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Old 02-03-2008, 07:24 AM   #121
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Perhaps in your individual case, that is what it "guarantees". You really can't assume that is true for everyone, or if everyone is running Firecalc to figure out how long they should work. Some are stuck working for other reasons such as waiting for lifetime medical to kick in. Firecalc is a great planning tool, even for those with more than just barely enough $$ to retire upon and lower risk tolerance than yours.
Excellent point. In my case, I am waiting for the young wife to complete sufficient years of service to become pension eligible, not shooting for a particular number. If my calculations are accurate, our withdrawal rate at that point should be only about 2.6%. with a good 40-50% of that number being fluff. I have also set social security to zero and not considered a reverse mortgage or downsizing of our house (which is twice the median value of houses in my town), so I am not advocating living on the edge by any means. The point of my posts has been that we will grow old and die waiting to be 100% secure. At some point, we need to say "I've planned conservatively enough, time to take the plunge. If things happen, I will adapt and survive."
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Old 02-03-2008, 07:35 AM   #122
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Excellent point. In my case, I am waiting for the young wife to complete sufficient years of service to become pension eligible, not shooting for a particular number. If my calculations are accurate, our withdrawal rate at that point should be only about 2.6%. with a good 40-50% of that number being fluff. I have also set social security to zero and not considered a reverse mortgage or downsizing of our house (which is twice the median value of houses in my town), so I am not advocating living on the edge by any means. The point of my posts has been that we will grow old and die waiting to be 100% secure. At some point, we need to say "I've planned conservatively enough, time to take the plunge. If things happen, I will adapt and survive."
Oops! Sorry. I couldn't agree more that eventually one has to decide on a threshold and just pull the trigger. I guess I didn't get the context of your post. I need another cup of coffee this morning.
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Old 02-03-2008, 09:48 AM   #123
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Great thread. It really made me think (it hurts a bit, after being retired ... )
Random Thoughts as I read through this;
1) Firecalc should be used as one additional indicator (albeit a good one) , not as the gospel. IMO, there is a bit of religious zeal going on re: Firecalc
2) Everyone’s risk tolerance is different. Those on this forum seem to run from 1 to 10 (where 1 is very low and 10 is very high, or vice versa )
3) The risk tolerance level and what level of luxury you want to have in retirement, will determine how much of a multiple of the ‘bare necessities’ you require to comfortably retire and SLEEP AT NIGHT. For example, if you need $1000/month to cover your rent/mortgage, basic food, clothes, transportation, and insurance and taxes,
a) and if you have a very low risk tolerence and you want to travel extensively, say at a rate of $3000/month average (or substitute your favorite brand of luxury), then you may need to have a portfolio that throws off $6000/month for you to sleep at night ($2K buffer). This way if things go south on you, you can throttle back and still do some of the niceties of life AND sleep at night.
b) and if you have an average risk tolerance and the above applies, then you may want to have your portfolio throw off $5000/month ($1K buffer).
c) and if you are in a hurry to retire and are a high risk taker, then you could retire on $4000/mth ($0K buffer). This is what I think many assume is the case (ala this thread). IMO, it is not. This assumes everyone is at the same risk tolerance level (a big ASSUMPTION). Those that are category a or b pad their portfolios and yes (gasp!) delay their retirements (in some eyes)… I don’t look at it as delaying their retirements, it is called planning their retirements correctly and implementing their plans. Hence the difference in opinions and discussions on 2% vs. 4% swr
(or as I like to view it, the ‘Great Taste, … Less Filling’ argument).
These are just an example, your mileage may vary.

Everyone is right, … so take your pick of plan, and back to w*rk, you wage slaves …
Great post, thank you, and great thread!
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Old 02-03-2008, 09:56 AM   #124
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Amen! As a modeler (of something totally different), I think that often too much burden is put on Firecalc for any model to bear.

