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Old 03-26-2015, 11:55 AM   #61
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Originally Posted by ERD50 View Post
photoguy, I'm not going to quote it all, but I think there is just a semantic difference here, a gap that keeps this conversation going back and forth. I think I said this before, but I can't find it off-hand so I'll repeat it here:
A) FIRECalc provides a report. Barring calculation or data errors, and within rounding, it is 100% accurate. There were references to this being 'scientific' - OK, but I don't care to debate the meaning(s) of that word, I don't think it is important. We could say it is deterministic. Different people with the same inputs get the same results.

B) What you do with those results is up to you. Looking to the future, and devising a plan is not deterministic. Different people with the same inputs will offer different approaches.
And I think you continue to blend the two, and that's where our conversations get twisted and difficult.
Sorry I thought I was being clear. In this thread I'm exclusively talking about how I start with the firecalc number and modify it for the future (Scenario B) and how I use expectations to do so.


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My point is, take history for what it is, and then apply your fudge factor, don't mix the two.
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Take the case of ten engineers reporting to their boss on the probability of failure of their subsystem. The boss wants to calculate the probability of failure of the overall system. If each of the engineers includes their own fudge factor, the boss is lost when trying to apply some fudge. Better to take the numbers straight, and apply one overall fudge factor. It's cleaner and more transparent.
I think this is a good analogy.

I'd expect each engineer to adjust their probability of failure based on what they know about the current conditions of their subsystem. For example, they might know the age of their parts and I'd expect them to use a survival curve to estimate the failure probability as opposed to using a historical average failure rate. That's all I'm trying to do with expected returns in a SWR scenario.

I think this is very different from a fudge factor.
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Old 03-26-2015, 12:02 PM   #62
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My plan is that our portfolio keeps pace with inflation. If I believed that the only risk to my plan involved shallow risks as Bernstein described them, I would probably be invested totally in the market at about 75/25. I do believe, however, there are threats that could cause deep risks ( Bernstein) and a permanent loss of capital. Tax increases or means tested entitlements would be examples. Those don't necessarily hamper market returns but may have a profound effect on ones personal rate or return. So, I try to hold assets like real estate which are harder ( maybe/ hopefully) to means tested but still provide a real return. Only time will tell. [Emphasis added]
Well put. Tax increases and means tested entitlements are two large looming unknowns. OTOH--and speaking strictly for myself--I'm not sure if I'm willing to put the time, effort, and energy into real estate as a Plan B to offset those unknowns. I don't want to get into any sort of annuity debate, but from everything I've read, annuities post-70 could be a Plan B or even Plan C (and one which I intend to use in a worst case scenario).

IMO, your last statement sums it up well for all of us: "only time will tell."
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Old 03-26-2015, 12:51 PM   #63
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This chart has real interest rates across time and countries:

Real interest rate (%) | Data | Table

It is the lending rate, but I think still useful for a long term perspective on planning for those using a real return planning model.
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Old 03-26-2015, 04:53 PM   #64
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Well put. Tax increases and means tested entitlements are two large looming unknowns. OTOH--and speaking strictly for myself--I'm not sure if I'm willing to put the time, effort, and energy into real estate as a Plan B to offset those unknowns. I don't want to get into any sort of annuity debate, but from everything I've read, annuities post-70 could be a Plan B or even Plan C (and one which I intend to use in a worst case scenario).

IMO, your last statement sums it up well for all of us: "only time will tell."

I understand the concerns with real estate. It is work, no doubt. I purchased the real estate for various reasons over the past decades. I have considered liquidating it to simplify things but for the reasons mentioned, it has a place in my portfolio. I wouldn't recommend purchasing it in retirement. Too many unknowns.
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Old 03-27-2015, 12:28 PM   #65
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Firecalc says we are fine. But firecalc uses historical returns, and I'm seeing a number of people saying a significant trough is very possible, which would be less than historical returns.


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Old 03-27-2015, 05:58 PM   #66
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Rick Ferri's 30 year forecast is now out:

Portfolio Solutions® 30-Year Market Forecast for 2015
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Old 03-27-2015, 07:22 PM   #67
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Firecalc says we are fine. But firecalc uses historical returns, and I'm seeing a number of people saying a significant trough is very possible, which would be less than historical returns.
Well, FIRECalc tells me that historically, in 30 years I could be a decamillionaire, or my stash could shrivel to a fraction of its current value. History has always shown such a wide range of outcome.

