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Old 03-21-2015, 12:06 PM   #21
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This just shows how goofy the premise of FireCalc is. That a fundamental question like this could engender a long discussion with a lot of differing ideas makes this clear. Unless someone is a proven successful trader, then what counts is what Warren Buffet calls "look through earnings". When you retire you aim to replace your labor earning power with the earning power of your portfolio. What somebody is bidding for that earning power is meaningless, unless you are selling it to them at that price.

Also, the idea that Firecalc could contain some sort of ratchet mechanism that, like a come along, allows you to increase your spending but does not compel you to decrease it is very strange on the face of it.

Ha
This suggests (unless I'm misreading what you're trying to say) that you should never touch principal. If you only touch the earnings of your portfolio (divs/cap gains) then you need a much bigger pile of money (or conversely, a much smaller spending budget.) Many of us are fine with slowly consuming the principal over time and leaving a lesser inheritance to those that survive us. Firecalc assumes this as well.

In an ideal world I would have a big pension, full SS, health care covered by a retirement plan, and enough dividends to make up any shortfall. In reality I have a very small pension (<500/month) starting next year, DH's SS, my smallish SS 10 years or more out, some rental income - and the rest comes out of my portfolio... some of it is in the form of principal since my investments are in broad index funds rather than funds that target dividend production. Even still I'm only at a 3.3% WR now (which will drop as the pension and my SS come online.) I also expect my spending to drop as the kids move out.
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Old 03-21-2015, 12:07 PM   #22
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FireCalc also doesn't know when you retired so if I retire in 2005 and it says I can withdraw $40,000, but in 2014 my portfolio is much higher, there's no reason I cant re-run FireCalc as if I was retiring in 2014 and if it says its safe to withdraw $62,000, then I should be able to increase my withdrawals to $62,000. There's no reason I would have to lower my withdrawals from there just because the market took a hit anymore than I would have to lower them from the original $40,000 in 2005 if the market took a hit.
The above is true, especially when you consider your money needs to last nine fewer years...
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Old 03-21-2015, 01:04 PM   #23
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Another simple way to look at it, (again, I like to use a 100% success WR rate to keep this simple), FIRECalc is conservative, and reports what will succeed in any period. A large number of periods will end up with as much or more than you started with, sometime much, much more. Each of those periods would have succeeded with a higher WR% than the conservative 'succeed all periods' number.
Agree with you, but just want to emphasize one thing:

FIRECalc reports what HAS succeeded. If you navigate on firecalc numbers the central premise is that the investment future will be at least as good as the worst past.

Not a bad premise, but good to always keep in mind.
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Old 03-21-2015, 01:49 PM   #24
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This suggests (unless I'm misreading what you're trying to say) that you should never touch principal.
You are correct, and this is my approach, but I do not think it is the only one. I do think however, that it is possible to get blindsided by adherence to the Firecalc type approach. Many here swear by it, and I do not want to oppose any of you. I am interested in logical inconsistencies, and I also am wary of thoughts that are sometimes suggested by words. For example, one poster on this thread mentioned that Firecalc is fine as long as the future is not worse than the past. Worse is a big word, and might be be hard to identify in advance. Also, remember than the 120 years or whatever of Firecalc history is a very small number of independent trials. Since I don't use this approach, I don't want to debate it, others likely have much more fully formed ideas about it.

Ha
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Old 03-21-2015, 02:10 PM   #25
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Right. You just wanted to do a verbal drive by shooting:
Ya shure, you betcha, chief.
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Old 03-21-2015, 02:26 PM   #26
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Problem? FIRECALC uses actual market history from 1871 to present which includes starting in good years/periods AND bad (including the Great Depression, 1965-1983, 1987, 2000, 2008 etc.). It doesn't need to "know" - that's kinda the whole point of FIRECALC. The "problem" with FIRECALC is there's no crystal ball, e.g. if future real returns are significantly worse than any period from 1871 thru present. That's the Achilles heel of all retirement calculators and the reason many use to withdraw more conservatively than their historic SWR. And "a few years in arrears" could just as easily be up, as down. Frankly I like using % of remaining portfolio methodology (like audreyh1, 5 year timeframes IIRC) for retirement income at the outset, and maybe going to inflation adjusted (Classic SWR, like FIRECALC) only when we reach 75-80 years old or thereabouts. YMMV
I am aware of firecalcs shortcomings in regards to retirement planning. I was just adding one more. It doesn't take into account recent history like the seventh year of a bull run, PE ratios, fifteenth year of artificially low interest rates, etc. Stock market returns aren't like coin tosses. There is such a thing as being overdue.
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Old 03-21-2015, 02:42 PM   #27
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FIRECalc does not predict the future, nor does it know whether the market is currently at the top of a cyclical bull, or at the bottom of a recession. You have to make that determination.

