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Old 05-10-2015, 12:37 PM   #21
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Itsme2, your calculation makes a lot of sense with a HUGE exception. It ignores what is called sequence of returns risk. You can google it, but in short, if your 6% return is large negative returns in the early years and very healthy returns in the later years, even if they average out to 6% for a 30 or 40 year period, the fact is that between withdrawals and negative returns in the early years, you end up running out of money and eating catfood.

That is why your calculations are coming up with a much higher withdrawal rate that you'll see as being safe with other calculators. In short, you need more that what you calculate to protect yourself from possible adverse sequence of returns scenarios.
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Old 05-10-2015, 12:55 PM   #22
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However, I came up my formular mainly for my own retirement planning and prior to learning the availability of FireCalc. I still believe most of people here are too conservative and seeking unnecessarily large lump sum before feeling safe. My formular can offer another approach.
What is your basis for believing most people here are "too conservative?" You're right that those who use FIRECALC and similar tools to estimate their retirement portfolio needs, are hedging to the high side by design, but it's not an uninformed or arbitrary choice. Planning on a 95% success rate for example, means a 5% chance of failure (historically) and a 95% chance of having more than enough. But most of us looking at a 20-40 year time horizon, begin with placing a much higher priority on not running out of funds than on leaving a surplus. One can easily ratchet up spending as the retirement proceeds (or save for end of life costs, LTC etc.). It would be pretty difficult late in retirement to radically reduce spending once it becomes evident you're going to fall short of funds.

FIRECALC results provide a probability of success based on actual returns and inflation from 1871 through present, and what the range of possible outcomes would have been throughout those periods.

And for anyone who might be interested in your approach, what probability of success does your formular offer? It's relatively simple to project the average portfolio needed to support a given spending for a given number of years, assuming a real rate of return - but that may give you a 50% probability of success. Good enough?
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Old 05-10-2015, 01:17 PM   #23
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Originally Posted by itsme2 View Post
Following your suggetion and Midpack's, I studied again with FireCalc and it does appear it includes lots of the factor and tested with historical data.

However, I came up my formular mainly for my own retirement planning and prior to learning the availability of FireCalc. I still believe most of people here are too conservative and seeking unnecessarily large lump sum before feeling safe. My formular can offer another approach.

I agree the rate of return and inflation will never remain the same. The annual expense like assumed rates should not be fixed as well. If we have a fantastic year with the market, we can definitely spend a little more.

Likewise, some people worry about what if the market crashes again like what we experienced in 2008. If that happens, I believe most people are ok to reduce their withdrawal without depleting the nest egg too soon.
I'm not sure how you arrived at the bold statement.

Maybe a numeric example would help. Suppose we try a very simple retirement. A single person, with

a: Annual expense for the first year: $40,000

c: SS of what you can withdraw:$18,000.
n1: The number of years before you start to withdraw SS: 0
n2: The number of years after you begin to withdraw SS: 30

You can specify r1, r2, and r3, plug them into your formula, and get a value for b.

Then, you can specify what number "most people here" would use for b, and show why you think it is "too conservative".
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Old 05-10-2015, 01:19 PM   #24
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I just use a return of 1% over inflation for asset income (long term TIPS have historically been around 2% + inflation) in a spreadsheet. We also have a low rate, fixed rate mortgage we will not pay off unless we move offset by a couple of non-COLA pensions (liability matching). We have some stocks, but aren't betting the farm on them.

100 years of U.S. stock history, most of it in an era with less U.S. income inequality and without flash boys, derivatives, computerized trading programs and global conglomerates, don't give me warm fuzzies on the ability of U.S. centric Monte Carlo programs to predict 50 years into a global future economy. I think the Triumph of the Optimists conclusions, taking many countries into account, are more likely to be correct regarding probabilities of returns going forward (stocks for the long term are generally a good bet but the long term might mean a long term past our remaining life spans).

We take a Zvi Bodie / post 2088 Bill Bernstein retirement investing approach.
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Old 05-10-2015, 02:01 PM   #25
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I hate to think that this guy spent hours and hours putting together and testing a model that may/may not be more/less accurate than the dozen other calculators immediately available online for free.

Besides, there's always a certain margin of error in all these calculators, so I'd wonder if it's better/worse by only 0.0002% or something.
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Old 05-10-2015, 02:31 PM   #26
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I hate to think that this guy spent hours and hours putting together and testing a model that may/may not be more/less accurate than the dozen other calculators immediately available online for free.

