Using Firecalc to look at return variance over time

[petershk]

Hi Guys.
As I'm getting closer to Fire (less than 1 year) my mind is switching from accumulation to spending... something all of us have to do.

Just like everyone I spend hours doing all kinds of spreadsheets and calculations... the easiest one being using FireCalc to get to 100%. At my current LNW (around 3.5M), and my roughly 45 year horizon (40 years old), and current spending (Around 100k w mortgage + insurance, etc), it's easy to get to 100% with 0% chance of having less at the end of the 45 years, historically.

But I quickly realized that isn't the big problem.

The big problem is what will I DO in the first few years, and how will I react to different situations. It's easy to say I'll just stick to my simple allocation/rebalance no matter what happens... but how can I be sure.

So I thought about preparing for various scenarios.

Using FireCalc, I can put in the same assumptions, but run it for 10 years.

In that timeframe I can expect my LNW to be anywhere from 1.6M to 10.8M. That is not a small range and I'd be lying if the results didn't have impact on my life. At 1.6M I might feel the urge to get a job, sell my house, sell all my holdings and all kinds of other crazy stuff. At 10M I might take more trips to Hawaii, treat more friends to dinner and donate more money to charity.

Here's a couple other ranges:

At 5 years, the expected range is 1.7M - 8M

At 1 year, its 2.4M-4.8M

Can I really say I will easily weather a 1M drop in LNW in the first 12
months of FIRE? Or that if it goes to 4.8M I'll think no differently?

No Way. It'll feel really different and if I'm not equally prepared, I could make terrible mistakes in over reacting.

Now in most cases, it will be somewhere in the middle... but what has a big impact on us short term is the smoothness of the ride.

I think time is a good teacher here.

Going back through the forums, I've seen how some people handled 2008 and it's pretty interesting. It seems that not looking at it too much, and not paying too much attention are really good methods for fighting through the pain. The discipline and habit of a simple strategy that you execute regardless will really pay off when it's a difficult time.

So I am trying to use these comparatively "easy" times to develop those as well as prepare for what to expect. So if my portfolio drops 25% in the first year, I won't freak out... or at least not as much. And if it goes up 25% I won't change my spending... or at least not too much .

Cheers!

 

[Independent]

Using FireCalc, I can put in the same assumptions, but run it for 10 years.

In that timeframe I can expect my LNW to be anywhere from 1.6M to 10.8M. That is not a small range and I'd be lying if the results didn't have impact on my life. At 1.6M I might feel the urge to get a job, sell my house, sell all my holdings and all kinds of other crazy stuff. At 10M I might take more trips to Hawaii, treat more friends to dinner and donate more money to charity.

Here's a couple other ranges:

At 5 years, the expected range is 1.7M - 8M

At 1 year, its 2.4M-4.8M

Can I really say I will easily weather a 1M drop in LNW in the first 12
months of FIRE? Or that if it goes to 4.8M I'll think no differently?

Thanks for posting these. It think the $1.7M - $8M is really interesting.
Like you've said, people planning to retire with a good "long term" AA probably should think about how they'd react to historic scenarios.

Most say "I'd flex spending", but I'd want to walk through the history and see how much flexing I'd do - assuming I'm human and have to deal with my emotions and don't have a crystal ball.

 

[marko]

That's the hell of it isn't it?!

You might end up with $1MM or $25MM at life's end.

But if you spend far beyond your SWR you run the risk of spending tomorrow's income producing engine and end up broke at age 78.

OTOH, if things go well, you find yourself at age 82 and falling apart physically/mentally with $22MM chugging away for you, unable to even think about spending it all, wishing maybe that you did take a few more of those trips to Hawaii.

 

[ERD50]

Yes, I think it is important to look at this and think through how you would deal with it if it happens to you.

Many people here casually say something like 'well of course we will cut spending if our portfolio drops', but I don't think many of them have actually looked at those historic dips, and just how little effect a cut in spending might have.

Running FIRECalc for 5 or 10 years like you have done is a good way to get a feel for this. It becomes pretty obvious that if you started with a conservative WR like ~ 3%, that cutting that even in half (or to zero for that matter), is a pretty small deal compared to a 50% drop in your portfolio. I think these people may be kidding themselves.

And often, the dips are temporary, and come right back in a few years, like the 2008 crash. If you cut spending immediately for a few years, it probably wouldn't have been much help, and you may have passed up some once-in-a-lifetime opportunities.

