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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: sol on April 09, 2014, 05:40:18 PM

Title: firecalc and cFIREsim both lie?
Post by: sol on April 09, 2014, 05:40:18 PM
I've been playing with firecalc (http://www.firecalc.com/) and it's mustache-forum-grown technical equivalent cFIREsim (http://www.cfiresim.com/input.php) for quite a while, and I think I've identified a conceptual problem with the approach.  Please correct me if I'm confused about this.
 
These tools make predictions about the long term success of your hypothesized withdrawal strategy based on the number of historical periods in the market record that correspond to your time horizon.  So if you ask for a 30 year projection, it will look at every 30 year period in the market's history and then tell you how many of those 30 year periods held up under your proposed withdrawals.
 
The problem is that these historical periods are necessarily biased by recent returns.  For example, the stock market has more than doubled in the past five years so if you had asked for a 30 year projection five years ago and asked for the same projection today, you'd get very different answers because the more recent simulation contains five additional years of incredibly profitable gains.
 
And this is exactly backwards from what we want, as retirement prognosticators.  Five years ago the market was depressed below long term averages and today the market is (maybe) a bit overpriced, meaning that for equal sized nest eggs your chances of FIRE success were higher five years ago than they are today.  But instead of recognizing this, both of these tools give you the exact opposite answer, than you're better off retiring today than you were five years ago.
 
From one perspective, the last five years of 20%+ per year market returns actually REDUCE the forecasted rate of return while INCREASING the firecalc/cFIREsim success projections (by adding additional positive years to the period of record).
 
This isn't a flaw in the way the tools are built or executed, it's a flaw in the conceptual model of how the theory behind them works.  Rapid market runups artificially inflate the success predictions while reducing return expectations in the real world.  They make things look rosier when instead they should be looking a bit darker.
 
Is it a huge difference?  I'll let others opine on that but given that most people here seem to be using these tools to get between 90% success and 95% success ratios, a few percent here or there could be significant to them.
 
This is the exact same problem another forum member mentioned here recently, about how everyone who is invested in the market is much more likely to hit their "target number" in the middle of a market surge than during a downturn, which virtually guarantees that we're all going to think we're retirement eligible based on overvalued assets.
 
My proposed solution?  I think I'm going to look at forecasting my retirement based on our assets and the current P/E ratio, rather than just assets alone.  Having a million dollars at the height of the tech bubble is a lot different from having a million dollars at the depths of the recession, and the P/E should help clarify where in that cycle we currently sit.
 
 
 
Title: Re: firecalc and cFIREsim both lie?
Post by: beltim on April 09, 2014, 05:47:12 PM
This is a really, really good question, with a lot of content to chew on.  Two quick thoughts, though:

1) If you think of the stock market returns we've experience as being a sample of the universe of potential stock market returns, then each additional year gives you better sampling of the "true" average.  Better sampling will reduce the error in your model.  Right?

2) Rather than use a simple PE, I'd use something with a longer history.  The Schiller PE10 has much better predictive value than the last 12 months PE, for example.
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on April 09, 2014, 05:53:08 PM
The problem is that these historical periods are necessarily biased by recent returns.  For example, the stock market has more than doubled in the past five years so if you had asked for a 30 year projection five years ago and asked for the same projection today, you'd get very different answers because the more recent simulation contains five additional years of incredibly profitable gains.
I don't see why they'd be biased towards recent years; it just happens to have that data in there, and uses it the same as the rest of the data. If anything, it should be weighted against recent years: for example, if 2013 is the last year in the database, then only one of the 30 year periods includes that data (1984-2013 inclusive), while the year 1970 is included in all 30 of the 30-year periods starting between 1941 and 1970 inclusive.

Quote
But instead of recognizing this, both of these tools give you the exact opposite answer, than you're better off retiring today than you were five years ago.
Ah, I think that's a misunderstanding. It doesn't mean you'd be better off retiring today than retiring five years ago; it means it now thinks you would be better off retiring at all (whenever you do retire), than it used to think five years ago.

Unless you're trying to time the market, the assumption is that whenever you retire, you have the same chance of success. That chance of success will be measured more accurately if it's based on more data. If including more data made it less accurate, we could get better answers by deleting the data!
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 09, 2014, 05:58:37 PM
Yes, after a bull market cFIREsim will have a few extra simulations of success, which may lead to portfolio failure down the road (though I'm skeptical - anyone with enough brains and foresight to be planning out their retirement via a tool like cFIREsim will make the necessary judgments and changes).

OTOH, after a bear market cFIREsim may be under representing how safe your portfolio is, and you might work even longer than necessary.

Further, I don't personally believe a few percent will make or break a retirement.  So there was the same level of historical failures in the past as if you had run FIRECalc in 2009, but running it now has a few higher successes so a bit higher percent, and that means yours is more likely to fail now?

Maybe someone with the time and cleverness can see if you can do something neat with P/E or Schiller P10 and cFIREsim (i.e. compare success rates of years in which it was above or below X).
Title: Re: firecalc and cFIREsim both lie?
Post by: beltim on April 09, 2014, 06:00:13 PM
Also, I'd suggest another kind of retirement calculator, specifically one that uses Monte Carlo simulations using historical data.  Vanguard has a free one:
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
Title: Re: firecalc and cFIREsim both lie?
Post by: FIPurpose on April 09, 2014, 06:00:18 PM
I believe one other major point is that this ignores the fact that most people do not hold 100% total stock market. There is some amount of balance between stocks/bonds. That means that overvalued/undervalued stocks at particular periods of time provide steadier, better, and more consistent returns.

EDIT: Provided that you are regularly rebalancing your portfolio.
Title: Re: firecalc and cFIREsim both lie?
Post by: mulescent on April 09, 2014, 06:04:59 PM
That is an interesting question.  I see two potential problems, and maybe formalizing them a bit will help.  First, there is the fact that the most recent five years are really great years.  They'll be included in the 30 year periods which are being drawn randomly and, being really good, they'll bias the results.  I'm not so worried about that, since there are over a hundred 30 year periods to draw from.

Another potential problem, which I think you raised and also concerns me is the inherent assumption that the starting point for the simulation (your NW today) will not influence the likelihood of any of the subsequent outcomes.  If you argue that we are near/at a market peak, then it's entirely reasonable to believe that what happens next will not be a randomly chosen 30 year period but one that tends to come after big market run-ups (i.e. a downturn).  Your idea of modifying the algorithm to take P/E into account is a reasonable one.  You could restrict the pool of 30 year windows to those occurring some short time after similar P/E values.  An even better algorithm would try to figure out whether that P/E was hit on the way up or down, so that you could account for momentum, too.
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on April 09, 2014, 06:11:31 PM
there is the fact that the most recent five years are really great years.  They'll be included in the 30 year periods which are being drawn randomly and, being really good, they'll bias the results.
No more than including the 6s when you roll dice biases the results by making them, on average, higher. It's not bias if they have equal weighting, and certainly not bias if they have significantly lower weighting due to appearing in far fewer of the 30-year spans.
Title: Re: firecalc and cFIREsim both lie?
Post by: beltim on April 09, 2014, 06:12:53 PM
The times a 4% withdrawal rate has failed according to cFIREsim and the Shiller PE on Jan 1 of that year:
1906: 20.1
1965: 23.27
1966: 24.06
1967: 20.43
1968: 21.51
1969:21.19
1973: 18.71

The average PE10 all-time is 16.52, so these are all at least 10% higher than the average.  The 4% rule has failed in 7/39 cases where the Shiller PE was above the average, and 6/15 times that the starting PE10 was above 20.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 09, 2014, 06:20:39 PM
The times a 4% withdrawal rate has failed according to cFIREsim and the Shiller PE on Jan 1 of that year:
1906: 20.1
1965: 23.27
1966: 24.06
1967: 20.43
1968: 21.51
1969:21.19
1973: 18.71

The average PE10 all-time is 16.52, so these are all at least 10% higher than the average.  The 4% rule has failed in 7/39 cases where the Shiller PE was above the average, and 6/15 times that the starting PE10 was above 20.

That's good data, thanks!
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on April 09, 2014, 06:47:27 PM
Most of those years are very close together, which demonstrates how the years in the middle are weighted more by appearing in more 30-year windows. It's probably the same crash which causes ruin in each of those 30-year windows, so that one crash appears 5-6 times in the list.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 09, 2014, 06:49:11 PM
1) If you think of the stock market returns we've experience as being a sample of the universe of potential stock market returns, then each additional year gives you better sampling of the "true" average.  Better sampling will reduce the error in your model.  Right?

I think I'd be more inclined to believe that if the long term average was stationary over time.  Except that no stock market in the history of the world has ever had a consistent long term average over hundreds of years, because stock markets reflect economies and economies evolve.  If the period of 2014 to 2044 averaged 1% return, would you believe that the Dow was due for a couple of huge decades to get us back to our long term average, or would you believe that the US economy had stalled?

I don't see why they'd be biased towards recent years

Not biased towards, just biased by.  The long term CAGR of the US market is about 0.2% different through 2007 than it is through 2013.  0.2% is a small number unless you're talking about compounding market history, in which case it is approximately a 100% difference in dollar value.

Yes, after a bull market cFIREsim will have a few extra simulations of success... OTOH, after a bear market cFIREsim may be under representing how safe your portfolio is, and you might work even longer than necessary.

Right, this was exactly my point.  If there have been recent dramatic swings in the market, then the tools will give you different answers and they will be different in the way that is exactly backwards from reality.  Use it after a bear and you've worked too much, use it after a bull and you quit too soon.

Quote
Maybe someone with the time and cleverness can see if you can do something neat with P/E or Schiller P10 and cFIREsim (i.e. compare success rates of years in which it was above or below X).

Several people have mentioned this idea already, and I had actually already formulated a post on this very topic several months back and just never got around to posting it.  I dug it up, and have pasted it below.  It's a little rough, this was a first draft, but I think it highlights how using the CAPE is very relevant to predicting future success ratios.  The 1973 example beltim just posted as one of the 4% SWR failures is, notably, a lower value than we're seeing today, suggesting that a 4% SWR may not be safe at this moment in time.  This is exactly what I mean by needing to use P/E to make retirement predictions, not just the historical simulators.

...

Firecalc suggests that the returns in the few years immediately following your retirement are most significantly determinitive of your long term success rate at fixed spending amounts.
 
For example, for a 35 year retirement at 30k on 750k saved, firecalc suggests a 93% success rate.
 
But if the market has a 10% "correction" in the first year of your retirement, now you're looking at having withdrawn the 30k and then seen the remaining 720 reduced to 645. Re-evaluating the odds on 645k for the remaining 34 years shows a 72.5% success rate.
 
And this effect is not symmetric.  If the market surges 10% in the first year of your retirement instead of dropping then your odds do increase but only by about 4%.
 
To review, if the market goes up 10% in your first year your odds increase 4% but if the market goes down 10% in your first then your odds decrease by 20%.  Very lopsided.  Depending on your assumptions about the market's future, you can construct a scenario in which your EV on firecalc success in the future should drop on the day you retire regardless of when that is.
 
I think this effect can be partially comensated by using CAPE or P/E ratio or something else.  The 1973/4/5 example from the firecalc homepage (http://www.firecalc.com/) shows dramatically different outcomes for the same nest egg and withdrawal combination in three consecutive years.  In 1973 30k on 750k goes bankrupt in 19 years, but P/E was ~18.  Same numbers in 1974 does okay, but P/E was ~12.  1975 with same numbers does fantastic, but P/E was only 8.3.
 
Here's the frightening part:  Today's P/E (trailing 12 month as of Feb 5 2014) is 18.56, higher than 1973.  Of course this ignores the importance of inflation in the 1970s, but I think it's still relevant.  Using the Cyclically Adjusted P/E should account for this effect, but in this example it doesn't make much of a difference (1973/4/5 are 18.7, 13.5, 8.9).
Title: Re: firecalc and cFIREsim both lie?
Post by: brewer12345 on April 09, 2014, 06:56:43 PM
Has hocus made an appearance on these boards yet?
Title: Re: firecalc and cFIREsim both lie?
Post by: BigRed on April 09, 2014, 07:09:05 PM
I recall reading an analysis by Pfau, I think, that did account for this effect, namely that the early years are extremely important to plan success and that recent returns are somewhat predictive of near future returns.

But, to some extent, you are engaging in the gamblers fallacy here.  If the market were truly correlated in the way you describe, the efficient market hypothesis would be roadkill.  While the EMH has some problems, the idea that a market fall is more likely at the present time ought to be priced into the current market value.  So, the best assumption from a naiive investor is that the market should still be expected to rise, and at the same rate as before.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 09, 2014, 07:28:26 PM
While the EMH has some problems, the idea that a market fall is more likely at the present time ought to be priced into the current market value.  So, the best assumption from a naiive investor is that the market should still be expected to rise, and at the same rate as before.

That's a totally sound theory, except that nobody here actually believes it.

I might be safe in saying that everyone on these boards recognized that the 2009 crisis was a buying opportunity. 

I realize that predicting future returns based on the CAPE is just a very simplified form of long term market timing.  I'm okay with that, because the long term data back it up.
Title: Re: firecalc and cFIREsim both lie?
Post by: BigRed on April 09, 2014, 07:35:19 PM
Ouch.  I suppose I earned that.  I don't believe in the EMH at all in the way my post implies, as I reread it now. 

The market timing implications of your theory seem like something I'd be hard pressed to act on, though.  What are the practical implications of your thinking?
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 09, 2014, 07:42:27 PM
Has hocus made an appearance on these boards yet?

No.  Though I do recall a post by you a year or two ago asking that and saying something to the effect that a forum hadn't "made it" until he made an appearance.

Guess we've slid under his radar, for now.  ;)

(Those of you curious will have some fun googling.)
Title: Re: firecalc and cFIREsim both lie?
Post by: brewer12345 on April 09, 2014, 07:47:43 PM
Has hocus made an appearance on these boards yet?

No.  Though I do recall a post by you a year or two ago asking that and saying something to the effect that a forum hadn't "made it" until he made an appearance.

Guess we've slid under his radar, for now.  ;)

(Those of you curious will have some fun googling.)

If we are all really, really lucky that troll will stay under his bridge. 

I just get a little nervous when I see such nice bait laid out for him.
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 09, 2014, 08:02:06 PM
OP, I don't think it matters whether the last 5 years are "good" or "very very good".  It just made the time series starting in 1980, 81, 82, 83, and 84 just a little bit better (well, a lot better) for terminal portfolio values.  But those 30 year periods starting in 1980-84 weren't at risk of failure at a 4% SWR anyway.

I don't see a problem with factoring in the market's recent run up over the last 5 years.  I'd feel better retiring with a million dollars in 2009 than I would with a million today, for example. 
Title: Re: firecalc and cFIREsim both lie?
Post by: wtjbatman on April 10, 2014, 06:51:04 AM
Has hocus made an appearance on these boards yet?

No.  Though I do recall a post by you a year or two ago asking that and saying something to the effect that a forum hadn't "made it" until he made an appearance.

Guess we've slid under his radar, for now.  ;)

(Those of you curious will have some fun googling.)

Indeed I did (http://www.retireearlyhomepage.com/rob_bennett_know.html) (content at link is 5+ years old, but is still hilarious)
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 06:54:03 AM
Interesting topic.

I think that an individual who is close to FIRE and has enough education and experience under their belt should be able to pick up on the risks inherent in FIRE. It is already known that a market drop at the beginning of FIRE is a risk which cuts your success rate. And of course it is a (I don't want to use the word flaw or a lie, maybe downside?) downside to historical data usage that more successful years inflate your success rate while more low years inflate your failure rate.

I guess we just have to be those educated and experienced people. :)

As usual we can't take all the advice from the boards on blind faith. These are things we have to grok.
Title: Re: firecalc and cFIREsim both lie?
Post by: simonsez on April 10, 2014, 07:17:35 AM
I apologize if this drifts or I am not understanding a concept but I have a question about firecalc and cfiresim.  If the assumption is that past does not predict the future but does give a reasonable range of what can happen given enough periods of time, why are the 30 year (or whatever number of years) periods ordered?

e.g. Results spit out 113 lines representing the 113 30 year periods but shouldn't we be seeing 113! (factorial) permutations  of 30 year periods if they are independent?  What does it matter if the random 30 year set includes 1871, 1915, 2009, and so on together?  They're supposed to be unrelated.

If the setup of these two websites (and others like it) did have all the permutations of n-year periods rather than chunks that move together through time, what the markets did in the last 5 years truly would not matter or bias the results, no?
Title: Re: firecalc and cFIREsim both lie?
Post by: mrigney on April 10, 2014, 07:30:08 AM
From my longtime interpretation on the utility of firecalc/cfiresim, I think the software's main purpose is different than is being represented. Both pieces of software are great for a lot of things, but neither is a forecast of whether you can retire. Instead it's a historical guide; a bunch of Monte Carlo runs of a simulation; a probabilistic tool for your tool belt. But it is not (and I don't think it claims to be) a tool that gives you the probability that your retirement will fail or succeed.

A lot of my work has been done in ensemble numerical weather modeling, where you multiple (20, 30, 40, 50) runs to find a potential range of forecasts. However, if I run my model for historical weather events and tweak my model so that parameters fit the historical events well (analogously, firecalc/cfiresim is a perfect model of history b/c it's not a model...it is straight historical data), that has very little worth in persuading people that my model will now predict future events well. You simply can't rely on a model designed to fit historical data--or in the case of firecalc/cfiresim pure historical data--to have any real value as a forecasting tool. It is a good way of summarizing historical information that I think is extremely useful in making an informed decision about whether or not you can FIRE, but it is not in and of itself a forecast.

Now, with that said, if you take historical data and models and start incorporating P/E ratios and other relevant data...now you're starting to create a model that might have some predictive value. But fundamentally, your predictive model at that point is largely in what you decide to do with PE ratios, CAPE, etc...your model is still taking historical data from firecalc (success rate from firecalc/cfiresim is still just that...historical data condensed down to a percentage) and then you are making predictions based on current P/E, CAPE, etc.

So, I whole heartedly agree that these tools aren't a good forecast...they're not designed to be a forecast at all. Instead they're a historical Monte Carlo/ensemble run that gives you a whole lot of information that you can then make a forecast off of. Does that make any sense at all?
Title: Re: firecalc and cFIREsim both lie?
Post by: nereo on April 10, 2014, 07:51:34 AM
I apologize if this drifts or I am not understanding a concept but I have a question about firecalc and cfiresim.  If the assumption is that past does not predict the future but does give a reasonable range of what can happen given enough periods of time, why are the 30 year (or whatever number of years) periods ordered?

e.g. Results spit out 113 lines representing the 113 30 year periods but shouldn't we be seeing 113! (factorial) permutations  of 30 year periods if they are independent?  What does it matter if the random 30 year set includes 1871, 1915, 2009, and so on together?  They're supposed to be unrelated.

If the setup of these two websites (and others like it) did have all the permutations of n-year periods rather than chunks that move together through time, what the markets did in the last 5 years truly would not matter or bias the results, no?
Hmm... interesting.  My take on it is that while "past results do not predict future returns" there are correlation between years.  Intuitively this makes sense.  If there is a huge drop in the market it affects virtually all large companies in some shape or form. The following year the companies are influenced by these events.  Customers may not be buying more, but they may take steps to ensure profitability, like laying off employees, squeezing out more productivity, or consolidating their business model.

