100% success at 7% initial withdrawal rate

[Sam]

Hi all,

For those who are constantly bugged by the 4% rate, here's something to make you feel better.   Run firecalc, and input:

Withdrawals:  7
Starting portfolio:  100
Life span:  10

The result is 100% success, and the mean portfolio after 10 years is 114!  But everyone's retirement lasts longer than 10 years.  Well, run firecalc for another 10 years, this time use 114 for the starting portfolio, and 7.98 for withdrawals.

Again it will be 100% successful, and the new mean balance will be again greater.

Smile, you can retire much sooner now.
Sam

 

[Robert the Red]

Such bad statistical reasoning. You should restart Firecalc not with just the MEAN output after 10 years, but multiple times with all the final conditions -- some of which would be very low and some very high. The low ones would be the ones that would kill you.

Of course, doing what I just suggested is more-or-less the Monte Carlo approach.

 

[GolferAndy]

I'm not an expert, but I don't think you're using Firecalc as it was intended to be used. The 100% success results for a 10 year period with a 7% withdrawl rate simply means that you still have sufficient funds at the beginning of year 10 to withdraw 7%, even assuming the worst of times. It doesn't guarantee anything is left in year 11 because you told it there wasn't going to be a year 11.

Look at the results if you start this scenario in 1973 with one million dollars and a 75% allocation to stocks. After 10 years you're down to about $52K. If you instead use a 4% withdrawl rate in 1973, at the end of 10 years you still have about 950K. Slight difference I'd say!

 

[youbet]

Sam,

I'm having trouble finding a feature on the calculator you seem to have found.  Where is the box I check to guarantee at least the average residual amount?  Like you, I can't afford any return less than average and that must be guaranteed.  After I find the box and check it, what documentation do I keep to prove my guarantee later if I happen to RE into a high inflation/down market situation?  And who do I present the guarantee to to get the situation straightened out?

Ain't statistics wonderful?  And isn't it amazing what a little misunderstanding can do to people?

youbet

 

[Nords]

Judging from the initial response, Sam, you're going to have to start borrowing Justin's "This is sarcasm!!" disclaimer...

 

[Sam]

Judging from the initial response, Sam, you're going to have to start borrowing Justin's "This is sarcasm!!" disclaimer...

Thank you Nords.  I didn't include the disclaimer, thinking that it would be redundant or too obvious.

Sorry guys, it was just a joke.  A twisted way to turn a ugly situation into something more bearable.

Sam

 

[REWahoo]

Sorry guys, it was just a joke. A twisted way to turn a ugly situation into something more bearable.

Sam, are you still being sarcastic? Or have you retreated to the basement and crawled under the bed with Apocolypse/Greg?

 

[sgeeeee]

Hi all,

For those who are constantly bugged by the 4% rate, here's something to make you feel better.   Run firecalc, and input:

Withdrawals:  7
Starting portfolio:  100
Life span:  10

The result is 100% success, and the mean portfolio after 10 years is 114!  But everyone's retirement lasts longer than 10 years.  Well, run firecalc for another 10 years, this time use 114 for the starting portfolio, and 7.98 for withdrawals.

Again it will be 100% successful, and the new mean balance will be again greater.

Smile, you can retire much sooner now.
Sam

Although I'm pretty sure Sam is joking, this is probably representative of what most retirees end up doing. FIRECalc finds the worst case. If retirees experience anything better than worst case, they are likely to find themselves with lots of money 10 years into retirement. If they don't readjust their spending model at that point, they will end up giving a lot away to relatives and the IRS on their demise.

 

[Sam]

REWahoo,

Who's Apocolypse/Greg?

Sam, are you still being sarcastic?  Or have you retreated to the basement and crawled under the bed with Apocolypse/Greg?

 

[Sam]

sgeeeeee,

Yes, it's a joke.  I think it's too risky at 7%.  But I also think it's ridiculous at 4%.  Life is full of risk and is too unpredictable to always play it safe.  I have decided on 6% initial rate and adjust accordingly based on the performance of the previous year.  In all case, I will try to never go below 5%.

