Personal Finance on a Napkin

[Katsmeow]

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Originally Posted by ERD50 That could be - again, assuming that the windfall-er ( windfall-ee? is there such a word?), had it all in MM. What I'm really getting at is it isn't the typical retiree scenario, and therefore not a very useful (and maybe harmful?) way to look at it for most all of us. -ERD50

Perhaps my DH is atypical but I can see one particular retirement scenario where having a sudden lump sum happens quite often. That is the retiree that takes a lump sum in lieu of pension. DH retired in June and just received his lump sum which is by far the most significant portion of the portfolio.

[haha]

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Originally Posted by FIREdreamer FIREcalc shows that If you retired in 1929 with $1M or in 1932 with $1M, you would have been able to live on $40K per year (adjusted for inflation) for the next 30 years in both cases. It's just that if you retired in 1929, you would have left very little to your heirs and if you retired in 1932, you would have left a fortune.

I completely understand what you are saying, really, I do. But FireCalc isn't god. It is roughly 4 unique 30 year trips through one of many many possible histories. (And only one trip through the two periods that you compared.) It happens to be the history that did occur, but that is in fact merely an accident of chance.

Among other differences is something that one poster mentioned, if only to discount it. The Margin of Error. I won't do this run because I am not in doubt about this issue, but if one were to go through the period that you mentioned, he might find that the max drawdowns from the 1929 start would scare many people right out of the market. These two trips are different in every possible way other than one, the one you have highlighted- the Firecalc success/failure go/nogo verdict.

Ha

[MasterBlaster]

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Originally Posted by haha This is one of the most intersting paradoxes (or delusions) of the whole asset allocation/SWR paradigm. Say Joseph retired October 2007 with $1mln. With this he bought 10,000 shares of World Market Index, a very diversified balanced index fund. Josefina retired roughly 18 months later, in March 2009. She also had $1mln, and invested it in the very same low expense fund that Joseph bought about 18 months earlier. But her million bought 15,000 shares, 50% more shares than Joseph was able to buy. So each retired with $1mln, and each expected a "safe" 4% withdrawal rates, adjusted annually for CPI inflation, so they each take $40,000 the first year and CPI adjust the withdrawal in the following years Is it even remotely possible that these two people should have the same expectations of success? Not in the universe that I know. Ha

I had the same question, that Dory answered in 2006...


My question...

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The twin paradox ? Does the reverse of that work too ? You retire with $1 mil taking $40k/year out. Several years later it is worth $700k due to down markets. But your buddy retires now with $700k and will take out only $28k. Could your buddy then look at past peaks and take out the same $40k/year as you.

Dory's response...

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Yes, other than the fact that the later retiree will have to assume a shorter withdrawal period, to match the earlier retiree's remaining years. Again, step back and look at the reasoning. If Bob has $300k in long term treasuries and $400k in the S&P 500 index, and Joe has exactly the same thing at the same time, and both do exactly the same things with these funds, then there is no way that their future results can differ. It doesn't matter that one of them used to have a lot more money, and the other is perhaps starting from a lump sum payout of a retirement plan -- the future results have to be the same for them. This seems even more counter-intuitive than the original example, but I see, after looking at the historical numbers, the reason this seemingly anomalous situation works is that historically, we haven't had extended bear markets that exceeded 5 years, and very few that exceeded even 2 years. So the fact that the first guy was unlucky enough to retire into a serious long term bear market means that it is behind him -- and if so, then it is behind the other guy as well -- he just didn't have to deal with it. Since 1871, we have only had two 5-year periods when each year-end stock market value was lower than the previous year-end, and that was back in the pre-depression days. (This is adjusted for inflation -- there was only one such period when I ignore inflation). There were only three periods with consecutive 4 year downturns, and only five 3 year downturns. Had this not been the case, then we would be talking about the 2% rule, or maybe the 1% rule I suspect. So... the best time to retire is after a bunch of crappy years. If history is any guide, it will only get better. dory36 (Can you see people watching the market, waiting to retire, saying "Oh crap - another good year -- now I have to postpone my retirement again!") PS - if you want to look at numbers, see the original source data for Irrational Exuberance and for a good part of what Firecalc and the REHP spreadsheets use, at http://www.econ.yale.edu/~shiller/data/ie_data.htm. I used the start-of-year figures for the above.

[ziggy29]

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Originally Posted by haha Among other differences is something that one poster mentioned, if only to discount it. The Margin of Error. I won't do this run because I am not in doubt about this issue, but if one were to go through the period that you mentioned, he might find that the max drawdowns from the 1929 start would scare many people right out of the market. These two trips are different in every possible way other than one, the one you have highlighted- the Firecalc success/failure go/nogo verdict.

True. Although the mechanical method is designed to eliminate the emotion from investment decisions, it's hard to imagine someone in 1931 or 1932 having the intestinal fortitude to not panic and stay put. It was hard enough in late 2008 and early 2009! And that would have been a shame since 1933 was the single best calendar year the modern U.S. stock market has ever had. Missing out on a lot of the gains of '33 would have been death for 4% starting in 1929.

For me, 4% came too close to failing in '29 to feel comfortable that (a) it won't be breached in the future and (b) I wouldn't do something stupid out of fear to sabotage myself.