So... my thought is no.  You need to link the 30 year time periods for it to make any sense.  You can't just pull any collection of 30 years and string them together.    If you do that, by pure chance you'd sometimes put 2008 (-37%), 2002(-37%), and 1974(-42%) all together, which would be catastrophic, and way, way worse than anything that has ever historically happened.  A $10k investment would have dropped to $2,302 in that time frame.
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 07:52:13 AM
I apologize if this drifts or I am not understanding a concept but I have a question about firecalc and cfiresim.  If the assumption is that past does not predict the future but does give a reasonable range of what can happen given enough periods of time, why are the 30 year (or whatever number of years) periods ordered?

e.g. Results spit out 113 lines representing the 113 30 year periods but shouldn't we be seeing 113! (factorial) permutations  of 30 year periods if they are independent?  What does it matter if the random 30 year set includes 1871, 1915, 2009, and so on together?  They're supposed to be unrelated.

If the setup of these two websites (and others like it) did have all the permutations of n-year periods rather than chunks that move together through time, what the markets did in the last 5 years truly would not matter or bias the results, no?

Because it is a historical analysis of how your particular circumstances would have performed in any 30 year time frame.

Just salad tossing all the data would be an interesting approach but a Monte Carlo simulation would do better.
Title: Re: firecalc and cFIREsim both lie?
Post by: mrigney on April 10, 2014, 08:09:02 AM
cfiresim and firecalc are a form of a Monte Carlo simulation, fyi. They just happen to sample all available starting dates instead of some population of all available data.

The Vanguard link posted earlier is also a MC sim of the sort described by simonsez. For a 30 year retirement period they randomly select a rate of return for year 1. Then randomly select a rate of return for year 2. Through all 30 years. Then they repeat 5,000 times. That gives a pretty complete range of possibilities:-)

Title: Re: firecalc and cFIREsim both lie?
Post by: Cpa Cat on April 10, 2014, 08:12:36 AM
Those last five years will only be in a few of your 30-year projections. I run mine on 70 years (in case I live to be 100+). I get 100% success. At my least successful, I die with under $1m in the bank. At my most successful, I die with 180 MEEEELLION DOLLARS.

If anything, your data only gets better for every 5 years that passes - regardless of how the market does. Because now you have 5 more 30-year ranges to run. You didn't lose five scenarios, you gained 5 scenarios. More data is usually better when trying to run averages.

It doesn't matter if the last five years are outliers - because so is the Great Depression, and it's in there too. Overall, the more data you have, the less impact outliers have.
Title: Re: firecalc and cFIREsim both lie?
Post by: Cpa Cat on April 10, 2014, 08:24:13 AM
I would also like to point out that the last five years are essentially irrelevant data today.

It has produced 5 new scenarios in which you have a huge upswing in the last 1-5 years before death. This would be highly unlikely to impact your life in any way.

In order to get a skewed result, you'd have to be running this simulation 30 years from now, at which point there would be 5 scenarios available in which you retire and immediately experience a huge portfolio surge.
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 08:27:22 AM
cfiresim and firecalc are a form of a Monte Carlo simulation, fyi. They just happen to sample all available starting dates instead of some population of all available data.

The Vanguard link posted earlier is also a MC sim of the sort described by simonsez. For a 30 year retirement period they randomly select a rate of return for year 1. Then randomly select a rate of return for year 2. Through all 30 years. Then they repeat 5,000 times. That gives a pretty complete range of possibilities:-)

I don't think cfiresim and firecalc are a form of Monte Carlo simulation. If I run the same numbers I will always get the same answer in cfiresim. That is a deterministic system. (https://en.wikipedia.org/wiki/Deterministic_system_%28mathematics%29)

A true Monte Carlo simulation will give a different answer each time you put in the same numbers as it will run different "scenarios" or rather just give different variables.

As I said before cfiresim is a historical look. It's quite valuable when you go under the assumption that nothing in the future can be worse than the past (optimism gun), but understand that doesn't mean that rough times can't happen (reality fish smack to the face).
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 10, 2014, 08:49:33 AM
"Lie" is a strong word ;)

I think that these tools show plenty of historical value in their analysis, but should be only used as part of the decision making process.  As Pfau's studies have confirmed (and Sol has theorized), where you retire in the bull/bear cycle matters hugely, but it does not invalidate the historical analysis of cFIREsim or FireCalc IMO.
Title: Re: firecalc and cFIREsim both lie?
Post by: mrigney on April 10, 2014, 08:50:49 AM
@matchweed If you think of every historical year as a member of a population, you could turn firecalc/cfiresim into a MC sim by randomly sampling from those years (say 30, 40, 50 or however many times). Each sampling would provide slightly different initial conditions (as a function of year). However, cfiresim and firecalc always sample every possible initial condition. You're definitely right that a true MC would give a different result each time you ran it. In a traditional MC, you're also typically perturbing initial conditions for each run, starting the sim with a different random number seed, etc. So I guess I'm agreeing that they aren't MC Sims in the traditional sense, but a sort of bastardized form where they have in essence sampled every possible "random" sample. Maybe it'd be better to call it an ensemble "forecast" (even though I railed against calling it a forecast earlier). With that said, as someone pointed out earlier, I'm not sure I buy into Vanguard's MC Sim methodology. The idea of sampling years randomly to get your 30 year ROI seems to assume that year-to-year returns are uncorrelated. Is that actually true? I haven't run the numbers. Might be true. If it's true that year-to-year returns are uncorrelated, it would also mean that a 5 year bull market shouldn't change the validity of a "forecast" from firecalc (since next year's returns would be uncorrelated to the recent bull market).
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 10, 2014, 09:02:59 AM
@matchweed If you think of every historical year as a member of a population, you could turn firecalc/cfiresim into a MC sim by randomly sampling from those years (say 30, 40, 50 or however many times). Each sampling would provide slightly different initial conditions (as a function of year).

Ehhh, you don't want to really do that.  It's important to keep the historical data in series, because the return/inflation/etc is all correlated from what was going on in the world at the time.  Randomizing those data points wouldn't make sense.

FWIW, though, both cFIREsim and FireCalc have actual Monte Carlo options (though, neither is robust)
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 09:05:48 AM
@matchweed If you think of every historical year as a member of a population, you could turn firecalc/cfiresim into a MC sim by randomly sampling from those years (say 30, 40, 50 or however many times). Each sampling would provide slightly different initial conditions (as a function of year). However, cfiresim and firecalc always sample every possible initial condition. You're definitely right that a true MC would give a different result each time you ran it. In a traditional MC, you're also typically perturbing initial conditions for each run, starting the sim with a different random number seed, etc. So I guess I'm agreeing that they aren't MC Sims in the traditional sense, but a sort of bastardized form where they have in essence sampled every possible "random" sample. Maybe it'd be better to call it an ensemble "forecast" (even though I railed against calling it a forecast earlier). With that said, as someone pointed out earlier, I'm not sure I buy into Vanguard's MC Sim methodology. The idea of sampling years randomly to get your 30 year ROI seems to assume that year-to-year returns are uncorrelated. Is that actually true? I haven't run the numbers. Might be true. If it's true that year-to-year returns are uncorrelated, it would also mean that a 5 year bull market shouldn't change the validity of a "forecast" from firecalc (since next year's returns would be uncorrelated to the recent bull market).

Unless you feel that you can guess what the market will do then yeah there is no correlation between one year's returns or the next. Now do other variables have any correlation from one year to the next? Dunno. Or do the variables correlate with each other? Well bo_knows... (lame I know).

I also wouldn't call it a forecast. Just call it what it is, an analysis of how a certain situation would perform historically.
Title: Re: firecalc and cFIREsim both lie?
Post by: mrigney on April 10, 2014, 09:08:32 AM
@matchwed Yeah, that was my contention in my original post. To use firecalc as a forecast of some sort is flawed. The "success rate" that it spits out is really just a different way of summarizing historical data. I don't think we're in disagreement really....and I'll concede that it's not a real MC....maybe MC like;-)
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 10, 2014, 09:11:59 AM
@matchwed Yeah, that was my contention in my original post. To use firecalc as a forecast of some sort is flawed. The "success rate" that it spits out is really just a different way of summarizing historical data.

Just FYI, neither of those tools directly state that it's for forecasting the future.  Specifically they state something along the lines of "If the future is no worse than the worst years of the past, then your portfolio will survive".  I think people often warp the meaning of the charts to think that it's a future forecast.
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 09:38:05 AM
Interesting topic.

I think that an individual who is close to FIRE and has enough education and experience under their belt should be able to pick up on the risks inherent in FIRE. It is already known that a market drop at the beginning of FIRE is a risk which cuts your success rate. And of course it is a (I don't want to use the word flaw or a lie, maybe downside?) downside to historical data usage that more successful years inflate your success rate while more low years inflate your failure rate.

I guess we just have to be those educated and experienced people. :)

As usual we can't take all the advice from the boards on blind faith. These are things we have to grok.

Exactly.

The recent market returns have put me ahead of schedule and have possibly increased the sequence of return risk at the same time. And that is what the problem is about: The influence of market performance immediately preceding retirement on sequence of returns risk

I'm very much into the life cycle approach and I'm dealing with the issue in the following way:

Set the future earnings potential at the day of RE to zero - that's retirement alright.

Match liabilities in two ways:

1. reduce cash flow needs by paying off mortgage/selling other liabilities

2. match essential cash flow needs with guaranteed/rental income. I sold stock funds and bought deferred fixed annuities (no inflation rider - it is not necessary when dealing with early sequence of returns risk and initial payout is much higher) and have a small rental income.

Check size of the market investments with respect to the ability to support desirable level of discretionary spending.

Add it all up and match the shortfall by realizing future earning potential + investment returns and one gets a date of FIRE.

Result in my case: 12 months more time to FIRE as of last summer, independent of market returns (I have enough already in the upside portfolio). A 4% withdrawal rate and an assumption of constant 6-7% market returns would have meant FIRE last summer but, because the numbers were so close, any significant downturn would have been a problem and I would have had to work for another year anyway to be on the safe side.

I my particular case, the decreasing present value of my non inflation adjusted annuities will lead over time to an increasing equity allocation and the additional incomes (pension, SS) kicking in over the next 18 years will make the market risk acceptable.
I have traded some upside potential for a firm date of FI and have set up for a rising equity allocation throughout retirement.
My future earnings potential is not really zero at the date of FIRE but belongs now strictly to the upside as does the market performance.

My plan is a little more complicated in the details but those vary anyways between households. I have access to attractive TIAA CREF annuities but for others bond/annuity ladders may be more attractive. In any case, this is just an example from someone close to FIRE.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: jordanread on April 10, 2014, 09:49:03 AM
Don't mind me, just commenting so I can catch up on it. I'll be doing some work with both of those soon, so I'll chime in once I have more data.
Title: Re: firecalc and cFIREsim both lie?
Post by: NumberCruncher on April 10, 2014, 09:57:04 AM
I apologize if this drifts or I am not understanding a concept but I have a question about firecalc and cfiresim.  If the assumption is that past does not predict the future but does give a reasonable range of what can happen given enough periods of time, why are the 30 year (or whatever number of years) periods ordered?

e.g. Results spit out 113 lines representing the 113 30 year periods but shouldn't we be seeing 113! (factorial) permutations  of 30 year periods if they are independent?  What does it matter if the random 30 year set includes 1871, 1915, 2009, and so on together?  They're supposed to be unrelated.

If the setup of these two websites (and others like it) did have all the permutations of n-year periods rather than chunks that move together through time, what the markets did in the last 5 years truly would not matter or bias the results, no?

This is basically what the vanguard link mentioned above does, except it just randomly picks the next year (random 1-year periods only as opposed to random n-year chunks): https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf 

If you have a high probability of success with that calculator, there's just about nothing that can slow you down (unless the markets experienced all the historical financial crises one after the other). These results seem much more conservative than cfiresim.
Title: Re: firecalc and cFIREsim both lie?
Post by: sirdoug007 on April 10, 2014, 10:17:14 AM
The times a 4% withdrawal rate has failed according to cFIREsim and the Shiller PE on Jan 1 of that year:
1906: 20.1
1965: 23.27
1966: 24.06
1967: 20.43
1968: 21.51
1969:21.19
1973: 18.71

The average PE10 all-time is 16.52, so these are all at least 10% higher than the average.  The 4% rule has failed in 7/39 cases where the Shiller PE was above the average, and 6/15 times that the starting PE10 was above 20.

The problem with this thinking is that it would lead you to never retire.  The last time the Shiller PE was less than 20 was 2009.  Before that it was 1992. 

So between 1992 and 2009, 17 years, you would have still been waiting for the "Big One".  Even in the aftermath of the tech bubble, the Shiller PE dropped only to about 21.

I think the MMM approach of covering your expenses with a very reasonable but not 100% safe withdrawal rate of 4% and rolling with the punches from there is the way to go.

If the market does well, good stuff.  If it doesn't, maybe go find a way to make some side money to reduce your withdrawal rate during those downturns.

You can spend a lot of time trying to predict the future.  However, the one thing that is guaranteed is that your projection will be wrong. :)
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 10, 2014, 10:21:54 AM
I think the MMM approach of covering your expenses with a very reasonable but not 100% safe withdrawal rate of 4% and rolling with the punches from there is the way to go.

+1 to that.  This is why I like modeling my expenses with a "floor" value that represents barebone necessities, and a "ceiling" value that represents a comfortable retirement.  If cFIREsim tells me that a model like that passes, I feel much better than a strict 4%.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 10:35:02 AM
So between 1992 and 2009, 17 years, you would have still been waiting for the "Big One".

Not necessarily.  He's saying a 4% SWR may fail at 20+ PE10, but presumably while keeping working waiting for a crash you'd accumulate enough to get down to a 3.5% or 3% SWR and be able to FIRE despite not having a crash or not hitting a PE10 of < 20.

It's not "work until crash" if you can get your SWR below that 4% SWR.
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 11:17:46 AM

This is the exact same problem another forum member mentioned here recently, about how everyone who is invested in the market is much more likely to hit their "target number" in the middle of a market surge than during a downturn, which virtually guarantees that we're all going to think we're retirement eligible based on overvalued assets.


The problem is t

But without considering the correlating trend between inflation a
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 11:21:47 AM

This is the exact same problem another forum member mentioned here recently, about how everyone who is invested in the market is much more likely to hit their "target number" in the middle of a market surge than during a downturn, which virtually guarantees that we're all going to think we're retirement eligible based on overvalued assets.


The problem is t

But without considering the correlating trend between inflation a

Another site bug?  I'm not sure your posts ar
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 11:47:06 AM

This is the exact same problem another forum member mentioned here recently, about how everyone who is invested in the market is much more likely to hit their "target number" in the middle of a market surge than during a downturn, which virtually guarantees that we're all going to think we're retirement eligible based on overvalued assets.


The problem is the "target number". When looking at retiring at a specific (age driven) date of retirement, the sequence of return risk is determined by the date of birth - more or less. When the date of retirement is determined by a "target number" (market driven - more or less) the risk of retiring towards the end of a bull market with consequently increased sequence of return risk is increased. The probability of success based on historical back testing the simulators spit out applies to the population of age driven retirees. It is therefore incorrect to use the result for a population of market driven retirees who are more likely to retire after significant market advances. Their probability of success is lower but cannot be quantified because on the day of the simulation it is not at all clear if the retiree indeed will have retired towards the end of a bull market.
Now, one could assume that the end of the bull market is near and then back test using only similar periods and I believe Wade Pfau is one who has done something in this direction. The projections should look much more mediocre then.
I would not interpret the overly optimistic projections of these simulators as a design flaw or bias, but rather acknowledge that they were not designed to be used in the same way by market driven as by age driven retirees.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 11:50:14 AM

This is the exact same problem another forum member mentioned here recently, about how everyone who is invested in the market is much more likely to hit their "target number" in the middle of a market surge than during a downturn, which virtually guarantees that we're all going to think we're retirement eligible based on overvalued assets.


The problem is t

But without considering the correlating trend between inflation a

Another site bug?  I'm not sure your posts ar

I don't know what happened and I messed it up even more by removing the rogue post...
Title: Re: firecalc and cFIREsim both lie?
Post by: Exflyboy on April 10, 2014, 11:55:06 AM
Yes the problem of a dramatic pullback right after you retire has not been lost on me.

My approach is to have about 2 to 3 years of expenses in cash, plus about half of our expenses are covered by rental income.

I'm hoping if we have a big pullback this year I will be able to ride through without drawing on any of the investments.

Frank
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 11:56:09 AM
Hmm, I'm not sure if an age driven retirement even exists. It's rather arbitrary as it doesn't necessarily say anything about how successful you will be in retirement regardless of market return. Your assets, cash flow, market performance, inflation...etc. all factor in much more than how old you are.
Title: Re: firecalc and cFIREsim both lie?
Post by: simonsez on April 10, 2014, 11:59:04 AM
Hmm, I'm not sure if an age driven retirement even exists. It's rather arbitrary as it doesn't necessarily say anything about how successful you will be in retirement regardless of market return. Your assets, cash flow, market performance, inflation...etc. all factor in much more than how old you are.
Sounds like you are avoiding the golden handcuffs quite well.
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 12:03:20 PM
Hmm, I'm not sure if an age driven retirement even exists. It's rather arbitrary as it doesn't necessarily say anything about how successful you will be in retirement regardless of market return. Your assets, cash flow, market performance, inflation...etc. all factor in much more than how old you are.

I am not necessarily implicating that an age driven retirement exists in reality or not.
The point is that the models used in the simulators assume retirement dates independent of preceding market returns.
The real world obviously contains everything from the retire at sixty five to somewhat market driven to completely market driven.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 12:32:28 PM
Hmm, I'm not sure if an age driven retirement even exists. It's rather arbitrary as it doesn't necessarily say anything about how successful you will be in retirement regardless of market return. Your assets, cash flow, market performance, inflation...etc. all factor in much more than how old you are.
Sounds like you are avoiding the golden handcuffs quite well.

Hah, considering tomorrow is my last day on the job before school starts in the fall I guess I am. :)

That being said it's not necessarily the age that is the factor in those incentives but the money no?

Hmm, I'm not sure if an age driven retirement even exists. It's rather arbitrary as it doesn't necessarily say anything about how successful you will be in retirement regardless of market return. Your assets, cash flow, market performance, inflation...etc. all factor in much more than how old you are.

I am not necessarily implicating that an age driven retirement exists in reality or not.
The point is that the models used in the simulators assume retirement dates independent of preceding market returns.
The real world obviously contains everything from the retire at sixty five to somewhat market driven to completely market driven.

Peter

Well what I mean is shouldn't all retirement attempts be market driven (I'll be honest I'm not sure I even like the term given my want for nuance and understanding risks and pitfalls as people get closer to retirement)?
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 12:47:51 PM

Well what I mean is shouldn't all retirement attempts be market driven (I'll be honest I'm not sure I even like the term given my want for nuance and understanding risks and pitfalls as people get closer to retirement)?

I do not think that the terms "market driven" or "age driven" are very useful in the real world.
The simulators give probabilities of success by plugging in a certain number at discrete intervals. That is, they simulate retirees retiring mindlessly at given points in time = more or less calendar age driven retirement. That is far from the real world and even farther from the early retiree with a market triggered retirement date.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: FIPurpose on April 10, 2014, 12:48:16 PM
So what I feel like this post is really driving at is that: long term returns do not translate to short term needs.

Perhaps, as others suggest, is to create a buffer in the good years of about 3-5 years in low growth/ low risk vehicles, and keep that buffer up in good years and in bad years dwindle it down, and then slowly build back up when the market returns. There are so many ways that you can protect yourself against market swings. You have common sense that no computer model is going to be able to do for you. Whether it is rebalancing, holding cash/CD's for a 3-5 year buffer, 5-10% in money market, etc. They all protect you from volatility.

