Has FIRECalc ever let you down?

[Gone4Good]

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Originally Posted by Rich_in_Tampa Has FC has ever misled you, been wrong in its logic, or revealed errors, deficiencies, or assumptions which might have led to serious planning errors, even though your input was acceptable to you?

Well the other day I updated a "FIRECalc like" spreadsheet I put together using data from Japan instead of the US (Nikkei index, Japanese government bond yields and prices, Japanese CPI). It wasn't pretty. Assuming the retiree pulled the plug after the Nikkei had already lost 40% of its peak value (like now with the SPX) a 3% withdrawal rate and a 60/40 equity allocation was close to failing after 20 years. On the positive side, a 100% bond portfolio was surviving nicely.

Then I looked at the ICEX (Icelandic stock exchange) down like 95% with inflation in Iceland running about 19%.

Then I started seriously thinking about the value of marketable skills.

[Lsbcal]

I really like FIRECalc and have the spreadsheet data from it that told me how things would have gone in the Great Depression and also the great inflation of the 70's. I knew I'd be a nervous wreck if the portfolio went down as badly over several years like the worst case that FIRECalc showed -- even if it had a 100% success rate.

BUT, it does not prepare one for the emotional turmoil of watching things go down. The decline last fall was kind of shocking to me even though I've been investing for many years and consider myself a thoughtful, careful investor. We are down to about 77% of what we had in Oct 2007 including expenses and all.

So...even at this point I'm making some portfolio changes that hopefully will get us a smoother ride going forward. Spent a lot of time since last September crunching models and looking at historical results.

[Lsbcal]

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Originally Posted by . . . Yrs to Go Well the other day I updated a "FIRECalc like" spreadsheet I put together using data from Japan instead of the US (Nikkei index, Japanese government bond yields and prices, Japanese CPI). It wasn't pretty. Assuming the retiree pulled the plug after the Nikkei had already lost 40% of its peak value (like now with the SPX) a 3% withdrawal rate and a 60/40 equity allocation was close to failing after 20 years. On the positive side, a 100% bond portfolio was surviving nicely. ...

That's why we have some reasonable percentage of international exposure in equities. I've got one model that looks at the Nikkei and SP500 and moves between them based on the price changes over recent months. For 1985-2009 the results were Nikkei CAGR=-1.6% whereas SP500 had CAGR=6.6% (without dividends). The model does less then 1 move per year and had CAGR=7.5%. So if you believed the Japan market was great in the 80's but were willing to move your money between major developed markets you would have done OK. Of course, this is only backtested results but I'm willing to take that risk.

[jdw_fire]

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Originally Posted by Rich_in_Tampa Well, a little more cushion never hurt anyone .

that sounds like the "1 more year syndrome"

[Rich_by_the_Bay]

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Originally Posted by jdw_fire that sounds like the "1 more year syndrome"

JDW - it's a longstanding joke around here -- just making sure REW knows I haven't retired yet.

[youbet]

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Originally Posted by lsbcal I really like FIRECalc and have the spreadsheet data from it that told me how things would have gone in the Great Depression and also the great inflation of the 70's. I knew I'd be a nervous wreck if the portfolio went down as badly over several years like the worst case that FIRECalc showed -- even if it had a 100% success rate. BUT, it does not prepare one for the emotional turmoil of watching things go down. The decline last fall was kind of shocking to me even though I've been investing for many years and consider myself a thoughtful, careful investor. We are down to about 77% of what we had in Oct 2007 including expenses and all.

FireCalc has never let me down.......always 100% accurate in doing what it does. My own sometimes misguided interpretations and analysis of the output, however, has led me astray.

As you say, a FireCalc test that shows zero failures (100% success) leads many to expect "smooth sailing" over the life of their retirement and in fact they may wind up with a roller coaster of ups and downs with perhaps gut wrenching near failures along the way. But as long as they don't completely run out of money, it's a 100% success!

Like you, I've been looking at investment strategies to tone down the variation since, three years into ER, I'm already finding the dips and dives to be upsetting and worrisome. I'm doing this despite the fact that these strategies reduce the average ending balance. That is, lower X-Bar but also smaller Sigma.

I find it useful to take FireCalc output for the terminal year and format it as a histogram in excel. That shows me clearly my probability of having my concluding balance at or near zero at the end despite the fact my run turned out to be 100% successful...... I didn't actually run out of money, just came damn close in a number of cases!

"100% probability of success" in FireCalc does not mean guaranteed smooth sailing or ending with most of what you started with!

