and this, this makes a huge amount of difference actually. Um, so that’s another bit of homework you can, you can take away with you. Um, So. I’ve looked at it soon. Do you think. Um, interested in any comments you may have. Uh, around the tool. Um, Just one further point.
Adam Um, I guess I wanted to make, was this doesn’t. Take into consideration. Capital gains tax. It’s not that. Uh, That would just be far too complex and it probably US-based in any case. So for the gains that you make. You need to factor in some couple of gains tax. On on that. Uh, on that 100 and or 200,000. You know, the B portion of that, which is taxable.
Adam So that’s just something else to bear in mind. Um, but yeah. I hope you find that useful. Um, Let me know what you think. Thank you. And so you’re going to say.