If your risk tolerance does not include short term losses, then remove your portfolio's volatility for the short term.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 12:56:40 PM
Well what I mean is shouldn't all retirement attempts be market driven (I'll be honest I'm not sure I even like the term given my want for nuance and understanding risks and pitfalls as people get closer to retirement)?

No, not necessarily.  Thus the golden handcuffs comment.  What if you need to hit a certain age for a pension, for example?  That's clearly not market driven.

We've discussed, and even had a poll on (https://forum.mrmoneymustache.com/welcome-to-the-forum/having-a-fixed-retirement-date/), hitting a number versus an age or date.
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 01:07:19 PM
Well what I mean is shouldn't all retirement attempts be market driven (I'll be honest I'm not sure I even like the term given my want for nuance and understanding risks and pitfalls as people get closer to retirement)?

No, not necessarily.  Thus the golden handcuffs comment.  What if you need to hit a certain age for a pension, for example?  That's clearly not market driven.

We've discussed, and even had a poll on (https://forum.mrmoneymustache.com/welcome-to-the-forum/having-a-fixed-retirement-date/), hitting a number versus an age or date.

Aren't pensions mostly dependent on years of service? True question as I know very little of it.
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 01:14:08 PM
So what I feel like this post is really driving at is that: long term returns do not translate to short term needs.


Right. And the simulators do not and cannot incorporate increased sequence of return risk, which is short/intermediate term, because the market context in which the "number" was generated can only be known in the future.
The result of that is that market driven retirees get overly optimistic results from the simulation programs just when they get excited about retirement.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 01:38:11 PM
Well what I mean is shouldn't all retirement attempts be market driven (I'll be honest I'm not sure I even like the term given my want for nuance and understanding risks and pitfalls as people get closer to retirement)?

No, not necessarily.  Thus the golden handcuffs comment.  What if you need to hit a certain age for a pension, for example?  That's clearly not market driven.

We've discussed, and even had a poll on (https://forum.mrmoneymustache.com/welcome-to-the-forum/having-a-fixed-retirement-date/), hitting a number versus an age or date.

Aren't pensions mostly dependent on years of service? True question as I know very little of it.

Typically that's a large component of them, yes.  I'm not seeing how that makes them market driven though?  Or maybe you aren't implying that, but I'm missing what you are saying..
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 10, 2014, 03:10:08 PM
I think the problem with any type of tool whether it be firecalc, cfiresim Vanguards Monte Carlo based Nest Egg calculator or any other tool is simply that they are looking at what has happened and giving you a best guess. As everyone has stated they are not forecasting tools, they analyze past data and determine the likelihood of a portfolio failing to last as long as you need it to considering past performance. Past performance is not a predictor of future results and no one on Wall Street (at least no one publicly admitting it) has managed to predict future returns accurately. Ok lots of scam artists claim to, and some can predict very short term market changes, but no one has been able to get the long term movements down well enough to build models. 

So in the end these tools at best will give you piece of mind that you have a fairly good shot at being able to survive combinations of things that happened before, the problem is we don't know what we don't know, in 1928 these tools couldn't help you plan for the Great Depression, in 2007 they couldn't let you know if you could FIRE before the Great Recession and real estate bubble.

The best and only plan to FIRE and in fact to FIR that is guaranteed not to fail is to have a much larger cushion then you need, so if you plan on using the 4% SWR have an asset base that allows you to take out 6% or 8% and still survives these tools 100% of the time and then withdraw 4% the likelihood of success goes up substantially against the unknown. A lot of people here are critical of larger then needed safety nets, I think having a larger then needed nest egg is absolutely 100% needed.

-Mister FancyPants
Title: Re: firecalc and cFIREsim both lie?
Post by: Eric on April 10, 2014, 03:23:45 PM
The best and only plan to FIRE and in fact to FIR that is guaranteed not to fail is to have a much larger cushion then you need, so if you plan on using the 4% SWR have an asset base that allows you to take out 6% or 8% and still survives these tools 100% of the time and then withdraw 4% the likelihood of success goes up substantially against the unknown. A lot of people here are critical of larger then needed safety nets, I think having a larger then needed nest egg is absolutely 100% needed.


Percentages don't work like that.  If you're withdrawing 4% of an asset base, you'll have the same success rate, regardless of the size.
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 10, 2014, 03:32:24 PM
The best and only plan to FIRE and in fact to FIR that is guaranteed not to fail is to have a much larger cushion then you need, so if you plan on using the 4% SWR have an asset base that allows you to take out 6% or 8% and still survives these tools 100% of the time and then withdraw 4% the likelihood of success goes up substantially against the unknown. A lot of people here are critical of larger then needed safety nets, I think having a larger then needed nest egg is absolutely 100% needed.


Percentages don't work like that.  If you're withdrawing 4% of an asset base, you'll have the same success rate, regardless of the size.

If I have $1mm portfolio and run a FIRE calc with an 8% SWR, which means I withdraw $80k per year for 30 years and get 100% success rate but only plan on withdrawing $40k which is 4% my likelyhood is success is higher.

I am fairly certain I know how percentages work.
Title: Re: firecalc and cFIREsim both lie?
Post by: Eric on April 10, 2014, 03:43:51 PM
The best and only plan to FIRE and in fact to FIR that is guaranteed not to fail is to have a much larger cushion then you need, so if you plan on using the 4% SWR have an asset base that allows you to take out 6% or 8% and still survives these tools 100% of the time and then withdraw 4% the likelihood of success goes up substantially against the unknown. A lot of people here are critical of larger then needed safety nets, I think having a larger then needed nest egg is absolutely 100% needed.


Percentages don't work like that.  If you're withdrawing 4% of an asset base, you'll have the same success rate, regardless of the size.

If I have $1mm portfolio and run a FIRE calc with an 8% SWR, which means I withdraw $80k per year for 30 years and get 100% success rate but only plan on withdrawing $40k which is 4% my likelyhood is success is higher.

I am fairly certain I know how percentages work.

I'm sure you do.  Maybe you just didn't explain it well.  Or maybe I didn't understand what you're saying.  But I'm pretty sure there are zero scenarios where a 6 or 8% WR has a 100% success rate, because even 4% is only ~95%.  You'd have to go lower, not higher.
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 10, 2014, 03:51:57 PM
The best and only plan to FIRE and in fact to FIR that is guaranteed not to fail is to have a much larger cushion then you need, so if you plan on using the 4% SWR have an asset base that allows you to take out 6% or 8% and still survives these tools 100% of the time and then withdraw 4% the likelihood of success goes up substantially against the unknown. A lot of people here are critical of larger then needed safety nets, I think having a larger then needed nest egg is absolutely 100% needed.


Percentages don't work like that.  If you're withdrawing 4% of an asset base, you'll have the same success rate, regardless of the size.

If I have $1mm portfolio and run a FIRE calc with an 8% SWR, which means I withdraw $80k per year for 30 years and get 100% success rate but only plan on withdrawing $40k which is 4% my likelyhood is success is higher.

I am fairly certain I know how percentages work.

I'm sure you do.  Maybe you just didn't explain it well.  Or maybe I didn't understand what you're saying.  But I'm pretty sure there are zero scenarios where a 6 or 8% WR has a 100% success rate, because even 4% is only ~95%.  You'd have to go lower, not higher.

I'm not all that familiar with those particular tools I've only used them once or twice to see what they do so that might be the case.

I have run some fairly sophisticated proprietary MC with $3mm and $4mm portfolio's and 2% SWR's and gotten 99% and 100% success returns though.

Those are more realistic scenarios for me as I will take a much lower % from a much larger portfolio.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 04:00:00 PM
I have run some fairly sophisticated proprietary MC with $3mm and $4mm portfolio's and 2% SWR's and gotten 99% and 100% success returns though.

Okay, but that's with 2% SWRs.

What it sounded like you were saying (and I interpreted it as how Eric did) was "If you get a portfolio big enough to support 8% SWR, of course it will support 4%" -- but of course no portfolio can support 8%, no matter how big (except over a short time frame, but not indefinitely).  The size of the portfolio doesn't matter, as it's a percentage of it.  8% of 100k is the same WR as 8% of 1MM.  A portfolio of 1 trillion couldn't sustain indefinitely an 8% SWR.

If you aren't saying that, please clarify what you mean.
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 10, 2014, 04:12:16 PM
I have run some fairly sophisticated proprietary MC with $3mm and $4mm portfolio's and 2% SWR's and gotten 99% and 100% success returns though.

Okay, but that's with 2% SWRs.

What it sounded like you were saying (and I interpreted it as how Eric did) was "If you get a portfolio big enough to support 8% SWR, of course it will support 4%" -- but of course no portfolio can support 8%, no matter how big (except over a short time frame, but not indefinitely).  The size of the portfolio doesn't matter, as it's a percentage of it.  8% of 100k is the same WR as 8% of 1MM.  A portfolio of 1 trillion couldn't sustain indefinitely an 8% SWR.

If you aren't saying that, please clarify what you mean.

You're right and my apologies to Eric in the previous post as he was correct...

This is what I get for doing math while while walking to the subway and posting from my iPhone...

Decrease the SWR or increase the portfolio size or both to hedge against failure was what I was trying to detail... I clearly grossly missed the point...
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 04:14:45 PM
Got it.  Thanks for the clarification.  :)
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 10, 2014, 04:21:58 PM

I'm not all that familiar with those particular tools I've only used them once or twice to see what they do so that might be the case.

I have run some fairly sophisticated proprietary MC with $3mm and $4mm portfolio's and 2% SWR's and gotten 99% and 100% success returns though.

Those are more realistic scenarios for me as I will take a much lower % from a much larger portfolio.

99%+ success projections probably are not any safer than 95%+. At some point uncontrollable events such as war or political changes present a higher risk than anything that can be controlled by financial planning. No individual can control these risks and therefore going from 95% to 99%+ is relatively meaningless, especially for early retirees with their long time horizon - finally one thing an early retiree doesn't have to sweat more than the work till you drop person.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: matchewed on April 10, 2014, 06:12:10 PM
Well what I mean is shouldn't all retirement attempts be market driven (I'll be honest I'm not sure I even like the term given my want for nuance and understanding risks and pitfalls as people get closer to retirement)?

No, not necessarily.  Thus the golden handcuffs comment.  What if you need to hit a certain age for a pension, for example?  That's clearly not market driven.

We've discussed, and even had a poll on (https://forum.mrmoneymustache.com/welcome-to-the-forum/having-a-fixed-retirement-date/), hitting a number versus an age or date.

Aren't pensions mostly dependent on years of service? True question as I know very little of it.

Typically that's a large component of them, yes.  I'm not seeing how that makes them market driven though?  Or maybe you aren't implying that, but I'm missing what you are saying..

Well going back to the original point that was made (noted below); that being there are market driven dates and age driven dates I was thinking of these age driven dates as just another way of looking at hitting a specific target number. An example of this being a person who is relying partially on a pension using a date that the pension pays out X% well if their investments do particularly well they could conceivably leave early when their pensions pay out <X%. So aren't they just looking for target numbers and age driven retirement dates as well?
I guess I'm just confused at this point now.

I think I may have been talking past people on this one and we may have been having different conversations.

The problem is the "target number". When looking at retiring at a specific (age driven) date of retirement, the sequence of return risk is determined by the date of birth - more or less. When the date of retirement is determined by a "target number" (market driven - more or less) the risk of retiring towards the end of a bull market with consequently increased sequence of return risk is increased. The probability of success based on historical back testing the simulators spit out applies to the population of age driven retirees. It is therefore incorrect to use the result for a population of market driven retirees who are more likely to retire after significant market advances. Their probability of success is lower but cannot be quantified because on the day of the simulation it is not at all clear if the retiree indeed will have retired towards the end of a bull market.
Now, one could assume that the end of the bull market is near and then back test using only similar periods and I believe Wade Pfau is one who has done something in this direction. The projections should look much more mediocre then.
I would not interpret the overly optimistic projections of these simulators as a design flaw or bias, but rather acknowledge that they were not designed to be used in the same way by market driven as by age driven retirees.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: BigRed on April 10, 2014, 06:39:17 PM
Here is the paper  (http://www.onefpa.org/journal/Pages/Safe%20Withdrawal%20Rates%20A%20New%20Approach%20to%20Retirement%20Planning%20over%20the%20Life%20Cycle.aspx) addressing the reality that the SWR is not independent of the returns during the final years of the accumulation phase.  The summary is


This seems to be the analysis to address the OP's concerns.
Title: Re: firecalc and cFIREsim both lie?
Post by: secondcor521 on April 10, 2014, 10:14:03 PM
Has h**** made an appearance on these boards yet?

Fixed your spelling for you.  Unfortunately he has indirectly.  Go to post 66 in this thread, click on the link to the Wade Pfau paper, scroll down to the Acknowledgements section, and then read the names in the first paragraph.  (Sorry.)  ETA:  It's even worse.  Look at the References section at the end of the article.

As far as sol's OP, I like the first graph here http://www.retireearlyhomepage.com/kitces_pe10.html (http://www.retireearlyhomepage.com/kitces_pe10.html), where as far as I'm concerned the work has already been done.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 10, 2014, 10:19:01 PM
As far as sol's OP, I like the first graph here http://www.retireearlyhomepage.com/kitces_pe10.html (http://www.retireearlyhomepage.com/kitces_pe10.html), where as far as I'm concerned the work has already been done.

Good call, totally forgot about that.  Thanks!
Title: Re: firecalc and cFIREsim both lie?
Post by: brewer12345 on April 10, 2014, 11:04:17 PM
I get 100% success when I run my particulars through firecalc.  However, I would be comfy with a lower number, maybe down to 85 or 90%.  Why?  First and most importantly, I might well be dead before the end of my 40 year plan in which case its a moot point.  Second, most intelligent people have the ability and smarts to make changes in a bad downside scenario.  Third, it was time to get out.  So debate all you like about how many Mote Carlos can dance on the head of a pin: I am enjoying the sunshine rather than being imprisoned in a battleship gray cube.
Title: Re: firecalc and cFIREsim both lie?
Post by: Threshkin on April 10, 2014, 11:20:25 PM
I noticed a similar "issue" with these simulators (easier to see in cFIREsim).  Starting your retirement at the bottom of a market dip generated the highest end of simulation returns.  See cycle starts 1877, 1921 and 1982 in the default cFIREsim model. 

This caught my eye but was logical to me because in those years, given the same sized nest egg, your effective portfolio was larger than it would have been in peak years/  The worst end of simulation returns were for retirements 10-15 years before a dip (1906, 1966-69).

I agree with the earlier posters that the best way to ensure success is to aim for a lower SWR.  The Investigate options I like in cFIREsim are the Spending Level and Portfolio amount for X% success rate.  I plug in 100% and then want to see my spending well under or my portfolio well over the amounts returned.
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 11, 2014, 12:17:48 PM
Here is the paper  (http://www.onefpa.org/journal/Pages/Safe%20Withdrawal%20Rates%20A%20New%20Approach%20to%20Retirement%20Planning%20over%20the%20Life%20Cycle.aspx) addressing the reality that the SWR is not independent of the returns during the final years of the accumulation phase.  The summary is

  • Focusing on a “safe withdrawal rate” and then deriving a “wealth accumulation target” to achieve by the retirement date may not be the best way to approach retirement planning. Such a formulation isolates the working (accumulation) and retirement (decumulation) phases.
  • When considered together, the lowest sustainable withdrawal rates (which give us our idea of the safe withdrawal rate) tend to follow prolonged bull markets, while the highest sustainable withdrawal rates tend to follow prolonged bear markets.

This seems to be the analysis to address the OP's concerns.


The only problem is that by replacing the SWR with the "safe savings rate", above average market returns won't affect the date of retirement, that is earlier retirement after large market advances. My personal solution to the dilemma was to consider part of the outsized market returns as accelerated savings and break the serial correlation by funding other aspects of my overall plan by partial profit taking (deferred partial annuitization). This dropped the required withdrawal rate to around 3% of the remaining market investments.
Of course, my situation is one of an adequately funded prospective retiree - a more than adequately funded retiree doesn't have to worry at all and can just dial down the initial withdrawal rate to 2.5-3% and ride it out while preserving all the upside potential.

Peter
Title: Re: firecalc and cFIREsim both lie?
Post by: BigRed on April 11, 2014, 01:25:19 PM
The only problem is that by replacing the SWR with the "safe savings rate", above average market returns won't affect the date of retirement, that is earlier retirement after large market advances.

Whether or not that's true depends on whether or not you believe returns are correlated in any way.  Using firecalc and cFIREsim imply that they are.  If they are correlated, then above average short term returns don't lead to above-average long term returns.  If not, then your winnings really do put you ahead long term.  The consensus seems to be a strategy that discounts the impact of those above average returns somewhat.
Title: Re: firecalc and cFIREsim both lie?
Post by: PeteD01 on April 11, 2014, 01:37:58 PM
The only problem is that by replacing the SWR with the "safe savings rate", above average market returns won't affect the date of retirement, that is earlier retirement after large market advances.

Whether or not that's true depends on whether or not you believe returns are correlated in any way.  Using firecalc and cFIREsim imply that they are.  If they are correlated, then above average short term returns don't lead to above-average long term returns.  If not, then your winnings really do put you ahead long term.  The consensus seems to be a strategy that discounts the impact of those above average returns somewhat.

That's the funny thing about the calculators: they assume serial correlation (it is present in the historical data) but exempt the input from the assumption - there is really not much that could be fixed about that. One just has to interpret the probabilities with that in mind.
I agree with the consensus and there are a number of strategies which one can employ to deal with the problem.

Peter 
Title: Re: firecalc and cFIREsim both lie?
Post by: nicknageli on April 11, 2014, 01:59:13 PM
I get 100% success when I run my particulars through firecalc.  However, I would be comfy with a lower number, maybe down to 85 or 90%.  Why?  First and most importantly, I might well be dead before the end of my 40 year plan in which case its a moot point.  Second, most intelligent people have the ability and smarts to make changes in a bad downside scenario.  Third, it was time to get out.  So debate all you like about how many Mote Carlos can dance on the head of a pin: I am enjoying the sunshine rather than being imprisoned in a battleship gray cube.


Enjoyed this.   (http://www.vwvortex.com/Anthony/Smilies/thumbup.gif)
Title: Re: firecalc and cFIREsim both lie?
Post by: secondcor521 on April 11, 2014, 05:39:59 PM
^ I liked that too.

One other point.  Personally I shoot for 100% SWR in Firecalc.  Since the only way to get to 100% safety is to get 0% failures, outsized upside returns are irrelevant to my analysis.  The only thing that affects my approach is if we have something worse than the Great Depression or the stagflation of the 60s/70s, and then that will just lower my 100% SWR by some unknown amount.

Currently I'm bouncing around a 3.9% projected WR and consider myself FI but OMY until I get to 3.5%, which depending on the market, might happen this summer.
Title: Re: firecalc and cFIREsim both lie?
Post by: Nords on April 16, 2014, 09:43:14 AM
Has hocus made an appearance on these boards yet?

No.  Though I do recall a post by you a year or two ago asking that and saying something to the effect that a forum hadn't "made it" until he made an appearance.

Guess we've slid under his radar, for now.  ;)

(Those of you curious will have some fun googling.)

If we are all really, really lucky that troll will stay under his bridge. 

I just get a little nervous when I see such nice bait laid out for him.
I think the latest versions of vBulletin and SMF include hocus pre-banning settings to have in place before the forum goes live...