Looking forward, what many pundits including well-known figures like Shiller and Bogle have said that future returns will be at the low end of the historical range. In other words, it will be below the average return. But I don't think any has said that the future return will set a new precedent low. There's a big difference.
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Old 03-28-2015, 01:09 AM   #68
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Like a few above, I don't predict future returns - and didn't do that in the accumulation phase either. I figured that we'd ER when our portfolio got big enough for a conservative SWR to meet our expense requirements with some padding. Now, I use an AA that, based on historical returns, should give me peace of mind. Based on historical returns, this AA & a relatively conservative withdrawal should meet needs over our expected lifespan.

But if you're interested in an opinion, Rick Ferri gives you one:
Portfolio Solutions® 30-Year Market Forecast for 2015
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Old 03-28-2015, 03:26 AM   #69
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Like Walkinwood, I don't try to predict future returns now that I am in the withdrawal phase. I have a simple portfolio consisting almost entirely of index funds with an approximately 65/33/2 AA, and a WR of ~2% of current portfolio value (~2.4% of starting value) which lets me sleep at night.

The rather wonderful thing about all of this (to me) is that whether you spend a great deal of time performing portfolio survivability calculations, or simply pick an AA and a reasonably conservative WR, and do little else in the way of analysis, both approaches are equally likely to yield success, due to the one thing we can't predict - the future.

However, if detailed analysis helps you to feel more comfortable, then I say go for it. My "poor man's" version of in-depth analysis consists of plugging the same (or very similar) numbers into Firecalc, clicking the "Submit" button, and becoming oddly surprised when I keep getting the same results - but like a trained monkey, I keep doing it
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Old 03-28-2015, 07:45 AM   #70
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Like a few above, I don't predict future returns - and didn't do that in the accumulation phase either. I figured that we'd ER when our portfolio got big enough for a conservative SWR to meet our expense requirements with some padding. Now, I use an AA that, based on historical returns, should give me peace of mind. Based on historical returns, this AA & a relatively conservative withdrawal should meet needs over our expected lifespan.
+2

Although I can see folks using projections to make sure their investments are aggressive enough during accumulation to grow the portfolio faster.
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Old 03-28-2015, 09:36 AM   #71
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Personally I think once you hit a sub 3% withdrawal rate with 95%+ historical success, other factors are far more likely to squash your plan than "the worst economy ever" types of scenarios.

A terrible illness, a local natural disaster, a family or friend that suddenly needs substantial help. Those seem far more likely and equally hard to control or predict.

Sooo... I think once you hit around 3% it's better to enjoy it and focus on making yourself flexible such that those surprises may be more manageable.

The other question is what to do about it. I personally use the worst historic case as my worst case and once that is "safe" I don't try to guess how much worse it could be.

Humans are fairly flexible so if it gets THAT much worse than it has in the past it'll be really bad for people that are already worse off which means that SWR is unlikely to be top of mind for me .

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Old 03-28-2015, 11:45 AM   #72
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I use lower than historical returns and higher than normal standard deviations when updating my Monte Carlo simulations.

It's not the bad average return that'll wreck you, it's bad sequencing.

That's why Bernstein recommends at least 7 years cash, and others talk about "glide path" with low initial equity weighting, for those embarking on retirement.


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Old 03-28-2015, 03:09 PM   #73
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Personally I think once you hit a sub 3% withdrawal rate with 95%+ historical success, other factors are far more likely to squash your plan than "the worst economy ever" types of scenarios.

A terrible illness, a local natural disaster, a family or friend that suddenly needs substantial help. Those seem far more likely and equally hard to control or predict.

Sooo... I think once you hit around 3% it's better to enjoy it and focus on making yourself flexible such that those surprises may be more manageable.

The other question is what to do about it. I personally use the worst historic case as my worst case and once that is "safe" I don't try to guess how much worse it could be.

Humans are fairly flexible so if it gets THAT much worse than it has in the past it'll be really bad for people that are already worse off which means that SWR is unlikely to be top of mind for me .

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I think that's a good, sensible approach. If you can live comfortably off of 3% or lower.
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Old 03-28-2015, 05:45 PM   #74
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For fixed income I assume 3% return being 2.5% interest + 0.5% capital appreciation. For equities I assume 5.25% return being 3% dividends and 2.25% capital appreciation. Nominal
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Old 03-28-2015, 08:10 PM   #75
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I assume 1% real return in my modeling (still in the accumulation stage) to factor in worst-case assumptions, but I realize that it will hopefully be better. Given that I have a large minority % exposure to oil/natural resources, it isn't too far off due to the plummeting we've seen lately in oil.