"All models are wrong; some models are useful" (G.E.P. Box, 1979).
Firecalc is a great deterministic simulator. It allows us to enter a whole cornucopia of inputs that we consider likely and simulates the financial outputs long term performance based on a rich database of historical scenarios. But ultimately it is a discrete event simulator. It can't think of absolutely everything, e.g. getting cold feet in 2011, moving to New Guinea, another Great Depression, or being discovered as a movie star at 70. For that, we would need stochastic models.

In other words, Firecalc is just a tool. YMMV.
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Old 02-03-2008, 10:11 AM   #125
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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.
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Old 02-03-2008, 11:22 AM   #126
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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.
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Old 02-03-2008, 11:24 PM   #127
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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.
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Old 02-04-2008, 08:14 AM   #128
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Monte Carlo simulations are another tool in the kitbag, but they have drawbacks that should be understood. Some use data series in which the historical relationships between asset classes are not maintained. In addition, they (as far as I know) posit that each year is an independent event, without any relationship to the performance of asset classes in previous years of that run. Real assets don't perform like that for long periods.

FIRECalc uses the actual historic data and maintains the relationships between the asset classes and from one year to the next. It's not perfect, and the number of available "past histories" is far more limited than can be provided with a MC simulation, but if you believe these relationships are important then you may have more faith in FIRECalc's results than those of a MC simulation. At least it's important to understand the limits of each method.

Also, unless Financial Engines has changed in the last 2 years, it doesn't support simulations of yearly withdrawals. It allows simulations in the accumulation phase, then just tells you the likelihood that you'd meet your investing target with a particular asset mix. After that, it assumes you buy an annuity to carry you through retirement--no more Monte Carlo simulation.
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Old 02-04-2008, 10:33 AM   #129
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Amen! As a modeler (of something totally different), I think that often too much burden is put on Firecalc for any model to bear.

"All models are wrong; some models are useful" (G.E.P. Box, 1979).
W2R, I've used simulation models in my line of work too, and that quote was also the first thing we were taught in modeling class. However, I just don't think the quote is relevant to FireCalc. FireCalc isn't simulating anything, it is just reporting historical data. When you create a simulation model (generally to interpolate or extrapolate data that you cannot easily obtain), it is best to assume that your simulation model is wrong, that it does not account for every possible interaction, etc. But unless there are actual errors in the data entry, or errors in the calculations in FireCalc, I think we can 'trust' it to report history accurately.

Like the intro to FireCalc - the analogy is to reporting past temperature data for a region. It's just a report, not a simulation of the conditions that led to those temperatures.

FIRECalc: A different kind of retirement calculator

Now, when we take that historic range of outcomes, and try to apply it to the our future - at that point I guess you can say we are running a simulation. But FireCalc isn't doing it - we are. FireCalc was done at that point, and provided a historic baseline for us to use in our planning, as we see fit.

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.... IMO, there is a bit of religious zeal going on re: Firecalc
see above - for me FireCalc is what it is. And it is just one data point to use in the FIRE decision. It can't tell me how long I will live, if I'm going to suffer some cataclysmic financial event, if my expenses will outpace historic inflation rates, if the future will be better/worse than history, etc, etc, etc. So it cannot give me an 'answer'.

That is one of the reasons I use a 100% success rate. I can't think of a single good reason to expect the future to have a distribution of outcomes that is more rosy than the past. As a general rule, as you collect more data (of any kind), it is reasonable to expect to see extremes added to the data set - right?

Plan for the worst, hope for the best?

Again, if those deep drawdown outcomes were outliers, it might be a bit easier for me to write them off as a low probability event. But the distributions of those deep drawdowns look pretty even, so there is a pretty good chance (historically) that we would have experienced a 'bad case' drawdown that is not much better than the 'worst case'.

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A 4% SWR is hyper conservative unless you retire right in front of a major market downdraft ... If you could somehow "know" you have ten years for retirement before a major market downturn, your portfolio would grow so high that you could take the big hit and not run out of money.
2B, I know you provided more context for this later, but I wanted to comment on that statement that if we make it past the first few (10?) years without a problem we will be in good shape - I'm not so sure (but one might need to look at the squiggly lines or the spreadsheet data in more detail to check this). Take this scenario:

Default 4% withdraw rate, assume $40K spend, $1M portfolio for easy math. Now, lets just say that after 10 years, your buying power increased by 25% - you are doing well. But if you plug those numbers (same $40K spend, but now a $1.25M portfolio) in for the remaining 20 years, you could see a dip down to $480K - still losing over one-half of your original portfolio.

