FIRECalc vs REW

[REWahoo]

Increasing that contingency is my way of betting against "bad timing". But how much is "enough" ? There's really no reasonable answer to that question ....

For some, hopefully not you, there will never be "enough". That leaves only a forced retirement from job loss or a health issue to decide for them. I was fortunate in that I got to make my own decision rather than allow 'rightsizing' or fate make it for me.

 

[ERD50]

Maybe I'm being too simplistic but I think this is sort of making a huge assumption and then is sort of missing the point of the graphs. ...

If it makes it easier, just assume that each one of them came into their money only in the year that each of them retired.

I'd say that rather than 'missing the point', I'm trying to make an additional point to put it in some perspective. And if you assume each one of them came into their money only in the year that each of them retired, then that is exactly what the graphs show. And as you point out, that happens for some (should we do a poll to see if we have any bank robbers? - I almost missed that one ).

My point is, that many (probably most?) of us built up a nest egg over many years. If you look at that graph as three individuals, with everything equal other than the year they retire (equal career income, equal amount saved, equal spending requirements, etc), and all three had a $750,000 portfolio in 1973, then my analysis (I think), makes sense. That $750,000 portfolio dwindled by 1975, and that guy that didn't retire in 1973 didn't dodge a bullet by retiring in a relatively safer 1975, he's going to be affected by starting retirement with a smaller portfolio, that was hit by the 1973-74 downturn.

I think the point in that graph is that there are a lot of points of view.

Probably the intention in the FIRECalc introduction was indeed to show that different starting years produce different outcomes. However, there are other points to make about "when should I retire and how much do I need?". We all need to get our 2 cents in on this.

Good point. I think the relevance depends on the question.

1) Would a person who hit 62 in 1973 help or hurt himself by waiting 2 years to retire? How much?

2) Were people born in 1913, who retired at 62 in 1975, a lot luckier than those who were born in 1911 and retired in 1973?

3) I have $750k and I'd like to retire today. Can I retire with an initial [$60k; $45K; $30k; $15k] withdrawal, adjust it annually for inflation, and expect my money to last longer than I do?

I think FireCalc is designed to answer question 3, and it does a reasonably good job.

I've seen people use results like FireCalc's to make claims about question 2, that I don't think are valid. The problem is the one you've identified, FireCalc does not look at before retirement returns.

Similarly, question 1 requires more than FireCalc for a meaningful answer.

I agree. Well said.

A parallel to this, that always bugs me, is when a poster defends a large fixed income AA by pointing to a 40% drop in equities as 'proof' that equities are risky. That 40% drop is always measured from a peak. So again, unless you came upon a lump sum, and put it all in the market right at the peak, that 40% drop is not apples-apples to a fixed investment.

The fixed investment didn't have a big peak to fall from. It makes more sense to compare the equity drop to the cost basis of investments made over a long period of time, which is probably what most of us have done. Viewed that way, a 40% 'drop' might not have been a drop at all.

-ERD50

 

[NW-Bound]

Good point. I think the relevance depends on the question.

1) Would a person who hit 62 in 1973 help or hurt himself by waiting 2 years to retire? How much?

FIRECalc example's premise was that the person initially had $750K and was drawing $35K each year (adjusted for inflation thereafter). That's a high WR of 4.67%.

If this person had $750K in 1973, and not retired but waited two years, he would see his stash shrunken down to $440K, using ERD50's info. Then, if he retired in the midst of this gloom and still insisted on drawing $35K/yr, he would eventually be doomed. His initial WR would be 35K/440K = 7.9%!

However, if he readjusted his standard of living, and retired using the new lower portfolio value as the basis, meaning drawing only 4.67% X $440K = $20.5K, then he would be fine.

In most likelihood, he would be too scared to retire on such a battered portfolio, unless he lost his job.

He would hang on a few more years until the dust settled, and his portfolio recovered a bit. Then, he rode off into the sunset.

 

[Meadbh]

In most likelihood, he would be too scared to retire on such a battered portfolio, unless he lost his job.

He would hang on a few more years until the dust settled, and his portfolio recovered a bit. Then, he rode off into the sunset.

I know a lot of people who took that course in 2008. There were many postponed retirements. Some of those people are still working, because they want to make damn sure they won't be the red guy.

