Hopefully I'm able to articulate my thought here. I've still many years before I can retire, probably a couple decades. As such I run numbers in firecalc and other simulators with 20 years of savings then 40 or so years of retirement.
I've also out of curiosity pretended I'm retiring this year and see what balance I need to retire, what's my 'magic number'. What's striking me as odd is that in the scenario where I save for 20 years first, I'll get many simulations that have a balance at my retirement year that is lower than my 'magic number' yet still end up succeeding in the long term.
For example take this input, but go to the investigate tab and check the box to export the data. See the data for 1930, you'll see the inflation adjusted balance right before retirement is $1,875,288. Yet if I use the investigate tab to see what the minimum balance is required to guarantee 100k withdrawals for 40 years, I get $2,992,703.
So say I start with that same plan saving for 20 years then retiring for 40. The simulation says in 100% of scenarios I'm successful. Yet if I followed that plan and followed along with one of the scenarios, starting this all in 1930, then ran the calculator again at my retirement year 1950, having a balance of $1,875,288, the same calculator would say I had only a 45.8% chance of success.
One of these two forecasts has to be wrong. I believe it's the forecast made in 1950, because when running the calculator then, I'm actually giving it less information. The only scenarios that would yield a balance that low after 20 years of saving 20k a year on top of a 750k starting balance is one where the market had performed very poorly leading up to retirement, which then eventually rebounded, carrying the portfolio along with it. I should be able to retire in confidence despite a 45.8% prediction because I followed the savings plan that produced a 100% success over the longer term.
I feel like people may be getting overly pessimistic forecasts. If I was on track to retire in 2008 based on all simulations (which include ones where there is a big crash right at the beginning of retirement), but as we know everything went to crap in 2007, I was probably still okay to make the jump in 2008, despite the fact that my balance was now likely far below the number I needed to achieve 100% success in simulations going forward.
So how do we avoid this? How can we, at the time of retirement, calculate the magic number, but include data on all our past savings history? Or is it past market performance we need to consider? And how do we do this using data based simulations to get a better picture, rather than just off-the-cuff gut feelings of market conditions?
Or is my thinking here wrong and the simulation run at retirement age is actually more accurate? A retirees Monty Hall problem perhaps? I need some statisticians or experts in probabilities to chime in.
I've also out of curiosity pretended I'm retiring this year and see what balance I need to retire, what's my 'magic number'. What's striking me as odd is that in the scenario where I save for 20 years first, I'll get many simulations that have a balance at my retirement year that is lower than my 'magic number' yet still end up succeeding in the long term.
For example take this input, but go to the investigate tab and check the box to export the data. See the data for 1930, you'll see the inflation adjusted balance right before retirement is $1,875,288. Yet if I use the investigate tab to see what the minimum balance is required to guarantee 100k withdrawals for 40 years, I get $2,992,703.
So say I start with that same plan saving for 20 years then retiring for 40. The simulation says in 100% of scenarios I'm successful. Yet if I followed that plan and followed along with one of the scenarios, starting this all in 1930, then ran the calculator again at my retirement year 1950, having a balance of $1,875,288, the same calculator would say I had only a 45.8% chance of success.
One of these two forecasts has to be wrong. I believe it's the forecast made in 1950, because when running the calculator then, I'm actually giving it less information. The only scenarios that would yield a balance that low after 20 years of saving 20k a year on top of a 750k starting balance is one where the market had performed very poorly leading up to retirement, which then eventually rebounded, carrying the portfolio along with it. I should be able to retire in confidence despite a 45.8% prediction because I followed the savings plan that produced a 100% success over the longer term.
I feel like people may be getting overly pessimistic forecasts. If I was on track to retire in 2008 based on all simulations (which include ones where there is a big crash right at the beginning of retirement), but as we know everything went to crap in 2007, I was probably still okay to make the jump in 2008, despite the fact that my balance was now likely far below the number I needed to achieve 100% success in simulations going forward.
So how do we avoid this? How can we, at the time of retirement, calculate the magic number, but include data on all our past savings history? Or is it past market performance we need to consider? And how do we do this using data based simulations to get a better picture, rather than just off-the-cuff gut feelings of market conditions?
Or is my thinking here wrong and the simulation run at retirement age is actually more accurate? A retirees Monty Hall problem perhaps? I need some statisticians or experts in probabilities to chime in.
Last edited: