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Old 12-12-2010, 06:51 AM   #41
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Originally Posted by cho oyu View Post
There's a difference in assumptions in the two scenarios:

Scenario 1: planning for retirement only looking with a forward model(i.e. your person B)

Scenario 2: planning for retirement by including both recent past and modeled future results assuming temporal autocorrelation (your person A); the answers to this simulation are merely a subset of answers to scenario 1

Therefore, scenario 1 is a more robust answer to a monetary survival question.

As to whether it is better? That depends on how well one thinks that the future can be predicted based on the past. Ultimately, which imperfect prediction method allows you to peacefully sleep each night?
Why would one assume temporal autocorrelation for A and not for B?
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Old 12-12-2010, 07:06 AM   #42
Recycles dryer sheets
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Originally Posted by FIRE'd@51 View Post
While I see your point, it is inconsistent with a FIRECALC probability prediction because of the 5-year time difference.

At this point A has 25 years to go and B has 30 in terms of measuring the success of a FIRECALC prediction. Certainly FIRECALC would say that A has a higher probably of success for 25 years than B for 30 at the same withdrawal rate. By saying they both now have 30-year horizons, you are implicitly saying that A should have based his initial withdrawal rate on a 35-year time span.
Yes, there is an implicit assumption that A retired earlier, should have (and did) base his initial WR on a longer period. But that was then and this is now. In spite of A getting an earlier start on ER, they have both experienced the same markets over the last 5 years. They are the same age, have the same expenses, portfolio, AA, etc.
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Old 12-12-2010, 11:34 AM   #43
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Originally Posted by Arnie View Post
Yes, there is an implicit assumption that A retired earlier, should have (and did) base his initial WR on a longer period. But that was then and this is now. In spite of A getting an earlier start on ER, they have both experienced the same markets over the last 5 years. They are the same age, have the same expenses, portfolio, AA, etc.
This is always good for an argument. But truthfully, it is understood best on a first take before you get confused. Short of some sort of magic attribution, it cannot matter, as I posted above. After a huge crash, another one is somewhat less likely. But just as less likely for a new retiree as for the battle scarred and portfolio damaged veteran. Valuation is what counts, not path.



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To give you a more serious answer, I agree with your conclusion 100%. Early on I would read the explanations of how the history of one’s getting to the present effects his chances going forward- given same size port, same WR, and same required duration. But I cannot see how it possibly could matter.

Because the markets tend to be mean reverting over long periods of time, (as to value ratios, not level) I believe that the market has some sort of memory. Its history does matter, as opposed to the model of it being a Monte Carlo generator. But the market has no idea when you or I dropped in, and would be indifferent to this information if it had it.


Ha
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Old 12-12-2010, 02:23 PM   #44
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This is always good for an argument. But truthfully, it is understood best on a first take before you get confused. Short of some sort of magic attribution, it cannot matter, as I posted above. After a huge crash, another one is somewhat less likely. But just as less likely for a new retiree as for the battle scarred and portfolio damaged veteran. Valuation is what counts, not path.
Yep.
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Old 12-12-2010, 05:09 PM   #45
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I like simple plans. However, I don't think it is reasonable to run FIRECALC (or any set of tools) on the day you retire, then plan to blindly adjust your withdrawals by inflation until the day that you and your spouse die. Though running such tools is a reasonable approach for determining your initial withdrawals.

I think it is more reasonable to do roughly the following.
  1. Decide what success percentage rate you want.
  2. Look up not just your life expectancy (joint if married, a 50% chance number), but rather when you have at least your success percentage odds of being dead. Basically determine your optimistic life expectancy number.
  3. Plug your portfolio information and your optimistic life expectancy number into FIRECALC and/or your other tools of choice, and have the tool(s) tell you your safe withdrawal rate at your success percentage.
  4. Try to spend at most that much, or try to WORK. However, don't worry too much if during a bear market you spend using a previous year's prediction for a few years.
  5. Wait a year.
  6. Repeat from step 2. Note that your life expectancy has now probably gone UP, but baring medical breakthroughs it has probably gone up by less than a year.
The main disadvantage of this approach is that you will not have nice constant inflation adjusted withdrawals. The main advantage is that you will have annual course corrections.

If nothing else, just surviving means you need to adjust your life expectancy. For example, according to the SSA tables, a single 50 year old male can expect (50/50) to live another 28.78 years until he is 78.78. So say he naively plugs 29 years into FIRECALC and similar tools and decides to retire. In 29 years, assuming no changes to the life expectancy tables, if he is still alive he can expect to live another 8.29 years. So the new best guess is that his portfolio must now survive about 28% longer than he thought when he was 50. In reality, I would expect the variation in portfolio performance over 29 years to have an even larger affect than the change in his life expectancy. Just because you retire does not mean you should stop thinking and adjusting!