Seriously, though, when he inevitably shows up I hope you moderators don't have to put yourselves through the five stages of moderator grief before you eject him.  At last year's FinCon Ignite! event he was bragging about how many forums have banned him.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 16, 2014, 10:12:03 AM
Seriously, though, when he inevitably shows up I hope you moderators don't have to put yourselves through the five stages of moderator grief before you eject him.

Hah!  I like that phrase.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 16, 2014, 03:56:12 PM
One other point.  Personally I shoot for 100% SWR in Firecalc.

Several people have mentioned that they are shooting for 100% in fircalc, and it just blows my mind.

I'm seriously considering the merits of shooting for 50%.  That's the "average" prediction of how your portfolio will hold up, right?  You'd have a 50% chance of overperforming, and you'd get to spend more.  You have a 50% chance of underperforming, and having to either trim some fat or find some additional income.

The end value predictions are way skewed for every scenario I've looked at.  Like after 30 years it predicts an average ending value of 1 million, with a maximum value of 5 million and a minimum value of -200k.   If you really want to work long enough avoid the lower tail of that distribution, your expected average ending value is going to be enormous and your upper end is going to be obscene.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 16, 2014, 04:38:13 PM
One other point.  Personally I shoot for 100% SWR in Firecalc.

Several people have mentioned that they are shooting for 100% in fircalc, and it just blows my mind.

I'm seriously considering the merits of shooting for 50%.  That's the "average" prediction of how your portfolio will hold up, right?  You'd have a 50% chance of overperforming, and you'd get to spend more.  You have a 50% chance of underperforming, and having to either trim some fat or find some additional income.

The end value predictions are way skewed for every scenario I've looked at.  Like after 30 years it predicts an average ending value of 1 million, with a maximum value of 5 million and a minimum value of -200k.   If you really want to work long enough avoid the lower tail of that distribution, your expected average ending value is going to be enormous and your upper end is going to be obscene.

Indeed.  Some people need that security and are working such that they will end up with way more than "enough" in the end.

If that's what makes them feel good, fine with me.  Without a crystal ball, who am I to judge that?

In the end, we all work to our comfort level of "enough."

I do like your aggressive nature on that though, and the viewpoint of "50% just means you'll be just as likely to be fine as to need to trim and adjust a little."

EDIT: After two minutes on cFIREsim, I found that 50% success rate is about a 5.85% SWR, which is the same as having about 17X your annual expenditures in assets.

That's actually about the level I'm at today (actually I'm currently at about 38x current expenses, but plan on having a lot higher ER expenses, so I'm at about 17X of THAT expense level), but I'm planning on working two more years.  Gave me pause for a second to realize I'm at the point where, historically, I'd have succeeded as often as failed if I FIRE'd today.  I'll be around a 100% success rate when I do FIRE in two years.

Thanks for the neat viewpoint.
Title: Re: firecalc and cFIREsim both lie?
Post by: brewer12345 on April 16, 2014, 04:58:40 PM
One other point.  Personally I shoot for 100% SWR in Firecalc.

Several people have mentioned that they are shooting for 100% in fircalc, and it just blows my mind.

I'm seriously considering the merits of shooting for 50%.  That's the "average" prediction of how your portfolio will hold up, right?  You'd have a 50% chance of overperforming, and you'd get to spend more.  You have a 50% chance of underperforming, and having to either trim some fat or find some additional income.

The end value predictions are way skewed for every scenario I've looked at.  Like after 30 years it predicts an average ending value of 1 million, with a maximum value of 5 million and a minimum value of -200k.   If you really want to work long enough avoid the lower tail of that distribution, your expected average ending value is going to be enormous and your upper end is going to be obscene.

I think you are misunderstanding.  50% success rate in firecalc means that historically you would have run out of money half the time. 
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 16, 2014, 05:00:59 PM
I think you are misunderstanding.  50% success rate in firecalc means that historically you would have run out of money half the time. 

I'm not misunderstanding at all.  50% success rate in firecalc means that historically speaking you would have saved too much money half the time.
Title: Re: firecalc and cFIREsim both lie?
Post by: JohnGalt on April 16, 2014, 05:04:26 PM
I think you are misunderstanding.  50% success rate in firecalc means that historically you would have run out of money half the time. 

I'm not understanding at all.  50% success rate in firecalc means that historically speaking you would have saved too much money half the time.

(https://encrypted-tbn3.gstatic.com/images?q=tbn:ANd9GcSHy0snf1JabxTLAD60B7RTB1cVuXoFNAinsMtw-y25gmq62eFVbw)
Title: Re: firecalc and cFIREsim both lie?
Post by: brewer12345 on April 16, 2014, 05:06:58 PM
I think you are misunderstanding.  50% success rate in firecalc means that historically you would have run out of money half the time. 

I'm not understanding at all.  50% success rate in firecalc means that historically speaking you would have saved too much money half the time.

These calculators are generally designed and built to plumb the downside, not the upside.  Frankly, when I am 80 I will not care about the upside as long as there has been enough money to carry me to the end of my days.  If you simply want to ensure you have "enough" then I guess you would save the minimum needed and then annuitize.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 16, 2014, 05:21:41 PM
One other point.  Personally I shoot for 100% SWR in Firecalc.

Several people have mentioned that they are shooting for 100% in fircalc, and it just blows my mind.

I'm seriously considering the merits of shooting for 50%.  That's the "average" prediction of how your portfolio will hold up, right?  You'd have a 50% chance of overperforming, and you'd get to spend more.  You have a 50% chance of underperforming, and having to either trim some fat or find some additional income.

The end value predictions are way skewed for every scenario I've looked at.  Like after 30 years it predicts an average ending value of 1 million, with a maximum value of 5 million and a minimum value of -200k.   If you really want to work long enough avoid the lower tail of that distribution, your expected average ending value is going to be enormous and your upper end is going to be obscene.

I think you are misunderstanding.  50% success rate in firecalc means that historically you would have run out of money half the time.

I'm pretty sure he understands.

50% success rate means you'd have run out half the time, which means the other half the time you were able to successfully make it without running out of money, and without having to adjust spending downwards or anything.

OTOH, the other 50% (the "failures") you'd have to adjust your spending in order to not run out of money (which, in itself, could be seen as a failure).

The primary problem I figured you'd point out is... how do you know which line you're on?  Is it one of the 50% failures, and you need to adjust, or is it one of the successes, and you'll be fine?
Title: Re: firecalc and cFIREsim both lie?
Post by: brewer12345 on April 16, 2014, 06:19:27 PM
It might be challenging to adjust your spending downward in a highly inflationary environment or when you are 75.

You usually know if you are off a good glidepath after the first 5 years.  Sequence of return risk is paramount.
Title: Re: firecalc and cFIREsim both lie?
Post by: Nords on April 16, 2014, 08:14:34 PM
Seriously, though, when he inevitably shows up I hope you moderators don't have to put yourselves through the five stages of moderator grief before you eject him.
Hah!  I like that phrase.
I hope my humor helps make the point, because I've watched the guy destroy three early-retirement discussion boards once the (former) mods said "Whoa, hey there folks, settle down a little and let's give this guy a chance."  Even Morningstar's moderators did that with the Vanguard Diehards forum, which led directly to the creation of the Bogleheads.org site.

Last year, through a bizarre sequence of events that would be more appropriate to a TV sitcom script, I dined at the same table with the man.  "Luckily" we were seated far enough apart that we could ignore each other, although Miss Manners would have noted a definite thermocline in our vicinity.  It's a situation that I do not care to repeat, just as I don't care to watch him trash another forum.

The primary problem I figured you'd point out is... how do you know which line you're on?  Is it one of the 50% failures, and you need to adjust, or is it one of the successes, and you'll be fine?
I think the primary problem is that we don't have a calculator tool which helps us do a good job of simulating variable-spending scenarios. 

Until that level of math and computing power is actually trusted, an annuity (of some percentage of the portfolio) is the only way to assure the portfolio's longevity.

To torture the water glass analogy a little more, some see it as twice as big as it needs to be... but I see that excess capacity as an engineering safety margin.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 16, 2014, 09:41:20 PM
Until that level of math and computing power is actually trusted, an annuity (of some percentage of the portfolio) is the only way to assure the portfolio's longevity.

This is a relatively easy thing to simulate.  It's not a matter of insufficient computing power, just insufficient generosity on the part of people who write these things for free for the benefit of the rest of us.

Firecalc and cFIREsim are not exactly complicated mathematical tools.  Building a model that allows you to turn down your spending by specified amounts wouldn't be hard.  I might devote a few hours to play with excel some weekend, just to see.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 12:20:33 AM
Until that level of math and computing power is actually trusted, an annuity (of some percentage of the portfolio) is the only way to assure the portfolio's longevity.

This is a relatively easy thing to simulate.  It's not a matter of insufficient computing power, just insufficient generosity on the part of people who write these things for free for the benefit of the rest of us.

Firecalc and cFIREsim are not exactly complicated mathematical tools.  Building a model that allows you to turn down your spending by specified amounts wouldn't be hard.  I might devote a few hours to play with excel some weekend, just to see.

I bet bo_knows would be happy to program it into cfiresim, the problem is coming up with the parameters. If you came up with some reasonable requirements and what the spending would look like based on various scenarios, I bet he'd be up for doing it. 

I mean, I can't speak for him, but he's been absolutely generous and ridiculous in accompanying all previous requests...

Though he does already have various spending models under the "adjust spending tab".

Maybe something as simple as a box that lets you put in an amount (dollar or percent) of your budget that is discretionary, and should be cut back if the market dropped the previous year? 
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on April 17, 2014, 03:22:46 AM
One other point.  Personally I shoot for 100% SWR in Firecalc.
I think everybody hasn't understood. 100% SWR means you withdraw 100% of your initial stash every year, adjusted for inflation. You need a real return rate of 100%/year to succeed. I estimate that the success rate for this strategy is 0%.
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 17, 2014, 08:13:03 AM
Seriously, though, when he inevitably shows up I hope you moderators don't have to put yourselves through the five stages of moderator grief before you eject him.
Hah!  I like that phrase.
I hope my humor helps make the point, because I've watched the guy destroy three early-retirement discussion boards once the (former) mods said "Whoa, hey there folks, settle down a little and let's give this guy a chance."  Even Morningstar's moderators did that with the Vanguard Diehards forum, which led directly to the creation of the Bogleheads.org site.

Last year, through a bizarre sequence of events that would be more appropriate to a TV sitcom script, I dined at the same table with the man.  "Luckily" we were seated far enough apart that we could ignore each other, although Miss Manners would have noted a definite thermocline in our vicinity.  It's a situation that I do not care to repeat, just as I don't care to watch him trash another forum.

The primary problem I figured you'd point out is... how do you know which line you're on?  Is it one of the 50% failures, and you need to adjust, or is it one of the successes, and you'll be fine?
I think the primary problem is that we don't have a calculator tool which helps us do a good job of simulating variable-spending scenarios. 

Until that level of math and computing power is actually trusted, an annuity (of some percentage of the portfolio) is the only way to assure the portfolio's longevity.

To torture the water glass analogy a little more, some see it as twice as big as it needs to be... but I see that excess capacity as an engineering safety margin.

I see the "engineering safety margin" or "excess capacity" as an absolute necessity. Especially for someone who FIRE's particularly young. I know people think they can project what their expenses will be for 30+ years or what there hobbies might be forever or that they will never want to spend more etc... I just think too many people are fixated on getting out of the workforce that they guesstimate too much and don't really know how to plan for this. Not everyone, but too many people.

It is like when you asking an 18 year to pick a college major which is going to have a huge impact on the rest of their lives at ripe old age of 18. They then go ahead choose Anthropology and to make it worse incur student loans for a private university because it was a good party school and have a kickass time learning about different cultures at $30k+ per year at 6%+ with no hopes of finding a job that can repay that in a timely manner. Their 48 old self might be unhappy with their 18 year old self about that decision... Now of course that example is an extreme just to make a point, but many people who FIRE completely underestimate what they will need to live off of and leave the work force, others plan very accordingly and like MMM even though they "retire" they never stopped working, if you dissect his posts he earns more income then his expenses without ever touching his portfolio, my guess is his dividends/cap gains are always reinvested.

If you leave the work force and 10 or 15 years into FIRE you run out of money because you miscalculated/misjudged what you really were going to do with all that new found free time at 45 your job skills will be very stale and it will be hard for you to recoup and you can become a very sad statistic.

I am building "engineering safety margin" or "excess capacity" and quite frankly it is strictly out of not knowing what I don't know, I have been hit with major uncovered medical expenses as well as costly home repairs while still working, and I do like to spend at a higher level than MMM and I choose wisely what to spend on so I know which expenses make me happy and which ones don't, having more space does make me happy for example. My eyes are wide open that markets might react poorly in the future and in ways that have not been experienced already or predicated and these trends might go one for extended periods of time, I might retire at an inopportune time in market history, health might fail, my children or grandchildren might need financial assistance, it might cost more money to see the world then I thought 20 years earlier and any one of countless other things I just can’t predict…
The worst thing about having "engineering safety margin" or "excess capacity" is I will definitely not run out of money and heirs and charities will receive my legacy. On the other hand poor planning can make me rely on government life support (Social Security), needing to get a job or hand family taking care of me, all things I just won’t accept.

-Mister FancyPants
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 17, 2014, 08:27:50 AM
I swear you people and your calculators.  You're staring at a glass half empty/full of tepid water.  Why isn't it filled to the rim with ice cold beer? 

As for the 30-something potential early retirees debating about 3.x% or 4.x% or whatever SWR giving a 50-95-99-100% SWR, I just don't think the traditional "adjust for inflation each year and maintain a flat real consumption" is realistic.  In many of the simulation runs, you're sitting on 3-4x the wealth you started with after a few decades. 

Are you really going to keep spending constant and only spend 1%/yr of your much larger portfolio when you are 65?  And if your portfolio drops in half within 10 years, are you going to keep up an 8% spending level?  I would answer "no" to both questions.  I'd rather cut spending (or find a little supplemental income) during the rough times (that statistically are uncommon historically) and enjoy a higher standard of living during the good times (statistically very common historically). 

Years ago I modeled a 2% fixed withdrawal plus a 2% variable withdrawal and it seemed to dampen the year to year swings well and accounted for market performance pretty well (spend more when you're rich, spend less when you're poor). 
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 09:20:20 AM
Maybe something as simple as a box that lets you put in an amount (dollar or percent) of your budget that is discretionary, and should be cut back if the market dropped the previous year?

This already sort of exists.  Under Basic Inputs > Adjust Spending you'll see Variable Spending. That option lets you put a "floor" and "ceiling" value to your spending, to account for the good times and the bad.  It adjusts downward during periods of hard market times (returns and/or inflation) and adjusts upwards when you're doing well.

It vastly improves the rate of success if you're flexible and honest with those floor/ceiling numbers.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 09:41:05 AM
Maybe something as simple as a box that lets you put in an amount (dollar or percent) of your budget that is discretionary, and should be cut back if the market dropped the previous year?

This already sort of exists.

Sort of?  It pretty much exactly exists.  :P

I really need to play around more.  Once I started going heavy to real estate I stopped using calculators like cFIREsim and FIRECalc as much because they became irrelevant for my equities portfolio that will be such a small percent of my overall net worth, but they're so awesome.

Alright, so using the above that I calculated:
I do like your aggressive nature on that though, and the viewpoint of "50% just means you'll be just as likely to be fine as to need to trim and adjust a little."

EDIT: After two minutes on cFIREsim, I found that 50% success rate is about a 5.85% SWR, which is the same as having about 17X your annual expenditures in assets.

Spending: 46,800/yr
Portfolio: 800,000
WR: 5.85%
Success Rate: 50.44%

And then changing spending from inflation adjusted to variable, and assuming you don't need to withdraw any extra in an up market (you have plenty of fat in your ER budget already - so set minimum for rising market to 0%/1MM), but you can cut back 10 grand of fat in bad years, which is a 20% haircut (set maximum withdraw to 100% of portfolio, but adjusted floor amount to 36,800) you get a success rate of 52%.

Hmm.. that didn't help as much as I'd have hoped it would.

Even dropping your minimum spending by 50% (to 23,400 in this scenario) only gets you to a 53% success rate.  WTF?  That can't be right, can it?

No, it's definitely not, because if I set the minimum spending to 1000, I still only get a 55% success rate, and if you're only spending 1k out of a (formerly 800k, but now somewhat depleted) portfolio, it should last forever. 
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 09:46:21 AM
arebelspy, http://www.cfiresim.com/input.php?id=94685   that is the scenario you describe (46800 ceiling, with a 20% haircut as a floor) and I get  73.45% success rate, which is a good bump from the flat scenario.

Also keep in mind that the Floor and Ceiling numbers are checked as guides, but so are those percentages (Max to take out, min to take out).  So, there are 2 sets of ceilings, really, and 2 floors.  (Don't ask me, I didnt develop this method, I just implemented it   lol)
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 17, 2014, 09:52:14 AM
I see the "engineering safety margin" or "excess capacity" as an absolute necessity.

So do I, but I think we differ on how to engineer that safety margin.

Because the worse case scenarios you're working to convert into successes are so rare, and so easy to mitigate with reduced spending or a bit of extra income, my suspicion is that the retirement success predictions are mathematically equivalent for something like these three different engineered safety margins.

A.  Work an extra three years to get to 100% simulated success at 4% inflation adjusted withdrawals.

B.  Retire three years earlier, take the same withdrawals, and commit to a 10% possibility of having to get a part time minimum wage job for six months at some point over the course of your retirement, if and only if the absolute worst case historic scenario unfolds. 

C.  Retire three years earlier, take the same withdrawals, and then prepare to foresake the inflation adjustment or even reduce spending in any year the market has dropped.

Of the three, the most common option A seems like the crappiest deal.  Getting part time work in retirement seems pretty easy, (remember first retire then get rich) unless you're planning to spend your retirement on your ass in front of a tv.  And I suspect that combining options B and C together would allow you to retire even earlier.  In most cases, you wouldn't need to implement either strategy, and in the bad cases you'd still see no difference is withdrawal rates.

I'm not arguing for retiring without a safety margin.  I just see some alternative ways to have that margin that are less onerous.  Since you probably won't need it anyway, why get it the hardest way possible?
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 09:57:08 AM
arebelspy, http://www.cfiresim.com/input.php?id=94685   that is the scenario you describe (46800 ceiling, with a 20% haircut as a floor) and I get  73.45% success rate, which is a good bump from the flat scenario.

Also keep in mind that the Floor and Ceiling numbers are checked as guides, but so are those percentages (Max to take out, min to take out).  So, there are 2 sets of ceilings, really, and 2 floors.  (Don't ask me, I didnt develop this method, I just implemented it   lol)

Right, I tried to get rid of that second ceiling and floor by setting the minimum percent to 0% and max to 100%.  This gets me that 52% number I quoted you.

So it is apparently those percent ceilings and floors that is giving you the 73% success rate.

Something is bugged with that.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 10:00:16 AM
I'm not arguing for retiring without a safety margin.  I just see some alternative ways to have that margin that are less onerous.  Since you probably won't need it anyway, why get it the hardest way possible?

I'm with you sol.  Also, as my own findings (dealing with cFIREsim) have shown, along with Wade Pfau's research, the biggest risk comes in the first few years of retirement.  If problems occur in the first 3 years of retirement, they will probably require mitigation (increased income and/or decreased spending).  If you model that flexibility, rather than a strict flat rate of spending, you get to retire earlier for sure.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 10:05:29 AM
arebelspy, http://www.cfiresim.com/input.php?id=94685   that is the scenario you describe (46800 ceiling, with a 20% haircut as a floor) and I get  73.45% success rate, which is a good bump from the flat scenario.

