Who is following Firecalc WR?

[KM]

Nope. I told FC how much I wanted to spend to be happily retired. It said I could spend more. I don't see any reason to run out and spend it. But it is nice to know it is there, simply because even FC cant predict the future - so I know I have buffer in FC's recommendation, as well as within my own budget.

 

[audreyh1]

Old habits die hard. I never ever spent all my salary, now that I "pay" myself I never spend all that either.

Yep - extra goes into a pigeonhole for "special expenses" - more travel or a major purchase someday when we feel like it........

 

[Midpack]

This is a common misinterpretation.

FIRECALC is based largely on SWR methodology. It's for planning, SWR was never meant to be applied rigidly for future withdrawal/spending, the various originators said as much from the outset - and repeatedly thereafter. I'd be surprised if the OP finds anyone following FIRECALC or SWR as defined, you're not supposed to!!!

The authors of the paper, however, did not mean for their scenarios to be applied rigidly or uncritically. The article makes this very important statement:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.​

Nisiprius requested clarification from Professor Philip L. Cooley, senior author of the Trinity study:

What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity. I think all the [Trinity] authors meant is that if it is late 2008 and your stocks halve in value, you don't need to halve your spending instantly. It's OK to cross your fingers and continue spending according to the 4%-then-COLAed plan, even though it means dipping into capital, and it's OK to go on doing that for a while.
​

Professor Cooley's response:

You have hit the nail on the head! I've tried to explain that thought to journalists but they don't seem to get it. You've got it. Stay flexible my friend!, which is the advice we should give to retirees​

.

Safe withdrawal rates - Bogleheads

http://www.aaii.com/journal/article...hoosing-a-withdrawal-rate-that-is-sustainable

 

[Major Tom]

Old habits die hard. I never ever spent all my salary, now that I "pay" myself I never spend all that either.

On a monthly basis, I usually have a little left over at the end of each month, which I save. However, bigger expenditures usually come up. Recently I gifted a friend who was in a very tight spot a fairly substantial sum of money. It was annoying because it took me the best part of a year to save that much up but at least I have it to give.

So between the more normal bigger expenditures and me being a philanthropist to my less fortunate friends, I spend most of what I pay myself, though I always keep a decent cushion in checking.

My WR is ~2.5% of the original portfolio and is now ~2.1% of the current portfolio amount, so although I don't save a lot from my monthly "paycheck" I feel as if I am effectively still saving due to my relatively low WR.

 

[MasterBlaster]

I have seen many posts over the years on this forum that suggest people spend their money ever so cautiously. If FIRECALC says they can spend 4 percent they spend 2 percent and so on.... Just in case. Many will go out as very wealthy individuals foregoing much utility from their hard-earned nest-egg. At some age it becomes impossible to spend it all without doing stupid things.

My personal opinion, is that we would be much better off to cover basic living expenses with Social Security and a self-funded pension (ie. a SPIA). And then take a somewhat aggressive decumulation approach to the remaining nest-egg. Perhaps making sure that half (or more) of the remaining nest-egg is completely spent by age 80. That type approach will allow for much better nest-egg utility (ie. lifestyle) while you are alive and yet protect you should you win the old age lottery. there are other approaches such as old-age insurance (ie. a SPDA) that can achieve similar results.

Gummi did a study of what "true" safe withdrawal rates would have been to never go broke had you retired in one of the last 50 years or so. His results showed that for a mixed portfolio, the real "safe" rate was almost always much greater than the ubiquitous 3 or 4 percent. If I recall, Safe rates depending on when you retire could be double the 3 or 4 percent rates, and sometimes above 10 percent, The peak in 1950 was at 16 percent (believe it or not).

In my opinion, the problem isn't just to never go broke. The issue is to never go broke and maximize the utility of what you have over your lifetime, especially before the go-slow years.

 

[Major Tom]

In my opinion, the problem isn't just to never go broke. The issue is to never go broke and maximize the utility of what you have over your lifetime, especially before the go-slow years.

We all have different opinions on this. Mine is to find the compromise WR that allows me enough income while still allowing me to sleep at night. Merely ensuring I don't go broke isn't enough for me; I want to do my best to make sure I'm not walking around with a full load in my pants during severe bear markets.

