45 year success rate

[Live And Learn]

Using FIRECalc for a 45 year period to age 95 I get 100% success.

Someone mentioned that there are fewer 45 year periods to review and that it might be good to break it down into two smaller periods. Sounds like a good idea, so I tried it two ways:

Method A:
1. 25 year period which assumes I am 70 years old and start SSI. Also assumes reduced HI costs due to Medicare. Calculated necessary starting portfolio fior 95% success
2. 20 year period starting today. Calculated success rate leaving the amount calculated in step 1 in the "leave money in my estate" box.
* Success rate --- a very scary 75%

Method B:
1. 20 year period starting today. Calculated success rate and looked at the lowest portfolio value from FIRECalc
2. 25 year period using the lowest portfolio value as my starting point. Assumed SSI and reduced HI costs.
* Success rate --- an even scarier 42% where the first line crosses zero at 12 years (age 82).

Being the way I am, this has me worried, since the wheels to leave Megacorp have already started to turn.

Is there a flaw in my methodology ? Does using the 2 periods as above make an assumption about two "worst case" 20 - 25 year periods occuring back to back, which would discount the results ? Is there another way to run this "two shorter period" analysis ?

 

[ERD50]

... Does using the 2 periods as above make an assumption about two "worst case" 20 - 25 year periods occuring back to back, which would discount the results ?

Yes, exactly.

Is there another way to run this "two shorter period" analysis ?

Well, how do your 30 and 35 year periods look? You could take the minimum ending portfolio, and guestimate if it would last an added 10-15 years. Maybe assume you are now invested in something that just keeps up with inflation - you could plug those fixed inflation and investment returns into FIRECALC and see how you do (it would probably be close to just dividing your portfolio by 10 or 15 for your annual WR.

-ERD50

 

[heeyy_joe]

Go to the "other" section of Firecalc and give a minimum ending portfolio value for your first trial period, a sufficient amount to give you comfortable success rate in the second half of your example. Then you can toy with everything else in the first half calculations.

Or, just use 30 years from where you are now with an estimated plugged-in ending portfolio figure. Your spending is likely to go way down at age 85 anyway.

 

[longinvest]

Breaking it in two periods makes no sense; its worst case is ending the first period with a 90% drop and starting the second period with another 90% drop on your stock holdings.

In other words, you are expecting a worst case scenario of a cumulative 99% portfolio drop over a 2 years period on your stock holdings. This has never never happened, other than when capitalism was abolished (e.g. Russia in the 1900s).

Personally, I think that one must model the complete investing horizon (60-70 years), including both contribution and withdrawal phases, to get a realistic (including: not too low) evaluation. Ignoring the contribution phase can lead to an overly pessimistic worst case evaluation.

 

[MooreBonds]

Using FIRECalc for a 45 year period to age 95 I get 100% success.

Someone mentioned that there are fewer 45 year periods to review and that it might be good to break it down into two smaller periods. Sounds like a good idea, so I tried it two ways:

Method A:
1. 25 year period which assumes I am 70 years old and start SSI. Also assumes reduced HI costs due to Medicare. Calculated necessary starting portfolio fior 95% success
2. 20 year period starting today. Calculated success rate leaving the amount calculated in step 1 in the "leave money in my estate" box.
* Success rate --- a very scary 75%

Method B:
1. 20 year period starting today. Calculated success rate and looked at the lowest portfolio value from FIRECalc
2. 25 year period using the lowest portfolio value as my starting point. Assumed SSI and reduced HI costs.
* Success rate --- an even scarier 42% where the first line crosses zero at 12 years (age 82).

Your concepts are good, but just need some perspective. They both suffer from the same 'problem':


After the first 20 or 25 years, you are correct in taking a 'worst case' view with the lowest portfolio value. HOWEVER, realize that historically, when you have the worst-case results in, say, years 15-20 or 20-25, you almost are guaranteed to NOT have another string of 5 really bad years in years 21-25, or 25-30 (or whenever).

SO if you do hit the worst 5-year period, historically, it's never been followed by another sequence of 5-years that were just as crappy. Usually, there has been some rebound in years 21-+ that would help recover your portfolio.

