Author Topic: Rich, Broke or Dead: Visualizing probabilities of outcomes in early retirement  (Read 23601 times)

Glenstache

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+1 on adding the flexible spending addition. It would be interesting to have a metric for how much/often reduced spending was implemented over the course of the simulation run. Is it one year or 10? It is easier to reduce spending for one year than multiple successive years.

maizeman

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Very nice added feature!

Not that you need it by I can independently confirm that I've played around with reduced spending simulations and also see that 4%, dropping to 3.2% when you're below your original inflation adjusted starting net worth never fails in my sims as well.

EnjoyIt

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Very cool update. Thank you.

Western_sean

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Cool update - might be interesting to add a reduced mortality (positive lifestyle effect?) option.  The impact of something like a 20% reduction in mortality v population average might be worth considering based on data from https://actuaries.asn.au/Library/Opinion/2018/AIExploringRetireeMortalityFINAL.pdf.

The thing I particularly like about this tool is the visual impact of the size of the wedges - I guess I just want to be able to tweak the death one in the same way as the others. I suspect that probably says more about my mindset than the application.....




Gyosho

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I'd like the option to add more fields for Extra Income (right now there is only 1) - some of us have more than 1 source of extra income expected at different times in our life.

I'd also like an option to input Decreased Spending - for example, paying off your mortgage.

CCCA

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Thanks to everyone for posting positive feedback on the model addition and analysis.  I'm super happy that people are finding it useful.


I'd like the option to add more fields for Extra Income (right now there is only 1) - some of us have more than 1 source of extra income expected at different times in our life.

I'd also like an option to input Decreased Spending - for example, paying off your mortgage.


You can already add more income streams.  Enter multiple values separated by semicolons: e.g. 50000;15000;5000 in the extra income box and then make sure you add 3 start ages and 3 end ages (also separated by semicolons) in the appropriate boxes

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Cool update - might be interesting to add a reduced mortality (positive lifestyle effect?) option.  The impact of something like a 20% reduction in mortality v population average might be worth considering based on data from https://actuaries.asn.au/Library/Opinion/2018/AIExploringRetireeMortalityFINAL.pdf.

The thing I particularly like about this tool is the visual impact of the size of the wedges - I guess I just want to be able to tweak the death one in the same way as the others. I suspect that probably says more about my mindset than the application.....



I will take a look at the pdf you linked to and see if it's possible/makes sense to add it in. I know that was a big discussion point earlier in this thread.

TexasRunner

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Great Resource!!!!

One thing that I like though, is the flexibility you have in a mere 20% spending fluctuation.  I've never been able to find a great mathematical resource that shows how powerful it is to just be able to 'turn down' the spending (or alternatively slightly increase earnings to the tune of 20% annual spending).  Having flexibility (especially if you have a very early crash, within about 5 years or so after FIRE) adds a MASSIVE safety buffer into FIRE.

This thing is pretty cool.  Nice work.

TomTX

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I just added the ability for a very simplistic spending reduction in the model.  You specify a % reduction in your inflation adjusted spending (e.g. 5%) and if your portfolio is below the inflation-adjusted starting value, then your spending will be reduced by this much, otherwise it will be what you stated. 

This level of flexibility significantly decreases the probability of failure.  Between 0% spending flexibility and 20% spending flexibility, the change of failure drops from 18% over 50years to 0% over 50 years.

GREAT addition!

And if you rejigger to 100% stocks and a 0.1% for investment fees (very doable), the flexibility needed for 0% failure rate drops to 15% on the 50 year horizon.

Basically if you can trim (or replace) $6k from your $40k spending in "down" years, the prediction is no failure.

2Birds1Stone

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That is one of my most sought after features (currently missing) from the likes of FIRECALC and cFIREsim.

Thank you!

EnjoyIt

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That is one of my most sought after features (currently missing) from the likes of FIRECALC and cFIREsim.

Thank you!

If I remember correctly EarlyRetirementNow has a really nice article on this in his early retirement series.  The whole series is an excellent read if you have the time.

CCCA

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It's always nice to hear feedback that this is a useful feature. 


One issue I had with the Early Retirement Now series (which I'll admit, i've only read a few of and it was awhile ago, so I should probably re-read it) is how he focuses on the one or two worst scenarios for FIRE and when a plan doesn't work with those scenarios, he concludes it is not a good plan.  It seems to be an exceptionally conservative way to plan for the future.