Besides, there's always a certain margin of error in all these calculators, so I'd wonder if it's better/worse by only 0.0002% or something.
Building your own model is the best way to really understand what drives the results, so that you can take specific action to improve those results. It is also helpful where your personal situation may differ from other, more generic models. In any event, I don't think it is a waste of time to learn how these things work.
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Old 05-10-2015, 02:41 PM   #27
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Use your model by all means, but be aware of risks that it doesn't model - like the sequence of return risk. Firecalc does a good job of modeling that risk using historical returns or (IIRC) monte-carlo simulations.

There are a number of threads here discussing the possibility that expenses will decline with age. Take a look at those threads too since that pushes your "number" lower.

Welcome.
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Old 05-10-2015, 03:31 PM   #28
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My calculation finally showed up again at #10.

Your id reveals your intended ER year as 2019. We are in the same boat, except you joined this site years earlier than me. Hopefully, there will be no catastrophic market correction in coming years.

I will check it out.

I actually got there four years early. Megacorp cut me mid 2014, and I am just doing temp work here and there as it shows up. Both feet are in the tub and it feels really good.
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Old 05-10-2015, 03:35 PM   #29
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Building your own model is the best way to really understand what drives the results, so that you can take specific action to improve those results. It is also helpful where your personal situation may differ from other, more generic models. In any event, I don't think it is a waste of time to learn how these things work.
Early on, I actually did build my own model. Because I'm not as smart as those who created FireCalc and others, I omitted a few key considerations which could have had potentially disastrous results.

In my case anyway, if you're not smart enough to NOT need a model, maybe you're not smart enough to build your own.
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Old 05-10-2015, 04:12 PM   #30
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I'm not sure how you arrived at the bold statement.

Maybe a numeric example would help. Suppose we try a very simple retirement. A single person, with

a: Annual expense for the first year: $40,000

c: SS of what you can withdraw:$18,000.
n1: The number of years before you start to withdraw SS: 0
n2: The number of years after you begin to withdraw SS: 30

You can specify r1, r2, and r3, plug them into your formula, and get a value for b.

Then, you can specify what number "most people here" would use for b, and show why you think it is "too conservative".
Here is the result based on the numbers given above.

a $40,000 Input
b $461,771 Output
SS $18,000
r1 1.06
r2 1.03
r3 1.02
n1 0
n2 30


How does $461k look like?
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Old 05-10-2015, 04:24 PM   #31
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Building your own model is the best way to really understand what drives the results, so that you can take specific action to improve those results. It is also helpful where your personal situation may differ from other, more generic models. In any event, I don't think it is a waste of time to learn how these things work.
That is exactly correct. I initially did this on a spread sheet based on my own situation (That is no consideration of pension, because all our pensions with previous employers were converted to 401k). As I played with the numbers again and again, I thought it would be fun to convert a spreadsheet results to a more generalized formular.

There are lots of existing guesstimates available. However, I believe this is the first one that makes the "magic" lump sum directly depend up your annual expense. If you need $a, you will know exactly how much $b should be.
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Old 05-10-2015, 04:56 PM   #32
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There are lots of existing guesstimates available. However, I believe this is the first one that makes the "magic" lump sum directly depend up your annual expense. If you need $a, you will know exactly how much $b should be.
So the trinity study that says you need 25X your expenses isn't magic enough for you?
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Old 05-10-2015, 04:58 PM   #33
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I don't get the obsession to know the answer to within a gnat's hair. The effort to try to achieve that level of knowledge isn't productive to enjoying life imo. In fact, I think it's a waste. Get/make a good estimate & live on 90% of that & adjust every few years. What difference is that initial 10% going to make to the next 30 years?
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Old 05-10-2015, 05:07 PM   #34
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What is your basis for believing most people here are "too conservative?"

And for anyone who might be interested in your approach, what probability of success does your formular offer? It's relatively simple to project the average portfolio needed to support a given spending for a given number of years, assuming a real rate of return - but that may give you a 50% probability of success. Good enough?
You and several others questioned why I said existing models are “too conservative”. First of all, it is purely subjective, as different people have different risk tolerance levels. While the average soon-to-retire people have relatively much lower retirement savings balance, people thinking about ER and joining this site, including myself, are generally “conservative” with our retirement planning approach.