 

[W2R]

In my opinion, the problem isn't just to never go broke. The issue is to never go broke and maximize the utility of what you have over your lifetime, especially before the go-slow years.

I think that those who are truly content with what they have and their current lifestyle may not see much "utility" in spending just for the sake of spending. Some of our members may choose not to spend simply because they don't have any great burning desire to spend.

 

[Ready]

In my opinion, the problem isn't just to never go broke. The issue is to never go broke and maximize the utility of what you have over your lifetime, especially before the go-slow years.

I tend to agree with you. And if I was around 65 years old and had as much as I do now, I'm sure I'd spend at least 4% and not worry much about it. But for those of us who retired early (47 for me), I just see a potentially very long road ahead, with many years that I need to cover my expenses. I live very comfortably, no complaints, but I'm sure I'd spend a bit more if I didn't worry about a major stock market crash wiping out a good chunk of my savings.

 

[tuixiu]

I usually run firecalc to include 70% of promised social security, 50 years of non-croak, and a 95% success rate. It comes slightly higher than 4%.

 

[Live And Learn]

100% success and a 45 year period gets you to ~ 3.23% HSWR (Historically Safe Withdraw Rate).

-ERD50

Thats what my WR would be if I retired now. I'm probably going to hold on a little longer because I'm afraid that history will NOT repeat itself and that things may be worse. If it turns out that it looks like I'll have more than expected when I'm 65 (in 14 years) then I'l up the travel budget for a few years - not a bad problem to have.

I don't plan to blindly follow a 3.25% WR each year. I am using FIRECalc (and other tools) to determine if I can retire. I will hopefully spend less as my ER budget assumes I hit the OOP maximum for healthcare costs every year.

 

[Danmar]

I use Firecalc as a tool, but not a script.

Me too. Haven't looked at Firecalc in years. Good planning tool but once you reach the conclusion that 3.25% or 3.75% or 4.25% is a good number why do you have to keep obsessing about it? I doubt many people would actually run it every year and base their spending on the results. Me? I just spend the portfolio income which is increasing nicely. port yield varies every day but certainly hasn't impacted my spending.

 

[Major Tom]

Good planning tool but once you reach the conclusion that 3.25% or 3.75% or 4.25% is a good number why do you have to keep obsessing about it?

Because I'm the mildly obsessive type

 

[Danmar]

Because I'm the mildly obsessive type

I think you may have quite a bit of company here.

 

[Major Tom]

I think you may have quite a bit of company here.

Yes, I think there is a contingent here that does mild OCD well (I claim membership )

 

[Willers]

Yes, I think there is a contingent here that does mild OCD well (I claim membership )

+1

If I had a dollar for every time I've run FireCalc and ******** I'd be...well...retired early...

 

[W2R]

Yes, I think there is a contingent here that does mild OCD well (I claim membership )

+2 I like running FIRECalc even though I have been retired for 4+ years.

I run it to age 95. Before retirement I was running it for a 34 year retirement, and now I run it for a 30 year retirement because I am older.

 

[NW-Bound]

When I run FIRECalc or another historical simulation program, it is to learn about and to understand past histories, to see what one could do in case one of the bad scenarios would repeat. It's not to see if I should change my WR, which was already decided.

Some of the past scenarios look very tough to navigate back in those days. Hopefully, the world is now a different place, and an investor has more ways to diversify.

 

[haha]

When I run FIRECalc or another historical simulation program, it is to learn about and to understand past histories, to see what one could do in case one of the bad scenarios would repeat. It's not to see if I should change my WR, which was already decided.

Some of the past scenarios look very tough to navigate back in those days. Hopefully, the world is now a different place, and an investor has more ways to diversify.

And these ways ordinarily diversify less well than they may have in the past. See Wm. Bernstein, "Skating Where the Puck Was".

Ha

 

[NW-Bound]

Then, I guess it's back to 50/50 indexing portfolio, with a 2.5% WR.

Even this low WR would reduce a portfolio to 50% of its initial value, if the era of 1960-1980 were to repeat.

 

[seraphim]

I decided how much money I wanted to retire with, then used FC to help decide if my WR was doable. I run it every couple of months with updated figures, just for reassurance lol. We could take out a lot more, but there's no real reason to do that. 2% provides for our needs and wants.