Now maybe those 'bad case' years only follow big bubbles, and you would be up by more than 25%? I don't know, that would take some more digging in the data. But if it's true, that tells me I may not want to raise my SWR just because my portfolio is growing - I may still have a bad patch ahead of me.

samclam made good points on Monte Carlo vs FireCalc historic analysis, IMO. I suspect that market cycles are not totally random, and that the historic cycles are probably a better guide to the range of outcomes we can expect. Inflation, market returns, fixed returns, etc are related in some ways, they are not totally independent variables, and I think the MC is treating them that way?

-ERD50
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Old 02-04-2008, 11:39 AM   #130
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Default 4% withdraw rate, assume $40K spend, $1M portfolio for easy math. Now, lets just say that after 10 years, your buying power increased by 25% - you are doing well. But if you plug those numbers (same $40K spend, but now a $1.25M portfolio) in for the remaining 20 years, you could see a dip down to $480K - still losing over one-half of your original portfolio.

Now maybe those 'bad case' years only follow big bubbles, and you would be up by more than 25%? I don't know, that would take some more digging in the data. But if it's true, that tells me I may not want to raise my SWR just because my portfolio is growing - I may still have a bad patch ahead of me. (Emphasis added)
In a previous thread people talked about the possibility of recalculating the SWR after their portfolios grew. A few of us cautioned that you might just be chasing the "initial downturn." The discussion here of the high number of bad periods that crop up in the Firecalc runs just adds to that caution. Rather than raise your SWR after a huge runup maybe that would be the time to move a substantial portion of your portfolio to fixed income or (horrors) even an inflation adjusted SPIA to cover needs. Then you could aggressively F around with the rest.
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Old 02-04-2008, 11:44 AM   #131
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the distributions of those deep drawdowns look pretty even, so there is a pretty good chance (historically) that we would have experienced a 'bad case' drawdown that is not much better than the 'worst case'.
It seems then that we are at a fork in the road in this discussion........

1. What to do now that the realization has set in that "success" in FireCalc includes "close calls." And, that "close calls" may cause some retirees to be unpleasantly stressed or to alter their lifestyles in undesirable ways, or both. How do we mentally cope with the concept of "close calls?"

2. How do you financially plan for RE (savings amount... AA... deferred or non-deferred... annuities... SS early or delayed... etc... ) and how do you manage the withdrawal phase to not only maximize survivability but also to minimuze mid-course dips or near zero terminal values?
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Old 02-04-2008, 01:30 PM   #132
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It seems then that we are at a fork in the road in this discussion........

1. What to do now that the realization has set in that "success" in FireCalc includes "close calls." And, that "close calls" may cause some retirees to be unpleasantly stressed or to alter their lifestyles in undesirable ways, or both. How do we mentally cope with the concept of "close calls?"

2. How do you financially plan for RE (savings amount... AA... deferred or non-deferred... annuities... SS early or delayed... etc... ) and how do you manage the withdrawal phase to not only maximize survivability but also to minimize mid-course dips or near zero terminal values?
Yes - the pragmatic part of all this, what to do about it? Well, they say 'forewarned is forearmed' - does that help? Hmmm, not really

But I think I have come to look at the following in new light:

A) I know a 50% dip from my start position would be an emotional issue for me. I'm going to look for methods that historically would keep me above that minimum. Hopefully well above.

B) I realize (again historically) that I would have had (guess-timating here) about a 50% chance of doing significantly better, and this may well be a non-issue. But I need to plan for the very real chance of a big drawdown.

C) To Investigate in more detail everything you outline in #2. But with the goal of reducing the drawdown (whenever it may occur), rather than looking at any 'average' numbers or focusing on the ending portfolio balance.

