interesting firecalc results today

[mathjak107]

what was interesting is i was playing with firecalc today and i threw in the 28 years we have left since we are already retired 2 years and at are a higher portfolio value today than the day we retired .

it showed that the 45% equity level we are at actually beat 50/50 and 75/25 by 1 cycle less in failures . 3 cycles failed vs 4 for 50/50 and 75/25 .

it held up better right down to 35% equities . 30% equities turned worse again .

the interesting thing is running 30 years , 4 cycles failed at 50% and 6 cycles failed at 45% . that 2 year difference in years had the allocations pan out very different for 45% to 35% equities .

 

[Ready]

Interesting, but I don't think I would feel confident with that level of equities if I were starting my retirement in today's ultra low bond yield environment.

 

[mathjak107]

we have been at 45% since day 1 and we are higher now than when we started and we are delaying ss drawing 120k a year from our portfolio which is just around 4% . once ss kicks in we will drop way down .. i am taking ss in october at 65

 

[audreyh1]

Interesting, but I don't think I would feel confident with that level of equities if I were starting my retirement in today's ultra low bond yield environment.

Why? We are also in a low inflation environment, and at the same time equities are richly valued - CAPE10 has almost reached 30, higher then anytime since 1999-2002. 45% is still a healthy amount for someone 65 or older.

I guess I don't try to second guess the models. They do include some low yield periods.

 

[Fedup]

Good to know, we are also low in equity and even in cash. I just recently added a bit of short term bonds to juice up our returns a bit. But our account, mine and my husband, is at an all time high. It's really unbelievable.

 

[mathjak107]

yes , i thought it was strange how 2 years difference made such a difference in the outcomes . the fact that the 2 years difference let equity allocations dip to 35% with no change was surprising as much as the fact it had a higher success rate than 50/50 .

 

[Ready]

Why? We are also in a low inflation environment, and at the same time equities are richly valued - CAPE10 has almost reached 30, higher then anytime since 1999-2002. 45% is still a healthy amount for someone 65 or older.

I guess I don't try to second guess the models. They do include some low yield periods.

I could probably live with 45%, but 35% just feels too low to me. Low inflation doesn't really help me out that much. We own our home. Our biggest expense is property taxes and they are capped at a 2% increase per year regardless of market value. And we have free health care through megacorp through 65.

So the things that might be subject to high inflation - food, utilities, consumables...they are not significant enough expenses to make much of a difference if we have higher inflation. I'd rather have higher inflation and higher bond yields personally.

 

[Fedup]

I have my garden, the next step is to raise a cow here. No grass though. Maybe I can keep food cost down. We are on the record of eating 6-7 zucchinis straight in a row, 7 days already. I need a break, or my husband needs a break from zucchini.

 

[Aiming_4_55]

.... the next step is to raise a cow here....

Don't forget raising chickens for eggs!! It doesn't take too much space either.

 

[Aiming_4_55]

the interesting thing is running 30 years , 4 cycles failed at 50% and 6 cycles failed at 45% . that 2 year difference in years had the allocations pan out very different for 45% to 35% equities .

Maybe this is to simple, but I view it as "Sequence Of Return Risk". Firecalc is a great tool, but it's still a tool. As I approach solid FI and thinking about ER, I wonder if I need more, I guess that's the OMY scenario that impacts many.

 

[Fedup]

Don't forget raising chickens for eggs!! It doesn't take too much space either.

I would but it's not allowed here. This morning my husband found a dead rabbit in front of our yard. Some animal must have killed it. I worry about the chickens if it was ok to raise them.

 

[mathjak107]

I could probably live with 45%, but 35% just feels too low to me. Low inflation doesn't really help me out that much. We own our home. Our biggest expense is property taxes and they are capped at a 2% increase per year regardless of market value. And we have free health care through megacorp through 65.

So the things that might be subject to high inflation - food, utilities, consumables...they are not significant enough expenses to make much of a difference if we have higher inflation. I'd rather have higher inflation and higher bond yields personally.

the problem is it is real returns that count . a one year cd had some decent historical returns but real returns were negative after inflation and taxes for 30-40% of all the years .

