What Success % do you use?

[youbet]

I have to admit I am now a little confused about the OP question. I never thought of the success rate as the free variable.

It really boils down to whether you are willing to take on a small risk of running out of money in the last few years of your projection (frequently 30 yrs for a traditional retirement) in exchange for needing a smaller nestegg (typically means retiring sooner).

As all the varied responses in this thread indicate, there is lots to consider, including other variables to tinker with. In the end, my opinion is that the difference between 95% and 100% will impact very few.

 

[youbet]

Not necessarily. I'm pretty confident that there are some 10% failure lines that would have you failing in your mid 80's (age, not % if that was confusing). And scrimping through your 80's would help, but might still leave you running out in your early 90's.

By 'scrimping', say cutting back withdrawals by 1/3rd? From what I've seen, a decade of 33% cuts doesn't change the outcome all that much.

-ERD50

I went back and tried some examples and my observation is spot on. If you have a 90% success rate, you DO NOT need to "scrimp" for the decade prior to the first failure to maintain that failure rate. Full bore spending is build into that calculation. Apriori scrimping would only serve to move out or eliminate some of the projected failures.

IOW, when FireCalc backtests your scenario and spits out a failure rate of 90%, it means 10% failures with full bore spending right to failure. It doesn't mean you also have to cut spending and scrimp for the prior decade (as you said).

Not a big deal. But there seem to be so many misunderstandings about FireCalc, that one probably needed to be corrected.

 

[SecondCor521]

Are you all saying that you adjust your WR up to the success rate you choose?

I'm trying. My mind tells me a 3.75% WR is "safe enough". Apparently my heart disagrees, as I seem to get nervous if my gross spending rate (spending / portfolio value) gets above 3%. With non-portfolio income of a bit over 1%, my net WR is under 2%.

The trade off is always between having fun and blowing the dough, and being safe and comfortable and maybe leaving some money to the kids.

 

[ERD50]

FWIW, I really appreciate your number based approach and it’s helped balance the emotional component I see often in people’s posts. We have no interest in living on an ultra low withdrawal rate, so it helps me balance their true risk vs perceived risk. As a relative newbie to thinking about all of this, understanding the numbers behind the failures, and the market dynamics behind cycles that failed, has changed my perspective a lot. My traditional ‘conservative’ approach was always property or cash. I still tend to keep too much in cash, but at least I understand the implications!

Thanks. This might be a good time for me to add, that though I personally take a conservative approach to WR, I don't think it is irrational at all for someone to start with a 50% success rate, providing they have an aggressive Plan B.

I ran some numbers, FIRECalc say 3.34% for historical SWR for 40 years, and 5.29% for 50% success rate.

So my hypothetical 'twin' could choose to spend 1.58x more than me each and every year over a 40 year period, ending with the two of laying in hospital beds side by side and he could say "Hah! I had a LOT of fun with all those extra indulgences the past 40 years - you lost out!". Who could argue?

But he'd need to be in a position to cut way back if thinks went bad. And I mean way, way back, for a very long time. And for some people, the early years of high living might be worth taking that risk. I think the scenario would need to be something like - hey, I can deal with frugal and still be happy - I just prefer not to. It's a choice, maybe the right one for some people.

Of course, knowing when and how much to cut back is tricky. Like the 2008 crash - I plowed right through it. A high WR would have made me more nervous, and I would have cut spending way down, and that would have affected my lifestyle, at an age where it matters (I might not be able to do those things when I'm older). But that's why I prefer the conservative approach. I can be happy (just a less extravagant version of happy), and it is unlikely I will ever need to cut back at all.

-ERD50

 

[Beldar]

At the risk of sounding like a broken record here...

Before I made the final decision to RE, I used very retirement calculator I could find, over and over and over. I used my most realistic expectations of what I would spend, conservative returns on my investments, and realistic expectations of future inflation and taxes. I only settled for 100% confidence of success in each calculator and scenario.

