Firecalc says my portfolio reaching critical stage

[Coach]

...

*Actually, you can run FIRECalc after a really good year and use those numbers. Just be sure to reduce the length of time the money needs to last due to the decrease in your expected lifespan.

REwahoo, I don't understand this comment -- could you expand on it?

TIA, Coach

 

[utrecht]

I would never sell out of stocks right now as the OP is suggesting, but I dont understand why you cant re-run FireCalc any time you like.

If I retire with a $1M and a 30 time horizon and get a 100% success rate.....then 3 years later I have $700,000 and a 27 year time horizon, why cant I re-run it? I understand that FireCalc has already accounted for a possible 30% decline, but by re-running it, it would be the same thing as a different person running it with $700,000 and a 27 year time frame to see if its OK to retire.

FireCalc doesnt know if you are the same person or a new person. Either its 100% safe to retire with this particular amount of money and time left...or its not.

It would be nice though to have an option to run FireCalc and figure in the fact that the market has just experienced an X % decline. I think if OP figured that in, he would be back to 100% success rate.

 

[REWahoo]

REwahoo, I don't understand this comment -- could you expand on it?

By definition, FIRECalc tells us the maximum amount we can withdraw from our portfolio annually and, based on the worst markets history has thrown at us, not run out of money for X years. Since FIRECalc tells us worst case, if your portfolio amount increases you can run the numbers again to get a new worst case withdrawal amount. If we trust the accuracy of FIRECalc when we had a smaller portfolio, why would we not trust the numbers when we have a larger portfolio?

Note that I am not advocating you or anyone else do this, merely pointing out how FIRECalc works and the logic behind it.

 

[REWahoo]

I would never sell out of stocks right now as the OP is suggesting, but I dont understand why you cant re-run FireCalc any time you like.

Certainly you can re-run FIRECalc at any time with any number of variables. The point is, if you trusted the withdrawal rate you got with FIRECalc when you initially retired, what is the point of re-running the numbers right after a huge market downturn? Does the market history in FIRECalc include a 40% drop immediately before a second Great Depression sell-off? No, because it only includes actual market history.

 

[utrecht]

If I ran FireCalc exactly one year ago with $1M and a 30 year time frame......and I ran it again right now with those same figures, would I get the same result? I believe I would and I believe thats a major flaw. Theres no way a person could believe the chances of survival are the same coming after a 40% decline in the market as they were when the market was at an all time high.

 

[REWahoo]

If I ran FireCalc exactly one year ago with $1M and a 30 year time frame......and I ran it again right now with those same figures, would I get the same result? I believe I would and I believe thats a major flaw. Theres no way a person could believe the chances of survival are the same coming after a 40% decline in the market as they were when the market was at an all time high.

FIRECalc can only tell us what market history says. It doesn't know whether we were at a market high or had just experienced a major decline when you ran your numbers. It only knows what the chances of survival were based on how the markets behaved from 1871 forward.

From the FIRECalc "How it works" page: FIRECalc "analyzes what would have happened if you retired in 1871, in 1872, in 1873 and so on. It then calculates how often your strategy would have panned out historically."

 

[Rich_by_the_Bay]

Regarding running FC repeatedly and acting on the results, the risk is that you will raise your SWR when times are good, and maybe not be so fast to lower it when times are bad. As pointed out, FC's basic model is one of XX years at YY SWR come hell or high water.

So if you plan on relying on it periodically versus one-time-and-go, you should probably do so on a time basis or some other nonfinancial scheme, and be ready to adjust either down or up. Otherwise the cherry picking may leave you high and dry some day, perhaps in an era similar to what we have now.

 

[FinanceDude]

Keep in mind that FireCalc, while an excellent tool is STILL an algorithim, while LIFE is not........

 

[youbet]

If you go to all fixed at this point you will destroy any predictive value your original Firecalc estimate had..

Actually, Firecalc did absolutely no predicting. It simply backtested your portfolio and other sources of income vs. a withdrawal rate and inflation. Any assumptions as to how this would apply to the future are made by the user, not by Firecalc!

