Author Topic: When FIRE Plans Go Wrong - Your Experiences?  (Read 20453 times)

brooklynguy

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #50 on: February 28, 2015, 06:21:35 AM »
The real problem (or is it??) is that cfiresim doesn't take into account the history of your stache.  If you retire at a market peak, all is fine and well.  But if you retire 1 year into a market crash, cFiresim doesn't simulate only paths that start AFTER a crash, it simulates all paths, including those that start at a peak.  This is a pessimistic result.

This is what I meant when I said that "this will magnify the effect of either a market run-up or a market downturn, as Sol observed in this thread."  The "problem" that cfiresim doesn't take into account the history of your stash (or, better said, where the markets are in their cycle) is discussed in that thread.

If you're living above the line for quite a bit (meaning that your portfolio value keeps growing while you're withdrawing your 4.5% of initial + inflation) then I think your success rate is much higher than 80%.  (depending on how long quite a bit is)  Most failures occur when there's an initial dip that never recovers.

I agree.  Unless you use an exceedingly low stock allocation or withdrawal rate (either of which will almost certainly result in working much longer than necessary), the majority of historical cases would have failed the "oh shit test" (perfect name Eric!) if it were set at 80%.

Is there a way to use cfiresim to figure out the precise oh-shit test failure rate for specific inputs?  (In other words, figure out what percentage of historical cases would have, at any point during their trajectories, had a then-current success rate of less than X%, where X equals the "oh shit percentage.)  Dr. Doom claimed that, using his numbers, the failure rate for an 80% oh-shit test was "greater than forty percent," but this may have been ball-park approximating using the cfiresim results.  I can't figure out a way to extract a precise answer from cfiresim, if there is one.

Livewell

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #51 on: February 28, 2015, 11:46:18 AM »
Lots of over analyzation going on, Im guilty myself of that. 

You can't know the future.  The trade off is between being absolutely solid in the math and working longer than you should.  Only way to solve that is to determine your personal risk profile.  Or get a crystal ball. ;)

I did npv calculations, ran the simulators, created huge spreadsheets, and in the end decided a well managed (keep taxes low - read go curry cracker) fire lifestyle with 4% swr with some flexibilty is the way to go.  That all boils into a number that I'm now building towards.

I started very conservative, and over the past year or so have become less so as Ive come to realize time is the most important asset we have and I'm find to trade 3-5 years of no commute, work bs for a 90% firecalc result (vs 100%).   


« Last Edit: February 28, 2015, 11:49:23 AM by Livewell »

brooklynguy

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #52 on: March 01, 2015, 10:18:42 AM »
Lots of over analyzation going on, Im guilty myself of that. 

As people who have decided not only to retire extremely early, but also to participate in internet forums to engage in discussions regarding the planning of our extremely early retirements, we are all guilty of over-analyzing (which, in my view, is a good thing--as Sol once said, I'm only planning on retiring once, and I don't want to fuck it up).


Is there a way to use cfiresim to figure out the precise oh-shit test failure rate for specific inputs?  (In other words, figure out what percentage of historical cases would have, at any point during their trajectories, had a then-current success rate of less than X%, where X equals the "oh shit percentage.)  Dr. Doom claimed that, using his numbers, the failure rate for an 80% oh-shit test was "greater than forty percent," but this may have been ball-park approximating using the cfiresim results.  I can't figure out a way to extract a precise answer from cfiresim, if there is one.

Ok, I've now gone back and re-read Dr. Doom's Withdrawal Series.  I think there's a flaw in the method he used determined the oh-shit test failure rate that produced an artificially pessimistic result.

Partly (or maybe solely, if there's no longer anyone else following along with this conversion that I'm now having with myself) for my own sanity, let's recap what I'm trying to figure out here, since it's getting very confusing given that we're talking about determining the probability of the occurrence of an outcome having a certain probability of the occurrence of another outcome.  So, to recap:

The "oh-shit percentage" is the historical portfolio success rate that will cause you to decide: "oh shit, that success rate is too low; I need to [go back to work/cut my expenses/etc.]"  As you progress through retirement, it's easy to determine if you ever breach the oh-shit percentage:  at any given time, you can re-run cfiresim using your then-current numbers, and see whether or not it spits out a success rate below the oh-shit percentage.

