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Old 05-03-2009, 05:46 PM   #21
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Well, I looked at alot of these Self Proclaimed Guru's Plans and methods and systems, prior to about 5 yrs before retiring... and then I just used my own Simple Minded Common sense...

Example: Bernstiens Retirement from Hell..."To make $100k yr at a 4% SWR you neng ave of $1. 769k?"
I don't know where he gets his #'s, but I come up with $250k and After paying 25% in Fed and state taxes, I'd have 3% net to spend. and adding another 4% or 3% net after taxes left in for inflation/buying power.. tells me I need a min. 8% apy on my $. and it's reasonable to make 10% apy on a 60/40 port? I don';t know about that either, a 60/40 port of indexes, Ending in 07' only had an ave of about 7.4% apy for the previous 10 yrs, add 08' and it's now the past 10 yrs ending 08' of only about 3.3% apy..

This , among other reasons moved me to get out of Indexes and get into Active Balanced Funds.. way back in 98/99', that had and still have the best chance of meeting and succeeding that 8% apy I'm looking for..and even after 08', the 4 BF's I have are still in the 9% apy range for the past 9 yrs now.. and I added an extra 20% to what everyone and Myself figured I would need to have ...thus worked an extra 4 yrs...

and being a person who believes you need a Speicalist for everything Now-a-days and Most of Us Amatures Haven't Got a Chance doing out own Investing..and we Need a Pro' to Beat a Pro'...and one with a proven record and not therories or Charts...with Real $..( most Advisors Won't share what their Past 3,5 & 10 yr Recommended ports did to you )

and everytime ( about every 6mos) I go see one of these Financial Advisors or A Firm offerring to do a Port. review to get my $? After they give me their recomendations for a conservative to Moderate Port? I pull out mine and none have yet to get close, let alone beat them and they critize them and hate them...

Which tells me, I'm on the right course...LOL

But, Like the Guy who Jumped off a 40 story building , said at the 30th floor?
Well, So Far, So good...
;>)
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Old 05-03-2009, 08:50 PM   #22
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Example: Bernstiens Retirement from Hell..."To make $100k yr at a 4% SWR you neng ave of $1. 769k?"
He didn't say that.
(From "Retirement Calculator From Hell-Part III")

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For centuries, investors used the amortization algorithm—the same formula used to calculate mortgages. Let’s say that you plan a 30-year retirement, estimate a 4% real return, and need $100,000 in annual income. Toss these figures into your trusty retirement calculator, and hey presto, out pops a required nest egg of $1,729,203.
Note that the 4% is real return (i.e. after inflation), and that every last penny is spent by the end of 30 years. Also, of course, he goes on to say how silly these straight-line calculations are, proposes MC as something better, then notes the limitations of any quantitative modelling.
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Old 05-04-2009, 12:18 AM   #23
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Modeling is fun, and people without sufficient modeling background frequently use (mis-use) models as described.

"All models are wrong. Some models are useful." - - George E.P. Box
I love this quote. Is there a detailed explanation of how FIRECalc does modeling. I know it uses historical data rather than a MC simulation.

What are the implications for this type of modeling vs MC?
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Old 05-04-2009, 01:17 AM   #24
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I agree with Bernstein, I guess, but does this really have any practical value?
Is it worthwhile to factor in probable outcomes over which there is no possible hedge? Working 10 more years while saving twice as much does nothing to move the needle above 80% in Bernstein's view . . . so why bother? In fact, the only rational response to a 1 in 5 chance of losing everything is to hurry up and spend it before its gone. Saving more, meanwhile, makes very little sense.
This is why retirees buy annuities. Even Milevsky has come to favor them for most situations, which is a course reversal from his 1990s research & conclusions.

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I love this quote. Is there a detailed explanation of how FIRECalc does modeling. I know it uses historical data rather than a MC simulation.
What are the implications for this type of modeling vs MC?
Better give yourself plenty of time and math when those physical oceanographers start talking numerical analysis & modeling simulation!

FIRECalc is only going on history, instead of potentially flawed assumptions, but it has to deal with a smaller number of runs or make approximations to deal with partial runs. For example in 125 years of data there will be 95 runs of 30-year retirements, but only 75 runs of 50-year retirements. Neither one may be enough to reach a rigorous confidence level.

FIRECalc will more accurately reflect correlation between returns (four good years in a row or two consecutive crappy years) where most MC simulations sequence them randomly. Recent (more sophisticated) MC software now tries to correlate returns instead of abruptly shifting from gains to losses.

FIRECalc's history will also more accurately reflect changing correlations between asset classes. Again MC is attempting to catch up with these new factors whenever they arise.

