FireCalc Newbie: Wide variability-final portfolio

Delawaredave5

Full time employment: Posting here.
New to forum and FireCalc. Great tool.

Are the final year portfolio totals adjusted for inflation ? I'm assuming they are "2004 dollars" - correct ?

I am AMAZED at the huge variability of the final portfolio totals - it ranged from -\$200,000 to +\$4million

(Given a \$1million today portfolio, \$50K withdrawl, 70% stocks, 30 year timeframe, no SS, no pension considered)

Could this be correct ? Also amazing the variability year-to-year -- retiring one year earlier or later had huge final portfolio impact.

The variability is "beyond belief" to me. How can you leave work with such huge swing of outcomes ?

Thanks for any thoughts !

Re: FireCalc Newbie: Wide variability-final portfo

Are the final year portfolio totals adjusted for inflation ? I'm assuming they are "2004 dollars" - correct ?
No. All balances are in nominal dollars, that is, without inflation adjustments.

Have fun.

John R.

Re: FireCalc Newbie: Wide variability-final portfo

The variability is "beyond belief" to me. How can you leave work with such huge swing of outcomes ?

Thanks for any thoughts !

The answer to your question, is that no one can predict the future.

FireCalc just places your portfoilo at a point in history for each year. Imagine that you retired with \$1 Million in 1929. Pretty Grim - But if you had that same \$1 MIllion in 1935 (just a few years later) - You'd be in great shape.

Since you'll never know what lies ahead of you, you just have to play the odds and stay the course.

So the variability has always been 'beyond belief' - My guess is that it won't change in that respect. To lower the variability you generally invest more in bonds. Run FIreCalc with a 50/50 mix and look at the results.

Re: FireCalc Newbie: Wide variability-final portfo

The variability is "beyond belief" to me.   How can you leave work with such huge swing of outcomes?

Because we can adapt and adjust to changing results.  FIRECalc uses a "FIRE and forget" model - set your withdrawal on the day you retire and never adjust.  We can be smarter than that by reducing our withdrawals after down years (trimming discretionary spending) and perhaps increasing them after up years.  A small change early in a losing year sequence seems to be all it would take to switch it over to a winning one.

I think most here plan something like this with the major difference being whether it is done mechanically or by "the seat of the pants".  The mechanical method works much like asset class rebalancing and keeps the often wrong "gut instinct" out of it.

Re: FireCalc Newbie: Wide variability-final portfo

Hyper,

You may a very good point. This is what we do naturally. When we hit downtowns in the economy, most all of us pull in our horns.

This is why I think it's great to have plenty of 'fluff' in your budget. So when the bad times hit, you'll have plenty to cut, if you need to.

Re: FireCalc Newbie: Wide variability-final portfo

This is why I think it's great to have plenty of 'fluff' in your budget.

I of course agree that it is a good thing to have lots of fluff in one's budget. However, the reality is that not all are in circumstances that permit the accumulation of lots of fluff before handing in the resignation from the corporate job. If you enjoy the work you are doing, it makes sense to remain at it a few extra years and accumulate a good bit of fluff. If you have been in a work situation that you are not happy with for some time, it may make sense to go with a plan that includes less fluff but which is built to last all the same.

As a post up above suggests, the way to do this is to lower one's stock allocation. The nice thing about stocks is that they are an asset class with lots of growth potential. The bad thing about stocks is that they are highly volatile asset class, which means that there are wild swings in the returns provided. When you have a plan that does not possess a lot of slack, volatility is your enemy. Aspiring early retirees in those sorts of circumstances need to be taking a look at asset classes more appropriate to their circumstances than stocks.

One of the comments above is that "most" participants at our boards go with heavy stock allocations with the hope that they will be able to reduce spending in the event that they suffer large losses. That may be so. One contributing factor to the imbalance in board investing discussions is that those who are seeking discussions of alternatives to stocks have not always felt comfortable participating in exchanges of viewpoints re the merits of the various asset classes. That's something that I would like to see change over time.

Stocks are a volatile asset class. That's another way of saying that they are a risky asset class. It's OK to invest heavily in a risky asset class if you have lots of slack to absorb any big hits. Those who are in circumstances where they cannot afford to build lots of slack into their plans need to be looking to alternative asset classes to comprise at least a portion of their investment portfolios.

Re: FireCalc Newbie: Wide variability-final portfo

Here is an old school question.

Suppose you saved all your working life to get a retirement nest egg. The day after you retire-- the market gives forth with a 1987 type -22% drop or say a gut grinding 1973-74 type death spiral down -50%.

Would you leap for joy, dump your bonds and buy 100% stocks to grab the low P/E AND higher dividends.

Well? Would you!

I was working in 1987 so I switched my 401k to 100% stock with no problem.

