How do you factor in FIREcalc success rate fluctuations?

[sunsnow]

I'm not sure what to make of this, and I would be grateful to hear what others think. I noticed recently something about FIREcalc: the historical rate of success for my retirement plan changes with the current fluctuations of the market. In my case, the changes have been small, but let me give a hypothetical example to illustrate... suppose one day you have 1M invested in the stock market. You enter that into the tool and see that the historical rate of success with a certain WR is 95%. The next day the market tanks. You now have only 700,000 in your portfolio. You enter that information into the tool, and all of a sudden the historical rate of success has dropped from 95% to a mere 65%. Which rate should you use for planning? Is it reasonable to say that even though the success rate has fallen, it is actually higher than indicated because your portfolio started at a higher value and once had a higher success rate? Or is that just wishful thinking? By the same token, should you then downward adjust your expectations if the success rate was lower recently and has surged with a run-up in stock values?

 

[73ss454]

You should switch to the 95% rule in firecalc if you are concerned, leave your numbers alone.

 

[Live And Learn]

What you are seeing is the impact of "poor planning". I've read a bunch of articles that say it is MUCH better to retire at the start of a bull market than an a bear market (duh ? really ??). a 30% decline is a buying opportunity pre-retirement and an "OMG moment" post retirement.

Personally I have about 300k that I do not include in my firecalc portfolio. It includes 4 bucket list vacations, 100k for long term care, and replacement of my roof, major appliances (hot water heater, stove, dishwasher and refrigerator) and two used cars.

I also assume a 5% decline in my portfolio.

All those "contingencies" give me a better feel for potential reality.

 

[brewer12345]

I am struggling to imagine how incredibly concentrated and risky a portfolio you would have to see a 30% drop in a day. Even in my heyday of leveraged Venezuelan Beaver Cheese futures, I never approached anything close to that.

I think firecalc is a tool, and like any tool it has its limitations. What it really tells you is whether you have a fairly solid plan, or one that is as substantial as a fart in a tornado. It guarantees nothing. If you see that your plan is fairly solid, then you are probably good to try it out. However, any prudent person should have plan B, C, etc. when they check out, especially if they have a long retirement in mind.

I think this also illustrates that you need to make sure that you have moderated the volatility of your portfolio prior to retiring.

 

[mathjak107]

What you are seeing is the impact of "poor planning". I've read a bunch of articles that say it is MUCH better to retire at the start of a bull market than an a bear market (duh ? really ??). a 30% decline is a buying opportunity pre-retirement and an "OMG moment" post retirement.

Personally I have about 300k that I do not include in my firecalc portfolio. It includes 4 bucket list vacations, 100k for long term care, and replacement of my roof, major appliances (hot water heater, stove, dishwasher and refrigerator) and two used cars.

I also assume a 5% decline in my portfolio.

All those "contingencies" give me a better feel for potential reality.

A buying opportunity assumes you are not already in.

A drop before you retire and spending down isnt a problem if your first buying in.

It can spell death to a retirement if your already in and spending down.

Sequence risk and inflation risk are the biggest risks we have when already spending down.

If you take a 30 year period and hypothetically get 30% a year for the first 15 years and then lose 10% a year for the next 15 years you could have taken a 24% swr.

But if the first 15 years were just the minus 10% years and then followed by 15 years of up 30% your swr would be 1.86%.

Your average return would have been over 8%.

Low stock valuations at the beginning can be good thing since the gains tend to be much bigger following it but that assumes you havent spend down to far to long.

Clearly hits in the beginning can be a most un-good thing.

 

[Rustward]

I fully understand your question, and have asked it here before. There are no answers that work for everybody every time.

I use two different approaches.

Approach 1 is to plan with 90% of the actual portfolio value. This just factors in a 10% drop in portfolio value. It is not scientific by any measure. If you are more conservative, you might use 85% or 80%. If you do this at the bottom (i.e. March 2009) it won't work very well, but will err on the side of caution. I dunno.

Approach 2 is to use the average of the last six end-of-quarter portfolio values. This tends to smooth out the peaks and valleys. Not perfect either, but it may be a bit more accurate than just using 90% of portfolio value.

I can't say what financial planning validity either of these has. It might be a starting point for your investigation.

