FireCalc Dips in Net Worth - Anyone Scared?

[REWahoo]

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Originally Posted by Jarhead* Jarhead, who truly believes that U.S.C. had the best college football team in the country this year...

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Originally Posted by Jarhead* ...and hopes the NCAA will come to their senses, and go to a playoff system in the future.

Agreed. But I'm doubtful we'll live long enough to see it happen...

[retire@40]

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Originally Posted by ERD50 ...If you think a 4% SWR and 95% is 'good enough', how would you feel if your original $1,000,000 buying power was just $274,000 in 15 years? You could be down 73% and you are only half way in to your 30 years! Could you be calm, and say 'Sure, I blew through almost 3/4 of my nest egg, but history says I should do OK.' BTW, that 95% success rate says that you will run out in year 24 in the worst case year...

This is why you need to look at your financial situation at least once a year.

If you all of a sudden figure out in year 15 that you may not have enough to make it, you haven't planned accordingly.

There has to be plenty of fluff in your original retirement budget to allow you to cut down to a leaner budget or even go to bare bones for a while if you feel your net worth has dropped more than anticipated. This requires a regular review every few month, but no less than once a year. For example, I am planning on living on a 4% SWR, but I can live on 3% just by just cutting out my "entertainment" expenses. There are plenty of free things to do to replace the costly travel that I planned on in full retirement.

[2B]

A sudden and severe market drop is one of the weaknesses I see in Ray Lucia's Buckets of Money. He has Bucket 1 and 2 depleted in 14 years before using Bucket 3 to reload them. If the market goes merrily along for 12 or 13 years before reaching 1929 - 1932, there won't be much for replenishing Buckets 1 and 2. That's why my moral equivalent of Bucket 1 is always going to be full of enough cash for my basic living costs.

There was a regular contributor here that used to refer to his "trailer down by the trout stream" as his fallback position. That's a little extreme for me but I don't believe anyone can retire and say "4% SWR from here on." The SWR rate concept is a planning tool and not a religion.

[megacorp-firee]

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Originally Posted by retire@40 There has to be plenty of fluff in your original retirement budget to allow you to cut down to a leaner budget or even go to bare bones for a while if you feel your net worth has dropped more than anticipated. ... For example, I am planning on living on a 4% SWR, but I can live on 3% just by just cutting out my "entertainment" expenses.

R@40, you SAID IT! Buffer, fluff, cushion, whatever you call it is the real answer. This accumulation stuff, AA, and budgeting, although we would like to think it is all math and science ... it isn't .. it's an art.
You have to have the right attitude going into this as well as the ability to deal in atom bomb targeting rather than sharpshooting (IMHO).
If you plan this to the penny and anything goes south on you that you did not expect; ... it's ... hat in hand ... 'uh boss can I have my old j*b back, PLEASE'
... not for me ... I have so many buffers that I can go to 0% swr and I'm still living good (not GREAT, but good) shape ... (I do have the advantage of a moderate sized pension).

[W2R]

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Originally Posted by retire@40 There has to be plenty of fluff in your original retirement budget to allow you to cut down to a leaner budget or even go to bare bones for a while if you feel your net worth has dropped more than anticipated. This requires a regular review every few month, but no less than once a year. For example, I am planning on living on a 4% SWR, but I can live on 3% just by just cutting out my "entertainment" expenses. There are plenty of free things to do to replace the costly travel that I planned on in full retirement.

This is where LBYM'ers have a huge advantage over fans of yuppie consumerism. We can cut back pretty easily, especially if it is just for a few years.

I have not been hit by the travel bug, but in your case you could probably really enjoy more inexpensive local travel during years of cutting back. Day trips to out-of-the-way areas just 100-200 miles away can be a lot of fun, and it's amazing how little most of us know about places close to home. Be a tourist in your home town.

As for me, if my portfolio sinks drastically then I can happily spend many hours in a library or going for walks and spend nothing. There are always labor-intensive projects to do around the house, too.

In my case I am not too worried, though I might be if/when my portfolio dropped that badly! I will try to forestall or prevent such drastic changes in portfolio value from occuring in the first place. During times when my portfolio is less than about 80% of its initial value I will probably just automatically revert to deep LBYM mode.

Honestly I do plan for economic conditions to be the worst in history during the years 2010-2020, or perhaps even 2010-2040. I plan for my portfolio to take some serious hits. Then if things aren't that bad, any portfolio gain at all will just be gravy.

[mexmeme]

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This is where LBYM'ers have a huge advantage over fans of yuppie consumerism. We can cut back pretty easily, especially if it is just for a few years.