TomTX

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It's a fabulous visualizer.

EnjoyIt

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It's always nice to hear feedback that this is a useful feature. 


One issue I had with the Early Retirement Now series (which I'll admit, i've only read a few of and it was awhile ago, so I should probably re-read it) is how he focuses on the one or two worst scenarios for FIRE and when a plan doesn't work with those scenarios, he concludes it is not a good plan.  It seems to be an exceptionally conservative way to plan for the future.

Indeed, it is work like his that gets people to not realize that all this historical data shows 4% as a SAFE withdrawal rate and not an average rate of withdrawal.  They then start thinking the only way to be safe is to go lower and all of a sudden you start having discussion of 2.5% withdrawal rates which are ludicrous in my mind.

CCCA

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It's always nice to hear feedback that this is a useful feature. 


One issue I had with the Early Retirement Now series (which I'll admit, i've only read a few of and it was awhile ago, so I should probably re-read it) is how he focuses on the one or two worst scenarios for FIRE and when a plan doesn't work with those scenarios, he concludes it is not a good plan.  It seems to be an exceptionally conservative way to plan for the future.

Indeed, it is work like his that gets people to not realize that all this historical data shows 4% as a SAFE withdrawal rate and not an average rate of withdrawal.  They then start thinking the only way to be safe is to go lower and all of a sudden you start having discussion of 2.5% withdrawal rates which are ludicrous in my mind.
Good I’m glad I’m not the only one. But I will take a look again anyways.

SugarMountain

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One thing I'd like to see, and maybe it's requested above, I haven't read the whole thread, is to have the ability to have two people in the model and have it show the probability for one or both being dead.  I mean, the odds of my making it to 95 are pretty slim, but the odds of both my wife and I making it that far are really long (although one set of my grandparents did it).  I suspect the visual would get pretty murky, but it would be interesting to see.

Mgmny

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One thing I'd like to see, and maybe it's requested above, I haven't read the whole thread, is to have the ability to have two people in the model and have it show the probability for one or both being dead.  I mean, the odds of my making it to 95 are pretty slim, but the odds of both my wife and I making it that far are really long (although one set of my grandparents did it).  I suspect the visual would get pretty murky, but it would be interesting to see.

Not built into the calculator on this thread, but this should help you do some rough calculations based on you and your spouse's age.

https://www.finder.com/life-insurance/odds-of-dying

RetirementInvestingToday

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Indeed, it is work like his that gets people to not realize that all this historical data shows 4% as a SAFE withdrawal rate and not an average rate of withdrawal.  They then start thinking the only way to be safe is to go lower and all of a sudden you start having discussion of 2.5% withdrawal rates which are ludicrous in my mind.

Hey, easy does it, that's the SWR I selected as a non-US based 46 year old FIRE'ee.  :-)  It was the lower of that or 85% of dividends received + 3 years spending in cash.  Psychology is a wonderful thing and I know I'd be incapable of selling down wealth to eat.

EnjoyIt

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Indeed, it is work like his that gets people to not realize that all this historical data shows 4% as a SAFE withdrawal rate and not an average rate of withdrawal.  They then start thinking the only way to be safe is to go lower and all of a sudden you start having discussion of 2.5% withdrawal rates which are ludicrous in my mind.

Hey, easy does it, that's the SWR I selected as a non-US based 46 year old FIRE'ee.  :-)  It was the lower of that or 85% of dividends received + 3 years spending in cash.  Psychology is a wonderful thing and I know I'd be incapable of selling down wealth to eat.

Iím not sure how much seriousness you have in that statement. But I think you need to understand how dividends work since taking the dividend devalues the company by the amount of the dividend. If you use that dividend to eat instead of reinvest, then you are in fact selling down wealth to eat. This is a fact and not really subject to argument.  But, we hope that investment growth is higher than that dividend and other withdrawals and therefor we do not deplete our wealth in the process. Expected returns are definitely subject to debate as seen on every finance forum in existence.

Those who subscribe to the 4% theory believe that future returns will be no worse than the very worst of history. If we are right then our wealth will grow over the decades. If we are wrong we will have to make a few changes to make things work. We understand that it is impossible to eliminate all risk and have decided that working longer to decrease that risk a tiny fraction is not worth our very limited time we have left on this Earth.

