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Old 08-04-2013, 10:33 AM   #41
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That, IMO, is the concise and correct way to look at it. Averages be damned! This is my life I'm talking about, not a group being pooled together for me to bet on.




One of the problems with your view is, the number changes over time:

A 55 YO has an 18% chance of reaching 90, and a 38% chance of reaching 85.

But an 85 YO has a 48% chance of reaching 90.

Here's the conundrum - if you are the 55 YO, and you become one of the 38/100 that reach 85, you now have a 48% chance of reaching 90. So what are your chances of reaching 90 - 18% or 48%? Sure, you can do it based on averages, but then why would I use my seat belt, on average it is extremely rare for me to have a life threatening accident. I do it on the outside chance that it happens, I want to be prepared.
-ERD50
It's 18%. You haven't made it to 85 yet. Otherwise, you could say that if you are 90, your chances of making it to 90 are 100%, so are your chances 18% or 100%? Of course it's not 100% at age 55.

I get the rest of your point. Say you use my numbers above and you look at this as a 97+% chance of success rather than 90%. It's very valid to not accept 97+% and want to push it to above 98 or 99%.

Others may be more comfortable with a lower number, especially since you can adjust spending to survive. Failure shouldn't sneak up on anyone. When I grocery shop I like beef tenderloin, wild caught pacific salmon, and micorbrews for at least a couple meals a week. If I have a number of down years and start to get concerned, I can cut back to sirloin and Atlantic salmon and Miller High Life. If things really get worse, it'll be hamburger and tilapia and water. I won't go hungry, as long as I don't eat tenderloin until my checks bounce.
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Old 08-04-2013, 10:37 AM   #42
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Originally Posted by MichaelB View Post
Very interesting discussion.


The math is still there. Just that odds are only meaningful (and actionable) when they can be applied to a statistically relevant universe.

That is one of the things being discussed - how do we apply this to individual situations?
Exactly.

And of course, people can make their own decision. I'm just curious if they have really thought out whether their back-up plan is OK with them if they become the individual that lives out to the edges. Is being an elderly ward of the state OK with them? If so, I guess they have their answer.

For me, the cost of living a somewhat lower lifestyle is worth the benefit of having added assurance of being able to support myself/DW in old age.

-ERD50
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Old 08-04-2013, 10:43 AM   #43
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Others may be more comfortable with a lower number, especially since you can adjust spending to survive. Failure shouldn't sneak up on anyone. When I grocery shop I like beef tenderloin, wild caught pacific salmon, and micorbrews for at least a couple meals a week. If I have a number of down years and start to get concerned, I can cut back to sirloin and Atlantic salmon and Miller High Life. If things really get worse, it'll be hamburger and tilapia and water. I won't go hungry, as long as I don't eat tenderloin until my checks bounce.
There are some other threads on this, but I think people are overestimating how much effect variable spending cuts can have on portfolio survival. I need to study more, and there are lots of variables, but it's looking like extended periods of cutting spending by half for extended periods are needed if you want to start at 4% initial WR with variable spending, versus something like 3.5% initial WR constant buying power.

That's more than just cutting back a few micro-brews a week and moving to cheaper protein.

-ERD50
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Old 08-04-2013, 11:03 AM   #44
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There are some other threads on this, but I think people are overestimating how much effect variable spending cuts can have on portfolio survival. I need to study more, and there are lots of variables, but it's looking like extended periods of cutting spending by half for extended periods are needed if you want to start at 4% initial WR with variable spending, versus something like 3.5% initial WR constant buying power.

That's more than just cutting back a few micro-brews a week and moving to cheaper protein.

-ERD50
Agree. A lot depends on how much fat you have in your budget. I can also give up the ski/golf membership, get rid of the 2nd car, take simpler vacations, and move to a smaller house and I'd be happy back at the LBYM lifestyle I had before my stock options allowed me those luxuries. Not sure that would get me down to half but it'd go a long ways. Someone who is already on a tight budget has a lot less room for error because their ability to cutback is limited
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Old 08-04-2013, 03:26 PM   #45
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My initial solution was to accept a 75% success rate in FIRECalc for 30 years and figure that when combined with our chance of actually living that long we were in decent shape.