Also keep in mind that the Floor and Ceiling numbers are checked as guides, but so are those percentages (Max to take out, min to take out).  So, there are 2 sets of ceilings, really, and 2 floors.  (Don't ask me, I didnt develop this method, I just implemented it   lol)

Right, I tried to get rid of that second ceiling and floor by setting the minimum percent to 0% and max to 100%.  This gets me that 52% number I quoted you.

So it is apparently those percent ceilings and floors that is giving you the 73% success rate.

Something is bugged with that.

Nah, it's not bugged... I think you just don't quite understand the model that ERD50 from e-r.org (who created this) created.

If you set the Minimum % to Withdraw From a Rising Portfolio to 0% and the Maximum % to Withdraw From a Sinking Portfolio to 100%, as you suggested, this is what you're telling it:    "If my portfolio is rising, the minimum withdrawal should be 0.  If my portfolio is sinking, the max withdraw should be 100%."  By setting it like that, you effectively have no min or max for that part of the formula.

The model is based off a combo of those percentages and the CPI-adjusted Floor/Ceiling values. If you look at the 0/100% example, on the output page, at the "Spending" chart... you'll see that it ends up being a binary decision (either ceiling or floor, no where in between). If you give more reasonable percentages that are close to your original portfolio's SWR, you'll see a more varied spending pattern.

Something that would be more reasonable for your scenario would be a 3% Min, 5.85% max, perhaps.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 10:18:20 AM
Nah, it's not bugged... I think you just don't quite understand the model that ERD50 from e-r.org (who created this) created.

If you set the Minimum % to Withdraw From a Rising Portfolio to 0% and the Maximum % to Withdraw From a Sinking Portfolio to 100%, as you suggested, this is what you're telling it:    "If my portfolio is rising, the minimum withdrawal should be 0.  If my portfolio is sinking, the max withdraw should be 100%."  By setting it like that, you effectively have no min or max for that part of the formula.

I do understand, and I still think it's bugged.

What I am telling it is indeed:
"If my portfolio is rising, the minimum withdrawal should be 0.  If my portfolio is sinking, the max withdraw should be 100%."

However because I'm also putting on a ceiling of 46800 and a floor of 36800, what I'm instead telling it is:
"If my portfolio is rising, the minimum withdrawal should be 36800.  If my portfolio is sinking, the max withdraw should be 46800." (Since those will be more than 0% and less than 100%, the percentages, in effect, don't matter.)

Correct?

I'm essentially setting it so the percentages don't matter, and only the number does.

Which means if I put in a ceiling of 46800 and a floor of 1000, I'm telling it "If it's rising, use 46800.. if it's falling, I'm only going to spend 1000" - yet somehow it still only has a 55% success rate?

That's bugged.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 10:49:16 AM
Yeah, it looks like you're breaking it using that model outside it's intended use.

It's been a while since I've talked through this model, but I think your situation is never actually taking advantage of the "sinking" or "rising" portfolio.  It's always using the ceiling.  That's because it calculates "sinking" or "rising" by using those percentages and comparing them to your ceiling/floor.  So, if you make it 0/100, you negate the whole model and it will choose the ceiling all the way until it's about to fail, then it will try to use the floor but its too late.

The default 40k/1M scenario says 3%/5%  50k/30k for the variable spending.  So an example is:

2010 - Portfolio - 1,000,000 : Spending - 40,000 (which is based on the initial spending listed to the far left).
2011 - Portfolio - 900k   (Ok, 3% of 900k is $27k. 5% is $45k. Because the current spending of 40k is in between the ceiling/floor and the 3%/5%, spending will remain at 40k)
2012 - Portfolio - 700k  (Major market hit. 3% of 700k is $21k, 5% is $35k. Because the 35k is less than the current spending, 35k is the new spending level)
2013 - Portfolio - 550k (More market hits. 3% of 550k is $16500, 5% is $27500. But, because the overall Floor is 30k, new spending is now 30k)
2014 - Portfolio - 1,200,000 (historical hypothetical major upswing!.  3% is $36k, 5% is 60k. Because the overall ceiling is 50k, new spending is 50k).

TL;DR: 0/100% breaks it, yes.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 10:57:47 AM
Ah, I see.

That's because it calculates "sinking" or "rising" by using those percentages and comparing them to your ceiling/floor.

That's the key part I was missing.

I was picturing it using sinking/rising as "market down/market up" based on the previous year.  This would fluctuate your spending quite a bit year to year though.

I'm picturing a spending model that calculates "market down (or maybe down X%) previous year, trim the fat and use $X.  Market flat or up, use normal spending).  So you basically have a  budget of $Y, and know there's some fat in it, such that you can cut down to a lean budget of $X if the market dropped at least a certain percentage.  Guess there's no way, as of yet, to model that.

I'll noodle it over some more.

Thanks for the help BK!
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 11:03:33 AM
Another second of noodling solved it.  If it's using the percentage to determine up or down, I can just set them the same.  (I really do like to break models and/or use them outside their intended use.  Heh.)

So setting both the floor and ceiling percent to 4%, then it will use my spending floor and ceiling.  As I said above, it does make your spending jump up and down a lot year-to-year, but it increases the success rate to 77%.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 11:06:07 AM
Ah, I see.

That's because it calculates "sinking" or "rising" by using those percentages and comparing them to your ceiling/floor.

That's the key part I was missing.

I was picturing it using sinking/rising as "market down/market up" based on the previous year.  This would fluctuate your spending quite a bit year to year though.

I'm picturing a spending model that calculates "market down (or maybe down X%) previous year, trim the fat and use $X.  Market flat or up, use normal spending).  So you basically have a  budget of $Y, and know there's some fat in it, such that you can cut down to a lean budget of $X if the market dropped at least a certain percentage.  Guess there's no way, as of yet, to model that.

I'll noodle it over some more.

Thanks for the help BK!

Well, if you think about it, it does follow the market dips/rises... it's just a little abstract.  That window of 3%/5% moves up and down based on the market.  Also, it will never fluctuate outside of the specified CPI-adjusted Floor/Ceiling values you set (say, 46800 and 37600 or whatever).

I think that when we were brainstorming on this idea, someone suggested making it "simpler" by tracking the actual market like you suggest (if down 10%, cut back a certain amount of spending, etc), but we got muddled up by trying to come up with concrete rules as to when to increase/decrease your spending after the first adjustment.  After that 10% decline, when is it safe to increase spending? After it reaches the original value? After a 5% flat climb? If you're drawing down a portfolio, you might never see it "climb" again... right?

Stuff like this has hurt my brain for the entire cFIREsim project :)
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 11:31:45 AM
Another second of noodling solved it.  If it's using the percentage to determine up or down, I can just set them the same.  (I really do like to break models and/or use them outside their intended use.  Heh.)

So setting both the floor and ceiling percent to 4%, then it will use my spending floor and ceiling.  As I said above, it does make your spending jump up and down a lot year-to-year, but it increases the success rate to 77%.

Hmm.. so that creates some interesting situations wherein the success rate goes down as you increase the spread. 

In any case, getting back to the relevant stuff we were discussing with Sol's "50% success rate" scenario...

I do like your aggressive nature on that though, and the viewpoint of "50% just means you'll be just as likely to be fine as to need to trim and adjust a little."

EDIT: After two minutes on cFIREsim, I found that 50% success rate is about a 5.85% SWR, which is the same as having about 17X your annual expenditures in assets.

Spending: 46,800/yr
Portfolio: 800,000
WR: 5.85%
Success Rate: 50.44%

Then setting your "fat trim" to be 20% of your budget (i.e. minimum spending of 37440), ceiling spending of 46800, min % withdraw from rising to be 5.85% and max withdraw from sinking to be 4.68%, or 37440/800000), you raise your success rate to 72%.

So variable spending will help, but historically even if you cut back 20% of your budget due to bad years, you'd still have run out of money 1/4 of the time. 

So one may need to be even more aggressive than that in cutting, or shoot for a higher success rate than 50% initially (i.e. lower than 5.85% SWR).

In fact, if I run a scenario of 5% SWR...

Portfolio: 800k
Spending (5% SWR): 40000
Fat trimmed spending (20% cut): 32000

Normal success rate (at regular inflation adjusted withdrawals, not variable) is 70% (69.91)

Now we switch to variable spending.  Max spending 40k, min 32k.  5% and 4% ceilings.  That increases your success rate all the way to 92%.

So if a SWR of 5% is viable over 9 times out of 10, historically, with some flexibility in spending, 4% is quite ridiculously safe, if you're willing to trim fat in bad years.

Starting with a 5% SWR and dropping spending by 30% in bad years (5%/3.5% and 40k/28k ceiling/floors) gives you a 99% success rate (just one failure, 1966).
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 17, 2014, 11:47:42 AM
Hmm.. so that creates some interesting situations wherein the success rate goes down as you increase the spread. 

In any case, getting back to the relevant stuff we were discussing with Sol's "50% success rate" scenario...

Spending: 46,800/yr
Portfolio: 800,000
WR: 5.85%
Success Rate: 50.44%


Then setting your "fat trim" to be 20% of your budget (i.e. minimum spending of 37440), ceiling spending of 46800, min % withdraw from rising to be 5.85% and max withdraw from sinking to be 4.68%, or 37440/800000), you raise your success rate to 72%.

So variable spending will help, but historically even if you cut back 20% of your budget due to bad years, you'd still have run out of money 1/4 of the time. 

So one may need to be even more aggressive than that in cutting, or shoot for a higher success rate than 50% initially (i.e. lower than 5.85% SWR).

In fact, if I run a scenario of 5% SWR...

Portfolio: 800k
Spending (5% SWR): 40000
Fat trimmed spending (20% cut): 32000

Normal success rate (at regular inflation adjusted withdrawals, not variable) is 70% (69.91)

Now we switch to variable spending.  Max spending 40k, min 32k.  5% and 4% ceilings.  That increases your success rate all the way to 92%.

So if a SWR of 5% is viable over 9 times out of 10, historically, with some flexibility in spending, 4% is quite ridiculously safe, if you're willing to trim fat in bad years.

Starting with a 5% SWR and dropping spending by 30% in bad years (5%/3.5% and 40k/28k ceiling/floors) gives you a 99% success rate (just one failure, 1966).

The reality is most people will not have the ability to cut $8,000 out of there annual budget $40,000 due to poor market performance on the turn of a dime, let alone do it for multiple years or indefinetely.

Having a larger amount of excess which allows for lower consumptions and higher wealth preservation is really the only thing you can plan for as you have no idea what you actual spending will need to be or what the markets will actually do.

Cutting it too close is too risky, modeling is all academic, a very useful tool for guidence but in reality too many people use it as a crutch or an excuse and for many it is way to early in the game for them to realize they are going to fail.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 17, 2014, 11:54:00 AM
So if a SWR of 5% is viable over 9 times out of 10, historically, with some flexibility in spending, 4% is quite ridiculously safe, if you're willing to trim fat in bad years.

Starting with a 5% SWR and dropping spending by 30% in bad years (5%/3.5% and 40k/28k ceiling/floors) gives you a 99% success rate (just one failure, 1966).

It's this last scenario that I'm most interested in.  Getting from 90% to 100% is really tough if you have to do it by working longer, because it means dropping your SWR from like 4.0 to 2.5%, which means saving 40 years of expenses instead of 25 years of expenses and at a 50% savings rate would commit you to working for at least an extra decade.

But if you can instead get from 90% to 100% by being flexible in your withdrawal rate, then you save yourself all those years of working and chances are good your SWR will be exactly the same.  And if you just so happen to retire in one of the historically worst possible years, your portfolio success would still be 100% as long as you could cut back a little. 

I'd much rather accept an extra 15 years of financial freedom with a slim 10% chance of having to tighten my belt someday than choose to stay stuck slaving away for 15 years in a crappy job for my prime years of life, missing my kids grow up, losing my health to a desk job.  It's like worrying about the cost of an auto accident so you buy a huge SUV, you've totally miscalculated the real costs. 

And I don't think so poorly of myself that I believe I could never find work again after retirement.  It's not like this is a one way street after you pull the trigger, where you are forbidden from ever re-entering the workforce.  The possibility of a little extra income at some point down the road also does a lot to ease the worry of hitting one of those worse case scenarios.

But that's just me.  If someone else really wants to double their stash in order to feel safe, instead of relying on their own flexibility to spend or ability to earn some side income someday, I'm fine with that. 

I'm also fine with people buying luxury cars and expensive vacations and $6 cups of coffee.  Somebody has to work and spend to keep the engine turning so that I can hitch a ride, so I don't begrudge them their decisions as long as they make them with their eyes open. 

Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 12:07:44 PM
I'd much rather accept an extra 15 years of financial freedom with a slim 10% chance of having to tighten my belt someday

Except that that's not quite it.  The 90% success rate assumes you start tightening your belt right away, not just "someday," if the market is down.
Title: Re: firecalc and cFIREsim both lie?
Post by: DoubleDown on April 17, 2014, 12:17:19 PM
Sol, another thing you may be interested in is that as a Fed, you can likely take at least one year of Leave Without Pay (LWOP), which gives you the option of returning to work on the off chance you see a horrible market year within your first 12 months (guaranteed to return to a position at your grade/step). Doesn't totally eliminate bad sequencing risk, but it's some help. Also, amazingly enough, 6 months of that LWOP time counts toward your retirement! So, for example, you could glide out of your job on LWOP after 9.5 years, and get credit for 10 years of service.
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 17, 2014, 12:53:59 PM
I did some research a looong time ago on the firecalc outputs and came up with a test to determine which line on the chart you're on (destined for success or destined for failure?). 

Full research here: six year old thread at early-retirement.org forums (http://www.early-retirement.org/forums/f28/dont-tell-anyone-but-i-found-the-secret-to-success-35074.html)

Abstract:
"About 10-15 years into your retirement, look at your portfolio balance in inflation adjusted dollars versus what it was when you retired. If you have less than 50-60% of your portfolio remaining at that point (adjusted for inflation), you are very likely to run out of money or have a very low portfolio balance at some point in the future. In other words, I'm proposing a FIRE check-up about 10-15 years into retirement. If your portfolio value at 10 to 15 years is less than 50-60% of the initial value, start thinking about earning income from some other source, or reducing expenses, or both."

One critique from a poster was that I'm data-mining a historical data set and the future might not hold.  True enough, although I don't know of a better solution than using the data we have.

Sadly, my spreadsheet went poof (per my comments from 6 years ago). 

Reflecting back on my thinking six years ago, wow was I a FIRE nerd.  Now that I'm FIRE'd, I don't have a hard and fast withdrawal rule.  I'm aiming at around 3-4% of the actual portfolio value each year with a floor of probably $25-30k.  If our portfolio dropped 43%, we could still pull 4% of the new value to generate a $25k withdrawal.  And I have a little side hustle income flowing in the door that can easily push our $25k bare bones spending to $30-35k or more if I focused more effort.  Basically, now that I have arrived at FI, I'm not too worried about a hard and fast rule. 
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 01:10:53 PM
Basically, now that I have arrived at FI, I'm not too worried about a hard and fast rule.

That's good for you, but us yet-to-be-retired dreamers sometimes cling to these calculations to find a semi-tangible goal date for retirement that makes us feel warm and fuzzy ;)
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 17, 2014, 01:54:54 PM
I did some research a looong time ago on the firecalc outputs and came up with a test to determine which line on the chart you're on (destined for success or destined for failure?). 

You're FUEGO on the ER boards?!

You just jumped up a bunch in my book.  That FUEGO guy, he fucking knows what he's talking about.  :D

I like how you say in the first post of that thread:
Quote
I'll be late 30's, maybe 40 by the time I can FIRE.

Hah, you beat the * outta that goal.  :)
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 17, 2014, 04:38:49 PM
I did some research a looong time ago on the firecalc outputs and came up with a test to determine which line on the chart you're on (destined for success or destined for failure?). 

You're FUEGO on the ER boards?!

You just jumped up a bunch in my book.  That FUEGO guy, he fucking knows what he's talking about.  :D

I like how you say in the first post of that thread:
Quote
I'll be late 30's, maybe 40 by the time I can FIRE.

Hah, you beat the * outta that goal.  :)

Oh crap, you guys know who FUEGO is?  ;)

Yeah, that's me. 

My FIRE date was advanced about 2 years thanks to a disgruntled boss.  :)  It has been working out well so far, and the up market got us where we wanted to be anyway. 

I think I tightened up my income needs and my idea of an adequately sized portfolio.  I don't need the 1.5 million I thought I would need in 2008.  It's closer to $1.2 million.  And wow, $60k/yr what was I thinking?  We're living pretty large on $32k right now.

Oh wait, I was budgeting $10k for health insurance in the pre-obamacare days.  And extra tax on the extra income to get us to $60k. 
Title: Re: firecalc and cFIREsim both lie?
Post by: Nords on April 17, 2014, 06:31:52 PM
Until that level of math and computing power is actually trusted, an annuity (of some percentage of the portfolio) is the only way to assure the portfolio's longevity.

This is a relatively easy thing to simulate.  It's not a matter of insufficient computing power, just insufficient generosity on the part of people who write these things for free for the benefit of the rest of us.

Firecalc and cFIREsim are not exactly complicated mathematical tools.  Building a model that allows you to turn down your spending by specified amounts wouldn't be hard.  I might devote a few hours to play with excel some weekend, just to see.
My commentary about "trusted math and computing power" is not directed at Bo_Knows.  I'm not complaining about "insufficient generosity".  Hell, Bo fixed FIRECalc from scratch after its new owner flailed around for over five years (and at least three programmers) trying to upgrade the current version.  Dory sold that program at the peak of its valuation and bagged the new guy with the task list.

What I'm apparently not expressing very well is the fact that there is scant peer-reviewed reproducible research leading to an accepted and widely-used retirement calculator which uses variable-spending algorithms in retirement. 

Many people fail to even complete a run on one of today's calculators, and USAA has built an entire retirement planner around this issue.  cFIRESim does lots of things right, but users struggle to figure them out.  ESPlanner is probably more complicated (and expensive) than most customers are willing to tackle.  FinancialMentor's retirement calculator is very good, but it's not based on SWRs.  The Bogleheads Wiki lists at least two dozen retirement calculators, and I couldn't even name six of them blindfolded.  Guyton's manual algorithm makes my head hurt, and I'm a nuclear engineer at the (presumptive) peak of my cognition.

If realistic retirement spending was "relatively easy" to simulate then it would've been done by now, yet researchers like Wade Pfau and Michael Kitces are going to spend their entire careers laying the foundation for (and perhaps building) the software that's going to help the average user figure out how much to spend in retirement for various market valuations and returns.  Then we really would be able to retire at a 4% SWR (or even higher) with 100% success rates because we'd know when to cut back spending, and by how much.  Everything right now is, at best, a "thumbrule".

I swear you people and your calculators.  You're staring at a glass half empty/full of tepid water.  Why isn't it filled to the rim with ice cold beer? 
As for the 30-something potential early retirees debating about 3.x% or 4.x% or whatever SWR giving a 50-95-99-100% SWR, I just don't think the traditional "adjust for inflation each year and maintain a flat real consumption" is realistic.  In many of the simulation runs, you're sitting on 3-4x the wealth you started with after a few decades. 
I suspect that we've read too many of these SWR threads over the past decade...

I did some research a looong time ago on the firecalc outputs and came up with a test to determine which line on the chart you're on (destined for success or destined for failure?). 

You're FUEGO on the ER boards?!