My model is still conservative. 1). by assuming that SS COLA is behind the inflation rate; 2). by assuming that the investment return rate is lower than the generally accepted 8% of historical US stock market return.

Models are just for planning and do not guarantee anything. Many people here use FireCalc and are looking at “success rate” in the end. My questions for you are: 1). what success rate is considered high enough and can be accepted? 2). unless you can achieve a success rate of 100%, have you thought about “what-if” bad luck do come?

To me, for retirement planning, the annual expense is a number for comfortable living, not for bare minimum. If the market goes down (especially in earlier retirement years), we can certainly reduce our living standard. It is no different from those who saw their retirement savings tanked due to market meltdown and decided to delay their retirement. Bad thing will occur, but it is never the end of the world.

I am aware that many people seek peace of mind by accumulating a higher figure. But, in the meantime, they are spending extra years on the job, that otherwise may not be necessary. So, it is a balance of choice.
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Old 05-10-2015, 05:17 PM   #35
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So the trinity study that says you need 25X your expenses isn't magic enough for you?
Like what I said earlier, those factors (25X or whatever) are irresponsible. It doesn’t take your available SS in to account. Also, it doesn’t tell you whether you can retire at 40, 60 or 70. The retirement age and your available SS, along with inflation & investment return rate, do significantly affect the outcome.

By how much? My model delivers the answer.
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Old 05-10-2015, 05:17 PM   #36
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I tend to agree, with huge caveats, that many here are probably too conservative. As I have noted before, I intend on using a 5-5.%% withdrawal rate after DW retires or semiretires, until SS, when we will probably reduce. Or not. It will depend on sequence of returns the next 7 years.
Caveats: our "needs" withdrawal rate is about 2.5%, with only a small mortgage but with 3x taxable savings. Why not pay out the mortgage? Because of the concerns above about making it to SS.
We can cut back travel, entertainment, and other categories, and health insurance is only 250/month. The less slack in the budget the more the sequence of returns will kill you, if you can't adjust (no 10-20k Europe trip).
I'm dialing back to half time work, which I should be able to expend for a while. DW is 5 years younger and wants to continue to work, for a while.
So we have huge flexibility with 1-1.5 partial incomes.




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Originally Posted by itsme2 View Post
You and several others questioned why I said existing models are “too conservative”. First of all, it is purely subjective, as different people have different risk tolerance levels. While the average soon-to-retire people have relatively much lower retirement savings balance, people thinking about ER and joining this site, including myself, are generally “conservative” with our retirement planning approach.

My model is still conservative. 1). by assuming that SS COLA is behind the inflation rate; 2). by assuming that the investment return rate is lower than the generally accepted 8% of historical US stock market return.

Models are just for planning and do not guarantee anything. Many people here use FireCalc and are looking at “success rate” in the end. My questions for you are: 1). what success rate is considered high enough and can be accepted? 2). unless you can achieve a success rate of 100%, have you thought about “what-if” bad luck do come?

To me, for retirement planning, the annual expense is a number for comfortable living, not for bare minimum. If the market goes down (especially in earlier retirement years), we can certainly reduce our living standard. It is no different from those who saw their retirement savings tanked due to market meltdown and decided to delay their retirement. Bad thing will occur, but it is never the end of the world.

I am aware that many people seek peace of mind by accumulating a higher figure. But, in the meantime, they are spending extra years on the job, that otherwise may not be necessary. So, it is a balance of choice.
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Old 05-10-2015, 05:24 PM   #37
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Like what I said earlier, those factors (25X or whatever) are irresponsible. It doesn’t take your available SS in to account. Also, it doesn’t tell you whether you can retire at 40, 60 or 70. The retirement age and your available SS, along with inflation & investment return rate, do significantly affect the outcome.

By how much? My model delivers the answer.
Except you are ignoring perhaps the biggest risk for early retirees: sequence of returns risk. Your model is frankly quite simplistic.

To illustrate the sequence of returns risk issue, I think this is a pretty good explanation: John Hancock - GIFL Solutions - Sequence of Returns Risk

Note that the hypothetical early retiree in the historical example they use who ran out of money was actually the one who had higher returns over time.

