Firecalc use after market correction?

[brainsagolfer]

SO... with the recent down cycle in the market i was wondering- if Firecalc says i am good to go (100% success) and THEN the market tanks .. say down 30%- i would assume that if i run firecalc i would NOT be okay? \
BUT, if the market just tanked 30%, i have already accounted for that in my worst case assumptions in the Pre- tanking use of Firecalc.
Any way to account for this?
If i was not quite 100%, market tanks and i throw in 25K $ for 2 years, i should be 100% at least, since these $ are at least 1 for 1, probably more as the market rises.

 

[pb4uski]

WADR, if you think this is a "down cycle" then you've never seen a real down cycle. This is just a blip... nothing more and nothing less.

One easy way to check is run Firecalc.... then go to the Investigate tab and select the next to last choice ("Given a success rate determine ..... portfolio for a set spending level") and compare the minimum portfolio balance for your desired success rate and spending level with your actual portfolio value.

Be sure to factor in your AA in making that comparison.

 

[RunningBum]

Here's a related question: If there's an unsustainable stock market run-up that takes you to 100% with Firecalc, do you really think you are at 100%? Or are you set up for a very likely poor sequence of returns as the market corrects.

 

[brainsagolfer]

WADR, if you think this is a "down cycle" then you've never seen a real down cycle. This is just a blip... nothing more and nothing less.

One easy way to check is run Firecalc.... then go to the Investigate tab and select the next to last choice ("Given a success rate determine ..... portfolio for a set spending level") and compare the minimum portfolio balance for your desired success rate and spending level with your actual portfolio value.

Be sure to factor in your AA in making that comparison.

I think you misunderstand my Question. IF I am Good by firecalc (100%) and THEN the market downturn matches the worst case scenario that Firecalc was considering PRE downturn- then i should still be 100% okay- but firecalc is certainly going to still factor in the same worst case scenario- essentially DOUBLING the worst case!

 

[brainsagolfer]

Here's a related question: If there's an unsustainable stock market run-up that takes you to 100% with Firecalc, do you really think you are at 100%? Or are you set up for a very likely poor sequence of returns as the market corrects.

Yes, i would say i am still 100%- firecalc is factoring in the worst historical downturn in the market. BUT, after a 40 % crash, when you put your portfolio into firecalc it will use you 60% of original $ and THEN still factor in the worst crash in history, correct?

 

[ERD50]

...
BUT, if the market just tanked 30%, i have already accounted for that in my worst case assumptions in the Pre- tanking use of Firecalc.
Any way to account for this? ...

That is exactly the scenario that already is accounted for (historically) in FIRECalc.

Remember, a 100% safe WR means it was safe at every point. And the most 'unsafe points were at the tops, going into a dip, which is what you described (though I'd barely call the recent market action even a dip).

That 'safe' years are those where they retired with the same $X but were already in a dip - those are the lines that end flat or up (sometime to the moon).

-ERD50

 

[ERD50]

Yes, i would say i am still 100%- firecalc is factoring in the worst historical downturn in the market. BUT, after a 40 % crash, when you put your portfolio into firecalc it will use you 60% of original $ and THEN still factor in the worst crash in history, correct?

But we don't get 2 consecutive crashes. And if we did, then THAT would be the worst case scenario, and already be accounted for in FIRECalc. If you wanted to re-run that, it would be 4 consecutive crashes - you could go on forever.

Again, the obligatory "assuming the future is not worse than the worst of the past", but we can't predict, this is just a historical look.


-ERD50

 

[Dtail]

Yes, i would say i am still 100%- firecalc is factoring in the worst historical downturn in the market. BUT, after a 40 % crash, when you put your portfolio into firecalc it will use you 60% of original $ and THEN still factor in the worst crash in history, correct?

I think I see where you are going here.
If we use your example in a historical sense and apply it to the 2008 scenario, then yes you are starting at a much lower base, but you are also receiving the much higher return period from 2009 to present times.
Thus since Firecalc is using actual historical scenarios, your example is not a typical scenario.
Even the 1999 retiree has been hurt by the 2000 yr drop and then using your example has been hurt again with 2008 yr drop, but still is considered okay with the 4% theoretical withdrawal scheme.

