Alright, I put in 1 million and said I'd spend $10,000 per year.
It tells me the lowest value for this portfolio is 1 million and the highest value is 12 million.
So the simulator is telling you that not only does a 1% withdrawal rate have 100% success in past sequences of returns, but 100% of the time you would have ended up with at least as much as you started with (in nominal $$$)
How the heck does a person decide not to spend more should their portfolio reach 12 million?
By deciding that their goal is to maximize their estate to leave to children, charities, etc.
What I am asking is, what type of datum or data line should you use to compare wild swings against before you "react" to them. At what point do you say, "I better go get a part time job" and at what point do you say "I better go on twelve trips this year to Disneyland."
I mean, what is a working system to keep yourself from over-reacting or over-correcting?
You did one simulation. Play with it some more and you may answer your own question. This is a very personal issue and everybody’s thresholds are different.
If you simply say, "I can spend 4% per year" do you take out 4% of it's current value. 4% of 12 million would be $480,000. Should you take that out if that thing actually did 12 million?
1. The 4% “rule” was intended as a guideline to determine whether someone has enough assets to support an intended level of withdrawals.
In the classic Trinity study used to support the 4% rule, there are several considerations which tend to make it more conservative than is perhaps necessary, based on the historical data:
A. The study assumed a 0.5% expense ratio, and most index funds charge far less. So, all other things being equal, you should be able to use a 4.45% withdrawal rate in the current environment and get similar results.
B. The study assumed that the retiree would blindly bump up their withdrawals to match inflation regardless of market results. In the example you cite, the withdrawal when the account reached that $12 million would be the original $10,000 adjusted by however many years of inflation. It isis not a 4%-of-balances approach. While that strategy will never fail, it could result in poverty-level-or-worse withdrawals if, for example, your accounts dwindle down to $10,000 and your formula tells you that you can only withdraw $400.
2. So if you have some “fat” in your budget and have an ability to cut back when the market dives, you should be able to spend more in the good times. There are alternative formulas that can overcome some of this stuff. The Bogleheads site has a Variable Percentage Withdrawal calculator that tells you to calculate your withdrawal, based on things like your age, your asset allocation, your pension/ social security amounts and effective dates, etc.