Edit: I just realized you are non-US based. I have no clue what historical returns and SWR you have investing in your country therefor my comments above are geared towards US investors.
« Last Edit: February 14, 2019, 03:19:54 PM by EnjoyIt »

RetirementInvestingToday

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Iím not sure how much seriousness you have in that statement. But I think you need to understand how dividends work since taking the dividend devalues the company by the amount of the dividend. If you use that dividend to eat instead of reinvest, then you are in fact selling down wealth to eat. This is a fact and not really subject to argument.  But, we hope that investment growth is higher than that dividend and other withdrawals and therefor we do not deplete our wealth in the process. Expected returns are definitely subject to debate as seen on every finance forum in existence.

Those who subscribe to the 4% theory believe that future returns will be no worse than the very worst of history. If we are right then our wealth will grow over the decades. If we are wrong we will have to make a few changes to make things work. We understand that it is impossible to eliminate all risk and have decided that working longer to decrease that risk a tiny fraction is not worth our very limited time we have left on this Earth.

Edit: I just realized you are non-US based. I have no clue what historical returns and SWR you have investing in your country therefor my comments above are geared towards US investors.

Yes, I do understand how dividends work and what companies do with those retained earnings if they don't give them back to the shareholders - some create value and some waste it.  That's all quantitative where I understand what matters is total return at the end of the day.  I'm more talking qualitative/psychological.  What's easier to do when the market has fallen by 50%.  Sell some of those equities/bonds to eat or withdraw the dividends that have accrued in the account plus possibly some of the 3 year cash buffer (dividends historically seem to fall less than the asset itself).  Of course we're all wired differently, including our risk profiles, so I expect some would have no issue with the former.  I accepted I had to work longer but now looking back in FIRE I'm glad I did that.

I'm UK based and have used the Wade Pfau work looking at what he called SAFEMAX (100% success) vs the 4% SWR which didn't have 100% success historically even in the US.  He found for a UK investor, 30 years duration and 50:50 local bonds/equities that the SAFEMAX was 3.05%.  You need to eat and pay investment expenses from that which in the UK are still more expensive than the US.  Switch from local to global and the SAFEMAX increased to 3.26%.  My expenses currently run to 0.22% and at age 46 I expect to be retired for a lot longer than 30 years so I settled on 2.5% plus expenses.

The worst years to start were 1900 and 1907 respectively where I think from a US view the typical worst start year is 1966.  Therefore both went through the 1907 Panic which I guess is not unlike our recent GFC so that could easily (will?) happen again.  It also included a World War which I hope never happens again.

EnjoyIt

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Iím not sure how much seriousness you have in that statement. But I think you need to understand how dividends work since taking the dividend devalues the company by the amount of the dividend. If you use that dividend to eat instead of reinvest, then you are in fact selling down wealth to eat. This is a fact and not really subject to argument.  But, we hope that investment growth is higher than that dividend and other withdrawals and therefor we do not deplete our wealth in the process. Expected returns are definitely subject to debate as seen on every finance forum in existence.

Those who subscribe to the 4% theory believe that future returns will be no worse than the very worst of history. If we are right then our wealth will grow over the decades. If we are wrong we will have to make a few changes to make things work. We understand that it is impossible to eliminate all risk and have decided that working longer to decrease that risk a tiny fraction is not worth our very limited time we have left on this Earth.

Edit: I just realized you are non-US based. I have no clue what historical returns and SWR you have investing in your country therefor my comments above are geared towards US investors.

Yes, I do understand how dividends work and what companies do with those retained earnings if they don't give them back to the shareholders - some create value and some waste it.  That's all quantitative where I understand what matters is total return at the end of the day.  I'm more talking qualitative/psychological.  What's easier to do when the market has fallen by 50%.  Sell some of those equities/bonds to eat or withdraw the dividends that have accrued in the account plus possibly some of the 3 year cash buffer (dividends historically seem to fall less than the asset itself).  Of course we're all wired differently, including our risk profiles, so I expect some would have no issue with the former.  I accepted I had to work longer but now looking back in FIRE I'm glad I did that.