Of course Dory explains it much better than I do, and with pictures: FIRECalc: Why another retirement calculator?
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Old 05-04-2009, 01:35 AM   #25
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About modelling, in my work we use mathemetical modeling all the time. Though the analytical models are numerical and spit out results to many digits of precision, we use it more as a qualitative tool than a quantitative one. We can conduct experiments or try out many different setups or inputs more easily with a model than with real-life. This narrows down our choices to try later with the real experimental prototypes. The real test results are then analyzed and used to refine the model. After some iterations, we may be able to see if our model starts to resemble real life. In some cases, we were never able to get as close as we originally thought possible. Nature is much more complex than our equations, no matter how sophisticated the latter look on paper.

In economics, it is even tougher, as it is also not possible to conduct controlled experiments with all factors under control or at least tightly monitored. In my field, we have all these luxuries. Yet, we still often get that unexpected disappointment with objects that have to obey the laws of physics, not something that is at the whim of politicians or their short-attention-span constituents, wars, natural disasters, and swine flus.

Yet, we only have one portfolio to manage for our retirement. There is no second chance, no rerun.

Gerald Loeb in his book "The Battle for Investment Survival" observed that "number" men (whatever that means) made the worst investors, while psychologists would be better ones. I do not know if there is any statistics to back this up. However, it appears to be true among my work circle that engineers often express frustration with the market not "working out" to their expectation.


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Agreed. An additional point to consider re FIRECalc is that the actual investment return data for the last century includes the time period when the US turned into the preeminent world power with an increase in wealth and productivity that may be difficult to match going forward. I wonder what the results of a FIRECalc type analysis would be if instead of using US data one were to use say Germany's or Japan or heaven forbid Argentina!
I think ejman hit it on the head! As it is not likely that this century will play out like the last one, it's better to hedge and look to invest in overseas economies, or at least US multinational corporations.
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Old 05-04-2009, 10:37 AM   #26
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Long long ago - in another time - tears and rage from the number cats when the models failed wind tunnel/re-entry simulation/shake rattle and roll sims.

Obviously us/we make em and break em empirical weenies made the model wrong or screwed up the test parameters - cause THEIR numbers did not lie!



Loved models - both physical and numerical.

heh heh heh - now in ER chickenheartedness demands some SEC yield - just in case.
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Old 05-04-2009, 12:26 PM   #27
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Loved models - both physical and numerical.

heh heh heh - now in ER chickenheartedness demands some SEC yield - just in case.
Uncle Mick,
You always provide the right kind of encouragement. Models are just models, and as much as we'd like to make them so they could predict a result, they are still just models without superior knowledge of probabilities.

So to continue to provide constructive criticism on how to improve the models strikes me as analysis paralysis.

Better to remember that SEC yield thingie (or the other Psst doohickey you occasionally mention).

-- Rita

P.S. Don't own the doohickey, but am beginning to appreciate the advantage of the thingie.
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Old 05-05-2009, 10:14 AM   #28
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"The best laid plans of mice and men ..... etc." Always have a Plan B
in your hip pocket.

Cheers,

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Old 05-05-2009, 10:28 AM   #29
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Monte Carlo has always been just "ok". Most if not all financial theorists have never seen the "prefect storm" of equities crashing, bonds getting haircuts, and historically low interest rates all in the same year.

I imagine it has Markowitz and all his buddied reconsidering their theories of MPT and such........

I never hear too much about beta. A little about alpha, but not much. I guess those terms are unsexy......
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Old 05-06-2009, 09:13 AM   #30
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In aeordynamics, designers often use Computational Fluid Dynamics, abbreviated "CFD", to predict how airflow will work.
Some of them sing the praises of CFD.
Others, who've had problems with the modeling, say that CFD stands for "Can't F*****g Decide"
Models are uh, less than perfect.
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Old 05-06-2009, 06:44 PM   #31
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Being an EE, I do not use CFD but can relate to what G-J described. In a previous project, I worked with a highly accurate electronic device that would be affected by the flexure of the mechanical structure that the device was mounted on. So, the mechanical department ran their NASTRAN model (a finite-element analysis method) to predict the flexure for me to compensate. Their result turned out all wrong! It did not even have the right sign; meaning they could not tell if it was coming or going, for crying out loud! So, we just measure the actual flexure across several prototypes, and use the average of the empirical data.

All the above does not mean that I do not use FireCalc. However, I only use it as a guide, as its author has said. "Don't measure with a caliper what you are going to cut with an axe", or something like that.

I believe in Uncle Mick's practical method. In lean years, tighten your belt. In good years, splurge. You can also splurge when you get older, as you cannot take it with you. Heh heh heh...
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Old 05-06-2009, 07:01 PM   #32
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Being an EE, I do not use CFD but can relate to what G-J described. In a previous project, I worked with a highly accurate electronic device that would be affected by the flexure of the mechanical structure that the device was mounted on. So, the mechanical department ran their NASTRAN model (a finite-element analysis method) to predict the flexure for me to compensate. Their result turned out all wrong! It did not even have the right sign; meaning they could not tell if it was coming or going, for crying out loud! So, we just measure the actual flexure across several prototypes, and use the average of the empirical data.