I know you will say "that does not account for social security." Straw man if I ever saw one. You can account for SS in firecalc while getting the benefit of modelling sequence of returns risk. In any case, ask 10 random people under 40 if they think they will be getting SS...
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Old 05-10-2015, 05:40 PM   #38
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Models are just for planning and do not guarantee anything. Many people here use FireCalc and are looking at “success rate” in the end. My questions for you are: 1). what success rate is considered high enough and can be accepted? 2). unless you can achieve a success rate of 100%, have you thought about “what-if” bad luck do come?
We all use whatever success rates we're comfortable with, typically from 75-200% - no one is under the illusion there's a narrow range of "right" answers. If we hadn't thought about the bad luck "what if's", we'd all use more optimistic success rates.

Quote:
Originally Posted by Itsme2
To me, for retirement planning, the annual expense is a number for comfortable living, not for bare minimum. If the market goes down (especially in earlier retirement years), we can certainly reduce our living standard. It is no different from those who saw their retirement savings tanked due to market meltdown and decided to delay their retirement. Bad thing will occur, but it is never the end of the world.
Sure it's easy to adjust early on, that's not the big question. The challenge is in projecting the range of likely outcomes 20-40 years on. Are you going to go back to work in your 80's or 90's when it becomes obvious your plan is going to fail? Might be too late when you realize it, could be "the end of the world" as you've known it during your first 20 years retired. Most here plan "too conservative" to avoid living in a box under a bridge eating cat food, it's a fair exchange for many here.

Quote:
Originally Posted by itsme2
I am aware that many people seek peace of mind by accumulating a higher figure. But, in the meantime, they are spending extra years on the job, that otherwise may not be necessary. So, it is a balance of choice.
Yep, a choice we all have to make, and live with - despite what anyone else may think. Most here would rather be safe than sorry, but there is no way you can know if you worked extra years/saved more than needed/spent less until the END of plan - no model can tell you that in advance, not FIRECALC or any other. I am not seeing how your simple model is more helpful, except as your self educating tool.
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Old 05-10-2015, 05:47 PM   #39
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My model is still conservative. 1). by assuming that SS COLA is behind the inflation rate; 2). by assuming that the investment return rate is lower than the generally accepted 8% of historical US stock market return.
This is one of the most peculiar methods of being conservative that I've ever heard of. Essentially, you are making multiple mistakes in your inputs that you hope will offset each other and lead to a more "realistic" retirement estimate. You have no way to include sequence of returns risk in your model, so you intentionally low-ball SS COLAs, in spite of the fact that by law SS COLAs are determined by the inflation rate. Sheesh, you may call your model "realistic" , but I would tend to call it GIGO. Still, if it works for you, go for it. Just don't expect me to follow your lead and base my planning on such a flawed model.
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Old 05-10-2015, 06:02 PM   #40
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We didn't start planning with "what we would need", but from what we had.
From an old post, this is how we've handled our savings. (The only change from this older plan, is that we now look at age 90)

Quote:
There are hundreds of financial planners on line where you put in your estimates of assets, and return and inflation, and come up with the amount you need to retire. In our case it doesn't work... All of the planners make the assumption that you will want to maintain your asset capital until you die... In our case, had we followed their plan, we NEVER would have retired.
We just decided to die at age 85... dead broke. Made our planning much easier. Personal decision of course, but if you plan to spend down capital assets, it makes planning easier.

Our plan is extremely simple... On the spending side, we have three different budgets that we can adjust as circumstances warrant. Best case... Nominal... and Austerity.

On the Asset/Nest Egg side, We boil our assets down into three categories.
1. Fixed assets... house, auto, and other valuable non cash items... real property, jewelry, . We do not count household goods... (experience tells us that this is not realistic)
2. Non Income producing assets... bank accounts, cash, cash value life insurance policies.
3. Income producing assets... stocks, bonds, annuity.

All of these items are kept on a spread sheet and periodically updated. It's easy to come up with a total value... and then to average the income from the total...

To calculate where we stand in our retirement plan, we add
a. Social security amount.
b. Amount of interest earned on income producing assets.
c. ... and add the Total Assets divided by the number of years between now and age 85.

That establishes how much we can spend, which we then adjust to our best/nominal/austerity budget.

Sounds funky, but it works,and it takes about 2 minutes to tell if we're on budget or not.

The second part of this budgeting thing, is that we've been blessed by not having any debt. All of this makes for very simple accounting.
Not for everyone, but has worked for us for the past 25 years.
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