You just jumped up a bunch in my book.  That FUEGO guy, he fucking knows what he's talking about.  :D
Hey, he's not just FUEGO, but in an earlier incarnation of E-R.org he was--

Well, I'd better let him reveal that identity when the time is right.  The statute of limitations may still have some time left to run, and he may still be negotiating the book/movie rights.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on April 17, 2014, 06:39:23 PM
I agree Nords... retirement calculators are too hard to use, and I'll be the first to admit that cFIREsim has a huge learning curve.

I intended to try and alleviate that with "crowdsourced" ideas, but it's hard to generate detailed discussion.  Plus, as you mentioned, there isn't enough peer-reviewed work on withdrawal strategies that would work.  I wish I knew more about Monte Carlo simulators, because I'd be able to tweak the one on cFIREsim and do WAY more analysis.  But, alas, it is pretty complicated statistics.
Title: Re: firecalc and cFIREsim both lie?
Post by: Mister Fancypants on April 17, 2014, 07:55:27 PM
Until that level of math and computing power is actually trusted, an annuity (of some percentage of the portfolio) is the only way to assure the portfolio's longevity.

This is a relatively easy thing to simulate.  It's not a matter of insufficient computing power, just insufficient generosity on the part of people who write these things for free for the benefit of the rest of us.

Firecalc and cFIREsim are not exactly complicated mathematical tools.  Building a model that allows you to turn down your spending by specified amounts wouldn't be hard.  I might devote a few hours to play with excel some weekend, just to see.
My commentary about "trusted math and computing power" is not directed at Bo_Knows.  I'm not complaining about "insufficient generosity".  Hell, Bo fixed FIRECalc from scratch after its new owner flailed around for over five years (and at least three programmers) trying to upgrade the current version.  Dory sold that program at the peak of its valuation and bagged the new guy with the task list.

What I'm apparently not expressing very well is the fact that there is scant peer-reviewed reproducible research leading to an accepted and widely-used retirement calculator which uses variable-spending algorithms in retirement. 

Many people fail to even complete a run on one of today's calculators, and USAA has built an entire retirement planner around this issue.  cFIRESim does lots of things right, but users struggle to figure them out.  ESPlanner is probably more complicated (and expensive) than most customers are willing to tackle.  FinancialMentor's retirement calculator is very good, but it's not based on SWRs.  The Bogleheads Wiki lists at least two dozen retirement calculators, and I couldn't even name six of them blindfolded.  Guyton's manual algorithm makes my head hurt, and I'm a nuclear engineer at the (presumptive) peak of my cognition.

If realistic retirement spending was "relatively easy" to simulate then it would've been done by now, yet researchers like Wade Pfau and Michael Kitces are going to spend their entire careers laying the foundation for (and perhaps building) the software that's going to help the average user figure out how much to spend in retirement for various market valuations and returns.  Then we really would be able to retire at a 4% SWR (or even higher) with 100% success rates because we'd know when to cut back spending, and by how much.  Everything right now is, at best, a "thumbrule".

I agree the "what I will spend per year?" and "what I will spend it on?" and "how and when to adjust my spending based on market and/or life events?" is nearly impossible to predict. Perhaps some neural network programming could approximate the randomness but no current retirement planner can effectively predict what people will actually need or do especially with longer retirement runs that are created by FIRE.

Tools like cFiresim are great for showing expected outcomes of portfolios against known spending drawdowns, as soon as you can know you spending 100% you are all set.

Until then plan on having excess margin of safety in your portfolio and plan on drawing less from it.

I'm not saying work an extra 10 years to guarantee you will never run out of money, I just think way too many people FIRE on a portfolio that can barely sustain them if it really can at all because they simply can't fathom what it takes to calculate true inflationary living expenses over multiple decades.
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 18, 2014, 08:37:30 AM
I'm not saying work an extra 10 years to guarantee you will never run out of money, I just think way too many people FIRE on a portfolio that can barely sustain them if it really can at all because they simply can't fathom what it takes to calculate true inflationary living expenses over multiple decades.

I'd wager the opposite is true among the FIRE community at large.  Those that actually get close to pulling the trigger seem to suffer "one more year" pretty often.  Which means even more margin of safety beyond the 4% firecalc results.

Then they retire early and live like they are destitute for a year or two because they are withdrawing instead of saving (something very painful when you're a hard core skinflint and have grown accustomed to saving more than you spend every year).

As for inflation, that's implicitly built into the firecalc/cFIREsim runs.  Among the FIRE community, there seems to be a lot of understanding of inflation (compared to the general population of traditional retirement seekers).   

Depending on the forum, some talk about 2% SWRs and having a multi-million dollar portfolio.  Then others will respond with "do you think $3 million will be enough?".  There's a thread on early-retirement.org right now with a 30-something guy with $3MM pondering sticking it out till he gets to $5-6MM "for a margin of safety".  He's making a million per yet net at a not-so-bad job, so I might stick it out too.  :)

Title: Re: firecalc and cFIREsim both lie?
Post by: Another Reader on April 18, 2014, 09:00:46 AM
Under 35:  Yeah, I got enough.  Heck, I'll just go back to work if I don't have enough income!

Over 35:  Well, there are the kids to educate.  And I don't know if Social Security will be there for me.  And what if we have another 2008?  Do these models really work out in real life?  I guess I will work one more year (or 5 more) just to make sure.
Title: Re: firecalc and cFIREsim both lie?
Post by: JohnGalt on April 18, 2014, 09:06:58 AM
I'm not saying work an extra 10 years to guarantee you will never run out of money, I just think way too many people FIRE on a portfolio that can barely sustain them if it really can at all because they simply can't fathom what it takes to calculate true inflationary living expenses over multiple decades.

I'd wager the opposite is true among the FIRE community at large.  Those that actually get close to pulling the trigger seem to suffer "one more year" pretty often.  Which means even more margin of safety beyond the 4% firecalc results.

Then they retire early and live like they are destitute for a year or two because they are withdrawing instead of saving (something very painful when you're a hard core skinflint and have grown accustomed to saving more than you spend every year).


Trying to find the middle ground between these two is one reason I ended up with my current plan to hit a bare minimum FI point such that I could get by off the 4% rule (or whatever rule I end up being comfortable with) and then switch over to consulting/job hopping/doing things that cover expenses (phD program with a stipend, peace corps, etc) until I run out of things I'm interested in doing that come with a paycheck of some sort.  I don't see that happening anytime soon.  In fact - I can't even imagine "retiring" at 30 with a goal of never doing anything again that involves a paycheck. 
Title: Re: firecalc and cFIREsim both lie?
Post by: wtjbatman on April 18, 2014, 09:13:18 AM
Guyton's manual algorithm makes my head hurt, and I'm a nuclear engineer at the (presumptive) peak of my cognition.

Yeah, but are you a PE?
Title: Re: firecalc and cFIREsim both lie?
Post by: Nords on April 18, 2014, 02:37:56 PM
I'm not saying work an extra 10 years to guarantee you will never run out of money, I just think way too many people FIRE on a portfolio that can barely sustain them if it really can at all because they simply can't fathom what it takes to calculate true inflationary living expenses over multiple decades.

I'd wager the opposite is true among the FIRE community at large.  Those that actually get close to pulling the trigger seem to suffer "one more year" pretty often.  Which means even more margin of safety beyond the 4% firecalc results.

Then they retire early and live like they are destitute for a year or two because they are withdrawing instead of saving (something very painful when you're a hard core skinflint and have grown accustomed to saving more than you spend every year).


Trying to find the middle ground between these two is one reason I ended up with my current plan to hit a bare minimum FI point such that I could get by off the 4% rule (or whatever rule I end up being comfortable with) and then switch over to consulting/job hopping/doing things that cover expenses (phD program with a stipend, peace corps, etc) until I run out of things I'm interested in doing that come with a paycheck of some sort.  I don't see that happening anytime soon.  In fact - I can't even imagine "retiring" at 30 with a goal of never doing anything again that involves a paycheck.
One of the ironies of getting over "Just One More Year!" syndrome is the fear that once you leave the workplace you'll never be able to earn another dime... and then your body will break down if you try to go back to work in another occupation.

Yet now that I'm not earning a paycheck, I see entrepreneurial revenue opportunities everywhere.  I've stumbled across them several times per year for the last 12 years, and they're everywhere.  Clearing $10K-$20K/year seems ridiculously straightforward, and even $30K/year is within a couple years of bootstrapping.  If I was really willing to surf less for a few years then I'd be able to completely replace my old paycheck.

Guyton's manual algorithm makes my head hurt, and I'm a nuclear engineer at the (presumptive) peak of my cognition.
Yeah, but are you a PE?
C'mon, I'm a nuclear-trained submariner, but self-inflicted masochism has its limits!

My daughter's currently beating her head against the civil engineering FE & PE wall.  Of course the wall is made of steel-reinforced prestressed concrete...
Title: Re: firecalc and cFIREsim both lie?
Post by: FIPurpose on April 18, 2014, 05:18:36 PM
I think a big reason MMM and others have continued to be successful post-RE is that retiring early allows one to start a business that can go without profits for years and you would still be fine. But I think more people than not on this forum would be successful entrpenuers, but the uncertainty of profits keeps them from being able to so.

As a software person myself, I've played with the thought of working for a startup in return for a share of the company. Being FIRE allows one to walk away from those stressful situations, and take on more risky ventures than before.
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 18, 2014, 08:13:12 PM
I think a big reason MMM and others have continued to be successful post-RE is that retiring early allows one to start a business that can go without profits for years and you would still be fine. But I think more people than not on this forum would be successful entrpenuers, but the uncertainty of profits keeps them from being able to so.

Put another way, you can start the business you want, build it at the pace you want, and make good long term decisions without undue influences of investors and outside money men.

Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on April 18, 2014, 08:36:10 PM
One of the ironies of getting over "Just One More Year!" syndrome is the fear that once you leave the workplace you'll never be able to earn another dime... and then your body will break down if you try to go back to work in another occupation.

Yet now that I'm not earning a paycheck, I see entrepreneurial revenue opportunities everywhere.  I've stumbled across them several times per year for the last 12 years, and they're everywhere.  Clearing $10K-$20K/year seems ridiculously straightforward, and even $30K/year is within a couple years of bootstrapping.  If I was really willing to surf less for a few years then I'd be able to completely replace my old paycheck.

I feel the same way.  Between business opportunities, partnering on rentals/flipping, or online entrepreneurship, I have to be pro-active to not devote my time to making more money. 

At least I know if I ever get bored, I can fill time and pick up some money from side hustles.  It's just the utility of money drops off once you have enough. 

Quote
My daughter's currently beating her head against the civil engineering FE & PE wall.  Of course the wall is made of steel-reinforced prestressed concrete...

Just tell her those exams are pretty easy if you study for them.  So says a guy on the internet...
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on April 18, 2014, 08:52:54 PM
If realistic retirement spending was "relatively easy" to simulate then it would've been done by now, yet researchers like Wade Pfau and Michael Kitces are going to spend their entire careers laying the foundation for (and perhaps building) the software that's going to help the average user figure out how much to spend in retirement for various market valuations and returns.  Then we really would be able to retire at a 4% SWR (or even higher) with 100% success rates because we'd know when to cut back spending, and by how much.  Everything right now is, at best, a "thumbrule".

I guess I'm not seeing the complexity here that you and others are.  I envision a spending rule that looks pretty easy to implement with one additional variable, something like "if the market was positive last year, withdraw your usual x% plus inflation" (the same as the usual rule) and then adding one additional variable that's something like "if the market was down last year, forego your annual inflation adjustment and reduce this year's withdrawal by z%" where z is some ratio of how much the market dropped.  Like if z is 50 then a 10% drop in the market means that this year you reduce your withdrawal by 5%.  In subsequent positive years, you start adding the inflation adjustment back in on top of the new amount.

There are a ton of different ways to do this, as bo has clearly stated, and it would be easy to get bogged down in the details.  Should z be 50 or 100 or 0?  In positive years, should you go back to taking the inflation adjustment on the new reduced amount, or go back to your old 4%?  I don't think it really matters which choices are made in how this would get implemented in a spreadsheet, as long as they result in a somewhat smoothed spending curve that doesn't dramatically alter the spending level too suddenly for people, but does reduce withdrawals a bit in down years and doesn't let the portfolio grow to ridiculous values in most historic scenarios.

I think this is probably what most early retirees do anyway.  If RootofGood saw a 30% decline in the markets tomorrow, I doubt he'd blindly take his planned inflation adjustment on top of his usual SWR.  If he saw 10 years in a row of steady 12% returns, he might get a little more loose with the spending.  We all use those big fuzzy logic brains to feel out what we think is some sort of moderate course, and my proposal here is to just find a way to formalize that thinking in a simple equation.   (This year's SWR) = either a) last year's withdrawal plus CPI adjustment, if the market was up or b) last year's withdrawal minus z% of the market decline, if the market was down.

Seems easy to do to me, and you could play with the success rate for various value of z in the same way you play with various values of SWR.
Title: Re: firecalc and cFIREsim both lie?
Post by: JohnGalt on April 21, 2014, 06:08:38 PM
I saw this come up in another discussion but thought it might be relevant here.  Apparently betterment recently released an automated variable withdrawal rate option.

https://www.betterment.com/blog/2014/04/11/retirement-income-shouldnt-be-a-guessing-game/
 
Title: Re: firecalc and cFIREsim both lie?
Post by: MDM on April 21, 2014, 06:55:50 PM
I saw this come up in another discussion but thought it might be relevant here.  Apparently betterment recently released an automated variable withdrawal rate option.

https://www.betterment.com/blog/2014/04/11/retirement-income-shouldnt-be-a-guessing-game/
Betterment may (or may not) be more reputable than your average indexed annuity sales firm, but when their article...
1) Portrays a 4% WR failing 30% of the time with a portfolio containing 30% stocks, then
2) Notes that to follow Betterment's suggestion, the "initial portfolio starts with a 56% stock allocation"
...it looks like so much smoke and mirrors.

Near the bottom of the Betterment article they do acknowledge "we are highlighting the Monte Carlo results using a 30% stock Betterment portfolio. Notably, we found that applying the 4% rule even to a 50% stock Betterment portfolio is expected to fail 21% of the time under modern market conditions."

They may have a good point (and a good product) but I'm always leery when the bold proclamations at the top say one thing, while the fine print at the bottom provides a different perspective.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 21, 2014, 07:38:37 PM
That blog post is actually being discussed here:
http://forum.mrmoneymustache.com/investor-alley/betterment's-blog-post-about-the-4-rule/

And a Bettermint employee who helped create that new withdrawal strategy posted in the thread.  I'd recommend those people interested post there, especially people who are skeptical of it.  I'd love to see MDM's concerns cut and paste over there so they can be addressed (or not).
Title: Re: firecalc and cFIREsim both lie?
Post by: MDM on April 21, 2014, 08:01:15 PM
Cut & pasted, with some explanation.  Thanks for the suggestion.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on April 22, 2014, 01:08:59 PM
EDIT: After two minutes on cFIREsim, I found that 50% success rate is about a 5.85% SWR, which is the same as having about 17X your annual expenditures in assets.

That's with a 30-year run.  For 50 years (there is less sample data, yes, but 93 runs instead of 113, so possibly still quite valid) 50% success rate drops down to a 4.9% SWR, or 20x your annual expenses in assets.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 09, 2014, 10:57:48 PM
If realistic retirement spending was "relatively easy" to simulate then it would've been done by now, yet researchers like Wade Pfau and Michael Kitces are going to spend their entire careers laying the foundation for (and perhaps building) the software that's going to help the average user figure out how much to spend in retirement for various market valuations and returns.  Then we really would be able to retire at a 4% SWR (or even higher) with 100% success rates because we'd know when to cut back spending, and by how much.  Everything right now is, at best, a "thumbrule".

I guess I'm not seeing the complexity here that you and others are.  I envision a spending rule that looks pretty easy to implement with one additional variable, something like "if the market was positive last year, withdraw your usual x% plus inflation" (the same as the usual rule) and then adding one additional variable that's something like "if the market was down last year, forego your annual inflation adjustment and reduce this year's withdrawal by z%" where z is some ratio of how much the market dropped.  Like if z is 50 then a 10% drop in the market means that this year you reduce your withdrawal by 5%.  In subsequent positive years, you start adding the inflation adjustment back in on top of the new amount.

There are a ton of different ways to do this, as bo has clearly stated, and it would be easy to get bogged down in the details.  Should z be 50 or 100 or 0?  In positive years, should you go back to taking the inflation adjustment on the new reduced amount, or go back to your old 4%?  I don't think it really matters which choices are made in how this would get implemented in a spreadsheet, as long as they result in a somewhat smoothed spending curve that doesn't dramatically alter the spending level too suddenly for people, but does reduce withdrawals a bit in down years and doesn't let the portfolio grow to ridiculous values in most historic scenarios.

I think this is probably what most early retirees do anyway.  If RootofGood saw a 30% decline in the markets tomorrow, I doubt he'd blindly take his planned inflation adjustment on top of his usual SWR.  If he saw 10 years in a row of steady 12% returns, he might get a little more loose with the spending.  We all use those big fuzzy logic brains to feel out what we think is some sort of moderate course, and my proposal here is to just find a way to formalize that thinking in a simple equation.   (This year's SWR) = either a) last year's withdrawal plus CPI adjustment, if the market was up or b) last year's withdrawal minus z% of the market decline, if the market was down.

Seems easy to do to me, and you could play with the success rate for various value of z in the same way you play with various values of SWR.

Have you figured out a formula for us yet so Bo can implement it? :)
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on June 10, 2014, 12:03:29 AM
Sure.  Define one additional variable z with a range of [0,1].

Iff last year's portfolio return was positive, withdraw last year's amount plus the CPI adjustment.  Same as usual.
Iff last year's portfolio return was negative, withdraw last year's amount reduced by the amount the market dropped multiplied by z.

Example 1.  My portfolio returned 30% this year and my withdrawal was 40k last year.  CPI was 2.5% so this year I withdraw 1.025*40k = 41k.  z is ignored.

Example 2.  My portfolio was down 10% last year and my withdrawal was 40k last year.  Z is set to .5 so I withdraw 40k*[1-(10%*0.5)] = 38k.  CPI is ignored.

The idea is to reduce spending slightly in years when the market tanks.  How much you reduce spending in a downturn is specified by z.  This mitigates the classical sequence of return risk where you normally would be taking out high dollar values from a depleted portfolio, thus allowing you to roll with a higher than 4% SWR in the first place because your spending is more flexible if returns turn out to be bad.

If you set z to 0 then you just forego your inflation adjustment in years when your portfolio doesn't grow.  Even that little bit helps. 
If you set z to 1 then your spending is much more variable, might be reduced by whatever % your portfolio drops, but you get a much higher initial SWR for equivalent success rates.
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on June 10, 2014, 04:31:05 AM
Iff last year's portfolio return was positive, withdraw last year's amount plus the CPI adjustment.  Same as usual.
Iff last year's portfolio return was negative, withdraw last year's amount reduced by the amount the market dropped multiplied by z.
According to this strategy, your withdrawal, in real terms, will only ever stay the same or go down, with no lower limit. Even if you still adjust upwards for inflation when the market drops (if you don't, a few years of slightly negative returns but 8-10% inflation will starve you to death), and you set z to something conservative like 0.2, when the stock market crashes by 30% you suddenly have to cut your budget by 6% and never increase it again.

