I don't use a static return per se, but being a spreadsheet junkie I do have one for that. At a 1.5% real return I am good to go. Since the real world doesn't give static returns I only use this spreadsheet to see if the "needed" annual real return seems reasonable for my 50/40/10 AA.
I also have some spreadsheets with static returns. As I said earlier, I think it makes sense to use them for a reference point, keeping in mind their limitations.
I actually use ZERO real returns in those spreadsheets, for two reasons. First, it keeps things simple, I'm far less likely to make an error, as I don't need formulas for inflation adjustments. The only adjustment is that I deflate my non-cola pension, but that's one line and fairly small impact anyhow. The second is that zero real return is a bit worse than the historical worst case that I showed in the previous post, so I get a simple, conservative SS.
I agree with you, I think it is useful as just another data point, to see if things seem within reason when looked at from another angle. I've always found it useful to view things from different angles, as a check (it applies to pretty girls as well! It's a universal constant!
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photoguy, I'm not going to quote it all, but I think there is just a semantic difference here, a gap that keeps this conversation going back and forth. I think I said this before, but I can't find it off-hand so I'll repeat it here:
A) FIRECalc provides a report. Barring calculation or data errors, and within rounding, it is 100% accurate. There were references to this being 'scientific' - OK, but I don't care to debate the meaning(s) of that word, I don't think it is important. We could say it is deterministic. Different people with the same inputs get the same results.
B) What you do with those results is up to you. Looking to the future, and devising a plan is not deterministic. Different people with the same inputs will offer different approaches.
And I think you continue to blend the two, and that's where our conversations get twisted and difficult.
I'll try a few excerpts:
photoguy said:
... To take this one step further, "lower lines more likely" means that the success probability that comes out of firecalc is too high (when used as a future estimate). ...
Here's where we breakdown (cue Led Zeppelin...) Using 100% HSWR (Historically Safe Withdraw Rates), none of those lines fail. The probability of success is 100%. Period.
(when used as a future estimate) - now you are into 'B'. It's a different conversation. It isn't FIRECalc that reported anything that is 'too high', it just reported the facts. They are what they are.
Firecalc computes an equal weighted probability but if we agree that some lines are more likely, then they should have greater weight in the calculation
If we have more weight on the lower lines, then we are in the following situation:
(A) if we keep the withdrawal rate constant, the probability of success decreases
(B) if we keep the probability of success constant, we have to reduce the withdrawal rate
No, the lower lines are the worst case, and with a HSWR, they don't fail. You don't have to make any changes, they don't fail. Period.
bold mine:
I'm saying that probability of future success for a 3.59% w.r. is not 100%.
And I've never disagreed with that. I have no Crystal Ball. But don't confuse/mix that and try to rewrite history. It is 100% for the past. Period. It confuses things when we don't accept that.
And it's going to be lower when current valuations are higher (expectations are lower).
Sure, FIRECalc (and common sense) tells us that it's better to have $1M at the trough of an economic cycle than to have $1M at the peak.
I'm not sure why it's necessary to draw a distinction with the future being worse than past.
Because we run into these endless semantic differences if we don't!
The future can easily be worse than the past. Consider that we have only about 4 independent (non-overlapping) 30 year periods in Firecalc. What's the chance that the next (5th) period is going to be worse?
I don't know, do you? It is certainly a possibility.
My point is, take history for what it is, and
then apply your fudge factor, don't mix the two.
Take the case of ten engineers reporting to their boss on the probability of failure of their subsystem. The boss wants to calculate the probability of failure of the overall system. If each of the engineers includes their own fudge factor, the boss is lost when trying to apply some fudge. Better to take the numbers straight, and apply one overall fudge factor. It's cleaner and more transparent.
That's all I'm saying.
One more analogy - what are the odds of rolling a "1" with a single, fair die? Clearly 1 out of 6. No one can correctly dispute that. Do you want to take the bet with a fair payout (6:1)? Do you want to take the bet with $100,000 at stake with a generous payout (say 12:1)? Different people will give different answers, but the 1 out of 6 odds remain the same. They are fact. They don't change based on the decision of taking the bet or not. It's the A/B I posted above. Get it?
-ERD50