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Old 11-09-2009, 03:59 PM   #21
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But then, I guess, ignorance is probably bliss.
'Size matters' and 'ignorance is bliss' tie for my first place motto...
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Old 11-09-2009, 04:03 PM   #22
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Man if you're gonna reach clear back to 1929.

Well then psssst Wellington.

So there. .

heh heh heh - make sure you don't lose the key to the back door - aka portfolio yield. .
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Old 11-09-2009, 08:15 PM   #23
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I also think we overstate the severity of "portfolio failure". Even though most of us equate portfolio failure with poverty, its really not in most cases. I can't imagine anyone actually riding a portfolio, Major Kong style, all the way to zero. Heeeee-Hawwwww!!!!




It's far more likely that when the 4% withdrawal becomes 8% you head back to work to bring it back in line. But even at that point, we're talking about finding work to replace half of your living expenses. So even a minimum wage job gives an individual ~$30,000 per year to live on. $60,000 for a couple. That's not exactly eating cat food.
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Old 11-09-2009, 08:15 PM   #24
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'Size matters' and 'ignorance is bliss' tie for my first place motto...
Then combine them . . .

Ignorance that size matters is bliss.
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Old 11-09-2009, 08:40 PM   #25
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Cooley, Hubbard, Walz (2001) noted a past 4% of initial portfolio plus annual inflation withdrawal for up to 30 years from a roughly 60/40 fixed allocation based on US data 1929-2000, before investing costs and taxes. Bengen presents similar results.
Pye (2001) noted that after ‘typical’ investing costs and taxes your net withdrawal was likely around 3%.
Dimson, Marsh, Staunton (2003) presented data from 15 countries 1900-2000 noting higher volatility and lower returns than US data in almost all cases.
Dichev (2004) noted investors receive a1-5% lower returns than the lump sum ‘buy and hold’ used in market histories, with the effect also seen in international markets.
Ultimately your planning is a combination of market action (such as return and volatility) usually drawn from history and investor action (such as timing and costs) the effects of which is less easily defined.
The question is how to weight prediction versus protection in your plans.
Personally I’ve adopted Hebeler’s approach of planning for a 0% real return in retirement after inflation, volatility, investing costs, increasing bonds, bad timing and taxes – expecting to divide portfolio and fixed pensions over life expectancy, spending the lesser of the new divisions or the previous yearly divisions plus inflation. It’s built in downward adjustment eliminates the hand waving “ just be prepared to do something else if the market is down” – with no method or timing of change given. I can easily estimate how much of the expected portfolio supports normal spending and how much is available for large purchases and emergencies. Furthermore it’s the only method I’ve run across that provides a built in discounting mechanism for fixed pensions and similar annuities – reinvesting part against future inflation.
Plus it’s simple enough that if I drop dead then my wife and her cats can do the calculation.
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Old 11-10-2009, 09:36 AM   #26
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Many good points above.

I agree with the OP that the last 100 years in the US is probably better than "average". I'm expecting less economic growth in the next 40 years and lower returns.

I also agree that it's impossible to plan for everything. In addition to hyperinflation or terrorists unleasing some fearsome virus, we can worry about the Yellostone volcano putting another 100 cubic miles of ash into the atmosphere. I can't protect myself against all of them.

One of those flexibility tactics is to think about the things that seem like "necessities" today that I lived without 50 years ago. I've done enough thinking about that to be reasonably confidendt that I can reduce my spending a long way and still have a "decent" life (if there is a functioning society around me).

Finally, as already said, death is the only certainty. Our biggest expenses can be trying to postpone it, but at some point most people accept it as inevitable.
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Old 11-10-2009, 11:10 AM   #27
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So even a minimum wage job gives an individual ~$30,000 per year to live on. $60,000 for a couple. That's not exactly eating cat food.
hmmmm, minimum wage in the US is $7.25/hr U.S. Department of Labor - Find It By Topic - Wages - Minimum Wage so lets do a little math.