I think the opposite is more doable. If you are living on your total income, and spending for non essentials, then tightening the belt is possible. If you have always LBYM, then there is no stretch room. We have always saved, and you can tell by the absence of new furniture (old beaten up furniture because of moving every 3 years) absence of new cars (not gonna take that first few years hit) and no vacations (haven't been out of my town for 3 years). I don't know where to cut. I have to say we don't scrimp your groceries. DH is a meat eater, but we don't eat out much. I'd hate to see the market keep up like it has.

[haha]

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Originally Posted by mexmeme I think the opposite is more doable. If you are living on your total income, and spending for non essentials, then tightening the belt is possible. If you have always LBYM, then there is no stretch room.

This seems right to me. While you are working, so what if you earn $200,000 and live on $60,000? What counts is your excess funding once you retire. And excess over what it takes to live reasonably well wherever you are or want to be. Remember we are talking about retiring voluntarily, not being refugees from a war, or displaced peple from a natural or economic disaster. In most places a couple can live OK on $60,000, and an individual on $40,000. Not great, but OK.

So if you retire with $2mm you do have some wiggle room, and obviously more room with more money. But put it down to $1.5mm for a withdrawal of $60,000, and the couple has less room. Not that you can't get cheaper, but better be sure that DH and DW are on the same page, that inflation stays contained, that medical insurance stays no more unaffordable than it is now, etc., etc.

Ha

[Spanky]

It's insane to debate whether a portfolio can survive under a series of consecutive market declines. It's almost like talking about whether you can survive if a huge asteroid struck the earth or the global economy entered a prolong, say 100 years, depression. We just have to be pragmatic about the world. Can we really identify or prepare for all the worst-case scenarios? The whole what-ifs are endless. I have been designing safety-critical systems, and it has never ceased to amuse me about the infinite number of failures that could occur. Despite enormous mitigations built into the design and manufacturing, failures are inevitable as evidenced by product recalls.

Back to portfolio protection or survival -- the basics still applies. That is, spend less if necessary, spread your money around, reserve a stash for living expenses for whatever number of years that you feel comfortable, postpone ER until you feel that you have enough, return to work, get a part-time job, etc. Most of all, stop worrying about the worst to come and enjoy life while it still lasts. There are countless people who have survived and lived comfortably with a lot less money than the amount posted by most people in this forum.

[REWahoo]

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Originally Posted by Spanky Back to portfolio protection or survival -- the basics still applies. That is, spend less if necessary, spread your money around, reserve a stash for living expenses for whatever number of years that you feel comfortable, postpone ER until you feel that you have enough, return to work, get a part-time job, etc. Most of all, stop worrying about the worst to come and enjoy life while it still lasts. There are countless people who have survived and lived comfortably with a lot less money than the amount posted by most people in this forum.

What Spanky said...

[haha]

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Originally Posted by Spanky It's insane to debate whether a portfolio can survive under a series of consecutive market declines. It's almost like talking about whether you can survive if a huge asteroid struck the earth or the global economy entered a prolong, say 100 years, depression. We just have to be pragmatic about the world. Can we really identify or prepare for all the worst-case scenarios?

While you make a good point, that is not what this thread is about. This thread is about exploring the paths of net worth in ordinary already experienced times.

Perhaps it might be insane, to use your word, to expect the future to be markedly better than the past?

Ha.

[TickTock]

I've been kicking around the idea of using a constant % withdrawal and banking any 'excess' that we don't spend in a year under that rule in a 'reserve' fund, MM / CD ladder / Treasury ladder or something ultra-safe. That fund could then be used for more spending in down years and/or big ticket fun stuff.

[donheff]

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Originally Posted by TickTock I've been kicking around the idea of using a constant % withdrawal and banking any 'excess' that we don't spend in a year under that rule in a 'reserve' fund, MM / CD ladder / Treasury ladder or something ultra-safe. That fund could then be used for more spending in down years and/or big ticket fun stuff.

I posted a similar idea in one of the previous threads on this topic (probably during one of those early summer market drops ). Like Audrey, I figure that it will be pretty safe to pull 4%/year. Since our needs are quite a bit lower, we would put the extra into a "mad money" account that we could tap during periods where 4% is lower than we would like. Couple that with a cash bucket to draw on when the market is down (to avoid whacking equities at low points) and hope for the best. If the mad money account runs dry, things are not looking good - look at selling the weekend house, seriously downsizing, etc. If it all goes to hell we will have a lot of company. I hope some of you stay online so we can exchange horror stories. Maybe we can open a communal campground or something.

[samclem]

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Originally Posted by donheff I hope some of you stay online so we can exchange horror stories. Maybe we can open a communal campground or something.

