4% rule failures?

[NW-Bound]

When I discovered FIRECalc and this forum, I made some simple runs and have not played with it since.

Just now, rerun it using current portfolio value, my estimate of what our spending will be (if I do not get bored in full retirement and keep finding new toys to buy), with our estimated future SS, and the default FIRECalc mixed portfolio, with "constant spending power" for the spending model.

Results: After 30 years, I will have anywhere between $6M and $32M. Isn't that too good to be true? Should I believe that? Should I up my spending? I must be truly frugal (so far!).

And if FIRECalc's suggested mixed portfolio gives me more money than I think I need, why should I keep fooling with my stock trades, trying to get a little more?

Is the whole thing that simple? Being a perennially pessimistic guy, I am not convinced yet.

 

[haha]

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.

If ordinary desriptive statistics will satisfy you, this is easily done.

Doesn't cut it with many around here.

Ha

 

[REWahoo]

Results: After 30 years, I will have anywhere between $6M and $32M. Isn't that too good to be true? Should I believe that? Should I up my spending?

Keep working. Maybe in a few years your FIRECalc runs will look better.

 

[NW-Bound]

I may have to do that, in addition to looking for better market returns by active trading. :-(

 

[explanade]

Yeah I remember some advisors ran a Monte Carlo assuming a starting portfolio value of about 1.5 to 2 million and then 30 or 40 years later, $19 million.

Was very skeptical about that.

 

[haha]

Yeah I remember some advisors ran a Monte Carlo assuming a starting portfolio value of about 1.5 to 2 million and then 30 or 40 years later, $19 million.

Was very skeptical about that.

With or without withdrawals?

Ha

 

[explanade]

Don't recall exactly. I did provide info. about my expenses.

But mostly got the sense that they were pushing their services, which was to use private accounts, customized portfolios instead of funds and these private accounts were from various vendors.

 

[dex]

Is the whole thing that simple? Being a perennially pessimistic guy, I am not convinced yet.

I feel the same way - strange isn't it? And, I have a degree in finance and accounting.

I have a detailed budget out to 2020 and then grow it from there by 4%, use a 4% growth rate for my investments and for a reality check I deflate the my investments by 3% for inflation each year. It all adds up that in 30 years I have the +/- same amount of deflated money as now. And this all excludes the value of my house.

Even with all those conservative assumptions I don't believe it.

 

[haha]

Don't recall exactly. I did provide info. about my expenses.

But mostly got the sense that they were pushing their services, which was to use private accounts, customized portfolios instead of funds and these private accounts were from various vendors.

I see, thnx

Ha

 

[NW-Bound]

Because FIRECalc said that I would be dieing with "money out the wazoo", I cranked up the spending to see where I would get a failed cycle.

It turned out that I would have to almost double my expected spending to get one failure! But for a frugal guy like me, that is an obscene spending level. Money does buy pleasure, but for me, that level is way past the point of diminishing returns. I would be throwing money away.

And then, I remember Bernicke's spending model, which I like a lot. It tapers off one's spending as one slides deeper into geezerhood, starting at the age of 56. Egads! I am almost there at that age.

Still, I turned that model on, as it fits me, a guy with few indulgences and no expensive habits. Yep, FIRECalc says I will die with lots of money again.

I am really not sure if I can buy this. Thirty years is a long time in this fast changing world. A black swan is likely to come along and chomp us to pieces. FIRECalc cannot model anything like that.

Oh well, I guess if that happens we are all going down the tube together, so I will always have company.

 

[Rustic23]

Not to hijack this to Bernicke, but I see two things I would take exception to in his model. One is his start time 55, and the other his data that shows people spend less as they age. i.e. chart on page 2 of http://spwfe.fpanet.org:10005/publi...anning_ A New Paradigm for an Old Science.pdf

Being 67, I have seen no decrease in my spending in the last four years, in fact I have increased slightly. My question as to the basic premise has to do with what is behind it. Do seniors spend less because they have less, or because they just don't have as many desires. For this, I have two data sets, MIL, FIL and my M&D. MIL&FIL were better off and their spending on travel, entertaining, eating out, dropped off when the crossed about 91. My parents on the other hand dropped their spending around 65 when my Dads income dropped off. Not because they no longer had the desire but because they did not have the means.

I think this is important when you look at using the Bernicke model. As brokers tell you 'your results may not be the same'. Note: NW-Bound says it fits him.

 

[dex]

Not to hijack this to Bernicke, but I see two things I would take exception to in his model. One is his start time 55, and the other his data that shows people spend less as they age. i.e. chart on page 2 of http://spwfe.fpanet.org:10005/publi...anning_ A New Paradigm for an Old Science.pdf

Being 67, I have seen no decrease in my spending in the last four years, in fact I have increased slightly.

What is the % increase?

My question as to the basic premise has to do with what is behind it. Do seniors spend less because they have less, or because they just don't have as many desires. For this, I have two data sets, MIL, FIL and my M&D. MIL&FIL were better off and their spending on travel, entertaining, eating out, dropped off when the crossed about 91. My parents on the other hand dropped their spending around 65 when my Dads income dropped off. Not because they no longer had the desire but because they did not have the means.

I think this is important when you look at using the Bernicke model. As brokers tell you 'your results may not be the same'. Note: NW-Bound says it fits him.

Good questions. I don't know the survey answer.

