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Old 12-14-2010, 11:25 AM   #81
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...the issue for me is that baby boomers with these 60/40 portfolios will be huge net sellers...
Yet we see repeated articles, surveys, and statistics saying the average boomer has only $50K saved for retirement. Not much danger of moving the market with those kind of numbers...
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Old 12-14-2010, 12:50 PM   #82
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You know what, I think you are right. I thought I had checked firecalc's output thoroughly. But it looks like what I thought were real dollar amounts from their output spreadsheet are actually nominal amounts.

When I read this: "Open an (unformatted) Excel spreadsheet showing the inflation-adjusted end-of-year portfolio balances for every year in each of the cycles tested by FIRECalc." I thought it meant the end of year portfolio balances were adjusted for inflation to present them in real terms. "Inflation Adjusted End Portfolio [values]" is the way that real values are presented in the companion spreadsheet from the results page. Hmmm... tricky.
...
Now I'm going to admit to being confused about how to interpret the inflation handling in (1) the results page, (2) the spreadsheet.

The results page says "Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved." This would seem to indicate that the end portfolio values are not adjusted to today's dollars. For example, if the $1M portfolio ends at $2M in 30 years and inflation was 3% then that reported $2M ending portfolio is actually $824K in today's dollars (reduced by 1.03^30). Does that sound correct?

Now for the spreadsheet results. Are those results supposed to be interpreted just like the chart results page? That is, are they just numerical values for the squiggly lines on the chart?

Sorry for beating this one to death .
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Old 12-14-2010, 01:09 PM   #83
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Now I'm going to admit to being confused about how to interpret the inflation handling in (1) the results page, (2) the spreadsheet.

The results page says "Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved." This would seem to indicate that the end portfolio values are not adjusted to today's dollars. For example, if the $1M portfolio ends at $2M in 30 years and inflation was 3% then that reported $2M ending portfolio is actually $824K in today's dollars (reduced by 1.03^30). Does that sound correct?

Now for the spreadsheet results. Are those results supposed to be interpreted just like the chart results page? That is, are they just numerical values for the squiggly lines on the chart?

Sorry for beating this one to death .
Well, it is a very relevant question. I have been proceeding the last couple years thinking things are rosy by looking at the detailed spreadsheet and assuming those were "inflation adjusted" real values. When they are nominal values. I guess better to find out now versus 15 years into ER...

To answer your question, let's look at the results:

When I run the FIREcalc with all defaults, I see this text on the results page:

"The lowest and highest portfolio balance throughout your retirement was $-300,739 to $4,259,606, with an average of $1,313,717. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)"

These dollar amounts are real dollar amounts, adjusted for inflation to the base year as of the start of each cycle.

The graph also shows the portfolio values in real terms.

The detailed spreadsheet that says it presents "inflation-adjusted end-of-year portfolio balances" does NOT present portfolio balances in real terms. The portfolio balances in that spreadsheet are in nominal terms and have not been adjusted downwards to account for inflation. I think there is an error in that spreadsheet because the portfolio values have not been divided by the inflation factor to present the portfolio values in real terms. At least that is my take on it.
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Old 12-14-2010, 01:35 PM   #84
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I will honestly admit that when we had that incredible drop in 2008 I questioned whether I should return to work but after adjusting my 4% for the new reality I decided against it . I was also close to SS age so that made a difference . Had I been in my 50's I probably would have taken a part time job for awhile just to be sure that my portfolio survived .
What does that mean, "adjusting my 4% for the new reality?"

You had been withdrawing 4% but then thought about cutting it to 3%, at least for a couple of years?
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Old 12-14-2010, 01:36 PM   #85
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Hi Fuego, thanks I think you are right. I tried running a test and forcing just 2 years results. You can do this by setting the years to analyze to 30, and setting the start year at 1990 in the "total market" part of the "Your Portfolio" tab, and set the year to 1990 in the "Investigate" tab. Then you will just see 2 lines in the chart.

