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Old 06-18-2014, 11:16 AM   #161
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...I think you will find it takes some serious cuts for some serious time to recover - it isn't simply a matter of hamburger versus steak once a week, or dropping cable...
I wholeheartedly agree with you that if one finds himself in a bad period as happened in the past, it takes a lot of expense cut back to make a difference. Following is some info I get from FIRECalc, using a starting portfolio of $1M with an AA of 50/50 which works out better in the worst case than the default 75/25.

The portfolio reaches the lowest point in Year 5, then recovers towards Year 10 if the WR is sufficiently low. Note how one can lose 40% even when not making any withdrawal.

Worst Case at 5 Yr 10 Yr
0% WR: $626K $715K
1% WR: $590K $632K
2% WR: $544K $550K
3% WR: $498K $468K
4% WR: $452K $386K

See how a bad stretch in the past lasted more than 10 years, and the portfolio could not recover after 10 years even without any WR.

Have I scared everybody yet?

So, can you wait 10 years to retire?
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Old 06-18-2014, 11:21 AM   #162
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WOW. Did the 3% and 4% wr runs go on to fail?

Ha
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Old 06-18-2014, 11:26 AM   #163
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The 4% WR went under at Year 25. The 3% WR stabilized at $500K until Year 30.

Again, these were historical worst case that happened during the 60s or the Vietnam war era. Inflation was the real killer.
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Old 06-18-2014, 11:32 AM   #164
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I wholeheartedly agree with you that if one finds himself in a bad period as happened in the past, it takes a lot of expense cut back to make a difference. Following is some info I get from FIRECalc, using a starting portfolio of $1M with an AA of 50/50 which works out better in the worst case than the default 75/25.

The portfolio reaches the lowest point in Year 5, then recovers towards Year 10 if the WR is sufficiently low. Note how one can lose 40% even when not making any withdrawal.

Worst Case at 5 Yr 10 Yr
0% WR: $626K $715K
1% WR: $590K $632K
2% WR: $544K $550K
3% WR: $498K $468K
4% WR: $452K $386K

See how a bad stretch in the past lasted more than 10 years, and the portfolio could not recover after 10 years even without any WR.

Have I scared everybody yet?

So, can you wait 10 years to retire?
Ugh, makes me want to go back to work. No not really! At the worst it means I have 10 years to party!
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Old 06-18-2014, 11:44 AM   #165
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So, can you wait 10 years to retire?
Nope. I will take my chances even if I have to live in Alaska, hunting for food, wearing animal hides, and live in a one room cave. It's not my style but, heck, it's better than going back to work after FIRE backfires.
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Old 06-18-2014, 12:06 PM   #166
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And for us pre-geezers, remember that towards the middle of the 30-year FIRECalc terrible run, SS will come online and save our tush. In fact, for many of us, SS becomes available a lot sooner than that. Let the youngster ERs sweat, we geezers keep on surfing Amazon.
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Old 06-18-2014, 12:28 PM   #167
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And for us pre-geezers, remember that towards the middle of the 30-year FIRECalc terrible run, SS will come online and save our tush.
+1

Been there.
Done that.
Got the T-shirt (at Goodwill).
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Old 06-18-2014, 12:53 PM   #168
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Speaking of SS, the other day when I finally sat down and figured out how much SS I will be getting at 62, 66-1/2 (full retirement age or FRA), and 70, I entered each scenario into FIRECalc along with my stash, then raised WR until the 30-year run failed.

What I saw was that claiming SS at FRA for me would support the highest WR before failure. However, the difference between the 3 SS cases was less than $2K/yr. They all showed that I could spend a whole lot more money than I do now. It was enough for me to buy a 3rd home (but I would be crazy to).

The above is just academic for me at this point, as I still have a few years to ponder this, and besides I am not planning to push my WR to such high values.

PS. I included my wife's SS in the above runs. Her SS is less than mine, but more than the 1/2 spousal freebie.
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Old 06-18-2014, 01:00 PM   #169
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The 4% WR went under at Year 25. The 3% WR stabilized at $500K until Year 30.

