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Old 10-17-2010, 11:09 AM   #21
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Originally Posted by Nords
1. Whaddya gonna do about it?
2. Got anything better?
See price-of-butter examples above (I hope my lazyness to look up the precise example won't bite me too much :-) ). Anyway, the point is lack of other methods, does not mean the one in use is any good. Recognizing this fact may be useful. Staying "more flexible" is one potential positive outcome for me personally - since the less I trust the other methods, the more flexible I have to be in my mind... (even though by my nature I'd rather have a set-it-and-forget-it kind of plan)

Perhaps periodic reminders of the lack of usefulness of "historical" data is good in that sense?
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Old 10-17-2010, 11:09 AM   #22
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Originally Posted by photoguy View Post
Trivially, we know that Firecalc does not contain all important market scenarios because it misses the one where the market collapsed completely, never to recover. I don't believe we fully understand the markets/economies enough to know what exactly might be missing from Firecalc.
Firecalc uses historical USA market information and not things that didn't happen in the past. That would be a completely different model and discussion.
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Old 10-17-2010, 11:12 AM   #23
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Originally Posted by smjsl
Would you trust the ballpark level you get out of a model based on 3-4 years of data when you plan a 1-year retirement? Would you trust it to the same degree as what FireCalc predicts for your real-life plans?

Regarding staying flexible - yes, I guess that's the only choice then. I agree.
Trust? Nothing in life is sure but death and taxes. A model like this is not producing some sort of mathematical/statistical certainty IMO. It just gives you another estimate. The smaller the timeline of historical data available, the less statistically reliable the output over long periods of time, theoretically - - but a longer timeline may not make the model any more reliable due to other problems related to the assumptions of the model. If you trust ANY model, or any financial planner, completely, then you are an even great fool than I am.

Personally I run FIRECalc, look at the results, laugh a little and mutter "yeah, right", and then during this first year of ER I spend about half of what it says I can spend. (If it told me I was spending too much, I would be very alarmed).

As I move into further years of ER, I may spend more depending on what unfolds as I go along. Flexibility will be the key. This is one reason why I choose to make my budget as flexible as I reasonably can during ER.

For those planning to retire, the way to approach these problems (IMO) is to pad your numbers, so that you have a safety margin above and beyond what any models or computations are telling you. Then be prepared to be flexible. But don't take your eye off the goal and remember, life is short.

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Maybe a Valium would help?
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Old 10-17-2010, 11:15 AM   #24
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Yes, I believe Firecalc (and any other method based on last 90-130 years worth of history) do not necessarily contain all market scenarios for a 40-year plan.
What are the scenarios and how are they significant?


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I don't follow this at all. I am saying using 100 year history to make predictions about next 30 is the same as using using 10 year history to make predictions about next 3.
To understand why this is incorrect you need to understand statical sampling and error rate.

Start here
Sampling (statistics) - Wikipedia, the free encyclopedia
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Old 10-17-2010, 11:27 AM   #25
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@Gone4Good: what I am saying is that if you treat year 1 and different data point vs year 2 in the context of 90-130 year history has for 30-40 year retirement plan; then by the same token you should be treating starting each Monday as different data point in the context of 3-4 year history for 1-year retirement plan.
You could do that, and you'd get a somewhat more refined result. It wouldn't yield substantially different conclusions though.

But I don't see how our ability to do the calculation for every day, month, or year supports your assertion that we only have 3 or 4 data points.

More specifically, you've yet to argue persuasively how a retirement pre-crash is the same as a retirement post-crash, which is basically your assertion. Instead of simply claiming that both periods are essentially the same data set because some data overlaps, maybe you could explain how the overlap invalidates what are obviously different results. I think the answer to that question is what Dex has said, that not all possible market scenarios are reflected in the data set. That is quite a different argument then the one you are making, and is one that most here would agree with. We except that a FIRECalc 100% success probability isn't really a 100% probability of success. We understand the model's assumptions and its limitations.
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Old 10-17-2010, 11:28 AM   #26
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Originally Posted by dex
What are the scenarios and how are they significant?
I'd rather not speculate about it in this thread - otherwise it'll go off on a tangent. Overall you can imagine any sequence of returns not represented by Firecalc and I am sure some events may or may not lead to them. Which 30-40-year outcomes are more likely and which ones are less likely is NOT represented by firecalc because it does not have anywhere enough data to work with. That's my only concern here.



