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Doesn't make sense
Old 07-16-2013, 04:17 PM   #1
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Doesn't make sense

Initial attempt and results do not make sense. I used a withdrawal of just $3000 and default portfolio of $750k and 30 yrs. All other TABS are default.

Here is part of the report:

"The lowest and highest portfolio balance throughout your retirement was $750,000 to $6,812,401, with an average of $3,511,908. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)"

The note says that values are BEGINNING values, but I don't care about beginning values, ending values are what matters, aren't they?? Also, the lowest portfolio balance is indeed the same as the beginning value, but the highest balance number matches the highest ENDING value on the accompanying chart. So, is the average value stated really right? Is it average of the starting values or average of the ending values? Is there something I have done wrong?
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Old 07-16-2013, 04:19 PM   #2
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I believe the average is the average value of all scenarios as of the end of the period you specified (30 years).
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Old 07-16-2013, 05:31 PM   #3
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You are correct - they don't make sense.

If you start with a $750,000 portfolio, even with no spending, in some cycles it would drop below that due to market drops. $750,000 cannot be right for "The lowest portfolio balance throughout your retirement".

Numbers are presented in "today's" buying power, that is, adjusted relative to the start of each cycle.

Maybe an admin can address this.

-ERD50
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Old 07-16-2013, 06:15 PM   #4
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Very good observations there! I did some experiments myself. Here are the results.
1) Starting with defaults for everything, i.e. $30K WR out of $750K portfolio. Portfolio minimum may be as low as -$300K. Fail!

2) Change WR from $30K to $3K, as OP has done. Portfolio minimum is $750K. This is what the OP observed.

Result in 2) means that the default investment style could always generate income of greater than $3K, and did not drop in value, hence portfolio never dropped below starting value. Seems to be too good to be true. The default investment style is 75% equities, and we know that there were years in the past when if one spent $0 out of the portfolio, it would still shrink. Big time in fact.
3) I change the 30-yr period to 10 years. Reran the $3K WR case. Minimum portfolio value is now $496,963, maximum is $2,757,213. That makes more sense.

4) Keep 10 years period, but change WR to $0. Minimum is now $521,079 to $2,841,865. This makes sense relative to case 3) above.

It appears that when one selects the 30-yr period, many bad cases got thrown out, and the results look better than for 10-yr period.

I remember that some members have observed this before, but I did not play enough with FIRECalc to see it.

Assuming no defects in the data, nor the software, it appears that historical data from the most recent 30 years would be included only when one specified shorter periods.
5) I repeat the $0 WR, but with the period set to 20 years. Result: min $750,000, max $5,530,217. This looks similar to the 30-yr case.

6) $0 WR, period set to 15 years. Result: Min $570,827, max $3,985,106.

Yes, this is definitely the effects of throwing out retirement periods that started from within the most recent 20 years.

Wow! Could it be true that the most recent years were worse than the Great Depression? Note that although the market collapsed during the GD, we might have had a greater deflation, such that the buying power of the default portfolio was preserved. Wow!
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Old 07-16-2013, 11:00 PM   #5
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Originally Posted by NW-Bound View Post
...
Assuming no defects in the data, nor the software, it appears that historical data from the most recent 30 years would be included only when one specified shorter periods.
5) I repeat the $0 WR, but with the period set to 20 years. Result: min $750,000, max $5,530,217. This looks similar to the 30-yr case.

6) $0 WR, period set to 15 years. Result: Min $570,827, max $3,985,106.

Yes, this is definitely the effects of throwing out retirement periods that started from within the most recent 20 years.

Wow! Could it be true that the most recent years were worse than the Great Depression? Note that although the market collapsed during the GD, we might have had a greater deflation, such that the buying power of the default portfolio was preserved. Wow!
No, I do not think this from throwing out the recent years from 30 year runs. Recall that the 1973 'red line' on the intro page on FIRECALC shows an immediate drop in a 75/25 portfolio. And 1973 is included in 30 year runs. No way would your portfolio proceed and never dip below starting value (and no positive mental attitude can overcome that!).

It's clearly a bug. Or maybe a misstatement of what is being reported?

Here's a rigged up example - FIRECalc: A different kind of retirement calculator

$1M portfolio, zero spend, constant Market growth of 0%, 0% inflation. Then I subtract $500K from portfolio in 2016, and add it back in in 2018. The graph is as expected - a flat line $1M, dipping to $500K, then recovering and maintaining $1M.