 

[NW-Bound]

I know a lot of people who took that course in 2008. There were many postponed retirements...

Both of us retired recently, although our circumstances may not be identical.

In my case, it was not just that my portfolio in 2009 lost more than 30% from the top. I still enjoyed my work and also needed to have income to see my children through college. And yes, the fact that my portfolio recovered and surpassed the previous high in 2007 gave me the confidence to retire.

The irony of this, however, is that if we retire at the top of the market AND base our expenses on that peak value, we may be setting ourselves up for overdrawing our stash if and when the market ebbs again.

I still say that the best strategy is to be "agile and hostile" as Uncle Mick often said. Be prepared to cut back when the market turns south. And in good years, one should "rebalance" some equities into a new car or house remodeling one has been thinking about. I do not see myself spending the same amount year in/year out. I could if I had to, but my life would be boring.

 

[Meadbh]

NWB, I was not referring to myself; I never had any plans to ER in 2008. You may recall my 5 year plan in late 2007 was to ER at the end of 2012......which I ultimately did. Our circumstances are quite different. I am not basing my decisions on the market. My planned SWR, which is significantly higher than last year's expenses, happens to be <2.8% of investable assets.

 

[NW-Bound]

I didn't mean to say that you delayed your retirement due to the market downturn. Me neither, as I was not thinking about early retirement at all until this forum rubbed off its bad influence on me.

But had the market stayed up, and if I were not supporting my children through college, I might have pulled the plug earlier. So, in my case, I will say that the market performance is one factor, though not the only one.

So, I have to caution myself against basing expenses on a good year in the market, and have to remind myself about the terrible trough I have just been through. My expenses are at 3.5% of current portfolio value, and I have decided I won't kick myself if it goes up to 4%. That extra 0.5% would mean quite a bit of additional travel, which may not happen at all.

On the other hand, I look at my expenses again to see if I can cut back. Perhaps I am kidding myself that I could if necessary, but at this point I am in a spending mode. I believe my expenses will follow Bernicke's glide path, and I want to start from a higher point before sliding down. If I spend less now, then cut back more in the future, gee, that may just make my children very happy when I croak and leave them that much money.

 

[obgyn65]

Great job REWahoo !

 

[growing_older]

However, this brings us back again to the perennial question of "knowing" where we are in the economic or stock cycle, in order to base our spending.

But isn't that a problem very commonly faced. If people retire when they see that their assets have reached a critical number, they will almost always see that they reached this number on the way up, that is during an up cycle, not a down one. How common is it that someone has more than they need, perhaps much more than they need for a particular lifestyle and only retires when their portfolio declines to that amount. Very rare I expect.

 

[Major Tom]

But isn't that a problem very commonly faced. If people retire when they see that their assets have reached a critical number, they will almost always see that they reached this number on the way up, that is during an up cycle, not a down one. How common is it that someone has more than they need, perhaps much more than they need for a particular lifestyle and only retires when their portfolio declines to that amount. Very rare I expect.

For someone who is saving at a high rate, the main reason a portfolio has reached a critical amount may have as much to do with the rate of saving than the point we are in the economic cycle.

 

[audreyh1]

But isn't that a problem very commonly faced. If people retire when they see that their assets have reached a critical number, they will almost always see that they reached this number on the way up, that is during an up cycle, not a down one. How common is it that someone has more than they need, perhaps much more than they need for a particular lifestyle and only retires when their portfolio declines to that amount. Very rare I expect.

I also think it's more likely that people retire during an up cycle, although often the timing is determined by age, tenure, etc.

But it is a good caution for folks who are looking at retiring mostly because their portfolios have had several years of strong gains.

Wait - um, did I mention that I retired in 1999?

Ironically, we went through an Asian financial crisis in 1998 that made it look like I might have to wait to pull the plug, but by 1999 it was all better!

 

[MichaelB]

It is far more likely that FI and retirement happen during the up cycle and not at the top, so many enjoy additional portfolio upside and only an unlucky few suffer the maximum portfolio decline.

 

[REWahoo]

But isn't that a problem very commonly faced. If people retire when they see that their assets have reached a critical number, they will almost always see that they reached this number on the way up, that is during an up cycle, not a down one. How common is it that someone has more than they need, perhaps much more than they need for a particular lifestyle and only retires when their portfolio declines to that amount. Very rare I expect.