I also did the following calcs in a spreadsheet:

Load the mortality tables for females, the most conservative, but only a single life. From SSA.gov period life table.

Figure out the expected lifespan at any age at which only 10% would still be alive. Again, conservative and should be valid for those in the best of health and good genetics.

Created a self annuity table that listed the starting withdrawal rates versus the number of years the money had to last. I selected 1.5% real IRR, which gave very close to 4% starting withdrawal rate for a 30 year period. Amazing how low that is compared to equity averages isn't it?

For each age, matched the expected 90% lifespan to the allowable annuitized withdrawal rate. That was the percent of the portfolio total you could spend each year.

When you get to ages in the 90's and 100's the life expectancies get down to 10 years and below, even with just 10% survivorship. I used a 10 year minimum because I'd be too chicken to spend half my portfolio in one year at 109.

The result was these withdrawal rates:
55: 3.23%
60: 3.56%
65: 4.0% (31 year 10% survivor life expectancy for one person, 1.5% real rate of return)
70: 4.46%
75: 5.29%
80: 6.29%
85: 7.85%
89: 9.78%
90 and above: 10.68% (just hits the 10 year minimum period)

I have these numbers output with the retirement plan as a bottom rail. Once all income sources are online, I won't exceed these withdrawal percentages. If we stay below them, then the portfolio is adequately healthy and I won't worry too much. The kids might not be as happy if we hit the rail.

I need to update the numbers for joint probabilities some time, but these are good for when only one is left, and as a male five years older than DW I'm not sure I'll have much impact on these results.
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Old 08-04-2013, 03:50 PM   #46
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We tend to get carried away with these retirement calculators.

People often say they want 100% certainty from FIRECalc for the next 40 years, and a 60+ year old often plans to live till 100. Let's put our own mortality aside, and just look at the FIRECalc number. Unless the future is exactly like the last 100 or so years, it's just a guide.

William Bernstein explains this best. See: The Retirement Calculator from Hell, Part III.

Here's an excerpt.

Realize that these probabilities are merely an imperfect estimate of the investment risk you are taking. In other words, they assume the continuity of financial and political institutions over the period studied. Consider the implications of the above 97% success rate... For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely?...

Let’s examine a small sampling of possible political, economic, and military failure modes.

Bernstein then lists some commonly known catastrophic failures that happened in other countries that the US has been spared so far.

He then continues:
...what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years.
Note that 3% failure over a 40-year period means one failure every 33 cycles. We have had many upheavals in much shorter periods than that. The US itself is only 237-year old, and look how things now do not resemble anything back then.
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Old 08-04-2013, 03:55 PM   #47
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Seriously? You would prefer living your last few years in a crappy Medicaid-paid nursing home cared for by minimum wage or below caregivers, suffering bedsores and neglect, just so you can say "damn! Sure glad I spent all my money before I died."?

Not me. I want top quality pain meds, a beautiful and well trained and well paid young nurse, and a golden bedpan (or at least a Teflon catheter). If I end up leaving some money to my daughter, grandkids, or even a charity, so it goes. I'm having enough fun in retirement already without worrying about whether I'm going to bounce my last check.
I'm with the former group, in that I'd hate to have passed up numerous life experiences just so I could die in a nice hospital. You only have one go around on this rock, I'd rather live a fun and experienced life and die a pauper than scrimp and save so I could spend all my savings on a couple of drug induced weeks at the end of life.
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Old 08-04-2013, 08:16 PM   #48
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I'm with the former group, in that I'd hate to have passed up numerous life experiences just so I could die in a nice hospital. You only have one go around on this rock, I'd rather live a fun and experienced life and die a pauper than scrimp and save so I could spend all my savings on a couple of drug induced weeks at the end of life.
OK, but let's put some numbers to that -

I just did some FIRECalc runs at "Investigate/Spending" with a 100% success:

30 Years - SWR = 3.59%
35 Years - SWR = 3.45%
40 Years - SWR = 3.34%
45 Years - SWR = 3.24%

If I go to 50 years, SWR starts increasing, as has been discussed - most likely due to dropping off some bad periods (actually, the inflection point is at 46 years - I just ran every year, and it is very linear until a steep rebound at 46 - so 1966?).