Again, these were historical worst case that happened during the 60s or the Vietnam war era. Inflation was the real killer.
Thanks for the stats, NW-bound. I think there are many here who get this and are okay with the risk and for some this may be a surprise.

As a total coward, my strategy was to look for ways to cut expenses to live on < (pensions + SS + (0 - 1 real returns in conservative investments)) without cramping or maybe even improving our overall lifestyle. That has been our main hobby these past few years since DH retired.

Good for you guys who are better risk takers. I would be freaking out if the market tanked like this or even thinking about the possibility of surviving a drop like this in our retirement years.
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Old 06-18-2014, 01:11 PM   #170
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FIRECalc shows that even with zero withdrawal, a 50/50 portfolio lost 40% after 5 years in the worst case. However, that was with inflation adjustment. In nomimal values, the portfolio might look constant or might even increase, but when you have inflation around 8% a year like that bad period, after 5 years your stash's buying power gets decimated.
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Old 06-18-2014, 02:05 PM   #171
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Thanks for the stats, NW-bound. I think there are many here who get this and are okay with the risk and for some this may be a surprise.

As a total coward, my strategy was to look for ways to cut expenses to live on < (pensions + SS + (0 - 1 real returns in conservative investments)) without cramping or maybe even improving our overall lifestyle. That has been our main hobby these past few years since DH retired.

Good for you guys who are better risk takers. I would be freaking out if the market tanked like this or even thinking about the possibility of surviving a drop like this in our retirement years.
A conservative WR is great if you can fit your lifestyle into it, few really want to take on too much risk.

But there may not be as much difference in these scenarios as you think (or you may even have it backwards?). Even a zero real return portfolio will allow for a 3.33% WR adjusted for inflation each year (simply portfolio/30 years, since both portfolio and expenses are zero real return). That ignores volatility, which may lower this a bit - but follow along for a reference point.

For a historically 100% safe, 30 year period, EQ/Fixed AA:

100/0 AA supports a 3.42% WR
75/25 AA supports a 3.59% WR
50/50 AA supports a 3.71% WR
25/75 AA supports a 3.49% WR
0/100 AA supports a 2.55% WR

Remember, these survived the worst cycles in the FIRECalc database.

So the more 'conservative' investments did not provide the retiree as much safety as those with higher stock allocations. And the most 'conservative' does not appear to have provided even 0% real returns over that period. So maybe 0-1% real returns on 'conservative' investments is no slam-dunk, and maybe cannot be counted on? A 1% real return would support 3.84% WR (again, straight line calculations for simplicity). A 3.84% WR is higher than ANY of the above AA's.

I think the combination of inflation and lower growth opportunities (relative to equities) is what makes 'conservative' investments such poor performers in a stress test such as 1966-1995 30 year period.

If my observations are close, we 'risk takers' may be taking a more conservative withdraw method than you are in counting on at least 0% real return from conservative investments?


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The 4% WR went under at Year 25. The 3% WR stabilized at $500K until Year 30.

Again, these were historical worst case that happened during the 60s or the Vietnam war era. Inflation was the real killer.
What year specifically did you use, I may run some variations on that? 1966 seems to keep coming up as the killer year.

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Speaking of SS, the other day when I finally sat down and figured out how much SS I will be getting at 62, 66-1/2 (full retirement age or FRA), and 70, I entered each scenario into FIRECalc along with my stash, then raised WR until the 30-year run failed. ....

PS. I included my wife's SS in the above runs. Her SS is less than mine, but more than the 1/2 spousal freebie.
I don't think you will see any great benefit to delaying SS on a 30 year run, and it depends at what age you start the run - the younger you start it, the fewer 'payoff' years get included.

It really is 'what if' longevity insurance, and maybe a spousal beneficiary benefit, depending on specifics.