[NW-Bound]

I am one who likes to look at his past personal high water mark and wants to exceed it.

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Originally Posted by bbbamI I've been keeping track of our investments for several years on a monthly basis.

I am doing it on the daily basis. Counting money is fun... Heh heh heh...

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Originally Posted by bbbamI It sure would be nice to never have to touch the principal...

I do it by keeping my part-time work, and also by not buying that RV with fancy cabinetry and countertop.

[LOL!]

I want more money, but I that is separate from trying to exceed a previous highwater mark. There are two issues with this.

(1) The highwater mark itself was because a quick run-up in 2007. A better value might be just before the run-up or an average value over several months in Fall/Winter 2007.

(2) It's now close to 3 years later. I don't need the $300K I spent in the last 3 years anymore because I've lived those years and they are behind me -- gone, done with. I need money for future years. If I was planning to live to 100, I am 3 years closer with 3 years less expenses to worry about.

[ERD50]

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Originally Posted by Katsmeow Perhaps my DH is atypical but I can see one particular retirement scenario where having a sudden lump sum happens quite often. That is the retiree that takes a lump sum in lieu of pension.

OK, that's another one. Maybe this is more common than I think. I never took a poll or anything, but I'd still guess most of the retirement portfolios were accumulated along the way. So again, we should always tailor things to our specific situations.

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Originally Posted by MasterBlaster I had the same question, that Dory answered in 2006...

MB, thanks for that twin paradox summary. I'm sure I've read it before, not sure I was ready to absorb it at the time though.

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Originally Posted by Katsmeow Perhaps my DH is atypical but I can see one particular retirement scenario where having a sudden lump sum happens quite often. That is the retiree that takes a lump sum in lieu of pension. DH retired in June and just received his lump sum which is by far the most significant portion of the portfolio.

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Originally Posted by haha But FireCalc isn't god. It is roughly 4 unique 30 year trips through one of many many possible histories. Ha

I think I reflected on this recently (comparing daily temperatures to seasons and decades of temperature swings) - we might look at FC as having 100-some data points, but maybe that's really only a handful of patterns. And maybe we can't derive much from that at all.

-ERD50

[oilspill]

Trying to make money without honest labor, without committing fraud or deception, is exceedingly difficult. That's why "investing" in the market is nothing more than rolling the dice.

[NW-Bound]

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You retire with $1 mil taking $40k/year out. Several years later it is worth $700k due to down markets. But your buddy retires now with $700k and will take out only $28k. Could your buddy then look at past peaks and take out the same $40k/year as you?

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Dory's response... If Bob has $300k in long term treasuries and $400k in the S&P 500 index, and Joe has exactly the same thing at the same time, and both do exactly the same things with these funds, then there is no way that their future results can differ.

I think Dory mis-answered the question, and that he missed the proposition stated in the question. The two results HAVE to differ, if Bob withdraws $40K/yr and Joe withdraws $28K/yr from the same portfolio of $700K at the later time mark. Well, the term "same portfolio" is a misnomer, because they will not be the same for long, if the amounts withdrawn differ.

We have been through this before. A retiree starting with $1M in 2007 WILL not do as well as the one starting with $1M in 2009. The first MAY survive, but will have many sleepless nights and definitely end up with less money than the second, although the two both have $700K in 2009.

Of course, the first can downshift his spending to match his frugal buddy's $28K/yr, and their fate will be identical.

PS. What I intend to do is to withdraw 4% based on CURRENT portfolio. It lasts forever that way!

[bbbamI]

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Originally Posted by NW-Bound I am doing it on the daily basis. Counting money is fun... Heh heh heh...

I wouldn't mind doing it on a daily basis while everything is coming up roses, but in the 'oh crap' times, it was all I could do to look at my holdings at the end of each month.

[NW-Bound]

I have a stronger stomach. And if you blink, you will miss the market bottom.

OK, OK, I watched intently, and missed the bottom ALL THE TIME.

But they say "Practice makes perfect." No?

[REWahoo]

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Originally Posted by NW-Bound I think Dory mis-answered the question...

I think you may have mis-read his response.

The question:

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Could your buddy then look at past peaks and take out the same $40k/year as you?

Dory's response:

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Yes, other than the fact that the later retiree will have to assume a shorter withdrawal period, to match the earlier retiree's remaining years.

[NW-Bound]

OK, you are right!

Then, our two retirees can both take out $40K from their $700K portfolio, and exchanging posts consoling each other after sharing sleepless nights.

Yes, their portfolio will then share the same trajectory, and this Dory already answered.

I would take just $28K so I can sleep better, thank you.

[smjsl]

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Originally Posted by NW-Bound PS. What I intend to do is to withdraw 4% based on CURRENT portfolio. It lasts forever that way!

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Originally Posted by NW-Bound I would take just $28K so I can sleep better, thank you.

While your portfolio may last forever, clearly, it may not provide what you need then (since you don't know how much you will be "allowed" to withdraw in some future year)... in other words, back to work... but what if you can't find work in the environment of a stock market crash (presumably which is why your portfolio is down so much)? In other, I wonder if you will HAVE to withdraw more than you currently hope you will (e.g. the 4% limit).