Firecalc accuracy and future.

[REWahoo]

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Originally Posted by photoguy What did the original Bengen / trinity studies do for the bond portion?

I'm really interested to know the answer to this question as well.

[ERD50]

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Originally Posted by clifp Quote: Originally Posted by Lsbcal I hope I'm not beating this thing to death ... No I don't think you are beating it do death all. I think it is important to bound how big an error we are looking at. ...

Agreed. Even though I was thinking this might wash over the long run, I could be wrong about that, and we really should understand it. Those are some big deltas.

-ERD50

[Lsbcal]

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Originally Posted by clifp No I don't think you are beating it do death all. I think it is important to bound how big an error we are looking at. If I am reading your chart correctly it says Firecalc is showing a portfolio of $530K (I assume in 2000 dollars) where as the correct amount using actual mutual funds is $810K

That's right and also the minimums are shown in red for 2008. I always like to look at how bad things could have been.

[ERhoosier]

Quote:

Originally Posted by photoguy What did the original Bengen / trinity studies do for the bond portion?

I'm assuming this was the "original" Bengen study (J Fin Planning, Oct 94).
http://www.retailinvestor.org/pdf/Bengen1.pdf

The article says "intermediate term Treasuries" (10yr ?) were used for bond portion of portfolio, and it appears that changes in bond prices were NOT included in the analysis. In the article's "appendix" (p 179) Bergen states he assumes the portfolio is in tax-deferred account (i.e. no tax effect) & describes his method of rebalancing. His example- $1M porfolio with AA of 50/50 stocks/bonds. Yr 1 returns stocks 10%, bonds 5%, and EOY withdrawal (4%SWR @ 3% inflation).
EOY Yr 1= $550k stocks + $525k bonds - $41,200 withdrawal= $1,033,800 EOY balance, or starting Yr 2 with $516,900 in both stocks/bonds. In his Yr 1 rebalance example, Bergen mentions nothing about changes in bond prices nor trading bonds so I believe his general assumption is holding to maturity with no default/credit risk (Treasuries).

I don't know of any complex analysis of Bergen's theory which includes realized capital gains/losses in bonds, but IMHO it would likely irrelevant to his analysis. Since annual returns of stocks are generally higher than bonds, rebalancing in most years would mean net purchases of bonds (assuming rolling maturation of laddered bond portfolio). Significant changes in bond prices would be relevant only when bonds (int term Treasuries) needed to be sold to bump up stock AA. This would typically occur after a year of markedly declining stock prices, a scenario during which bond prices usu rise (falling int rates in weaker economy). But there have been exceptions to this (e.g. 69-70, 73-5) when bonds might have been sold at loss. Conversely, since rates have been generally falling since early '80's, bonds sold for rebalancing since then would likely have been sold at gains. My guess is that in Bergen's long term SWR portfolio any net bond price gains/losses would be small.

[clifp]

Quote:

Originally Posted by ERhoosier I'm assuming this was the "original" Bengen study (J Fin Planning, Oct 94). http://www.retailinvestor.org/pdf/Bengen1.pdf The article says "intermediate term Treasuries" (10yr ?) were used for bond portion of portfolio, and it appears that changes in bond prices were NOT included in the analysis. In the article's "appendix" (p 179) Bergen states he assumes the portfolio is in tax-deferred account (i.e. no tax effect) & describes his method of rebalancing. His example- $1M porfolio with AA of 50/50 stocks/bonds. Yr 1 returns stocks 10%, bonds 5%, and EOY withdrawal (4%SWR @ 3% inflation). EOY Yr 1= $550k stocks + $525k bonds - $41,200 withdrawal= $1,033,800 EOY balance, or starting Yr 2 with $516,900 in both stocks/bonds. In his Yr 1 rebalance example, Bergen mentions nothing about changes in bond prices nor trading bonds so I believe his general assumption is holding to maturity with no default/credit risk (Treasuries). I don't know of any complex analysis of Bergen's theory which includes realized capital gains/losses in bonds, but IMHO it would likely irrelevant to his analysis. Since annual returns of stocks are generally higher than bonds, rebalancing in most years would mean net purchases of bonds (assuming rolling maturation of laddered bond portfolio). Significant changes in bond prices would be relevant only when bonds (int term Treasuries) needed to be sold to bump up stock AA. This would typically occur after a year of markedly declining stock prices, a scenario during which bond prices usu rise (falling int rates in weaker economy). But there have been exceptions to this (e.g. 69-70, 73-5) when bonds might have been sold at loss. Conversely, since rates have been generally falling since early '80's, bonds sold for rebalancing since then would likely have been sold at gains. My guess is that in Bergen's long term SWR portfolio any net bond price gains/losses would be small.

