Dipping under 100% on Firecalc?

[daylatedollarshort]

Actually no, I had not read the article, because it had nothing to do with my question to you. I was questioning your pointing out that "... the 4% rule which Bill Bengen himself keeps changing year to year - ...". As if him changing it (year to year?) reflects at all on the tool?

I just skimmed the article, but the "starting point paradox" is only an "apparent" paradox. It isn't a paradox at all once you understand how to read the data. It really doesn't matter how many people bring it up, it's not actually a paradox. The number of times it is brought up only reflects that is can be a little hard to get one's head around. It took me some effort to get there.

And from my skim, I think the authors point this out.

Maybe I'm just misunderstanding where you are coming from. It sounds to me like you are saying the tool contradicts itself, and is therefore of questionable value. But it really does not, once you understand it. It's value is exactly what it is and all it can be - to show how a given portfolio and spend pattern would have survived with the historical data it has.

-ERD50

The authors defend the starting point paradox using the 4% rule to explain the paradox. But Bill Bengen himself has abandoned ship on the 4% rule. My comment was on the article, so it is illogical to ask why I brought up the 4% rule when I commented on an article based on the 4% rule. You say there is no starting point paradox and repeatedly point to my lack of understanding and try to personalize and demean my comments over what is simply a basic logic issue that others have noticed as well, and discussed without any input from me.

Google the starting point paradox. I didn't invent the paradox, I just noticed it and didn't know it had a name until now. It is discussed in numerous places online. You can agree or disagree with the apparent paradox as you want, but it would probably be more helpful if you stuck to math and logic reasons of why you agree or disagree, and left my motives, agendas and your perceptions of my lack of understanding out of it, because none of those starting point paradox discussions have anything to do with me personally. It is just something I have observed as well as others, like Kitces discusses it here - https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf

And, "The DMSWR (named after the authors’ initials, plus the acronym for safe withdrawal rate) addresses two commonly cited shortcomings of the 4 percent rule. First, it addresses the starting point paradox (Kitces 2008) by ensuring that initial retirement incomes are stable regardless of the precise retirement date and short-term fluctuations in the stock market." - https://www.financialplanningassoci...-retirement-income-harmonizing-drawdown-paths

It would also be helpful if you are replying to a comment on an article, that you read the article before criticizing the comment.

 

[ERD50]

... It would also be helpful if you are replying to a comment on an article, that you read the article before criticizing the comment.

I'll read the article later when I can give it my full attention. I don't expect it will change anything, for the reasons below...

The authors defend the starting point paradox using the 4% rule to explain the paradox. But Bill Bengen himself has abandoned ship on the 4% rule. ...

I don't care that "Bill Bengen himself has abandoned ship on the 4% rule". It's irrelevant to what I'm saying. He can do whatever he wants, even tell us we don't need to eat or drink and that we can live on air and sunshine - it doesn't change one thing about the report that FIRECalc (or equiv) spits out.

... it would probably be more helpful if you stuck to math and logic reasons of why you agree or disagree, and left my motives, agendas and your perceptions of my lack of understanding out of it, ...

I am sticking to math and logic, but when I think you aren't getting it, I wonder if there is a motivation to pointing out Bill Bengan's position changes - he has nothing to do with any math/logic of a FIRECalc (or equiv) output.

The FIRECalc output either correctly reflects what would happen in history, or it doesn't. I think there have been enough people testing the math/logic for us to reasonably conclude it is reasonably accurate (there's been some questions about the exact timing/order of re-balancing, and the value of bonds on a re-balance, and such - I think these are fairly minor) in that regard.

How people interpret or misinterpret that is an entirely separate issue. Of course, it is an important one, as we don't want people to misinterpret it. In a more perfect world, the tool would be easily understood by all. But some/many things just aren't that simple. As I've said, I've struggled with this myself. One reason I engage in a debate like this is to refresh myself, it is a bit tricky. It's good practice to try to keep my mind sharp (OK, less dull?).

OK, many people have called out this 'paradox'. Fine. But just like the Monty Hall example mentioned earlier, just because people may have trouble seeing the answer, doesn't lead to that answer being any less correct.