Now you can compare 2 spreadsheets. The "inputs" spreadsheet and the full results spreadsheet. Look at the "inputs" spreadsheet: the last 2 columns show "Ending portfolio" and "Infl Adj End Portfolio".

From this it is clear that the chart shows the inflation adjusted ending portfolio i.e. the values in today's dollars. This is the most useful result. Unfortunately the spreadsheet just shows inflated dollars. Maybe that is what is meant by "unformatted"?

Correcting the spreadsheet data to match the chart is not going to be fun. I don't think there is any way to easily dump the inflation corrections for all years tested but one could do this in several runs where the "inputs" spreadsheet is forced to take on values for a set of the years we are examining.
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Old 12-14-2010, 01:54 PM   #86
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I think there is an error in that spreadsheet because the portfolio values have not been divided by the inflation factor to present the portfolio values in real terms. At least that is my take on it.
I also think you are right and the spreadsheet output is futzed. I recall posting on this a while back, I just couldn't make heads/tails out of the spreadsheet. Stuff that I thought should be inflation adjusted wasn't, stuff that I thought shouldn't be was...

I decided (right or wrongly) that the spreadsheet was just an output, and the FIRECALC results were not determined by it. So I don't think FIRECALC itself is messed, but that spreadsheet is. If someone has an explanation to the contrary, please post it.


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Old 12-14-2010, 01:58 PM   #87
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Hi Fuego, thanks I think you are right. I tried running a test and forcing just 2 years results. You can do this by setting the years to analyze to 30, and setting the start year at 1990 in the "total market" part of the "Your Portfolio" tab, and set the year to 1990 in the "Investigate" tab. Then you will just see 2 lines in the chart.

Now you can compare 2 spreadsheets. The "inputs" spreadsheet and the full results spreadsheet. Look at the "inputs" spreadsheet: the last 2 columns show "Ending portfolio" and "Infl Adj End Portfolio".

From this it is clear that the chart shows the inflation adjusted ending portfolio i.e. the values in today's dollars. This is the most useful result. Unfortunately the spreadsheet just shows inflated dollars. Maybe that is what is meant by "unformatted"?

Correcting the spreadsheet data to match the chart is not going to be fun. I don't think there is any way to easily dump the inflation corrections for all years tested but one could do this in several runs where the "inputs" spreadsheet is forced to take on values for a set of the years we are examining.
I followed a similar procedure to what you describe and came to the same conclusion. The spreadsheet with detailed formulas does have the last 2 columns that show the end of year portfolio value and the "inflation adjusted" value. The latter "inflation adjusted" column is in real terms, the 2nd to last column is in nominal terms.

Getting the matrix with all the inflation factors for every year of the 110 cycles was pretty easy. Just need to copy the inflation results from 2 detailed sheets if you set your analysis period really long (120 years for example). Then use some clever formulas and copy/paste it only took a couple minutes. I have attached a spreadsheet that has the annual inflation factors in a 110 row x 30 column matrix that can be copy/pasted (paste as values FYI because formulas are still in the xls spreadsheet).

Row 112 starts the first inflation factor matrix which is annual inflation in each year.

The second inflation factor matrix starts at row 223 and is a cumulative inflation factor that multiplicatively adds the inflation factor for each successive year of each cycle.

File is 1 MB FYI.
Attached Files
File Type: xls 4 percent variable withdrawal.xls (957.5 KB, 14 views)
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Old 12-14-2010, 02:00 PM   #88
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I decided (right or wrongly) that the spreadsheet was just an output, and the FIRECALC results were not determined by it. So I don't think FIRECALC itself is messed, but that spreadsheet is. If someone has an explanation to the contrary, please post it.
Agreed - I think firecalc itself is sound. The addition of the xls download is the problem.
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Old 12-14-2010, 03:08 PM   #89
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Thanks Fuego for the inflation factors. This discussion clears up what I thought was a major defect in FIRECalc but turns out to be interpretation.