I found that I & DW could reasonably expect to die as "wealthy" old geezers and that I could RE at any time. So I did.

I should say I did thanks to this forum, otherwise I would probably be still w*rking, not knowing the secret FIRE handshake.

_B

 

[ERD50]

I went back and tried some examples and my observation is spot on. If you have a 90% success rate, you DO NOT need to "scrimp" for the decade prior to the first failure to maintain that failure rate. Full bore spending is build into that calculation. Apriori scrimping would only serve to move out or eliminate some of the projected failures.

IOW, when FireCalc backtests your scenario and spits out a failure rate of 90%, it means 10% failures with full bore spending right to failure. It doesn't mean you also have to cut spending and scrimp for the prior decade (as you said).

Not a big deal. But there seem to be so many misunderstandings about FireCalc, that one probably needed to be corrected.

You are correct for the scenario you describe, but you are misunderstanding what I was trying to get across.

I'm talking about someone who starts with a 90% success rate, and then sees they are on a failure path, and wants to do a 'course correction' late in life, so they don't run out of money. IOW, they are not 'maintaining a 90% success rate', they are moving from a 90% to a 100%.

Which is what I think people would plan to do. We often hear people say 'I would cut my spending if things look bad'. And that justifies a higher initial WR. That's what I'm talking about.

However, I may have still overstated it a bit (though the concept applies). I was thinking off the top of my head about the course corrections early in the cycle (first 5-10 years). But stretching a 'fail in 10 years' portfolio to a 'fail in 15 years ' portfolio, means you probably have a more conservative AA, and it gets closer to simple arithmetic - assuming the portfolio keeps up with inflation, cutting by WR 1/3rd will take you from 10 years to 15 years - but that's pretty close and there are more variables in real life (like real death!).

-ERD50

 

[audreyh1]

Personally I think prudent increases in income make sense if your portfolio grows during the early years. We know the classic SWR is very conservative and based on the worst runs.

Well - since I use % remaining portfolio my income increases as the portfolio grows anyway. But this is completely different from the traditional SWR method.

And I also plan to increase my withdrawal % as well as I get older. At first I had to deal with 50 year timeframe, and then 40. Now I'm getting closer to 35 years. Makes a difference.

 

[TwoByFour]

IOW, when FireCalc backtests your scenario and spits out a failure rate of 90%, it means 10% failures with full bore spending right to failure. It doesn't mean you also have to cut spending and scrimp for the prior decade (as you said).

Our withdrawal amount is quite variable, from about 2% to 5% in SWR terms (that is, as a percentage of assets at year-0, inflation adjusted). Our average is about 3% but the variability is just like the sequence of returns problem with the variability in annual market returns in which a run of down years early in your retirement is a huge risk we all have. Well, the same is true for withdrawing - if you are exceeding your average WR for several years in a row in the early years of retirement it has a more detrimental effect than if you exceed the average WR in later years of retirement.

Likewise with scrimping - if your actual withdrawal amount is less than your planned on WR in early years, it has a more beneficial effect than doing the same thing in later years. In other words, it is much harder to make a mid-course correction late in retirement than early in retirement if you see disaster looming. As someone else said here, you only get to do this once so you have to get it right.

 

[exnavynuke]

In my planning, I'm shooting for 95%. In reality, when I'm >80-85% I'll likely evaluate the current environment (work, economic, health, etc) and determine if I'm "good enough" to go. My planned "mandatory" expenses are already covered by a pension, so the portfolio is really all about lifestyle beyond staying home and eating food. As such, I'm sure I could be convinced/convince myself that I'm ready even if I'm below 95% if work gets to be too much, or I'm at 85% following a 2007-2009 market cycle etc.

 

[Midpack]

You could say I used 190%, without Soc Sec. How?

