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Old 06-16-2014, 10:12 AM   #101
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The classic 4% is not 100% safe, even historically. So a big market drop may mean you are on one of the failure paths. ...

... you put your portfolio balance into it and FIRECalc tests scenarios that include retiring just at the start of the Great Depression. If the portfolio balance you input was already at a market bottom (unlike right now), that might be a scenario of two big market drops in a row (the current market bottom plus any number of historical market drops). ... So FIRECalc is probably best used during a market peak, not at a market bottom. ...
That covers it very well. I think that is what photoguy and a few others are missing. FIRECalc is already looking at the worst cases in history, you don't need to re-adjust after a market drop, that is already accounted for with the initial WR, which is carried forward through market dips, and succeeds without further adjustment if you target 100% success rate for that initial WR%.

Again, based on history, but that is all FIRECalc can do. If you think the future may be worse than the worst of the past, build in some appropriate cushion. But use FIRECalc as a guide, and then apply any teaks you wish.

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Old 06-16-2014, 10:13 AM   #102
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Yes, one can draw 4% WR from portfolio at market top and survive, but that survival means the balance is barely above 0 after 30 years. ....
Just to be clear - ~ 5% of the time, the portfolio would drop below zero (the failures), at a 4% WR.

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Old 06-16-2014, 10:18 AM   #103
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....The Trinity authors used a fixed SWR rate because it was easy to analyze. But they did not expect actual retired investor to keep their withdrawal rate constant. ...
Exactly what I was thinking. They expected that in some of the more extreme stress scenarios that the retiree would curb discretionary spending and tighten their belts a bit, and that is exactly what I would plan to do if needed.

That said, since Mr. Market has helped to increase my nestegg by 25% since I retried two and a half years ago, I don't forsee any need for belt tightening for a while (but please don't let DW know that).
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Old 06-16-2014, 10:24 AM   #104
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Originally Posted by ERD50 View Post
Just to be clear - ~ 5% of the time, the portfolio would drop below zero (the failures), at a 4% WR.

-ERD50
I think this is a very good point! FIRECalc assume failure as a zero account balance. How many people would feel comfortable blindly drawing down to near zero? If we die soon relative to the projection time (failure in some peoples mind! ) then all is well, on the other hand if we live a long time (or retire very early) then there is a larger chance that nearing a zero balance will occur. One can never allow nearing a zero balance in real life. So no matter what FIRECalc says, we all have to adjust spending at some point if there were a sequence of really bad years that drove us down precipitously.
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Old 06-16-2014, 10:24 AM   #105
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I am confused on this SWR scenario: I have a million dollars, I have it invested in a 70/30 stock/bond AA- I plan to withdraw $40,000 a year and adjust up by the inflation rate - classic 4% SWR...BUT my great uncle Fester dies and leaves me exactly $40,000, so I spend that instead of touching my portfolio....during my year of spending Uncle Fester bequest the market tanks and is only worth $600,000 by the time I need to make my first withdrawal....so am I still going to be okay taking $40,000 x 1.inflation rate ? Which is now starting my withdrawals off a smaller start and a larger percentage?
Welcome to the irrationality of FIrecalc and all other calculators based on the same principle.

Ha
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Old 06-16-2014, 10:25 AM   #106
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Just to be clear - ~ 5% of the time, the portfolio would drop below zero (the failures), at a 4% WR.

-ERD50
I was making a point and just borrowed the poster's number to elaborate on. Yes, the result you cited was for the case where one used the default portfolio.

For what it is worth, FIRECalc will show that a portfolio heavily weighted towards value stocks will handle a 4% WR with a good margin.
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Old 06-16-2014, 10:40 AM   #107
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...

The Trinity authors used a fixed SWR rate because it was easy to analyze. But they did not expect actual retired investor to keep their withdrawal rate constant. Here is a quote from their paper:

http://www.aaii.com/journal/article/...m_medium=click

True, but that is with a 4% WR, which includes failures. So for success, adjustments would be needed when you find yourself in one of the ~ 5% failure paths.