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Originally Posted by ERD50 View Post
But if the a FIRECalc 100% SWR ends up being too high, it just means the actual future ended up being worse than the worst in the data set. I've said that all along.


Are we more likely to see relatively high stresses on a portfolio when we are at a peak (which we don't know until it passes), or even when we seem to be nearing a peak? Sure, if we continue to see economic cycles similar to the past.

But once again, only if they are worse than the worst in the data set. Past high valuations are already in there. And now we are back to square one - how do you estimate how much worse we might get?
A few points to bring up, some of which have been pointed out by posters in various threads:

Current bond yields - FireCALC assumes a default, what, 60/40 portfolio mix? If 40% of your portfolio is bonds, and currently have a weighted yield of, what, 2% (maybe less?)...how does that compare with inflation, and what return will be going forward for bonds (both capital losses and microscopic yields)? How would another 5 years with your bond portfolio yielding this microscopic yield affect things? Remember that it's the first few years which can have huge ramifications later on in years 20-40. If 40% of your portfolio has a negative real yield for several years early on, how does that factor in with what your 60% of portfolio must do to compensate? Have rates ever been like this before in FireCALC's data inventory?

Before you answer that, read the other points below (especially the 'stock dividend yield point - which would do wonders to help offset non-existent bond yields)

One-time PE Expansion - If your average equity PE expands from perhaps 10 to more like 15-18 over the course of 60 years, that's a true one-time benefit to the investment returns which would NEVER be repeated....unless average PE expands again from 15-18 up to 25. Do you see this happening? Especially with world stock markets growing and making up a larger share of the equity pie?

Dividend Yields - Average stock dividend yields were ALMOST ALWAYS more than 4% for most of recent history up until perhaps 1980s. After that, zooming equity prices (coupled with economic expansion and PE expansion) dropped those dividend yields down to the S&P average yield of under 2% today. Do you think having 60% of your portfolio in equities yielding 4%-6% would be a significant factor in achieving a 4% SWR, irrespective of whatever the stock price did?

Now imagine what that does when that same 60% of your portfolio suddenly yields just 1.5%-2% instead of 4%-6%. Do you think it might have different results going forward during market gyrations? Yes, there will be capital gains to spend and grow your portfolio...but if you have to rely on eating up more of your portfolio capital gains to live off of, it becomes far more sensitive to the specific timing, compared to having your equities funding almost all of your expenses from dividends alone.

Tax impacts - as recently pointed out in this thread, there is also the specter of possible legislative policies which would have a true black swan impact to your models, completely unrelated to your asset mix, SWR, or any other calculations you previously worked up.

If you wish to take your chances with your models and assume higher real returns, then so be it....but don't act like those who take a more conservative approach for very legitimate, sound reasons are completely unrealistic and not basing their view on anything rational or real.
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Old 03-28-2015, 08:16 PM   #76
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5%. Seems to be the biggest number I don't have to work too hard to get...
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Old 03-28-2015, 08:51 PM   #77
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From Jason Zweig in today's WSJ: The New Era of Low Stock Returns

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After more than six years of a bull market, investors should stare a cold, hard truth straight in the face: Future returns on stocks are likely to be far slimmer than the fat gains of the past few years.
Leading investment analysts think you will be lucky to squeeze out an average return of 2% annually, after inflation and fees, from a typical portfolio of stocks and bonds over the coming decade or so.
Investment expenses will loom much larger in a world of smaller expected returns. So will avoiding big mistakes.
That's based on historical returns when stocks are at today's valuations (Schiller's data), and by another estimating approach (based on dividends and dividends growth). William Bernstein agrees.

The author's observations and suggestions:
Quote:
- First, you aren’t entitled to higher returns just because you feel you need (or deserve) them. . . .
- Take extra risk in a low-return world and you are likely to reap the risk without earning the reward. . . .

- You can also look overseas now. “The expected returns on foreign stocks are higher,” Mr. Bernstein says, “plus you’re buying the currencies cheap relative to the dollar.” . . .
- Next, treat every nickel like a manhole cover. Purge any expensive mutual funds, replacing them with well-diversified, low-cost index funds or ETFs. Against a backdrop of 2% returns, a half-percentage-point reduction in management fees will give a bigger boost to your returns than almost anything else you can do.
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Old 03-28-2015, 10:18 PM   #78
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I assume 1% real return in my modeling (still in the accumulation stage) to factor in worst-case assumptions, but I realize that it will hopefully be better. Given that I have a large minority % exposure to oil/natural resources, it isn't too far off due to the plummeting we've seen lately in oil.