What I am trying to determine is the historical probability that you will find yourself in a situation where you have a historical success rate below your designated oh-shit percentage (which tells you the historical probability that you will have to do whatever it is that you are using breach of the oh-shit percentage as a trigger for--return to work, cut your expenses, etc.).

Dr. Doom claimed that the historical probability of breaching his designated 80% oh-shit percentage using his particular cfiresim inputs was "greater than forty percent."  I believe he determined this > 40% oh-shit test failure rate as follows:


     -  first, he used cfiresim to determine the stash size that would (as of the beginning of the period) result in a success rate equal to the oh-shit percentage.  In Dr. Doom's case, using his specific inputs, a stash size 20% lower than his actual original stash size (i.e., a stash size of $484k, which is 20% lower than his original stash size of $605k) would result in an 80% success rate.

     -  next, he ran a cfiresim simulation using his specific inputs and examined the dip analysis to find out the percentage of historical cases that, at any point in their trajectories, fell below the reduced stash size determined in the first step.  In Dr. Doom's case, the dip analysis told him that in over 40% of the historical cases, the stash size dipped below $484k.


However, I think this approach overstates the oh-shit test failure rate.  This method takes the stash size that would generate a success rate equal to the oh-shit percentage at the beginning of the period and incorrectly uses it as a proxy for the stash size that would generate a success rate equal to the oh-shit percentage at any point throughout the entirety of the period.  But this is not accurate -- the success rate will vary as the remaining life to the end of the retirement period changes.

Using Dr. Doom's numbers, over 40% of the historical cases had dips that caused the stash to shrink below $484k.  However, some of those dips will have occurred very early in the period (e.g., cases where the market crashed over 20% immediately following retirement) and others will have occurred later in the period.  Let's say in one of those historical cases, the dip below $484k occurred 8 years into retirement; if Dr. Doom would have re-executed cfiresim at the 8-year mark plugging in his stash size then-equal to $484k, cfiresim would not have reported a success rate of only 80% (his designated oh-shit percentage).  Instead, it would have reported a higher success rate, because his then-applicable retirement period would have been 8 years shorter (and his money would have needed to last 8 years fewer).

That said, I can't figure out a way to use cfiresim to calculate the actual oh-shit test failure rate from the data it currently provides.  I know Bo-Knows is in the process of updating cfiresim; I wonder how much work it would be to modify cfiresim to calculate the failure rate for you for a specified oh-shit percentage.

Dr. Doom

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #53 on: March 01, 2015, 02:28:04 PM »
Thanks for spotting the logic error.  You're right.

Walking through it:

I thought:  I'll set my Oh Shit Percentage (OSP) to 80%.

And then I conflated two unequal things: 
1) A portfolio drop of 20% (i.e. a 'dip') and
2) A 20% drop in ER success as per cFIREsim output. 

As you point out, it's
a) not the same plus
b) you have fewer years to get to social security, assuming you entered values and also
c) you are closer to the end of your lifespan.


Example:
Let's take a 1 million stash size, 75/25 split, 30K (3%) WR, 30 years (result is same for 50 years btw), no SS
This is 100% success.

The output shows a dip rate of 20% below initial (< 800K stash) is 43%

But if you plug these numbers back into the calculator (800K, 75/25, 30K spend), you still get a 95.65% success rate.   (NOT 80%)

In fact, you'd have to drop to just under 600K (a 40% total inflation-adjusted reduction in your original stash) to wind up at a < 70% overall result from cFIREsim.

But again, this calc does not change # of years.  Your percentage may go up if you are beginning to enter timeframes lower than 30 years.

>>What I am trying to determine is the historical probability that you will find yourself in a situation where you have a historical success rate below your designated oh-shit percentage.

It's an interesting idea.  Hopefully Bo will comment.  What I can say is that on the 3% WR figure, it appears to be a 40% drop in assets to go below 70% success on cFIREsim.  This makes the determination easy: I can key in on the 40% dip rate percentage listed in the report of the original input (1 million stash, etc)

Works out to 20% or so, appx 1/5

I can live with that.  And if I can't, for whatever reason, go back to work then I will, as other posters have already suggested, start finding ways to drop the yearly spend in order to get that % up again, i.e. spend at my floor or build a trapdoor to go even lower (basement spending?)

