Timing Your Retirement

[Nords]

Could the second guy take his 600k back in time and deterime when it was at it's max and use a 4% swr from that point, even though he never actually had that much?

As REW says, that 4% "warranty" is only good for 30 years. So if he goes back in time, he has to end that much sooner.

If he went back 29 years, he could start his ER today at a 100% SWR with a 100% success ratio! "Offer good for a limited time only."

 

[REWahoo]

Rustic, to respond to your question a little more seriously, I think the "even though he never had that much" qualifier in your example would disqualify the second guy from having good odds of success using the larger SWR - even after adjusting for a reduced time horizon.

 

[TromboneAl]

Hey guys, the Bill, Betty and Bob Firecalc example is extremely misleading. It overstates the difference that one or two years can make.

Here's my reasoning, tell me if you think I've got this about right.

It says "Each had $750,000 in their nest egg." That makes you think that they started in the same place. But in fact, in 1973 Bob had much more money than Bill. That's because he had $750,000 after two years of a bear market. Based on the graph, Bob had about $1,400,000 in 1973. If Bill had retired in 1973, he would have done just about as well as he did retiring in 1975. The only difference is that he wouldn't have contributed to his retirement accounts in 73 and 74 -- those contributions would have been relatively insignificant compared to his 1.4 Million.

If you're not convinced, imagine that the example were stated like this: In 1973 Bill had $1.4 million and Bob had 750K. Bill retired and ran out of money. Bill waited two years to retire and didn't run out of money.

So take heart guys, a year or two doesn't make as much difference as you might think. The reason is that your contributions are small relative to your current nest egg.

 

[W2R]

Hey guys, the Bill, Betty and Bob Firecalc example is extremely misleading. It overstates the difference that one or two years can make.

Here's my reasoning, tell me if you think I've got this about right.

It says "Each had $750,000 in their nest egg." That makes you think that they started in the same place. But in fact, in 1973 Bob had much more money than Bill. That's because he had $750,000 after two years of a bear market. Based on the graph, Bob had about $1,400,000 in 1973. If Bill had retired in 1973, he would have done just about as well as he did retiring in 1975. The only difference is that he wouldn't have contributed to his retirement accounts in 73 and 74 -- those contributions would have been relatively insignificant compared to his 1.4 Million.

If you're not convinced, imagine that the example were stated like this: In 1973 Bill had $1.4 million and Bob had 750K. Bill retired and ran out of money. Bill waited two years to retire and didn't run out of money.

So take heart guys, a year or two doesn't make as much difference as you might think. The reason is that your contributions are small relative to your current nest egg.

To me, the Bob, Bill, and Betty paragraphs are a little confusing. I prefer to just use Firecalc as a starting place, and temper the results with my own ultra-conservative safety nets and instincts. If the market goes up 25% in the 12 months between now and my future retirement date, I would probably select a slightly lower SWR than Firecalc decrees on the day of my retirement, "just because".

I have never planned to spend as much as Firecalc will allow, even back when my retirement plans were assuming a bare bones retirement. To me, the HUGE advantage of Firecalc is in the comparison between different scenarios, and not in the absolute amount one can spend. I am just more conservative than Firecalc about how much I am willing to spend. Perhaps that means that I am pessimistic about our economic future relative to our economic history up to now. Or, perhaps it means that I would like to see my nestegg growing and my spending growing along with it.

 

[REWahoo]

Here's my reasoning, tell me if you think I've got this about right.

It says "Each had $750,000 in their nest egg." That makes you think that they started in the same place. But in fact, in 1973 Bob had much more money than Bill. That's because he had $750,000 after two years of a bear market. Based on the graph, Bob had about $1,400,000 in 1973.

I don't see it Al. The text says and the graph shows all three starting with $750,000 when they began retirement in their respective year. Where do you get the higher numbers for Bob?

 

[TromboneAl]

I agree it's confusing, and I had to think about it for a bit. See if this doesn't make it clear:

Here's the original plot. The x axis is years from retirement.

Now, let's get rid of Betty, and replot it so the x axis is date:

Now the x axis starts at 1973. I've shifted Bob's line over, because he retired in 1975.

Now to extrapolate to see how much Bob had in 1973. Bill went from 750 K in 1973 to about 400K in 1975. So Bob must have had 1.4 Million in 1973 (750/400 * 750). The dotted green line shows that.

Does that sound right?

 

[Rustward]

Is the x axis supposed to represent time?

Edit: I was composing this while Al was posting the previous post.

The text says Bill, Betty, and Bob retired in 1973, 1974, and 1975 respectively and it is implied that each had $750,000 when they started. But ... all three graphs start at about .5 on the x axis (or we could say that 1.0 is actually midway between the first two tickmarks).
Betty's graph should be offset to the right by one tickmark, and Bob's should be offset by two.
Just kinda guessing, the graphs look like they might be correct but Betty and Bob start in the wrong places on the x axis.

