FireCalc Dips in Net Worth - Anyone Scared?

[W2R]

Quote:

Originally Posted by 2B 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).

Maybe they are just being more cautious than others. Some may think that an SWR of 2% is too cautious, and that they are depriving themselves, but remember that SWR's around 4% were derived by using past market history, which is not necessarily predictive of the future. Often the unexpected happens and preparing for it isn't necessarily a bad thing, though it may seem overly cautious. Take, for example, the housing market.

When I bought my home with a 30 year fixed in 2002, lots of people would have said I was depriving myself of a bigger, more enjoyable home by not doing some creative financing with ARM's, or getting that extra quarter of a percent lower mortgage by going with a fly by night. I thought a 30 year fixed with a solid bank that had a long history was safer, though, and now I'm glad I went that way. It's all a matter of viewpoint.

[Gumby]

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Originally Posted by 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'.

I'm with you on this, Bob. If ER means being in a constant state of worry, maybe we should just forget about it.

Regardless of your religious leanings, Jesus' words on worry bear repeating "So do not worry about tomorrow, for tomorrow will bring worries of its own. Today's trouble is enough for today" (Matthew 6:34)(As an aside, I really like the King James version of the last sentence -- "Sufficient unto the day is the evil thereof".) Another, more secular saying is the old military dictum that "No battle plan survives first contact with the enemy."

All we can do is plan as well as we can and adapt to the inevitable changes that will come our way. While a certain amount of caution is commendable, fear of an unknown future should not prevent us from living our lives today.

[ERD50]

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Originally Posted by Gumby I'm with you on this, Bob. If ER means being in a constant state of worry, maybe we should just forget about it. ... All we can do is plan as well as we can and adapt to the inevitable changes that will come our way. While a certain amount of caution is commendable, fear of an unknown future should not prevent us from living our lives today.

I think you are missing the point. No, I'll re-phrase that - you ARE missing the point. It is not fear of an unknown future, but the reality of a known past.

FireCalc shows that a 4% withdraw rate can leave you with just 27% of your portfolio after just 15 years. How would you 'adapt' to that?

For some, realizing this issue and planning for it with a conservative SWR may be exactly what is needed to avoid a 'constant state of worry'. No reason to forget about ER, but one should know what the past has held for people. That is what FireCalc is all about.

-ERD50

[Gumby]

As others have said, you would not wait until you have lost 73% of your money before taking action.

But aside from that, one thing I know with certainty is that I will never have enough money to guarantee that I won't run out. Depending on the length of your retirement, the monte carlo simulation in Firecalc covers roughly 100 periods. Yet there are actually an infinite number of possible courses the financial markets can follow starting from any point in time. Firecalc may well say you have a 100% success rate, but that would not guarantee it. The future may be better or it may be worse; it may be the similar to the past or not. We simply can't know.

It may well be that using a 2% withdrawal rate will be just the comfort some people need, and therefore, they should do that But no one should be under any illusion that even a 2% withdrawal rate guarantees anything.

[lsbcal]

Quote:

Originally Posted by ERD50 For some, realizing this issue and planning for it with a conservative SWR may be exactly what is needed to avoid a 'constant state of worry'. No reason to forget about ER, but one should know what the past has held for people. That is what FireCalc is all about.

I agree and will add a little data to illustrate. Using FireCalc I determined that the average drawdown (lowest level portfolio reached before rebounding) was 28%. The worst drawdown was 62% in the 1966 to 1982 period. Note this is with my SWR and social security and etc.

So if, for example, I had a $1,000,000 portfolio the average worst case situation I should expect to experience is a portfolio of $720,000. The absolute worst case portfolio situation would have left me with $380,000 before rising again.

I think that I should be mentally prepared for at least the average worst case situation. But it will still be an uncomfortable situation.

BTW, looking at FireCalc version 3 you can kind of eyeball drawdowns by looking for the lowest level some of those squiggally lines reach in the results chart.

[audreyh1]

Quote:

Originally Posted by 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'.

Bob I think your post was brilliant and apropos to the current discussion. It seems to me that on this forum sometimes people get so wrapped up in worrying about dire financial outcomes, that they miss the whole point of ER.

There simply isn't 100% financial security. No one knows what the future will bring, or whether or not you will even be alive to enjoy or suffer it!

ER takes a leap of faith. But sometimes we forget that what we are leaping from isn't guaranteed either - all sorts of bad things can happen no matter which life stage. I think it's key to trust ourselves to be flexible and creative when retired, and focus on enjoying life and NOT spend too much time worrying about worst case financial scenarios. Having plenty of padding in the budget and total assets is important. But at some point, enough is enough.

You mustn't sacrifice too much of your quality of life today for some imagined outcome in the future. Balance is essential.

