Author Topic: Playbook on down markets/portfolio - steps?  (Read 18752 times)

arebelspy

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Re: Playbook on down markets/portfolio - steps?
« Reply #50 on: November 13, 2015, 02:09:48 AM »
I think VPW has a lot to offer, even if only used as a spending ceiling which won't prematurely deplete your portfolio.

Yes, that's the one use I can think of.  But that isn't insignificant, it could be quite helpful for the paranoid who oversave and later aren't sure how much they can raise spending.

Which is your preferred spending model? I'm still searching for mine, but this seems to be as good as it gets in my opinion.

I think rigid spending models are a naive way to look at retirement.  Literally zero people pick a spending model before ER and stick to it year after year.  Their expenses fluctuate (but voluntarily--more travel perhaps--and involuntary--unexpected home repairs, for example), the market fluctuates, etc.  No one says "I picked this spending model a decade ago, so I'm sticking to it hell or high water."

Many people just do semi-ER, so they continue work on a part time basis, and aren't even doing any spending model at all, but are just using the portfolio to supplement earned income (or have the earned income just cover expenses and leave the portfolio to grow until they hit full FI with it).

I think--for someone close to FIRE--it's good to do your best to estimate ER spending (including known unknowns, and a safety margin for unknown unknowns), pick a FIRE number that supports that given potential future inflation and returns, and go with it.  Use any and all models you like to simulate ER spending and see how you'd have done, historically, if you followed that model.  Then reevaluate as you go along.  Check your spending levels, check your portfolio amount as it fluctuates, and decide if your portfolio could handle a raise in spending within your comfort level (or if you even want to spend more), or, if it drops, if you want to drop spending, or think you'll be okay riding it out, or if you want to earn extra income, or whatever.

Looking at all the models is all well and good, but when the rubber hits the road, it's more nitty gritty than that, and it's unrealistic to pick one spending model and think that's the end-all, be-all and that you'll just spend that for all your years of ER.  :)
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Daisy

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Re: Playbook on down markets/portfolio - steps?
« Reply #51 on: November 13, 2015, 06:55:40 AM »
I like that ER spending attitude, ARS. Sounds like a good flexible plan. How has your initial estimate of spending while full time travelling panned out? Are you over, under, or on plan?

arebelspy

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Re: Playbook on down markets/portfolio - steps?
« Reply #52 on: November 13, 2015, 08:35:21 AM »
I like that ER spending attitude, ARS. Sounds like a good flexible plan. How has your initial estimate of spending while full time travelling panned out? Are you over, under, or on plan?

Too early to tell.

Like when someone looks at their annual budget after two months, it may be wildly off (too low if they haven't had any major expenses, too high if they paid a giant annual bill like car insurance), having done a few types of travel (walking the Camino, and now moving a little faster before settling in for the baby) it's hard to project if our current spending is typical or atypical, and, if the latter, if it's higher than it will be or lower.

Our first year or two of travel/baby will sort of set a "baseline," and I'll decide from there if it's sustainable or if we'll need to make changes.  I'm positive we're fine for a few years, so we'll see how it goes and evaluate.  :)
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

FIPurpose

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Re: Playbook on down markets/portfolio - steps?
« Reply #53 on: November 13, 2015, 05:14:11 PM »
I think this method answers 2 really great questions that people have on this forum quite frequently.

1. When is it safe for me to increase my spending.
2. How much side income would I need to supplement in order to quit my job today.

I have attached 2 VPW simulations for 60 year time frames. The first is a Permanent Portfolio at 50% equity/25% bond/25% gold. The second is the typical 80-20 that we all love so dearly (And has better results overall, and a higher standard deviation).

Obviously just like the standard 4% rule, the worst cycles are the ones that start bad. Starting this at the peak of the market still makes you over-estimate how much you should really be initially withdrawing.

Here are a few observations I would make about this VPW:

1. There are 0 cycles where withdraws were lower than 40% of the initial withdraw.

2. This plan is better than the 4% rule because it uses the knowledge that 4% is historically the worst it is likely to be, but the average is much higher than 4%.

