Define "good"

[tmm99]

Is there a calculator that mimics this scenario (mrket being down for the first 3-5 years of your retirement)?

Also, is there a calculator that mimics Nikkei Index? (Wait, forget I asked. I just looked at the historical chart, and most of us would not be able to survive the sustained drop they experienced for the 20 some years. I would have to reply heavily on SS at that point.)

Firecalc tells me it will be 100% successful with only 60% of my current asset for my expenses, but I still wonder how I would fare if the market stayed down for a prolonged period of time (lasting past my cash/short term reserves were all exhausted).

 

[jIMOh]

To me "good" would be the portfolio generated a gain equal to income needed. If I needed $35k, and portfolio generated $36k or more, that is "good", if it generated $34k or less, that is "bad". Meaning if portfolio in first X years has more than it had in year X-1, that is "good".

I have read that the market recovers in 3 years just about every time, so I think the right "length of time" is 3 years for X.

 

[youbet]

This may help.

Below is a chart from the front page of FIRECalc giving examples of a 750,000 starting portfolio withdrawing $35k per year. "Good"(green - retired in 75), "OK" (blue - retired in 74) and "Lousy"(red - retired in 73). You can check out how the market performed in the first few years following each retirement to see what "good" looks like.

I believe that the biggest influence, more than market performance, on the crashing red line was several consecutive years of high cpi. Both were factors, but cpi was extraordinarily high.

 

[walkinwood]

I agree that the models that are typically run don't adjust spending for down markets. This is a good model for people who's budget include zero discretionary spending, but that's not most of us here. When markets are down / there is an economic slow down, everyone, not just the retired, pull back, so it's not as hard to cut back on discretionary.

The way the models usually work is you plan once, at the beginning of retirement, then blindly do what it says until the end (not realistic). The reality is that we run the model every year, if not more often, and if changes are called-for to stretch it out a bit, those changes can be made.

There are variable SWR models out there too like the 4/95 plan that Bob Clyatt laid out. We use a percentage of our portfolio at the beginning of the year as our max withdrawal for the year.

I liked the Guyton "decision rules" which allow both an increase and decrease in withdrawals based on portfolio performance and inflation. These have been discussed on the forum before

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.534.3545&rep=rep1&type=pdf

 

[NW-Bound]

After you have been in retirement for some time, say 5 or 10 years, how much should your portfolio be in order to ensure that you are on the right track? It occurs to me that it is easy to use FIRECalc to explore this. Here's what I did.

1) Set portfolio size to $1M. Leave the "Years" at 30. Portfolio mix to a 50/50 mix between total market and long interest rate, everything else in default value. Use "Investigate" tab to search for the max WR to support a 30-year retirement. Answer: $37124/yr.

2) Now go back to the "Start" page, set the spending to $37124. Set the "Years" to 25 instead of 30. Then, use "Investigate" tab to look for the portfolio size to support this spending for 25 years. Answer: $915K.

3) Repeat for 20 years, 15 years, etc...

Results:

30 years: $1M
25 years: $915K
20 years: $800K
15 years: $657K
10 years: $489K
5 years: $269K

Note that FIRECalc reports everything in inflation-adjusted dollars, so in nominal dollars you will need more than the amounts shown above.

It is interesting to see that the portfolio size is not proportional to the retirement duration. It takes a lot more money in the short-term than in the long run. Take the shortest duration of 5 years for example. At a WR of $37124, you only draw $37124 x 5 years = $185620 in 5 years. Yet, to die broke after 5 years you need to start out with $269K, or 45% higher. Yikes!

The above shows that in the short term, market crashes can really devastate a portfolio and leave you with no time to recover. Time is not on your side. If this bad short-term interval happens early in your retirement, then we have the bad sequence risk.

 

[NW-Bound]

OK, here's another way of looking at the above results. With the first result of $1M start value, $37124 withdrawal, 30-year period, you get to spend a total of $37124 x 30 = $1114K. That's only 11% above inflation for the worst case.

