Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: dory36: old vs. new firecalc results?
Old 05-26-2006, 07:43 PM   #21
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 190
Re: dory36: old vs. new firecalc results?


dory, from way up the thread there was this:

Quote:
Current year withdrawals are taken at the beginning of the year, but since they will be used to meet currrent year expenses, they are adjusted for the actual inflation in the current year. (Note: I think this may be the biggest impact for you. If you are taking 50k and growth averages 8% and inflation averages 5%, then the program is withdrawing $2500 more to provide you with the spending money you'll need for the year (as did the old version), but you're no longer getting the 8% growth on the $52,500k ($4,200).
You are taking withdrawls at the beginning of the year and denying them any of the year's growth on the presumption that they will be spent in January, prepaying the year's expenses. This approach is for people who own a house free and clear and do not pay rent and prepay healthcare (maybe an HSA: probably legitimate expectation). We already covered this.

(BTW if we presume checking accounts yield about 1/2 inflation and the formula for gradual withdrawl would be 1/2 the total, in effect what this assumption does is add 0.25% to the inflation rate. I think.)

Question, at t=0, in the very first year, did you apply inflation to the year's required expenses? If you take the money out in January, that very first year should have no inflation on it because no months of the year have yet occurred in which inflation might exist. Succeeding years will, or course, but 3% in year "0" would compound out to 30 yrs and have a significant effect.

I have another question for a different thread.
__________________

__________________
modlair is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: dory36: old vs. new firecalc results?
Old 05-26-2006, 08:18 PM   #22
Early-Retirement.org Founder
Developer of FIRECalc
dory36's Avatar
 
Join Date: Jun 2002
Posts: 1,826
Re: dory36: old vs. new firecalc results?

At t=0 the inflation is still adjusted. I retired early 2001, and my expenses for the year had to come from the money withdrawn for that year, even if I didn't know in January that inflation was going to increase my costs in November -- I still had to pay those costs.

But you have a good point -- it's likely that most expenses are front-loaded or spread evenly through the year rather than end-loaded. Let me ponder that a bit.

Regarding growth of the money taken out, there is no way for me to know what someone will do with that money. That's why I treat withdrawn money as completely outside the model. It's not that I object to the idea that this money can grow after withdrawal -- of course it can. But where ever possible, I have tried to avoid any assumptions about how people will handle things, and only analyze the historical behavior of the market.

If someone expects to make 5% total return on their withdrawal, then they ought to enter 95% of their spending requirement instead of 100%.
__________________

__________________
Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
dory36 is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-26-2006, 10:06 PM   #23
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 190
Re: dory36: old vs. new firecalc results?

Quote:
Regarding growth of the money taken out, there is no way for me to know what someone will do with that money. That's why I treat withdrawn money as completely outside the model. It's not that I object to the idea that this money can grow after withdrawal -- of course it can. But where ever possible, I have tried to avoid any assumptions about how people will handle things, and only analyze the historical behavior of the market.
The rationale is legit. No question. But the t=0 case looks inconsistent. If expenses are to grow that year, rather that be frozen at the user specified number of t=0, then clearly they had time to do so. If they had time to grow, then so did the withdrawl.

I'm kinda thinking this can be a fairly big effect because mostly, it's about t=0 and that means anything done compounds 30 or 40 or however many yrs.

Quote:
If someone expects to make 5% total return on their withdrawal, then they ought to enter 95% of their spending requirement instead of 100%.
Hmmm. Something like this, but I don't think exactly this. It has to be briefed too. The real problem here is . . . this is a really big effect. It will substantially affect planning -- just like the year 0 situation (which is probably related). Hmmm.

Thanks for considering the thoughts. Don't mean to nitpick and wouldn't if I thought these effects would be miniscule.
__________________
modlair is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-27-2006, 10:21 AM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: dory36: old vs. new firecalc results?

And then at the end of the day, its just a simulation and a bunch of the assumptions and calculations will turn out to be at odds with reality...
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-27-2006, 06:12 PM   #25
Early-Retirement.org Founder
Developer of FIRECalc
dory36's Avatar
 
Join Date: Jun 2002
Posts: 1,826
Re: dory36: old vs. new firecalc results?