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But FIRECALC isn't MonteCarlo. There is no rolling of dice, it is just reporting on the past scenarios. It has nothing to do with the likelihood of it happening. It either happened or it didn't. If it happened it's considered.

And the fail scenarios you get don't start 5 years into the bad period, that would shorten the bad period by 5 years and that wouldn't be the worst of the worst. And they don't start at the beginning of the second stage of a double-whammy bad market, the worst would be both stacked together (if/when that happens). So for that case, we are now talking about someone surviving a bad market and then throwing two more sequential bad markets on top of that with the FIRECALC failure. That no longer reflects history, and is outside the realm of what FIRECALC does.

And this assumes the future is no worse than the past, but that is all the tool can do. You can adjust for that if you wish (not a bad idea at all), but don't double-adjust w/o considering what it is really telling you.

-ERD50
If you do NOT assume the "Great Depression" is the worst scenario we could see, then it could be reasonable to say that the midst of a "Great Recession" might be the start of the "Greatest Depression" instead of a mean reversion back to prosperity. You could even say that being in the midst of a "Great Recession" increases the odds that the near future will be the "Greatest Depression." So rerunning FIRECALC style tools does not seem unreasonable, just depressing, during a "Great Recession."

Given two identical twins with identical portfolios, identical life expectancies, and identical portfolio survival choices, an ideal tool should spit out the same withdrawal rate guess. However, under the rules of statistics, it is possible to pose the question in such a way (eg one retired earlier) that the statistical answer is different. I just don't think that is generally a useful thing to do.
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Old 12-12-2010, 06:16 PM   #46
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Interesting approach bamsphd, but not for me. Pre-FIRE DW and I studied our spending and estimated how that would change in retirement and how we would meet other goals such as self-insuring for LTC, providing for a special needs grandchild and other things. Then we calculated how much retirement resource we'd need to give us the necessary income with a conservative WR to meet that spending level. We did not, as you are doing, simply retire and then calculate how much we could withdraw from whatever we had.

IMO, you're making a mistake not considering how much you want/need to spend but rather simply testing for a WR that would survive given what you have and then assuming you'll somehow survive on that spending level. You really should consider how much you want/need to spend.

Edit: Oh yeah..... the Great Depression was not the toughest period in US economic history for retirement portfolios to survive....
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Old 12-12-2010, 07:49 PM   #47
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Pre-FIRE DW and I studied our spending and estimated how that would change in retirement and how we would meet other goals such as self-insuring for LTC, providing for a special needs grandchild and other things. Then we calculated how much retirement resource we'd need to give us the necessary income with a conservative WR to meet that spending level.
That is actually the stage I am at now.

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We did not, as you are doing, simply retire and then calculate how much we could withdraw from whatever we had.
That is not what I am advocating in my post above. I'm certainly in favor of doing your best to calculate what you will need, and what size portfolio that implies before retiring.

However, above I am advocating using the re-calculate step to detect quickly if you are off-course after you retire. Regardless of what the calculations say the day you retire, if calculations in later years show you are withdrawing money at an unsustainable rate, I think you are better off realizing that quickly, and adjusting your income and/or spending to get back on course.

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IMO, you're making a mistake not considering how much you want/need to spend but rather simply testing for a WR that would survive given what you have and then assuming you'll somehow survive on that spending level. You really should consider how much you want/need to spend.
I definitely agree. I will want to know what I absolutely need to meet my obligations, as well as what I need to live comfortably. However, I also want to know the current best guess based on what has actually happened to my portfolio and my and my spouse's current age and current life expectancies what can I probably safely spend going forward without seriously risking a future as a Walmart greeter?
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Old 12-12-2010, 11:42 PM   #48
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Thanks for clearing up the issue of whether you're taking projected spending levels into account. Your first post sounded as though you weren't. I'm not sure if you are in the withdrawal stage now or not. Your profile makes no mention.

While I do agree with you that making spending adjustments in response to negative portfolio performance could enhance survivability, the retiree needs to consider the sacrifice carefully. For example, my portfolio took a beating during the recession and I considered cutting some discretionary travel expenditures to try to "cut back." I would have withdrawn about $6k less by canceling plans and staying home.

