FireCalc Dips in Net Worth - Anyone Scared?

[FIREd]

So you've got these backup sources that you could tap into if you need them (and they are part of your planning, since they are your cushion and let you sleep at night). You say you've got some discretionary spending. Given all this, why not just take your 4% at the end of each year's total? That way there's no chance of going broke, there's no market timing involved, there's no need to try to figure out how long the bad times will last. If the market does well, enjoy the money while you're young enough to really use it. If the market goes down, make your adjustments in annual withdrawal/spending early in any downturn (reducing the number of devalued shares you sell and significantly enhancing the chance of an eventual recovery of your portfolio).

Well, some of the backups I listed are still not guaranteed. I might not get a cent in SS benefits for example (I am only 33 so who knows if SS will still be there for me) and my parents could eat up their entire estate and leave me nothing (though that's very unlikely). So in those events, I may have to rely on slashing my expenses for a few years and drawing less from my portfolio. If I get both SS and inheritance, then you are right, there will be no need for me to cut my expenses and draw less than 4% of my personal portfolio each year in case of a downturn.

 

[Dawg52]

I plan to stick close to a 2.5% w/d rate in the early years for the very reason brought out in this thread. Since I am only 53, I could have 35-40 years to live so I think it is prudent to go with a lower rate. Fortunately, it's not a burden as I can live as I always have. But when I reach SS age, I will probably not reduce my w/d rate by what I receive in SS benefits.(assuming my portfolio is in good shape) At that point, I think I should be in good shape to blow it out a little. Unclemick, you listening?

 

[playaman]

My head hurts after reading all of the above.

I know two things: (1) my portfolio is way down; and (2) it will go back up in time. In the meantime, I can live on 4% SWR of what's left. I just hope it doesn't continue to decline much more. My retirement date is August 1, and I'm going through with it if at all possible.

 

[Gearhead Jim]

On December 31 each year, I total up our assets and re-run FIRECALC; based on 95% success and living to 100. Adjust the next year's withdrawl accordingly.

I'm already taking SS early, have a small-moderate pension (non-COLA), wife gets early SS in two years. Plus a larger portion of bonds/CD's than many folks. So, spending reductions should be less than folks with no pension and a high equity percentage. Works for me, but YMMV.

 

[ERD50]

Wow - got back to find ~ 50 responses to my original post. I was hoping someone would point out my error, and make me feel better - no such luck

Where to start? Well, how about with something pro-active? I agree with the posts that state that we would cut our spending when the portfolio goes down significantly. But when/how? Since we can't predict the future, we wouldn't know if a 30% decline was a blip that we could safely ignore, or the start of a protracted downturn. So we would need to mechanically 'just do it'. It would be interesting to see an algorithm like that in FireCalc, but there are a million ways to do it. I wonder how much a 'soft adjustment' would help?

I'm picturing something like: Don't increase your inflation adjusted SWR when your net worth rises, but if it dips below that support level, cut your spending by half that deficit. Less drastic than a one-for-one cut. I wonder how much that would cushion the dips?

Example: If your SWR was 4.0% of a $1M portfolio, and your inflation adjusted portfolio dropped to $800,000 (a 20% drop), drop your spending to an inflation adjusted 3.6% (a 10% drop in spending).

Or an ~ 2% SWR as HaHa states, would limit the dips to 50%. A variable spending plan on a somewhat higher SWR sounds more attractive to me (if it works!). It would only come into play in those 'bad case' scenarios.

For me, cutting spending anytime over the next ten years is a moot point. DW would say 'Hmmm, time to go back to work?'. No way to win that discussion

-ERD50

 

[ERD50]

Now, on to a few counter-points:

2B - " ... A 4% SWR is hyper conservative unless you retire right in front of a major market downdraft .... "

I would agree if the graph showed only a few 'outlier' years like that. But as I said, the worst case year had plenty of company, there were many 'almost as bad' years. It is not a a 'doom and gloom' view, but it reflects the reality of what retirees have faced in the past. As time goes on, one should expect even worse outcomes to appear (records were made to be broken).

And just a reminder, I'm not focused on the 'ending value', but the interim dips that we need to face.

I'm not sure what to make of some of the comments about 'ultra-safe' investments. In an inflationary environment, would 'ultra-safe' (fixed?) investments help, or hurt? Seems we would need a crystal ball to know what is 'ultra-safe', right? Do i-bonds fit the bill?

-ERD50

 

[Mysto]

Reality - You withdraw at 4%. If the market has a series of bad years and you see your stash get smaller - you adjust downward. (wouldn't everybody)

If you don't have a plan to downsize if necessary then you don't really have a plan. If you can't downsize then you didn't start with enough money.

The odds of a 4% SWR are in our favor and I feel confident in starting there. In other words - 4% works until it doesn't work. Like everything else in life you adjust. No big deal.

 

[W2R]

Reality - You withdraw at 4%. If the market has a series of bad years and you see your stash get smaller - you adjust downward. (wouldn't everybody)

If you don't have a plan to downsize if necessary then you don't really have a plan. If you can't downsize then you didn't start with enough money.

