FireCalc Dips in Net Worth - Anyone Scared?

[twaddle]

Easier to see on a linear scale.

 

[cute fuzzy bunny]

Try a chart of the value of money invested instead of playing games. Do remember to add the dividends.

Except for the depression and the sideways 60's, no protracted loss of value.

 

[unclemick]

Some guys got to beat the same drum with the same stick:

Pssst - Wellesley! 4.31% current yield as of Friday.

No. no. no! Don't rush out and buy it - it's just that the Norwegian widow would like to point out that dividends are almost as good as real money.

Soooo - my Target 2015 plus a few dividend stocks at a tad over 3% yield plus a small pension and SS have hard times covered. Now after I feel my belly button and decide I'm still kicking - I may go 5% variable if ready to let the good times roll.

Between chickenheartness and FireCalc as a 'ballpark' check - I plan to party till I croak at precisely 86.3 my IRSrolleyes number.

And no I have no plans to spend down to zero - RMD to keep the IRS happy yes - but zero probably not.

heh heh heh

 

[Notmuchlonger]

"Sometimes you dont have to beat the bear...just the other guy.

Under such horrid conditions, luxuries would become worth much less, theres a good chance we'd see general deflation, and a smart person with ready capital (even ready REDUCED capital) could make some nice buys."

Good point. Sometimes people forget that things could possible deflate.

 

[twaddle]

Try a chart of the value of money invested instead of playing games. Do remember to add the dividends.

Except for the depression and the sideways 60's, no protracted loss of value.

I'm not playing games. Bears and bulls are generally defined by price movements, don't you agree?

I'm not saying that price movements are all that matter. Dividends matter. Inflation matters. Correlations matter. Etc.

Now, I'm not predicting that we're now in a "long bear," but the current dividend yield doesn't help. The current P/E doesn't help. And the current bond yield doesn't look good if you're hoping for a long-term bond bull market, either.

 

[Moemg]

There are always uncertainties, but planning for the absolute worst and living your entire life that way might suck more than working until you're 70. Be adaptable. Expect to improvise. Limit your liabilities without reducing your quality of life. Have a backup reduction budget and a bare-bones one. Dont take on excessive risk without clear benefits that make the risk acceptable.

It aint rocket science.

WEll said CFB

 

[samclem]

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 portfolio 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.

I'm with Audrey, though I'll admit that having a pension to cover the basic expenses makes it much easier for us to deal with a changing "take" from the portfolio. Still, regardless of that, would anybody still be taking $40,000 annually out of portfolio that had suffered years of declines and was now worth $150.000? Would the fact that "history says I'll probably be okay" really offer sufficient comfort? Should it? I don't think so, and it's much better to make small adjustments when things start to turn south (and also enjoy the extra cash ASAP when the investments go up) rather than sticking to a fixed sum adjusted yearly for inflation. If, in the real world, we'll adjust our living expenses when the portfolio takes a big multi-year hit, then why not acknowledge that, build it into the plan, and behave that way. Pick a % of year end value and live on that. If it's too volatile for you, then add more cash. Your portfolio should be designed to stay ahead of inflation-if it doesn't, then it is not very smart (IMO) to take inflation-adjusted withdrawals.

 

[haha]

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.

 

[Delawaredave5]

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]

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?

 

[twaddle]

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.

 

[haha]

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

 

[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]

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.

Depends on whether you're trying to show long-term growth or bull runs and bear declines. There's no "one scale fits all."

 

[twaddle]

I was relieved to find that I could withdraw up to $100K without going over an SWR of 3%.

Don't forget that if you simply stick your money under your mattress, you can safely withdraw 3.33% (not adjusted for inflation) over 30 years.

That doesn't mean your mattress is a great asset class, but that's what we should use as a baseline.

 

[Lsbcal]

Depends on whether you're trying to show long-term growth or bull runs and bear declines. There's no "one scale fits all."

Assuming you are showing this long term series on the same graph, I'd like to see an example of how the linear graph is better then the semilog. Blue bunnies can be very skeptical guys.

 

[Meadbh]

Don't forget that if you simply stick your money under your mattress, you can safely withdraw 3.33% (not adjusted for inflation) over 30 years.

That doesn't mean your mattress is a great asset class, but that's what we should use as a baseline.

I adjusted withdrawals for inflation at 3% per annum. The mattress generates no MERs, but is associated with the risk of fire or theft!

 

[mexmeme]

Quote
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.

 

[twaddle]

Here's a semilog of the S&P 500 in nominal terms. I wasn't able to find one in real terms, which would better show the 1968-1982 results.

But, I guess you're right in that the dips still show. The log scale just reduces the magnitude of recent changes. Still scary looking, don't you think?

 

[Lsbcal]

Twaddle, well you do have to use your imagination on that 1968-1982 period based on that graph sans inflation. I guess that long period of daylight between the green line from the late 80's to now might be even more scary. That's the trouble with graphs though, a lot of ways to interpret them. I think it's time for the bunny to go into the hole.

 

[haha]

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

 

[FIREd]

I feel fairly confortable with a 4% SWR, even knowing that I could end up with nothing at the end. But I will enjoy the luxury to have a few backups (in case things go south) to keep me sleeping at night:

Social Security benefits which I never include in my projections.
A substantial inheritance which I will probably receive after FIREing, so again not included in my projections.
Home equity, which can be tapped via reverse mortgage if needed, is not included in my calculations.
A retirement budget consisting of 50% fixed expenses and 50% discretionary expenses. So if the market really plunges our expenses could be cut in half temporarily.
A proven ability to live cheaply and be happy with it.

 

[samclem]

I feel fairly confortable with a 4% SWR, even knowing that I could end up with nothing at the end. But I will enjoy the luxury to have a few backups (in case things go south) to keep me sleeping at night:

Social Security benefits which I never include in my projections.
A substantial inheritance which I will probably receive after FIREing, so again not included in my projections.
Home equity, which can be tapped via reverse mortgage if needed, is not included in my calculations.
A retirement budget consisting of 50% fixed expenses and 50% discretionary expenses. So if the market really plunges our expenses could be cut in half temporarily.
A proven ability to live cheaply and be happy with it.

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).