How to model that? Short answer is: you can't. You can cherry pick data to try and estimate what it would be after the worst 25% runs in years 15-20, but that's not really any different than a modified Monte Carlo simulation, or some variant.

In the end, it's all just an educated guess, because there isn't really much substituting for a true 45 year period. And even then, the past is the past, and can only be a guide. The future could be worse, better, or the same. So for your purposes (and mine, since I am hoping to have a 45-50 year ER), I'd just suggest looking at a 30/35/40/45 sequences, see how the results work out in terms of maximum safe withdrawal rates, look at the trends of lower SWR as you extend your timeframe, and keep it in perspective.

If your SWR trend from 30-45 years starts at 4% and drops down to, say, 3% at 45 years, just know that you'll need to assume about 3% for an ultra safe base for your ER, subject to a little tweaking for future unknowns.

 

[Live And Learn]

Thanks for confirming what I thought I might know.

Monte Carlo simulators give me a 90% success rate to age 90. I'm happy enough with that. Granted, we can't know the future, but I think I have enough fluff in my numbers to allow me to tweak as I go along.

ERD50 - I liked the 30 year think so I tried that instead. Success rate was 68% assuming the same level of spending, first line crossed at age 89 which is a little better.

Ok, time for me to follow the advice in my signature line !!!

 

[Katsmeow]

ERD50 - I liked the 30 year think so I tried that instead. Success rate was 68% assuming the same level of spending, first line crossed at age 89 which is a little better.

How did you do this. Are you saying you are taking the same starting portfolio you use for the 45 year portfolio and use the same spending but only change the term to 30 years and it goes to 68%? Also, I thought from the 45 year term you are around 50 so if you use a 30 year term, how does age 89 come into it?

 

[Live And Learn]

How did you do this. Are you saying you are taking the same starting portfolio you use for the 45 year portfolio and use the same spending but only change the term to 30 years and it goes to 68%? Also, I thought from the 45 year term you are around 50 so if you use a 30 year term, how does age 89 come into it?

I took my current portfolio and ran it out 30 years which gets me to age 80. At the FIRECalc results it said "you have a 100% chance of success with an ending portfolio average of X and lowest of Y" (paraphrasing). I took amount Y and ran that out for 15 years, and got the 68%. Looking at the lines the first one to cross zero was at 9 years (hence my age would be 89). HTH.

 

[Apex1]

In a similar boat as you (ie. Planning for 50+ years of RE) and gone through the same thought process. In the end, FIREcalc just gets me a ballpark figure. After that, the "fluff" and "tweaking" of expenses during RE amounts to 300k windfalls for every 10k that you can shave off your annual expenditures (using 3.5% SWR). As it says in the "how it works" section, "why measure with a caliper when you'll be cutting with an axe"

For me, the mental process of a lifestyle downshift or doing part time work in a worst case scenario helps me put things in perspective. Contingency plans are my ace in the hole. YMMV

Apex

 

[growing_older]

Back to back worst cases are an unrealistic scenario, but if you want to explore that have you tried breaking up the 45 years into other segments. Like 30 followed by 15, or 35 followed by 10. You would still have the back to back worst case unrealistic assumption, but you could perhaps get a feel for how significant it is. By putting the longer segment first you somewhat reduce the incidence of a sharp down period followed by another repeat of the same period. (ie 1929-1938 followed by 1929-1964) The replay of a shorter intense downturn followed by another is what's killing you.

 

[Live And Learn]

Back to back worst cases are an unrealistic scenario, but if you want to explore that have you tried breaking up the 45 years into other segments. Like 30 followed by 15, or 35 followed by 10. You would still have the back to back worst case unrealistic assumption, but you could perhaps get a feel for how significant it is. By putting the longer segment first you somewhat reduce the incidence of a sharp down period followed by another repeat of the same period. (ie 1929-1938 followed by 1929-1964) The replay of a shorter intense downturn followed by another is what's killing you.

Exactly ! I've now decided that the 60% success rate is GOOD news. It means I have a 60% chance of surviving two back to back horrible scenarios. And if I'm 89 and broke and have to live on SSI alone I'll take that as "payback" for having been retired for 39 years !