 

[Animorph]

FIRECalc just takes your starting portfolio number ($1M or $700k) and then says OK, what happens if you had this amount at the start of 1920 (or whenever the FIRECalc data starts) and your retirement lasted 30 years? How about 1921? 1922? It does that until the 30 year period would run past the last year of the FIRECalc data. Knowing this, FIRECalc will obviously have a better result if you start with $1M instead of $700k and have the same expenses.

That also gives a partial answer about what to make of the data in light of current conditions. All of the FIRECalc failing scenarios (starting years) will roughly start after the market has performed well and just in time to catch a big bear market, or perhaps really bad inflation. If your starting portfolio was a value from the end of 2008, then the market has just tanked and the worst-case scenarios in FIRECalc will be things like assuming the Great Depression starts in 2009.

I think it is actually almost reasonable to use FIRECalc at market peaks, since the should match the bad FIRECalc scenarios the best. But most of the time you will be using a more or less average market as your starting point. That is probably valid for many of the FIRECalc scenarios, but could be a little pessimistic for the worst case.

 

[foxfirev5]

This stuff can drive you nuts if you let it. As I approach retirement I've endlessly run the numbers even through the '08-'09 debacle. I use about 90% of my portfolio, have reserves for various unforeseen emergencies, and still get nervous with anything other than a 100% success rate. I also know if things started south I would modify my plan to minmize the impact.
I hope I am able to get my head on straight for my targeted 2014 retirement.

 

[ejman]

The answer is really quite simple. Firecalc tells you given a certain amount of money what would have happened if you'd teleported yourself back in time to a series of years that fit the given time frame. So, assuming that the future history of the US will mirror the past as reflected in Firecalc there is your answer. If the future years do not mirror what happened in the past you are on your own.

 

[donheff]

I don't see the mystery. You are essentially running two FCC scenarios at the same time one for a million, the other for 700k. Of course the million is safer. What FCC tells you is that had you retired at 1m you would have a 95% chance of surviving. The next day it is telling you that a lot of the historical upside scenarios no longer apply to your particular situation. It is like the odds or getting one heads and one tails before you start tossing a coin twice. After the first toss, They change because you now have some real data about your tosses.

 

[marko]

What it really tells you is whether you have a fairly solid plan, or one that is as substantial as a fart in a tornado. .

+1

 

[Midpack]

30% market value drop on one day aside, it's a reasonable question that has been studied and addressed many times. Just Google for studies of PE ratios vs withdrawal rates, here's one fairly recent Retirement Researcher Blog: Safe Withdrawal Rates and Retirement Date Market Conditions with other related links.

Not built into FIRECALC or any other calculator that I've seen (nor should it be). You can't pinpoint directly, but it is something to keep in mind when you're pulling the plug. And then there's the first big market pullback after you've retired to try your resolve as well...

 

[H2ODude]

OP question just reinforces what I've come to believe...all the calculators should be used to give a general RANGE of expectations. Those ads for one of the big mutual firms about "what's YOUR number" are bunk. If you're a worrier and you suddenly "hit" that number, you'd better expect some shivers in the future. Me, I'm a worrier so while I've run several of the calculators, it just gives me a "range" of comfort. Which is pretty darn comfortable right now since I'm at a 2.3% +/- WR. I expect to ramp that up when personal life changes allow DW and I to travel more.

 

[MichaelB]

Remember, a fall in asset prices can also be a buying opportunity.

Large market declines happen. FIREcalc can help simulate how your plan will do in such a situation. How you react is much more critical. If a 30% decline in portfolio value is too steep, you need to reduce the volatility.

 

[sunsnow]

Thanks to everyone who posted many helpful thoughts. This is a little bit hard to explain, so for those who didn't see the mystery, I will try to do a better job of explaining. It's true that after running the calc on two different data points, you now have additional information. My question is what do you do with that information? If you get a lower rate on a later run than you want to see (as a result of your portfolio declining in value), is that success rate the one to trust, or should you still believe the earlier result? It doesn't matter whether you "pulled the plug" and retired after doing the earlier calculation or were still working, as that doesn't have anything to do with expected stock market performance, which is really all this question is about. It also doesn't matter how volatile your portfolio is -- I just was trying to illustrate a dramatic example. Even a slightly lower result in the calc may put the risk of retiring over one's comfort zone. Rustward, you get my question. I like your approach 2 "use the average of the last six end-of-quarter portfolio values".