I'll update the post with this correction -- really appreciate you catching this issue as it makes a big difference in how you evaluate a breach of the OSP threshold.
« Last Edit: March 01, 2015, 02:55:36 PM by Dr. Doom »

brooklynguy

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #54 on: March 01, 2015, 04:01:12 PM »
Dr. Doom, thanks for restating the issue in a much clearer fashion than my long-winded post did!

It's an interesting idea.  Hopefully Bo will comment.

Yes, hopefully Bo will comment.  One potential hurdle could be that it is impracticable (or impossible) to reconstruct the actual historical success rate that cfiresim would have reported for any given set of inputs at any given time in the past, but for purposes of this feature I think it would actually be better for cfiresim to take advantage of the newer data as it becomes available and instead calculate the failure rate for breach of a specified Oh Shit Percentage based on the success rates that cfiresim would report today using the rolling sets of historic inputs.

Quote
What I can say is that on the 3% WR figure, it appears to be a 40% drop in assets to go below 70% success on cFIREsim.  This makes the determination easy: I can key in on the 40% dip rate percentage listed in the report of the original input (1 million stash, etc)

Works out to 20% or so, appx 1/5

But, unless I'm misunderstanding you, this approach suffers from the same problem -- those dips below 40% that occurred in 20% of the cases did not all occur immediately after commencement of the start period of those cases that make up the 20% (and those cases where the dip occurred relatively late in the retirement period probably had correspondingly higher historical success rates at the time of the occurrence of the dip), so you can't conclude that 20% of the cases breached the Oh Shit Percentage.

Quote
I'll update the post with this correction -- really appreciate you catching this issue as it makes a big difference in how you evaluate a breach of the OSP threshold.

Likewise -- I love it that we all get to use this online community to crowdsource our own retirement planning!

Dr. Doom

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #55 on: March 01, 2015, 04:32:08 PM »
But, unless I'm misunderstanding you, this approach suffers from the same problem -- those dips below 40% that occurred in 20% of the cases did not all occur immediately after commencement of the start period of those cases that make up the 20% (and those cases where the dip occurred relatively late in the retirement period probably had correspondingly higher historical success rates at the time of the occurrence of the dip), so you can't conclude that 20% of the cases breached the Oh Shit Percentage.

I do see what you're saying re: data issues.  If you hit the 40% dip 20 years in, and you've only got 10 years left, it might not matter: your % chance, as reported by cFIREsim, may still be 90% or something, meaning:  This particular dip should not alarm you, even though it was included in the 40% dip analysis bucket.  So that one-in-five "back to work" scenario is actually less than one in five.

Still, it's useful to have guidelines that prompt you to at least consider invoking safety nets or patches.  At 3% WR, I'd say 40% asset sheet drop and you should probably be considering changes.  Plug your updated numbers into the calculator, think about your current life situation, and make the call. 

At 4% WR, your safety margins are initially lower, and even a 20-25% drop might be significant enough to have you thinking about, at the very least, cutting spending.  You could also use a different spend model like non-inflation adjusted or ceiling/floor.  Again, take a look at your updated report and think about it.

Just pick some guidelines that seem to make sense and work them in.  It's something we're all going to have to keep tabs on.  Many people are comfortable simply winging it but my own preference is to set these triggers to guarantee I do a full analysis on the off-chance that things aren't going well.

It might help to remember there are no hard and fast rules here.  Everyone is going to learn more about how to handle things as they trek through their own financial future, myself included.
« Last Edit: March 01, 2015, 08:31:14 PM by Dr. Doom »

Dr. Doom

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #56 on: March 01, 2015, 05:21:18 PM »
... But if you retire 1 year into a market crash, cFiresim doesn't simulate only paths that start AFTER a crash, it simulates all paths, including those that start at a peak.  This is a pessimistic result.

Exactly.  Before a major crash, the results are generally optimistic.  After, they're the opposite.  This is really the fundamental problem with the history based calculators:  They have zero sense of market valuations at the time the simulation starts, and this data point does matter.

But how do you program that valuation data into a calculator?  Answer:  With difficulty.  You'd first need some accepted criteria for normalizing market prices, stock and bond, based on metrics that are generally agreed upon to be an accurate indication of valuation.  Use PE10 and a lot of people will complain that it's bogus or irrelevant because of <some reason.>  Etc.   

