Firecalc slays a strawman, deceives many

[hankjoy]

unintentially, but the cost is delaying ER for many and reducing the WR and lifestyle of ER's unecessarily while increasing their risk (the very thing firecalc purports to help you reduce).
This is a email I sent to Dory36 as a comment on using firecalc.
"Okay I broke down and looked at firecalc. The problem as I see it is firecalc is setup to run "what ifs" for people who plan to sell stock when they retire and then they are forced into the problem of selling shares sometime during their retirement when the market is down. If they retire just before a major downturn they will wipe out their portfolio if they take out much more than ~4%. In debate circles this is called setting up a straw man (an intentionally flawed description of your oponents position that is easy to knock down and make your oponents' position look foolish before they can begin to accurately describe their proposal). This whole paradigm is based on having to sell shares in a volatile market (being a short or long term speculator in the market rather than a true partial owner in a growing business who owns for generations and just accepts their share of the profits each year [dividends]). Firecalc unintentionally is a setup to fail ER withdrawal rates much above 4%, because it is based on low yielding indexes.
For firecalc to fairly show what a growing high yield equity portfolio would do, it needs to calculate high yield equity portfolios such as the DJ utilities, the natural gas index, the REIT indexes, etc. These have a history of paying out more than 4% yield with growth in both the yield (based on inflation adjusted buying prices) and share price. Without selling shares you could withdraw more than firecalc is saying is safe. I realize firecalc costs money to set up and add features to, but without this option it is misleading to those who want to find the highest safe WR and how much they need to retire safely and therefore how early they can retire. What are your thoughts? HankJoy

 

[wabmester]

FIREcalc is a web-based adaptation of a spreadsheet-based calculator. The spreadsheet and data are freely available here:

http://retireearlyhomepage.com/re60.html

If you have spreadsheet chops and a source for long-term dividend data, then you should be able to hack up your own version. I'm sure a lot of people would be interested in the results.

 

[dory36]

And my reply...

Thanks for the note.

I suggest you post this on the forum and see what others think. I am a lowly numbers juggler, not a market expert. But you have probably already seen posts there from a few folks who are convinced that the approach that Firecalc implements paints too rosy a picture. Geez -- I can't win!

You are right that Firecalc is meant to be a "what if" tool, but more than that, it is intended to be a worst case tool. When I cut loose from the paycheck and the associated benefits that a traditional job offers, I simply wanted to know that if I did nothing more than implement the classic "couch potato" portfolio, x% S&P 500 index and the balance in a broad bond fund, I would be OK. That's my "it's OK to retire now" point.

When Firecalc was being written (late 90s), the often-repeated view was that if you couldn't get 20-25% annual returns on stocks, you were an idiot -- those were almost the exact words from a poster on the forum we were all on then.

Firecalc includes the dividends, but only from the overall market, not from a high-yielding subset. If there were data on that subset that matched data we're using, I'd love to include it. But the whole point of using a relatively large set of historical data is that it doesn't require me to postulate that some current phenomenon will last 30-40 years.

Best regards, and hope you continue this discussion on the forum, where others can contribute!

dory3

 

[hocus]

Geez -- I can't win!

Thw way you "win" is by playing it straight.

William Bernstein is an expert in this field. He says that the methodology used in the REHP study is "highly misleading." That statement alone puts the question of the analytic validity or lack thereof of the REHP study on the table.

We have had some wonderful discussions here re my claims that the REHP study is analytically invalid. The two most popular threads in the history of the site deal with that topic. I know that you personally have learned from the SWR discussions because I have noted the change in your statements about SWRs from those you put forward prior to May 13, 2002 (when I put up the first post questioning the study) to those you put forward today. That learning experience should continue.

There are several posters at this forum trying to intimidate any poster who points out the invalidty of the REHP study. JWR1945 rarely posts here on SWRs anymore. I rarely do. Mikey is cautious in what he says re the study. There are no doubt others who understand the flaws of the study and have been reluctant to speak up because of "the Treatment" they have seen delivered to those who do.