Any realistic long-term withdrawal strategy must always withdraw, inflation-adjusted, at least as much as the bare minimum you actually need to live. (Unless you go back to work.)
Title: Re: firecalc and cFIREsim both lie?
Post by: dude on June 10, 2014, 07:33:21 AM
I've posted this in another thread before, but it does seem relevant to this thread:

http://www.bloomberg.com/news/2013-04-09/maybe-past-performance-does-predict-your-savings-future.html

Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 12, 2014, 05:56:56 AM
Iff last year's portfolio return was positive, withdraw last year's amount plus the CPI adjustment.  Same as usual.
Iff last year's portfolio return was negative, withdraw last year's amount reduced by the amount the market dropped multiplied by z.
According to this strategy, your withdrawal, in real terms, will only ever stay the same or go down, with no lower limit. Even if you still adjust upwards for inflation when the market drops (if you don't, a few years of slightly negative returns but 8-10% inflation will starve you to death), and you set z to something conservative like 0.2, when the stock market crashes by 30% you suddenly have to cut your budget by 6% and never increase it again.

Any realistic long-term withdrawal strategy must always withdraw, inflation-adjusted, at least as much as the bare minimum you actually need to live. (Unless you go back to work.)

Right.  Is it more prudent to set a Z-value, set a CPI-adjusted spending floor and a CPI-adjusted spending ceiling, then apply your formula for both downturns AND upswings?

Edited Example 1 to reflect my suggestion:
Quote
Example 1.  My portfolio returned 30% this year and my withdrawal was 40k last year.  CPI was 2.5% so this year I withdraw 40k*[1+2.5%]*[1+(30%*0.5)] = $47150. 

Example 2.  My portfolio was down 10% last year and my withdrawal was 40k last year.  Z is set to .5 so I withdraw 40k*[1-(10%*0.5)] = 38k.  CPI is ignored.
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on June 12, 2014, 06:33:13 AM
Quote
Example 1.  My portfolio returned 30% this year and my withdrawal was 40k last year.  CPI was 2.5% so this year I withdraw 40k*[1+(30%*0.5)] = $46k. 

Example 2.  My portfolio was down 10% last year and my withdrawal was 40k last year.  Z is set to .5 so I withdraw 40k*[1-(10%*0.5)] = 38k.  CPI is ignored.
(I assume you still meant to increase by inflation in Example 1).

You can't get away with ignoring inflation, ever. Inflation means prices went up. Taking a $2k pay cut on $40k sounds like no big deal, but what if inflation is 10%, or even 15%? After just two years you'd be withdrawing $36k which is nominally a harsh 10% pay cut, but in real terms could be equivalent to a punishing 32% pay cut. At this point you may be wishing you chose a withdrawal strategy which didn't give you such wildly different standards of living in different years.

I realise you're setting an inflation-adjusted lower limit which avoids the main problem, but my concern is that if you ignore inflation in some circumstances, then your withdrawal isn't always adjusting to how well your investments do in real terms.

The easiest and most sensible way to do handle inflation is to adjust the investment growth figure before doing anything else. (1 + r) = (1 + n)/(1 + i) where r is the real return, n is the nominal return, i is inflation. Rounding errors aside, if your nominal return is 10% with 3% inflation, this is the same as if they returned 13% with 6% inflation, or 7% with 0% inflation. However, the z formula produces a different (real-terms) withdrawal in each situation. More worryingly, if your nominal return is exactly equal to inflation, your investments didn't really grow at all, but if both are positive, the formula tells you to increase your real-terms withdrawal.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 12, 2014, 09:26:53 AM
I should have just rewritten those rather than copy/pasting.  I fixed the Example 1 above.  However, sol specifically wanted to ignore CPI during a downturn year.  I don't think there is anything inherently wrong with that.  There are plenty of strategies that go with a nominal value, and are successful.  The good ole "percent of portfolio" strategy ignores CPI by default, but often folks will put in CPI-adjusted floor/ceiling values.

I do think that sol's strategy needs SOME method of raising spending during the good times, or else, as you said, the spending will only get worse and worse...never better.
Title: Re: firecalc and cFIREsim both lie?
Post by: boarder42 on June 12, 2014, 11:03:34 AM
this is fantastic analysis.  our travel budget in retirement assuming we dont just gocurrycracker our lifestyle is about 20% of our total budget ... soooo.... that makes the 5% SWR the easy goal now.  just dont travel after a bad year. 
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 12, 2014, 06:54:42 PM
this is fantastic analysis.  our travel budget in retirement assuming we dont just gocurrycracker our lifestyle is about 20% of our total budget ... soooo.... that makes the 5% SWR the easy goal now.  just dont travel after a bad year.

In a similar vein, our plan D or E for that scenario is to travel to places with a cheap COL - Asia, or South America, for example.  Save Europe for the "up" market years.  ;)
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on June 12, 2014, 07:23:27 PM
I do think that sol's strategy needs SOME method of raising spending during the good times, or else, as you said, the spending will only get worse and worse...never better.

A good point, thanks.  And it points towards a couple of obvious solutions.

solution 1:  Take the CPI every year regardless, but adjust down by z*(portfolio performance) in down years.  This fixes the original problem you both mentioned.

solution 2:  Ignore CPI completely, and adjust up OR down by z*(portfolio performance).  If the market is up 10% and your z is .5, your withdrawal goes up 5%.  If it's down 10% your withdrawal goes down 5%.  This method assumes that market performance will approximately move in conjunction with CPI over the long term.   Crazy stagflation would hurt, but I presume we're all smart enough to abandon a strategy not designed for crazy times.

solution 3:   Withdraw last year's withdrawal amount adjusted by z times both portfolio performance and CPI.  So if CPI was 2% and the portfolio did +10%, your withdrawal amount is up (1%+5%) = 6%.  If CPI was 4% and your portfolio was down 30%, your withdrawal amount is (+2% + -15%) = -13%.

The idea I'm trying to capture is that you should withdraw less in years when your portfolio is way down.  This naturally assumes you have some flexibility in your budget to make 10% or greater adjustments in the case of market catastrophe.  I think having that flexibility in your spending level should logically translate into higher withdrawal rates the rest of the time without burdening people with 4% or less during prosperous times.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 12, 2014, 07:36:38 PM
The idea I'm trying to capture is that you should withdraw less in years when your portfolio is way down.  This naturally assumes you have some flexibility in your budget to make 10% or greater adjustments in the case of market catastrophe.  I think having that flexibility in your spending level should logically translate into higher withdrawal rates the rest of the time without burdening people with 4% or less during prosperous times.

Or you could look at it the opposite - instead of having a budget with fat that you trim in down years (causing you to work longer to get that higher budget) you have a leaner budget that you increase in good years.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on June 12, 2014, 07:43:37 PM
Or you could look at it the opposite - instead of having a budget with fat that you trim in down years (causing you to work longer to get that higher budget) you have a leaner budget that you increase in good years.

It's probably a matter of personal preference, but I think I'd rather have a comfortable budget that I might have to cut than a tight budget I might get to increase.

It's all just sequence of return risk.  If things go along swimmingly, both budgets are fine though mine is nicer.  On the off chance the economy tanks, mine has to tighten the belt to the point where yours was already tightened.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 12, 2014, 08:13:25 PM
Or you could look at it the opposite - instead of having a budget with fat that you trim in down years (causing you to work longer to get that higher budget) you have a leaner budget that you increase in good years.

It's probably a matter of personal preference, but I think I'd rather have a comfortable budget that I might have to cut than a tight budget I might get to increase.

It's all just sequence of return risk.  If things go along swimmingly, both budgets are fine though mine is nicer.  On the off chance the economy tanks, mine has to tighten the belt to the point where yours was already tightened.

Oh, absolutely, for sure.  And others may be more comfortable with a budget they don't have to cut at all.

It's all about balancing how long you want to work to build up a stache to provide enough.  Your way (cushy, cut in bad years) means more work than the way I put it in the post you quoted (barebones, increase in good years), but less than I put it in the line above (cushy, never decrease).

It's, as you say, all personal preference. 
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on June 13, 2014, 04:43:04 AM
solution 1:  Take the CPI every year regardless, but adjust down by z*(portfolio performance) in down years.  This fixes the original problem you both mentioned.
Problem there is your withdrawal still never goes up in real terms.

Quote
solution 2:  Ignore CPI completely, and adjust up OR down by z*(portfolio performance).  If the market is up 10% and your z is .5, your withdrawal goes up 5%.  If it's down 10% your withdrawal goes down 5%.  This method assumes that market performance will approximately move in conjunction with CPI over the long term.   Crazy stagflation would hurt, but I presume we're all smart enough to abandon a strategy not designed for crazy times.
Crazy times are a real possibility and a strategy that can't handle them has room for improvement. Also, we'd like to be able to simulate the strategy to work out how safe it is, and simulators can't use human intelligence to change strategy mid-retirement.

Quote
solution 3:   Withdraw last year's withdrawal amount adjusted by z times both portfolio performance and CPI.  So if CPI was 2% and the portfolio did +10%, your withdrawal amount is up (1%+5%) = 6%.  If CPI was 4% and your portfolio was down 30%, your withdrawal amount is (+2% + -15%) = -13%.
This one sounds most reasonable, but realistically you still need an inflation-adjusted spending floor. Going broke is the obvious way a retirement plan can fail, but not withdrawing enough to live on also ought to be considered a failure.
Title: Re: firecalc and cFIREsim both lie?
Post by: boarder42 on June 13, 2014, 05:54:05 AM
this is fantastic analysis.  our travel budget in retirement assuming we dont just gocurrycracker our lifestyle is about 20% of our total budget ... soooo.... that makes the 5% SWR the easy goal now.  just dont travel after a bad year.

In a similar vein, our plan D or E for that scenario is to travel to places with a cheap COL - Asia, or South America, for example.  Save Europe for the "up" market years.  ;)

Yes a similar thought crossed my mind if i can convince my wife we can live in a duplex or condo in the us and rent it out while we are gone to offset cost of living.  Been looking at CR quite a bit.  very low COL compared to most places ... same with SE asia
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 13, 2014, 07:00:29 AM
solution 3:   Withdraw last year's withdrawal amount adjusted by z times both portfolio performance and CPI.  So if CPI was 2% and the portfolio did +10%, your withdrawal amount is up (1%+5%) = 6%.  If CPI was 4% and your portfolio was down 30%, your withdrawal amount is (+2% + -15%) = -13%.

This makes the most sense to me, and would provide the easiest user-interface (and would be easiest to describe to someone, since both ups and downs are handled with the same formula).

Quote
The idea I'm trying to capture is that you should withdraw less in years when your portfolio is way down.  This naturally assumes you have some flexibility in your budget to make 10% or greater adjustments in the case of market catastrophe.  I think having that flexibility in your spending level should logically translate into higher withdrawal rates the rest of the time without burdening people with 4% or less during prosperous times.

You're absolutely correct. Being flexible allows for a higher WR overall.  I actually prefer the idea of a variable spending method based on market conditions, but I will admit that the current "Variable Spending" on cFIREsim is a bit confusing.  Another user came up with it, and it's hard to describe.  I think your idea with a z-value, and an optional Floor/Ceiling (which is available to all spending methods on cFIREsim regardless), would be MUCH more easy to understand.

I think I'll get a version of this out on the development version of the site today and see how it fares.  I'll report back.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 13, 2014, 08:41:57 AM
I think I'll get a version of this out on the development version of the site today and see how it fares.  I'll report back.

I cannot express how happy it makes me that we have someone in this community that is both willing and able to do something like this. You rock, BK!
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 13, 2014, 12:58:01 PM
I've got something over at www.cfiresim.com/dev/input.php.

If you're in the Spending Plan section, you'd choose "Variable Spending(new)".

Though, I'm not 100% sure that I have the logic correct (inflation always messes me up when developing new methods) because if you choose a low z-value (say 0.2), you get some really weird things.   My son is about to wake up from his nap, so I'll have to review it later.

For now, if anyone wants to troubleshoot it, at the bottom of the output page, there is a "

Edit: Nevermind, I think I found the quirk.  When the portfolio dropped below $0, the spending calculation got out of control... so I set spending = $0 if the portfolio was negative (makes sense, right? Can't spend money you don't have?)  I really need to re-evaluate the value of having these fake "negative" portfolio values. They screw so many things up.
Title: Re: firecalc and cFIREsim both lie?
Post by: boarder42 on June 13, 2014, 01:57:32 PM
THIS IS SWEET!!! YOU ROCK
Title: Re: firecalc and cFIREsim both lie?
Post by: boarder42 on June 13, 2014, 02:03:50 PM
How hard would it be to add a buffer to the over spend.  meaning i probably wont start spending over my starting annual withdrawl plus inflation until i know i'm safe.  say the first 5-10 years then maybe.  then i will probably be comfortable spending up to a higher amount on good market years.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 13, 2014, 03:07:58 PM
How hard would it be to add a buffer to the over spend.  meaning i probably wont start spending over my starting annual withdrawl plus inflation until i know i'm safe.  say the first 5-10 years then maybe.  then i will probably be comfortable spending up to a higher amount on good market years.

Trying to protect against sequence of returns risk, eh?  How do you envision this buffer working, exactly?  Right now, there is a Spending Ceiling, but that isn't time dependent, so it can't exactly do what you want.
Title: Re: firecalc and cFIREsim both lie?
Post by: boarder42 on June 14, 2014, 05:19:39 AM
1.So the first x many years of gains I don't increase spending by anything more than inflation. Where x is a variable in years the market went up. Say you put in 5. And market goes uuuddddddduu. Where u is up more than inflation and d is down each represents a year. So at the end of that I have hit my 5 up years now I'm willing to go to my spending ceiling.

2.  If that's too complicated (not knocking your skills just don't know how your formula works). Say I don't want to increase my ceiling for x years regardless of gains. So I will just increase for inflation til I hit my x years mark then after that I will use my ceiling.
Title: Re: firecalc and cFIREsim both lie?
Post by: DoubleDown on June 14, 2014, 11:56:11 AM
Isn't trying to simulate all these n-th degree variables and complexities in a long-term ER simulation ultimately a fool's errand? Honest question here, not just poking holes.

I mean, I really value cFIREsim, so I hope bo_knows does not take this as me stating we should give up on the value it delivers. But trying to simulate such complex situations using historical returns seems akin to introducing a small error in an equation that gets amplified so much that it makes the outcome meaningless (such as when you have a 5% error margin, and then multiply and multiply it so many times that the resulting window of error exceeds the result itself).

It seems to me that about every year, we're all going to have to re-evaluate where we are financially and make determinations and tweaks along the way. Trying to accurately model a 30, 40, 50, 60-year spending plan based on hypothetical conditions and past market returns seems impossible, too open to invalid assumptions. Because ultimately, what you get out of FIRecalc or cFIREsim is a "confidence factor" in how likely your portfolio will survive, and I think it would be misleading to believe any spending plan is 93% (or whatever) likely to succeed.  But prove me wrong!
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on June 14, 2014, 01:15:44 PM
If I'm reading those results right, the proposed spending plan (adjusted by half of CPI + portfolio return) increases your SWR by about 0.4% for equivalent risks.  Meaning 4% SWR still fails 7% of the time but the new adjusted SWR can start at 4.4% and only fail times.  For perspective, you can get the same increase in your expected SWR by tilting your portfolio more heavily towards small caps, so the difference is not huge.

Conversely, setting z=1 so that you adjust this years withdrawal by last years CPI + portfolio return straight up seems to be a huge improvement but I'm pretty sure it's bugged.  It's telling me this plan NEVER fails regardless of initial withdrawal rate, which can't be right.  Any suggestions on what's going on there bo?

Low values of z are also giving me funny numbers, where the portfolio rapidly plummets to zero for z values of 10% instead of 50%.  I think it still needs a little tweaking.
Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on June 14, 2014, 02:52:23 PM
Conversely, setting z=1 so that you adjust this years withdrawal by last years CPI + portfolio return straight up seems to be a huge improvement but I'm pretty sure it's bugged.  It's telling me this plan NEVER fails regardless of initial withdrawal rate, which can't be right.  Any suggestions on what's going on there bo?
The simple strategy of always simply withdrawing 4% of your portfolio never fails, either, because there's always the other 96% left so you can't go broke. Adjusting equally to the market return (i.e. z=1) is mathematically equivalent to this. So as long as CPI never brings your 4% up to 100% (which would take over a century), you're always withdrawing less than 100% of the portfolio value. has a similar problem to this (see below).

The problem is still the lack of an (inflation-adjusted) minimum withdrawal - retirement plans also fail if they don't give you enough income to live on, but your analysis considers "going broke" as the only failure mode.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on June 14, 2014, 03:24:12 PM
The simple strategy of always simply withdrawing 4% of your portfolio never fails, either, because there's always the other 96% left so you can't go broke. Adjusting equally to the market return (i.e. z=1) is mathematically equivalent to this. So as long as CPI never brings your 4% up to 100% (which would take over a century), you're always withdrawing less than 100% of the portfolio value.

If that's what it's doing, then it's not at all what I was hoping.  The idea isn't to withdraw a percentage of your portfolio equal to some fraction of the CPI+returns, it is to withdraw last year's withdrawal amount adjusted by some fraction of the CPI+returns.  So in years when the market is down 30% and CPI is zero, your withdrawal amount shrinks 15% from last year.  Your strategy would be impossible to implement in negative return years, right?  How would you withdraw negative 15% of your portfolio?

Quote
The problem is still the lack of an (inflation-adjusted) minimum withdrawal

cFIREsim already has a means of addressing this concern.  You can always specify a floor of minimum spending.  I'm not interested in those cases, I'm trying to demonstrate that voluntarily reducing withdrawals in down years dramatially increases your success rate for equivalent SWRs.

Title: Re: firecalc and cFIREsim both lie?
Post by: warfreak2 on June 14, 2014, 04:15:43 PM
Your strategy would be impossible to implement in negative return years, right?  How would you withdraw negative 15% of your portfolio?
I was describing your strategy with z=1, so if the market dropped 30% with 0% inflation you would withdraw 30% less than last year.

Aside from the inflation adjustment, your withdrawal as a percentage of your portfolio is unaffected by the market return:

Looks like I did make a mistake though, you aren't still withdrawing 4%, so it's not a guaranteed "success" - in fact (inflation aside) the strategy should be a guaranteed failure after 25 years, since that's what would happen with constant market returns of 0%, and we've established that the market returns don't affect the percentage of portfolio withdrawn.

If you adjust the market return by subtracting 4% (which would be sensible, since returns below 4% aren't really "good years" when you have to get 4% just to break even) then it's fully equivalent to a constant-percentage-of-portfolio withdrawal.

Quote
cFIREsim already has a means of addressing this concern.  You can always specify a floor of minimum spending.  I'm not interested in those cases, I'm trying to demonstrate that voluntarily reducing withdrawals in down years dramatically increases your success rate for equivalent SWRs.
The thing is, by not setting a minimum inflation-adjusted withdrawal, all you're really demonstrating is that you can dramatically increase your success rate by not necessarily withdrawing enough to buy food and heat. Guaranteeing a minimum inflation-adjusted withdrawal is part of what success means, so you can't ignore it when calculating a success rate. Otherwise withdrawing $0 every year would be the best strategy.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 14, 2014, 05:01:18 PM
Isn't trying to simulate all these n-th degree variables and complexities in a long-term ER simulation ultimately a fool's errand? Honest question here, not just poking holes.

I mean, I really value cFIREsim, so I hope bo_knows does not take this as me stating we should give up on the value it delivers. But trying to simulate such complex situations using historical returns seems akin to introducing a small error in an equation that gets amplified so much that it makes the outcome meaningless (such as when you have a 5% error margin, and then multiply and multiply it so many times that the resulting window of error exceeds the result itself).