The issue is... does FIRECalc report too conservative an SWR due to too great a withdrawal the first year, because* FIRECalc assumes your spending in the first year will be spent at the inflated rate near the end of the year rather than the average of the start and end inflations, and does not build in any growth of those withdrawn funds once they are taken out.

We can test the effect without rewriting a lot of code simply by running the model and adding a single lump sum back to the portfolio in the first year. The range of annual numbers discussed have been in the 3-5% range for inflation and in the 8-12% range for growth. As rodmail points out, only half would apply, as the adjustment would average the zero at the start of the year and the total at the end of the year, so the combined effect would seem to be a return of a possible 5% - 10% of the first year withdrawal to the portfolio.

So... what happens to the maximum withdrawal that still achieves a 100% SWR* if we put back in, say, 5%, 10%, or even 15% of the first year's withdrawal? (These use the defaults except for the added back funds.)




Added
Amount* **
|
100% Safe
Withdrawal* * *
|
Increased Spending
Year (cumulative)

$0 (0%)
|
$26,960
|
-
$1500 (5%)
|
$27,015
|
$55/year
$3000(10%)*
|
$27,070
|
$110/year
$4500 (15%)
|
$27,129
|
$169/year


So even if we project the high end of the likely difference, 10%, to account for unspent growth and savings due to spending prior to the impact of the inflation for the year, we're talking about $110 per year extra spending per year. That is 30 cents a day difference in spending, between my conservative approach, and the high end of the approach that would allow the FIRECalc user to try and squeeze the last penny out of the portfolio.

Even if we went to 15%, as the table shows, we're still only talking $169/year, or 46 cents/day.

While we disagree whether I am being too conservative with my approach, I suggest that in a tool designed as a go/no-go planning tool for an uncertain future, being 30 cents a day too conservative is a non-issue.

dory36
__________________
Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
dory36 is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-27-2006, 07:15 PM   #26
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 1,012
Re: dory36: old vs. new firecalc results?

Quote:
Originally Posted by dory36
The range of annual numbers discussed have been in the 3-5% range for inflation and in the 8-12% range for growth.
Having read a number of posts on this board I suggest that the growth rate for money to cover current year expenses would be more on par with the rates produced in a MMA and thus much closer to the inflation rate.* If this is so then the growth is cancled out by the increas in inflation through the year.
__________________
jdw_fire is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-27-2006, 09:52 PM   #27
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 190
Re: dory36: old vs. new firecalc results?

Thanks for giving it thought and effort, dory. I'm gonna scratch my head some and think. I was thinking originally that a relatively small number in year 0 would compound over 30 or 40 yrs and get pretty serious later, but you may have shot that down.

Hmmm.
__________________
modlair is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-28-2006, 04:31 AM   #28
Early-Retirement.org Founder
Developer of FIRECalc
dory36's Avatar
 
Join Date: Jun 2002
Posts: 1,826
Re: dory36: old vs. new firecalc results?

A small amount can grow a whole lot, but this isn't a linear function. All we care about is how many cycles dip below zero.
__________________
Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
dory36 is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-28-2006, 12:35 PM   #29
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 190
Re: dory36: old vs. new firecalc results?

Okie doke, Sunday morning and time to think. Let me get the core concepts understood:

1) We're looking for an inaccurate number of failed cycles. If we adjust a total on the portfolio with some change in the calculation, but that adjusted total is not sufficient to change the number of failed cycles, then it is nitpicking even if the portfolio value changes what appears to be a significant amount. Nothing is significant and wastes your time unless it changes the number of failed cycles. I think this is clearly true. The number of failed cycles is what determines confidence level so that is all that matters.

2) Apparently your implementation of inflation on spending is done in January, but uses December's inflation measure (??). This means that for year 1876, you apply the (Dec) end of year inflation measurement to the year's spending -- even though you're going to pre-spend that money in January. And because you prespend that money in January, that year's spending does not reside for any months in an interest bearing account and does not grow.

3) I said 1876 in item 2) but you also do the same thing in year 0 (1871?). 1871's end-of-year reported inflation determines the spending level of 1871, after being added to the user's input number for first year spending. So if a user says his first year's spending will be 30,000, you will actually spend in that first year (30000 X (1.0 + infl rate)).


