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FIRECalc; SWR; Long term retirement period
Old 03-06-2014, 04:30 PM   #1
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FIRECalc; SWR; Long term retirement period

Hi:

I am using FIRECalc to plan and prepare for my early retirement.

I am 43, I plan on retiring in the next 1 to 3 years, and if I take care of my health, I estimate that I could live to 88.

I have heard of the 4 percent safe withdrawal rate. I have also heard that those who plan for 40+ years of retirement should consider using 3 or 3.5 percent as a safe withdrawal rate.

I guess I want to know if FIRECalc factors in the length of my retirement plan in its analysis. I know I include the planned start year of my retirement and my life expectancy in FIRECalc. But does FIRECalc reduce the safe withdrawal rate when it does my forecasts?

If I am planning a long term retirement, are FIRECalc's outcomes as reliable as if I was planning a short term retirement? I want to make sure I am making a long term decision on good data and analysis. Thanks.
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Old 03-06-2014, 04:43 PM   #2
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Quote:
Originally Posted by nico08 View Post
1) I have heard of the 4 percent safe withdrawal rate. I have also heard that those who plan for 40+ years of retirement should consider using 3 or 3.5 percent as a safe withdrawal rate.
2) I guess I want to know if FIRECalc factors in the length of my retirement plan in its analysis. I know I include the planned start year of my retirement and my life expectancy in FIRECalc. But does FIRECalc reduce the safe withdrawal rate when it does my forecasts?
3) If I am planning a long term retirement, are FIRECalc's outcomes as reliable as if I was planning a short term retirement? I want to make sure I am making a long term decision on good data and analysis. Thanks.
1) That's what I've heard too as long as the next 30 to 40+ years are like the past 140+ years and you're investing in the USA primarily.
2) Yes, FIRECALC takes into account the number of years you plan for in retirement based on what you enter on the first input page. FIRECALC calculates safe withdrawal rate directly based on portfolio $, years and annual spending (plus any other inputs you provide) so it's not a matter of "reducing SWR" for your analysis or anyone else's. But it makes no provision for you to live longer than the years you input, so most people plan on best case - a long life. So if you live past 88 and real returns are worse than 95% of historical (or whatever probability you enter), you will run out of money.
3) Probably not, the more years, the more uncertainty. But FIRECALC simply looks at what WOULD have happened in the past and assumes you blindly withdraw the same amount (with annual inflation adjustment) for as many years as you input. The range of outcomes is wide, and no one actually withdraws that systematically, you're not supposed to. FIRECALC is an axe, not a scalpel, so "good data and analysis" for making "a long term decision" (which implies predicting the future it seems) might be a stretch.
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Old 03-06-2014, 04:57 PM   #3
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1) 3) Probably not, the more years, the more uncertainty. But FIRECALC simply looks at what WOULD have happened in the past and assumes you blindly withdraw the same amount (with annual inflation adjustment) for as many years as you input. The range of outcomes is wide, and no one actually withdraws that systematically, you're not supposed to. FIRECALC is an axe, not a scalpel, so "good data and analysis" for making "a long term decision" (which implies predicting the future it seems) might be a stretch.
Two thoughts on this. 1. a longer period gives more time for "all things to balance out" but 2. In FIRECalc specifically, if you use anything longer than a 35 year range you have less scenarios to evaluate. I tend to stick to a 30 year period on the first page and then look at the lowest remaining portfolio at the end to see if I think that's enough for me to live on from age 80 to 90.
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Old 03-06-2014, 05:14 PM   #4
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When I bring the length of time down to 30 years, I get the following result. Do you use the $-901,191 amount to figure out if you could live on that amount from 80 to 90?

FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
Because you indicated a future retirement date (2015), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 1 years of preretirement plus 29 years of retirement, or 30 years.
FIRECalc looked at the 113 possible 30 year periods in the available data, starting with a portfolio of $1,025,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 113 cycles. The lowest and highest portfolio balance throughout your retirement was $-901,191 to $5,690,242, with an average of $1,628,062. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 11 cycles failed, for a success rate of 90.3%.
Understanding the charts below: Don't try to follow any individual line -- with most scenarios, there are just too many of them. But if you look at the mass of lines, and the zero axis, you can get a clear visual representation of how frequently your strategy would have failed (dropped below zero) or succeeded. The objective of presenting the information this way is to allow you to get a "big picture" sense of the way your strategy would have performed historically.
Year-by-Year Portfolio Balances
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Old 03-06-2014, 05:22 PM   #5
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+1

Also consider that FireCalc results will not include the risks of war, revolution, civil disorder, epidemic, strong AI or asteroid impact.
It is also wise to remember that past results do not guarantee future outcomes.
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Old 03-06-2014, 05:26 PM   #6
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I hate asteroid impacts. They can ruin great plans for early retirement. But I think I will take the risk on them.
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Old 03-06-2014, 05:37 PM   #7
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From any point in time looking forward to today has the future results been worse than past results?
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Old 03-06-2014, 09:49 PM   #8
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Quote:
Originally Posted by nico08 View Post
When I bring the length of time down to 30 years, I get the following result. Do you use the $-901,191 amount to figure out if you could live on that amount from 80 to 90?

FIRECalc Results
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
Because you indicated a future retirement date (2015), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 1 years of preretirement plus 29 years of retirement, or 30 years.
FIRECalc looked at the 113 possible 30 year periods in the available data, starting with a portfolio of $1,025,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 113 cycles. The lowest and highest portfolio balance throughout your retirement was $-901,191 to $5,690,242, with an average of $1,628,062. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 11 cycles failed, for a success rate of 90.3%.
Understanding the charts below: Don't try to follow any individual line -- with most scenarios, there are just too many of them. But if you look at the mass of lines, and the zero axis, you can get a clear visual representation of how frequently your strategy would have failed (dropped below zero) or succeeded. The objective of presenting the information this way is to allow you to get a "big picture" sense of the way your strategy would have performed historically.
Year-by-Year Portfolio Balances
That just means that a 40 year retirement will have less than a 90.3% success rate.

The 30 year period picks up a bad retirement year or two starting in 1974 or later, where the data runs out for a 40 year period.

Without picking up each of the yearly results and stitching together some fake "historical" data for years after 2012, that's about the best you can do.
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Old 03-07-2014, 05:55 AM   #9
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To the OP : please use the search function on this website as there have been many threads on this topic.
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Old 03-25-2014, 09:09 AM   #10
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Thanks for the post. I too was wondering these things.

Mostly because per FIRE I can SWR 4%+ and still not fail.

I'll rerun some numbers using the 30 years as other above suggest and see if I get more fails at higher than 4%
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Old 03-25-2014, 12:24 PM   #11
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Thanks for the post. I too was wondering these things.

Mostly because per FIRE I can SWR 4%+ and still not fail.

I'll rerun some numbers using the 30 years as other above suggest and see if I get more fails at higher than 4%
Since neither FIRE or any other method is perfect, why not just accept 4% as the upper limit, unless you are already getting along in age and can safety deplete faster than a younger person. There is no safety in trying to use these tools to push your luck.

I am 70+, have no more guarantees of long life than anyone else, but I withdraw considerably less than 4%.

Maximization efforts are not based on reality, and may well bite you.

Ha
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