[Lsbcal]

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Originally Posted by youbet ... Like you, I've been looking at investment strategies to tone down the variation since, three years into ER, I'm already finding the dips and dives to be upsetting and worrisome. I'm doing this despite the fact that these strategies reduce the average ending balance. That is, lower X-Bar but also smaller Sigma. ...

This is a key point -- some tactical asset allocation (or market timing) may well lower the returns somewhat but will also probably give a smoother ride. BUT, one has to really do one's homework and then follow the plan. Many are not interested in getting so intensely involved in the analysis and implementation side of this. It sounds like we are thinking in similiar directions. Nice to know I'm not alone.

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I find it useful to take FireCalc output for the terminal year and format it as a histogram in excel. That shows me clearly my probability of having my concluding balance at or near zero at the end despite the fact my run turned out to be 100% successful...... I didn't actually run out of money, just came damn close in a number of cases! "100% probability of success" in FireCalc does not mean guaranteed smooth sailing or ending with most of what you started with!

Yep, I took the spreadsheet results and then colored it using the conditional formatting in Excel. The colored areas showed when the results started to dip into maybe 50% of the starting retirement value. Very interesting. I'd be a basket case at the 50% level if it came in the early years of retirement.

[Moemg]

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Originally Posted by lsbcal . Very interesting. I'd be a basket case at the 50% level if it came in the early years of retirement.

Then I hope you did not retire last year !

[bbbamI]

Has FIRECalc ever let you down?

I wonder if JG ever used it. IIRC, he just used a pencil and a piece of paper. I wonder how that's worked out.

[Lsbcal]

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Originally Posted by Moemg Then I hope you did not retire last year !

I retired in 2003. What I meant by the 50% level is when the inflation corrected portfolio less living expenses gets down to 50% of the starting amount (as per FIRECalc output).

[ERD50]

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Originally Posted by lsbcal I retired in 2003. What I meant by the 50% level is when the inflation corrected portfolio less living expenses gets down to 50% of the starting amount (as per FIRECalc output).

If you are on a 4% "SWR" path, it happens a fairly high percentage of the time (historically). If you search for a thread I started a year or so ago, I think it had the words "scary" and "dips" in it, you'll see some examples.

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Originally Posted by bbbamI Has FIRECalc ever let you down? I wonder if JG ever used it. IIRC, he just used a pencil and a piece of paper. I wonder how that's worked out.

Before FireCalc, my "back-of-the-envelope", or "thinking it through as I cut the grass (not even pencil-paper)" calculations went like this:



1) Hmmm (in tune with the lawn mower engine), seems like I see a lot of references to stocks returning 8-12% per year on average.

2) Hmmm, seems like you ought to get about 5% in fixed investments.

3) Hmmm, seems like I see a 3% number tossed around a lot for long term inflation estimates.

4) So, if I be conservative and say, oh 9% return for stocks, and a 50-50 balance of safer stuff, that is, ummmm.... 9+5 divide by 2... 7% return. Now, subtract 3% inflation, and the magical 4% "SWR" appears.

I always feel more comfortable when very different approaches come to a similar conclusion. Of course, my simple number does not look at all the nasty volatility. I'm shooting for something around 3% long term, I'm more comfortable with that. A few of us have estimated that by the time you get to a 2% WR, you essentially have a "forever" portfolio. 4% can be a wild ride.

-ERD50

[youbet]

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Originally Posted by ERD50 If you are on a 4% "SWR" path, it happens a fairly high percentage of the time (historically). If you search for a thread I started a year or so ago, I think it had the words "scary" and "dips" in it, you'll see some examples.

That was an excellent thread. Based on reading many, many posts regarding SWR's, I've come to the conclusion that some users of FireCalc fail to take volatility into consideration. When they see an outcome showing a high (95% - 100%) success rate, they assume their original investment more or less holding its value over their retirement. And while that might happen, or it might even grow significantly, this thread brought to light the fact that some "successes" will be fraught with mind alternating dips, dives and crashes such as we've just experienced.

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Before FireCalc, my "back-of-the-envelope", or "thinking it through as I cut the grass (not even pencil-paper)" calculations went like this: 1) Hmmm (in tune with the lawn mower engine), seems like I see a lot of references to stocks returning 8-12% per year on average. 2) Hmmm, seems like you ought to get about 5% in fixed investments. 3) Hmmm, seems like I see a 3% number tossed around a lot for long term inflation estimates. 4) So, if I be conservative and say, oh 9% return for stocks, and a 50-50 balance of safer stuff, that is, ummmm.... 9+5 divide by 2... 7% return. Now, subtract 3% inflation, and the magical 4% "SWR" appears. I always feel more comfortable when very different approaches come to a similar conclusion. Of course, my simple number does not look at all the nasty volatility. I'm shooting for something around 3% long term, I'm more comfortable with that. A few of us have estimated that by the time you get to a 2% WR, you essentially have a "forever" portfolio. 4% can be a wild ride. -ERD50

I also used that informal methodology and came to the 3% conclusion. And, like you, I made the mistake of assuming some steady level of returns as opposed to year to year wide swings.