Maybe you can restate exactly what your issue is. It may have got lost in some of this back-and-forth?

-ERD50

 

[daylatedollarshort]

I am sticking to math and logic, but when I think you aren't getting it, I wonder if there is a motivation to pointing out Bill Bengan's position changes - he has nothing to do with any math/logic of a FIRECalc (or equiv) output.-ERD50

Per my earlier post, I didn't bring up Bill Bengen in this thread until someone posted an article on the starting point paradox that used Bill Bengen's 4% rule to explain the apparent paradox. Then you criticized my comment on the article for mentioning the 4% rule, without even clicking the link or reading the summary at the top of the article, where the first words of the article are literally "Building on Bengen’s famous 4 percent rule (Bengen 1994)".

The two people that wrote the article used the 4% rule to explain the paradox, which has been 80% of the topic of this entire thread. If you don't know what my point is, may I suggest you reread this thread from the beginning and the articles in the above links describing the starting point paradox. Also please note the DMSWR paper authors felt the subject deserved enough attention to debate the concept using math and logic examples, instead of just lobbing intelligence insults at those with opposing viewpoints.

Please note the authors' backgrounds:
"David Marwood is a staff software engineer, working on the future of machine learning at Google. He completed his MSc at the University of British Columbia in 1996 and has a strong interest in both investing and retirement planning.

David Minnen is a senior research scientist at Google, where he works on machine learning methods for image and video compression. He received his Ph.D. at the Georgia Institute of Technology in 2008 where his research on unsupervised time series analysis was funded by an NSF Graduate Research Fellowship."

 

[REWahoo]

 

[ERD50]

Agreed. I hope to continue this a bit later, let things cool down a bit. There is value to this discussion, but it's just getting a bit off.

That's OK, it's a difficult thing to grasp, I still get lost sometimes.


BTW, DLDS, no insult was ever intended. Sorry if it came across that way. I will try again, later.


-ERD50

 

[SnowballCamper]

I googled, and this was the fourth hit

https://www.kitces.com/wp-content/uploads/2014/11/Kitces-Report-May-2008.pdf

maybe it helps...

 

[ERD50]

I'm just going to dip my toe back in the water here, with a little side note/observation.

I was wondering about the use of the term 'paradox', and my use of 'apparent paradox'. So I went to the on-line dictionary. IMO, the word 'paradox' is a bit of a paradox in itself! And/or the term 'apparent paradox' may be redundant?

par·a·dox
noun

a seemingly absurd or self-contradictory statement or proposition that when investigated or explained may prove to be well founded or true.

"in a paradox, he has discovered that stepping back from his job has increased the rewards he gleans from it"
Similar:
contradiction
contradiction in terms
self-contradiction
inconsistency
incongruity
anomaly
conflict
absurdity
oddity
enigma
puzzle
mystery
conundrum
oxymoron
antinomy

a statement or proposition that, despite sound (or apparently sound) reasoning from acceptable premises, leads to a conclusion that seems senseless, logically unacceptable, or self-contradictory.
"a potentially serious conflict between quantum mechanics and the general theory of relativity known as the information paradox"

a situation, person, or thing that combines contradictory features or qualities.
"the mingling of deciduous trees with elements of desert flora forms a fascinating ecological paradox"

So it seems to me a 'paradox' is in the eye of the beholder. If person A understands why X leads to Z, it isn't a paradox to them. They would just say that person B doesn't understand. How far does this go, before you move from misunderstanding/paradox, to "that's just how it works, see!".

But person A may be able to understand why person B calls it a paradox, there may very well be something counter-intuitive to it, and a deeper understanding is needed to to resolve the paradox. At that point, it it still a 'paradox'?

Tree/forest/sound?

But that's all for now, just found that side bar kind of interesting. Have a good day!