If I set my WR to 4%, and without SS, FIRECalc tells me that historically, I could be either broke, or a decamillionaire at the end of 30 years. That's all. And that's 100% success for a 30-year retirement (although I could be totally broke by year 31st).

Is the future going to be like the past? Up to me to ponder. Where are we in the market cycle? Again, that's for me to think about.
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Old 03-21-2015, 02:46 PM   #28
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the seventh year of a bull run, PE ratios, fifteenth year of artificially low interest rates, etc. Stock market returns aren't like coin tosses. There is such a thing as being overdue.
Nonsense! I have it on good authority that this time it's different.
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Old 03-21-2015, 02:50 PM   #29
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Gatordoc, I don't think posters here disagree with you.

Look how many concurrent threads are runnning where people talk about rebalancing some of these expensive stocks into overseas flight and train tickets, and hotel stays.

I have been doing some rebalancing into home maintenance/update myself.
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Old 03-21-2015, 04:30 PM   #30
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Presumably, if one reruns FireCalc after say 5 years of retirement, one also has to deduct 5 years from the total time one will be retired, thus making it easier for the investments to last.
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Old 03-21-2015, 04:43 PM   #31
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But, but, but statistically the longer you live the higher the life expectancy. You should deduct some years, but not the entire 5.

PS. For example, for IRA RMD the IRS says a 70-year-old shall use a distribution period of 27 yeas, but an 80-year-old to use 19 years, and a 90-year-old to use 11 years.
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Old 03-21-2015, 05:03 PM   #32
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I like this one, too. % of remaining portfolio is reassuring in that you should never run out of money. In an up year, you get to spend more, but in a down year you need to be prepared to spend less. I'm ok with that.
Ditto

My modification is that I keep a running average of the last three years. This smooths out the tops and bottoms (so far it's only been tops, but I know the bottoms are coming someday).

While I certainly don't want to run out of money, I also don't want to be on one of those paths where I leave a huge pile of money to the kids. They'll get plenty, but I intend to spend most of it.
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Old 03-21-2015, 06:38 PM   #33
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I am aware of firecalcs shortcomings in regards to retirement planning. I was just adding one more. It doesn't take into account recent history like the seventh year of a bull run, PE ratios, fifteenth year of artificially low interest rates, etc. Stock market returns aren't like coin tosses. There is such a thing as being overdue.
It doesn't? During the history FIRECALC is based on:
  • There have been 4 "bull runs" longer than 'seven years', 3 of them much longer and fairly recent.
  • PE ratios have reached current levels or higher quite a few times.
  • And interest rates have been low before (not sure where you're getting 15 years though).
I am not looking for an argument, and I agree it's prudent to be more conservative than past history would suggest. But you simply can't say conclusively that we're in unchartered territory, and neither is FIRECALC. 'This time is different' still doesn't apply - yet...
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Old 03-21-2015, 07:01 PM   #34
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why don't we just use 10% SWR because it just gives me more to spend?
First remember that the 4% SWR is a rule of thumb with some caveats. This is not a universal truth. Those who do variable WR to take less in bad years are likely being prudent. In a good year... sure you can spend a bit more. But some of that growth may be needed to help in down years or decades.
the SWR is a rote method for approximating likelihood of success in retirement funding. but there is no guarantee
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Old 03-21-2015, 07:56 PM   #35
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It doesn't? During the history FIRECALC is based on:[*]There have been 4 "bull runs" longer than 'seven years', 3 of them much longer and fairly recent.[*]PE ratios have reached current levels or higher quite a few times.[*]And interest rates have been low before (not sure where you're getting 15 years though). I am not looking for an argument, and I agree it's prudent to be more conservative than past history would suggest. But you simply can't say conclusively that we're in unchartered territory, and neither is FIRECALC. 'This time is different' still doesn't apply - yet...
I am not saying things are different. What I am saying is that where we are in the cycle is significant and isn't taken into account by firecalc. Let's say there are 25 cycles ( out of 113) in firecalc where valuations and interest rates are similar to now( which I doubt). Now let's say you get a 90 % success rate when plugging in your numbers. I would argue that most, if not all, of the failures would come from those similar 25 times and the successes were coming from times when valuations and interest rates were better. So, your success rate is most likely going to be much less than 90. That is an additional flaw to firecalc, along with not being able to predict the future.
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Old 03-21-2015, 08:12 PM   #36
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What Gatordoc describes is called conditional probability. It applies when we have some info that allows us to narrow down from the general a priori probability.