 

[dgalbraith100]

Re-running firecalc

This is the way I look at using firecalc. It isn't "god" and capabable of telling you 100% safe or not. There is a flaw in its modeling capabilities...

If you re-run and adjust upwards when the market is good, even if you always goto 100% safe, you are slowly putting yourself into the position to experience the worst case scenario. (You will run out of money)

If you re-run and adjust downwards when the market is bad until you get 100% safe, you are slowly putting yourself into the "best case" scenario (you'll die very rich).

If you re-run and adjust both ways, you'll be doing alot of hand waving and very little valuable work.

That isn't the way the tool should be used, the "valid run" case would be to run it in the middle of a up or down run. (When the market has recently returned *average* returns). Running it at the top or bottom, will lead to best/worst case computations. (Still *possibly* valid, but either very safe, or very risky).

Running firecalc after a major loss to see if you are *still* 100% isn't really a valid test, firecalc has no method of seeing the market has just lost 40%, and by the "law of averages" must come back to average at some point.

Running firecalc after a major upturn to see if you are *now* 100% isn't really a valid test either. Once again firecalc can not tell that the market has just gained 50% in the last 3 years.

Thats the danger of using past data, to predict future, based on the present.

Unless firecalc looks at current (present) market to determine if we are above average, or below average (based on what? some number of years?) it can dangerously say you are 100%, when you may not be. Or less than 100% when you in fact still safe.


Laters,
-d.

 

[donheff]

Of course you can re-run the numbers as often as you want. The way I view it is that Firecalc looks at hundreds of possible historical scenarios and reports back whether you would have survived them. 100% means you would have survived anything history threw at you. If you ran it last year you know now that you are on one of those scenarios that involves a major down turn shortly after your start date -- scary place to be. But, if history is a good predictor, you will likely survive.

If you are going to re-run your numbers everytime the market takes a major turn there is an easier way -- simply choose your rate (e.g. 4%, 5%) and take that amount form your portfolio every year -- don't adjust for inflation, don't change anything, just ride the volatility. Don't just spend it all willy-nilly. Bank any excess in good years in a separate account to draw on in down years and hope for the best. You can't run out of money that way although you can get pretty low in a sustained bear.

 

[Rich_by_the_Bay]

If you are going to re-run your numbers everytime the market takes a major turn there is an easier way -- simply choose your rate (e.g. 4%, 5%) and take that amount form your portfolio every year -- don't adjust for inflation, don't change anything, just ride the volatility. Don't just spend it all willy-nilly. Bank any excess in good years in a separate account to draw on in down years and hope for the best. You can't run out of money that way although you can get pretty low in a sustained bear.

And FC has an option to model your plan that way, capping the downside to 95% of the prior year balance (Clyatt's plan as presented and backtested in his book).

I have not found FC's approach to that strategy to be all that helpful when you're in "Clyatt mode" but maybe it works well for others.

 

[Moemg]

These are really scarey times and I think we all think about throwing in the towel but the smartest thing is probably to just hang in there . Just make sure you have a few years in cash .

 

[dex]

Keep in mind that FireCalc, while an excellent tool is STILL an algorithim, while LIFE is not........

Exactly - it should not be your only tool.

Good - rules of thumb X% of working salary needed in retirement
- 4% withdrawl rate

Better - Firecalc

Best - a personalized projection of your net worth based upon your specific expense budget, investment ratio, investment growth rate, social security, pension, etc projections and cash flow.

If a person is not doing their "Best" why not?

 

[Rustward]

. . . the "valid run" case would be to run it in the middle of a up or down run. (When the market has recently returned *average* returns). Running it at the top or bottom, will lead to best/worst case computations. (Still *possibly* valid, but either very safe, or very risky).
. . .

I believe I tried to say this in another thread recently and was unable to make the point as clearly as d has here.

 

[ziggy29]

Keep in mind that FIREcalc only looks at the *start* of your retirement. If it says you are "barely safe" with 4%, any downturn is going to say your current withdrawal rate is not "completely" safe. If you retired with 4% in 1972, by 1974 you would have looked "very critical" -- but eventually, you would have made it once the bull market returned in '82.

