How do you measure Portfolio sustainability During ER

[rwc356]

OK, so now that I have saved enough (I hope) and have a 91% success projection using FIRECalc based on a 30 year period - how do I measure likelihood of success During the retirement years? How do I determine if I am above or below the 90% guide slope? I start drawing from my IRA this year and find this question rather challenging.

My initial though was to run FIRECalc each year using the then current portfolio data and current inflation adjusted WD for that year. Instead of a 30 year term, I would adjust the term using a countdown number (30, 29, 28, etc.)

Does this make sense, is it valuable or am I just looking for something to do while I wait for the snow to melt so I can hit the golf course.

Appreciate any suggestions.

Bob

 

[W2R]

It's a tough question.

I think many of us just "play it by ear", and we withdraw less than usual when the market is down, or whenever we are less than certain that we are doing OK. In other words, our faith in our initial projections is less than perfect. Others with more perfect faith in these projections just continue according to plan.

 

[FIRE'd@51]

I would rerun Firecalc for the years left until your original horizon using your original withdrawal $ (adjusted for inflation) as a percent of the current portfolio value, as in your initial thought.

 

[Ed_The_Gypsy]

Review your assumptions every year.

Don't spend too much. Spend less than FIRECalc says.

Keep a big emergency fund.

 

[youbet]

Does this make sense, is it valuable or am I just looking for something to do while I wait for the snow to melt so I can hit the golf course.

Bob

Good question Bob. It's been discussed here on the forum a number of times and opinions vary all over the map.

I've been FIRE'd almost 6 years. Our retirement income is roughly 50% SS/pension and 50% WR. Our FIRE portfolio withdrawals are spent substantially on discretionary and/or big ticket items such as vacations, housing improvements/remodeling, cars, toys or gifts to the kids/grand kids. This tends to make portfolio withdrawals sporadic and variable. It hasn't been at all like the smooth percentage level + inflation we anticipated. And with the recession tucked into the middle of all this, measuring how we're doing and trying to feel confident we're "on track" hasn't been easy.

Personally, I have been re-running FireCalc, other web based tools and my own spreadsheets over the years since FIRE. I remind myself that these subsequent tests are independent of earlier tests and work hard to understand what question I'm asking the tool to answer and that the answers are a range of outcomes with probabilities.

I haven't always followed the direction the "re-tests" seem to have pointed to. For example, at the depth of the recession, our portfolio had dipped by a third or so. And we were starting to lose some confidence as to the "guaranteed" nature of DW's State of Illinois pension due to the widely publicized criticism our state has been receiving in the media. Despite my interpretation of the various tools suggesting the need to cut back, we chose to not reduce discretionary spending because much of it was, at the moment, time sensitive. We wanted to pick up the pace of involvement in outdoorsy activities while we could still lift a kayak paddle and enjoy camping (early 60's here), and we did. Bought some new boats, a nifty camper, spent zillions of bux on gas putting on thousands of miles on our F150. That turned out to be a great [-]guess[/-] decision as our portfolio has fully recovered and we had great experiences and great times we'll never forget.

My point is, go ahead and re-test. But understand what the tests are and that a significant amount of subjective override will come into play. Likely, extreme over or under-spending vs portfolio performance will be obvious. Mid-range, not so much. It's tough to predict your financial future with any amount of confidence other than you know you're going to die and enjoying (by your own definition) life is the target. You don't know how big your portfolio will be a year from now, but you do know with certainty you'll either be one year older or dead.

 

[potto0213]

If you read Jim Otar's "Unveiling The Retirment Myth", he gives several checks you can make to see if your retirement portfolio is sustainable. It used to be available for free, but I think you need to purchase it now.

Free E-Book: Unveiling the Retirement Myth by Jim Otar

 

[REWahoo]

... how do I measure likelihood of success During the retirement years? How do I determine if I am above or below the 90% guide slope? I start drawing from my IRA this year and find this question rather challenging.

In case you missed it, here is a recent thread on a similar subject: http://www.early-retirement.org/forums/f28/my-s-wr-59518.html

 

[MichaelB]

OK, so now that I have saved enough (I hope) and have a 91% success projection using FIRECalc based on a 30 year period - how do I measure likelihood of success During the retirement years? How do I determine if I am above or below the 90% guide slope? I start drawing from my IRA this year and find this question rather challenging.

My initial though was to run FIRECalc each year using the then current portfolio data and current inflation adjusted WD for that year. Instead of a 30 year term, I would adjust the term using a countdown number (30, 29, 28, etc.)