Quote:
Originally Posted by dex
Quote:
Originally Posted by smjsl
I am saying using 100 year history to make predictions about next 30 is the same as using using 10 year history to make predictions about next 3.
To understand why this is incorrect you need to understand statical sampling and error rate.

Start here
Sampling (statistics) - Wikipedia, the free encyclopedia
There is the same number of samples and same error rate in both. In 100/30-year case and in 10/3-year case, the only difference is scale (i.e. 10 years vs 1 year). The rest is the same...
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Old 10-17-2010, 11:31 AM   #27
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Here's a way to improve on the overlapping data issue. I've contributed to FIRECALC, so I expect these improvements to be incorporated ASAP. Everyone on board?

http://www.qass.org.uk/2009/Vol_3/paper4.pdf
I agree it would be nice to fix this but the issue of overlapping data is not central at all to this thread. If you like overlapping data (as Gone4Good indicated), I don't mind you using it in 3-4 year example as well. The point was that predicting 30-40 year retirement based on currently used and available history is the same as predicting 1-year retirement based on 3-4 year history. This applies whether or not you will use overlapping data (in both cases).
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Old 10-17-2010, 11:32 AM   #28
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Above statement however again displays some degree of confidence and usefulness of the prior data. I recall reading that some research found out, US stock market prices have most correlation with price of butter in some African country (forget which) - would you use this observation as an initial sanity check for what seems to have worked? So I come back to whether the small set of data we have is so small that it can only mislead as to the original "sanity check"... ?
Do a Montecarlo if you want random, unrelated year simulations - there are programs out there that do so. Personally, I don't think sequential years of historic market are independent of one another -- the gains of 2009 were not unrelated to the losses of 2008, for example, IMHO.

You are letting perfect be the enemy of good. Taken to the extreme, it's like saying that just because the sun has risen every morning for millions of years, that doesn't mean it will happen tomorrow. True, but I'll take the odds.
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Old 10-17-2010, 11:40 AM   #29
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@Gone4Good: you are concentrating on the overlapping periods being significant to my argument. They are not. As I mentioned, you can overlap all you like in the 3-4 year data as well... :-)
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Old 10-17-2010, 11:43 AM   #30
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@Gone4Good: you are concentrating on the overlapping periods being significant to my argument. They are not. As I mentioned, you can overlap all you like in the 3-4 year data as well... :-)
Um, yeah, but it's not the same at all. 3-4 year periods don't even include a full political cycle, let alone a business cycle. Can you name any known and relevant 30-40 year cycles that make this a valid comparison?
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Old 10-17-2010, 11:47 AM   #31
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Taken to the extreme, it's like saying that just because the sun has risen every morning for millions of years, that doesn't mean it will happen tomorrow. True, but I'll take the odds.
To the contrary, if I had a large enough sample pool I would also take the odds. My point is that because we don't have a large enough history, there is not much value I can assign to the outcome based on such history.

Regarding your other point that consecutive years are not independent - it's actually probably true but the only reason we can conclude it is true is BECAUSE we have a large number of consecutive years from which we can now make that conclusion... If you lived in a world where you had only 3-4 consecutive years of returns, you would not know whether this statement is true or not. (and to gone4good & midpack: ... even if you used overlapping periods in those 3-4 years ;-) )
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Old 10-17-2010, 11:50 AM   #32
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Ive always relied on this:

Ask the Magic 8 Ball

until I stumbled upon this:

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Old 10-17-2010, 11:55 AM   #33
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Um, yeah, but it's not the same at all. 3-4 year periods don't even include a full political cycle, let alone a business cycle. Can you name any known and relevant 30-40 year cycles that make this a valid comparison?
Of course at 30-40 years we have different scale of events as well. As I mentioned in an earlier post, you have to scale down your events as well in 3-4 year example. See my reply to CB in the 5th post on this thread (hope the link works)

Now, you could say that at 30-40 year scale, the events are much more predicable and will have a tendency to repeat themselves, thus making prior data more reliable; but I would guess it's the opposite actually... countries and economies collapse and get reborn as you start approaching such large scales.
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Old 10-17-2010, 11:58 AM   #34
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2B or not 2B - That is the Question

The OP is exactly correct. There are not enough statistically independent data cycles to accurately predict the likelihood of sucessful retirements going foreward. Whatever estimates Monte Carlo calclators come up with are highly varaiable.