For someone who is saving at a high rate, the main reason a portfolio has reached a critical amount may have as much to do with the rate of saving than the point we are in the economic cycle.

The typical aspiring FIREd has some target amount in mind that they are saving, investing and praying to reach. The usual process is to repeatedly run numbers through every retirement calculator one can find or create until reasonably certain what number they have to hit. Once that number is reached, the 'just one more year' syndrome strikes and retirement is delayed until a cushion (atop the target amount to which they have already added a cushion) is reached. Only then does the individual FIRE.

Once finally reaching that number the thinking isn't, "OK, once the economy tanks and the market declines, I'm pulling the plug."

 

[Huston55]

The typical aspiring FIREd has some target amount in mind that they are saving, investing and praying to reach. The usual process is to repeatedly run numbers through every retirement calculator one can find or create until reasonably certain what number they have to hit. Once that number is reached, the 'just one more year' syndrome strikes and retirement is delayed until a cushion (atop the target amount to which they have already added a cushion) is reached. Only then does the individual FIRE.

Hey, have you been reading my RE notes?!

Congrats on your black line and keeping your head thru the 2008 downturn.

 

[ERD50]

The typical aspiring FIREd has some target amount in mind that they are saving, investing and praying to reach. The usual process is to repeatedly run numbers through every retirement calculator one can find or create until reasonably certain what number they have to hit. Once that number is reached, the 'just one more year' syndrome strikes and retirement is delayed until a cushion (atop the target amount to which they have already added a cushion) is reached. Only then does the individual FIRE.

Once finally reaching that number the thinking isn't, "OK, once the economy tanks and the market declines, I'm pulling the plug."

Sounds about right.

And I'll just point out that a 'target amount' is fine w/regards to FIRECALC, you don't have to try to analyze the relative 'value' of that amount, or whether you might be retiring at a peak/trough or in between. The failures in FIRECALC are due to that target amount being at high valuations (and therefore in danger of a fall). The 'SWR' that FIRECALC would provide is already looking at your 'target' number as the worst case historically, so that buffer is already built in.

Historically, of course.


-ERD50

 

[NW-Bound]

Yes, growing_older has a very valid point that more people are likely to retire in good years than in bad ones. During bad years, if one has the option for "just one more year", he would exercise it. Whether that intention was explicitly declared or not, hanging around here since 2008, I did not see too many posters retiring in 2008 and 2009, but more since 2010.

There were some posters who retired a couple of years before 2008 and ran into trouble. It was before my time, and I did not know what WR they stated, but a few have dropped out. So, I strongly suspect that there's survivorship bias among remaining posters who still stick around. However, it may not have to do with WR but with people panicking and selling out at the bottom too. We certainly have been through an interesting time.

And then, there are also posters who either retired shortly before and during the crash, and they stated how they went into survival mode by cutting expenses, or taking a part-time job. They are still around to tell their stories.

In my case, as I have the option of "just one more year", and my children were still in school as I came to this forum in mid 2008, right in the midst of the banking crisis, I would be crazy to pull the plug then.

Anyway, I think I'd better remember that I started my ER after a couple of good years, and must rein in my desire to spend and must keep some for bad years. I think the risk of me going crazy and ruin myself financially is slim because I would not commit to any debt or additional on-going expenses at this point. I will only indulge in discretionary expenses like travel, which will be cut back in bad years.

 

[deserat]

Very interesting - I think what's important to me is that each of those graphs assume static situations and then let them run out over time. Most pople would adjust their behavior in some way and then would end up somewhere in between the lines. In your case, you were only relying on your portfolio 100% for a short amount of the time, so you could take the risk as you had a high probability of receiving the SS in time to then reduce the amount of income you would require form your portfolio.

This is similar to my situation....I would only need to rely upon other streams until my other streams due to pensions or other aspects kick. I.e. my eggs were not all in one basket.

As it is, I don't even count SS in my income calculations as I believe there will be some serious curtailment of that if you have some other means of income coming from the government (my Reserve pension and my husband's active duty pension). This is even if you've paid the full boat (I am self-employed). Interesting times ahead.