Still I will probably just tend to run it by (1) setting it so only a few lines are drawn, (2) examining the chart output for the minimum values not just the end values. As others have mentioned, the drawdown is a key part of peace-of-mind. The chart values are much easier to see this way too (wish the chart could be semilog). I'll just tend to run it for the 1929 and 1968 periods I guess.

My biggest concern is that FIRECalc doesn't really help me with my current investment mix (internationals, etc.). So I've got my own spreadsheet for that going back to 1970.
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Old 12-14-2010, 03:17 PM   #90
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Still I will probably just tend to run it by (1) setting it so only a few lines are drawn, (2) examining the chart output for the minimum values not just the end values. As others have mentioned, the drawdown is a key part of peace-of-mind. The chart values are much easier to see this way too (wish the chart could be semilog). I'll just tend to run it for the 1929 and 1968 periods I guess.
I have come to the same conclusion - "fail" means your portfolio is way less than what you started with, not it goes to zero. To me at least. And the odds of it getting low and to what extent and for how long really interest me the most, moreso than the terminal values.


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My biggest concern is that FIRECalc doesn't really help me with my current investment mix (internationals, etc.). So I've got my own spreadsheet for that going back to 1970.
What are your conclusions when you include international in the mix? Is the diversification worth it? Does is allow 4% with 95% success (above zero end value) or so?
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Old 12-14-2010, 03:41 PM   #91
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....(snip)...
What are your conclusions when you include international in the mix? Is the diversification worth it? Does is allow 4% with 95% success (above zero end value) or so?
What I've done is to gather data for 1970 to 2010. Then applied my own rebalance and spending variables. So the results are not going to be general plus I have an equity rotate strategy between US LV and large international. And there are some other market timing elements too. Without those "market timing elements" when I compare a 60/40 portfolio with equities:
(1) sp500
(2) 25% SV, 25% LV, 50% equity rotate between US LV and large international

I see about a 2% higher CAGR for #2. For the inflationary 1970's the CAGR differences were much larger. Maybe because SV did better then. That 2% excess CAGR can mean a lot in retirement as we all know. Of course, that was past performance.

If you just want to check out the international performance over a long period you can get the EAFE index data (includes dividends) at the MSCI site. That goes back to about 1970 I think.
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Old 12-14-2010, 09:54 PM   #92
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What I've done is to gather data for 1970 to 2010. Then applied my own rebalance and spending variables. So the results are not going to be general plus I have an equity rotate strategy between US LV and large international. And there are some other market timing elements too. Without those "market timing elements" when I compare a 60/40 portfolio with equities:
(1) sp500
(2) 25% SV, 25% LV, 50% equity rotate between US LV and large international

I see about a 2% higher CAGR for #2. For the inflationary 1970's the CAGR differences were much larger. Maybe because SV did better then. That 2% excess CAGR can mean a lot in retirement as we all know. Of course, that was past performance.

If you just want to check out the international performance over a long period you can get the EAFE index data (includes dividends) at the MSCI site. That goes back to about 1970 I think.
For #2, inclusion of LV and SV is probably what bumped up the performance by a couple percent. My portfolio is heavily tilted towards LV and SV too (and international). So if the LV/SV premium persists like in the past, then I guess it means 4% might be a little higher. Big "if" though.
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Old 12-14-2010, 10:30 PM   #93
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For #2, inclusion of LV and SV is probably what bumped up the performance by a couple percent. My portfolio is heavily tilted towards LV and SV too (and international). So if the LV/SV premium persists like in the past, then I guess it means 4% might be a little higher. Big "if" though.
Part of the reason the rotational method on LV and large international worked out nicely is because we had two big multi-year run ups in the dollar. The first was in the 1980's under Reagan and the subsequent dollar decline led to large international outperformance. So there were clear periods of US outperformance and then international outperformance. Who knows what the next decade will give us.

