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Befuddled
Old 08-24-2006, 02:50 PM   #1
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Befuddled

I am befuddled. I decided to take advantage of Firecalc, since everyone is so positive on it. I didn't want to do anything very fancy, get get to know the tool so to speak. I used the advanced form, and entered the following conditions and constraints:

Starting Porfolio* * * * * * * * * *$2,000,000
Starting Withdrawal* * * * * * * * *$50,000
75/25 equity/5yr T Notes
35 Year Duration
Minimum Interim Value* * * * *$1,000,000

% Success 0.0%

Now i submit tha tthere are many ways that a guy with $2,000,000 who wants to withdraw $50,000 a year can do it with very close to 100% success. One of them is to buy US Treasury TIPS at 2.5% real- a level at which they are flirting at present.

So have I done something wrong, or is the psychology of most of the folks who post here and accept the total return approach to retirement investing just very different from my own?

HA
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Re: Befuddled
Old 08-24-2006, 03:18 PM   #2
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Re: Befuddled

don't know, 35 years, 2 mil, 50k, 75/25 gave me a 100% rate
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Re: Befuddled
Old 08-24-2006, 03:19 PM   #3
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Re: Befuddled

Quote:
Originally Posted by HaHa
I am befuddled...So have I done something wrong, or is the psychology of most of the folks who post here and accept the total return approach to retirement investing just very different from my own?
Ha,

Did you mean terminal value rather than "minimal interim value?"

If so, FC is probably tripping on your $1mm figure. It is very sensitive to that figure since not only does it have to reduce your success rate for sequences where it goes negative, but also by sequences which leave you low at the last year of your retirement period (from which you thus have not time to "recover").

Try iterating starting at a 0 or very low terminal value and work your way up. Then the other numbers should fall into place. At least that's been my observation.
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Re: Befuddled
Old 08-24-2006, 03:20 PM   #4
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Re: Befuddled

Those darn *puters' . *They always give you grief.

I ran your numbers and came up with (as expected) a 100 percent sucess rate

FIRECalc Results
Your plan is to spend $50,000 a year, or 2.50% of your starting portfolio.

FIRECalc looked at the 101 possible 35 year periods in the available data, starting with a portfolio of $2,000,000 and taking out $50,000 the first year of your retirement, and the same amount after adjustments for inflation each year thereafter.

(FIRECalc assumed your retirement portfolio is in investments that perform about like the US stock market as a whole. Mutual funds report each year how well they have performed relative to the stock market as a whole. Such information can help you see how relevant this information might be to your situation.)

The key result: a 100.0% Success Rate
For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

Here's how your portfolio would have fared for 35 years had you retired in, for example, 1960 . (The Advanced FIRECalc version allows you to select a different year.)
*
And here is how your portfolio would have ended up in each of the 101 cycles. The range was $2,000,000 to $23,718,052, with an average of $7,343,288. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)


A withdrawal of $76,992 (3.85% of your starting portfolio) provided a success rate of 95.0% (101 total cycles, of which 5 failed).

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Re: Befuddled
Old 08-24-2006, 03:27 PM   #5
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Re: Befuddled

I got an 88.1% success rate using the $1M terminal value minimum.

Is it possible you had an extra 0 in the terminal value field? When I tell FC to leave me $10M, it says "0% chance, Buddy."
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Re: Befuddled
Old 08-24-2006, 03:29 PM   #6
 
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Re: Befuddled

I am confused by the "Minimum Interim Value $1,000,000" that you entered. I don't even see where to enter it?
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Re: Befuddled
Old 08-24-2006, 03:58 PM   #7
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Re: Befuddled

Quote:
Originally Posted by wab
I got an 88.1% success rate using the $1M terminal value minimum.

Is it possible you had an extra 0 in the terminal value field?* *When I tell FC to leave me $10M, it says "0% chance, Buddy."
Looks like that is what I did. When I re-ran it carefully counting the zeros I also get 88.1%.

Quote:
Did you mean terminal value rather than "minimal interim value?"
Quote:
I am confused by the "Minimum Interim Value* * * * *$1,000,000" that you entered. I don't even see where to enter it?
Yes, it is described as "Terminal Value." But the text explains that if you fall below this value anywhere along the path, you fail:
"Terminal Value: There should be a minimum of $* left in the portfolio at all times, including at the end." I translated that to what it appears to be functionally, a minimum interim value.

Cutthroat, this choice in under the "Options" tab in Advanced Firecalc.

Well, 88.1% sure looks better than 0%, but I am not sure that a judicious approach favoring sources of regular cash flow from dividends and interest might not be better for a retirement portfolio.

I would not be surprised if I could guess what the retirement starting dates were for the 12 failure years . Later, I will try this.

Thanks all for the aid.

Ha
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Re: Befuddled
Old 08-24-2006, 04:05 PM   #8
 
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Re: Befuddled

Mikey,

Yes the terminal value I saw and I also ran that and got the same as Wab 88.1%
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Re: Befuddled
Old 08-24-2006, 04:49 PM   #9
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Re: Befuddled

Quote:
Originally Posted by HaHa
Well, 88.1% sure looks better than 0%, but I am not sure that a judicious approach favoring sources of regular cash flow from dividends and interest might not be better for a retirement portfolio.
Can you explain that a little more? If you aim for around 4-4.5%, does it matter whether this comes from dividends v. other means of withdrawal?

Glad you got your problem squared away. I didn't realize til you pointed it out that terminal value is really misnomer, and that "minimal value at any time" is really what it means.
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Re: Befuddled
Old 08-24-2006, 07:52 PM   #10
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Re: Befuddled

Quote:
Originally Posted by Rich_in_Tampa
Can you explain that a little more? If you aim for around 4-4.5%, does it matter whether this comes from dividends v. other means of withdrawal?
Rich, I think it does, at least in the case of someone who has no adequate COLA pension. There is a wide divide between those who have this, and those who don't, so everything I say here applies only to those who don't. (If it applies indeed to anyone beyond me).*

I just ran what may model your 4% to 4.5% withdrawal. I used $2,000,000 portfolio, 75/25 equity/fixed split, default expenses, $1,000,000 "terminal value" minimum, and in the 4% case, $80,000 draw, in the other case, $85,000 draw. I used 35 years as the intended duration, and 5 year treasuries as the fixed component. All else is default.

The results for the $80,000 draw are 67.3% success; for the $85,000 draw 62.4% sucess.

The reason I insist on the $1,000,000 cushion is that I have been an investor and speculator for a long time, and I know how I react to adversity. The whole concept behind Firecalc and the whole boomer era idea of total return investing even for retirees is at base heavily reliant on mean reversion.

I have used mean-reverting strategies to spread commodities, and to take long positions in commodities. I can tell you that when the spread goes outside of your 95% bands, you think, oh crap, it is different this time. And sure enough, often it is.

So I know that I will be able to find lots of reasons to doubt the assumptions of Firecalc under this sort of stress.

Let's take the $80,000 case above. 32.7 % of paths went below $1,000,000. That means you who used to be a person with a $2,000,000 portfolio now are a person with less than one million. How much less, you could probably tinker around and find out. But to me, case closed.

In fairness, in today's interest rate and yield climate, I don't think you could find indexed bonds and high quality dividend paying stocks (and dividend raising stocks) to*allow you to draw $80 to $85 K with definite safety .

My own answer to this would be to demand less from the portfolio today, while keeping powder dry for better opportunities on the equity side in the future. I can't say more than this, or I might be accused of ***(feeble attempt to get around the ban on spelling the name of he whose name shall not be mentioned here)*** worship. Another approach would be to annuitize a good portion with the CPI indexed annuity marketed by Vanguard.

I do think you could find a very safe way to draw $50 or $60 K from $2mm, with what would essentially be a permanent portfolio rather than a portfolio for which for which liquidation or large drawdowns over time must be accepted as a possibility. See the discussion of Dividend Paying stocks (at least the part before it became consumed with purely technical considerations of adjustments made or not made to limit orders).

http://early-retirement.org/forums/i...p?topic=9183.0

Remember, you may have totally different ways of looking at things. Also, many others will likely add differing to sharply differing opinions. No debate will be coming from me, I love the market place and also the rather definite sanctions operating in our mostly free economy

Ha
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Re: Befuddled
Old 08-24-2006, 08:03 PM   #11
 
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Re: Befuddled

Quote:
I do think you could find a very safe way to draw $50 or $60 K from $2mm, with what would essentially be a permanent portfolio rather than a portfolio for which for which liquidation or large drawdowns over time must be accepted as a possibility.
Yeah TIPS! - $50K or $60K would only be 2.5 or 3% withdrawal. For a 35 year Portfoilo eat into a little Principal and 3 or 4% is easy!

Mikey, You've never had a health problem have you? - Financial worries are really nothing!
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Re: Befuddled
Old 08-24-2006, 08:48 PM   #12
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Re: Befuddled

Quote:
Originally Posted by HaHa
Rich, I think it does, at least in the case of someone who has no adequate COLA pension.
Ha,

That's an interesting and well-stated post.

Maybe Bob Clyatt's approach has some advantage. At least you feel the pain when things aren't going well, and thus have an early warning system you can't ignore for too long. The math virtually guarantees portfolio survival and your expenses become the variable. Hopefully after a few 95%-of-prior-year's income occurrences you can (if you are well-diversified and paying attention) figure out where the nail in the tire is.

I've always been a tad uncomfortable with that part of the "4% rule" which says, in effect, "yes things are down now, but stick with the inflation-adjusted 4% because history shows that up years will sooner or later neutralize this bad spell and all will be well." True enough based on history, but the stakes are pretty high if history was "wrong" as a crystal ball (esp if this occurs early in your retirement).
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Re: Befuddled
Old 08-24-2006, 09:21 PM   #13
 
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Re: Befuddled

Quote:
Originally Posted by Rich_in_Tampa
I've always been a tad uncomfortable with that part of the "4% rule" which says, in effect, "yes things are down now, but stick with the inflation-adjusted 4% because history shows that up years will sooner or later neutralize this bad spell and all will be well." True enough based on history, but the stakes are pretty high if history was "wrong" as a crystal ball (esp if this occurs early in your retirement).
This has been discussed here many times. Human nature being what it is, after a severe down-market drubbing most all of us here would reduce spending by a lot. I have always said that you should be able to reduce spending by 50% if necessary to retire. IOW - 50% of spending is discretionary. This will go a long way to survive a bear market.