Moving on to 25 years, you get to spend $37124 x 25 = $928K, compared to start value of $915K. Keep going down the lines, and it gets very discouraging.

30 years, $1000K, $1114K
25 years, $915K, $928K
20 years, $800K, $742K
15 years, $657K, $557K
10 years, $489K, $371K
5 years, $269K, $186K

So, it looks like for 20 years or less, to protect against the worst case you are better off just looking for something that matches inflation.

Hey, Daylatedollarshort, are you there?

 

[walkinwood]

Nice analysis, NW-Bound.

Those are good numbers to check your portfolio values against.

 

[NW-Bound]

I made the above posts, then went upstairs to continue putting down some laminate floor boards. There was something bothering me, and I thought about it some more. In the process, with my thoughts diverted, I miscut a couple of boards.

I am taking a break now, and have figured out the fallacy in the above runs. You cannot break a 30-year retirement period into segments, then run FIRECalc on each segment. The market return is not a random walk! There's correlation between successive periods. After a sequence of bad years, the following years saw the market rebound with above average returns. By breaking a 30-year period into segments and looking for worst cases, what we see are successive bad segments one after another.

Here's something to help. At the beginning of retirement, the SWR for a 30-year retirement is $37,124 on a $1M 50/50 portfolio. This is 3.7% WR.

At the mid-point, when we look at what it takes for a 15-year retirement and drawing $37,124, FIRECalc tells us we need $657K. But $37K withdrawal on $657K is 5.6%! Going down to 5 years, FIRECalc says we need $269K, but the WR of $37K has gone up to 13.8%.

What happens to our original 3.7% WR? Confusing, is it not?

The values in post #31 still stand, but they are worst-case values. If you start out at 3.7%WR, and at year 15, you find yourself drawing 5.6%, that means your first 15 years were lousy, and chances are that the next 15 years will not be as bad.

By rerunning FIRECalc with the shorter period and with a higher WR, you are subjecting yourself to another bad 15 years, and historically that has not happened. Not in the US so far anyway. Keep our finger crossed.

 

[RetireAge50]

Define "good"

I think there are ways to protect against the worse case while still allowing for the average and upside to occur. Classifying the first few year's returns as good, bad, or otherwise mostly only applies if you use a predefined/non-dynamic withdrawal strategy.

 

[kcowan]

If you truly believe in LBYM, a couple of down years forces you to cut back. Then when the market corrects, live is good. We retired in 2003 so we knew about the 2000 market meltdown and we had to adapt to that new reality. 2008 was a bonus because it was not permanent!

And our budget run was great from 2003 to 2008! As luck would have it, in 2007 we decided to buy a place in Mexico for 6 months snowbirding and our budget declined by 40% without sacrifice so we concluded that we can live forever!

It is ironic that the decision to enjoy life in the winter solved the budget problems. Maybe unique to Canadians because the COL is relatively high. And then the property we bought was at C$1.065 and now the loonie is at $0.73x.

 

[NW-Bound]

It occurred to me that to look at the vagaries of the market, there is a much simpler way to use FIRECalc. One simply sets the WR to 0, and see how a portfolio shrinks in the worst case after 5 years, 10 years, 15 years, etc... I have done that before, but old age has reduced the superiority of my memory (and I am not quite 60 even).

You can do the above and see the results are really bad in the worst case. And it does not matter whether you are 100% stock, 100% bond, or balanced in that doomsday scenario. See for yourself.

 

[sherrywilliam]

The market has not been good to us this year so far we are down less than what we started with. And it is first year of distributions.

 

[W2R]

The market has not been good to us this year so far we are down less than what we started with. And it is first year of distributions.

I didn't notice that but you're right! Share prices for the funds I have are down, too. But don't forget, December fund distributions are coming up and for some funds they can be substantial. So, that may help.

My portfolio is down about 4% YTD. I can accept that, especially because I sold funds to pay for buying my dream house in cash, fixing it up, moving into it, and selling my former home.

 

[petershk]

I consider "bad" when I am unable to adjust my spending to match the economic conditions.