Am I hitting your question?

Edit - I see that ERD50 is responding with the same general concept.

 

[audreyh1]

SO... with the recent down cycle in the market i was wondering- if Firecalc says i am good to go (100% success) and THEN the market tanks .. say down 30%- i would assume that if i run firecalc i would NOT be okay? \
BUT, if the market just tanked 30%, i have already accounted for that in my worst case assumptions in the Pre- tanking use of Firecalc.
Any way to account for this?
If i was not quite 100%, market tanks and i throw in 25K $ for 2 years, i should be 100% at least, since these $ are at least 1 for 1, probably more as the market rises.

I think you can take the highest your portfolio has ever been and run FIRECALC.

 

[cyber888]

Yes, i would say i am still 100%- firecalc is factoring in the worst historical downturn in the market. BUT, after a 40 % crash, when you put your portfolio into firecalc it will use you 60% of original $ and THEN still factor in the worst crash in history, correct?

Correct. My Firecalc for a 2020 retirement was 100%. With the market correction it is 96%-98% even after I deducted $100-$150/month from my expenses.

Got to work 1 or 2 more years for a buffer.

 

[copyright1997reloaded]

Not really an answer for the OP, but fun with numbers:

If the market goes down 20% and you then invest and the market continues to go down until it loses 50% from the peak, how much did you lose? 30/80*100% = 37.5%

If the market goes down 20% and you then invest and the market continues to go down until it loses 60% from the peak, how much did you lose? 40/80*100 = 50.0%.

History of SP 500 bear markets (since 1950's):
1. Crash of 1957: -20.7% (3 months)
2. Crash of 1962: -28.0% (6 months)
3. Crash of 1966: -22.2% (8 months)
4. 1969/1970: -36.1% (18 months)
5. 1973/1974: -48.8% (21 months)
6. 1980/1982: -27.1% (20 months)
7. Crash of 1987: -33.5% (3 months)
8. 2000/2002: -49.1% (31 months)
9. 2007/2009: -56.8% (17 months)
10. ?? / ??: ?? (?? months)


Some older bear markets as measured by the Dow Jones:
1. 1901/1903: -46.1% (29 months)
2. 1906/1907: -48.5% (22 months)
3. 1909/1911: -27.4% (22 ")
4. 1912/1914: -26.4% (27 ")
5. 1916/1917: -40.1% (13 ")
6. 1919/1921: -46.6% (22 ")
7. 1929/1932: -89.2% (34 ")
then a big upswing (almost 4x), then
8. 1937/1938: -49.1% (41 ")
9. 1938/1942: -41.3% (42 ")

Fun with numbers on the 1929-1932 crash. Let's say you managed to get out before the crash of 1929, and invested after the market had lost the typical amount of prior bear markets (say 40%). How much would you have lost at the great depression bottom: (10.8-60)/60 = -82%. Yes, that bad!

 

[mrWinter]

Yes, I've asked a similar question before. Firecalc already included worst case crashes, so adding another crash back to back is worse than has happened in history. Firecalc doesn't know what has actually happened recently in the real world, and so doesn't take that into account. In theory you should be able to safely trim those worst case scenarios out from the simulation and get a more 'accurate' picture, but I think the difficulty is in determining exactly the criteria for removal objectively. Really I'd think firecalc is most accurate when running at the peak of a market run-up. If you are at the bottom, or somewhere in the middle of market valuations, then firecalc is going to give you an overly pessimistic picture. So I believe the answer to the question:

Here's a related question: If there's an unsustainable stock market run-up that takes you to 100% with Firecalc, do you really think you are at 100%? Or are you set up for a very likely poor sequence of returns as the market corrects.

is Yes, you really are at 100% and can retire. As long as this current unsustainable market run-up is no worse than the worst so far in history.


I also like this way of putting it by audreyh1:

I think you can take the highest your portfolio has ever been and run FIRECALC.

If you are believe in the predictive capability of the CAPE, you could use that to trim scenarios, excluding scenarios that start in a year with a CAPE higher than the current CAPE at the time of running the simulation.