I calculated the standard 30 year, 95% SWR - and retired when our nest egg reached twice that. We’ll live closer to 40 years and we’ll probably spend more later, though we haven’t in the 7 years since I retired. But our nest egg has increased more than 35% since I retired in 2011, there’s an inheritance on the horizon and I didn’t assume anything from Soc Sec even though I assume we’ll get at least 70% of the SS estimate.

 

[NW-Bound]

100%.

And then, the last couple of years, I spent less than FIRECalc said I could. And the FIRECalc result did not include future SS either.

I just did not need to spend as much as I thought. Some expenses went away. New ones have not occurred.

 

[flyingaway]

I like 150%, I.e., 100% plus 50% safety margin.

 

[Dtail]

I like 150%, I.e., 100% plus 50% safety margin.

Getting into Boglehead territory.
For ones who retired somewhere between 2010 and 2013, their NW has probably increased a decent amount and can probably increase their spending over time.

 

[DEC-1982]

When I made the decision in 2014 to retire, FIDO RIP said there was an 84% likelihood that my money would last till 103. I decided to retire anyway. IMHO, one should retire when the time is right. Money is only one factor of many when you make this decision.

 

[BeachOrCity]

I think retirement calculators are a variation of the old problem: Garbage in, gospel out.

First, they cannot predict the future. The best they can do is to assume the future will be like the past. But what past? Looking back 30 years average inflation is like 2.6%. Look back another ten years, incorporating the late 70s/early 80s excitement and you get a 40 year average of 4.1%. And were the 2000s like the 1980s? And will the dollar still be the world's reserve currency in 20 years?

+1

A good way to balance a historical simulation is to pair it with a Monty Carlo analysis.
The Monty Carlo will generally have a lower chance of success if set up with wider swings in returns, inflation etc

History does not repeat itself the same way in the future so best to have a Monty Carlo to see how those black swans effect things.

As for the percentage success to use, it is highly dependent on how much of your spend you consider discretionary. If a lot of your spending is discretionary (eating out, travel come to mind), then a lower confidence indicator in the model should be acceptable.

 

[big-papa]

+1

A good way to balance a historical simulation is to pair it with a Monty Carlo analysis.
The Monty Carlo will generally have a lower chance of success if set up with wider swings in returns, inflation etc

History does not repeat itself the same way in the future so best to have a Monty Carlo to see how those black swans effect things.

As for the percentage success to use, it is highly dependent on how much of your spend you consider discretionary. If a lot of your spending is discretionary (eating out, travel come to mind), then a lower confidence indicator in the model should be acceptable.

Is Monty Carlo like Monty Hall? What's behind door #3? That's also statistical.

Anyway, what is often missing in Monte Carlo simulators are things like the expected distribution of returns (more log-normal than normal) as well as things like a nonzero autocorrelation. Jim Otar has one available from his site that takes many of these things into account, and more, but it isn't free.

otar retirement calculator

 

[ERD50]

Is Monty Carlo like Monty Hall? What's behind door #3? That's also statistical.

I've never seen the value of MonteCarlo for this (it has its place in other areas).

How much variance to use for each component? Correlation between components? Seems like the people who promote them will say, well we adjust until it matches to the historical reports! What's the point? Seems circular to me.

-ERD50

 

[big-papa]

I've never seen the value of MonteCarlo for this (it has its place in other areas).

How much variance to use for each component? Correlation between components? Seems like the people who promote them will say, well we adjust until it matches to the historical reports! What's the point? Seems circular to me.

-ERD50

If you read Otar's discussion of this, you'll see he's not a big fan either - more of a "if you insist", here's a tool and here's what I did and why. Hard to say that MonteCarlo is any less valid than any other method for which past data of any kind is used since the future is unknowable.

 

[Dtail]

I just look at it as one more perspective and a usually more conservative perspective in conjunction with the historical calculators.

 

[ERD50]

... Hard to say that MonteCarlo is any less valid than any other method for which past data of any kind is used since the future is unknowable.