I also don't think it is that easy to identify a failure path until after the fact. And if you misjudge, you are cramping your lifestyle, for maybe no reason. Or you might do too little, too late.

I just tried this in FIRECalc -

FIRECalc: A different kind of retirement calculator << link to my data entries

After default 4% WR, 30 years, ~ 95% success (but with 40K/1M for easy calculation). Then try to get to 100% with spending adjustments. I found it took cutting spending in half, in the fourth year, and continuing this reduced spending for 6 more years to get back to 100%.

That might work for someone with lots of discretionary spending, but I would not care to live 6 of my first 10 years of retirement at a 50% spending cut level.

Personally, I'd rather go with a constant 3.59% WR which succeeds 100% historically for 30 years, with no adjustments.

-ERD50
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Old 06-16-2014, 10:41 AM   #108
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But that has nothing to do with the historical information in FIRECalc, and how one interprets that output.
Firecalc is very careful to state the percentages it produces are the results on historical data and that it doesn't try to predict future returns.

However what people actually want is a probability their WR will succeed in the future for their own retirement. It is not unreasonable to use the past success rates as the basis for future estimates (this is the basis of predictive statistics -- if there was no connection we wouldn't look at the data at all). Of course, analyzing financial data is very troublesome for all sorts of reasons so generalizing from history to the future won't be 100% accurate and will almost certainly be biased or wrong in some way. But it still can provide useful guidance.


Quote:
Historically, a 4% WR provides ~ 95% success rate, and that, by definition includes retiring at market peaks, market troughs, and everything in between, maintaining that inflation adjusted WR throughout.
If the first year of retirement is a 50% bear market, you're much more likely to be on one of the "5%" of paths that lead to failure.

Also keep in mind that Firecalc only looks at about 100 or so years of US data. So there are many combinations of possible return sequences not in data. Additionally, using only the US data as the basis for analysis is ignoring all the SWR results from other countries (where success rates are *much* lower) and may be subjecting ourselves to survivorship bias.
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Old 06-16-2014, 10:52 AM   #109
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Originally Posted by urn2bfree View Post
...during my year of spending Uncle Fester bequest the market tanks and is only worth $600,000 by the time I need to make my first withdrawal....so am I still going to be okay taking $40,000 x 1.inflation rate ? Which is now starting my withdrawals off a smaller start and a larger percentage?
Welcome to the irrationality of FIrecalc and all other calculators based on the same principle.

Ha
Ha, it's not really an irrationality at all. It is, IMO, an over-simplification that isn't explained well. I have to run, but I can cover it later.

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...
If the first year of retirement is a 50% bear market, you're much more likely to be on one of the "5%" of paths that lead to failure.

...
Yes, but I think the point that Animorph and I are making is that people should be careful not to double count. I like to use 100% success, because it makes this point clearer, IMO.

IOW, retiring at a peak and experiencing a historic market drop is already baked in those numbers. If you make further adjustments, you are double counting.

-ERD50
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Old 06-16-2014, 10:58 AM   #110
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Firecalc allows one to put a floor in, it is at the bottom of the investigate page.

"Leave some money in the portfolio for my estate


There should be a minimum of $ left in the portfolio at all times, including at the end."
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Old 06-16-2014, 11:17 AM   #111
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Yes, but I think the point that Animorph and I are making is that people should be careful not to double count. I like to use 100% success, because it makes this point clearer, IMO.
What exactly is being double counted? To make a percentage we have a numerator and denominator. At the start of retirement, a simple way of estimating the probability is to run firecalc and use the following:
  • numerator = number of failures
  • denominator = all runs

After one year, when that first year is a bear market, I think the percentage should be computed as follows*:
  • numerator = number of failures where the first year is bear market
  • denominator = number of runs where the first year is a bear market

This is basic conditional probability. The probability of failure is going to shoot up, most likely because the denominator is much smaller than before (see the example numbers in previous post). The numerator, which represents the failures, doesn't have to change for the percentage to increase.

* This is a very simplified way of estimating the probability. It has a number of drawbacks.