-ERD50

 

[daylatedollarshort]

For those interested in the starting point paradox, and had not seen the prior discussions before on Bogleheads like I didn't, there are some pretty good discussions in their threads. They seem to cover the topic well and stick to the math and logic points, without the personal attacks that unfortunately took this thread repeatedly off track: https://www.bogleheads.org/forum/viewtopic.php?t=329473

 

[Exchme]

My worry about SWR techniques is not the fancy math, but that they tell us how things would have done in the US in the past. That may or may not have much to do with the future; our kids could mess it all up.

 

[daylatedollarshort]

My worry about SWR techniques is not the fancy math, but that they tell us how things would have done in the US in the past. That may or may not have much to do with the future; our kids could mess it all up.

One of the posts from the Bogleheads thread I found interesting is this one, in the thread Does the 4% withdrawal rate work for other countries (which is based on firecalc type past success / failure rates): "LH, check out the book ‘Triumph of the Optimists” by Dimson, Marsh, and Staunton. They show the returns and volatility for 15 or 16 developed world countries, including the US, 1900 – 2000. I ran a quick and dirty test using the Moneychimp.com monte carlo demonstrator, setting up a beginning $1000000 portfolio with a $40000 withdrawal. The US data gave an about 85% success rate (consistent with most US studies), with the lowest being Italy at about 13%, suggesting the US is the anomaly not the rule.

I’ve finally concluded that most recent withdrawal studies are just silliness, as authors churn through small data sets pretending to find complicated withdrawal rules. Add to that the consistently reported fact that most mutual fund investors receive below market returns (costs, dollar weighting) makes most study results optimistic. Hebeler seems to be the only one using realistic costs with past US history."

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=9609

 

[SnowballCamper]

I’ve finally concluded that most recent withdrawal studies are just silliness, as authors churn through small data sets pretending to find complicated withdrawal rules. Add to that the consistently reported fact that most mutual fund investors receive below market returns (costs, dollar weighting) makes most study results optimistic. Hebeler seems to be the only one using realistic costs with past US history."

I can't disagree with this in essence. After reading the DMSWR article, I thought I was getting it, until the chart that shows how the DMSWR depends heavily on the retirement date (Figure 6). With the future unknown, how does the date encode useful information?

The fine tuning of withdrawal rate rules using any historical returns data is fraught with much more risk in assuming that past performance is indicative of future results, than the risk that you tuned your withdrawal rate in a suboptimal way. The uncertainty in the length of the retirement period is a much neglected issue as well.

I do see the inconsistency in how the 4% rule is generically applied, where a delay of one year for retirement results in a much lower withdrawal amount. One could just as easily examine the statistical spread in life expectancy and apply that data to the length of a retirement, resulting in some new rules for withdraw rates.

At some point it just comes down to what the individual believes about their situation, and their future, but informed by their spending, and savings. A prudent advisor would spend much of the time talking about the assumptions in their analysis...and adjust to meet the client.

 

[daylatedollarshort]

I can't disagree with this in essence. After reading the DMSWR article, I thought I was getting it, until the chart that shows how the DMSWR depends heavily on the retirement date (Figure 6). With the future unknown, how does the date encode useful information?

Just to be clear, so I didn't say that quote - it was from a post in a thread on Bogleheads called Does the 4% rule hold true in other other countries?

 

[NomDeER]

Ran a FIRECalc with zero return today. Just for fun.

Fill out FIRECalc as normal, then add zero return.
5th top tab: "Your Portfolio"
Then 3rd tab. down "A portfolio with consistent growth of" add 0% return.

A portfolio with consistent growth of 0%, and an inflation rate of 3.0%

And see what you get. Might help you sleep better.

Not for me. I went from 100% to 0%. There are some people who will still be at 100% because they had such a low withdrawal rate to start with. I am not one of them.

My take on this is that the market and inflation has its swings high and low, but we haven't have a low like this followed by a really bad low like 1929 or 1966.

Still, I get your point and I don't think anyone should blindly follow Firecalc. The more dangerous point I think is if we have a run up or bubble that puts someone at 100% and they pull the trigger, and then the market tumbles back to reality. In most cases they will probably be ok, but I think it's dangerous to retire on a spike. Hard to know if you're on a spike but if there's been a rapid run up you gotta know you might be. I don't think Firecalc factors in this temporary highs. I can't tell for sure from the "How it works" page, but it looks like it only starts with Jan 1 of each year, rather than from each day of the year. If Firecalc started on 10/25/29 instead of 1/1/29 like I think it does, how many more portfolios would be less than 100%? The market data is there, but inflation data may not be.