 

[mathjak107]

Why? We are also in a low inflation environment, and at the same time equities are richly valued - CAPE10 has almost reached 30, higher then anytime since 1999-2002. 45% is still a healthy amount for someone 65 or older.

I guess I don't try to second guess the models. They do include some low yield periods.

the models actually don't contain much in the way of high stock valuations , low real returns at the same time .


in fact the period in the 1920's everyone cites was actually a very high yield because 1% in a world where the cpi fell 18% is a great return .

 

[audreyh1]

the models actually don't contain much in the way of high stock valuations , low real returns at the same time .


in fact the period in the 1920's everyone cites was actually a very high yield because 1% in a world where the cpi fell 18% is a great return .

1950s was the period when interest rates were kept low, and the stock market took off, although comparative valuations specifically, I don't know.

I seem to remember in my somewhat different studies some of the worst historical scenarios ever going to lowest value at about 27/28 years for 50/50 at higher withdrawal rates and then recovering a little. Might count for your 28 versus 30 year results, but really, variations from the 2 year difference is just noise. Seems like if something failed in 28 years it failed in 30, so it would only make sense if you had slightly more failures for the 30 year case, which is exactly what your results showed. Basically- fewer failures in general at 28 years than 30.

BTW - I'm pretty sure that the shorter the time period the more bonds help survival rates, and the longer the time period the more stocks help. You can see this pretty clearly on the charts of allocation versus time period versus withdrawal rates conparing 15, vs 20, vs 25, vs 30.

 

[mathjak107]

we never really had both high valuations and low rates this bad together . it is generally one or the other . chart ends in 2011 and valuations went higher and rates lower .

 

[audreyh1]

we never really had both high valuations and low rates this bad together . it is generally one or the other . chart ends in 2011 and valuations went higher and rates lower .

That chart appears to show stock prices, not valuations, FWIW.

 

[mathjak107]

valuations were not high at all when rates were low then .

 

[Lsbcal]

what was interesting is i was playing with firecalc today and i threw in the 28 years we have left since we are already retired 2 years and at are a higher portfolio value today than the day we retired .

it showed that the 45% equity level we are at actually beat 50/50 and 75/25 by 1 cycle less in failures . 3 cycles failed vs 4 for 50/50 and 75/25 .

it held up better right down to 35% equities . 30% equities turned worse again .

the interesting thing is running 30 years , 4 cycles failed at 50% and 6 cycles failed at 45% . that 2 year difference in years had the allocations pan out very different for 45% to 35% equities .

You might be seeing a "threshold effect". What is labeled as a successful cycle might be getting down to having $1000 in the account at some point followed by many years of recovery.

That is why I do not like the FireCalc output choices. All the squiggly lines should be shown on a log plot so one can see the cycle minimums easily. This is not just about endpoint results. It is too bad that FireCalc development has ceased. All the data is there to present it in a more informative way.

I prefer to just look at worst case periods. So I use VPW and modify it (if you want to) to be something that mirrors my spending choices. One does not have to use VPW's suggested withdrawal strategy. It is a great open tool. Then I look at the start years 1966, 1929, 1906, 2000.

 

[Lsbcal]

I object your honor. I just don't think valuations are as bad as some feel. Yes CAPE is highish but accounting issues make it overstate versus historical (maybe subtract 4 from it). And CAPE is not predictive of the next year's outcome. It is more a longer term signal.

But that is what makes markets. Opinions and how people allocate. Those that think CAPE is too high and who emphasize this fact have probably already taken action to be more conservative. For me, this is only a weak item in the timing picture.

 

[audreyh1]

I object your honor. I just don't think valuations are as bad as some feel. Yes CAPE is highish but accounting issues make it overstate versus historical (maybe subtract 4 from it). And CAPE is not predictive of the next year's outcome. It is more a longer term signal.

But that is what makes markets. Opinions and how people allocate. Those that think CAPE is too high and who emphasize this fact have probably already taken action to be more conservative. For me, this is only a weak item in the timing picture.