When I was 19 years old, I decided to escape from Vietnam by boat.  My estimate chance of success is around 50%.  I'm somewhat spoiled now after 28 years in the US, but I think I can live with 90%+ chance success 

Sam

Although I'm pretty sure Sam is joking, this is probably representative of what most retirees end up doing.    FIRECalc finds the worst case.  If retirees experience anything better than worst case, they are likely to find themselves with lots of money 10 years into retirement.  If they don't readjust their spending model at that point, they will end up giving a lot away to relatives and the IRS on their demise.   

 

[REWahoo]

Who's Apocolypse/Greg?

This guy: http://early-retirement.org/forums/index.php?topic=6486.msg115691#msg115691

There is a belief on the forum that the bed he resides under is located in Martha's basement. Posts such as this one reinforce that myth:

http://early-retirement.org/forums/index.php?topic=5422.msg100894#msg100894

 

[cute fuzzy bunny]

Its not so much that the 90% success rate means you'd make it 9 out of 10 times...pretty good odds. Its that you wont survive a 'great depression' or 'stagflation/sideways market' conditions. Whether one or the other will happen in our remaining lifetimes is debatable...but unless you get 100% success out of firecalc...you wont make it through an event like that.

But then again, as I often say, everyone else is going to be in very deep doo-doo as well, and we'll all still probably have some assets and expertise that will keep us afloat.

 

[GolferAndy]

Ok Sam.. ya fooled me (and others) and I gave you a serious reply. Your joke and my mistake. Won't happen again. But what's this about 6%? Another joke? I hope so for your sake.

 

[Sam]

Ok Sam.. ya fooled me (and others) and I gave you a serious reply. Your joke and my mistake. Won't happen again. But what's this about 6%? Another joke? I hope so for your sake.

Sorry about the 7% joke, GolferAndy.

The 6% is not a joke.  It's real for me, but with some tuning based on the performance of the previous year.  Thanks for your concern.  I am not even trying to convince anyone at all to use that percentage.  It's simply the risk level that I'm comfortable with.  Besides, I know I don't have to be dependent on a fixed yearly income.  If it's a good year, I spend a little more.  If not, a little less.  Not much different from my way of life as an adult.  And I suspect it's the same for most people too.

Sam

 

[Sam]

Its that you wont survive a 'great depression' or 'stagflation/sideways market' conditions.  Whether one or the other will happen in our remaining lifetimes is debatable...but unless you get 100% success out of firecalc...you wont make it through an event like that.

CNF,

I understand you perfectly.  I fully understand the ramification of the several depressions since 1871.  But who's to say that the next depression won't be worse than the worst depression experienced so far?  Should that be the case, the 4% rate won't save me either.

Sam

 

[retire@40]

Its not so much that the 90% success rate means you'd make it 9 out of 10 times...pretty good odds.  Its that you wont survive a 'great depression' or 'stagflation/sideways market' conditions.  Whether one or the other will happen in our remaining lifetimes is debatable...but unless you get 100% success out of firecalc...you wont make it through an event like that.

I've thought about that, but I think in case of a depression scenario, I would make adjustments to my lifestyle (that I don't think can be done in FIRECalc) allowing me to mold myself to new economy and still survive.

If I fully retired today and a depression hit tomorrow, I've positioned myself with lots more cash than the average person to manage to live on the bare essentials until times got better. For example, compare me with say $XXXK in cash with no job to everyone else with little or no cash and no job. I'd still be better off than most other people and if they survive, I would survive. If it's so bad that most people die, then I guess we are all screwed.

If a depression happened half-way through or toward the end of my retirement, it would affect me even less since avoiding the worst of times in the first half of my retirement would have allowed me to build my portfolio to an inflation-adjusted higher point than when I had first retired.

So I think 90% is still doable.

 

[cute fuzzy bunny]

I understand you perfectly. I fully understand the ramification of the several depressions since 1871. But who's to say that the next depression won't be worse than the worst depression experienced so far? Should that be the case, the 4% rate won't save me either.

