What are reasonable pessimistic assumptions

[kmt1972]

I am 50 and will be entering into partial retirement soon followed by full retirement. I plan on making reasonable pessimistic assumptions about various factors beyond my control to stress test my numbers.

These assumptions are

a) Inflation will be 0.2% higher than current inflation swaps implies
b) Medicare will kick in at 67 instead of 65
c) SS eligibility age will move by 2 years so my DW and I will start taking SS at age 72 and not 70
d) SS will pay out at around 60% of what is promised
e) 100% of SS instead of 85% will be taxed
d) A 60/40 portfolio will return 4% nominal terms every year
f) All medical costs (insurance premiums etc) will grow 1.8% more than the assumed inflation
g) My son's college costs will grow by 1.5% faster than inflation

All of them are most likely too negative but not absurdly so.

Any feedback on other factors I should think about that I can build in pessimic assumptions on to stress test my model ?

 

[aaronc879]

Any more pessimistic and you will be leaving your Son 8 figures instead of 7.

 

[COcheesehead]

For d) the second d) 60/40 returning 4%, do not make the mistake of assuming constant returns of 4%. Reality of the markets are very different with a more random set of returns. 4% on average is different than 4% a year. You need to take into account return sequence risk when removing funds while your personal returns bounce around.

 

[jeroly]

I think that even if the SS Trust Fund were completely drained and promised SS payments could only be paid from current taxes, about 75% of promised payments could be made. That seems to me to be the worst case scenario and going down to a 60% payout seems over the top conservative.

 

[USGrant1962]

Any more pessimistic and you will be leaving your Son 8 figures instead of 7.

Yup. Each assumption is reasonably conservative but cumulatively they are MUBS.

MUBS is a poker term for “monsters under the bed and stairs.” A term for scared players that always think the worst. They lose.

So think conservative, but not pessimistic. Otherwise you’ll retire way too late or be the richest in the graveyard. Or both.

 

[RobbieB]

I guess you're close to the 6 mill then.

Don't worry about it.

 

[audreyh1]

Fortunately I’m past the period for guessing such things.

But when I retired quite young I assumed SS would not be in the picture. That’s what they kept telling us young-uns anyway.

I also didn’t do any portfolio performance or inflation rate guessing. I just went by the models close to what FIREcalc uses (Trinity study). FIREcalc takes historical investment performance and inflation into account. And I also started out with a lower withdrawal rate due to assuming 50 years rather than 30.

 

[Aerides]

Besides F & G, I think those all seem super pessimistic. But all the more, taken all together.

For example, IF they raise the SS ages for those of us who are already 50, that's huge, and then if it's only 60%...eh, one not both. Then, after that, if they ALSO raised the Medicare age, that's getting into some serious voter revolt territory.

4% (for years and years) on a 60/40 would mean history is meaningless, and the global economy is in a long term depression.

IOW, if even 1/3 of those assumptions come true, lots of other things are not as we know them now.

 

[youbet]

I also didn’t do any portfolio performance or inflation rate guessing. I just went by the models close to what FIREcalc uses (Trinity study).

Smart.

 

[CRLLS]

Since you ask for pessimistic things that you haven't thought about, what if you live to 110 years of age? Have you got enough to live on? And to stress out a bit more, the last 15 years are in a care facility. Just kidding, sort of. Seriously, one can always think of pessimistic things that will kill a plan. I just add some fluff to my theoretical expenses to cover a few of the unknowns and run the normal scenarios in the calculators. Oh, I also use age 100 for both DW and myself.

 

[SJhawkins]

Reasonable pessimistic assumptions?

Become plant food at age 70! This maybe more likely than the other items on your list.

A little of the glass is half empty or full thing��

Im a few years older than the OP and still grinding away so what do I know!

 

[RobbieB]

That's good, I like it.

Yeah, what if you die tonight? You won't have to anguish over "the plan" any more.

So, instead...think about what you would like to do if you don't die tonight?

 

[RunningBum]

Consider VPW, variable percentage withdrawal? If things go bad and stay bad, you start throttling back your withdrawals (spending) right away, rather than sticking to a 4% + inflation plan hoping it will recover like the Trinity study shows. If it doesn't follow history and recover, you have to decide when to bail out and the cuts will have to be deeper.

And if things go well, the plan lets you increase spending as your investment return rate exceeds your spending rate, but spread out over your remaining years so you have room to throttle back if things reverse.

Theoretically you won't run out of money with VPW but if you get down to $10K left it really doesn't matter what your WR is.

If you have some big personal spending event, it also gets absorbed over your remaining years as it essentially is treated like a market loss.

Where it may not work as well is if you start needing expensive long term care. You could purchase LTC insurance, or set aside a buffer for that.

Bogleheads has a wiki page on VPW.

 

[marko]

Fortunately I’m past the period for guessing such things.
.

+1. I think at some point--age + NW-- where you hit a sort of critical mass where, short of an asteroid, you just know you're going to be ok no matter what happens. There's just not enough time left to go through all that money. (Despite DWs best efforts)

 

[Samsung4321]

-$39.68

reasonable pessimistic assumptions about various factors beyond my control to stress test my numbers.

These assumptions are

a) Inflation will be 0.2% higher than current inflation swaps implies
b) Medicare will kick in at 67 instead of 65
c) SS eligibility age will move by 2 years so my DW and I will start taking SS at age 72 and not 70
d) SS will pay out at around 60% of what is promised
e) 100% of SS instead of 85% will be taxed
d) A 60/40 portfolio will return 4% nominal terms every year
f) All medical costs (insurance premiums etc) will grow 1.8% more than the assumed inflation
g) My son's college costs will grow by 1.5% faster than inflation

Consider VPW, variable percentage withdrawal? If things go bad and stay bad, you start throttling back your withdrawals (spending) right away, rather than sticking to a 4% + inflation plan hoping it will recover like the Trinity study shows.