Bill started with two down years followed by an up year.
Betty's first year was down and the second was up. Betty's first year coincides with Bill's second year, and Betty's second year coincides with Bill's third year.
Bob's first year was up. Bob's first year was Bill's third year and Betty's second year.

This is the classic scenario in which Bill will never catch up with Betty or Bob, and Betty can never catch up with Bob.

I think it would be easier to understand if the graphs started at the correct places on the x axis.

I doubt that the creator of that page intended for it to be picked apart like this.

 

[haha]

One of my prior post got me to thinking, always dangerous. The guy who retired a year ago win 1m, at a 4% swr is drawing 40k adjusted for inflation. The guy who retires today with 600k would retire with a 4% swr of 24k. So even though both have 600k today, wouldn't both be able to draw the 40k, even though the second guy never saved that much. Could the second guy take his 600k back in time and deterime when it was at it's max and use a 4% swr from that point, even though he never actually had that much?

Either one of these guys is on thin ice, or the other is is really good shape!

 

[TromboneAl]

Or verbally:

Bob had 750,000 in 1975.
Bill had 750,000 in 1973 and had 400,000 in 1975.
Bill lost 53% between 1973 and 1975.
Bob must have also lost 53% between 1973 and 1975.
Bob must have had 1.4 million in 1973.

 

[REWahoo]

Bob must have had 1.4 million in 1973.

Or he could have had 0 in 1973, lived off his dying parents for two years, and inherited $750,000 on 1/1/1975.

Kidding aside, I understand where you're getting your numbers. To your original point - that things may not appear as bad as they seem in this example - I certainly hope you are correct. I retired mid-2005 and see a close parallel to the performance of my portfolio and the first three years of Bob's green line. I can only hope it continues to follow a similar course.

 

[chinaco]

If someone retires into a bear market, and can still live on their SWR, then one could argue that this is probably the safest way to retire.

I would think it more risky to retire in a bull market, where a 4% SWR would be a lot more. Really, a 4% during a bull market might represent 5% or 6% later on in the depths of a bear market.

Besides, after the bear comes the bull, and that would be really nice a few years after retiring.

Yes 4% at the bottom of a bear should be pretty safe if things return to normal in a reasonable period of time.

------------

I dredged up a few old posts on P/E10.

http://www.early-retirement.org/forums/f28/business-weeks-special-retirement-issue-36971.html

Another Look at Safe Withdrawal Rates and PE Ratios

At an S&P 500 P/E10 of 15, Kitces indicates that a SWR of about 4.8 might be OK. Not sure if I trust the numbers.

Anyone have a current P/E10 calculation?

 

[bongo2]

Shiller himself puts one out every month: Online Data

The last one was 20.67 based on an S&P of 1266. An S&P of 900 would be about 14.7.

 

[youbet]

Or verbally:

Bob must have had 1.4 million in 1973.

You don't know that T'AL. We only know he had $750k in '75 when he retired, however he got it. It's not necessarily the residual from $1.4 mil in '73.

I wish you were right. But I think actual back-testing shows that the one year differences as shown are accurate.

Despite having done dozens (hundreds?) of FireCalc runs, I'm still surprised at the variation in outcomes depending on the year you retire. For the run that represents my FIRE status, outcomes vary from failure to about 7X what I started with!

Only time will tell how it works out......

 

[chinaco]

I am about 3 years off ER.

There are two hurdles to retire in this type of situation. The numbers... and the persons basic confidence. I could tighten the belt and get by until the market returned (if the recovery is somewhat typical of other bears/recessions). My fear would be a long protractive recovery or sideways for quite a while.


IMO - this situation is different than anything we have experienced. There are some similar scenarios that might lend insight into the recover.


I am optimistic and keeping my fingers crossed. But I am braced and going to be realistic.

Several people I know at work were intending to retire in the next couple of years at 62... they are considering delaying till 65.

 

[Geoffrey]

The biggest risk is that when you retire the market will not meet your expectations, especially in the first few years, i.e., you'll be blindsided by and unexpected bear market. Given the present state of affairs, your expectations for the next few years should be very low. Therefore, if you run the numbers and can live with such low expectations, there is little risk of disappointment -- any surprise is more likely to be to the upside. So, this is a good time to retire . . . provided you can handle the likelihood of very anemic returns. My own plan is to retire next spring, or early summer. I can live on fixed income investments for quite some time. When it is reasonably clear that the bear has gone back into hibernation, I'll venture back into some equities. I'll probably miss the initial upward climb. However, bull markets tend to last longer than bears, so I should have ample opportunity to catch some of the ride. At this stage of the game, however, preservation of my nest egg is more important to me than increasing its size. All I need is a little boost from equities, so I won't get greedy, or expose myself to unnecessary risk. Bottom Line: I'll wait for the all clear signal, knowing that I'll probably miss a fair amount of the upside.