So what do you personally?  I've resolved this problem unscientifically by getting to 3% WR instead of 4% to just pad a bit and improve my odds.  I won't be going further than that, though.  It now requires too many years required to move that number downward, instead seeming much easier to adjust spending if things seem to be going badly.  See the cFIREsim FAQ for how to add some values for ceiling and floor spending.
Edit:  Typo.
« Last Edit: March 01, 2015, 08:26:56 PM by Dr. Doom »

RootofGood

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #57 on: March 01, 2015, 08:11:36 PM »
So what do you personally?  I've resolved this problem unscientifically by getting to 3% WR instead of 4% to just pad a bit and improve my odds. 

+1

Works for me.  3% WR means you can lose 25% of your portfolio and still have a 4% WR. 

bo_knows

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #58 on: March 02, 2015, 06:07:23 AM »
I just got turned on to this thread from a PM someone sent me.  (I've been in the midst of selling our current home and buying a new one. What an exhausting process).

Anyways, the idea of an "Oh shit percentage" wouldn't be THAT practical for cFIREsim.  It would require running an entirely new simulation every single year just to check the Oh Shit Percentage.  So, for a 30 year simulation, it wouldn't just be 1 simulation run... it'd be 30 (31?).  For the legacy cFIREsim, I think the simulation would take well over 30 seconds and would time out.  It's possible for the cFIREsim Open that it would work... I can do some tests.

You could use the "Criteria for marking a cycle as "failed"" section, and set the "Portfolio falls below" value to an Oh Shit value.  If you start with $1M, and you never ever want it to drop below $400k, you can do that.  The problem with this approach, is that it's not as forward-looking as the idea of the Oh Shit percentage.  People in this thread are trying to simulate a situation where they're checking cFIREsim every year during FIRE to see if the future SWR is going to work.

Short of that, my personal opinion is that if you're realistic about a flexible spending plan (spending floor/ceiling) and judge the historical successes of that, you'd be in pretty good shape.


brooklynguy

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #59 on: March 02, 2015, 07:58:19 AM »
Bo, thanks for your feedback!  Personally I would find it helpful to know the historical likelihood of breaching a specified Oh Shit Percentage using a fixed withdrawal rate (just like I find it helpful to know the historical success rate of a specified fixed withdrawal rate) even though in reality I plan to use a flexible retirement plan that reacts and adapts to the actual conditions "in the field."

DanielleS

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #60 on: March 02, 2015, 12:28:39 PM »
I first FIRE'd at age 36, and it was partly out of desperation to get out of the high stress (high pay) work situation I was in.  I was determined to make it work and I was very good with numbers, but I was ignorant about other things - like how much harder it is to fixer-up a 100 year miner's shack than a 40 year old apartment, and how living in a low income area with lots of money in your bank book makes you a target.  I lived and learned but I lost a lot of money buying low and selling lower, and trusting people I had no business trusting.

So I got another comparatively well paying job in a different field, buckled down and put away 75% of my salary for 5 years til I could FIRE again.  Better luck this time, I knew what I could and couldn't manage in re real estate, and made some very nice profit there. 

So ... yeah.  There are times when I think about going back and taking 36 year old me by the hand and turning her into a multi millionaire.  It could have been done.  But I've loved a lot of my life both FI and struggling back to it, and I'm living proof that if at first you don't succeed, all is not lost.

Frufrau, way to go getting back to your goal!! I know that I have some 'what if...' thoughts about my younger self's mistakes (or should I say learning opportunities), but since it all worked out I try not to waste very much time on that :) It's more a wistful feeling I get sometimes rather than wracked with grief over my mistakes, thankfully.

Actually, we sometimes fantasize about purchasing and redoing another fixer-upper, and we probably will someday. Sometimes we will see a great candidate on our walks exploring new neighborhoods, and we will feel a little urge to refurb.

Exhale

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #61 on: March 02, 2015, 07:41:44 PM »
I am simply looking to hear real stories that highlight stuff I didn't consider.  We can always conjecture about what might go wrong, but real examples, well, make it more real.