And yes, the small and value premiums helped too. I pray every night for the continuance of that premium as I drift off into blissful sleep .
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Old 12-14-2010, 11:27 PM   #94
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...And clearly, having a $1M portfolio at the peak of a bubble is not worth as much as still having $1M after the bubble has burst. (edit/add: ) and in your example, the $500,000 is worth about as much as the $1M from a year earlier, so yes, they should be able to spend about the same. I'll venture that in rough numbers, that 'same' is probably best looked at as an average of the two - about 3%.

But FIRECALC is saying that historically, the $1M portfolio survives 95% of the time at 4%. So if 95% is OK with you, and relying on history is OK with you - there ya' go. It's really the $500,000 guy that could go to 8% in this case (if you could 'trick' FIRECALC to skip the first year of downturns, as is what happens in your construct).
Yes, we all agree that there seems to be a paradox, where a guy who retired at the top of the market with $1M was told by FIRECalc he could get $40K/yr, whereas if he waited until the bubble has burst, he would be told to draw less than $40K. How to reconcile this difference?

Actually, there is no paradox. Not knowing where we are in the stock market cycle, let's say that the 4% SWR would give us a 95% chance of success over all outcomes from past market histories. This means that we have a 5% chance of failure.

Now, after our portfolio has suffered shrinkage to say half its initial size, this a posteriori knowledge now should lead us to suspect that, darn it, we may indeed fall into that unlucky 5% after all.

Another example is this (not quite the same as Katsmeow's post earlier). We are given two coins and told that if we roll 2 tails, our fate is doomed. Because there are 4 equally possible combinations, Head-Head, HT, TH, and TT, we know that our chance of being doomed is 25%.

So, we proceed to roll our first coin, and lo and behold, it comes up tail. Now, given that we already get one tail, the chance of doom for us is no longer 25%, but 50% now of getting the second tail.

Since most of us have been taught not to "time the market", we dare not theorize where we are in the market cycle. This is not bad, because people most often get it wrong, and I do not disagree with Malkiel and Bogle about this. So, when starting his retirement with $1M and drawing $40K, our retiree is told that his chance is 95%, because FIRECalc makes no assumption about where we are in the market cycle. But once our retiree has experienced the decimation of his portfolio, and it has been known for a fact that he was unlucky to retire at the top of the market, of course his chance of failure is now greater than 5%.

On the other hand, had he delayed his retirement until now and withdrawing less than $40K, of course his chance would be a lot better.

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Of course it's hard to know where we are when we are in the middle of a cycle, but I think the intro to FIRECALC should touch on this. If you just saw your portfolio rise in value because we just had a few extra good years, you should be extra conservative with the SWR %. Conversely, if we have had several bad years, you might be able to be less conservative. Human nature probably drives people to the opposite conclusion. And we can't bank on ANY of it.
Ah, again, we are told not trying to guess what phase of the market cycle we are in. It's a sin to avoid at all costs! We are told not to rely on our heuristic reasonings, that good years tend to follow bad years and vice versa.

Of course there is no certainty in life, just lots of probabilities. There is absolutely no guarantee how long a spell of bad years will last. "You pays your money and you takes your chances".
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Old 12-15-2010, 12:00 AM   #95
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Ah, again, we are told not trying to guess what phase of the market cycle we are in. It's a sin to avoid at all costs! We are told not to rely on our heuristic reasonings, that good years tend to follow bad years and vice versa.
I am gradually learning that there are some ideas that cannot be reconciled with some others. Examples are your mental model as outlined above, and mine as market returns being generated by profitable economic activity by businesses.

I can see your paradigm if the trials are over a very short period of time, where luck and random fluctuation can prevail over economic reality. 30 years is too long for that.

Another big difference would seem to be our differing conceptions of the nature of sin. I couldn't give a fig about "what we are told", as I believe it is mostly fantasy spun by people who are too abstract and have too little real world understanding.

Who is more likely to understand this? An academic book writer whose only business experience is serving on boards, or billionaire investors? I think we might choose differently.