So that might include annuities, spending adjustments (I need to do more FireCalc runs on this - I think people may be over-estimating the effect of modest 'cutting on the dips'), early/delay SS and /or pensions, AA adjustments, and... that option which shall not be named.

So basically, all the things that have been discussed time and again here, but with the focus on that drawdown number. I'll probably be doing a matrix of FireCalc runs for myself, or general ones just to get the feel for the sensitivity of some of these factors on that drawdown. But I'm almost 10 years away from being able to take any SS - I'd like to discount my SS benefits and my pension, so those numbers get pretty foggy. So some of this is still a bit crystal-ball for me.

Probably the biggest 'actionable item' (geez, sounds like some of my old meetings on the job ) that I take away from this is - I'm not going to look at a short term portfolio increase and decide that I can up my spending. I'm going to look at that as something that can offset any future dips. Or, if I see some real 'quality of life' opportunity that I do want to spend that money on, I can weigh that against the 'comfort factor' of protection against dips. As some have suggested, maybe move any 'excess' to a 'safe money' - though, if that does not beat inflation, maybe it isn't 'safe'?

All things considered, it is a 'leap of faith' to retire, I'm just trying to make the best of that.


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Old 02-04-2008, 04:00 PM   #133
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It seems then that we are at a fork in the road in this discussion........
...
2. How do you financially plan for RE (savings amount... AA... deferred or non-deferred... annuities... SS early or delayed... etc... ) and how do you manage the withdrawal phase to not only maximize survivability but also to minimuze mid-course dips or near zero terminal values?
Yesterday I had a talk with DW and explained that if financial markets fell out of bed a few years in a row we'd have to cutback somewhat in spending. She got me to agree to go out to lunch today ... her idea of cutting back on spending . Still I'm going to repeat this idea until she's used to it -- she really is a good sport.

One somewhat concrete idea for avoiding inflationary periods is to load up on TIPS when they real rates are reasonably high and sell or switch to shorter maturity TIPS when real rates decline (like now). Doesn't solve the equity problem but perhaps helps to balance out a tad. It worked in this last downturn.
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Old 02-04-2008, 04:42 PM   #134
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Lots of good thoughts on this thread.

I think we all agree that FIRECalc is great tool but it isn't foolproof. My number one learning after being retired for 8 years and figuring I still have 40 more years left, is that you can't put your retirement finances on autopilot (I guess if you put everything in annuity you can..).

I have yet to hear of an early retiree who follows all of the firecalc rule. I.e. they dutifully has put 75% of their money in stock index fund and 25% in bonds and cash. Each year they rebalance, check the inflation rate and dutifully withdraw their inflation adjusted money which they stick into a money market. Repeat each year.

I suspect all of us deviate for the FIREcalc standard in many ways. People who manage to retired early instead of being pushed out the door at 65, generally have a lot common sense. Common sense says that if your future income looks shaky you tighten the belt. On the flip side if you are assets and income grow much faster than expense, live a little you can't take it with you.

The one advantage of retiring right before a bear market is your faith is tested early.
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Old 02-04-2008, 07:11 PM   #135
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The one advantage of retiring right before a bear market is your faith is tested early.
Nice to know about the advantages:confused:

Looks like that will be my issue, retiring in three weeks, right into a recession. I can hope it actually started in Oct 07 and has bottomed now and will be on the way up (is there a hopeful emoticon to insert here?)

But I do not have to touch savings for 2008 and planned to sell one stock in 2009. May have to revisit that depending on how well the stocks and Wellesley/target retirement accounts play out.
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Old 02-04-2008, 07:27 PM   #136
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The one advantage of retiring right before a bear market is your faith is tested early.
That sure was fun, wasnt it?

It was a pretty good time to be heavily in REITS, Wellesley, OAKBX and DODBX though. I guess it taught me that it was okay to cut expenses a little bit and just take hits from the dividend pipe.