It seems to me that about every year, we're all going to have to re-evaluate where we are financially and make determinations and tweaks along the way. Trying to accurately model a 30, 40, 50, 60-year spending plan based on hypothetical conditions and past market returns seems impossible, too open to invalid assumptions. Because ultimately, what you get out of FIRecalc or cFIREsim is a "confidence factor" in how likely your portfolio will survive, and I think it would be misleading to believe any spending plan is 93% (or whatever) likely to succeed.  But prove me wrong!

Yes.  Everyone here agrees it's not going to be accurate, and will require reevaluation.  I don't think anyone is going to come up with a plan and blindly stick to it for 40 years because of what some online calculator told them decades before.

On the other hand, tweaks like this allow someone to get a rough plan in mind for how they will deal with the trying times.  Knowing historically that if you cut X% from your budget you'd have a 93% success rate doesn't mean you're counting on it to work exactly 93% of the time, but it does allow you to compare it to other plans and see what has traditionally been more, or less, successful, and create a rough plan to stick with that you're comfortable with and can continually reevaluate from.

Most previous studies are so rigid ("withdraw 4%, adjust it up for inflation every year blindly") that it's nice to tweak with realistic parameters ("I'd cut my 20% travel budget if the market was down") and see how you'd have fared so you can come up with a plan you're comfortable with, and see what that does to a success rate and the "number" you have to hit.
Title: Re: firecalc and cFIREsim both lie?
Post by: Spudd on June 14, 2014, 06:01:38 PM
I think the confusion is in "withdraw x% of portfolio" vs "withdraw x% of initial portfolio". I think the latter is what the intention was. Clearly the former will never fail. But it could result in some very lean years!
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 14, 2014, 06:27:22 PM
Isn't trying to simulate all these n-th degree variables and complexities in a long-term ER simulation ultimately a fool's errand? Honest question here, not just poking holes.

I mean, I really value cFIREsim, so I hope bo_knows does not take this as me stating we should give up on the value it delivers. But trying to simulate such complex situations using historical returns seems akin to introducing a small error in an equation that gets amplified so much that it makes the outcome meaningless (such as when you have a 5% error margin, and then multiply and multiply it so many times that the resulting window of error exceeds the result itself).

It seems to me that about every year, we're all going to have to re-evaluate where we are financially and make determinations and tweaks along the way. Trying to accurately model a 30, 40, 50, 60-year spending plan based on hypothetical conditions and past market returns seems impossible, too open to invalid assumptions. Because ultimately, what you get out of FIRecalc or cFIREsim is a "confidence factor" in how likely your portfolio will survive, and I think it would be misleading to believe any spending plan is 93% (or whatever) likely to succeed.  But prove me wrong!

I take no offense.  Although other people have answered, I'll state my peace on the whole thing.  No, I do not have any delusions that cFIREsim (or ANY simulator/calculator) is of scalpel precision.  However, being able to tweak and adjust a spending plan, so that you can better prepare for the future (even if you don't follow it exactly) isn't really a fools errand in my opinion.  If you weren't playing with the numbers, maybe you wouldn't realize that a big market drop in the first couple years of retirement is cause for great concern when it comes to withdrawals.  Just getting a rough idea of what makes a portfolio survive better, can give you better expectations.  It doesn't need to be perfect  *shrug*.

Quote from: warfreak2
The thing is, by not setting a minimum inflation-adjusted withdrawal, all you're really demonstrating is that you can dramatically increase your success rate by not necessarily withdrawing enough to buy food and heat. Guaranteeing a minimum inflation-adjusted withdrawal is part of what success means, so you can't ignore it when calculating a success rate. Otherwise withdrawing $0 every year would be the best strategy.

The spending floor/ceilings ARE inflation-adjusted.  Maybe I should label that, eh? :)

Quote from: sol
Quote from: warfreak2
The simple strategy of always simply withdrawing 4% of your portfolio never fails, either, because there's always the other 96% left so you can't go broke. Adjusting equally to the market return (i.e. z=1) is mathematically equivalent to this. So as long as CPI never brings your 4% up to 100% (which would take over a century), you're always withdrawing less than 100% of the portfolio value.

If that's what it's doing, then it's not at all what I was hoping.  The idea isn't to withdraw a percentage of your portfolio equal to some fraction of the CPI+returns, it is to withdraw last year's withdrawal amount adjusted by some fraction of the CPI+returns.  So in years when the market is down 30% and CPI is zero, your withdrawal amount shrinks 15% from last year.  Your strategy would be impossible to implement in negative return years, right?  How would you withdraw negative 15% of your portfolio?

Sol, it's working as you think it is... it's not the way warfreak2 describes.  But, he is correct... the straight 4% method never "fails", but it can cut your expenses quick.  That is why you're seeing the z=1 have a 100% success rate.  I mean, define success?  It says that the average withdrawal rate is $57k (impressive, no?), but the standard deviation (volatility) of that withdrawal amount is huge.  Also, look at the lowest values. The lowest every was $15k, and it at least 1 instance, withdrawal rates dropped to $18k in the first 5 years of retirement.

I don't know about you, but if I'm expecting about $40k in income, I'm not going to consider $15k a "success".  You need to set spending floor/ceiling's in there to meet your expectation of income.   If you expect $40k, and can live with $32k, but $28k seems too low, then you know where to put the spending floor.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 14, 2014, 06:33:03 PM

Low values of z are also giving me funny numbers, where the portfolio rapidly plummets to zero for z values of 10% instead of 50%.  I think it still needs a little tweaking.

The rapid plummeting of spending to zero is some new code that I introduced.  Those buggy looking instances are actually the year that a portfolio goes below $0.  I set the code up to automatically change your spending to $0 if your portfolio fails, that's because you get all sorts of weird problems when you start multiplying market gain with negative portfolios, when trying to dynamically change your spending based on these multiplied values.
Title: Re: firecalc and cFIREsim both lie?
Post by: DoubleDown on June 15, 2014, 09:25:48 AM
Okay, I'm definitely in agreement with you all and in favor of the goal, which is to determine how different factors affect the survivability of a portfolio. But to get engineering-geeky, my question has to do with the margin of error. How do we know how precise these outcomes really are?

For example, if changing a variable (like spending "z" or whatever) increased the survivability from, say, 94% to 97%, then that 3% change is only meaningful if the precision is far better than 3% -- like, in the tenths of percentage points. If the margin of error is +/- 10%, then a 3% change is meaningless. When we're talking about long time horizons, my intuition tells me that we're greatly magnifying potential error margins so much that any perceived change in the results is meaningless. As in, we could not say if changing the variable mattered one iota, it may in fact have the opposite effect of what we think, but we don't know because of the large margin for error.

I realize no one (with any smarts) is making high-precision decisions with the simulations, but I'm playing devil's advocate wondering if the entire exercise is essentially impossible because we're dealing with too large of a margin for error?
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 15, 2014, 09:44:27 AM
We don't know for sure.  There is way to many variables.

But it's plenty reasonable to conclude that if a strategy of X would have been beneficial to a portfolio in the last 97 periods of history that can be run, it may also be helpful in the future.

Further, does it matter if we don't know "for sure"?  Isn't it still better than the alternative, throwing up our hands?

Your point of "don't rely on its precision too much" is well taken, but beyond that, I don't think saying "we can't know for sure" tells us anything.
Title: Re: firecalc and cFIREsim both lie?
Post by: sol on June 15, 2014, 10:35:11 AM
But to get engineering-geeky, my question has to do with the margin of error. How do we know how precise these outcomes really are?

You're misconstruing the cFIREsim model.  It's not a mathematical model like most engineers are used to seeing, in which things like residual errors can be computed and compared.  cFIREsim has no objective function, no target observations, no discretization scheme.  It's just a list of historical market performance evaluated retrospectively against withdrawal patterns.  It doesn't have any "errors" because it is a discrete list of numbers calculated different ways.

There is certainly a large area of uncertainty because the future may not look like the past.  But I don't think anybody believes the next 100 years in the market will look exactly like the last 100 years.  The idea isn't to be able to predict exactly how your future portfolio will hold up, it's to see how your portfolio would have held up under all available recorded historical periods.  There is no "precision" and no multiplying "margin of error" because it's not that kind of model.

In modeler terms, the problem with cFIREsim is a problem with the conceptual model, not the numerical model.  It is formulated a particular way, using all available past data, but then it numerically treats that data perfectly.  If the future is different from the past, say zombie apocalypse or nuclear holocaust, then of course the cFIREsim results will be utter garbage.  It's not useful to people who think those are likely outcomes, but it is very useful to people who want to use the best available information about the history of the US market to better position themselves for the future of the US market.

Title: Re: firecalc and cFIREsim both lie?
Post by: Nords on June 15, 2014, 12:40:00 PM
Okay, I'm definitely in agreement with you all and in favor of the goal, which is to determine how different factors affect the survivability of a portfolio. But to get engineering-geeky, my question has to do with the margin of error. How do we know how precise these outcomes really are?
Precision is for theorists.  We all know what happens when you try to turn a skewed bell curve (especially one with fat tails) into a log-normal distribution. 

Everybody builds huge statistical structures on top of that assumption and loses sight of the questionable validity of the original premise.

Instead of trying to quantify the precision, apply a better algorithm derived from weapons engineering.  Shoot at the target as soon as you have it in range and can track a decent solution, then depend on mid-course guidance and terminal homing. 

If you're 95% certain that you can hit a target, then would you shoot?  This is where the term "polishing a cannonball" came from.

I used to shoot 50-knot torpedoes at targets that could evade at 30 knots.  We used to do it from ranges as great as 10,000 yards and solutions that were only within about 1000 yards of accuracy, even though the torpedo might run out of fuel at 20,000 yards.  But the torpedo had a pretty good sonar sensor on it, and its terminal homing did a great job of refining our initial solution even if the target deviated from its original track and tried to evade...

In financial terms, you want a portfolio that's relatively insensitive to the risk factors.  If a single point of failure can destroy your portfolio then you might not be adequately capitalized to begin with, so grasping for precision might be a sign that you don't have enough safety margin. 
Title: Re: firecalc and cFIREsim both lie?
Post by: TomTX on June 15, 2014, 09:17:24 PM
Okay, I'm definitely in agreement with you all and in favor of the goal, which is to determine how different factors affect the survivability of a portfolio. But to get engineering-geeky, my question has to do with the margin of error. How do we know how precise these outcomes really are?
Precision is for theorists.  We all know what happens when you try to turn a skewed bell curve (especially one with fat tails) into a log-normal distribution. 

Everybody builds huge statistical structures on top of that assumption and loses sight of the questionable validity of the original premise.

Instead of trying to quantify the precision, apply a better algorithm derived from weapons engineering.  Shoot at the target as soon as you have it in range and can track a decent solution, then depend on mid-course guidance and terminal homing. 

If you're 95% certain that you can hit a target, then would you shoot?  This is where the term "polishing a cannonball" came from.

I used to shoot 50-knot torpedoes at targets that could evade at 30 knots.  We used to do it from ranges as great as 10,000 yards and solutions that were only within about 1000 yards of accuracy, even though the torpedo might run out of fuel at 20,000 yards.  But the torpedo had a pretty good sonar sensor on it, and its terminal homing did a great job of refining our initial solution even if the target deviated from its original track and tried to evade...

In financial terms, you want a portfolio that's relatively insensitive to the risk factors.  If a single point of failure can destroy your portfolio then you might not be adequately capitalized to begin with, so grasping for precision might be a sign that you don't have enough safety margin.

I'm taking your analogy differently, at least for the sonar and homing - you want some flexibility in your retirement, whether that's reducing spending when the market crashes, or picking up a side hustle you enjoy. If the market crash is your target evading, the reduced spending and side hustles are your terminal homing and sonar.
Title: Re: firecalc and cFIREsim both lie?
Post by: DoubleDown on June 16, 2014, 09:58:15 AM
Right, I understand the difference in these simulations with historical data from simulations with, say, a built-in margin of error for measurements. Ultimately what I'm trying to say is I think these strategies for modifying spending based on CPI, down-market years, etc., is overly complex/precise, based on what the simulations give us. I think MMM's broad stroke approach with "safety margins" against 4% SWR failure is already ample ammunition (to further use Nords' metaphor!). Trying to tweak the simulations to the nth degree with slightly variable spending plans is putting too much confidence (imo) into the historical data.

In personal terms, if there was a bad market year or three, most should likely evaluate their retirement plan to see where they stand, and make some decisions about increasing income or decreasing spending  as needed. Walk a dog, or eat beans tonight, or both. Then they'd evaluate again after another year or two and see where they stand. I don't think it's advisable to think, "Everything's going to be okay, the robotic withdrawal simulations from history proved that as long as I withdraw no more than 3.876% this year of my original portfolio amount, I can likely weather it with 98% chance of success based on historical returns."

Anyway, thanks for putting up with my complainy-pantsiness. I really don't mean to rain on the parade, so carry on and make that simulation better (seriously, I will be very happy if some improved strategies come out of it)!
Title: Re: firecalc and cFIREsim both lie?
Post by: DoubleDown on June 16, 2014, 10:19:32 AM

In financial terms, you want a portfolio that's relatively insensitive to the risk factors.  If a single point of failure can destroy your portfolio then you might not be adequately capitalized to begin with, so grasping for precision might be a sign that you don't have enough safety margin.

I'm taking your analogy differently, at least for the sonar and homing - you want some flexibility in your retirement, whether that's reducing spending when the market crashes, or picking up a side hustle you enjoy. If the market crash is your target evading, the reduced spending and side hustles are your terminal homing and sonar.

Bingo on both counts (Tom's and Nords')! And to carry the metaphor further, your guy on the ship (Nords) is going to make adjustments along the way to deal with the enemy's own advances. Nords and his superiors are not going to follow a predetermined script laid out 14 years ago using chances of success based on historical battle outcomes. They're going to adapt (or die) based on current, evolving conditions.
Title: Re: firecalc and cFIREsim both lie?
Post by: lauren_knows on June 17, 2014, 06:47:45 AM
Right, I understand the difference in these simulations with historical data from simulations with, say, a built-in margin of error for measurements. Ultimately what I'm trying to say is I think these strategies for modifying spending based on CPI, down-market years, etc., is overly complex/precise, based on what the simulations give us. I think MMM's broad stroke approach with "safety margins" against 4% SWR failure is already ample ammunition (to further use Nords' metaphor!). Trying to tweak the simulations to the nth degree with slightly variable spending plans is putting too much confidence (imo) into the historical data.

In personal terms, if there was a bad market year or three, most should likely evaluate their retirement plan to see where they stand, and make some decisions about increasing income or decreasing spending  as needed. Walk a dog, or eat beans tonight, or both. Then they'd evaluate again after another year or two and see where they stand. I don't think it's advisable to think, "Everything's going to be okay, the robotic withdrawal simulations from history proved that as long as I withdraw no more than 3.876% this year of my original portfolio amount, I can likely weather it with 98% chance of success based on historical returns."

Anyway, thanks for putting up with my complainy-pantsiness. I really don't mean to rain on the parade, so carry on and make that simulation better (seriously, I will be very happy if some improved strategies come out of it)!

No need to be overly apologetic.  I think that we both have similar views.  Yes, MMM's "safety margins" are a great way to think about how to go through the future.  But, I think that trying to simulate those safety margins to any bit of accuracy, so that you can get an actual visual representation of how things might play out, is what drives people to use sites like cFIREsim.  Even if doing endless simulations is just teaching you a rough idea of how to actually manage your spending in retirement based on the market changes, it's better than winging it :)    That's how I look at it at least.  I prefer the idea of a variable spending with a "target" spending and a floor/ceiling.  In reality, I'm not going to follow a precisely laid-out 30yr long script for spending, but when the market drops 30% I'll know to tell myself "Hey, we should probably not go on vacation this year".   That's a good enough education for me.
Title: Re: firecalc and cFIREsim both lie?
Post by: arebelspy on June 17, 2014, 07:55:57 AM
In reality, I'm not going to follow a precisely laid-out 30yr long script for spending, but when the market drops 30% I'll know to tell myself "Hey, we should probably not go on vacation this year".   That's a good enough education for me.

And to add to that (because you could be doing that anyways, going off gut feeling), it's somewhat helpful, IMO, to go "Hey, market was down, I'll cut spending by X% by not going on vacation, and historically that would have kept me from running out of money a few extra times."  Knowing that data gives you more than a gut feeling to go on, and may also help with the motivation when you aren't getting that vacation.

Regardless of if the future is identical to the past, if it's even similar in nature, that's useful information.
Title: Re: firecalc and cFIREsim both lie?
Post by: boarder42 on June 17, 2014, 08:21:35 AM
yes.  and not being on vacation in that down year could encourage some lower cost vacations in the future years so that even in a down year you can still go on a vacation
Title: Re: firecalc and cFIREsim both lie?
Post by: Nords on June 17, 2014, 10:42:20 AM
In reality, I'm not going to follow a precisely laid-out 30yr long script for spending, but when the market drops 30% I'll know to tell myself "Hey, we should probably not go on vacation this year".   That's a good enough education for me.

And to add to that (because you could be doing that anyways, going off gut feeling), it's somewhat helpful, IMO, to go "Hey, market was down, I'll cut spending by X% by not going on vacation, and historically that would have kept me from running out of money a few extra times."  Knowing that data gives you more than a gut feeling to go on, and may also help with the motivation when you aren't getting that vacation.

Regardless of if the future is identical to the past, if it's even similar in nature, that's useful information.
Just because this discussion isn't complicated enough already, here's another aspect of the choices.

When the market is down 30%, there's probably a recession.  That's a fantastic time for bargain vacations and contractor discounts.

Even if you feel obligated to cut back the vacation spending by 30%, there may still be 50%-off deals.  (Especially if you've been tracking prices.)  Better yet, your vacation location is likely to be less crowded with more opportunities for fun and less competition for resources like transportation, dinner reservations, or concert tickets.

When 9/11 happened, we'd been planning a trip to Disneyland for the October school break.  We had a long discussion about the issues, and we decided to go anyway.  When we started looking at tickets, there were discounts everywhere:  air travel, Disney, the local hotels, the local restaurants.  Best of all, the parks were practically empty... nobody needed a FastPass.

When the economy cratered again in 2008, we'd been talking about major concrete work around our house.  (Removing old FuturaStone, pouring a new lanai slab, stamped-concrete finishes.)  We got a 30% discount and the contractors were some of the happiest workers we've ever had.  We actually expanded the job scope because the labor was already on site and ready to go.

On the other hand, buying a used Prius when oil was over $140/barrel turned out to be a dumb idea-- even during a recession. 
Title: Re: firecalc and cFIREsim both lie?
Post by: RootofGood on June 18, 2014, 08:56:22 PM
I used to shoot 50-knot torpedoes at targets that could evade at 30 knots.  We used to do it from ranges as great as 10,000 yards and solutions that were only within about 1000 yards of accuracy, even though the torpedo might run out of fuel at 20,000 yards.  But the torpedo had a pretty good sonar sensor on it, and its terminal homing did a great job of refining our initial solution even if the target deviated from its original track and tried to evade...


Very apt analogy.  Don't wait and close to 1000 yards to get a 99.999% certainty of hitting your target.  Wait too long to pull the trigger and you'll be dead.  "Close enough" works in horseshoes, hand grenades, portfolio survivability, and torpedo launching apparently. 

Title: Re: firecalc and cFIREsim both lie?
Post by: much ado on December 22, 2015, 01:29:59 PM
I know this is an old thread, but the Mad Fientist wrote a nice article using the Shiller P/E ratio to predict the success of different withdrawal rates here
http://www.madfientist.com/safe-withdrawal-rate/