Fine, so subtract 4 from 30, and we're at 26. Still way high.

Also, I tend to compare recent decades and ignore any "reversion to the mean" speculation. So you can just look at what happened since the rule change in 2001. We've exceeded 2007 levels by quite a bit now.

So, I think valuations are out of whack. It has that exhuberance feel of 1999 ignoring all the pesky details. Either interest rates are going to rise and put pressure on stocks, simply from competition, or the economy is not going to do nearly as well as the happy people are banking on. I tend to expect the latter, with a small serving of higher interest rates piling on. Certainly recent data has been weak. Equity markets are partying like 1999 because they have factored in all sorts of magical wonderful things like castles in the air and they aren't exactly being delivered as expected. But now it's like a game of musical chairs (greater fool game of chicken).

 

[Lsbcal]

Fine, so subtract 4 from 30, and we're at 26. Still way high.

Also, I tend to compare recent decades and ignore any "reversion to the mean" speculation. So you can just look at what happened since the rule change in 2001. We've exceeded 2007 levels by quite a bit now.

So, I think valuations are out of whack. It has that exhuberance feel of 1999 ignoring all the pesky details. Either interest rates are going to rise and put pressure on stocks, simply from competition, or the economy is not going to do nearly as well as the happy people are banking on. I tend to expect the latter, with a small serving of higher interest rates piling on. Certainly recent data has been weak. Equity markets are partying like 1999 because they have factored in all sorts of magical wonderful things like castles in the air and they aren't exactly being delivered as expected. But now it's like a game of musical chairs (greater fool game of chicken).

Whoa, I'm now backpedaling. I guess I didn't convert you.

One of my personal timing model parameters is the PE10 rank for the last 30 years. I figure that this is a reasonable way to avoid some broad historical changes. That number is now 84%. So yes, it is fairly high. In 1999 the same 30 year look back for PE10 was at the 100% level.

But as a timing method such valuations have pretty weak correlations with strong market declines. Generally markets really head south due to business declines (recessions0. So for me, I give more credit to these parameters: stocks declining versus bonds, yield curve inversions, upticks in unemployment, and stock yield versus Treasury bond yields.

Regarding 1999, recollections are always fun and I remember early 2000 when everybody was a day trader. One saw TV commercials about ETrade and such. Regular investors had become "tech investors". The tech industry was completely bananas especially in the ".com" space. To me, we haven't gotten to those crazy levels of thought ... yet. I would not be surprised if we went sideways for a year. A recession would be quite a surprise to me.

Plus the most important observation: I don't want this bull market to end so I only think happy thoughts.

 

[Fedup]

Where is the Whee when we really need it, at least to calm our nerves.

 

[audreyh1]

Where is the Whee when we really need it, at least to calm our nerves.

Oh W2R has Wheed several times over the past few months, and it hasn't derailed the party yet!

 

[audreyh1]

But as a timing method such valuations have pretty weak correlations with strong market declines. Generally markets really head south due to business declines (recessions0. So for me, I give more credit to these parameters: stocks declining versus bonds, yield curve inversions, upticks in unemployment, and stock yield versus Treasury bond yields.

As a timing method - right. It is predictive of what happens 10 years out, not next year. More a method to decide whether to use larger or smaller withdrawal rates, for example.

I have some new funds to put to work, the result of divesting most of my remaining company stock that I've held all these years. I've come up with a band of CAPE10 18 to 25 (eyeballed mostly from post 2000 CAPE10) to drive my allocation between 50% and 60% stocks with a sliding scale in between. So if CAPE10 is 18 or lower, I invest in equities more aggressively at 60%, if it creeps above 25, I back off to 50% equities. Average in range CAPE10 21.5 is 55% equities. Not a big influence, but it helps me put new funds to work without cringing and stopping in my tracks.

FWIW - the yield curve can't invert, IMO with the Fed funds rate low as it is today, it has to get up to 2%, where the curve can start to flatten. That would take four more quarter point raises. So Fed rate rises are a prerequisite to yield curve inversion IMO.