 

[Midpack]

Thanks to everyone who posted many helpful thoughts. This is a little bit hard to explain, so for those who didn't see the mystery, I will try to do a better job of explaining. It's true that after running the calc on two different data points, you now have additional information. My question is what do you do with that information? If you get a lower rate on a later run than you want to see (as a result of your portfolio declining in value), is that success rate the one to trust, or should you still believe the earlier result? It doesn't matter whether you "pulled the plug" and retired after doing the earlier calculation or were still working, as that doesn't have anything to do with expected stock market performance, which is really all this question is about. It also doesn't matter how volatile your portfolio is -- I just was trying to illustrate a dramatic example. Even a slightly lower result in the calc may put the risk of retiring over one's comfort zone. Rustward, you get my question. I like your approach 2 "use the average of the last six end-of-quarter portfolio values".

The link I provided in post #12 is about exactly what you're asking, and how to objectively evaluate both FIRECALC results using PE ratios. There is no universal answer on which to trust, they may in fact be the same in the long run...

 

[rbmrtn]

I think you may be "doubling up" on the negative effects. Tools like firecalc don't know that you just had a 30% loss. They only know you told it to use a portfolio value of X. Then the proceed to run the scenarios which include the great depression, 73 bear market etc.

So you are putting a 30% loss back to back with the 73 bear market, naturally you get much lower success.

You're sort of asking why did it succeed on 10/16/87 but fails on 10/19/87.

 

[sunsnow]

Midpack, thanks for those links. I have been working through them, and have started educating myself about the different flavors of P/E analysis. It seems like there are many opinions about exactly how to use P/E information, whether and how to consider dividends, and also what to do with information about the current yield of risk-free investments. As you say, there's no universal answer. Clearly history and context do matter.

robmrtn, I think you are right about "doubling up" on the negative effects. That helps me understand better.

 

[brewer12345]

Midpack, thanks for those links. I have been working through them, and have started educating myself about the different flavors of P/E analysis. It seems like there are many opinions about exactly how to use P/E information, whether and how to consider dividends, and also what to do with information about the current yield of risk-free investments. As you say, there's no universal answer. Clearly history and context do matter.

robmrtn, I think you are right about "doubling up" on the negative effects. That helps me understand better.

Make sure you take into account the ground breaking PE/valuation based SWR methodology here: A Rich Life

 

[REWahoo]

Make sure you take into account the ground breaking PE/valuation based SWR methodology here: A Rich Life

 

[Nords]

... the ground breaking PE/valuation based SWR methodology ...

Yeah, that's one way to put it...

 

[kaneohe]

I like to think of this problem as you being the designer for your own personal vehicle. You want it to be all things: safe, high mpg, good performance, etc.
However the labs who test your materials are not very good so their test results vary considerably from day to day even if the product does not change. What do you do? You can be very conservative, be a worst-case designer, and stress safety. However you may find then that although you build the car from battleship steel, the cost and weight are prohibitive and the mpg are terrible. You might prioritize mpg and end up with a small light vehicle that get triple digit mpg and doesn't cost very much but depends on luck for protecting your family. Or you might compromise with a design in the middle with properties also in the middle with features like seat belts, air bags, etc.

The analog in your world for the battleship steel is that you design for 100% no matter what. That requirement may mean that you never retire. Or you may opt for the bicycle designing for 95% when the market is at its all time high. Or perhaps something in between designing for 95-99% when the market is at some "midpt " of its long term trend....I don't know how you really know that but you can surely have some idea when you might want to be conservative on your valuation............e.g. check here and set the time scale on the bottom to MAX

S&P 500 Index Chart - Yahoo! Finance

.....or you can wait for W2R's Wheeeee!

For the seat belts and air bags, you might consider what your sources of semi-guaranteed fixed income (perhaps add more?) will be that will cover at least your base expenses so that you don't panic or deplete your portfolio excessively when the market tanks. In the end, no magic number ........just the realization as others have said that this is a fuzzy business, nothing is for sure, and you need planning and contingency planning for the journey. Since it is your personal vehicle , nobody will care more about the outcome than you.

 

[Brett_Cameron]

I use Firecalc as one data point in attempt to gain a warm fuzzy. I update my Firecalc calculations annually based on current considerations such as portfolio value, estimated future discrete annual withdrawals, estimated retirement duration and so forth. Firecalc is just one data point and the success results are different every time.