I wrote a modification to the open source shall-not-be-named retirement calculator that did this, as expected the effect of including that logic on recent market conditions was nil, as the CAPE is basically as high as it's ever been, so there are no simulations with higher CAPE starting years to be cut.

 

[redduck]

<snip>Firecalc doesn't know what has actually happened recently in the real world.

Does anybody?

 

[Navigator]

The OP makes an interesting observation that points out the weakness of retirement calculators such as Firecalc. They take information at a single point in time and use historical market data to estimate the chances of someone having a financially successful retirement. However, Firecalc does not know if the market just crashed or had a large run up, whether stocks are priced high or low. It also doesn’t know that the US has a rapidly aging population or what current government policy is. Given all the factors that can affect future stock and bond prices, there is not nearly enough historical data available to make accurate long term predictions about retirement success. Rather, IMHO, Firecalc results should be viewed as a rough estimate of your chances of success, with the understanding that your plans may need to change as circumstances change.

 

[pb4uski]

Correct. My Firecalc for a 2020 retirement was 100%. With the market correction it is 96%-98% even after I deducted $100-$150/month from my expenses.

Got to work 1 or 2 more years for a buffer.

You do realize that there is really no statistical significance between 100% and 96%... right? IOW 96% is as good as 100% for this sort of an analysis... so retire in 2020.

 

[ERD50]

The OP makes an interesting observation that points out the weakness of retirement calculators such as Firecalc. They take information at a single point in time and use historical market data to estimate the chances of someone having a financially successful retirement. However, Firecalc does not know if the market just crashed or had a large run up, whether stocks are priced high or low. It also doesn’t know that the US has a rapidly aging population or what current government policy is. Given all the factors that can affect future stock and bond prices, there is not nearly enough historical data available to make accurate long term predictions about retirement success. Rather, IMHO, Firecalc results should be viewed as a rough estimate of your chances of success, with the understanding that your plans may need to change as circumstances change.

To your first point, I don't consider this a weakness of the calculator. It just 'is', and needs to be considered as part of the process. If FIRECalc tried to account for these things, I would consider that a weakness - now I have to consider its considerations and second guess everything it tells me. Just give me the report. That's what I want.

To your last sentence, please give an example of how you would adjust. Time and time again, people throw out this little chestnut, but I have yet to see anyone consider just how much, how long, and when a cut would need to occur to make a meaningful difference.

Please share an example.

-ERD50

 

[Chuckanut]

FireCalc is just a tool, imperfect and subject to variables that it cannot control.

When I was considering retiring I ran FireCalc, and I also ran a few MonteCarlo simulations . They were all 90%+ so I figured I was OK to retire.

No guarantees, of course!

 

[big-papa]

SO... with the recent down cycle in the market i was wondering- if Firecalc says i am good to go (100% success) and THEN the market tanks .. say down 30%- i would assume that if i run firecalc i would NOT be okay? \
BUT, if the market just tanked 30%, i have already accounted for that in my worst case assumptions in the Pre- tanking use of Firecalc.
Any way to account for this?
If i was not quite 100%, market tanks and i throw in 25K $ for 2 years, i should be 100% at least, since these $ are at least 1 for 1, probably more as the market rises.

Only if such a similar correction already happened in the past. Problem is, there are an infinite number of trajectories that can happen to portfolio returns after such a correction.

Firecalc uses sequences of returns as they actually occurred in the past. Most research shows that large market corrections early in retirement results in a higher probability of premature portfolio depletion.

A large correction that happens right after you retire will by definition be included in the Firecalc calculation, but at first only for the end of a simulated retirement, not for the early part of retirement. So, yes, it does give you some information, but it doesn't give you all of the information. For that, unfortunately, you have to wait for a number of years to pass to know whether you are on a track for early depletion or are OK. Firecalc can't predict future returns..

 

[HI Bill]

I think you can take the highest your portfolio has ever been and run FIRECALC.

Thank you! Since I was at 100% a month ago, but am no longer, I was thinking of deferring retirement to get back up to 100%, but it sounds like that may be overly conservative.

 

[Navigator]

Just give me the report. That's what I want.
-ERD50

Yes - that’s what we all want. If only it were that easy!