Quote:
IOW, retiring at a peak and experiencing a historic market drop is already baked in those numbers. If you make further adjustments, you are double counting.
I disagree -- this is just adjusting your probability estimate for new information. There is a whole field of statistics (Bayesian Inference) which is based on updating your estimates in response to new information.

Here's an analogy: At the start of the NBA championships (before any games were played) the odds for Miami Heat winning were about 1:1. After they played 4 games and the Spurs were leading the series 3:1, the odds for the Heat winning were adjusted drastically downward.

What you are suggesting is even after we know the results of the first four games, we shouldn't adjust the odds.
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Old 06-16-2014, 11:26 AM   #112
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I guess I was "spared" the concerns of retiring at a market "Top", by suddenly and unexpectedly e-r'ing near a market bottom. Though I didn't know it was nearing the bottom at the time, just going down... down.

Didn't find FIRECALC, and then this forum, for many months later. Oh what a fool I was
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Old 06-16-2014, 11:30 AM   #113
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IOW, retiring at a peak and experiencing a historic market drop is already baked in those numbers. If you make further adjustments, you are double counting.
+1

I sometimes wonder how those who do this ever retire, much less early. The typical approach I've seen is those who make further adjustments also delay retirement until they can have a sub-3% withdrawal rate, and pad their expected retirement expenses. They are also likely to decide to wait OMY (then OMY, then...) before pulling the plug. All this to be "certain" they won't run out of money in retirement - when the only real certainty any of us have is the longer we delay retirement the shorter our retired life will be.

Others will be along shortly to disagree.
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Old 06-16-2014, 11:33 AM   #114
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Yes, one can draw 4% WR from portfolio at market top and survive, but that survival means the balance is barely above 0 after 30 years.

No, not really. Historical testing shows that MOST of the time you'll be nicely above zero. Do a FireCalc run and look at the distribution of outcomes. Only a few are below, at or just above zero under the conditions you describe.
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Old 06-16-2014, 11:49 AM   #115
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+1

I sometimes wonder how those who do this ever retire, much less early. The typical approach I've seen is those who make further adjustments also delay retirement until they can have a sub-3% withdrawal rate, and pad their expected retirement expenses. They are also likely to decide to wait OMY (then OMY, then...) before pulling the plug. All this to be "certain" they won't run out of money in retirement - when the only real certainty any of us have is the longer we delay retirement the shorter our retired life will be.

Others will be along shortly to disagree.
Well, I won't disagree. A while back I listed a number of the "padding" factors commonly used here on the board by the nervous nellies. I can't remember them all now, but they included:

1. Withdrawal rate well below the FireCalc tested rate for 100% survival.

2. Large pot of cash held outside the retirement portfolio and not included in FireCalc calculations. "Just in case" money.

3. Ongoing part time work or business or spousal income which is not included in FireCalc inputs.

4. Substantial padding of expenses.

5. No accounting for the value of non-financial assets such as an expensive home, summer home, rental properties, antique car collection, millions of dollars of rare art, ownership of the Clippers, etc.

6. Assumed longevity where you're still spending big time at 135 years old.

7. Discounting future SS or not counting it at all. "It'll be gravy."

8. Etc.

I'm most amazed at this type of conservative over doing when the poster, usually in other threads, mentions they don't like their job or their working life and are extremely anxious to quit and get on to a retirement lifestyle. Yet, they'll work extra years to go from a super conservative position to a super-super conservative position or perhaps even the coveted super-super-super conservative position.

It's also interesting to observe how many folks do not look at the distribution of outcomes from FireCalc runs but only focus on the bottom, worse outcome, line. While I've done so many FireCalc runs that I don't do histograms too often anymore, I've done a bunch and they give important insight into the probability of your outcome (based on historical data anyway) given you AA and WR.

To OP:

Beginning withdrawals at a equity market peak is not "hard." It's just another number, another set of circumstances. Make your assumptions, do your testing and get on with life. I wonder if we're at an equity market "peak" now?
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Old 06-16-2014, 12:04 PM   #116
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If the first year of retirement is a 50% bear market, you're much more likely to be on one of the "5%" of paths that lead to failure.
I'm not sure what you mean by "much more likely." Have you actually looked at the numbers?

