Author Topic: firecalc and cFIREsim both lie? (Read 142052 times)

PeteD01 · « **Reply #50 on:** April 10, 2014, 12:47:51 PM »

Quote from: matchewed on April 10, 2014, 12:32:28 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

FIPurpose · « **Reply #51 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.

arebelspy · « **Reply #52 on:** April 10, 2014, 12:56:40 PM »

Quote from: matchewed on April 10, 2014, 12:32:28 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, hitting a number versus an age or date.

matchewed · « **Reply #53 on:** April 10, 2014, 01:07:19 PM »

Quote from: arebelspy on April 10, 2014, 12:56:40 PM

Quote from: matchewed on April 10, 2014, 12:32:28 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, 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.

PeteD01 · « **Reply #54 on:** April 10, 2014, 01:14:08 PM »

Quote from: flyingcircle 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.

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

arebelspy · « **Reply #55 on:** April 10, 2014, 01:38:11 PM »

Quote from: matchewed on April 10, 2014, 01:07:19 PM

Quote from: arebelspy on April 10, 2014, 12:56:40 PM
Quote from: matchewed on April 10, 2014, 12:32:28 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, 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..

Mister Fancypants · « **Reply #56 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

Eric · « **Reply #57 on:** April 10, 2014, 03:23:45 PM »

Quote from: Mister Fancypants on April 10, 2014, 03:10:08 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.

Mister Fancypants · « **Reply #58 on:** April 10, 2014, 03:32:24 PM »

Quote from: Eric on April 10, 2014, 03:23:45 PM

Quote from: Mister Fancypants on April 10, 2014, 03:10:08 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.

Eric · « **Reply #59 on:** April 10, 2014, 03:43:51 PM »

Quote from: Mister Fancypants on April 10, 2014, 03:32:24 PM

Quote from: Eric on April 10, 2014, 03:23:45 PM
Quote from: Mister Fancypants on April 10, 2014, 03:10:08 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.

Mister Fancypants · « **Reply #60 on:** April 10, 2014, 03:51:57 PM »

Quote from: Eric on April 10, 2014, 03:43:51 PM

Quote from: Mister Fancypants on April 10, 2014, 03:32:24 PM
Quote from: Eric on April 10, 2014, 03:23:45 PM
Quote from: Mister Fancypants on April 10, 2014, 03:10:08 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.

arebelspy · « **Reply #61 on:** April 10, 2014, 04:00:00 PM »

Quote from: Mister Fancypants on April 10, 2014, 03:51:57 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.

Mister Fancypants · « **Reply #62 on:** April 10, 2014, 04:12:16 PM »

Quote from: arebelspy on April 10, 2014, 04:00:00 PM

Quote from: Mister Fancypants on April 10, 2014, 03:51:57 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...

arebelspy · « **Reply #63 on:** April 10, 2014, 04:14:45 PM »

Got it. Thanks for the clarification. :)

PeteD01 · « **Reply #64 on:** April 10, 2014, 04:21:58 PM »

Quote from: Mister Fancypants on April 10, 2014, 03:51:57 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

matchewed · « **Reply #65 on:** April 10, 2014, 06:12:10 PM »

Quote from: arebelspy on April 10, 2014, 01:38:11 PM

Quote from: matchewed on April 10, 2014, 01:07:19 PM
Quote from: arebelspy on April 10, 2014, 12:56:40 PM
Quote from: matchewed on April 10, 2014, 12:32:28 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, 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.

Quote from: PeteD01 on April 10, 2014, 11:47:06 AM

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

BigRed · « **Reply #66 on:** April 10, 2014, 06:39:17 PM »

Here is the paper 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.

secondcor521 · « **Reply #67 on:** April 10, 2014, 10:14:03 PM »

Quote from: brewer12345 on April 09, 2014, 06:56:43 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, where as far as I'm concerned the work has already been done.

arebelspy · « **Reply #68 on:** April 10, 2014, 10:19:01 PM »

Quote from: secondcor521 on April 10, 2014, 10:14:03 PM

As far as sol's OP, I like the first graph here 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!

brewer12345 · « **Reply #69 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.

Threshkin · « **Reply #70 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.

PeteD01 · « **Reply #71 on:** April 11, 2014, 12:17:48 PM »

Quote from: BigRed on April 10, 2014, 06:39:17 PM

Here is the paper 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

BigRed · « **Reply #72 on:** April 11, 2014, 01:25:19 PM »

Quote from: PeteD01 on April 11, 2014, 12:17:48 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.

PeteD01 · « **Reply #73 on:** April 11, 2014, 01:37:58 PM »

Quote from: BigRed on April 11, 2014, 01:25:19 PM

Quote from: PeteD01 on April 11, 2014, 12:17:48 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

nicknageli · « **Reply #74 on:** April 11, 2014, 01:59:13 PM »

Quote from: 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.