I am in my first year of retirement and I'm pretty much the person who retired at the highest point of the stock market. I thought stocks were too high and that bonds would not counter a downturn in the market given interest rates. I was concerned about sequence of returns risk. I assumed we would have an increase in inflation but nothing like what we are currently experiencing, which is a big problem. I don't own a home, so the insane increases in rent have a more significant impact on me.

I am very grateful that I am not a low-wage worker attempting to pay for increased rent and all the other inflation right now. I can reduce my expenses. And I retired with a fairly good cash cushion. But, unlike with past corrections or bear markets before I retired, I don't feel comfortable putting more money into the market.

The reality is that I don't think that FireCalc or any other calculator takes into account today's very unusual conditions since these conditions did not exist in the historical scenarios. So, it's very difficult to determine what a safe withdrawal rate is for someone retiring early right now. I'm in the midst of planning a move to another city and state and really am not sure where to live and what to budget for housing and other costs. As someone in their fifties and given the current unusual conditions, I don't feel comfortable with a 4% withdrawal rate or with using the number where I currently first hit 100% on Firecalc. (And I'm definitely not using the Firecalc number I calculated at the time I retired just months ago.) Unfortunately I just don't have much idea how much lower I should go. It makes it hard to plan.

 

[ERD50]

OK, took a little break, still busy with some other things, but I'm going to try to dip my toe back in the water here.

DLDS, what I gathered is you have two things going on, so before I start, let's see if I'm on target with that:

1) You comment on people (some high profile) changing what they consider a 'safe withdrawal %". It's not clear to me, but I think you are saying that this is a reflection on the usefulness of the tool itself? Can you clarify that? I can easily explain this as separate from these tools.

2) There have been references to the many different scenarios that are referred to as a "paradox", Bob/Mary, the three brothers, " Bill, Betty and Bob" from FIRECalc intro, etc. With your Bob/Mary example, they have the same $ at the same time, but FC gives different success rates (but not really - it's not apples-apples, and I can show why). This is also not clear to me, but I think you are saying that this is a reflection on the usefulness of the tool itself? Can you clarify that? I can pretty easily explain that this is just a function of the data, and should be 100% expected . It would be screwy if the tool didn't show this.


-ERD50

 

[daylatedollarshort]

ERD50, why don't you stick to discussing the Boglehead thread on DMSWR, the Kitces paper and the DMSWR paper as those all cover my points in greater detail plus other points I hadn't thought of. The link to the 4% rule is all explained in those papers and the paper discussion thread.

 

[daylatedollarshort]

The reality is that I don't think that FireCalc or any other calculator takes into account today's very unusual conditions since these conditions did not exist in the historical scenarios. So, it's very difficult to determine what a safe withdrawal rate is for someone retiring early right now. I'm in the midst of planning a move to another city and state and really am not sure where to live and what to budget for housing and other costs. As someone in their fifties and given the current unusual conditions, I don't feel comfortable with a 4% withdrawal rate or with using the number where I currently first hit 100% on Firecalc. (And I'm definitely not using the Firecalc number I calculated at the time I retired just months ago.) Unfortunately I just don't have much idea how much lower I should go. It makes it hard to plan.

I don't think the conditions we have today will persist forever. The Fed knows what it has to do to prevent stagflation because they have a playbook now that includes what Volcker did to correct that in the past, though we may have some rough investing seas in the short term - https://www.stlouisfed.org/publicat...andling-of-the-great-inflation-taught-us-much

"Volcker, in office only two months, took the radical step of switching Fed policy from targeting interest rates to targeting the money supply. The days of "easy credit" turned into the days of "very expensive credit." The prime lending rate exceeded 21 percent. Unemployment reached double digits in some months. The dollar depreciated significantly in world foreign exchange markets. Volcker's tough medicine led to not one, but two, recessions before prices finally stabilized."