Nothing predicts the future, so that's not relevant in a comparison.

History is history, a tool like FIRECalc just reports that. It is valid (unless there is a mistake in the calculations). No human is making a decision on what comes out. 1 + 1 = 2.

Monte Carlo is a guess. It is totally dependent on what a human puts into it. Its validity is undefined.

-ERD50

 

[big-papa]

Nothing predicts the future, so that's not relevant in a comparison.

History is history, a tool like FIRECalc just reports that. It is valid (unless there is a mistake in the calculations). No human is making a decision on what comes out. 1 + 1 = 2.

Monte Carlo is a guess. It is totally dependent on what a human puts into it. Its validity is undefined.

-ERD50

Sorry, but I disagree. History is history, sure, but people here are using the history provided by the results of tools like Firecalc to make decisions about future withdrawal rates or odds of success given their desire AA/number of years by assuming that the future will fall within the bounds of the actual past. Likewise, MonteCarlo uses history as well, be it by bootstrapping (using actual returns, but not in the order they happened), and/or by the historical relationships within or between asset classes, variances, etc. to calculate odds of success in a different way. A different approach to asking the same question: what are my chances of running out of money in an unknowable future using some sort of historical data?

 

[big-papa]

I just look at it as one more perspective and a usually more conservative perspective in conjunction with the historical calculators.

Indeed! Until we have a crystal ball, I'm not sure what more we can do besides either looking at the past as it happened or looking at a range of possibilities that might happen. Both have their pros/cons. For example, using historical data as it happened doesn't cover all possibilities of what *could* happen in the future. For example, even 10 years ago, I'm not sure a lot of people would have thought that we could have near zero interest rates combined with high stock valuations as we did, so it wouldn't have been included in historical sequences for backtesting chances of success.

 

[ERD50]

Sorry, but I disagree. History is history, sure, but people here are using the history provided by the results of tools like Firecalc to make decisions about future withdrawal rates or odds of success given their desire AA/number of years by assuming that the future will fall within the bounds of the actual past. Likewise, MonteCarlo uses history as well, be it by bootstrapping (using actual returns, but not in the order they happened), and/or by the historical relationships within or between asset classes, variances, etc. to calculate odds of success in a different way. A different approach to asking the same question: what are my chances of running out of money in an unknowable future using some sort of historical data?

So let's say I'm programming a MonteCarlo app. Let's say it gives results that are more optimistic than history. Do I now 'tweak' the factors? How far do I go before someone says it is too negative? It all seems crazy to me.

but people here ... assuming that the future will fall within the bounds of the actual past.

Not everyone. That's why some choose a spending level below the 100% historical SWR. That is to allow for a future that is worse than the actual past. Plus, many have a 'Plan B'.

You are also conflating the concept of the tool predicting the future, and the concept of people applying the results to plan for the future.

Example:

Plan for the future: It gets cold here in winter, into the - 20 F range some years, and even down to -32 once. I better plan accordingly.

Predicting the future: I predict a low of -23F this winter.


-ERD50

 

[kcowan]

You know your (and if married, spouse's) expiration date? How many calculators, and which ones, did you use?

omni

Only have a rough approximation from various longevity calculators, many of which conflict on various factors. Even FireCalc is based on shaky assumptions such as: the next 30 years will reflect the results from the 30 years before age 65. That is such a crazy assumption that the whole effort is a house of cards.

As investors have said elsewhere, we are in a time of unprecedented easy money thanks the Fed. That has never been the case before. The current generation cannot imagine what life was like in the 80s. (I held a bridge mortgage that peaked at 22%!)

 

[MichaelB]

Even FireCalc is based on shaky assumptions such as: the next 30 years will reflect the results from the 30 years before age 65. That is such a crazy assumption that the whole effort is a house of cards.

FIRECalc does not make any assumption regarding future returns. It just applies the portfolio and spending input to all the past historical market cycles and measures the survival rate.