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Do you rely on a non-zero 'real' return to make it thru retirement?
Old 03-11-2014, 08:33 AM   #1
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Do you rely on a non-zero 'real' return to make it thru retirement?

Aside from Firecalc, I have slowly built up my own excel model, complete with estimated tax brackets, options for what SS age to pick, even RMD tables, and options to draw down different percentages across after tax, tax deferred, and tax free accounts.

I can model different 'real' returns - which I model as after inflation and fees.

When I plug in 0% and model different ages for 'end game' of 80, 90, 100, 110 I am estimating that I can make it (along with SS and a modest pension).

It isn't as robust as Firecalc with the Monte Carlo random runs, but is just another tool I use to get a better feel for planning.

Do you use 0% just to take that off the table in your planning?

Or are you relying on a positive real return (after fees and inflation)?
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Old 03-11-2014, 08:38 AM   #2
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I'm relying Wellesley and Wellington returns...
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Old 03-11-2014, 08:38 AM   #3
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I think you better use a positive real return if you are also relying on pensions, as the pension fund most likely relies on a positive real return to stay solvent.
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Old 03-11-2014, 08:44 AM   #4
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Our discretionary spending gives us room to adjust if for some reason we experience zero real returns. Things like travel and gifting are easy cuts if needed.
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Old 03-11-2014, 08:44 AM   #5
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If I take the overall expected return for my portfolio (based on AA) and just model it as a constant return, this is greater than my planned withdrawal rate.

If I assume 0% real return, I can probably make it but will have very little, or nothing, left over. I don't expect this to happen.
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Old 03-11-2014, 09:22 AM   #6
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I like the FIRECALC approach because while no one knows what "worst case" could mean, the model at least uses the worst case in the last century.

Like so many worriers here, I have run the numbers at zero percent real return, and we would survive. There would have to be minor discretionary cuts and our kids won't get as much help, but we won't run out of funds. But this assumes our pension and SS. And who says we won't get negative real returns for a decade or two? There is always another "worst case" to worry about, but not a good use of my time.
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Old 03-11-2014, 09:29 AM   #7
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This gives you a WR% that simplifies down to just 1/(number of years to plan for). So if you plan for 30 years, 1/30 = 3.33% WR, 40 years = 2.5% WR.

It gets a bit more complex if you have non-cola pensions in there, or other income/spend.

IIRC, even the worst historical periods in FIRECalc's database showed positive real returns for 30-45 year periods. So it might be considered overly conservative to assume worse than the worst, but I think it does provide a helpful 'guide post'.

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Old 03-11-2014, 09:57 AM   #8
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....Do you use 0% just to take that off the table in your planning?

Or are you relying on a positive real return (after fees and inflation)?
For my deterministic plan I use 2.5% real (5.5% nominal return for a 60/40 portfolio - which is the 8.9% historical return for a 60/40 portfolio and a very significant haircut) less 3.0% inflation.

I guess I am somewhat relying on real returns as my plan fails once real returns fall below 1.5%. However, the assumed living expenses are significantly higher than what we really need to live on - more of what we want to live on. If I dial the real return to 0% and dial down the spending to what we need to live on the plan would pass.
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Old 03-11-2014, 10:41 AM   #9
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I have a simply model and if I use 1.5% real I make it to age 95. At 0% real I only make it to 83. So my answer is "no, I don't count on a real return if I plan on dying before age 83, but I do count on 1.5% if I plan to live to age 95".
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Old 03-11-2014, 11:13 AM   #10
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As ERD50 says, planning for a 0% real return gives you the formula of WR = 1/length of retirement.

I know that this is only one of many different tools that can be used, but I've never felt comfortable with a tool that used any particular fixed rate of return as a guide, for the simple reason that the market doesn't give us a fixed rate of return every year. Firecalc has been my main tool and although the past is obviously not a predictor of the future, for some reason, I feel more comfortable with a tool that mimics all the past market runs for which data is available, so that I can see how my portfolio would have fared under different sequences of returns.

All of these tools are only rough estimators anyway. When I began withdrawals, I had 41x my annual withdrawal, and now have 46x. It would be nice to make it to 50. If the multiple gets any higher, I might consider giving myself a modest raise.
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Old 03-11-2014, 11:26 AM   #11
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In my model I use 4% return and 3% inflation. If I set my investment return to 0% (so -3% real return) things still work as post 65 my expenses will be covered by rent, US and UK SS payments and a small pension. My after tax and defined contribution savings are sort of insurance.
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Old 03-11-2014, 12:13 PM   #12
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I am an early retiree and yes, my current expenses are covered by 0% real if I include my current Social Security estimated payments at age 70. I make it to well past age 100.
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Old 03-11-2014, 12:26 PM   #13
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As ERD50 says, planning for a 0% real return gives you the formula of WR = 1/length of retirement.

I know that this is only one of many different tools that can be used, but I've never felt comfortable with a tool that used any particular fixed rate of return as a guide, for the simple reason that the market doesn't give us a fixed rate of return every year. Firecalc has been my main tool and although the past is obviously not a predictor of the future, for some reason, I feel more comfortable with a tool that mimics all the past market runs for which data is available, so that I can see how my portfolio would have fared under different sequences of returns.

All of these tools are only rough estimators anyway. When I began withdrawals, I had 41x my annual withdrawal, and now have 46x. It would be nice to make it to 50. If the multiple gets any higher, I might consider giving myself a modest raise.
That's what I like about Firecalc too. When it tells me 95%, I basically tell myself if I'm unfortunate enough to retire in one of the 5% worst case sequence of returns, I'll run out of money.
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Old 03-11-2014, 12:38 PM   #14
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I use 1% real in a spreadsheet, SS, with private well funded pensions and no part time work, and we should be able to save money on that basis once the kids are launched and we downsize. So the plan is to not spend down the portfolio to any age. The longer we live the more we save.

In reality we have been working part time, and most years that income alone would more than cover the downsized, no kids, no college expenses lifestyle for just the two of us living in a condo near a beach and with some slow travel to other countries.
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Old 03-11-2014, 12:47 PM   #15
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When I plug in 0% and model different ages for 'end game' of 80, 90, 100, 110 I am estimating that I can make it (along with SS and a modest pension).
110? I love your optimism .
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Old 03-11-2014, 12:48 PM   #16
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We currently have ~43x expenses, which would take us to age 83 with zero real return. Throw in SS and we would be fine until our 90's.
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Old 03-11-2014, 12:59 PM   #17
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Aside from Firecalc, I have slowly built up my own excel model, complete with estimated tax brackets, options for what SS age to pick, even RMD tables, and options to draw down different percentages across after tax, tax deferred, and tax free accounts.

I can model different 'real' returns - which I model as after inflation and fees.

When I plug in 0% and model different ages for 'end game' of 80, 90, 100, 110 I am estimating that I can make it (along with SS and a modest pension).

It isn't as robust as Firecalc with the Monte Carlo random runs, but is just another tool I use to get a better feel for planning.

Do you use 0% just to take that off the table in your planning?

Or are you relying on a positive real return (after fees and inflation)?
If my portfolio keeps up with inflation, then like you, with SS and tiny pension I am fine for the duration.

I do not want to die broke, and it looks like I won't. My daughter will inherit something to throw away on trinkets or whatever.

Of course, this assumes that my inflation adjusted spending stays the same from here on out. It might not! It could increase quite a bit and lead to abysmal failure of my portfolio, if I acquire a taste for McMansions, diamonds, or luxury travel packages...
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Old 03-11-2014, 05:17 PM   #18
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.....if I acquire a taste for McMansions, diamonds, or luxury travel packages...
It seems to me that an asteroid is more likely than that!
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Old 03-11-2014, 05:29 PM   #19
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It seems to me that an asteroid is more likely than that!
Well, you never know! At least, I don't. Every now and then I look at diamonds and Jaguars and other high end things online, just to find out if my tastes are changing.

Last night I spent a while looking online at Coach purses, which many women love but which can sometimes be a bit pricy. I was satisfied to find that I honestly don't happen to want one.
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Old 03-11-2014, 05:42 PM   #20
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That's what I like about Firecalc too. When it tells me 95%, I basically tell myself if I'm unfortunate enough to retire in one of the 5% worst case sequence of returns, I'll run out of money.
Or if a scenario occurs in the future that is more injurious to portfolios than anything that happened in the past.
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