My guess and assumption is that for the person with disposable income; spending remains constant over time. I think that discretionary spending, e.g. travel, hobbies, decrease as other costs increase e.g. health insurance costs.

 

[walkinwood]

My question as to the basic premise has to do with what is behind it. Do seniors spend less because they have less, or because they just don't have as many desires.....

Note: NW-Bound says it fits him.

IIRC, Bernicke analyses the data and comes to the conclusion that seniors spend less even though they have the money to spend more.

All these studies address behavior in the aggregate, and that is something that is easy to forget. It may not apply to you, but does to the 'average' person.

The tough question is - how do we determine if the model fits us or not? I know the 'me' a year out, I'm sort of familiar with the person I'll be in 5 years, but I'm not sure I know the dude I'll be in 10. Especially in our later years, our temperaments & health can change quite fast. Again - this is specific to the individual.

 

[NW-Bound]

I have not read Bernicke's original paper. However, it would seem to me that the applicability of this spending model depends on the spending level.

In my case, when I set my spending at a level I know is sufficient to give me a comfortable living, a "constant spending power" model would make sense. But when I experimented to bump it up to double that, to a level in the 6-figure level/yr spending, the Bernicke's model would make sense to me. I only spent that much in a year past when I had a lot of foreign travel in addition to spending more than $40K on house improvements. I just don't see myself doing that every year, and into my 70s or 80s.

 

[Lsbcal]

...(snip)...
Being 67, I have seen no decrease in my spending in the last four years, in fact I have increased slightly. My question as to the basic premise has to do with what is behind it. Do seniors spend less because they have less, or because they just don't have as many desires. ...

We are in our early 60's. When I think about 10 years from now I realize that more will be needed for services as some of the things I do now will be tougher perhaps -- like the physical part of gardening, or services while traveling that I currently handle. So perhaps spending will stay about constant given other spending areas that might decline.

If there are some reading this that are in their 70's, how has the last 10 years affected your spending?

 

[Rustic23]

I agree. I am still mowing the acre of land the house sits on, however, I think when the mower gives up, I will go to a service. About 80 percent of the folks around here use one. My guess is it's going to be a couple of hundred a month for that.

 

[Gearhead Jim]

...
Also, remember that the historical data says that a 30 year 4% WR and a diversified portfolio means that you could see your portfolio drop to less than half what it was (in buying power) and still 'succeed'. I think most would be pretty frightened by that, and might go back to work or make other adjustments if that happened.

-ERD50

I think it would depend on my age, and how big the portfolio was in relation to my basic needs.

If I was 65 and lost 50%, that would be frightening.

If I was 95 and lost 50%, not so big a deal.

 

[explanade]

4% is only for a 30-year period?

People on this forum are looking to retire in their 50s or earlier. So is 30 years enough?

 

[Arnie]

4% is only for a 30-year period?

People on this forum are looking to retire in their 50s or earlier. So is 30 years enough?

No. Just that 30 was the the number of years in the original studies. Search for Trinity Study, look for 4% rule on this site. etc. That's my understanding anyway.

 

[NW-Bound]

When playing with FIRECalc, I found that if one's setup outlasts a 30-yr period, it tends to survive a 50-yr period also.

My problem with using the past to predict 50 years into the future is that it is difficult to reassure myself that the US economy growth in the 21st century will be like it was in the 20th.

On the other hand, I do not expect to live that long. My concern will be more for our children's generation that we will continue to prosper.

 

[ERD50]

When playing with FIRECalc, I found that if one's setup outlasts a 30-yr period, it tends to survive a 50-yr period also.

We've talked about it before, but there is a bit of a problem with looking at longer cycles in FIRECALC. A 50 year period cannot include any data from 1960 onward. So you 'escape' the very bad inflationary period of the 80's in the analysis. So I'd be careful with that assumption of safety.

-ERD50

 

[tuixiu]

That is an interesting point ERD50. I had always noticed same thing as NWB, if I made 30 then 50 was usually in the bag as well.

Thanks for ruining it for me.

 

[DeborahB]

I set up a spreadsheet with income, expenses, etc. on a yearly basis. I can vary the % increase of inflation or SS individually, or the % return on investments. If you are comfortable doing spreadsheets, I think it's a worthwhile way to spend some time. It gives me comfort.

I do think my spending (except possibly for medical) will decrease when I get older (80 and up). Less energy for travel, less need for clothes - I'm already seeing that. Might eat less, you can never tell

My Dad is 90 and he eats badly (lives 1400 miles away, I can't help him). But he says he doesn't have a lot of appetite - my mother too, when she was alive, said the same thing. Smaller portions were enough. So maybe less on food.

More on having other people work on the house, though.

 

[REWahoo]

I set up a spreadsheet with income, expenses, etc. on a yearly basis. I can vary the % increase of inflation or SS individually, or the % return on investments. If you are comfortable doing spreadsheets, I think it's a worthwhile way to spend some time. It gives me comfort.

Be aware that this 'comfort' can be terribly misleading as it omits the one of the "Big Three" portfolio killers - volatility. (Inflation and overspending are the other two...)

 

[explanade]

Well long-term care is suppose to be a big thing.

At least if you believe people who are selling long-term care insurance, who are saying you need high 4-figure or even 5-figure sums per month to pay for care in your old age.

Investment advisors are touting these products because it makes people think they have to have more savings by the time they retire and the way to amass these savings is to hire these advisors.