FireCalc Dips in Net Worth - Anyone Scared?

[W2R]

Quote:

Originally Posted by ERD50 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.

[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]

Quote:

Originally Posted by 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.

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.

Quote:

Originally Posted by ERD50 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.

[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.

[Notmuchlonger]

Quote:

Originally Posted by 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.

Slabs of smoked bacon is luxury.

[Moemg]

Quote:

Originally Posted by 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.

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

[samclem]

Quote:

Originally Posted by cute fuzzy bunny 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

[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.)

[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.

[twaddle]

Quote:

Originally Posted by 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.

[ERD50]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by ERD50 .... 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.

[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.

[cute fuzzy bunny]

Ah, the circle of bacon life.

[ESRBob]

Actually, I think we've finally outed CFB -- he is Scott Adams!

I'm in for a spot in the campground. Who's collecting the 30k?

Seriously (or unseriously), while markets are going up, we're all growing our confidence in ER based on the financial possibilities. I think the discipline now is that if markets go down, we don't get panicky-obsessed about the money side of ER. Instead we need to start thinking about the whole bigger purpose of this path -- it is about Freedom, about Living Life, about Discovering. If the money gets tight, then find a cheaper way to live! Some of the most uptight and unhappy people I know are the ones with the most money.

Sure a certain amount of money/savings is essential to ER, but if we're looking at today's stock market to figure out if we can ER or not, or whether the path is viable, I think that misses the point. The point is to hope for the best, but be prepared to make trade-offs if the finances run against you for a sustained period, and at every turn, keep focussed on the benefits of having your life back, your time, your freedom to fully access all this life has to offer. ER is like getting out of prison. Let's not recreate a new prison called 'financial anxiety'.

[youbet]

Quote:

Originally Posted by ESRBob Let's not recreate a new prison called 'financial anxiety'.

Sometimes easier said than done.......

In preparing for ER, I used a number of tools, including FireCalc, to test if I had enough to reasonably conclude I could afford to stop working. Having worked with statistics on the job for a number of years, I was well aware that FireCalc's definition of success means any non-zero or positive outcome. The successful outcomes, however, are distributed from + $1 to a real multiple of the beginning amount....... normally quite a wide dispersion skewed to the right.

My opinion is that there is little about the world economy today to make it less variable than historically. As tested by FireCalc, I expect the probability of depleting my portfolio at my WR is very low. But when I create a histogram of the possible ending values outputted by FireCalc, I clearly see there is a significant probability that I'll have a close call either mid-course in the withdrawal phase, by the end of the withdrawal phase, or both.

Before I actually pulled the trigger and retired, I spent time becoming comfortable with the "close call" concept and that as long as I didn't hit zero, it was a success. It was easy to say and hard to do........

I'm still not sure how I'll react if my net worth trends down over several years at a slope which would intersect the zero line long before my anticipated departure from terra firma.

To those of you with generous pensions, oversized portfolios supporting low WR's or both, congratulations! You'll probably won't have the opportunity to see the ground rushing up at you as you free fall through economic downturns. But to those who have little ongoing income and are counting on a full 4% WR to support your desired lifestyle, my hat is off to you. You're really walking the talk!

[donheff]

Quote:

Originally Posted by youbet To those of you with generous pensions, oversized portfolios supporting low WR's or both, congratulations! You'll probably won't have the opportunity to see the ground rushing up at you as you free fall through economic downturns.

About six months before I retired I broke my knee sky diving so the ground rushing up image is scary. Luckily, I have a good pension so I will land in a marsh, not on rocks.

[2B]

Quote:

Originally Posted by youbet To those of you with generous pensions, oversized portfolios supporting low WR's or both, congratulations! You'll probably won't have the opportunity to see the ground rushing up at you as you free fall through economic downturns. But to those who have little ongoing income and are counting on a full 4% WR to support your desired lifestyle, my hat is off to you. You're really walking the talk!

I wonder about the people that claim they are living on some extemely small % as the "SWR." That tells me they are either depriving themselves of a more enjoyable lifestyle or they waited way too long to ER (or both).