That nonsense should stop, Dory36. It is your job to see that it does. Please win one for all of us by making clear that you will not tolerate abusive posting at this forum.

 

[bruce1]

All of these calculators are tools and we should be cautious enough to use them and interpert their results into our own situation. It is essential to know how they work and what they are based on. A discussion of possible limitations or other interpertations does not seem in any way out of line to me Thanks to those who created FIRECALC and and to those who wish to provide an alterantive viewpoint or calculator.
My 2 C

cheers
Bruce

 

[unclemick]

My SWR is 8.5% - has been for the last ten years. Of course - my data set is a little flaky (Norwegian widow - heh,heh), There is no such thing as nonsense - just conclusions lifted out of context of their data set. I want to thank ***** for convincing me that the whole idea of SWR is horse manure.  
The old way (before computers) is the best way - dividends and interest count - all else are interesting data sets.

I do love FIREcalc though-a great hand grenade indicator and just plain fun to play with.

I can't think of a single retiree (I go to several old phart functions) of at least 'a hundred?' who actually owns anything close to the data sets availible for a retirement calculator.

My secret weapon - step daugher in spare room.

These calculators - done properly are wonderful indicators. Real life is another matter.

Now that Vanguard has tumbled to De Gaul and come out with the Target Retirement Series - we can shut off the computers and go fishing, concentrate on dryer sheet recyling and enjoy our ER. The flat earth debate is over - unless you like real estate.

 

[Cut-Throat]

I think FIRECalc is doing it's job!

To assemble a portfoilo of high yielding stocks to compare against is almost impossible in my way of thinking. Stock picking rather than indexing.

I think Dorys statement of a worst case condition is what most all of us are looking for. I also think that you should be able to live (exist) on about half of what FIRECalc indicates. This should give you plenty of room, if the Dow should lose about 90% of its value like 1929 and we repeat another depression. If we never approach the dire economic conditions of the depression, then celebrate and buy an expensive luxury car and take the African Safari.

 

[hocus]

There is no such thing as nonsense - just conclusions lifted out of context of their data set.

In the "Yahoo Finance Quiz" thread, the community was having a good discussion until Intercst (the author of the REHP study) showed up. Intercst posted a deliberate deception. He said that his study shows that an investor cannot reasonably expect more than a 2.3 percent withdrawal from TIPS paying a 3.5 percent annual real return. He said that TIPS are a "fixed income" investment, but of course they are not (the appeal of TIPS is that their return VARIES with inflation) The claim that there is some sort of historical data showing that 3.5% TIPS will only permit a withdrawal of 2.3 percent is pure nonsense.

Intercst has written about how TIPS work, both in his study and elsewhere. So he knew when he put it up that this claim was false. He was engaging in deliberate deception. That is unacceptable. To trick community members on the SWR question (which is complex enough without having to sort through deliberately deceptive claims) could cause busted retirements.

Intercst needs to be reined in. If he is not willing to engage in reasoned discussion on SWRs, he should be kindly asked not to participate on SWR threads at all. Community members have demonstrated many times that they love reasoned discussions re SWRs, but that they hate the ridicule and personal attack and deception stuff that intercst frequently engages in. Responsible community members should be taking steps to put a stop to the nonsense that has frequently poisoned discussions of the flaws of the REHP study.

 

[hocus]

I also think that you should be able to live (exist) on about half of what FIRECalc indicates.

This statement points the way to a possible solution to the problem. Bernstein says that the historical data showed a SWR of 2 percent for high-stock portfolios at the top of the bubble. The REHP study says 4 percent. If intercst would simply change the terminology of the study to explain that he is reporting the historical surviving withdrawal rate (HSWR) and not the SWR, and that the SWR number is at some recent valuation levels only half of the HSWR number, the study would be accurate.

It is good advice to tell people using the REHP that they need to provide lots of slack in their plans because of the analytical flaws in the study's methodology. But it's not enough for us to make that point on this forum. That point needs to be made in the study itself. Otherwise, the study is going to continue to mislead those who make use of it.