3. More than 50% of the cycles start at 4.5% withdraw rate, and by the last 3rd average a 7.8% rate.

4. The absolute worst year among all cycles was a single year where the withdraw rate 1.8%. (The 1906 cycle) (meaning that at $40k expenses, you would only have to find $22k to cover the down time)


Since it is much more likely that many here save more than they need, this is another method to consider when thinking of your overall life plan. It seems to be much more useful for those of us that are looking for a longer period of part-time work, as it gives a nice estimate on how much part-time work you need to cover expenses.

And also for the mustachians that want to know how much they can draw down their portfolio each year and still be safe. This can be a great guide for people who want to start giving away their money before they die, or to or just to feel a bit more at ease in case of rising medical costs later in life.

Mustachians also regularly talk about how if retirement fails early on it will be plenty obvious. I think this can help provide some guidelines to exactly what is still safe to take out during bad times, without having to go back to full-time work. And it also provides an upper-limit for people who want to perhaps have a more spendy year.

Great tool overall! Thanks for showing it to me. I'm having great fun messing with the inputs.

dabears847

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Re: Playbook on down markets/portfolio - steps?
« Reply #54 on: November 16, 2015, 06:00:10 PM »
I've done cfireism calcs with a target of 4% and then set ceiling and floors. I don't see the need for more than $40,000 in my household and can withstand a drop to $30,000 for a few years.

1. Basically be flexible, theory "work less live more" 95% of last year withdrawal but I would be more aggressive and cut 25% with a floor of $30,000.
2.  Get a side gig once 4% withdrawal is less than $30,000.
          a. So if my portfolio drops from a million to $500,000, 4% would be $20,000 and I would need a side job to cover the gap. ???? Sound correct?

No ceiling/4-5% of portfolio:
I posted another question on this but figured out the answer about two weeks ago. If I draw out more with a ceiling set to no limit, the ending balance is substantially less. However I would enjoy some big living years.

dabears847

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Re: Playbook on down markets/portfolio - steps?
« Reply #55 on: February 22, 2016, 06:33:04 PM »
You've made a few points now which have already been addressed. It'd be much easier if you read the thread.

I did read the thread, and I don't appreciate being told that I didn't.

I noticed you chose to use a high percentage of bonds for your variable withdrawal scenarios because a lower volatility means you get to withdraw more in a stock market downturn. You didn't spell out what asset allocation you were using for your 4% rule comparison scenarios. You do know that the 4% rule only works with a stock-heavy portfolio, right? Why not test your variable withdrawal bond-heavy portfolio against someone who follows the asset allocation most suited for success under the 4% rule? If you do, you'll find that the 1929 retiree could actually retire in 1929 and make it to 1977 by following the 4% rule.

A 47-year retirement wouldn't be that appealing to a 30-year-old retiree, I agree, but that's why someone retiring at 30 shouldn't blindly follow the 4% rule. They should use a slightly lower withdrawal rate and/or be a little bit flexible. I think we're mostly on the same page here. Blindly withdrawing 4% doesn't work for a retirement lasting several decades. Where we differ is that I think it's absolutely unnecessary for someone to cut their withdrawals in half when the market gets cut in half.

All charts are modeled after someone FIREing at 30 with 100% stocks, following Arebelspy example.

Agreed, we're mostly on the same page. I don't mind cutting my withdrawals in half during a market crash. You do. Nothing wrong with that :) Luckily the old cfiresim lets us set a spending floor for the VPW calculations. That might be more up your alley.
I just used your link for old cfiresim, couldn't find the old sight.

arebelspy

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Re: Playbook on down markets/portfolio - steps?
« Reply #56 on: February 23, 2016, 12:54:45 AM »
You've made a few points now which have already been addressed. It'd be much easier if you read the thread.

I did read the thread, and I don't appreciate being told that I didn't.

