Please help me understand environment idea

[palomalou]

I have many times read (on Firecalc instruction page, for one) that how one does financially depends upon the market environment and trajectory when one retires. I'm not sure I understand, because if I had done it last year, we would have had one year less savings, but would be retiring into a hot market. Would not the year less savings far overcome the market not necessarily going higher? This is a DUMB question, but thank you for your help.

 

[Major Tom]

Well, let's just say that you decide to retire in the first year of a down market, instead of waiting one more year. Then you would have had one less year of savings AND the phenomenon of retiring into a less-than-hot market.

There are so many variables.

 

[brewer12345]

It does not work like that. What the comparison means is this:

Suppose two retirees with the same portfolio and the same withdrawal amount retire. Retiree A has a favorable sequence of returns where the market is positive material amount for each of the first 5 years and inflation is quiescent. He usually does well and has good survivability and high portfolio balances for the rest of his life.

Retiree B retires into the teeth of poor returns and high inflation for the first 5 years. Even if he then has good market results for the rest of his retirement he is at high risk for the rest of his retirement because of the damage inflicted on his portfolio out of the starting gate (which he may never recover from.

 

[donheff]

Brewer has it. The idea is a look back feature not a predictive concept since you can't know how things will go in the future. Brewer's retiree A can look back after 5 years and eliminate all the scary scenarios that had him crashing and burning because his portfolio was decimated and he kept on with his rosy SWR. He can be more confident now that his chosen SWR is survivable than he was 5 years ago. Unfortunately, nothing is guaranteed going forward.

There is a somewhat different but predictive concept that posits you can look at the current PE10 or other factors indicating where we likely are in the business cycle and can assume we are more or less likely to be heading into a good period or a bad period. I.e., you can make a better guess as to what the next 5 years will be like. To the extent that you buy that theory you can adjust your SWR up or down to fit.