Before ER that means employment income - expenses > 0 every year (usually saving around 50%). That 50% saving target allows for all kinds of terrible things to happen.

Post ER it's total return - expenses > 0 (inflation adjusted). Of course that's ideal and market fluctuations tend to be more turbulent than job fluctuations.

That said... I try to look at my target SWR (3%) and then see what 3% looks like in terms of historic income changes. For example if I have a 90/10 stock/bond mix... My income fluctuates about 50% in 08/09. That's pretr brutal. Could I cut my ecpenses in half? Not easily.

During stagflation real income drops a couple % a year... But over a long period. That also would have been tough to survive.

But if I have fairly broad flexibility I can at least prepare in advance what I will do if there's a big swing or a long, protracted dead period.

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[audreyh1]

The last few years we've spent less than our withdrawal, and built up a significant surplus in short-term accounts. So I guess that means we're already ready for a "bad" year or two when we draw less from the portfolio.

We'll be drawing a little less next year as our portfolio is more or less flat and thus hasn't recovered the Jan withdrawal. Unless there is a heck of a Santa Claus rally!

 

[braumeister]

I sold funds to pay for buying my dream house in cash, fixing it up, moving into it, and selling my former home.

Exactly my situation.
This year's expenses brought me up to just about a 4% WR which is the highest ever. So no worries for now.

 

[W2R]

Exactly my situation.
This year's expenses brought me up to just about a 4% WR which is the highest ever. So no worries for now.

Good job! That's is really excellent.

At first glance, I think my effective WR will be higher than that this year. I am dipping into my investment principal, which I never did before.

But even so my future WR's will still be less than my dividends, so I am not freaking out. I don't buy a dream house every year, and honestly I plan to stay here for good.

 

[tmm99]

If I didn't have the cost of the move this year, it would have been OK, but the cost of the move definitely raised the spending this year (My RE was in April) which I did budget for (I spent money gained by unspent vacation days, etc) so I shouldn't really fret. My NW is down slightly though. (I transferred a big chunk of money from USD to CAD and since Mint doesn't seem to be able to distinguish CAD from USD, my NW still shows up as good as the beginning of the year. I figure, as long as I am spending the cash, I am OK. I would hate to sell equities right now for sure. I feel for people who have to do that right now.

 

[RetireAge50]

Define "good"

Deleted-pocket typed it.

 

[Bikerdude]

Wow. At the 4 year point (mid 2009) I was down about 25%.

As I recall, that was your incentive to begin SS. In hindsight....a very prudent response.

 

[Options]

Up in 06 and 07, not in 08. By 2013 it did recover to my nominal starting balance.

REW, did you ever cease (or reduce amounts of) rebalancing between 06-13?

 

[REWahoo]

As I recall, that was your incentive to begin SS. In hindsight....a very prudent response.

At the time it felt like a desperate reach for a life raft.

REW, did you ever cease (or reduce amounts of) rebalancing between 06-13?

No, I made no changes in my rebalancing schedule.

The bulk of our portfolio is in balanced funds (Wellington and Wellesley) and those funds rebalanced both on the way down and on the way back up - at least I assume they did. Not sure I would have had the courage to do so if I had to make the rebalancing sell/buy moves myself, but since it wasn't my decision to make, I did great!

 

[Options]

At the time it felt like a desperate reach for a life raft.

But a good one!

No, I made no changes in my rebalancing schedule.

The bulk of our portfolio is in balanced funds (Wellington and Wellesley) and those funds rebalanced both on the way down and on the way back up - at least I assume they did. Not sure I would have had the courage to do so if I had to make the rebalancing sell/buy moves myself, but since it wasn't my decision to make, I did great!

Good strategy, actually. My taxable is in in a balanced fund and I hadn't considered the "automatic rebalancing" feature in a severe down market. Thanks!

 

[palomalou]

We ought to be able to do the next year between cash and earnings. So far, have not touched an investment for the whole 18 months. We are living on 70% of our planned budget.

 

[palomalou]

Oops, I lied! Forgot that a couple of t-bills matured and they went into cash. Or was it bonds?.....