I noticed you chose to use a high percentage of bonds for your variable withdrawal scenarios because a lower volatility means you get to withdraw more in a stock market downturn. You didn't spell out what asset allocation you were using for your 4% rule comparison scenarios. You do know that the 4% rule only works with a stock-heavy portfolio, right? Why not test your variable withdrawal bond-heavy portfolio against someone who follows the asset allocation most suited for success under the 4% rule? If you do, you'll find that the 1929 retiree could actually retire in 1929 and make it to 1977 by following the 4% rule.

A 47-year retirement wouldn't be that appealing to a 30-year-old retiree, I agree, but that's why someone retiring at 30 shouldn't blindly follow the 4% rule. They should use a slightly lower withdrawal rate and/or be a little bit flexible. I think we're mostly on the same page here. Blindly withdrawing 4% doesn't work for a retirement lasting several decades. Where we differ is that I think it's absolutely unnecessary for someone to cut their withdrawals in half when the market gets cut in half.

All charts are modeled after someone FIREing at 30 with 100% stocks, following Arebelspy example.

Agreed, we're mostly on the same page. I don't mind cutting my withdrawals in half during a market crash. You do. Nothing wrong with that :) Luckily the old cfiresim lets us set a spending floor for the VPW calculations. That might be more up your alley.
I just used your link for old cfiresim, couldn't find the old sight.

Works for me.  Try again?

Also I'm not sure why to use the old one--the new one lets you set a floor for VPW spending as well.
« Last Edit: February 23, 2016, 12:57:35 AM by arebelspy »
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

dabears847

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Re: Playbook on down markets/portfolio - steps?
« Reply #57 on: February 23, 2016, 08:36:00 AM »
No luck for me but I have some questions using the calc and reviewing the results... I'm having much more success with (Cfiresim - old) with lower balances and a ceiling and floor. Please review and provide feedback if I'm on track. Also, if the vpw is a range what amount does it pull annually?

100% success if when:

$650,000 Portfolio
Retire 2016, 30 years, Age 36
Social Security wife and I, 2040year, $36,000 combined
College Loan 2032 4000 annually 20 years
Downsize, Sell House year 2032 cash out for investing $150,000
80% stock 20% bonds low fees


 

dabears847

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Re: Playbook on down markets/portfolio - steps?
« Reply #58 on: February 23, 2016, 02:27:13 PM »
I've attached the grid of the calculations for more information.

dabears847

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Re: Playbook on down markets/portfolio - steps?
« Reply #59 on: February 23, 2016, 02:31:24 PM »
Also, I've attached the inputs as mentioned. Seems like $650,000 would work with some variable spending, but the spending would cause the portfolio to dip into an uncomfortable zone. The average spending would drop into the lower spectrum of spending often. Thoughts?

Spending Goal: $38,500 but can cut back to $30,000 easily, VPW method used



sallylee

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Re: Playbook on down markets/portfolio - steps?
« Reply #60 on: March 03, 2016, 07:26:15 PM »
i was wondering if you have 1 million cash and the cash earns 5% interest per year and you are 35 years old will it last you an entire lifetime if you spend $35000 per year and at age 65 you will receive 500 per month in social security? This assumes only money in bank and person does not invest in stocks

dabears847

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Re: Playbook on down markets/portfolio - steps?
« Reply #61 on: March 08, 2016, 02:06:43 PM »
i was wondering if you have 1 million cash and the cash earns 5% interest per year and you are 35 years old will it last you an entire lifetime if you spend $35000 per year and at age 65 you will receive 500 per month in social security? This assumes only money in bank and person does not invest in stocks

Not sure if this was for me or others to opine. Without the interest this should last 28 years.

steveo

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Re: Playbook on down markets/portfolio - steps?
« Reply #62 on: March 08, 2016, 03:40:32 PM »
When you use a Variable Percentage Withdrawal (VPW), you don't have to worry about a plan. It tells you exactly how much you can safely withdrawal, there is no risk of prematurely depleting your portfolio, and you end up with much more money to spend than simply sticking to the 4% rule.