Now if you want to worry - Think cancer, Nuclear War etc. etc.
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Re: Befuddled
Old 08-25-2006, 12:02 AM   #14
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Re: Befuddled

Hmmm

I love my dividends and watch current yield like a hawk. However at 13 years into ER - my cheap bastardhood the first ten having stood me in good stead - now I have to go with CT and worry more about running out of time than money.

So trying 5% variable thru my 60's until RMD hits at 70 1/2.
Right now - non cola pension and early SS cover 41% of the budget which I can stretch to 100% in my super frugal mode if necessary.*

The wild card is - how many healthy years to spend left. 5% of the balance every year should compensate for a truly wild portfolio swing - down or up.

heh heh heh heh - the mechanical stuff is great for calculators and laying out plans - but us humans just gotta tweak - at least this human.

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Re: Befuddled
Old 08-25-2006, 07:21 AM   #15
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Re: Befuddled

Quote:
Originally Posted by unclemick2
Hmmm
So trying 5% variable thru my 60's until RMD hits at 70 1/2.
Right now - non cola pension and early SS cover 41% of the budget which I can stretch to 100% in my super frugal mode if necessary.
I'm taking another hard look at variable v. 4%/inflated. Seems like at some point, all you can control is your expenses. Variable approach plays to that.
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Re: Befuddled
Old 08-25-2006, 08:37 AM   #16
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Re: Befuddled

I don't think variable withdrawal schemes would be as painful as they might seem at first blush.

If you use the ESRBob 95% rule, or something along those lines, it seems clear that any reduction in your draw would have to come from your discretionary expenditures. If you're like me, you quickly think "Ruh-roh...Momma ain't gonna be happy about cutting back on restaurants and golf this year..." when the market drops.

I don't think it's really quite like that because a significant portion of our discretionary expenses are on longer-cycle items, like car & motorcycle replacements, home redecorating, every third year Hawaiian vacations, etc. If we simply defer those types of outlays until the sun comes back out we won't have to cut back much on the restaurants, golf, etc.

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Re: Befuddled
Old 08-25-2006, 09:16 AM   #17
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Re: Befuddled

Quote:
Originally Posted by Cb
I don't think it's really quite like that because a significant portion of our discretionary expenses are on longer-cycle items, like car & motorcycle replacements, home redecorating, every third year Hawaiian vacations, etc. If we simply defer those types of outlays until the sun comes back out we won't have to cut back much on the restaurants, golf, etc.
Good points. I'd like to hear from anyone actually following a variable strategy and see how they handle down years in terms of lifestyle adjustment.

It reinforces the wisdom of minimizing fixed, essential payments like mortgage, condo fees, and of course car payments and the like. I guess most on this board have already done that. But it would be easy to see how some might decide they need to cut back due to bad market performance, and find that after a couple of years there's little to cut since fixed
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Re: Befuddled
Old 08-25-2006, 10:01 AM   #18
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Re: Befuddled

Quote:
Originally Posted by Rich_in_Tampa
Good points. I'd like to hear from anyone actually following a variable strategy and see how they handle down years in terms of lifestyle adjustment.

It reinforces the wisdom of minimizing fixed, essential payments like mortgage, condo fees, and of course car payments and the like. I guess most on this board have already done that. But it would be easy to see how some might decide they need to cut back due to bad market performance, and find that after a couple of years there's little to cut since fixed
Maybe folks need to follow a strategy that gives them growth potential but guarantees minimum income streams regardless of market returns................
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Re: Befuddled
Old 08-25-2006, 10:06 AM   #19
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Re: Befuddled

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Originally Posted by FinanceDude
Maybe folks need to follow a strategy that gives them growth potential but guarantees minimum income streams regardless of market returns................
Here we go with the variable annuity pitch again... :

Please, spare us the snake oil. There might be children reading this.
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Re: Befuddled
Old 08-25-2006, 11:44 AM   #20
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Re: Befuddled

Quote:
Originally Posted by brewer12345
Here we go with the variable annuity pitch again...* :

Please, spare us the snake oil.* There might be children reading this.
Whose making a pitch?* I guess you don't know what smilies mean..............

He's making a good point...........something people don't think about.........I wonder what retired people did when their variable accounts dropped 30% or more in the last market crash?.......which they did.*

Not everyone on this board is going to have a large pension waiting for them at ER.................just a thought............

If you have $1million at ER, and take 4% a year, that's $40K.* If the market "corrects" it to $700K million, 4% is $28K............I think I WOULD notice if my income decreased by $12K a year.........how about you??

There is no clear answer to this scenario..............

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