 

[rickier55]

After running firecalc for several years using a cushion of a substantial amount for a terminal value and still showing 100% success rate, my portfolio just reached a value that firecalc says is the minimum amount (with no cushion terminal value) to achieve 100% success rate. Bogle was on CNN the other day and stated that IF one cannot afford to lose another nickel they MUST sell out even at these depressed market levels. Because of my age I cannot replace this stash. I am thinking of throwing in the towel and go either all fixed (mostly ginnemae) or 100% VWIN? Or should I grow a backbone and rebalance taking a lot out of fixed and into equities? Comments welcome.

You have to decide what's best for you. But keep in mind that what you are seeing with Firecalc is the timing affect of markets.

If your portfolio 'just' went into the point of not surviving 100% of the time, that's tellling you that With your current portfolio, you could STILL survive if we were STARTING into one of the major downturns right now.

And it's plain that we aren't just starting, we may or may not be close to ending, but with the market already down by 40%, it's certainly not in the beginning of a bear market.

Rick

 

[Canadian Grunt]

After running firecalc for several years using a cushion of a substantial amount for a terminal value and still showing 100% success rate, my portfolio just reached a value that firecalc says is the minimum amount (with no cushion terminal value) to achieve 100% success rate. Bogle was on CNN the other day and stated that IF one cannot afford to lose another nickel they MUST sell out even at these depressed market levels. Because of my age I cannot replace this stash. I am thinking of throwing in the towel and go either all fixed (mostly ginnemae) or 100% VWIN? Or should I grow a backbone and rebalance taking a lot out of fixed and into equities? Comments welcome.

Cash flow,

Can you rebalance into ETF's that currently have high payout ratios without taking the full portfolio loss? If you wait for a good rebound and go into bonds the spreads between the two should narrow to minimize your losses. On the market recovery you should also make up some more ground.

Canadian Ishares XCB (Corp Bond) is currently paying 5.94% and that will likely go up within the month. The bond fund is anchored by Canadian banks and Insurers so you won't have to worry about default.

You might want to rebalance a certain percentage into bond or T bills and hold your worst losers for recovery if you suspect they will likely be there after the fallout. Go for yield if you rebalance.

I would check where your portfolio is from the date of retirement and make your decision from there. If you are up the hit is not so bad.

 

[Canadian Grunt]

After running firecalc for several years using a cushion of a substantial amount for a terminal value and still showing 100% success rate, my portfolio just reached a value that firecalc says is the minimum amount (with no cushion terminal value) to achieve 100% success rate. Bogle was on CNN the other day and stated that IF one cannot afford to lose another nickel they MUST sell out even at these depressed market levels. Because of my age I cannot replace this stash. I am thinking of throwing in the towel and go either all fixed (mostly ginnemae) or 100% VWIN? Or should I grow a backbone and rebalance taking a lot out of fixed and into equities? Comments welcome.

I would not sell fixed to average down if you don't like your portfolio results right now. I sold all my fixed income at the start of the month and am down more than I would have been. This doesn't bother me as I have a long time horizon and I see the market rising over the next 10 years. But I wouldn't do it if I was retired as it compounds the losses if the market goes down further. It's a gamble...don't make it if you don't need the additional risk.

 

[donheff]

OP -- if you cashed out yesterday you would have missed 10% today. If you cashed out today you could miss a big jump tomorrow -- or a big fall. Impossible to call em.

 

[jIMOh]

Sorry things are so tight after all those years of hard saving. Little comfort that you have ample company.

If you MUST sell low to meet expenses, take out as little as you can. That part time job may not seem like much but it can make a big difference, if it's plausible for you.

You have expressed what everyone seems to be calling capitulation (" I am thinking of throwing in the towel and go either all fixed (mostly ginnemae) or 100% VWIN?"). Ironically, pundits often take that as a sign that a bottom is near.

Hang in if you can.

I second this advice.