[jdw_fire]

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Originally Posted by Rich_in_Tampa JDW - it's a longstanding joke around here -- just making sure REW knows I haven't retired yet.

ty, i thought u were joking. (i have been reading since about 2000)

[Lsbcal]

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Originally Posted by lsbcal I retired in 2003. What I meant by the 50% level is when the inflation corrected portfolio less living expenses gets down to 50% of the starting amount (as per FIRECalc output).

Just want to expand on this a bit. One of the most important metrics that we track is the inflation adjusted starting value of the retirement portfolio updated annually. It's very easy to compute based on the CPI for the year.

FWIW, based on that we are -9% off of that value -- bad but we are hoping along with many others that the future will be rosier. In Oct 2007 we were +20% of that value. If we get into a position like that again you can bet we will move more equities to bonds to reduce risk.

[Telly]

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Originally Posted by bbbamI Has FIRECalc ever let you down? I wonder if JG ever used it. IIRC, he just used a pencil and a piece of paper. I wonder how that's worked out.

I doubt JG ever looked at it, as he was strongly (and repeatedly, over and...) anti-stock. JG had a wad of General Motors bonds, IIRC. We know now how that's worked out!

Anyone living near the Rock or Mississippi Rivers, keep an eye out for JG. He might come floating by...

Back to FireCalc, I think it is the best calculator out there, as running the original version does not ask ME to predict future return rates for different asset classes, etc.

I found FireCalc AFTER I had made the decision to E-ER. Running FC was a nice reinforcement of my decision. I played a lot with sensitivities, twiddling this parameter or that to see the effects.

As mentioned by others, looking at the detailed outputs shows one that there are scenarios that are a really wild ride, but survive none the less. But don't eat three hot dogs before getting on the roller coaster!

[Nords]

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Originally Posted by bbbamI Has FIRECalc ever let you down? I wonder if JG ever used it. IIRC, he just used a pencil and a piece of paper. I wonder how that's worked out.

I think his "plan" hit a brick wall when his spouse became unable to work...

[W2R]

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Originally Posted by youbet I've come to the conclusion that some users of FireCalc fail to take volatility into consideration. When they see an outcome showing a high (95% - 100%) success rate, they assume their original investment more or less holding its value over their retirement. And while that might happen, or it might even grow significantly, this thread brought to light the fact that some "successes" will be fraught with mind alternating dips, dives and crashes such as we've just experienced.

Firecalc has a great feature that I would recommend to those users. You can specify a "floor" for your portfolio size. If someone with a $1M portfolio specifies that the portfolio should never drop below $500K, then if they get a 100% success rate they can be sure that their portfolio would not have dropped below that level in any of the historical scenarios tested.

This feature is also great for those of us who want to leave something to our children.

[Ed_The_Gypsy]

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I'll let you know when we show up like dirty hippies in the Airstream on your doorstep, looking for a meal and a shower.

Now you know why some of us protect our personal information.

In my case, you will have to pull up next to my Airstream.

Spare change, man?

[heyyou]

When working, I met plenty of people living in smaller, no longer movable trailers in rural trailer parks. Most were living on SS only. Some were happy, some weren't. I would be happier there than reliving my last few years of work. If FC was too optimistic and this recession is longer than Japan's, we should all move to the same trailer park since we won't all have Internet connections.

I'm not afraid of that life, it just isn't my first choice. You are likely more adaptable than you know. Studies show that you compare yourself to your neighbors. We will still have more than most of the unemployed population.

[bbbamI]

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Originally Posted by Telly Back to FireCalc, I think it is the best calculator out there, as running the original version does not ask ME to predict future return rates for different asset classes, etc. I found FireCalc AFTER I had made the decision to E-ER. Running FC was a nice reinforcement of my decision. I played a lot with sensitivities, twiddling this parameter or that to see the effects. As mentioned by others, looking at the detailed outputs shows one that there are scenarios that are a really wild ride, but survive none the less. But don't eat three hot dogs before getting on the roller coaster!

Yes...I agree FC is a great tool.

I did and still do a lot of twiddling....

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Originally Posted by Nords I think his "plan" hit a brick wall when his spouse became unable to work...

Uhhh oh....