The historical data shows that a 4 percent withdrawal may work. It has about a 50 percent chance. The study should say that. For the study to claim that a 4 percent withdrawal has a 100 percent chance of working when the data shows that it has only a 50 percent chance is wrong.

 

[Cut-Throat]

This whole paradigm is based on having to sell shares in a volatile market (being a short or long term speculator in the market rather than a true partial owner in a growing business who owns for generations and just accepts their share of the profits each year [dividends]).

Hankjoy,

Another thought on this just occurred to me.

It seems to me that the way FIRECalc works, is that you'd actually be a buyer of cheap equiities at these times.

As an Example. If you had a 50/50 portfoilo of Stocks/TIPS and the market hit the 1929 crash, wouldn't FIRECalc be buying these cheap stocks and you would be living off of the TIPS to maintain the 50/50 split of the portfoilo?

 

[unclemick]

Yep

1929 on - Wellington, Dodge and Cox balance, a guy named Ben Graham.

Index funds, TIPs are the new crop of rookies.

8.49% from high yield stocks - a totally bogus number (applied only to me) - and lifted out of context.

Glad some got it. A little left handed, INTJ, engineer humor.

Todays number - 4.2735% marked to market - leaving out step daughter and balanced index.

BTY - I found FIREcalc - after ten years of ER without a retirement calculator and never heard of SWR.

 

[Jarhead*]

As UncleMick stated, very few of the older retired folks have any idea that calculators even exist.
Until I found this board (about a year ago), had no idea that there were so many 30, early 40's that either had retired, or were going to shortly. (Age 55 was early in with the information I had available).
It is very understandable that many young people (especially in above example) are looking for a "silver bullet" that will allow them to confidently retire based on what a calculator indicates. (Indeed, with the net worth figures I have seen posted by some very young folks, if they keep their spending under control, they probably can. (But, in my opinion, it is self-discipline and not a calculator that will be the final determining factor on success.
These tools are kind of fun to play with, but in the real world, it will be the individual that can set up a life style that they can be happy with, and spend less than their income that will be successful.

 

[Cut-Throat]

Another question I had on this.

Do you think that a portfoilo of only high dividend yielding stocks would give enough proper diversification?

 

[cute fuzzy bunny]

Not really. Theres a rather high concentration of these stocks in certain industries. Not that theres anything wrong with holding a port heavy in utilities, tobacco, and badly injured companies as long as you comprehend the risks.

The whole strategy has several holes in it, however.

For starters, most high yield stocks that are REALLY high yield are paying that level of dividend for a reason.

The idea that you can buy and hold a really high dividend stock ignores the fact that many of these heavy payers go out of business and take your principal with it.

Even if they stay in play, a lot of these guys may decide that they cant afford to pay the high dividends anymore and lower them. At that point, try to unload the stock without taking a loss.

The other half is the automatic presumption that TIPS accurately measure inflation. In my area of the world, as I've mentioned before, CPI doesnt seem to have much bearing.

I imagine you could do well in areas of the country that experience closer to CPI levels of inflation. However near the coasts I think you'd see that over a long haul you'd suffer extensive loss of principal from defaulting companies and income degradation from actual levels of inflation.

The idea "I'll buy tips and they'll inflation proof me for 30 years" is automatically defective unless you really believe CPI will protect your purchasing power interests. Good luck with that...

 

[unclemick]

Nope(my opinion)

Now a portfolio with high dividend stocks plus some middle of the road reasonable dividend plus dividend growth plus a few heh, heh super dupers - like say - PAYX with roughly 1% or so div and 40+ % div growth or my Nuccor or Eli Lilly or dark horse dog - Exxon mobil.

The number of stocks, industry spread and whether you want international, dollar or cap weight ,etc is an ongoing debate.

P.S. - all of the stocks mentioned above can be found in 2003 , Mergent's Dividend Achievers. AND can be bought via DRIPs.