A few points I have not seen brought up:

• What is the payout (dividends and capital gains) of the portfolio?
• 100% firecalc is excellent, I have read many other threads where anything above 80% is wasted anyway.
• So are we talking about keeping firecalc from going below the 100% mendoza line or are we talking about avoiding a 50% survival rate?
• why were you 100% equites when in draw down phase?

 

[Bikerdude]

I think this thread brings to the forefront the issue of successfully executing a 4% SWR means that at some point in your retirement you run a good chance of being faced with a reduction (in some cases substantial) of your starting balance. How you react to that reality will determine your success or failure. Its not as easy as some would believe.

 

[Gardnr]

I think this thread brings to the forefront the issue of successfully executing a 4% SWR means that at some point in your retirement you run a good chance of being faced with a reduction (in some cases substantial) of your starting balance. How you react to that reality will determine your success or failure. Its not as easy as some would believe.

Exactly. If you look at all the lines on a FC graph you see some that drop perilously low before turning up and succeeding in the long run. It's easy to look at that in an academic sense and just see the 100% success result and not really think about what that scenario means in real life. It's another thing altogether to live thru a large drop not knowing for certain what the future holds.

If you aren't ready and able to tough thru that worst case scenario you need to plan accordingly with either a larger portfolio or smaller WR.

 

[cashflo2u2]

I greatly appreciate all the responses. It is very heartened. A few more specifics and answers to some questions.

• I retired 7 years ago at age 61.
• 100% vs. 90% success rate. Even though the 90/10 sounds like good odds, the 10% represents catastrophic failure to me so I weight it much more heavily in this circumstance, to the point that I cannot tolerate it and go for 100%.
• At the time I retired, never heard of SWDR or and WDR for that matter. At some point I discovered the SWDR concept and firecalc. I have done a “look back” calculation to see how far off I drifted. When I retired, my shortfall was $15,000 a year (SS, pension, rental income less expenses). I think I would have taken about 3 1/4% of my portfolio as an annual distribution. If I had followed that rule, my cumulative distribution to date, adjusted for CPI inflation, should have been $124,000. My actual withdrawals have been $162,000. My portfolio balance, after rising substantially, is back down close to the balance it was at retirement (unfortunately I fooled around with some penny stocks when things were good). After moderate cut back in expenses, my withdrawal rate is about 3% of my current portfolio. This is less than what my proforma inflation adjusted rate of distribution would have been from original retirement date, but of course I cannot make up for the over distribution I did of $38,000. Of course my life span is now 7 years less and I am using 21 years to lift off, a 3% inflation rate, portfolio is 55/45. I am not sure if I understand the nuances of not running firecalc after one retires, but if I “pretend” I am retiring 1/1/09, using the output that says what the beginning portfolio balance should be to get 100% success rate, it shows a balance needed of about 15% less than my current balance (the narrative shows one figure and the little chart below it shows another).
• This has been mentioned, but the firecalc shows a potential worse case drawdown where the balance gets to a point that I don’t think anyone with blood in their veins could tolerate.
• For anyone’s benefit, when I retired I had a fantasy of saving money from not going out to lunch everyday, coffee out at break twice a day, commuting expenses, clothes, etc. Yes, I was going to make my lunch at home and coffee, no commuting, no more suits, hang around the house, etc. Well, that lasted about 6 months. I go out to lunch often with my cronies, go out for coffee for excitement and now my retired wife goes with me, I drive around town a lot more, took up golf, gourmet cooking, drink twice as much wine, got a second dog, etc. etc. Plus, when I retired I just estimated my expenses using good old Kentucky windage. I now use Quicken and keep track of every penny.

I suppose I could use more specific numbers, but still would appreciate any additional comments.

 

[harley]

Bogle was on CNN the other day and stated that IF one cannot afford to lose another nickel they MUST sell out even at these depressed market levels.

Does anyone have a link to this interview? I'd like to see what he said in context. I think there is a difference between "cannot afford to lose another nickel they MUST sell " and "cannot stand to lose another nickel they MUST sell ". I'm curious to see which he meant. I'd tend to reluctantly agree with the former, but not with the latter. I googled around but couldn't find it.