Of course, back then I also thought I was going back to work sometime in 2002. I'd taken the company RIF severance deal "one years pay, full TCOMP benefits, and a free computer", figuring to have my years paid vacation, including the bonuses that regular employees would never get, and the free home pc that none of the regular employees got either, then go back a year later, get my old job back and all my stock options reset from $45-75 to $12.

Oh well, the best laid plans of mice and men...

Too bad too, those stock options would have been worth some good money right now...
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Old 02-04-2008, 11:12 PM   #137
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These discussions have been wonderful, and then I realized, dang...I always thought the tough part was making and saving money.
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Old 02-05-2008, 04:54 AM   #138
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see above - for me FireCalc is what it is. And it is just one data point to use in the FIRE decision. It can't tell me how long I will live, if I'm going to suffer some cataclysmic financial event, if my expenses will outpace historic inflation rates, if the future will be better/worse than history, etc, etc, etc. So it cannot give me an 'answer'.

That is one of the reasons I use a 100% success rate. I can't think of a single good reason to expect the future to have a distribution of outcomes that is more rosy than the past. As a general rule, as you collect more data (of any kind), it is reasonable to expect to see extremes added to the data set - right?

Plan for the worst, hope for the best?

Again, if those deep drawdown outcomes were outliers, it might be a bit easier for me to write them off as a low probability event. But the distributions of those deep drawdowns look pretty even, so there is a pretty good chance (historically) that we would have experienced a 'bad case' drawdown that is not much better than the 'worst case'.
-ERD50
hmmmm... I can't really tell, ... did you just make the point?
If you did ... amen brother.

However, that was not the point I was trying to make ... it was one of using (or rather NOT USING) FIRECALC as THE (or THE major) factor in deciding whether or not you are ready for retirement.

Apologies in advance if I have mis-read your post.
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Old 02-05-2008, 09:53 AM   #139
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Seems to me that everyone has to go through the "calculator phase" either early in their planning to ER or shortly thereafter. I'd never heard of withdrawal rates when I retired, I just took a common sense approach that it seemed if I didnt spend too much and made a decent average return the back of the envelope calculation said I'd at least make it into my 70's without running out of money. Good enough.

Later when I found this site, I went through weeks of exhaustive calculations to prove pretty much the same thing I'd determined using the basic pen and paper method.

Lots of things could influence the future looking different from the past. For a lot of the historic data that firecalc uses, the US was an emerging and developing market. The data series starts right at the end of the civil war, which was pretty much a serious low point, which makes the data from there to the 1920's look pretty optimistic. The prior data contains many periods of deflation which we probably wont see much of. Inflation may be under better control than it was in the 60's-90's; then again, maybe not. The lack of direct information on investments until the 90's made for many opportunities for people to make money by leveraging the lack of knowledge and/or obscurity. Perhaps those exotic investments like commodities and real estate trusts will work differently in the future. Perhaps automation will continue to improve productivity, maybe it wont.

My back of the envelope calc said I oughta be able to make an average of 7-8% a year. 2-3% off to inflation and another percent or two off to taxes. Manage my own investments to make the costs <.2% instead of 1-2%. Spend the rest in good years, spend less in bad years. Rinse and repeat.
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Old 02-05-2008, 11:47 AM   #140
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A) I know a 50% dip from my start position would be an emotional issue for me. I'm going to look for methods that historically would keep me above that minimum. Hopefully well above.
I've started to look at FIRECalc for hints on how to reduce drawdowns to a tolerable level. One big improvement that should come as no surprise is to add small value and large value to your portfolio. For instance, the following gave a much better result for my inputs using the "mixed portfolio" option:
small = 5
small_value =5
sp500 = 20
US_large_value = 20
1mo_treasury = 50

I was comparing that to a total stock market and 5yr treasury mix which was much worse. I'd view the 1mo_treasury as a stand in for TIPS + short term bonds strategy. I had to use the old FIRECalc version as the new version3 seems to have a bug in the spreadsheet (I've reported it).

I'm sure this has been done a lot before by others. Anyone have a more optimal set of numbers for the mixed portfolio? It has to be realistic as nobody's going to go with 100% small value for instance.
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