When I thought through the facts, I eventually changed my mind. We were really looking forward to the trips and they were appropriate to our age and perhaps not postponable. (Outdoorsy stuff we'd likely not be fit enough to do later). And the money saved represented a small portion of our portfolio losses. I think we were down about $240k at the time and cancelling the travel would have meant we'd only be down $234k (by returning the $6k to the portfolio). Hardly seemed to matter enough to justify changing important life plans.

In the end, it turned out the portfolio recovered despite not cutting back, we enjoyed the heck out of the trips and our basic withdrawal plans are forging ahead. We're in our 5th year of withdrawals.

My point is that your yearly testing may be too sensitive and whip saw your plans causing sacrifices which will be out of proportion to their positive impact on your portfolio. And, of course, not considering portfolio performance at all might be not sensitive enough.

I can't say that I agree with your six step procedure for a number of reasons. But methods of modulating WR's to accomodate portfolio performance over time are many and varied and yours could as easily be the best as mine. Perhaps we can compare results in a decade or so and see how things are going?

In the meantime, be sure to enjoy life.
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Old 12-13-2010, 07:34 AM   #49
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I have been using the 4% withdrawl and my portfolio has gained except in 2008 but i made back all those losses in 2009. Since we are in a bear market and have been since 2000 BTW the average bear market lasts 18 years. I am still to young to collect social security. I am a 100% Vanguard investor and I use 40% High yield bonds as a proxy for stocks my equity holdings are about 6% I also hold corporate long bonds my current porfolio generates 4% in interest and dividends so I dont lose sleep over a shinking portfolio by needing to sell equities to raise cash. I sweep all my interest and dividends into a money market. I am also getting about 4-5% in capital appreciation. For me stocks just do not pull the wagon and have not for ten years. I am still shocked that so many people are 60% plus in stocks at retirement age.
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Old 12-13-2010, 11:02 AM   #50
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I have been using the 4% withdrawl and my portfolio has gained except in 2008 but i made back all those losses in 2009. Since we are in a bear market and have been since 2000 BTW the average bear market lasts 18 years. I am still to young to collect social security. I am a 100% Vanguard investor and I use 40% High yield bonds as a proxy for stocks my equity holdings are about 6% I also hold corporate long bonds my current porfolio generates 4% in interest and dividends so I dont lose sleep over a shinking portfolio by needing to sell equities to raise cash. I sweep all my interest and dividends into a money market. I am also getting about 4-5% in capital appreciation. For me stocks just do not pull the wagon and have not for ten years. I am still shocked that so many people are 60% plus in stocks at retirement age.
Rob, Welcome to the board. Please consider introducing yourself in the Here I am... forum with some details about your ER, how you made it happen and your investment plan. Sounds interesting.
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Old 12-13-2010, 11:58 AM   #51
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I am not sure why people are adding the inflation rate to the 4% withdraw rate. In my book you can take 4% of your net assets per year. If your investment decisions are good your net worth will increase about the rate of inflation even after the 4% annual payout to yourself
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Old 12-13-2010, 12:05 PM   #52
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Heck, DW/me at are at a 6% forecast SWR and doing fine (what's the problem?) ...
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Old 12-13-2010, 12:38 PM   #53
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I am not sure why people are adding the inflation rate to the 4% withdraw rate. In my book you can take 4% of your net assets per year.
Rob, if any meaningful part of your portfolio is in stocks, taking x% of the total each year will lead to a very, very volatile level of income. It could easily swing 30% or more from year to year, and you'd need a very flexible lifestyle. Most people can't handle those swings in their post-retirement income, but if you can, I salute you!
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Old 12-13-2010, 12:47 PM   #54
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During the downturn, and realizing I am still young enough to encounter more downturns, I opted to early semi-retire instead for ten years or so. It's not that 4% failed, but I decided I did not want to test it.
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Old 12-13-2010, 01:43 PM   #55
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I am not sure why people are adding the inflation rate to the 4% withdraw rate. In my book you can take 4% of your net assets per year. If your investment decisions are good your net worth will increase about the rate of inflation even after the 4% annual payout to yourself
You misunderstand the "4% rule". It says you can take inflation adjusted withdrawals from your portfolio in the amount of 4% of your initial portfolio value. And keep doing the 4% of initial value every year for 30 years (adjusted for inflation) and have a high chance of success (~95%).


edited to subtract discussion of variable withdrawal rates based on end of year portfolio balances due to errors in calculations.
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Old 12-13-2010, 02:31 PM   #56
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I have been looking at a similar withdrawal concept. To help deal with the withdrawal volatility I am considering using a average balance of the rolling last 2 years (i.e., average of Dec 2009 and December 2010 balances used for calculating 2011 withdrawal) to compute the annual withdrawal amount. I'm not sure how it would impact the FIREcalc results but it should help smooth out the withdrawals.