$30,000/$7.25 = 4137.93 hrs

4137.93/52 = 79.6 hrs/week ---> 2 full time jobs with no time off

4137.93 hrs/365 = 11.34 hrs/day, every single day of the year, again no time off

to say the least that would be a very difficult work pace to sustain
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Old 11-10-2009, 11:13 AM   #28
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hmmmm, minimum wage in the US is $7.25/hr U.S. Department of Labor - Find It By Topic - Wages - Minimum Wage so lets do a little math.

$30,000/$7.25 = 4137.93 hrs

4137.93/52 = 79.6 hrs/week ---> 2 full time jobs with no time off

4137.93 hrs/365 = 11.34 hrs/day, every single day of the year, again no time off

to say the least that would be a very difficult work pace to sustain
He was talking about a minimum wage replacing HALF of your retirement income -- in other words, $15K a year comes from a full-time minimum wage job. And if you assume 2000 hours a year in a full time job, at $7.25 an hour that's $14,500 a year -- I'd say that's close.
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Old 11-10-2009, 11:15 AM   #29
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Then combine them . . .

Ignorance that size matters is bliss.
Mmmm....that's what a guy would say.... I'm not a guy......
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Old 11-10-2009, 11:29 AM   #30
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He was talking about a minimum wage replacing HALF of your retirement income
sorry, i guess i am not awake yet, at first look i didnt read it that way. thank you for pointing out my mistake

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in other words, $15K a year comes from a full-time minimum wage job. And if you assume 2000 hours a year in a full time job, at $7.25 an hour that's $14,500 a year -- I'd say that's close.
yes, i agree with you, that is close.
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Old 11-10-2009, 01:37 PM   #31
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When I am need of ER reinforcement, I just open up the obituarys in the local paper. Yes, there are plenty of 75-85 olds passing away, but you know, there are plenty in the 45-55 category as well.

There is a 100% probability that these folks are dead. Don't need firecalc to figure this out.
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Old 11-10-2009, 01:54 PM   #32
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@YrsToGo (and clifp): Your fundamental point is that other people are not making nearly the same amount of research into how long their retirement funds and income will last them. While I agree, I believe it is NOT relevant to this thread. The question I am posing here is whether (for those that do want to make some projections) relying on US data (and thus firecalc) is appropriate or not.

I don't think you would argue that because others are not making any projections, it makes sense to do projections based on wrong data.

Now, I think your points will make sense in a new thread discussing how much we can really project given life uncertainties and that rest of population does not seem to bother with this. I will happily contribute to that discussion. I will probably point out that
- most people work for 40 years and then have 10-20 years of retirement. - Social Security system (before 1900's people did not live nearly as long so retirement was not an issue) gives them income based on those 40-year carriers, which also helps with retirement
- children take care of parents that run out of money
For someone like me (and I believe YrsToGo), who are considering 10-20 year carriers and then 50-60 years of retirement, the situation is completely different with how long we are accumulating funds, how long we have to spend them, and how much we can rely on government programs... and thus much more planning is required.

In any case though, again this is a subject of a different thread. Here, I am just addressing the question of whether relying on US data is wrong when you DO want to project anything.
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Old 11-10-2009, 02:19 PM   #33
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For someone like me (and I believe YrsToGo), who are considering 10-20 year carriers and then 50-60 years of retirement, the situation is completely different with how long we are accumulating funds, how long we have to spend them, and how much we can rely on government programs... and thus much more planning is required.

In any case though, again this is a subject of a different thread. Here, I am just addressing the question of whether relying on US data is wrong when you DO want to project anything.
Looking at your situation, I think you are absolutely correct. You would be wrong to rely on US data when you want to project anything.

Using your proposed alternative data sources and evaluation tools, it's obvious you're at FIRE and ready to enjoy 50 - 60 yrs of retirement. Congratulations! Enjoy!
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Old 11-10-2009, 02:23 PM   #34
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@samclem (and Rustic23) I think you are making an important point which is summarized as...

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There are basic structural differences (political, social, and economic) that make the nations, and the likely performance of their economies over the next few decades, very different.
I can't help but recall all those stories about people retiring in 1999 on the assumption that in the "new world" tech-based economy 20% growth is a given. Does not some part of you feel like it's a similar argument? You are saying it's a "new" world here in US (including that nice graph that samclem included), and thus we should base future based on "recent" past of US market returns.