Does this make sense, is it valuable or am I just looking for something to do while I wait for the snow to melt so I can hit the golf course.

Appreciate any suggestions.

Bob

What would you do if you ran FIRECalc a year from now and it projected less than 90% probability of success? You can develop scenarios now and plan for a few possibilities, then just get on with enjoying life.

 

[youbet]

In case you missed it, here is a recent thread on a similar subject: http://www.early-retirement.org/forums/f28/my-s-wr-59518.html

When you asked in the opening post of that thread

what will my chart look like in five, ten or 25 years?" Where will my lonely single line go and what story will it tell?

you really summed up my feelings about it all.


FireCalc gives a range of outcomes based on back-testing vs. historical data. Results are all over the map. Even with a range of outcomes that are all successful (100% success rate), you might spend your last dollar on your last day. Or, you might die with a multiple of your original portfolio value and might spend your last day wondering why you didn't do some of the things you wanted to do since you're ending with gobs of extra money.

We just don't know! And, IMHO, given that we're acting with prudence and flexibility, there isn't all that much we can do about it.

 

[donheff]

I approach it about the way Youbet described. At the bottom of the recession a Firecalc run would propose a significantly smaller withdrawal amount than it did just before. But it also seemed likely that equities would bounce back up significantly. After the recovery Firecalc was back telling me to spend. I simply stay conservative and figure that, in ten years or so, if things are looking I can relax and spend more if I want or gift if I want. If the worst of the forecasts proves correct I will undoubtedly have already curtailed my spending accordingly.

 

[walkinwood]

You've asked a very good, but impossible to answer, question.

Lots of good suggestions above.

In my 4th year of ER, my suggestion would be
1) Leave yourself some head-room in the initial SWR. ie. if you need 10K, your SWR should allow you to withdraw a little more. How much? Depends on your personality.

2. Devise some backup strategies. If you feel uncomfortable with your portfolio performance (eg. 2008-09), or your expenses shoot up temporarily, what will you do? Go back to work, fulltime or part time? Down size? move?

3. Try and live within the budget suggested by whatever SWR rule you use. Run the calculations each year and see if it still shows an acceptable level of performance.

You'll never be sure if you'll succeed, so at some point, you need to make the leap and try and live the life you have envisioned for yourself in ER.

All the best.

 

[Alan]

FWIW, I do the following:

I have a withdrawal spreadsheet with the value of the principal at the start of the year, target spending, actual spending, $ amount of withdrawls and % WR. Only have 2 full years in it so far but at least I can easily see how I am doing against my target SWR of 3%.

Every year I run FIRECALC and Fido's RIP with updated figures to see probabilities of success.

The idea is that we will cut back on discretionary spending if the WR % gets too high, although I haven't really decided exactly what is too high.

 

[justplainbll]

You can try limiting current year expenditures that are funded from investments to the dividend and interest income received in the previous year.

 

[RetireBy90]

I'm not yet to the draw period, however one item to consider is what portion of your income is from the draw. If your draw were all you had to live on I would probably spend more time tracking what was left. However I you get two pensions and SS then probably less time. IMHO

 

[Midpack]

As others have said, there is no way to know for sure. Just as there was no way to know exactly what you'd have to save and where to invest during accumulation. Spending less than FIRECALC or any other calculation says you can can only improve your probability of success. And checking where you stand throughout retirement is important too, I plan to do so no less than annually. And Otar does give some good suggestions re: how to know if you're getting near "the red zone."

 

[youbet]

Spending less than FIRECALC or any other calculation says you can can only improve your probability of success.

I know what you mean Midpack. And, yes, reduced WR's lead to higher portfolio survival rates in FireCalc testing outcomes.

But in a broader sense of the word "success," I wonder if spending less always leads to more success? If you postpone desired activities, especially those appropriate for your current age and which might not be appropriate later (Say a ski trip to Switzerland or a fishing trip to Alaska you and DW have always dreamed of), is that always good? Or is there a risk that if your portfolio performs well, you might later regret not having spent on the activity while you were young enough to engage?

It seems like as long as you have the desire and ability to get up and do things and don't have unlimited wealth to fund doing these things, there's always a delicate balance to calculate. You don't want to run out of money. But you know, given the high variability of possible final portfolio outcomes, that denying yourself one-time opportunities now may be needless.

6 years into FIRE and in my early 60's, I'm finding that I'm less concerned about what I'm doing/spending (within reason) and the risk of running out of money than with what I'm not doing/spending and the risk of leaving currently doable bucket list items unfulfilled.