As for the one more year syndrome, count my husband and I in that camp now---this is our first year or so of his active retirement and we are using only his pension income to pay for all of our living expenses --- so far, we are fine and then some. However, we are struggling with the 'what do you do all day' syndrome, so are both working part-time as consultants in different industries....I waver between I like the intellectual challenge and interaction to I hate having deadlines and keeping track of all of the changes. He gets tired of being in 'crap holes' for weeks at a time. But, but, but the money is crazy....if we just do this for a few more years - sheesh....and then one never knows what will happen in the future - I wonder where we will be in five years..

In any case - congrats for weathering the fiscal roller-coaster - although most who post here or make it where you are will not fail in their goals.

 

[REWahoo]

In your case, you were only relying on your portfolio 100% for a short amount of the time, so you could take the risk as you had a high probability of receiving the SS in time to then reduce the amount of income you would require form your portfolio.

+1

Had I retired in mid-2004 as originally planned instead of mid-2005 I think my story would be different. I would have likely gone back to work, at least part-time, and may have been less willing to stay the course with our investments during the downturn.

My individual bout of "one more yearitis" involved not only added savings and investment returns, it also involved me re-thinking the payoff the mortgage early question. Delaying a year and paying it off allowed me to go into retirement with ~$12k less in annual expenses but with a portfolio of approximately the same size as originally planned due to the unexpected and very fortunate payout of stock options the month before I retired.

As previously mentioned, 90% of my success in achieving that black line was due to luck, and 50% due to "psst - Wellesley"...

 

[NW-Bound]

As previously mentioned, 90% of my success in achieving that black line was due to luck, and 50% due to "psst - Wellesley"...

90% + 50% = 140%.

Where does that extra 40% go? Into the RV?

 

[Lsbcal]

...(snip)...
As previously mentioned, 90% of my success in achieving that black line was due to luck, and 50% due to "psst - Wellesley"...

... and a good bond market (declining rates) from mid-2005 to now.

 

[REWahoo]

90% + 50% = 140%.

Please see my sig line...

 

[REWahoo]

... and a good bond market (declining rates) from mid-2005 to now.

+1

That's included in that 90% I attribute to luck.

 

[NW-Bound]

Had I retired in mid-2004 as originally planned instead of mid-2005 I think my story would be different. I would have likely gone back to work, at least part-time, and may have been less willing to stay the course with our investments during the downturn.

With no pension or SS during the first three years of retirement, our withdrawal rate averaged 7.9% of our initial portfolio value. With both DW and I now on SS our withdrawal rate declined to 3.9% of our initial portfolio value in year seven.

From 1/2005 to the top value in late 2007, Wellesley rose by 23%. Not wow, but not too shabby, and could certainly support the 7.9% WR.

Last year, I got 12+% return, and if that continues for another year or two, man, it's party time!

PS. I hope the market god did not take the above as a Wh***. And nobody but the Oracle of NO can issue a Wh*** decree.

 

[REWahoo]

It has been more than a year since I updated my "FIRECalc vs. REW" graph. I started this thread early last year to track how I was holding up when compared the the 1973, 1974 and 1975 retirees Dory36 used as examples on his FIRECalc intro page.

I'm very happy to report this 2005 retiree (and his DW) are doing well.



The black line represents the value of our portfolio over the first nine years of our retirement, scaled to show an apples-to-apples comparison to Dory's three retirees. Once again I'm happy to be able to say "so far, so good".

For reference, we have a 45/45/10 AA, with the equity and bond component largely invested in Wellington and Wellesley funds. We lived entirely off the portfolio the first four years of retirement before my SS kicked in, DW's SS started in year five and she began drawing a small pension (~8% of our annual expenses) in year seven.

Our withdrawal rate was significantly higher the first few years because we had no other source of income other than withdrawals and in year two we paid for the purchase an RV with a cost roughly equal to a full year of living expenses. That purchase, combined with the 'market unpleasantness' in 2008/2009 caused more than a few sleepless nights and a change in plans regarding waiting until FRA or later on SS. I began drawing SS in year five (2009) at age 62 at what turned out to be the market (and portfolio value) bottom.

Our calendar year withdrawal rates to date shown as a percentage of our initial portfolio value the day we retired in 2005:

Year 1: 4.8%
Year 2: 9.8%
Year 3: 7.9%
Year 4: 6.1%
Year 5: 5.4%
Year 6: 4.2%
Year 7: 3.9%
Year 8: 3.5%

 

[Rustic23]

Thanks, I hope things continue to go up!