What percentage of stocks were you using in your FIREcalc computations?
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Old 12-13-2010, 02:39 PM   #57
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The bottom line is this - if you are willing to accept a small chance of a few years of slightly lower than ideal spending, then you can have a large chance of much better spending for most of your years.
During the FIRE planning stage, I think one should keep working until the 4% + inflation rule is projecting that your retirement should go well. (I'm still trying to get to that point, my target keeps moving .)

However, once retired, I think one should switch to some system which feeds your actual portfolio value back into the calculation of how much you can allow yourself to spend going forward.

One variant of that is the fixed percentage of current portfolio withdrawal rate. Another variant is the interest and dividends withdrawal rate. Another variant is splitting the portfolio into essential (inflation adjusted percent of initial retirement portfolio) and variable (fixed percentage of current portfolio) withdrawals. Other variants create buckets of assets to be spent in different years. The variations are endless.

However, I would not want to simply tell the trustee of some blind-trust, I'm retiring today and my portfolio is currently worth $X,XXX,XXX. So send me 4% inflation adjusted of $X,XXX,XXX every year minus your fee until the money runs out or I die. Don't bother to tell me my portfolio's value ever again, because it doesn't matter, and I don't want to worry about it.

For me, the main upsides of feeding the portfolio value back into your withdrawal calculation are that under most variants you will not run out of money unless you are forced to withdraw more than your plan allows, and you can usually withdraw more money than the inflation adjusted percentage of initial portfolio value plan permits.

The biggest challenge is that variable withdrawals can be painfully variable. I'm confident in my ability to handle upside portfolio volatility. However, I also know that a luxury once sampled becomes a necessity. I lived without a _____ (computer, cell phone, broadband internet connection, air-conditioning, ...) for many years, but ______ is now pretty much a necessity. In my mind the biggest danger of a variable withdrawal rate is that during the boom years I'll convert new luxuries into necessities which I will not be able to afford during the bust years. I know that will be more painful than never sampling the luxuries in the first place.

That is why my current spend plan rules includes:

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4. Try to spend at most that much, or try to WORK. However, don't worry too much if during a bear market you spend using a previous year's prediction for a few years.
I frankly have never had anything near perfect control of my annual budget to date, and I don't expect that to change in retirement. However, I have been able to recognize when I should cut back and be more frugal for awhile. So having FIRECALC or some other tool tell me I can spend $XX,XXX this year does not mean I am going to spend $XX,XXX. I might spend a little more, or a little less. I just want regular feedback telling me when I need to step on the brake. I want to press gently, not wait until I panic and believe I need to slam on the spending brakes.
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Old 12-13-2010, 02:46 PM   #58
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I have been looking at a similar withdrawal concept. To help deal with the withdrawal volatility I am considering using a average balance of the rolling last 2 years (i.e., average of Dec 2009 and December 2010 balances used for calculating 2011 withdrawal) to compute the annual withdrawal amount. I'm not sure how it would impact the FIREcalc results but it should help smooth out the withdrawals.

What percentage of stocks were you using in your FIREcalc computations?
80% equities. Pretty high by most standards, but I'm hoping to pull the plug around age 35, so there may be much more than 30 years of withdrawals in DW and my future.
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Old 12-13-2010, 04:36 PM   #59
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bamsphd - I don't know how you did it, and I'm sure you didn't mean to deceive intentionally, but you show a quote from FUEGO as being mine. I'm referring to the first quote in your post #57. The quoted words are from FUEGO in post #55. You (or the system) attributes them to me. How did you do that?

Originally Posted by youbet
The bottom line is this - if you are willing to accept a small chance of a few years of slightly lower than ideal spending, then you can have a large chance of much better spending for most of your years.
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Old 12-13-2010, 04:53 PM   #60
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What this means to me is that before I would consider a 3-3.5% "fixed" withdrawal strategy, I would really consider a higher variable withdrawal amount based on a higher percentage of portfolio value each year. It will never fail at all in the sense that withdrawals are zero, and for 95% of scenarios, it would provide more spending (in real terms) EVERY YEAR versus a conservative 3-3.5% fixed withdrawal strategy.

.
I don't think that's correct FUEGO. I don't have time for a lengthly explanation right now, but folks following the thread should check out this statement before assuming it to be fact.

I'm not saying variable withdrawal plans don't have merit, just that the bolded statement above wouldn't necessarily be true.
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