I like this approach and I think it's what we will do. Our expenses I believe could range from 25k to 40k. Of course we could go higher if we decided to go nuts on spending but I can't see that happening.

If the markets tank or if we just don't feel like spending a lot of money we will stick to 25k. If the markets are booming and we need to buy something then we may spend more.

secondcor521

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Re: Playbook on down markets/portfolio - steps?
« Reply #63 on: March 08, 2016, 06:04:35 PM »
As a recent FIREee I find this thread to be one of the more interesting rehashes of withdrawal rates that I've read lately, so I'm chiming in with my 2 cents as a way of posting to follow.

My plan is to use the traditional/standard 4% SWR model starting at age 46 with a 90%/10% target AA, rebalancing annually.  I also plan to use the POPR (pay-out-period-reset) model, AKA "retire again and again" to increase my withdrawal over time and reduce mean ending portfolio, while keeping portfolio depletion risk roughly constant.  In my written plan, I also plan to check my actual spending against my portfolio value twice per year[1] and institute contingency measures if my WR is getting too high.  "Too high" is defined as exceeding a 4% withdrawal rate, which is pretty strict.  In reality I might wait a little bit to see if the portfolio recovers.  In my case, a 4% withdrawal represents about 125% of my typical recent spending, and perhaps 150% of my bare minimum spending.

Even though the above is my official written plan, I think what ARS posted in reply #52 is what really happens - you live your life, spend as life requires, monitor things, and make common sense adjustments if things are going "well" or "poorly".  Looking at the graphs up-thread, even though I have more ice in my veins than most, I think I would be between nervous and panicked in about 1932 and 1974 and would be tightening the purse strings as well as filling out the Walmart application regardless of whether my official plan was VPW or 4%.

I also think there is more nuance in particular situations.  I've run all the simulation tools with my particular numbers as exactly as I can get them, but my particular-very-specific situation with regards to income, taxes, spending, budget, contingency plans, risk tolerance and so forth is both very unique to me and becomes subjective.  Is there a 42.8% chance that my Social Security estimate is too high, or is it more that I've just de-rated it "enough" for my particular situation?

I have been surprised at how much my perspective has changed from hyperanalysis/spreadsheet/98.37%vs99.44% before FIRE-ing to "it's irie mon"/"hakuna matata" after FIRE-ing.  And it's only been a few weeks.  I used to get annoyed that posts from most FIREees with more experience were fairly generic and vague and laissez-faire and not cut-and-dried "If the market drops between 15% and 30% for between 3 months and 1 year, I will reallocate to 65%/35% and switch to withdrawing from my cash reserves for 7.9 months".  I wanted that pre-arranged clarity.  Now that I've been FIREd for a little while, I think I understand better where they're coming from and am pretty much feel the same way myself.

As the saying goes, "measure with a micrometer, cut with an axe".

[1] Who am I kidding?  I check my WR basically every day to two decimal places.  Using yesterday's closing prices I was at 3.56%...
« Last Edit: March 08, 2016, 06:08:55 PM by secondcor521 »

ShortInSeattle

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Re: Playbook on down markets/portfolio - steps?
« Reply #64 on: March 08, 2016, 07:50:21 PM »
What ARS advocates (run the numbers a few different ways, be flexible, use common sense) is pretty much what we're doing.

We're currently in year one of semi-FIRE and our budget for 2016 is equal to 4% of our portfolio as of the end of 2015. Because the market went down between when we decided to FIRE and when we ran our numbers (at the end of 2015) we did end up lowering our budget by a few thousand bucks. Specifically we cut our travel budget and our eating out budget by something like 20%.

But if the stock market tanks by 50% next year we're probably not going to cut our budget in half. And if the stock market doubles next year we're not going to double our spending either. We'll adjust, yes, but not too sharply.

4% WR is a good starting place but each December we'll make a judgement call on what to spend the following year.

Time will tell but my hunch is that we'll be fine. We're currently spending under our anticipated ER budget and my hobby-job continues to throw off income.

SIS