Just recently I had to make a big purchase (mattress and box spring). I have the financial cushion to do it (having budgeted - as one needs to - for unexpected non-emergency expenses), but absolutely hate losing the funds, especially this early in the calendar year. I know this wouldn't be as hard for me if I hadn't touched my cushion all year and then had to make this purchase in Dec. (I think of my budget Jan-Dec, but maybe that's not the best approach.)

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #62 on: March 03, 2015, 07:18:29 AM »

Still, it's useful to have guidelines that prompt you to at least consider invoking safety nets or patches.  At 3% WR, I'd say 40% asset sheet drop and you should probably be considering changes.  Plug your updated numbers into the calculator, think about your current life situation, and make the call. 


Honestly I don't think it is useful.

There are far too many variables and onced FIRE'd you have so much free time I would just set aside some time each year to review your investments and FIRE plan in general.

I don't see any simple rule giving you much benefit.

I do think a fire and forget approach to FIRE is foolish, but I don't think adding a simple trigger is really any more beneficial.

Given the time and effort anyone who didn't inherit their money put into both earning and planning for FIRE while working a fulltime job - it just seems judicious to allocate a small amount of time each year to analyze your FIRE plan's performance in the context of both your own life and the larger events of the world/economy once you are no longer working a day job.

-- Vik

Dr. Doom

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #63 on: March 03, 2015, 08:11:08 AM »
Honestly I don't think it is useful.
We're entitled to take our own approaches and I'm certainly not saying "I'm right" or "Everyone should do what I'm doing."  Not even close.

I advocate the opposite:  Everyone should just do something that works for them.  As was already mentioned, some people like to over-engineer their plans, and some people don't.  In the end, it probably doesn't make much difference other than to your personal level of comfort re: planning. 

brooklynguy

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #64 on: March 03, 2015, 08:53:08 AM »
Honestly I don't think it is useful.
We're entitled to take our own approaches and I'm certainly not saying "I'm right" or "Everyone should do what I'm doing."  Not even close.

I advocate the opposite:  Everyone should just do something that works for them.  As was already mentioned, some people like to over-engineer their plans, and some people don't.  In the end, it probably doesn't make much difference other than to your personal level of comfort re: planning.

It sounds to me like you're actually both advocating for essentially the same approach.   Evaluating your FIRE plan's performance "on the fly" (as Vik advocates) still necessarily requires you to use certain criteria to judge that performance (whether or not you've mentally categorized those criteria as predetermined triggers).

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Re: When FIRE Plans Go Wrong - Your Experiences?
« Reply #65 on: March 03, 2015, 02:24:07 PM »
I first FIRE'd at age 36, and it was partly out of desperation to get out of the high stress (high pay) work situation I was in.  I was determined to make it work and I was very good with numbers, but I was ignorant about other things - like how much harder it is to fixer-up a 100 year miner's shack than a 40 year old apartment, and how living in a low income area with lots of money in your bank book makes you a target.  I lived and learned but I lost a lot of money buying low and selling lower, and trusting people I had no business trusting.

So I got another comparatively well paying job in a different field, buckled down and put away 75% of my salary for 5 years til I could FIRE again.  Better luck this time, I knew what I could and couldn't manage in re real estate, and made some very nice profit there. 

So ... yeah.  There are times when I think about going back and taking 36 year old me by the hand and turning her into a multi millionaire.  It could have been done.  But I've loved a lot of my life both FI and struggling back to it, and I'm living proof that if at first you don't succeed, all is not lost.

Frufrau, way to go getting back to your goal!! I know that I have some 'what if...' thoughts about my younger self's mistakes (or should I say learning opportunities), but since it all worked out I try not to waste very much time on that :) It's more a wistful feeling I get sometimes rather than wracked with grief over my mistakes, thankfully.

Actually, we sometimes fantasize about purchasing and redoing another fixer-upper, and we probably will someday. Sometimes we will see a great candidate on our walks exploring new neighborhoods, and we will feel a little urge to refurb.

+1 - thanks for sharing that frufrau, and congrats on getting back there! It's heartening to hear.

Danielle, I don't mean to pry if you'd rather not say, but I'm curious as to what your mistakes were - and what lessons you had the opportunity to learn?

Also, I love the idea of trying to mathematically work out the likelihood of hitting an oh-shit percentage... not exactly where I thought this thread would go, but it's a very interesting related concept. I can see that people have used cFIREsim to a far great extent than I have yet.