To achieve the most conservative/cautious estimate...

[WyndChym]

would it make sense if I select and enter the following on the Your Portfolio tab?

A portfolio with consistent annual market growth of 0 %, fixed income returns of 0 %, and an inflation rate of 3 %

 

[pb4uski]

No. I think it is very unlikely that real returns are going to be consistently negative.

 

[WyndChym]

Thank you, pb. I just want to use the worst case scenario of investments and savings not growing. FIRECalc still returns a 100% success rate using what I've shown above. Is that a good sign?

 

[MichaelB]

Thank you, pb. I just want to use the worst case scenario of investments and savings not growing. FIRECalc still returns a 100% success rate using what I've shown above. Is that a good sign?

It sounds like you could put your money under your mattress and still have enough to retire. Yes, that is a good sign.

 

[pb4uski]

It sounds like you could put your money under your mattress and still have enough to retire. Yes, that is a good sign.

+1 It means that you need to splurge a bit more and spoil yourself and your loved ones. If you don't spend it then they will!!!

 

[Midpack]

would it make sense if I select and enter the following on the Your Portfolio tab?

A portfolio with consistent annual market growth of 0 %, fixed income returns of 0 %, and an inflation rate of 3 %

That would be outstanding, but are you sure you made all the right selections?

1. There are 4 "buttons" along the left edge of the Your Portfolio page. If you just edit the boxes and don't select the (in your case) 3rd button, it's still using the Total Market default (1st button) when it generates results.
2. In trying to model what you're suggesting, I got a result I'd never seen before (and doesn't make sense to me);

Since you elected the "crystal ball" option for every year, every year will have succeeded or failed, so it is 0% or 100%. FIRECalc found that 0 cycles failed -- the portfolio was depleted before the end of the 30 years -- for a success rate of 100%

. How many lines are on the chart that comes up with your results, many or just one (I got just one).
3. Though you don't want to disclose your numbers, what is the withdrawal rate you're entering (Spending / Portfolio)? We can probably diagnose better starting there if you're interested...

 

[WyndChym]

Midpack,

My results show one line.
On the Start Here tab I enter the numbers for our annual Spending, Portfolio, and Years.
On the Other Income/Spending tab I enter our SS and Pension numbers (no Off Chart Spending).
On the Spending Models tab I select 3% Inflation and Constant Spending Power.
On the Your Portfolio tab I select the option "A portfolio with consistent annual market growth of" and I enter 0% (for both market growth and fixed income returns) and 3% for inflation rate.

 

[Midpack]

Midpack,

My results show one line.
On the Start Here tab I enter the numbers for our annual Spending, Portfolio, and Years.
On the Other Income/Spending tab I enter our SS and Pension numbers (no Off Chart Spending).
On the Spending Models tab I select 3% Inflation and Constant Spending Power.
On the Your Portfolio tab I select the option "A portfolio with consistent annual market growth of" and I enter 0% (for both market growth and fixed income returns) and 3% for inflation rate.

Well, I had never played with the consistent market growth option, but now I realize what it is. It's literally a fixed rate of return, in your scenario, a 0% return on equity and fixed income and 3% inflation - year in and year out. And that's why there is only one line on the results chart, even if you enter some positive return. Unless you're literally putting your money under a mattress, I don't believe there are any real (30 year) fixed rate of return investments. Even if equity and fixed income returns 0% overall, they will flucuate from year to year.

At any rate, I used your consistent market growth 0% market growth -0% fixed income -3% inflation scenario and the 100% success threshold 30 year withdrawal rate was 1.98%. This literally models putting your money under your mattress in a 3% inflation environment! IMO, the consistent market growth option shouldn't be used to model any real world scenario except under the mattress.

If you actually plan to invest in equities and fixed income but you want to model a net 0% return to be "most conservative/cautious", I think you'd have to select the fourth Your Portfolio option, random performance, and enter 0% portfolio return, 10% standard deviation (default, unless you believe otherwise) and 3% inflation. That results a 100% success threshold 30 year withdrawal rate of about 0.9%! OUCH!

I hadn't thought about it, but that says if you expect a 0% distribution portfolio return, you are indeed better off putting your money under your mattress instead of investing at all (based on 100% success WR's).

However, in your example you also have an appreciating asset in Soc Security which will improve your WR result.

And if we have 0% portfolio returns and 3% inflation for 30 years, we are all in big trouble...

 

[WyndChym]

Thank you so much for taking the time to run different scenarios, Midpack.

Is one of the "Portfolio" options more suitable for a portfolio that is mostly savings and CDs?

I will try running the numbers using the random performance option, as well.

 

[Rustward]

This will not matter for what you are trying to do, but just so you know, if you select "a portfolio of consistent annual market growth", any value you enter for market growth will be totally ignored until it gets fixed. The whole pile is treated like fixed income.

 

[Midpack]

This will not matter for what you are trying to do, but just so you know, if you select "a portfolio of consistent annual market growth", any value you enter for market growth will be totally ignored until it gets fixed. The whole pile is treated like fixed income.

What needs to be fixed? I'm no expert by any means, but the way I interpret that page is you can choose only one of the four options. If you choose consistent annual market growth, it ignores any entries for total market, mixed portfolio & random performance. Consistent annual market growth is just a theoretical constant return year in and year out, and the results chart only shows one line as a result - which would make sense in that scenario. I'm not sure how useful that is, but in some cases maybe (shorter periods with actual fixed returns). But I may be all wrong...

 

[Rustward]

What needs to be fixed? I'm no expert by any means, but the way I interpret that page is you can choose only one of the four options. If you choose consistent annual market growth, it ignores any entries for total market, mixed portfolio & random performance. Consistent annual market growth is just a theoretical constant return year in and year out, and the results chart only shows one line as a result - which would make sense in that scenario. I'm not sure how useful that is, but in some cases maybe (shorter periods with actual fixed returns). But I may be all wrong...

You didn't understand my post.
You are correct that you can choose only one of the four options.
And... if you choose consistent annual market growth, you then enter 1) market growth %, 2) fixed income returns %, and 3) inflation %.

The number that you enter for market growth percentage (default of 10) is completely ignored. This is a bug. It has been discussed here
http://www.early-retirement.org/for...consistent-annual-market-growth-of-47116.html
and in other threads.

Edit to add, I first discovered this while trying to answer this question:
If I select consistent annual market growth, and supply values for market growth, fixed income returns, and inflation, how does FireCalc know how much of my portfolio is in stocks, and how much is in fixed income?

FireCalc needs to know this because there are separate input parameters for market growth and fixed income returns, and it seems that the tool should apply market growth % to the stock allocation, and fixed income % to the fixed income allocation.

The answer to the question is, "FireCalc does not know how much of your portfolio is stock and how much is fixed income." It ignores the market growth percentage. Broke.

 

[Midpack]

You didn't understand my post.
You are correct that you can choose only one of the four options.
And... if you choose consistent annual market growth, you then enter 1) market growth %, 2) fixed income returns %, and 3) inflation %.

The number that you enter for market growth percentage (default of 10) is completely ignored. This is a bug. It has been discussed here
http://www.early-retirement.org/for...consistent-annual-market-growth-of-47116.html
and in other threads.

Now I've got you, thanks. When I tried it the other day on behalf of the OP, I was changing fixed income also and didn't notice the first box doesn't seem to active.

 

[youbet]

Midpack,

My results show one line.
On the Start Here tab I enter the numbers for our annual Spending, Portfolio, and Years.
On the Other Income/Spending tab I enter our SS and Pension numbers (no Off Chart Spending).
On the Spending Models tab I select 3% Inflation and Constant Spending Power.
On the Your Portfolio tab I select the option "A portfolio with consistent annual market growth of" and I enter 0% (for both market growth and fixed income returns) and 3% for inflation rate.

Using the "3% Inflation" choice is pretty daring, not conservative. By not using the "historical inflation" choice, you're choosing to ignore the possibility of retiring into a period of significant inflation, such as folks who retired in the early 70's did.

FireCalc tests show that retiring into the 70's inflationary period yielded lower success rates than retiring into the Great Recession. Therefore I wouldn't leave that possibility out of your testing choices.

 

[WyndChym]

Thank you everyone for your responses.

youbet,

I have been running tests using higher inflation rates but how do I choose "historical inflation"?

 

[WyndChym]

youbet, I think I understand what you meant now (please correct me if I am mistaken)... I actually have been choosing "historical inflation" on the Spending Models tab but entering 3%. I agree with you... I need to try scenarios with higher inflation rates.

When inflation is higher, interest rates on savings/CDs usually go up some, correct? So I have changed my worst case scenario
From this:
Spending Models - 3% “for inflation adjustments to the historical data” and Constant Spending Power.
Your Portfolio - "A portfolio with consistent annual market growth of" 0%, fixed income returns = 0%, inflation rate = 3%.

To this:
Spending Models - 8% “for inflation adjustments to the historical data”and Constant Spending Power.
Your Portfolio - "A portfolio with random performance, mean portfolio return = 1%, standard deviation = 1%, inflation rate = 8%.
Is this a more realistic worst case scenario?

What options do others choose/enter for their worst case scenarios?

 

[Midpack]

My most conservative expectations are 0-2% real return. If we have a -7% real return for 30 years (what your entering it appears), there's no hope for 99.9% of us. If inflation runs 8% for 30 years, we're all going to have to assume a lot more risk than all CD's, and hope for a miracle. I am not sure what you're trying to accomplish.

Other than the consistent annual market growth option (which seems useless to me, you can do the same with a simple Excel spreadsheet) which is not working correctly as youbet mentioned, the others all give results showing average, best case, worst case and everything in between for all history back to 1871. Just chose a conservative, but a little more hopeful outlook (not some Armageddon scenario that's never happened), and let FIRECALC show you the worst case based on those assumptions. Maybe start with investment returns that match inflation, most people here are planning on (much) better?

 

[WyndChym]

Thanks again, Midpack. Will do.

 

[seraphim]

Ouch. My head hurts. I need to sit and study the FireCalc manual, and have a good dictionary at hand lol.