Absolutely correct. Just waving the magic wand over the risk scenario a little bit. One could look at the risk in terms of running across the highway with a paper bag over your head. Occasionally a motor bike comes along and you might have a good chance of dodging it by listening to the sound. Once every ten times it hits you and messes you up a bit. Thats workable. Once every 50 times a silent bus comes along and absolutely creams you. Doesnt matter how big the bus is.

Its not a matter of increasing or decreasing the number of motor bikes to measure 'risk'...which is what a lot of people model. Trying to mitigate the damage done by the bus is, I think, the really important part.

As the Noodge Who Was Late For Dinner indicates, if and how you prepare for the bus is whether you survive, not what percentage firecalc kicks out.

If you have no debt, a few years worth of cash, a willingness to return to work, and/or the ability to have complete control of your expenses...anyone with a solid net worth is going to make it.

If you've got a couple of grand a month in fixed expenses you cant avoid, low cash, the inability or unwillingness to work a little, and you cant ratchet down the monthly costs (and the debt thing is key here), the bus kills you and thats that.

Its worth noting that a bus already went by not that long ago and fortunately the damn bus service doesnt schedule them that close together...

 

[justin]

I've decided to take a 8.9% SWR and retire next year on my nest egg. I'm moving to Thailand and plan on supporting my family on $2000 per month. Firecalc says it is a little risky but I can always go back to work if my portfolio fails me.


(this is sarcasm).

 

[cute fuzzy bunny]

If they dont have any busses in thailand, you're good to go!

 

[Sam]

One could look at the risk in terms of running across the highway with a paper bag over your head.  Occasionally a motor bike comes along and you might have a good chance of dodging it by listening to the sound.  Once every ten times it hits you and messes you up a bit.  Thats workable.  Once every 50 times a silent bus comes along and absolutely creams you.  Doesnt matter how big the bus is.

Its not a matter of increasing or decreasing the number of motor bikes to measure 'risk'...which is what a lot of people model.  Trying to mitigate the damage done by the bus is, I think, the really important part.

The analogy sounds interesting, but what's the point?  You definitely can mitigate the damage done by the bus by never crossing the highway with a paper bag on your head!

Actually, I would never cross any road blindfolded, let alone a highway.  I think the relevant point here is that even 4% is not 100% future proof.

Sam

 

[cute fuzzy bunny]

The point is that we're all running across the highway with bags on our heads. We have absolutely no idea whats going to happen.

Some of us have two bags, just in case the first one slips.

Some are so scared of the bus that they never cross the road. Imagine your whole life standing in the breakdown lane, listening for the screams of those hit by the bus. With two bags on your head.

 

[ESRBob]

CFB-
Great analogy.

I don't want to stop in the middle of the road, but I don't want to spend my life dancing around on the side of the road, either, missing out.

But does your metaphor mean we are going to spend 50 or 60 years crossing the road? In that case now I am getting worried!

I think we all want to get safely to the other side as quickly as possible. Is that possible? Or is the other side of the road kinda like the other side of the River Styx... sort of a terminal condition?

Hey, anybody you know building tunnels?

 

[Nords]

It's a great joke-- why did the ER wannabe cross the road?

Hey, anybody you know building  tunnels?

It's hard enough doing this topside without worrying about collapsing mineshafts...

I met an electrical engineer with a master's degree at Home Depot last week. He could have been fibbing, but he works in Home Depot's electrical-supplies department and he knows he could get called on it. As long as Home Depot is hiring people like him, I don't care how many paper bags are on my head-- I'm crossin' that road.

 

[Sam]

The point is that we're all running across the highway with bags on our heads.  We have absolutely no idea whats going to happen.

CNFB,

I see what you mean now, and I agree.  But this analogy should not be limited to the "Early Retirement decision".  This analogy applies to life, from birth to death.

Sam

 

[ash]

When I was 19 years old, I decided to escape from Vietnam by boat. My estimate chance of success is around 50%.

Thanks for the perspective! Life is risky, and you have to enjoy it while you're here.