 

[Dawg52]

Kidding aside, I understand where you're getting your numbers. To your original point - that things may not appear as bad as they seem in this example - I certainly hope you are correct. I retired mid-2005 and see a close parallel to the performance of my portfolio and the first three years of Bob's green line. I can only hope it continues to follow a similar course.

And I'm frigging Bill.

Where's my medicine?

Hopefully I will fare a little better than Bill as my current w/d rate is well below 4%.

 

[haha]

Given the present state of affairs, your expectations for the next few years should be very low. Therefore, if you run the numbers and can live with such low expectations, there is little risk of disappointment -- any surprise is more likely to be to the upside. So, this is a good time to retire . . . provided you can handle the likelihood of very anemic returns.

I understand and more or less agree with your overall statement here. But I don't understand why "your expectations for the next few years should be very low". I also don't understand why you would assume "the likelihood of very anemic returns." I should think that rationally formed expectations for the next few years are either equal to or better than the long term data, since we are clearly starting from better long term valuations. If it were clear that returns going forward could be expected to be low, prices would already be there.

What happened to all the efficient marketeers and portfolio theorists?

Serial price correlation tends to be very short term. The idea that "we are in a bear market" can't really be rationally derived. We have been in a bear market, of that there is no doubt. But it may become a flat market, or a bull market at any time. or it might continue down. These are only after the fact descriptions.

Ha

 

[TromboneAl]

You don't know that T'AL. We only know he had $750k in '75 when he retired, however he got it. It's not necessarily the residual from $1.4 mil in '73.

I agree. In the extreme case he could have won the lottery, or inherited it.

But for our purposes, the scenarios are meaningful only if we assume "all things being equal." That is, the value of the example is in its ability to help us decide "Do I retire now in a recession, or do I wait?" Or: "Am I screwed because I've retired into a recession?"

To answer those questions, we need to assume that in 1973 Bill and Bob had their money in the same places. The example makes it seem that Bob would have been screwed if he'd retired in 1973, but in fact, he would have done just about as well. The only difference would have come from two additional years of deposits and no withdrawals. Small potatoes relative to the 1.4 Million he likely had invested.

That is, the example seems to say that two years difference can make the difference between collecting shopping carts and having 2.25 million. That's misleading, since the different retirees had vastly different amounts of money in 1973. My conclusion is that two year's difference is significant, but not life or death significant.

If we don't assume that Bill and Bob had their money invested in the same way, then the example is only useful if we are trying to decide:

"Do I retire now, or wait two years, and perhaps win the lottery?"

 

[Dawg52]

DOW down 300 plus points at this moment. As of yesterday, I'm down 21% for the year. It's the Bill 1973 syndrome.

 

[bbbamI]

DOW down 300 plus points at this moment. As of yesterday, I'm down 21% for the year. It's the Bill 1973 syndrome.

In 1973 I didn't have a care in the world........

 

[youbet]

"Do I retire now, or wait two years, and perhaps win the lottery?"

We've had threads related to this before........

I think it's important for folks to realize that successful FireCalc outcomes may be fraught with staggering dips, dives and plunges along the way. And to remember that a FireCalc success includes outcomes where you're pretty close to broke at the end of the period. The years immediately following your retirement have the biggest impact.......

It's not so much a matter of deciding if you should retire at a particular time. You know what your portfolio looks like at that moment. It's what happens in the next year or two or three, that you really know little about, that throws the wrench in the works or makes you one of the lucky ones.....

Frankly, at 29 months into RE, I'm considering the current recession as the harbinger of a retirement that ends with a smaller residual ( perhaps much smaller) for the kiddies and won't include some of the discretionary spending we might have been able to do had we retired into a rising market.

As I said in an earlier post, for the FireCalc run that represents my FIRE status, outcomes vary from failure to about 7X what I started with! Now that a couple years have passed and I know I've retired into a down cycle, I think that 7X possibility may have evaporated! And so be it! You just to laugh it off and go on enjoying life, as challenging as that can be with all this crap going on.......

 

[Gotadimple]

In 1973 I didn't have a care in the world........

In 1973 I didn't have any money!!! I had been out in the workforce just a few years and was just managing to make ends meet.

It's all relative -- you know?

-- Rita

 

[FurBall]

In 1973 I was thrilled to land my first post college job paying $8400 (the guys made $9400) and I thought I was wealthy beyond belief. My share of the rent was $70/month and food was $5/week. I started my savings that year with $4000.

 

[bbbamI]

In 1973 I didn't have any money!!! I had been out in the workforce just a few years and was just managing to make ends meet.

It's all relative -- you know?

-- Rita

Yep...

I didn't have a care in the world because in the fall of '73, I started my junior year in high school. Well, maybe I did have one care...did I have enough strawberry lip gloss to last the day!

 

[Gotadimple]

Yep...

I didn't have a care in the world because in the fall of '73, I started my junior year in high school. Well, maybe I did have one care...did I have enough strawberry lip gloss to last the day!

LOL

-- Rita