Instead we hope that (relatively recent) past is prologue and base our predictions on that. Note that the past century or two includes massive growth for the US economy. One could pontificate whether or not that is likely going foreward.

It still is a giant crapshoot. Your little retieement timeframe may or may not perform as Firecalc and other calculators suggest.
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Old 10-17-2010, 11:59 AM   #35
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Of course at 30-40 years we have different scale of events as well. As I mentioned in an earlier post, you have to scale down your events as well in 3-4 year example. See my reply to CB in the 5th post on this thread (hope the link works)

Now, you could say that at 30-40 year scale, the events are much more predicable and will have a tendency to repeat themselves, thus making prior data more reliable; but I would guess it's the opposite actually... countries and economies collapse and get reborn as you start approaching such large scales.
Your answer is a cop-out. Your assertion that using 3-4 years of market data to project a 1 yr retirement is the same as using 130 yrs of data to project a 30-40yr retirement assumes that the cycles that are apparent over short periods, are equally apparent over long periods. If that is true, you should be able to list them. If you can't list them, then the comparison is invalid.

Said another way, I know precisely why I wouldn't use 3-4 years of financial market data to make projections. The same is not true for longer periods.
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Old 10-17-2010, 12:02 PM   #36
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Firecalc uses historical USA market information and not things that didn't happen in the past. That would be a completely different model and discussion.

You asked about what scenarios firecalc was missing. Events that did not occur in USA market but have occured elsewhere is directly relevant to the discussion because it speaks to the completeness/assumptions on which firecalc is based and hence how much confidence we can put in the results.

As you state, firecalc is based on US historical data (about 100 years). If it is missing important events that have occured in the past (in other markets), then we need to adjust our confidence in Firecalc results appropriately.
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Old 10-17-2010, 12:11 PM   #37
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You asked about what scenarios firecalc was missing. Events that did not occur in USA market but have occured elsewhere is directly relevant to the discussion because it speaks to the completeness/assumptions on which firecalc is based and hence how much confidence we can put in the results.
No post should have to put in the caveats you require. And the 'elsewhere' is in the USA information to the degree it affected the USA data.


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As you state, firecalc is based on US historical data (about 100 years). If it is missing important events that have occured in the past (in other markets), then we need to adjust our confidence in Firecalc results appropriately.
The confidence is represented by the success rate result.
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Old 10-17-2010, 12:13 PM   #38
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I'd rather not speculate about it in this thread - otherwise it'll go off on a tangent. Overall you can imagine any sequence of returns not represented by Firecalc and I am sure some events may or may not lead to them. Which 30-40-year outcomes are more likely and which ones are less likely is NOT represented by firecalc because it does not have anywhere enough data to work with. That's my only concern here.
Your first post introduced the speculation.

So the question below remains. You should be able to identify the scenarios, approximately how often they would occur over the years covered by Firecalc and their significance to the model.

Originally Posted by dex
What are the scenarios and how are they significant?


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There is the same number of samples and same error rate in both. In 100/30-year case and in 10/3-year case, the only difference is scale (i.e. 10 years vs 1 year). The rest is the same...
Research statistics, error rates and related topics and you will see the error in the above.
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Old 10-17-2010, 12:13 PM   #39
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More specifically, you've yet to argue persuasively how a retirement pre-crash is the same as a retirement post-crash, which is basically your assertion. Instead of simply claiming that both periods are essentially the same data set because some data overlaps, maybe you could explain how the overlap invalidates what are obviously different results.
When I go to Firecalc, I notice it doesn't actually produce any statistical estimations. For example, it states that "FIRECalc found that 6 cycles failed, for a success rate of 94.5%." This is not a statistical estimate but purely a statement of fact.

Where overlapping periods comes into play, statistically, is if you tried to put confidence bounds on future success rates based on the historical data.

Firecalc does not do this, but internally we all look at the number and try to figure out how reliable it is. Since firecalc is based on overlapping data I might personally put wider bounds, say +/- 10% on the estimate whereas if Firecalc had more non-overlapping data I might use +/- 5%.
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Old 10-17-2010, 02:48 PM   #40
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How is it any different than trying to guess distribution of market returns over the next year if all you had was historical returns of the past 3-4 years? That's all we seem to be doing with above approaches.
I tend to agree. I personally don't use Firecalc. I wrote my own retirement program where I can enter in varying inflation rates, varying TIPS returns, varying social security income, etc.
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