Okay jdw_fire pointed out that if we presume that short term rates are pretty close historically to inflation, anything done to say that spending is spread over the year means that inflation cancels growth. I think this is true. The only question is does "inflation cancels growth" constitute an increase or decrease in portfolio size in comparison to the current algorithm (and of course if that size change is big enough to generate new cycle survivals/failures).

dory, your post seemed to try to explore any difference in inflation vs short term returns as the year traverses and yeah, that's pretty convincing that such an amount will be small (though it will compound as an annuity, with year 0 compounded 30 yrs, year 1 compounded 29 yrs etc), but I suspect it is not going to generate a cycle survival/failure change so that is persuasive.

The only remaining doubt I would suggest is that a user specifies a first year spending value and that is not what he or she gets. He gets the number he or she specified plus that year's inflation. This difference is not going to compound (I don't think), but it means one year's worth of inflation will affect the successful SWR. I'm guessing small potatos and at most this might change one cycle, but I'm not sure.

Anyway, thanks for entertaining the questions.
__________________
modlair is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-28-2006, 01:11 PM   #30
Early-Retirement.org Founder
Developer of FIRECalc
dory36's Avatar
 
Join Date: Jun 2002
Posts: 1,826
Re: dory36: old vs. new firecalc results?

A few points, for those lost in this thread.


1 - The user enters what it costs them today to live on, annualized, not what they think it will cost them to live on in the coming year. They don't and can't know that. Because FIRECalc uses historical data, it can use the year end results, even though they are not knowable by the retiree in January.

2 - As a failure-avoidance utility, FIRECalc and other similar tools don't particularly care if a strategy will make you enough money to hire Bill Gates as a houseboy -- that is still simply a "1" in the number of successes column, the same as if you had ended with 12 cents. The only number that matters in the failure avoidance tool is the worst case outcome. If the worst case is greater than zero, it's a success.

3 - FIRECalc and similar tools are planning tools, not spending models. After using FIRECalc and other tools to decide that living off your portfolio and other non-employment sources is feasible, you don't ignore the world. Your actual spending model is likely to be more like ESRBob's 95% rule, where you party hearty following great years, and tighten your belt when the market, unexpected expenses, or anything else makes you think that doing so is a good idea.
__________________
Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
dory36 is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-29-2006, 08:23 AM   #31
Early-Retirement.org Founder
Developer of FIRECalc
dory36's Avatar
 
Join Date: Jun 2002
Posts: 1,826
Re: dory36: old vs. new firecalc results?

A Memorial Day present for rodmail...

I modified the code so the inflation-adjusted withdrawal for year 1 is the average of the nominal withdrawal and the year-end inflation-adjusted amount.

The difference is quite a bit less than I expected. In the default conditions, the success rate is unchanged, and the average ending portfolio increases by only $992, after 30 years. The withdrawal amount for a 100% safe W/D goes up only $19 a year.

But it is calculated more closely to actual likely spending patterns, spread throughout the year, so the idea makes sense to incorporate.

OTOH, factoring in growth of money taken out of the portfolio is not something I feel comfortable doing. I don't know whether or how people would invest these withdrawn funds, and I have no good source of data for the sorts of very short term investments that the average investor would have had access to in 1871 and later.

So, once money is withdrawn, it is "out of sight" to FIRECalc.
__________________
Often uninformed, seldom undecided.

Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. Mark Twain
dory36 is offline   Reply With Quote
Re: dory36: old vs. new firecalc results?
Old 05-29-2006, 10:31 PM   #32
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 190
Re: dory36: old vs. new firecalc results?

Quote:
A Memorial Day present for rodmail...
haha, excellent! I'm a former USAF officer so my fellow servicemen thank you.

Not surprised it proves insignificant. The discussion was headed in that direction.

Now . . . about tax loss carry forwards . . . .
__________________

__________________
modlair is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Firecalc slays a strawman, deceives many hankjoy FIRE and Money 46 11-30-2010 04:14 PM
FIRECalc special option results Lsbcal FIRE and Money 0 06-28-2006 04:54 PM
FIRECalc Results Chince Hi, I am... 4 09-11-2005 04:51 PM
Question for Dory36 on FIRECalc moguls FIRE and Money 24 03-06-2004 06:03 AM

 

 
All times are GMT -6. The time now is 09:02 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.