Sorry..... didn't mean to get philosophical over the meaning of "success."

Carry on.....

 

[REWahoo]

6 years into FIRE and in my early 60's, I'm finding that I'm less concerned about what I'm doing/spending (within reason) and the risk of running out of money than with what I'm not doing/spending and the risk of leaving currently doable bucket list items unfulfilled.

+1

Life is a [-]crapshoot[/-] balancing act.

 

[justplainbll]

For some old dogs who have spent their pre-retirement years scrimping and saving to ensure a secure retirement it's tough to learn new tricks. Some may find increasing post-retirement income to levels well above pre-retirement income a rewarding endeavor.

 

[Midpack]

I know what you mean Midpack. And, yes, reduced WR's lead to higher portfolio survival rates in FireCalc testing outcomes.

But in a broader sense of the word "success," I wonder if spending less always leads to more success?

It seems like as long as you have the desire and ability to get up and do things and don't have unlimited wealth to fund doing these things, there's always a delicate balance to calculate.

Sorry..... didn't mean to get philosophical over the meaning of "success."

Carry on.....

All true. We all have to decide what success means for ourselves. But I try to keep in mind running out of money happens nearer the end of plan, at age 70-80-90, when going back to work or other adjustments will be difficult at best. Anyone with a decent plan will be successful for the first 20 years or so...

 

[Bikerdude]

OK, so now that I have saved enough (I hope) and have a 91% success projection using FIRECalc based on a 30 year period - how do I measure likelihood of success During the retirement years? How do I determine if I am above or below the 90% guide slope? I start drawing from my IRA this year and find this question rather challenging.


Bob

This has been mentioned many times before but the leading indicator that your retirement scenario may fail is big losses in the early years.

 

[REWahoo]

But I try to keep in mind running out of money happens nearer the end of plan, at age 70...

If our plan ends at 70 we've got only five or six years to spend a bunch of money. Maybe that '58 Vette really IS a possibility!

 

[W2R]

6 years into FIRE and in my early 60's, I'm finding that I'm less concerned about what I'm doing/spending (within reason) and the risk of running out of money than with what I'm not doing/spending and the risk of leaving currently doable bucket list items unfulfilled.

+1

Life is a [-]crapshoot[/-] balancing act.

I think I have had an epiphany. After reading these two posts, I have decided that I don't have a bucket list after all.

Are you sure you would be this distressed about not doing these bucket list items, and not simply distressed because you are that many years closer to death? I sure don't want to die, and if immortality were for sale I'd be the first one in line. Each day is a renewal of the fabulous gift of time. Each day is the experience of a lifetime, full of opportunities to fully enjoy and experience each moment. But the other side of that coin is that each year I am distressed because I am one year closer to the end of the great story, so to speak.

But bucket list items? Pffft. I thought going to the Smithsonian was tops on my bucket list, but either now or in the years to come I am sure I would be able to find online tours of various parts of the Smithsonian. That would be a perfectly fine substitute IMO. No big deal (for me).

 

[Lsbcal]

I approach it about the way Youbet described. At the bottom of the recession a Firecalc run would propose a significantly smaller withdrawal amount than it did just before. But it also seemed likely that equities would bounce back up significantly. After the recovery Firecalc was back telling me to spend. I simply stay conservative and figure that, in ten years or so, if things are looking I can relax and spend more if I want or gift if I want. If the worst of the forecasts proves correct I will undoubtedly have already curtailed my spending accordingly.

Is it just me or is everyone getting a little bit too conservative? Somehow I have this picture of all of us trying to board those planes to Europe to spend all those dollars before giving it to our heirs. Only we're now a lot older and travel is even harder.

P.S. Don, I don't mean to pick on you ... just that too maybe many of us (including yours truly) are thinking the same way.

 

[Lsbcal]

I think I have had an epiphany. After reading these two posts, I have decided that I don't have a bucket list after all.

Are you sure you would be this distressed about not doing these bucket list items, and not simply distressed because you are that many years closer to death? I sure don't want to die, and if immortality were for sale I'd be the first one in line.
...

I'm selling it, if your buying it.

 

[W2R]

Is it just me or is everyone getting a little bit too conservative? Somehow I have this picture of all of us trying to board those planes to Europe to spend all those dollars before giving it to our heirs. Only we're now a lot older and travel is even harder.

I promise you, I won't be lining up to get on those planes when I'm elderly and infirm.

I'm selling it, if your buying it.

Um, er, uh.....