Now, it could indeed be true that this first-of-kind growth US experienced in the last 100 years is sustainable going forward, but I would point out that it is VERY unique and looking at BOTH other countries and other time periods (thanks samclem for the graph) should tell you it is the BEST record out there... So, if you feel comfortable with relying on this very unique recent record, I think that's fine; but you should at least recognize that you are betting on these out-of-ordinary best results to keep going forward.

Another thought... you are implying that "likely performance of [US] economies over the next few decades"
(a) will continue as it has in the past AND
(b) will imply stock market returns comparable to those of the past.

On (a), is there more reason to believe in this other than the overall political, social, and economic differences that you mention? (and of course, even these "structural" aspects have indeed changed over years)

On (b), does not experience of Japan (with second largest GDP) show that prior periods of huge GDP growth do not necessarily imply further market outperformance?

Aside: if the GDP growth continues as per that graph, I wonder if in 20 years noone will need worry about retirement because robots will be doing everything we need and noone will really have to work anymore :-)

P.S. I am not talking about next "few" decades by the way.. I have to look into next 7 decades in my case... and this assumes only very modest life-extending medical progress, or none at all if i am very lucky to live a long life.
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Old 11-10-2009, 03:04 PM   #35
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A few quick observations:
- I think you'd enjoy Bernstein's "The Birth of Plenty." It's a quick read and talks to the 4 factors Bernstein identifies as being responsible for societal prosperity. They existed almost nowhere before the early 1800s, which is why the graph is flat for all times previous to that.
- These four factors have come and gone in various countries, but the general trend is in the right direction. For the most part, these changes are unlikely to be reversed--in most places most of the time. I've no fear that, as a planet, we'll be going back to the flat line days unless there is some terrific conflagration that makes this entire discussion irrelevant.
- US outperformance relative to other countries: It could very likely wane. We are taking steps now that (IMO) will significantly decrease US productivity and competitiveness. But, when it comes time to actually place bets with my own money I've elected to keep most of it here. Looking around and trying to identify the world's big winners 20-50 years hence is not easy. Maybe bet on everything through a global fund.

So, regarding the overall growth of wealth over the last century compared to the previous two millenia, I'd say, yes, it really is "different this time." Concerning the US vs the rest of the world--it's very possible things will "cool off" here.

You're not going to get an algorithm that allows you to prog this thing out 7 decades. We've already identified why the existing data won't do what you are seeking. Probably the best you can do is use US data, whack off about 2%-3% of expected real return overall (to account for the post WW-II boom years here and the unsustainable "built on borrowing" economy of 1970-2008), and see how things work out in your model. If you are feeling more gloomy, subtract a few more percent.

Given the obvious lack of precision and accuracy likely to result from this approach, how many additional years would you be willing to stay in the traces to honor its results?
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Old 11-11-2009, 12:50 PM   #36
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I also think we overstate the severity of "portfolio failure". Even though most of us equate portfolio failure with poverty, its really not in most cases. I can't imagine anyone actually riding a portfolio, Major Kong style, all the way to zero. Heeeee-Hawwwww!!!!




It's far more likely that when the 4% withdrawal becomes 8% you head back to work to bring it back in line. But even at that point, we're talking about finding work to replace half of your living expenses. So even a minimum wage job gives an individual ~$30,000 per year to live on. $60,000 for a couple. That's not exactly eating cat food.
You'd think so, but check out this exerpt from the Time Magazine "Time to Retire the 401k" article:
Dennis O'Neil plays the part of a former HR executive well. You can find O'Neil, who left Oxy on disability a few years ago, on a golf course, clad in picture-perfect golden-years attire: a black Izod shirt with white shorts, faux-alligator-skin cleats, Ray-Bans, a gold shamrock hanging from a gold chain on his neck and a black baseball cap. But O'Neil's retirement outlook is growing darker every day. He once made a six-figure salary, but the 63-year-old is fairly certain that his savings won't be able to sustain him for very much longer. He has some $500,000 left in his 401(k) and spends about $75,000 a year. At this rate, he worries he will tap out his retirement savings within the next decade.