 

[unclemick]

Also - along the lines of ex-Jarhead's - "silver bullet" - I recently bought a tad more Consolidated Edison - but look at this:

1994 book (owned by Moody's then ) lists Con Ed as 7.1% yield, 7.5% ten yr div growth.

2003 book (now Mergent's) lists Con Ed as 5.2% yield, 1.57% ten yr div growth.

My $ put in dribs and drabs since 1993, plus reinvested dividends are yielding 11.75% ( note this is less than the S&P compounded ) but a steady income stream as Hankjoy mentioned.

This is work/ah er a hobby folks - not a silver bullet.

 

[dex]

Consolidated Edison - is the symbol "ED"?

It was below 30 in Feb of '00 now about 40.

Looks good - makes sense that it wil remain strong - located in northeast - primarily housing and office needs not mfg.

 

[unclemick]

I bought a slug more in 2000 when ED's yield went briefly to 8%. But I think my main point was that even though my div growth disappointed in the subsequent ten yrs. after I took a postion - with quasi DCA plus adding more on dips, one can establish a decent income stream. Like rolling correlations in mutiple asset class investing, you got to stay in up to your elbows and enjoy it. No silver bullets here. 40 DRIP plans purchased over the years since 1989.

 

[hocus]

Here's a link to an earlier thread in which Hankjoy first presented his stratagy of buying high-dividend stocks to generate a larger income stream than could ordinarily be expected from a general stock index fund.

http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=inv_strat_board;action=display;num=1084752712

 

[intercst]

Here's a link to an earlier thread in which Hankjoy first presented his stratagy of buying high-dividend stocks to generate a larger income stream than could ordinarily be expected from a general stock index fund.

http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=inv_strat_board;action=display;num=1084752712

Has anyone found the "missing data" showing me how I can reliably pick stocks with a 10% to 12% dividend yield that won't go bankrupt?

I wonder what Bernstein has to say about the risk of picking individual stocks with dividend yields well above the market average?

intercst

 

[Cut-Throat]

Has anyone found the "missing data" showing me how I can reliably pick stocks with a 10% to 12% dividend yield that won't go bankrupt?

I wonder what Bernstein has to say about the risk of picking individual stocks with dividend yields well above the market average?

intercst

Yup, I know I can't do it. I'll be sticking with index funds.

 

[John Galt]

"Missing data"? We don't need no stiiiiiinking data!

If you could buy stocks paying 10-12% dividends
consistently that wouldn't go bankrupt, I might even
go back in the market. Most everyone else too I
suspect

John Galt

 

[unclemick]

Once again I repeat - just another income stream - heh, heh - like rental real estate, hangin in long enough for a pension, living long enough for SS, or heaven forbide a part time job.

75% balanced index, 10% REIT Index, and when me, Monte Python, and the Nowegian widow make it big with last 15% in dividend hobby stocks - I may write a book or give tv interviews.

 

[John Galt]

unclemick, you need a good title for your book.
How about "Monte Python, The Norwegian Widow
and De Gaul share a room at Motel 6" ?

Or maybe "Takin' a lickin'? Try unclemickin' " ?

Or possibly 'Don't cry "UNCLE" : Mick's stock picks' ?

Let me know if you need more

John Galt

 

[unclemick]

BTY- dividends and utilities are regaining popularity in the fanancial media again (things go in cyles) so expect Wall Street to roll out products to feed the ducks. Mario sent me blurb with my closed end fund report saying I should consider a utilities fund. Black Rock rolled out a Dividend Achievers recently. SOOO - lets all buy at the top so we all can see how tough our 'buy and hold grit' is when interest rate rise as expected. Heh, heh - no guts, no glory. High div stocks are usually very sensitive to interest rates so a quick 50% drop in portfolio value should be of no concern to someone hold this type of portfolio. If your ER nest egg say dropped from 1 mil to 500k in 1-2 yrs - no problem since you are working the dividend stream. Right?