I retired into a 30% bear market (the recent recession) after making my decision to ER near the top of the preceding bubble and things have worked out OK so far. Of course, that's not the 50% bear you're speaking of, but enough of a bear that it got many board members' attention!

I'd rather retire into a bear market than into several years of 10% - 12% inflation though.
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Old 06-16-2014, 12:06 PM   #117
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What exactly is being double counted? To make a percentage we have a numerator and denominator. At the start of retirement, a simple way of estimating the probability is to run firecalc and use the following:
  • numerator = number of failures
  • denominator = all runs

After one year, when that first year is a bear market, I think the percentage should be computed as follows*:
  • numerator = number of failures where the first year is bear market
  • denominator = number of runs where the first year is a bear market
It would be nice if we could calculate the second ratio, but FIRECalc won't.

The double accounting is like this: You are at the bottom of the Great Depression. You take your portfolio balance at that time and enter it into FIRECalc. FIRECalc takes that balance and says, "OK, now what happens to this portfolio if the guy is retiring just before the Great Depression?" Then it proceeds to subject your portfolio to another Great Depression as one of its scenarios. That's not really fair. Two Great Depressions in a row?
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Old 06-16-2014, 12:20 PM   #118
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It's also interesting to observe how many folks do not look at the distribution of outcomes from FireCalc runs but only focus on the bottom, worse outcome, line.
It's because they want absolute guarantee that they will not be broke, while not giving up their current standard of living. But there's never any guarantee in life. A FIRECalc version written for any country other than the US will show dismal results. We are making the most essential assumption of all: that the US is in a unique position to continue its economic growth and dominance of the last 100 years. A lot more depends on that premise than the difference between 3 or 4% WR.

I myself have a lot of financial reserve already, and also know that I have resilience to survive hardship, so I am not worried. I often talked about living in an RV in boondocks, and that was only half-joke. No, I am not giving up hope that I will end up a decamillionaire as the most optimistic FIRECalc outcome shows. It's that the range of past outcomes in FIRECalc is so large that one has to be prepared to accept that huge uncertainty.
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Old 06-16-2014, 12:27 PM   #119
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Welcome to the irrationality of FIrecalc and all other calculators based on the same principle.

Ha
Joe retires in 2106, with $1M and a planned 4% SWR for 30 years with a 94% rate and 75/25 stock bond mix.

In 2017, the market crashes. Joe's portfolio drops 40% to $600,000. Mary wants to retire in 2017 for 29 years with a portfolio of $600,000, and a 75/25 mix and a 4% SWR, but Firecalc says she only has a 43% chance of success.

Are Joe's odds still 94% or have they dropped now to 43%? If they are now 43%, what happened to the 94%? Can Mary retire anyway? Should Joe go back to work? Do they each have different odds of success because Joe pulled the plug one year earlier, even though goiing forward they now both have 600K portfolios, 75/25 AAs, 4% SWR and want to retire for 29 years into the future?

Maybe I am just dense, but I really don't understand the logic in Firecalc at all, even if the future will be 100% like the past. And personally I would only give the future 50% odds of being like the past.
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Old 06-16-2014, 12:35 PM   #120
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..........one has to be prepared to accept that huge uncertainty.
+1

You, I and I think ERD50 have spoken about the likely "roller coaster ride" we could experience financially during retirement, especially a long early retirement. And that's the way it is. If you're not willing to accept that there will be much going on financially that's out of your control and that even with your best efforts to be flexible and on top of things that your final financial results are basically unpredictable outside of broad parameters, then you better keep gathering more.

I love retirement and living off passive income. Eight years in, I can say it's just been great despite the roller coaster ride so far. Retired at a bubble peak, rode out the Great Recession and now am enjoying a really nice ride back up. I expect even more volatility going forward and have no idea whether I'll die broke or worth tens of millions.
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