While I agree over a 30 year period the capital gains/losses for bonds would modest. The thing is what is important is not the average but the worse case, when we are looking at survival rates.

We already know that 1929 was a bad time to retire cause the stock market crashed, but if you had a significant bond portfolio with 10 and/or 30 year treasury they increased in value making rebalancing less painful. Interest rates in the early 2000 were flat to modestly declining once making it easier to survive with a 4% withdrawal. The same think is true in 2008 10 year Treasury started of at 3.74% and hit a low of 1.91% in 2012. If you rebalanced Jan 1 of 2014 you sold stocks and bought bonds at a 2.97%. Or you got 4% more Total bonds shares Jan 2014 than in Jan 2013.

If we look at the methodology of FIRECalc, Raddr, Trinity studies, and suspect most Monte Carlo, prospect for a Y2K retire look really grim. But if you look at what NW and Lsbcal did not nearly so bad.

Perhaps just as importantly if you look at my portfolio, or another 2000 retiree like MichealB (I am guessing about his portfolio) the situation is considerably better.

I sort of hate to see people anxious to retire, hit their number and then convince themselves that 4% isn't safe when it maybe be even more safe than we realize cause the calculators have flaws.

Conversely, I think it is, more likely than not, that sometime in the next 5 years we have a bear market, accompanied and perhaps even caused by higher interest rates. If the high interest rates also include high inflation than 201x may actually be one of the times when a 4% withdrawal isn't safe. But the higher interest rates may mask the decline in the bond portfolio and create a false sense of security for retirees of the 2020s looking back.

I contributed in the past to FIRECalc (although can't seem to login) and I'd be willing to do so now if we can make it a more accurate and useful tool.

[Ed_The_Gypsy]

Interesting discussion.

Still, it won't affect me very much. Except for Wellesley, my only fixed income asset will be SS. I think there are a few others here with a similar FI AA (including the Kaderlis, IIRC).

[MichaelB]

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Originally Posted by clifp If we look at the methodology of FIRECalc, Raddr, Trinity studies, and suspect most Monte Carlo, prospect for a Y2K retire look really grim. But if you look at what NW and Lsbcal did not nearly so bad. Perhaps just as importantly if you look at my portfolio, or another 2000 retiree like MichealB (I am guessing about his portfolio) the situation is considerably better. I sort of hate to see people anxious to retire, hit their number and then convince themselves that 4% isn't safe when it maybe be even more safe than we realize cause the calculators have flaws.

In our case the positive divergence from the Y2K retiree was the result of large allocations to emerging markets and small cap int'l equities, which rose in value while the S&P declined.

This is a useful exercize and I hope we can keep it going. I don't see this as a flaw, more like an incomplete aspect, but still important for those of us using it to model portfolio behaviour.

[NW-Bound]

I did very well from 2000 until now, but then I was having part-time income which roughly covered my expenses. I did not keep good records, so there might have been some net savings, but they should be minimal compared to the portfolio and also net worth growth.

All of that was done with no help from bonds, which had exceptional performance. I never had more than 7-8% in bonds, and mainly just traded between cash and stocks. I do have a bit in I-bonds, but these are more like cash or CDs than traditional bonds, of course. I just started to study bonds recently.

[Lsbcal]

I wonder what level of support FIRECalc gets. Just a quick browse of this "FIRECalc support" section did not turn up anything recent for me.

Is FIRECalc just on minimal support?

I think this thread should focus on FIRECalc accuracy and future. It would be nice if we could hear from someone responsible for support.

[ERhoosier]

To expand on clifp's points-

I always include 1928 (or earlier) as start year in running any Monte Carlo scenario to include Black Swan event (29 Crash). IMHO- All FIRE's should include at least 1 BS in their projections.

When DW & I had extensive FP done by our FA about 18mo ago the advice we took was to scale back our planned 'safe' SWR from traditional 4% to 3-3.5%. FA's logic was/is that although the 4% SWR will usu be OK under most future projections, the statistical chance of failure going forward appears to be increased due to record low bond yields (e.g, <25 10yr Treasuries). That, along with the uncertainty of economic effects of unwinding QE, makes me sleep better at lower SWR. And if I'm wrong, well having too much $$$ to spend later ain't such a bag prob to have