So for a $1M portfolio, we are talking the difference between spending $35,900 per year (CPI adjusted each year) to support a 30 year LE, and $32,400 to support a 45 year LE. That is 15 additional years, not "a few weeks". And if you can't pay for them, who will?

That is a less than 10% cut in spending. Is that really the difference between "a fun and experienced life" and "scrimp and save"? Ten percent is not insignificant, but for many of us, well worth it to greatly reduce the chance that we will be a burden on our families.

-ERD50
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Old 08-04-2013, 08:25 PM   #49
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One more analogy ( then I can rest - I just have to get this out of my head! ):

Let's say your nest egg is $1M, and you have no pension and no SS and no chance of going back to work.

I offer you a crazy bet - You put up all $1M, and we flip a coin. If I win, I get your $1M. If you win, I give you $10M.

Hey, the math says that is a fantastic bet! 10:1 payback on a 50:50 bet! Wowsers!

But you won't take it, because you can't afford to lose your only $1M, right? Hey, what happened to the math?

-ERD50
The correct math in this case is based on the theory of diminishing marginal utility rather than dollars. It's the same math I use to justify buying insurance even when I know that insurer's collect more in premiums than they pay in claims.
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Old 08-04-2013, 08:37 PM   #50
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The correct math in this case is based on the theory of diminishing marginal utility rather than dollars. It's the same math I use to justify buying insurance even when I know that insurer's collect more in premiums than they pay in claims.
I believe that you are correct (but I'm not well versed enough in 'marginal utility' to say that with great confidence, but I certainly don't doubt it).

The problem I think, is that many posters are applying the math I used in my example (straight probabilities) to this problem. It ain't that simple, IMO.

-ERD50
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Old 08-04-2013, 09:43 PM   #51
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OK, but let's put some numbers to that -

I just did some FIRECalc runs at "Investigate/Spending" with a 100% success:

30 Years - SWR = 3.59%
35 Years - SWR = 3.45%
40 Years - SWR = 3.34%
45 Years - SWR = 3.24%

If I go to 50 years, SWR starts increasing, as has been discussed - most likely due to dropping off some bad periods (actually, the inflection point is at 46 years - I just ran every year, and it is very linear until a steep rebound at 46 - so 1966?).

So for a $1M portfolio, we are talking the difference between spending $35,900 per year (CPI adjusted each year) to support a 30 year LE, and $32,400 to support a 45 year LE. That is 15 additional years, not "a few weeks". And if you can't pay for them, who will?

That is a less than 10% cut in spending. Is that really the difference between "a fun and experienced life" and "scrimp and save"? Ten percent is not insignificant, but for many of us, well worth it to greatly reduce the chance that we will be a burden on our families.

-ERD50

I see that and think FIRECalc isn't "accurate" to 10%. Reducing the WR by 10% guarantees you nothing but 10% less income from your portfolio. I'm happy to be in the ballpark with FIRECalc, and I'll adjust as necessary to keep the portfolio value comfortable.
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Old 08-04-2013, 10:01 PM   #52
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I see that and think FIRECalc isn't "accurate" to 10%. Reducing the WR by 10% guarantees you nothing but 10% less income from your portfolio. I'm happy to be in the ballpark with FIRECalc, and I'll adjust as necessary to keep the portfolio value comfortable.
I suspect that FIRECalc is very accurate in reporting what has happened historically.

Reducing the WR by 10% actually would guarantee that your portfolio lasts longer than if you didn't reduce spending. How can it not?

OK, but I've been saying, I think people underestimate how much can be accomplished with adjustments.

-ERD50
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Old 08-04-2013, 10:19 PM   #53
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I suspect that FIRECalc is very accurate in reporting what has happened historically.

Reducing the WR by 10% actually would guarantee that your portfolio lasts longer than if you didn't reduce spending. How can it not?

OK, but I've been saying, I think people underestimate how much can be accomplished with adjustments.

-ERD50
Oh yeah, that's all true. My detailed retirement plan, with x% growth every year, says if I save about 10% of my spending I have a ridiculous ending portfolio value in today's dollars. But still, the unknowns kind of swamp out the 10% stuff. Heck, 10% is like waiting "One More Year" with decent investment gains and savings.
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