 

[audreyh1]

Then, I guess it's back to 50/50 indexing portfolio, with a 2.5% WR.

Even this low WR would reduce a portfolio to 50% of its initial value, if the era of 1960-1980 were to repeat.

The only good thing (perhaps) is that 50% of initial value is inflation adjusted.

 

[NW-Bound]

Yes.

The case I described was for a 50/50 portfolio starting at $1M in 1966, and drawn down by a 2.5% WR to $500K in 1981. However, inflation from Jan 66 to Jan 81 was 174%. So, that $500K became $500K x (1 + 1.74) = $1.37M.

Our hapless retiree would still think he was a millionaire, until he went grocery shopping and found out how things were priced nearly 3X higher than when he just retired.

 

[samclem]

Then, I guess it's back to 50/50 indexing portfolio, with a 2.5% WR.

Even this low WR would reduce a portfolio to 50% of its initial value, if the era of 1960-1980 were to repeat.

Can you point me toward a handy source for the 1960-1980 data set (total returns) you are using? I'd like to see how a "x% of year-end portfolio value" withdrawal method would have behaved.
Figures of merit:
Maximum drawdown percent (portfolio minima, inflation adjusted)
Year-to-year variability in withdrawals
Total inflation adjusted withdrawals over the period.
Comparison of spending power of withdrawals to a "X% of inflation" approach.

My entering hypothesis is that linking withdrawals to portfolio performance rather than the inflation rate allows higher average withdrawals (actual value) with the same or higher portfolio minimas. I'd start with a 3% of YEV and compare it to a "2.5% adjusted for inflation" method.
Since some variant of this withdrawal method (e.g. Bob Clyatt's 95% rule etc) are used by a lot of people here, I think this might be useful to see. I think very few people will blindly keep taking inflation-adjusted withdrawals in the face of a plummeting portfolio, so it makes sense to model behavior that is more in keeping with what people will actually do.

 

[NW-Bound]

Can you point me toward a handy source for the 1960-1980 data set (total returns) you are using?

You can run FIRECalc or an equivalent historical simulator to get the data. FIRECalc allows you to download the portfolio history starting from a particular year. By setting the portfolio to 100% equities, then to 100% bonds, with 0% WR in both cases, you can get the total growth of the two individual components.

I'd like to see how a "x% of year-end portfolio value" withdrawal method would have behaved.
Figures of merit:
Maximum drawdown percent (portfolio minima, inflation adjusted)
Year-to-year variability in withdrawals
Total inflation adjusted withdrawals over the period.
Comparison of spending power of withdrawals to a "X% of inflation" approach.

My entering hypothesis is that linking withdrawals to portfolio performance rather than the inflation rate allows higher average withdrawals (actual value) with the same or higher portfolio minimas. I'd start with a 3% of YEV and compare it to a "2.5% adjusted for inflation" method.
Since some variant of this withdrawal method (e.g. Bob Clyatt's 95% rule etc) are used by a lot of people here, I think this might be useful to see. I think very few people will blindly keep taking inflation-adjusted withdrawals in the face of a plummeting portfolio, so it makes sense to model behavior that is more in keeping with what people will actually do.

It is possible to test out your own strategy on the above worst-case inflationary period with the data loaded onto a spreadsheet. I have not done so, however.

With the constant 2.5% WR adjusted for inflation, a retiree already saw his portfolio shrink to 1/2 (with inflation adjustment). If he started out with a higher WR than 2.5%, he would have to cut back below that 2.5% later on to make up. Such austerity is not easy to stomach, though it might be possible if one has no choice.

 

[NW-Bound]

Out of curiosity, I searched the Web and found that there are indeed Web sites with various data bases of historical stock prices, dividends, stock splits, etc... For a brief review, see Historical Stock Data. I also ran across globalfinancialdata-dot-com, which claims a very extensive data set.

However, many of these sites require a paid subscription, and are not meant for the armchair ER financier. If one wants just two simple stock and bond indices going back to 1928 which should be the same as the 2 components of FIRECalc simple portfolio, I found a free one that is already in a nice XLS format. Search the Web for "historical stock market returns spreadsheet download" and you should be able to find it.