-ERD50
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Old 06-18-2014, 02:10 PM   #172
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... the most 'conservative' does not appear to have provided even 0% real returns over that period. So maybe 0-1% real returns on 'conservative' investments is no slam-dunk, and maybe cannot be counted on? A 1% real return would support 3.84% WR (again, straight line calculations for simplicity). A 3.84% WR is higher than ANY of the above AA's...
In a past post, daylatedollarshort talked about being heavily in TIPS. I do not follow it nor have any, so do not know what the yield is, or how it has been doing recently.
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Old 06-18-2014, 02:19 PM   #173
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In a past post, daylatedollarshort talked about being heavily in TIPS. I do not follow it nor have any, so do not know what the yield is, or how it has been doing recently.
Yes, TIPS will provide whatever you purchased them at (certainly above zero, IIRC they were over 3% real for a while), but I'm not sure many of us have been able to buy enough to make them a really significant part of our portfolio.

Perhaps DLDS has?

They probably do make good sense for diversification, I have not followed them much, I was thinking you could only buy $X/year?

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Old 06-18-2014, 02:28 PM   #174
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I think people who argue for higher allocations to price-variable assets, usually where at least part of the return is expected to come from selling appreciated securities, are those who are comfortable with statistical thinking. Statistical thinking is very nice, however we may forget that this derives from the law of large numbers, while each of us one person living his one life. And even Firecalc is based on a very flimsy data set. Just running through a 60 year sequence in 30 different trips with 30 different beginning and ending periods, in no way creates 30 independent trials. ( same principle holds with the longer history accessed by Firecalc)

Much more of this is luck than we care to admit. This is one reason why I am puzzled when I hear people reject taking SS at 70, because Firecalc gives them a "better" result when starting at some earlier age, and therefore getting a smaller monthly check.

I have invested assets =~50x my spending needs. This does not include much travel or unusual medical expenses, but neither does it involve clipping coupons or doing without anything that I want. If I do certain things it will cost me more. But I own my home in the city and neighborhood where I want to be, with weather I find good to very good, eat as well as I want, etc. Nevertheless, feeling unsinkable I believe would be as misguided as it was for those who boarded the Titanic in April of 1912.

Ha
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Old 06-18-2014, 02:30 PM   #175
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Yes, TIPS will provide whatever you purchased them at (certainly above zero, IIRC they were over 3% real for a while), but I'm not sure many of us have been able to buy enough to make them a really significant part of our portfolio.

Perhaps DLDS has?

They probably do make good sense for diversification, I have not followed them much, I was thinking you could only buy $X/year? -ERD50
That is I-bonds.
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Old 06-18-2014, 02:48 PM   #176
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If my observations are close, we 'risk takers' may be taking a more conservative withdraw method than you are in counting on at least 0% real return from conservative investments?
Over time, odds are you will make much more money. I am okay with not making a lot more money than I have today, in inflation adjusted dollars. The pain of losing 50% of our portfolio would hurt more than making another 300%, which we probably wouldn't spend anyway. Technically I believe this is called diminishing marginal utility (marginal desirability of money decreasing as it it accumulated).

The Fidelity RIP shows that we will have more in inflation adjusted dollars at age 100 than we have today with a conservative portfolio. We've looked at that and said good enough. We'd rather do that than risk losing half our life savings in one year due to a market correction, especially early on in retirement. I feel like I am buying peace of mind to not have to worry about the day to day or year to year happenings in the stock market for the next 40 years.

I think Bill Berstain called this why keep playing when you've won the game. YMMV.
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Old 06-18-2014, 02:49 PM   #177
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I wonder if there might be some overthinking going on here...
Isn't that what we do here?

I attended a webinar today that Wade Pfau presented regarding his safe savings rate work. An aside: It was interesting hearing him say that he considered his career to be a success now that he's been published in The Economist.

Now back to the subject - although it didn't specifically talk about the topic of this thread he did discuss on the of the graphs from the paper that I do think is relevant. It related "next year's" SWR to market (60/40) return. The correlation was high and was an interesting look at the historical change is successful SWR after a above or below average market returns. He also talked about the "target" number method and how it can be deceiving (high or low) depending on market performance close to retirement.

