Variable SWR

[RonBoyd]

You are all aware that FIRECalc uses actual history, not Monte Carlo simulations, right?

FIRECalc: How it Works

Okay, my wheels seem to have come off the track again. The chart at that link looks suspiciously like it was "Monte Carlo" generated:



I know that MC is not mentioned in the link but what exactly does "uses actual history" mean and how, then, is it used to sniff out future scenarios?

 

[REWahoo]

I know that MC is not mentioned in the link but what exactly does "uses actual history" mean and how, then, is it used to sniff out future scenarios?

I think if you read the "How about describing FIRECalc step by step?" section in that link it will be clear.

FIRECalc makes no claims as to predicting the future, only showing what would have happened to your portfolio had you retired at any point in the past - after 1871, that is.

 

[donheff]

View attachment 9223

I know that MC is not mentioned in the link but what exactly does "uses actual history" mean and how, then, is it used to sniff out future scenarios?

Without getting into the metaphysical, nothing can really sniff out future performance. In Firecalc, each of what appears to be a simulated MC run is actually a "real" run of your numbers starting at some point in the past. For example, a bad run might have started in 1930. Firecalc shows you how you would have fared in the best of times and the worst of times historically. The underlying assumption for planning purposes is that things won't be far worse than the worst run in history. That is why you can get a "zero risk" return. All that means is there is no previous 30 year (or whatever you entered) period during which a portfolio like you input would have failed under the withdrawal approach you specified. Of course, since the future may not be like the past, we still get nervous when Wall Street implodes, Greece goes belly up, a pandemic threatens...

 

[RonBoyd]

The underlying assumption for planning purposes is that things won't be far worse than the worst run in history. That is why you can get a "zero risk" return. All that means is there is no previous 30 year (or whatever you entered) period during which a portfolio like you input would have failed under the withdrawal approach you specified.

Okay, got it. Sort of a "The more things change, the more they stay the same" style of risk aversion.