Unless, as O'Neil's thinking goes, he can make something happen in the stock market. So he spends much of his day watching CNBC. "Right now, I want to know which area of the economy is going to recover first. Will it be retail? Commodities? Energy?" says O'Neil. Playing the market is probably the wrong thing to do, but he got divorced eight years ago, depleting a good portion of his savings, and his medical bills are likely to go up soon. O'Neil is going blind from histoplasmosis. These days he has to golf with a friend. He would like to buy a house in Florida before he loses his eyesight completely, but he just can't afford it.

Under Occidental's old pension plan, he would have gotten a monthly check of about $2,200. More important, he wouldn't have to spend much of his remaining eyesight squinting at CNBC, wondering how he will afford the rest of his life. The pension check would have been guaranteed until he died. "I'm a pretty optimistic guy, but I'm still worried," says O'Neil. "Ten years from now, where am I going to be after I burn through the cash?"


Here is a man with every reason to go back to work while he can still see well enough to do it, and to drastically cut his spending, but he is doing neither. I don't understand how he can expect to end up anywhere but old, blind and broke, unless he changes something (which he doesn't appear to have any intention of doing). I hope at least he has delayed starting his Social Security until age 70 to maximize his benefit at that age, but I suspect he will have to decrease his spending a great deal even if he has.
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Old 11-11-2009, 04:43 PM   #37
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Here is a man with every reason to go back to work while he can still see well enough to do it, and to drastically cut his spending, but he is doing neither. I don't understand how he can expect to end up anywhere but old, blind and broke, unless he changes something (which he doesn't appear to have any intention of doing). I hope at least he has delayed starting his Social Security until age 70 to maximize his benefit at that age, but I suspect he will have to decrease his spending a great deal even if he has.
If I were this person I would not be in a hurry to go back to work or to drastically cut my lifestyle with certain disability and dependency dead ahead.

What I would do however, is to look for a roommate to reduce expenses, buy a SPIA for 100K and begin taking SS immediately. Done correctly and with some luck, he could maintain most of his lifestyle, possibly even into his early 80's.
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Old 11-11-2009, 05:11 PM   #38
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If I were this person I would not be in a hurry to go back to work or to drastically cut my lifestyle with certain disability and dependency dead ahead.

What I would do however, is to look for a roommate to reduce expenses, buy a SPIA for 100K and begin taking SS immediately. Done correctly and with some luck, he could maintain most of his lifestyle, possibly even into his early 80's.
Good point about the annuity, Bikerdude—at least with that he would never run completely out of money. But two questions...why an annuity only for +/-1/5 of his current assets? Wouldn't he be better off to buy an annuity (or annuities) for the whole amount instead of looking for some way to beat the market (a search which I doubt is likely to be successful) and boost his portfolio so it will support his $75K (approx 15%) withdrawal rate? The other question is, why would it better for him to take SS now rather than holding out for the maximum monthly amount, especially if he is not going to convert his entire portfolio to an annuity right away?

I'd like to understand your thinking on this.
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Old 11-11-2009, 05:16 PM   #39
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If I were this person I would not be in a hurry to go back to work or to drastically cut my lifestyle with certain disability and dependency dead ahead.

What I would do however, is to look for a roommate to reduce expenses, buy a SPIA for 100K and begin taking SS immediately. Done correctly and with some luck, he could maintain most of his lifestyle, possibly even into his early 80's.
How temperaments differ! I've had a place of my own, and had it all to myself ever since I moved out of the parental abode. If faced with a situation like Mr. O'Neill's, I'd rather cut spending to the bone (and maybe further) than have to adjust to living with someone else after all this time. Takes all kinds to make a world, I guess.
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Old 11-11-2009, 05:23 PM   #40
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How temperaments differ! I've had a place of my own, and had it all to myself ever since I moved out of the parental abode. If faced with a situation like Mr. O'Neill's, I'd rather cut spending to the bone (and maybe further) than have to adjust to living with someone else after all this time. Takes all kinds to make a world, I guess.
I could well understand how having someone else in the house could be a real help to a newly blind 65 year old. Just a few minutes a day of going through the mail, helping to find misplaced items, etc, plus a few trips to the store every week could significantly ease the stress of a very challenging situation. A roommate could be a win-win for both parties.
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