Enjoyed this.

secondcor521 · « **Reply #75 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.

Nords · « **Reply #76 on:** April 16, 2014, 09:43:14 AM »

Quote from: brewer12345 on April 09, 2014, 07:47:43 PM

Quote from: arebelspy on April 09, 2014, 07:42:27 PM
Quote from: brewer12345 on April 09, 2014, 06:56:43 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.

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.

arebelspy · « **Reply #77 on:** April 16, 2014, 10:12:03 AM »

Quote from: Nords on April 16, 2014, 09:43:14 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.

sol · « **Reply #78 on:** April 16, 2014, 03:56:12 PM »

Quote from: secondcor521 on April 11, 2014, 05:39:59 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.

arebelspy · « **Reply #79 on:** April 16, 2014, 04:38:13 PM »

Quote from: sol on April 16, 2014, 03:56:12 PM

Quote from: secondcor521 on April 11, 2014, 05:39:59 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.

brewer12345 · « **Reply #80 on:** April 16, 2014, 04:58:40 PM »

Quote from: sol on April 16, 2014, 03:56:12 PM

Quote from: secondcor521 on April 11, 2014, 05:39:59 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.

sol · « **Reply #81 on:** April 16, 2014, 05:00:59 PM »

Quote from: brewer12345 on April 16, 2014, 04:58:40 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.

JohnGalt · « **Reply #82 on:** April 16, 2014, 05:04:26 PM »

Quote from: sol on April 16, 2014, 05:00:59 PM

Quote from: brewer12345 on April 16, 2014, 04:58:40 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.

brewer12345 · « **Reply #83 on:** April 16, 2014, 05:06:58 PM »

Quote from: sol on April 16, 2014, 05:00:59 PM

Quote from: brewer12345 on April 16, 2014, 04:58:40 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.

arebelspy · « **Reply #84 on:** April 16, 2014, 05:21:41 PM »

Quote from: brewer12345 on April 16, 2014, 04:58:40 PM

Quote from: sol on April 16, 2014, 03:56:12 PM
Quote from: secondcor521 on April 11, 2014, 05:39:59 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?

brewer12345 · « **Reply #85 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.

Nords · « **Reply #86 on:** April 16, 2014, 08:14:34 PM »

Quote from: arebelspy on April 16, 2014, 10:12:03 AM

Quote from: Nords on April 16, 2014, 09:43:14 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.

Quote from: arebelspy on April 16, 2014, 05:21:41 PM

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.

sol · « **Reply #87 on:** April 16, 2014, 09:41:20 PM »

Quote from: Nords on April 16, 2014, 08:14:34 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.

arebelspy · « **Reply #88 on:** April 17, 2014, 12:20:33 AM »

Quote from: sol on April 16, 2014, 09:41:20 PM

Quote from: Nords on April 16, 2014, 08:14:34 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.

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?

warfreak2 · « **Reply #89 on:** April 17, 2014, 03:22:46 AM »

Quote from: secondcor521 on April 11, 2014, 05:39:59 PM

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%.

Mister Fancypants · « **Reply #90 on:** April 17, 2014, 08:13:03 AM »

Quote from: Nords on April 16, 2014, 08:14:34 PM

Quote from: arebelspy on April 16, 2014, 10:12:03 AM
Quote from: Nords on April 16, 2014, 09:43:14 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.

Quote from: arebelspy on April 16, 2014, 05:21:41 PM
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

RootofGood · « **Reply #91 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).

lauren_knows · « **Reply #92 on:** April 17, 2014, 09:20:20 AM »

Quote from: arebelspy on April 17, 2014, 12:20:33 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.

arebelspy · « **Reply #93 on:** April 17, 2014, 09:41:05 AM »

Quote from: bo_knows on April 17, 2014, 09:20:20 AM

Quote from: arebelspy on April 17, 2014, 12:20:33 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:

Quote from: arebelspy on April 16, 2014, 04:38:13 PM

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.

lauren_knows · « **Reply #94 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)

sol · « **Reply #95 on:** April 17, 2014, 09:52:14 AM »

Quote from: Mister Fancypants on April 17, 2014, 08:13:03 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?

arebelspy · « **Reply #96 on:** April 17, 2014, 09:57:08 AM »

Quote from: bo_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)

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.

lauren_knows · « **Reply #97 on:** April 17, 2014, 10:00:16 AM »

Quote from: sol on April 17, 2014, 09:52:14 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.

lauren_knows · « **Reply #98 on:** April 17, 2014, 10:05:29 AM »

Quote from: arebelspy on April 17, 2014, 09:57:08 AM

Quote from: bo_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)

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.

arebelspy · « **Reply #99 on:** April 17, 2014, 10:18:20 AM »

Quote from: bo_knows on April 17, 2014, 10:05:29 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.

News:

Author Topic: firecalc and cFIREsim both lie? (Read 142052 times)

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