But it reports "The lowest and highest portfolio balance throughout your retirement was $1,000,000 to $1,000,000" even though the graph clearly shows the dip to $500K.

I think it may be reporting starting, or ending, or intermediate lows, based on who knows what? It seems I've noticed this oddity before, and had to go to the shorter year runs, and then it seems to report the ending lows. Or something, but it's not right/expected.

Administrators?

-ERD50
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Old 07-17-2013, 01:09 AM   #6
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I think you are right, that the bug is in the recording of the minimum value of the portfolio, and it is not related to the throwing out of the recent years for longer periods.

I made another set of runs, using $0 WR and varying the retirement period from 15 years to 20 years. The reported minimum number got progressively higher (meaning more and more wrong) with the period length. So, it is tied to the period length somehow.

Earlier, I neglected to scroll down to look at the graph below the summary text where I got the exact dollar figures. Just now, I did, and the family of graph appeared to be correct for all periods, meaning it looks reasonable, despite the wrong numerical value reported in the text.

I am not a software guy, but have written plenty of software in my life to have a lot of my own bugs to chuckle over. Software bugs often have weird manifestation, such as this one.
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Old 07-17-2013, 09:50 AM   #7
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I made another set of runs, using $0 WR and varying the retirement period from 15 years to 20 years. The reported minimum number got progressively higher (meaning more and more wrong) with the period length. So, it is tied to the period length somehow. ...
OK, I think I figured this out. It isn't directly related to period length, it's just that the period length is setting up different conditions with a $0 WR - it dips and then rises over time. Here is what I think I found:


A) If the END LOW is > START PORTFOLIO; It reports START PORTFOLIO as the 'lowest portfolio balance throughout your retirement'.

B) If the END LOW is < START PORTFOLIO; It reports END LOW as the 'lowest portfolio balance throughout your retirement'.

C) It never actually reports the 'lowest portfolio balance throughout your retirement', it reports the lowest of the start/end values.

So when you change the period, that mid-period low in a 30 year run becomes the end-point, and it does get reported. Does that match what you are seeing?


So at a minimum, the text should be changed to reflect what is actually reported.

Better yet, I think it should actually report the within-period low, in addition to the ending low/median/average/high. The within-period low would give an indication of volatility during retirement, something of great concern to most of us.

-ERD50
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Old 07-17-2013, 01:39 PM   #8
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...C) It never actually reports the 'lowest portfolio balance throughout your retirement', it reports the lowest of the start/end values...
Thinking about this some more, I think you have captured what the software actually does. And it is not what it says it does.

Quote:
So at a minimum, the text should be changed to reflect what is actually reported.

Better yet, I think it should actually report the within-period low, in addition to the ending low/median/average/high. The within-period low would give an indication of volatility during retirement, something of great concern to most of us...
I also believe that recording the absolute interim minimum of all the runs will greatly enhance the utility of FIRECalc. For example, some people think that the conservative approach of investing in 100% fixed income will minimize their loss in the worst case scenario, the so called "minimax" problem. They think that by willingly giving up any potential gain of a portfolio holding equity, they would avoid the loss in a worst case scenario.

When FIRECalc properly reports the dip in buying power of such "safe" portfolios, they will see that it is not any safer than a mixed portfolio. In other words, they throw away any potential gain, yet still have the same pain.
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Old 07-17-2013, 05:10 PM   #9
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So, is there a consensus on what is wrong and any impact on conclusions that should be made from the analysis/
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Old 07-17-2013, 09:11 PM   #10
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So, is there a consensus on what is wrong and any impact on conclusions that should be made from the analysis/
Well, if you accept two guys on this forum agreeing as 'consensus', then you've got it! I'm pretty sure that neither of us has ever been wrong, but perhaps we both have.

It would be nice to hear from an admin on this, I do think the text should be updated if they aren't up to digging into the code.

So, be careful in assigning any value to that reported low. You can eyeball the graph, to get a rough idea on interim lows. Without a code change, I think that's all you'll get from FIRECALC.

-ERD50
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Old 07-17-2013, 10:37 PM   #11
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The OP has not been here long, so he did not recognize that two guys agreeing on anything on this forum would be a rare event. Maybe it will freeze in Phoenix tomorrow.

Anyway, perhaps we are like economists, and as Churchill noted, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."
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