Audrey

[ERD50]

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Originally Posted by 2B People seem to be taking on my comment about a hyper-conservative 2% SWR pretty hard. I intend to start out with a 4% SWR (factoring in future SS) but my lifestyle plan includes a substantial amount of discretionary spending .... I would agree 2% is "reasonable" if someone was just barely surviving on that amount with little discretionary spending. .... I will be willing to adjust my lifestyle as necessary.

2B, that does add a lot of balance to your statement. It makes perfect sense to me in that context. From my perspective, I've always lived fairly LBYM, so there is not a lot of my spending that I would want to consider discretionary. I'm sure I could if I had to, but that is my point - for me a lower SWR is more comfortable and less worry than having to consider big cuts in spending.

As far as cutting spending to adjust - try the runs in FireCalc and see if those numbers are ones you would be comfortable with. And as youbet stated, for someone with a large % of expense covered by COLA pensions and.or SS, it is less of an issue. If half your spend is covered by pension/SS, then cutting your portfolio withdraws in half only cuts your spending by 25%.

Quote:

Originally Posted by audreyh1 There simply isn't 100% financial security. No one knows what the future will bring, or whether or not you will even be alive to enjoy or suffer it! ER takes a leap of faith. But sometimes we forget that what we are leaping from isn't guaranteed either - all sorts of bad things can happen no matter which life stage. Audrey

Audrey, once agian - I am not talking about 'what the future may bring', but what the past has brought!

You are 100% correct - nothing is guaranteed. My viewpoint is, since so little is guaranteed, I want to at least have some assurance that my portfolio won't drop in half. So, if other bad things happen, at least I won't have that worry on top of it.

What seems 'prudent' to some, seems like 'needless worry' to others. As I said before, find your own comfort level, but I will recommend that you run FireCalc and look at those portfolio dips (NOT just the end balance), and decide if that is really something you could be comfortable with.

-ERD50

[youbet]

Quote:

Originally Posted by ERD50 What seems 'prudent' to some, seems like 'needless worry' to others. As I said before, find your own comfort level, but I will recommend that you run FireCalc and look at those portfolio dips (NOT just the end balance), and decide if that is really something you could be comfortable with.

I really do share your concerns over people's interpretation of FireCalc results. It's been my observation that since FireCalc gives it's output in terms of success or failure, many individuals have been drawing the conclusion that success means your portfolio retaining or growing it's value, in real terms, throughout your retirement. Actually, FireCalc clearly states success = any non zero or positive outcome and observation of the output of my FireCalc runs shows plenty of "close calls."

It's something you just have to understand and accept. A WR that, when tested historically, results in a 100% probability of portfolio survival may incur significant real losses over the withdrawal period and even approach zero at the end. But, it doesn't cross the zero line and that means 100% success!

If low portfolio values disturb you, use the FireCalc option to call out a minumum portfolio value defining failure. You'll need a larger portfolio to support your desired WR, but you won't have to stomach scary dips below that amount.

Finally...... While reducing your WR to some level less than FireCalc's SWR will slow portfolio erosion during tough times (I think you folks are referring to this as reducing spending), the real answer to avoiding dips is to assume an AA with a lower beta in the beginning. This also requires a larger portfolio, more w**k and less RE time.

It's a tradeoff. The inability to stomach portfolio value swings during the withdrawal phase = needing a more conservative approach (larger portfolio supporting a lower WR or more conservative AA). A more conservative approach = working more.

[audreyh1]

Quote:

Originally Posted by ERD50 You are 100% correct - nothing is guaranteed. My viewpoint is, since so little is guaranteed, I want to at least have some assurance that my portfolio won't drop in half. So, if other bad things happen, at least I won't have that worry on top of it. What seems 'prudent' to some, seems like 'needless worry' to others. As I said before, find your own comfort level, but I will recommend that you run FireCalc and look at those portfolio dips (NOT just the end balance), and decide if that is really something you could be comfortable with. -ERD50

Well, that is why the fishing guy (what was his handle?) often recommended having 2x your real needs as your retirement fund. Take your absolute bare-bones, no frills, living expenses, and double that to be your "plenty of padding" living expenses. So, I suppose that in this scenario, you could claim that this was a 2% withdrawal rate, but IMO it's more like you live at 4%, and only cut back to bare-bones when the portfolio shrinks appreciably.

I think most of us who have retired, have made sure there is plenty of padding. So perhaps this is more of a language argument than an implementation argument. The main (but crucial) difference being whether one starts out at a super low withdrawal rate, or whether one cuts back drastically only when needed.

I'm sure the fact that I've been retired since 1999, and at present my retirement portfolio is 67% higher than when I started makes me quite a bit more sanguine about the future as I've been able to "get ahead" in the timeline scenario. In other words, my portfolio being cut in half would now mean only down 16.5% from where I started. I also know that I can cut way back if necessary, but I won't do it unless is IS necessary.