A few points to bring up, some of which have been pointed out by posters in various threads:

Current bond yields - FireCALC assumes a default, what, 60/40 portfolio mix? If 40% of your portfolio is bonds, and currently have a weighted yield of, what, 2% (maybe less?)...how does that compare with inflation, and what return will be going forward for bonds (both capital losses and microscopic yields)? How would another 5 years with your bond portfolio yielding this microscopic yield affect things? Remember that it's the first few years which can have huge ramifications later on in years 20-40. If 40% of your portfolio has a negative real yield for several years early on, how does that factor in with what your 60% of portfolio must do to compensate? Have rates ever been like this before in FireCALC's data inventory?

Before you answer that, read the other points below (especially the 'stock dividend yield point - which would do wonders to help offset non-existent bond yields)

One-time PE Expansion - If your average equity PE expands from perhaps 10 to more like 15-18 over the course of 60 years, that's a true one-time benefit to the investment returns which would NEVER be repeated....unless average PE expands again from 15-18 up to 25. Do you see this happening? Especially with world stock markets growing and making up a larger share of the equity pie?

Dividend Yields - Average stock dividend yields were ALMOST ALWAYS more than 4% for most of recent history up until perhaps 1980s. After that, zooming equity prices (coupled with economic expansion and PE expansion) dropped those dividend yields down to the S&P average yield of under 2% today. Do you think having 60% of your portfolio in equities yielding 4%-6% would be a significant factor in achieving a 4% SWR, irrespective of whatever the stock price did?

Now imagine what that does when that same 60% of your portfolio suddenly yields just 1.5%-2% instead of 4%-6%. Do you think it might have different results going forward during market gyrations? Yes, there will be capital gains to spend and grow your portfolio...but if you have to rely on eating up more of your portfolio capital gains to live off of, it becomes far more sensitive to the specific timing, compared to having your equities funding almost all of your expenses from dividends alone.

Tax impacts - as recently pointed out in this thread, there is also the specter of possible legislative policies which would have a true black swan impact to your models, completely unrelated to your asset mix, SWR, or any other calculations you previously worked up.

If you wish to take your chances with your models and assume higher real returns, then so be it....but don't act like those who take a more conservative approach for very legitimate, sound reasons are completely unrealistic and not basing their view on anything rational or real.

That PE expansion thing always has worried me. I do buy some mutual index funds monthly but don't pay attention and don't want to. Individually, I just buy higher yielding "safe" preferreds and nothing else (but that is not without warts either). I remember back in the day being told....Never buy a stock whose PE is higher than their growth rate. Ya that really works well today with the big caps any more. Of course I never here that philosophy discussed anymore either.


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Old 03-28-2015, 11:32 PM   #79
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This was in response to my post #55, but I'm confused:

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If you wish to take your chances with your models and assume higher real returns, then so be it....but don't act like those who take a more conservative approach for very legitimate, sound reasons are completely unrealistic and not basing their view on anything rational or real.
but how does that jibe with:


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... I assume 1% real return in my modeling (still in the accumulation stage) to factor in worst-case assumptions, but I realize that it will hopefully be better. ...
If you are assuming 1% real, that is higher than the worst case static real return in the data-set (0.52% static real). So why do you say I'm taking chances with my models and assuming higher real returns? I am even more stringent, that number was for a 30 year retirement for reference, I plan to allow for longer, and I throw in a buffer on top of a 100% HSWR (at least that's my goal).


The rest of your post has to do with predicting the future. Sorry, can't help you there. But I still don't get how you consider yourself so conservative assuming 1% real, after all the possible doom & gloom you offered, when 1% is higher than what we have seen? Or infer that I think anyone else is unrealistic?

I don't recall criticizing anyone else's view of the future (correct me if I'm wrong). I've only been trying to separate out what the historic reports tell us versus what we decide to do based on the reports.

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Old 03-29-2015, 12:38 PM   #80
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But if you're interested in an opinion, Rick Ferri gives you one:Portfolio Solutions® 30-Year Market Forecast for 2015
Thanks for that link - he does seem very optimistic. 5% - 6% real in equities, 2.6% on 30 year TIPS (currently at 0.75%).

I hope he's right!
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