Look on the gloomy side and let all the unknowables on the bright side take care of themselves:

With the minimum number of assumptions ---

How much Withdrawable / y?
Nominal returns 2%, inflation 1%, retirement 50 y, $1 initial capital, $0 terminal capital:
= PMT((1 + 2%) / (1 + 1%) - 1, 50, -1, 0)
= 2.55% / y
Iterate as assumptions change.

Conversely; How much Initially?
Nominal returns 2%, inflation 1%, retirement 50 y, $1 withdrawal / y, $0 terminal capital
= PV((1 + 2%) / (1 + 1%) - 1, 50, 1, 0)
= -$39.29 [-=invested]
Scale according to required/desired/achievable withdrawal / y.

 

[mrfeh]

For d) the second d) 60/40 returning 4%, do not make the mistake of assuming constant returns of 4%. Reality of the markets are very different with a more random set of returns. 4% on average is different than 4% a year. You need to take into account return sequence risk when removing funds while your personal returns bounce around.

+1

I suggest the OP use the Fidelity retirement planner tool. If you want to be conservative/pessimistic, pay close attention to the "significantly below historic market returns".

 

[DrRoy]

All plenty pessimistic. Exceptionally unlikely that they would all happen together.

 

[pb4uski]

In addition to the assumptions in the OP, add to those asteroids, an alien invasion and global thermo nuclear war.

 

[Midpack]

Using a scalpel where an axe isn’t good enough. I never bothered with that kind of precision before or after retiring as it’s pointless. Choose a number that you’re comfortable with, like FIRECALC, and then be prepared to adjust throughout retirement, VPW is one method. Could be better, could be worse than you expect.

I used to admire Milton Friedman, much of his work doesn’t hold up in todays world.

 

[Montecfo]

It is good to understand specific risks so you can plan most effectively.

But the idea that you can make these calculations truly precise is an illusion.

Building in shock absorbers for the unknown in terms of expense padding and discretionary expenses, is perhaps more important than trying to identify and quantify all risks.

 

[perez99]

I will only keep:
- Reduce SS to 75% @ 70 year's
- Keep those assumption's related to my spending (e.g. medical costs, college cost), but use an estimate $, not % of inflation. Goal is to have estimated spending.

Then use Firecalc and other similar tools that use historical returns/inflation modeling or Monte Carlo analysis. Monte Carlo can give you some crazy results, but you still learn something.
I will try to figure out stash needed to stay at 95%+ success, or say, don't go over 3% withdrawal.

Lastly, do some sensitivity analysis where you change some of these variables and re-run the analysis. This can give you a sense of which variables are more impactful.

Hopefully this makes you feel you have done your due diligence, without creating many hypothetical scenarios that can lead to analysis paralysis.

 

[GravitySucks]

Add two years of consecutive double digit losses on the portfolio and five more years of no gains to mix for a truly pessimistic list.

 

[COcheesehead]

I retired in 2020 and had two bear markets to deal with - while taking money out to live. I never expected that, but I planned for it. I think the OP is thinking right. If you plan for the worst everything else is a piece of cake.

 

[Jimonlimon]

I am 50 ...
These assumptions are

...
c) SS eligibility age will move by 2 years so my DW and I will start taking SS at age 72 and not 70

I doubt this. Maybe your FRA will bump up to 68 but I think min and max ages will stay at 62 and 70. Source: Gut

d) SS will pay out at around 60% of what is promised

I think this is unlikely. Congress will dance around with income caps, age factors, and tax but not alter the basic formula (90/32/15%)

e) 100% of SS instead of 85% will be taxed
...

I agree on this one. It will effectively lower the benefit for higher tax bracket individuals but have less impact for those who are in low brackets.

I do think that the contribution cap will get moved up, but without changing the benefit formula. Your contributions that get paid out at the 15% rate help subsidize the program.

(My source for understanding the 90/32/15% benefit formula is SSA.GOV and SSA.TOOLS)

 

[FI_RElater]

...think that there's gonna be a bit more finagling

I doubt this. Maybe your FRA will bump up to 68 but I think min and max ages will stay at 62 and 70. Source: Gut I think this is unlikely. Congress will dance around with income caps, age factors, and tax but not alter the basic formula (90/32/15%) I agree on this one. It will effectively lower the benefit for higher tax bracket individuals but have less impact for those who are in low brackets.

I do think that the contribution cap will get moved up, but without changing the benefit formula. Your contributions that get paid out at the 15% rate help subsidize the program.

(My source for understanding the 90/32/15% benefit formula is SSA.GOV and SSA.TOOLS)

I think a bit more will be eventually done to SS:

-- agree that probably 100% will become taxable (remember that the breakpoint ISN'T adjusted for inflation)

-- expect that the contribution limit will be raised much higher (and possibly even be eliminated), and that another tier will be added with a much lower payout per PIA

-- expect to see the DRC's be lowered to about 4%/yr vs the current 8%/yr.... driving even more people to claim at FRA or earlier (and thus helping the SS funding)

(I'd read elsewhere that if these were used, even without going to 100% taxable SS, that it would push back the funding problem to nearly 2090... but the later it was introduced the shorter til depletion.)