Here's a thread I started back in 2008 on this subject:

http://www.early-retirement.org/for...t-worth-anyone-scared-32866-2.html#post606756

BTW, I did not cut spending in that dip. But DW still chooses to work at a part-year job, not big $$ but it does buffer our withdraws, so that helped. And I have a modest non-COLA pension and we both have SS coming by ~ 2020, so not so many years to bridge before we get some added buffer (but of course lose her current income).

Some others here decided to take SS early, to get that buffer, and that worked out for them as well (though the general advice, barring WEP or other issues is to delay SS to 70). In their case, this means every $ they didn't pull from their portfolio while it was down had the chance to return to its pre-dip value, and it did.

-ERD50

 

[mrfeh]

Using FireCalc, I can put in the same assumptions, but run it for 10 years.

In that timeframe I can expect my LNW to be anywhere from 1.6M to 10.8M. That is not a small range and I'd be lying if the results didn't have impact on my life. At 1.6M I might feel the urge to get a job, sell my house, sell all my holdings and all kinds of other crazy stuff. At 10M I might take more trips to Hawaii, treat more friends to dinner and donate more money to charity.

If the thought of swings like that freak you out, I would consider dialing back your equity allocation, or consider buying an SPIA.

 

[petershk]

I think swings like that freak almost everyone out . It's just a question of how people deal with it.

I think if I write down "ok... At end of year one as long as I have between 2.4 and 4.1m... We're on course" BEFORE stuff happens... I can go back when the market drops 40% and say "yes I'm scared but I also knew it might happen and I know I should stay in."

For me downside pre planning at the execution level is really helpful.

Some people I guess are just psychologically tough and see a 30% dip... No problem and sleep like babies. It helps me sleep to consider the outcome ranges.

As for dialing back exposure. That might help but I don't want to let the fear drive my financial decisions if I can.

If I have tons of money at the end... I have no problem giving it away after kids have a modest inheritance... And actually I'm not that worried about running out. I want to consider the ranges so I have some idea of what I should do so I don't make decisions under emotional stress.

Thanks all!

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[petershk]

ERD: that was a really great thread and shows a lot of variation in opinions and actions.

For me it's all about not having to think about it and range outcome planning works for me .

Eg at work I used to program and now manage software dev. Just like all human projects it takes longer than people think and outcomes are never precise. so I try to plan for ranges in both effort and success and hedge risk by looking at the cost of those upper and lower ranges. Then when the inevitable scope creep, surprise delay, or didn't do as well as we thought provoke hits... I can stay cool while people run around like headless chickens. Of course... Doesn't always work but it helps me a lot.

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[hesperus]

I always keep around 18 months of expenses in cash. With dividends also coming in, this helps me weather the ups and downs without fearing I have to sell equities at a low.

 

[Terryjm51]

Great thread



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[Symbiotic]

I did some similar deviation modeling to help me come to terms with the variance and to help set expectations appropriately low. I'm with ya entirely on that.

But I found more solace in two other exercises: one, forcing myself and spouse to visualize what it would be like if we do have to cut spending aggressively one day; and two, forcing myself to think about what it would be like to not have a regular job anymore.

After six months, I am still struggling with that last one by /far/ the most. I am okay with the rest of the numbers and always sleep well at night, but then I've always loved gambling and measured risk.

On the other hand, I don't know that I can hang out in my fuzzy slippers and sip fruity drinks all day, every day, for too much longer. I'm wired to be a builder, and I suspect my brain is happier when it's exercised in the entrepreneurial avenues that it's used to.

I guess what I'm saying is, good for you -- but maybe not the hardest part. You're welcome.

 

[petershk]

Symbiotic: I hear you. I'm in that camp... But then... Why do you need someone else telling you what to build. Go forth thyself and build for thy own .

I plan on doing lots of tinkering... But I'm also happy to not HAVE to do it. That said... Absent the discipline forced by a job I'll have to exercise self discipline *gasp* but that itself is a project.

I highly recommend the book "The Practicing Mind" for just such an occasion.

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[Symbiotic]

Symbiotic: I hear you. I'm in that camp... But then... Why do you need someone else telling you what to build. Go forth thyself and build for thy own .

Oh, sure... except then it has to be marketed and sold, and there's the rub. Starts to feel an awful lot like w*rk at some point in there, eh?

Thanks for the book suggestion. Added to the queue, which drains quickly these days!

 

[petershk]

Symbiotic: ah yes... That is the irony . But at least you don't have to go to meetings or negotiate KPIs.

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