In an indirect way it touched on retiring after a high or low return environment and the expected change in SWR that you should expect (based on historical of course). It's what one might expect, but it puts some numbers to it.

The text from the paper (below) and the graph (attached):

"
Figure 2 shows a very close relationship in which the MWR tends to fall after a year with high real portfolio returns and rises after negative returns. The figure plots annual real returns on a 60/40 portfolio against the percentage point change to the MWR for a new retiree in the next year. The fitted regression line shows that on average, the MWR falls in years that real portfolio returns exceed 5.6 percent. "
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Old 06-18-2014, 02:52 PM   #178
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I think people who argue for higher allocations to price-variable assets, usually where at least part of the return is expected to come from selling appreciated securities, are those who are comfortable with statistical thinking. Statistical thinking is very nice, however we may forget that this derives from the law of large numbers, while each of us one person living his one life. And even Firecalc is based on a very flimsy data set. Just running through a 60 year sequence in 30 different trips with 30 different beginning and ending periods, in no way creates 30 independent trials. ( same principle holds with the longer history accessed by Firecalc)...
Absolutely - in fact, I was doing some digging today, and it looks like 7 of the 8 worst periods are ALL due to the 1974 market drop followed by low real returns (high inflation). The 8th was 1906. So really only two different profiles of failure modes - not much to draw general rules from.

But I don't know what we can do really. It's why I'm conservative enough to go for 100% and as long a period as I can enter (~ 45 years before 1966 drops off the data set), and that takes me past all but the most extreme life expectancy. So while I can't count on this being enough data to provide any real assurances of success, I also can't see taking a WR that has been known to fail in the past.


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Much more of this is luck than we care to admit. This is one reason why I am puzzled when I hear people reject taking SS at 70, because Firecalc gives them a "better" result when starting at some earlier age, and therefore getting a smaller monthly check.
I agree on this as well. There are statistics, and then there are the things that just make sense to provide protections. Delaying SS is one, especially if it provides added security for a spouse.

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I have invested assets =~50x my pending needs. This does not include much travel or unusual medical expenses, but neither does it involve clipping coupons or doing without anything that I want. If I do certain things it will cost me more. But I own my home, eat as well as I want, etc. Nevertheless, feeling unsinkable I believe would be as misguided as it was for those who boarded the Titanic in April of 1912.

Ha
Our thinking convergences - Once we are taking pensions and SS, I'll be at 2% or maybe even less. I'll only be in the 3-4% WR range for a few years between DW fully retiring and us starting to collect some of the pensions/SS. And of course, my expenses may increase in unpredictable ways. Too many unknowns to call it unsinkable, but you've got to pull away from the dock sometime.

-ERD50
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Old 06-18-2014, 03:09 PM   #179
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I do have a low 6-figure in I-bonds, but not TIPS. The latter is more complex and can be traded in the after-market. I have not owned any, same as individual corporates or munis.

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What year specifically did you use, I may run some variations on that? 1966 seems to keep coming up as the killer year.
I only looked at the ensemble, and did not try to pinpoint the exact years. If one sets WR to 0 and looks for a starting year that resulted in a low value after 5 years, he will find 1915, 1975, 1976, and 1977. So, my earlier comment about the Vietnam War era was wrong. It was the post-Vietnam and oil crisis period.
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Old 06-18-2014, 03:20 PM   #180
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In a past post, daylatedollarshort talked about being heavily in TIPS. I do not follow it nor have any, so do not know what the yield is, or how it has been doing recently.
I sold most of the TIPS when interest rates bottomed out. The gains were like 20 - 40% so I could not see giving that up as interest rates rose. We are DCAing back in now.

We just have a conservative tilting hodge podge right now of CDs, TIPS, I bonds, short term bond fund, stocks, etc. We have three stable value funds in various 401Ks.

I don't have a lot of I bonds right now due to cash flow reasons. But we do have about 9 tax ids between all the family members, businesses, trust, tax refund, etc. to potentially purchase more in the future.
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