Audrey

[deserat]

Didn't ESRBob cover this with his 95% rule? Basically you adjust the 4% by only taking 95% of what you took last year if it is a down year - it allowed for a graceful reduction.

[ERD50]

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Originally Posted by deserat Didn't ESRBob cover this with his 95% rule? Basically you adjust the 4% by only taking 95% of what you took last year if it is a down year - it allowed for a graceful reduction.

I just did a few quick runs of that, I'll try to organize and post later.

Is there a data output? It's kind of tough to scan the squiggly line output for specifics, but at a glance, it looked like spending got cut in half for many years, and there was still a deep dive. It's probably the right thing to do, and probably what most of us would choose to do, but it may not help as much as we think.

-ERD50

[wabmester]

I don't think the solution to all of this angst has been mentioned yet: annuities!

Some people seem to have pension envy. Annuities!

The real reason we're all sticking with stocks and bonds is greed, right? We're basically betting that worst-case won't really happen to us.

[youbet]

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Originally Posted by wabmester I don't think the solution to all of this angst has been mentioned yet: annuities! Some people seem to have pension envy. Annuities! The real reason we're all sticking with stocks and bonds is greed, right? We're basically betting that worst-case won't really happen to us.

Personally, I'm no fan of annuities. Wild swings in portfolio value over the withdrawal phase help keep my "edge." However, you're correct. A low cost annunity replacing some percentage of your portfolio will dampen total portfolio value swings at the expense of guaranteeing a lower terminal amount. Depending on your personality and life circumstances, could be a wise choice.

[donheff]

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Originally Posted by youbet A low cost annunity replacing some percentage of your portfolio will dampen total portfolio value swings at the expense of guaranteeing a lower terminal amount.

True in a good market, but not necessarily in a bad market. I think some of the studies indicate that partial annuitization increases the likelihood of portfolio survival if spending remains equal under both approaches.

[2B]

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Originally Posted by donheff True in a good market, but not necessarily in a bad market. I think some of the studies indicate that partial annuitization increases the likelihood of portfolio survival if spending remains equal under both approaches.

So will increasing your percentage of fixed income if you can live with the declining purchasing power. The "advantage" of annuities is that they consume your principle up front in exchange for a promised payout for life. The insurance company bets you (in the aggregate) don't outlive your actuarial mortality table age. If you accept depleting principle and are willing to risk that you aren't one of the 5% that makes it 10 years past your expected life span, you'll have a greater amount of retirement spending available.

Annuity salesmen have also shown that buying variable annuities result in a higher spending rate in retirement.

[donheff]

Quote:

Originally Posted by 2B So will increasing your percentage of fixed income if you can live with the declining purchasing power. The "advantage" of annuities is that they consume your principle up front in exchange for a promised payout for life. The insurance company bets you (in the aggregate) don't outlive your actuarial mortality table age. If you accept depleting principle and are willing to risk that you aren't one of the 5% that makes it 10 years past your expected life span, you'll have a greater amount of retirement spending available.

I am talking about inflation protected annuities - no decline in purchasing power, at least up to the limit of the inflation adjustment. I suspect more of these arrangements will be offered as the boomers start looking for new products. I have a Federal pension so I already have a cushion. But if I was flying completely on my own I would consider partial annuitization (of the VG inflation protected type) rather than limit myself to 2% WR.

I don't want to hijack this thread into an annuity thread -- we have been there before. So lets go back to FireCalc runs. Here is the bat aimed at myself for going this way

[haha]

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Originally Posted by wabmester I don't think the solution to all of this angst has been mentioned yet: annuities! Some people seem to have pension envy. Annuities! The real reason we're all sticking with stocks and bonds is greed, right? We're basically betting that worst-case won't really happen to us.

Yes. And the strong desire to be sure no one is making money by selling us a product or service, no matter how helpful these might be.

"It's my money, all mine!"

Ha

[Spanky]

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The point of my posts has been that we will grow old and die waiting to be 100% secure.

What is 100% secure? There is no absolute security or certainty (except death). One's entire fortune can be wiped out by a single event (e.g., a change in government or nuclear war). In other words, stop anticipating or planning for worst-case scenarios and get a good night sleep.

[lsbcal]

A lot of good points about not getting too hung up on FireCalc results. I'm very analytical compared to DW. She just wants to have a good time. I'm only about 8 years younger then when my parents died. Hopefully I'll avoid the ills that felled them but it keeps me remembering that life's not forever. That's why I've moved our spending levels to around 5% at this point. This will scale back as our son gets done with school and we take SS. Actually FireCalc gives this a 100% success rate but drawdowns could get scary -- in which case we'll just have to scale back a little and adjust.

[Spanky]

There are other tools (other than FireCalc) to determine success rate using other methods, e.g. Monte carlo. Check out other calculators from T.Rowe Price, Fidelity or Financial Engines.