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Old 12-15-2010, 12:16 AM   #96
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I have admitted more than once that I am a clean "market timer". Clean meaning I also look at economic activities and projections more than just prices, like "chartists" do.

And talk about fundamentals, which you follow, yes, I look at the projections of that too, but only for the next year or two. Earnings of many companies have picked up, and their forward P/Es in the teens don't look too bad to me. And yes, I have also said I like cap gains more than dividends.

Looking further ahead, 30 years like you said, I don't know what will happen, but I look more to companies or countries doing trade with China as I feel that is where the future growth is.

So, do we differ that much? Are the differences irreconcilable?

Anyway, back to the 4% SWR, what is your take?

PS. About the "sin", it is a joke.
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Old 12-15-2010, 12:31 AM   #97
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I have admitted more than once that I am a clean "market timer". Clean meaning I also look at economic activities and projections more than just prices, like "chartists" do.

And talk about fundamentals, which you follow, yes, I look at the projections of that too, but only for the next year or two. Earnings of many companies have picked up, and their forward P/Es in the teens don't look too bad to me. And yes, I have also said I like cap gains more than dividends.

Looking further ahead, 30 years like you said, I don't know what will happen, but as I have said, I look more to companies or countries doing trade with China as I feel that is where the future growth is.

So, do we differ that much? Are the differences irreconcilable?

Anyway, back to the 4% SWR, what is your take?
Well, I have no idea what you actually do. I was only responding to your post, which I apparently didn't understand was ironic. Anyway what I actually do, and have been doing for a very long time doesn't involve charts, doesn't really involve much guessing about the future, but is mainly based on how cheap or expensive are the shares I wish to buy, and the market as a whole. I do a bit of macro, especially with respect to things like long term crude oil supply/demand. I think oil is an easier call than China.

I also think that today in most issues we are speculating, not investing. If the tax bill doesn't get passed, I may just take the hit on $200k+ of LTCGs. In 2007 I was afraid of the taxes, but the taxes would have been nothing compared to how far down I was after the decline got going. These huge downdrafts are dangerous to one who is living from his portfolio.

And you pay them and forget them, unlike that damn decline which was a version of hell.

Ha
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Old 12-15-2010, 12:58 AM   #98
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Yes, I was just being a bit too oblique when pointing out the irony of the fear most people have of committing the "sin of market timing", if one should entertain the reasoning like in ERD50's post.

About paying taxes on gains, yes, I have read that one should not let it influence his trading decisions. Easier said than done! I trade more actively on my before-tax account and do better there than with my after-tax investments.

About guessing about the future, well, I try to do that quite often as I believe in what Gerald Loeb said. He wrote in Battle for Investment Survival that investing is speculating. The latter means taking action without full knowledge. Yes, there is risk involved because of the uncertainty, but when is anything certain? And if something is certain, well, there is no reward either.

I have made some quite risky moves with my career, yet I survive despite awful failures with startups. So, speculating in the market does not scare me as much as it does other people. However, I never go "all the way".
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Old 12-15-2010, 06:18 AM   #99
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Of course it's hard to know where we are when we are in the middle of a cycle, but I think the intro to FIRECALC should touch on this. If you just saw your portfolio rise in value because we just had a few extra good years, you should be extra conservative with the SWR %. Conversely, if we have had several bad years, you might be able to be less conservative. Human nature probably drives people to the opposite conclusion. And we can' bank on ANY of it. -ERD50
I agree with the "hard to know" part. Does one considering retirement now look at 2009/2010 as good years and be extra conservative? Or would one compare to 2007 and say we've had a stretch that is overall negative so it's okay to be less conservative? Very subjective and probably depends on what you think "normal" is.
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Old 12-15-2010, 07:37 AM   #100
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I agree with the "hard to know" part. Does one considering retirement now look at 2009/2010 as good years and be extra conservative? Or would one compare to 2007 and say we've had a stretch that is overall negative so it's okay to be less conservative?
Yes.

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