To your last sentence, please give an example of how you would adjust. Time and time again, people throw out this little chestnut, but I have yet to see anyone consider just how much, how long, and when a cut would need to occur to make a meaningful difference.

Please share an example.

-ERD50

Sure. One example can be found in the paper T. Guyton, Jonathan & J. Klinger,
William. (2006). Decision Rules and Maximum Initial Withdrawal Rates. I put a link in below, but if it does’t work, you can google it. Basically, it states that a failing retirement portfolio can be saved by using rubrics to adjust the spending rate. Of course, computer algorithms can do a better job today.

https://r.search.yahoo.com/_ylt=Awr...al_Rates/RK=2/RS=7Yyu0G8aEgqAfAlhYJAd75tKlx4-

 

[ERD50]

Originally Posted by ERD50 View Post
Just give me the report. That's what I want.
-ERD50

Yes - that’s what we all want. If only it were that easy!

Sure it is. Run FIRECalc, you get the report. Pretty easy.

Originally Posted by ERD50

To your last sentence, please give an example of how you would adjust. Time and time again, people throw out this little chestnut, but I have yet to see anyone consider just how much, how long, and when a cut would need to occur to make a meaningful difference.

Please share an example.

-ERD50

Sure. One example can be found in the paper T. Guyton, Jonathan & J. Klinger,
William. (2006). Decision Rules and Maximum Initial Withdrawal Rates. I put a link in below, but if it does’t work, you can google it. Basically, it states that a failing retirement portfolio can be saved by using rubrics to adjust the spending rate. Of course, computer algorithms can do a better job today.

https://r.search.yahoo.com/_ylt=Awr...al_Rates/RK=2/RS=7Yyu0G8aEgqAfAlhYJAd75tKlx4-

No, the link didn't work for me. And it's bad form to make a statement, and then ask me to prove your statement to myself. The onus is on you.

So I'll try again -

Please give an example of how you would adjust. Time and time again, people throw out this little chestnut, but I have yet to see anyone consider just how much, how long, and when a cut would need to occur to make a meaningful difference.

Please share an example.

-ERD50

 

[Lewis Clark]

... but I have yet to see anyone consider just how much, how long, and when a cut would need to occur to make a meaningful difference.

Karsten over at Early Retirement Now has a great series of articles on safe withdrawal rates.
https://earlyretirementnow.com/start-here/

Scroll down the index to articles on flexibility (Parts 23, 24 and 25)

 

[sengsational]

I think you can take the highest your portfolio has ever been and run FIRECALC.

Best answer! If you get 100% or close, you're good . My thoughts were along the lines of accepting lower success percentages based on CAPE but the high water mark and 100% is better.

 

[TwoByFour]

I think I see where you are going here.
If we use your example in a historical sense and apply it to the 2008 scenario, then yes you are starting at a much lower base, but you are also receiving the much higher return period from 2009 to present times.
Thus since Firecalc is using actual historical scenarios, your example is not a typical scenario.
Even the 1999 retiree has been hurt by the 2000 yr drop and then using your example has been hurt again with 2008 yr drop, but still is considered okay with the 4% theoretical withdrawal scheme.

Am I hitting your question?

Edit - I see that ERD50 is responding with the same general concept.

The above scenario that I bolded should not be accounted for in FireCalc for a normal 30-year return. Using historical data should only consider all complete 30-year sequences in the historical data set. The last possible 30-year sequence has a start date of 1987, which would end in 2017, the last year for which there is historical data. So the terrible decade of 2000-2010 is not accounted for, at least not if FireCalc is using only complete sequences.

 

[ERD50]

The above scenario that I bolded should not be accounted for in FireCalc for a normal 30-year return. Using historical data should only consider all complete 30-year sequences in the historical data set. The last possible 30-year sequence has a start date of 1987, which would end in 2017, the last year for which there is historical data. So the terrible decade of 2000-2010 is not accounted for, at least not if FireCalc is using only complete sequences.

But you can run a 1999-2017 cycle, and compare to other 18 year runs. My research says that 18 years in, the 1966 start year was way worse than a 1999 start year. Start with $1M and 4% spend:

1999 got to $675K in 2017
1966 got to $153K in 1984

-ERD50