An example is the following. If all we know about A is that he's a man born in the US, we can say that his life expectancy is X. But suppose our friend A has diabetes, overweighs, smokes, and has high blood pressure, we will be able to say that his life expectancy is now Y, and darn it, would anyone be surprised that Y is less than X.

But in a way, FIRECalc takes care of that by saying that yes, you will survive your 30-year retirement even if you start out in a bull market and live high on an initially inflated portfolio, but there's still a chance you will live under a bridge in Year 31.

What people want is the ability to measure that risk, to have a quantitative assessment. That is hard. And if someone can figure that out, he is not going to use it just for retirement planning. He is going that info to time the market and makes big bucks!
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Old 03-21-2015, 08:23 PM   #37
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That is an additional flaw to firecalc, along with not being able to predict the future.
Yep, that lack of knowing how to time the market and predict the future is a real problem with FIRECalc. I'm surprised anyone bothers to use it...
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Old 03-21-2015, 08:26 PM   #38
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FIRECalc data are one limited set of historic data. They did not take every series from every intrayear high point. Likewise, unless you have 100% success, the few failure cases you see in any given run are mostly those with a bad string of returns shortly after starting the simulation. If you consistently adjust your starting date to new highs, you are implicitly increasing the likelihood that you are starting on one of those failure cases with a string of bad returns about to happen. So when you get some kind of 90% success at a randomly chosen date that may be a real 90% success, but if you get 90% success after cherry picking a high starting point, you may very well have cherry picked yourself into one of the 10% failure cases, so the "independent" odds on which the simulations are based are no longer really independent. You end up selecting a worst case starting point.
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Old 03-21-2015, 08:45 PM   #39
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FIRECalc data are one limited set of historic data. They did not take every series from every intrayear high point. Likewise, unless you have 100% success, the few failure cases you see in any given run are mostly those with a bad string of returns shortly after starting the simulation. If you consistently adjust your starting date to new highs, you are implicitly increasing the likelihood that you are starting on one of those failure cases with a string of bad returns about to happen. So when you get some kind of 90% success at a randomly chosen date that may be a real 90% success, but if you get 90% success after cherry picking a high starting point, you may very well have cherry picked yourself into one of the 10% failure cases, so the "independent" odds on which the simulations are based are no longer really independent. You end up selecting a worst case starting point.
Exactly. I would also argue that even if you have a 100% success under times of high valuations there would be more near misses than if valuations were better. So, if you increased your SWR after a good year you most likely will turn some of those successes into failures.
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Old 03-21-2015, 09:52 PM   #40
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... I do think however, that it is possible to get blindsided by adherence to the Firecalc type approach. Many here swear by it, and I do not want to oppose any of you. ...
I'm not looking for a debate either, just trying to learn and challenge my own thinking. But I think you are over-generalizing to say many here 'swear by' FIRECalc.

I wouldn't be surprised if I have the highest number of posts on the subject, yet, I only look at it as something to give some insight and perspective. It's interesting to test different scenarios against history, to get some feeling for sensitivity. I think it's useful to a point, but 'swear by' the results? I feel pretty confident that the results are an accurate reflection of history, but we all know that only means so much.

We know the future may look different, but it seems useful to study history, and I think this is all most of us do with the historical report software.

-ERD50
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