The odds of a 4% SWR are in our favor and I feel confident in starting there. In other words - 4% works until it doesn't work. Like everything else in life you adjust. No big deal.

I couldn't agree more. I think that it is difficult to truly understand that past performance of the market does not guarantee the future, and to realize that consequently one might have to downsize in a bear market of unprecedented length. So naturally, people want to "pull the trigger" as soon as 4% will give them the lifestyle they demand or need. Really, they will probably be fine but life has its way of surprising us sometimes.

The simplicity of computing 4% withdrawal every year is appealing. The possible problems arise from the assumptions, not the computations.

I'm not sure what to make of some of the comments about 'ultra-safe' investments. In an inflationary environment, would 'ultra-safe' (fixed?) investments help, or hurt? Seems we would need a crystal ball to know what is 'ultra-safe', right?

We do the best we can to identify "ultra-safe". But I think this brings up a good point. Again, life has its way of surprising us sometimes. I will be putting my "ultra-safe" money in four different ultra-safe places (bonds, money market, G Fund (guaranteed treasury fund), and savings account), but even then who knows what the future could bring? Hopefully if one turns out not to be so safe, another might be safe. All we can do is the best that we can do, and then hope like crazy and hang on for the ride.

By the way, thanks for the idea of putting a higher "lowest amount of portfolio" into Firecalc. I feel a lot better having checked that.

 

[dbr]

Where to start? Well, how about with something pro-active? I agree with the posts that state that we would cut our spending when the portfolio goes down significantly. But when/how? Since we can't predict the future, we wouldn't know if a 30% decline was a blip that we could safely ignore, or the start of a protracted downturn. So we would need to mechanically 'just do it'. It would be interesting to see an algorithm like that in FireCalc, but there are a million ways to do it. I wonder how much a 'soft adjustment' would help?

-ERD50

FireCalc DOES implement spending rules on the tab sheet of that same name. The options are constant spending power, the Bernicke approach, and percentage of remaining portfolio including the 95% rule approach. It is also possible to implement one time variations in spending.

 

[W2R]

I'm picturing something like: Don't increase your inflation adjusted SWR when your net worth rises, but if it dips below that support level, cut your spending by half that deficit. Less drastic than a one-for-one cut. I wonder how much that would cushion the dips?

Example: If your SWR was 4.0% of a $1M portfolio, and your inflation adjusted portfolio dropped to $800,000 (a 20% drop), drop your spending to an inflation adjusted 3.6% (a 10% drop in spending).

Or an ~ 2% SWR as HaHa states, would limit the dips to 50%.

What I have had in the back of my mind, is to examine the portfolio's value each year and compare with a yearly target amount which I will define as the portfolio's beginning value plus inflation.

If my portfolio value is equal to or greater than the target amount, then I would withdraw as much as I need and want of the excess over the target amount, up to 4%.

If the portfolio value is below the target amount, I would cut back to 1% plus my tiny pension check. (Until I start receiving SS in 2014, I would cut back to 2% instead of 1% if necessary.)

This ought to work really well, and with only 45% equities I wouldn't expect the portfolio to fall below the target much at all, if ever, after the first few years.

 

[donheff]

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]

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 . . .

 

[W2R]

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 . . .

Sounds like Slab City!! UGH. My ex and I used to go fishing there sometimes back in 1980-82. Agh, the humanity.

 

[cute fuzzy bunny]

All would not be lost.

I'll have a little smoker shack going outside my yurt with a bunch of slabs of bacon in it going 24x7.

Pretty sure we'd have a couple of stills going around the fishcamp as well.

 

[donheff]

Bring your own yurt/RV/converted shipping container/small cabin. We'll call this the "Firecalc Fireside Fishcamp Option."

I call dibbs on a bunk in SteveR's rolling palace.

 

[Notmuchlonger]

All would not be lost.

I'll have a little smoker shack going outside my yurt with a bunch of slabs of bacon in it going 24x7.

Pretty sure we'd have a couple of stills going around the fishcamp as well.

Slabs of smoked bacon is luxury.

 

[lazygood4nothinbum]

i would have to go shopping in order to spend 4% of my net worth yet no one's gonna be seeing me at the mall anytime soon. (would a mall be an example of concatenated consumerism?)

i've said it before. if a million bucks doesn't get you through life, life isn't worth it. death has got to be cheaper (& more secure) than this.

but just to make certain, i'm hoping to head off my worst case scenerio by reducing my swr to under 3% as i get my vagabond adventure touring of the world out of my system. but if take to it, i just might become a very secure lazy perpetually wondering bum.

 

[Independent]

We're up to 64 posts. I think I can still say something that hasn't been said on this thread. This is the traditional "basic income" vs. "fun income" approach that has appeared on other threads.

Before I retired, I noted that if we deferred our SS start date to 66, we could live modestly on our SS benefit alone. We then put enough money into non-equities to comfortably get to 66.