I'm UK based and have used the Wade Pfau work looking at what he called SAFEMAX (100% success) vs the 4% SWR which didn't have 100% success historically even in the US.  He found for a UK investor, 30 years duration and 50:50 local bonds/equities that the SAFEMAX was 3.05%.  You need to eat and pay investment expenses from that which in the UK are still more expensive than the US.  Switch from local to global and the SAFEMAX increased to 3.26%.  My expenses currently run to 0.22% and at age 46 I expect to be retired for a lot longer than 30 years so I settled on 2.5% plus expenses.

The worst years to start were 1900 and 1907 respectively where I think from a US view the typical worst start year is 1966.  Therefore both went through the 1907 Panic which I guess is not unlike our recent GFC so that could easily (will?) happen again.  It also included a World War which I hope never happens again.

May I ask you a question and I hope it doesnít come off as rude. What is the infatuation with a 100% success rate especially for someone young who can easily adapt if sequence of early returns is similar to some of the worst in history?

Basically by going for 3% you are preparing yourself that the next 5 years have a chance of being worst in history or close to it. If you can survive the first 5 years, you are set even if the worst comes thereafter. While young it is just so easy to adapt for a few years so why strive for 100% if realistically it is impossible to mitigate all risk?

FIRE 20/20

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May I ask you a question and I hope it doesnít come off as rude. What is the infatuation with a 100% success rate especially for someone young who can easily adapt if sequence of early returns is similar to some of the worst in history?

Basically by going for 3% you are preparing yourself that the next 5 years have a chance of being worst in history or close to it. If you can survive the first 5 years, you are set even if the worst comes thereafter. While young it is just so easy to adapt for a few years so why strive for 100% if realistically it is impossible to mitigate all risk?

I can't answer for RIT, but I think there are some valid reasons.  Any combination of dependents, lean-fire, a high-paid career that requires regular certifications to continue to practice, FIRE for much longer than a 30 year timeframe, lack of skills outside one's career, a current fantastic job that one enjoys, or a personality/risk tolerance that wouldn't allow one to sleep well at night without extreme safety could do it.  For instance, I have a friend who has a young child with significant developmental challenges; they will definitely require significant lifelong care.  If I were in that situation, had a career that was exceptionally difficult to get back into after being out for 5 years, and I loved my job then I'd stick around until I hit 100% and then stay a little longer. 
We're all in different situations.  Some of us can afford to be flexible while others, for any number of reasons, simply can't take significant risks with their FIRE plans. 

Blindsquirrel

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Fire 20/20 is spot on. It is a great big world and some situations and life choices mean bailing out a bit later. One is aged parents who require help, and yes, I have delayed the RE part to help my dad, the guy taught me how to use a spoon. That said, time and tide waits for none, I really do need to quit piddling around and pull the trigger.  This is one of the most powerful calculators I have ever seen and I should hit it every single day until I bolt from work with two middle fingers in the air for Forever Freedom!  Incidentally, if you want a second stream of income, such a SS or rentals, just enter the expense as a negative and the calculator works just fine.

TomTX

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I'm UK based and have used the Wade Pfau work looking at what he called SAFEMAX (100% success) vs the 4% SWR which didn't have 100% success historically even in the US.  He found for a UK investor, 30 years duration and 50:50 local bonds/equities that the SAFEMAX was 3.05%.  You need to eat and pay investment expenses from that which in the UK are still more expensive than the US.  Switch from local to global and the SAFEMAX increased to 3.26%.  My expenses currently run to 0.22% and at age 46 I expect to be retired for a lot longer than 30 years so I settled on 2.5% plus expenses.

Whenever I've dug into Wade's numbers, he has sneakily thrown in some significant additional drag to show the 4% rule "doesn't work"

Are you sure he didn't already put in a hefty management fee on top of the withdrawal amount? Or handicap projected returns to 25% worse than historical? These are both actual examples.

So yeah - if you calculate the 4% rule as "4% withdrawals, and in addition a 1% management fee every year" - it doesn't work. Because it isn't 4%, it's 5%.

Le Barbu

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I just stubled on this and realized I was not the only one who appreciate Maizeman genius!

CCCA

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I just stubled on this and realized I was not the only one who appreciate Maizeman genius!


nope, we should all appreciate @maizeman