Now there's the ultimate backup plan. We form a small company, everybody pitches in a few bucks, we buy 40 acres somewhere as a group. Then, everyone gets a small lot with electrical hookup, water, a cable hookup, and a hookup to the communal septic system. I'll bet for $30K each that 40 people could all have "worst case" insurance. Bring your own yurt/RV/converted shipping container/small cabin. We'll call this the "Firecalc Fireside Fishcamp Option."

Now, we need to decide who lives next to who. I've got strong preferences, so I'll go first . . .

[Delawaredave5]

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Originally Posted by haha This thread is about exploring the paths of net worth in ordinary already experienced times. Perhaps it might be insane, to use your word, to expect the future to be markedly better than the past? Ha.

Historical data in Firecalc is US data - correct ? What is the imapct of the "global economy" going forward and having a chunk of international stocks in the mix ?

Anyone ever look at the "dark ages" in Firecalc (1929, 1972, etc) and re-run assuming 1/4 to 1/2 of the equities in the mix are International ?

I believe equities around the globe will have similiar long term returns as an asset class. I'm hoping that having 1/2 of my stocks international will counterbalance a little future "dark ages" in the US stock market.

[twaddle]

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Originally Posted by Delawaredave5 Anyone ever look at the "dark ages" in Firecalc (1929, 1972, etc) and re-run assuming 1/4 to 1/2 of the equities in the mix are International ?

In the past, being in the right asset mix has absolutely helped. For example, small caps did relatively well during the 1968-1982 period. But nobody knows what the right asset mix is going forward.

[lsbcal]

To answer the original post (anyone scared?), I am scared but then I'm always scared. I try to be really scared when I stress test my portfolio with FIRECalc. It says the worst case would be that my portfolio goes down to 38% of original. Not permanently but if that happened it would really cramp my style.

But I like to think there are a few options like (1) reducing comsumption a little, (2) buying TIPS to ward off that nasty 1970's inflation possibility, (3) being fairly conservative in equity selection to avoid the worst of a depression scenario and (4) having the right long term AA. For (1) we're taking a domestic vacation this year. For (2) I had 10yr TIPS and just sold to buy short term bonds for the low rate environment ahead. For (3) I tend towards larger balanced stock approach instead of highly tilted to value and small cap value which might be a problem in a very severe recession (or depression).

I've enjoyed a lot of the posts above. And guys, if your showing long term charts you need to do it with semilog on the y-axis or it just doesn't give the right picture for growth rates.

[Meadbh]

I must admit I feel a bit queasy about the prospect of a long term market decline. I reworked a spreadsheet I had been using to project net worth and SWR, using lower growth rates - though not negative ones! I was relieved to find that I could withdraw up to $100K without going over an SWR of 3%.

Here is a sample in Word, based on a starting NW of $1m. (Excel files can't be attached). If anyone wants a copy of the spreadsheet, send me a PM and we can do that by email. In this example, the "special expenses" are new cars in 2011 and 2021.

[twaddle]

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Originally Posted by haha Perhaps it might be insane, to use your word, to expect the future to be markedly better than the past?

Forget better than the past. I would be ecstatic if I could convince myself that the future would be nearly as good as the past.

I don't like the dividend yield. I don't like the P/E or earnings trend. I don't like the demographic trends. I don't like our current economic hurdles.

Give me faith, Ha. Tell me we'll have another 20 years of P/E expansion, will ya?

[haha]

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Originally Posted by twaddle Give me faith, Ha. Tell me we'll have another 20 years of P/E expansion, will ya?

Better speak to one of the others on this request.

Ha

[audreyh1]

I handle it by using a straight X% withdrawal rate rather than the inflation adjusted initial 4% rate as used in the original SWR.

This means that I take more out when the market has been good, but it also means that the portfolio is not being depleted at a high percentage rate when performing poorly. Such an approach means you have to be willing to take a pay cut now and then in the interest of preserving the portfolio. I guess this bothers some people, but it doesn't bother me at all.

I never felt comfortable with taking an initial fixed rate + inflation adjustment each year disregarding market performance. This technique was developed for folks who needed a constant "salary" each year mimicking the financial "predictability" of their working years. I would rather react quickly once entering years of poor porfolio performance.

And instead of doing some kind of artificial annual "inflation adjustment", I prefer to let my portfolio grow enough to supposedly beat inflation over the long run and thus keep up with increasing costs of living by whatever my porfolio performance provides.

Dealing with unpredictable and varying withdrawal amounts doesn't bother me. I have a "buffer" - a cash account for living expense in which I carry 1 to 3 years living expenses. If the portfolio has a good year, the buffer gets more in it, a bad year less. Over a 3 year period this reduces the variability. Of course, there is nothing wrong with variability either, because you can time large purchases to wait for a "good year". That more mimics real life expenses than a predictable salary does.

FWIW my WR is in the range 3 to 3.5%. This is pretty conservative.

Audrey