Some people feel they can't get by on just SS. They can, of course, increase the SS benefit by deferring to 70. They can also buy a small CPI indexed annuity to supplement SS.

The point is that before you retire you plan to cover your basic income needs from low-volatility sources.

Any remaining assets are "fun money" and can be invested and spent however you like. You can do all equities and spend 10% of the balance each year if that feels good. You'll probably have decreasing amounts for fun spending, but you aren't putting your basic spending at risk.


(Sure, I know that SS isn't 100% guaranteed. For people my age (I was born in 1947) I think there will be no or small decreases. Even if they come, they will be somewhat means-tested. This means that if we lose SS benefits, it will be because our other investments did just fine. If I were a lot younger, I might plan on 75% of the SS benefit.)

 

[Moemg]

All would not be lost.

I'll have a little smoker shack going outside my yurt with a bunch of slabs of bacon in it going 24x7.

Pretty sure we'd have a couple of stills going around the fishcamp as well.

This is sounding better all the time . I'd better start cruising RV world.

 

[cute fuzzy bunny]

Hey, whats not to like? We've got a doctor, a lawyer, people who can fix and build stuff, folks who can keep computers running spiffy, people who can cook and make booze, plus a bunch of guys that know how to blow stuff up...in the air, on the ground and underwater.

Sounds like a good time to me.

 

[audreyh1]

Have RV, but not sure I'm willing to keep it parked anywhere. If I can't afford enough gas to keep rolling, my RVing life is over....

Smoked bacon, or no...

Audrey

P.S. I might come by to visit.

 

[twaddle]

Hey, whats not to like? We've got a doctor, a lawyer, people who can fix and build stuff, folks who can keep computers running spiffy, people who can cook and make booze, plus a bunch of guys that know how to blow stuff up...in the air, on the ground and underwater.

Sounds like a good time to me.

 

[ERD50]

Hey, whats not to like? We've got a doctor, a lawyer, people who can fix and build stuff, folks who can keep computers running spiffy, people who can cook and make booze, plus a bunch of guys that know how to blow stuff up...in the air, on the ground and underwater.

Sounds like a good time to me.

Hey, it does sound like fun! Problem is, in a short time reality would set in, and this group would need some real life 'moderators' to step in.

Kinda like the Presidency, I'm not sure I'd trust anyone who wanted that job!

On a more serious note to this thread... yes, much of this thread has been covered before one way or another. But I had always thought of that 'success factor' in terms of the ending position, and was surprised at the actual deep dips that history threw at those survivors.

I did a quick spreadsheet, modeling a portfolio that dropped in buying power by 5% a year for seven years, and then rose 10% a year for eight years. Comparing a constant 3.5% spend rate (in 'today' $$) to a variable spend rate of 3.5% of NW:

Constant initial 3.5% hit a low of 46% of original NW, and ended at 59%.

Variable 3.5% of NW hit a low of 53% of original NW, and ended at 85%. However, if you take out a lump sum at the end equal to what you didn't spend over that time (to make it more apples-to-apples), you are back to ending the period with 70% of your NW.

Remember that the variable plan has you cutting your spending almost in half for a while.

So obviously, cutting spending in half in bad times improves your portfolio: 85% of NW preserved versus 59%.

Cutting in bad times, and then shifting that spending to better times also helps: 70% of NW preserved versus 59%.

But the dip only went from a low of 46% of NW with full spend to 53% of NW with cutting spending. Still a gut-wrenching drop. Maybe not as much difference as I would have thought for big spending cuts....

BTW, if anyone tries modeling something similar, I'm sure the results will vary depending when you calculate the withdraws and the market returns. I just threw the formulas together w/o any timing concern, but I used the same formulas for each of the cases.

-ERD50

 

[Lsbcal]

.... But I had always thought of that 'success factor' in terms of the ending position, and was surprised at the actual deep dips that history threw at those survivors.

I did a quick spreadsheet, modeling a portfolio that dropped in buying power by 5% a year ...

Exactly, the end value isn't going to mean much if along the way you are scared out of your wits !!! Or worse yet, you are scared out of a carefully crafted plan because it turned out not to be a plan for all seasons. So smart planners should look at the worst case drawdown.

I've always used the spreadsheet FIRECalc spits out. You may have to munge it a little after that. For instance you can find the minimum of a time series by using the MIN function in Excel. That's how I easily got the maximum drawdown in my worst case scenario which was retire in 1966 and by 1982 the portfolio was 38% of the start value. Yee gads, if that even started to happen I'd be forced into taking steps to modify the spending/investing plan (as mentioned in my post above). I don't think I could tolerate more then about a 50% drawdown.

 

[samclem]

I'll have a little smoker shack going outside my yurt with a bunch of slabs of bacon in it going 24x7.

And Scott Adams completes the circle for us. Like everyone else in America, when I was working I was sure he had a source inside my organization. Now I wonder if he's not lurking on this board.

http://dilbert.com/comics/dilbert/archive/dilbert-20080130.html