All the above does not mean that I do not use FireCalc. However, I only use it as a guide, as its author has said. "Don't measure with a caliper what you are going to cut with an axe", or something like that.

I believe in Uncle Mick's practical method. In lean years, tighten your belt. In good years, splurge. You can also splurge when you get older, as you cannot take it with you. Heh heh heh...
FWIW FireCalc is more like what you did that worked, i.e. measure what actually happened, and then use that data to set a boundry.
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Old 05-06-2009, 07:47 PM   #33
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"All models are wrong. Some models are useful." - - George E.P. Box
I love this, too.

I once worked for a guy who thought that models should simulate reality accurately in all respects. (This is f or a chemical plant simulator, but it applies to every kind of simulation.) Guy was a nut. Did not understand the utility and limits of simulations.
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Old 11-06-2009, 12:09 AM   #34
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Here's an article posted today relevant to this thread:

Retirement tools often underestimate risk Robert Powell - MarketWatch

The article summarizes a paper by Richard Fullmer, who is mentioned in the WSJ article in the OP's post.

http://www.plansponsor.com/uploadfil...rment-Risk.pdf

From the Marketwatch article:
"Models that measure only the probability of failure ignore one side of the risk equation completely."

Fullmer isn't suggesting that Monte Carlo be scrapped. Simulation models actually lend themselves very well to proper risk measurement but only if they measure both the probability of failure and the magnitude of the failure cases that occur. Right now, however, the models use this calculation: The magnitude is the total amount of desired spending and bequeathing (how much money is left to heirs and others after you die) that does not occur because the portfolio ran out of money -- often referred to as "shortfall." In other words, the existing tools use this model: Shortfall risk equals probability of shortfall.

A better risk measure, however, would be this: Shortfall risk equals probability of shortfall times the magnitude of shortfall.
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Old 11-06-2009, 01:08 AM   #35
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If a carpenter understood his tools as poorly as the average retiree or retirement planner understands his, many houses would fall down.

What this author seems to be trying to do is differentiate between risk and expectation. Any gambler who can even break even understands this.

But many if not most retirement board and FA discussions are glib recitals that often miss the point. Command of the lingo and a dubious precision don't equal wisdom. Like Fullmer says, many of us may be accepting too much chance of catastrophe. A high equity allocation does apparently give a lower probability of failure over longer time periods, but the failures can be real doozies.

A retirement academic like Moshe Milevsky writes clearly about this issue.

I think that the past 18 months may have reinforced this damn the torpedoes approach as we all got scared strongly, but then quickly let off the hook. This is a classical desensitization treatment. "Hey. I went over the falls but here I am."

It would be hard not to conclude that Little Ben isn't correct when he suggests that given enough money the Fed can fix anything.

But next time could easily be different.

I believe that the truth is that it is very hard to live for a long period of time without wage or active business or professional income, or a secure stream of inflation adjusted retirement payments. This may be unpleasant, and it may turn out to be false, but I would advise a high burden of proof before rejecting it.

Ha
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Old 11-06-2009, 07:48 AM   #36
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There are no mathematical or physical laws that underlie ANY market model or simulation, so there's always the chance that these simulations understate risks.

Any retirement plan that does not include a behavioral component is flawed. By that I mean, a component that specifies behavior changes in response to financial conditions.

Even people living on COLA pensions need to be ready to adjust to financial conditions. How are the Iraqis on government pensions doing? or the Russians, or the Argentinians?
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Old 11-06-2009, 08:00 AM   #37
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I believe that the truth is that it is very hard to live for a long period of time without wage or active business or professional income, or a secure stream of inflation adjusted retirement payments. This may be unpleasant, and it may turn out to be false, but I would advise a high burden of proof before rejecting it.
What he said. A point seemingly missed by many.
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Old 11-06-2009, 02:05 PM   #38
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'I wonder what the results of a FIRECalc type analysis would be if instead of using US data one were to use say Germany's or Japan or heaven forbid Argentina!'

Actually, I took the indiviual countries data 1900-2000 from 'Triumph of the Optimists' and ran it through the moneychimp.com monte carlo demonstrator using a 60% stock/40% bond portfolio and an initial 4% withdrawal from a $1,000,000 over 25 years.
Germany (ex-weimar republic) had a 40% success rate, Japan 42%, but no Argentina. Italy was the low at 35%. The US success rate was 83% , probably due to the slightly lower returns the book lists.
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Old 11-06-2009, 02:21 PM   #39
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In reality, Monte Carlo can only "estimate" or "simulate" risks that have already occurred. If you understand it in THAT context, with the understanding that the future may not resemble the past, it is likely prudent to add a "margin of safety" to their estimates to account for the potential future scenarios that Monte Carlo can't predict.
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Old 11-06-2009, 04:10 PM   #40
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Financial simulations are like the old "double slit experiment". They act one way when you run them and another when you actually try to execute them in real life while you watch.

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