Today my 75% balanced index rebalances automatically to hold preselected asset ratios.

I watch the short end of the stick - dividends and interest.

You need to master the nuts and bolts of what you have - including 'POGO',  the emotional part.

Re: FireCalc Newbie: Wide variability-final portfo

Unclemick, I remember that day in 1987 very well.
Lyn and I were returning from Texas A&M after a
visit to our son. I wanted so much to take advantage.
But as I recall, the rebound the next few days was
high and you missed your chance to catch most of
the rebound. My retirement money was tied up as
I did not retire until 1989 and most of my after tax
was already committed to the laundromat.

BTW, my 60/40 coffeehouse is down about 2.3%
already due to heavy commitment to small cap,
small cap value and REIT. If/when I think the knife
has stopped falling, I will rebalance. My instinct,
right or wrong, has always been to buy low. My
problem mostly comes with when to sell.

Cheers,

Charlie

Re: FireCalc Newbie: Wide variability-final portfo

Would you leap for joy, dump your bonds and buy 100% stocks to grab the low P/E AND higher dividends.

Personally, I would not go with 100 percent stocks in any circumstance. My rough rule of thumb is to go with 30 percent stocks at times of great overvaluation, 50 percent stocks at times of moderate valuation, and 70 percent stocks at times of great undervaluation. Any investor using such a rule of thumb would need to take his or her particular life goals and financial circumstances into account in making adjustments to it, of course.

Re: FireCalc Newbie: Wide variability-final portfo

Would you leap for joy, dump your bonds and buy 100% stocks to grab the low P/E AND higher dividends.
We did that in 1987, our first "bear market". What a great year!

We did it again after 9/11 with cash on the sidelines, eight months before I retired. That worked out for a small profit, especially after Oct 02.

By March 03 it was a different story. We were about 40% cash then (stopped out in Jan) and sat out half of the small-cap runup. Part of it was "Don't screw this up" risk aversion, but most of it was disbelief in such a small-volume war-relief rally. That was an impressive climb up a wall of worry and it led to a lot of introspection & discussion. (Jul-Sep 02 almost turned my spouse into a bond investor.)

I think we've learned a lot from the last few years, and today we've stopped worrying about it. We're sitting on the cap gains, I'm playing around in my own smaller account, and we spend the dividends as they come in.

Re: FireCalc Newbie: Wide variability-final portfo

I just noticed this thread, but Cut-Throat stole my thunder. The guy knows his stuff (and his fish).
Too bad he's so left of center politically
When I notice someone who has it together
(seems smart and common sense) I always wonder
what pushed them into the liberal camp.

Now back on topic. As Cut-Throat so correctly explains,
we are all planning for an unknown future using a known past as a partial guide. Not perfect but better
than nothing. I try to remove as much variability as
possible, even to the point of losing opportunities
(as in equities) because I value certainty over
"maybes". For example, I could certainly have made a
lot more money if I had worked longer. Didn't want to.
There is a high probablity that I would receive a higher
total return with some equity exposure. I was "certain"
I wanted to ER, and I want to be "certain" about how much is coming in EVERY month. The rest (health problems. aging parents, inflation) I can deal with.
Nope, for me, I won't "go into the unknown not knowin' " (The Sopranos).

JG

Re: FireCalc Newbie: Wide variability-final portfo

I just noticed this thread, but Cut-Throat stole my thunder. The guy knows his stuff (and his fish). Too bad he's so left of center politically. When I notice someone who has it together (seems smart and common sense) I always wonder what pushed them into the liberal camp.

Perhaps CT knows something you have yet to explore, being soooo far to the right of the edge of the flat world.

MJ

Re: FireCalc Newbie: Wide variability-final portfo

O.K., dumb question, but in the part where you put the amount to reduce withdrawal due to social security, that's in nominal dollars, not "today's dollars", right? If that's the case I've been underestimating my income stream, happy day for me!

Re: FireCalc Newbie: Wide variability-final portfo

O.K., dumb question, but in the part where you put the amount to reduce withdrawal due to social security, that's in nominal dollars, not "today's dollars", right?  If that's the case I've been underestimating my income stream, happy day for me!

It's in "today's dollars" where "today" is the first day of retirement. Look at the FIRECalc input screen where it says for Social Security - "Uses inflation-adjusted dollars." That means that FIRECalc will inflate those Social Security payments with inflation as the calculator runs.

Now, if your retirement is in 20 years then the "today" that FIRECalc starts with is 20 years in the future. Then you want to enter some inflation (or wage increase adjusted) SS estimate for 20 years from now.

Re: FireCalc Newbie: Wide variability-final portfo

Thanks, worse than I hoped, better than I feared. Good news!