Author Topic: CFireSim Success Rate  (Read 30014 times)

beltim

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Re: CFireSim Success Rate
« Reply #50 on: May 06, 2015, 08:23:32 AM »
It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.

As recently as two months ago I would've agreed with this statement as being tautologically true, but, as you (beltim) recently pointed out here, as counterintuitive as it seems, retiring in the wake of a large market run-up has historically had zero impact on portfolio success rate.

Now, as we recognized in the linked thread, there are flaws in the statistical analysis you conducted that prevent us from drawing statistically significant conclusions (most prominently, the lack of sufficient data in the historical record), and perhaps if we run the same analysis again a few years from now (when the more recent market crashes are included in the data set) that answer will change.  But it just isn't true that retiring on a stash equal to a given withdrawal-multiple after a big market run-up is necessarily less safe than retiring on a stash equal to the same withdrawal-multiple before a big market run-up, because both options may turn out to be 100% safe -- the problem is that it's impossible to ever know whether that's the case in advance, before we have benefit of hindsight to confirm it for us.

Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in.  The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge.  The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.

I still think it's reasonable to think that valuation plays an important role in SWR.  Perhaps broad US markets have never reached the valuation levels needed to see that effect.  We know, however, that international markets have seen such an effect, at least at very high valuation levels.

dude

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Re: CFireSim Success Rate
« Reply #51 on: May 06, 2015, 08:24:01 AM »
You have to diversify internationally.

I'd definitely agree with the first four words. 

I'm not sure international exposure is the only viable option to get that diversification, though.  If you live in the US there are tons of other options for diversifying your investments.  Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.

People like to invoke Japan, so I'll be trendy and do that here. In the 80's Japan looked like it was ruling the business world and going to take over everything, had a rip-roaring economy, international business, the Nikkei was 40% of global market cap, yadda yadda. Well, the US has a lot of similarities there, and we're something like 55% of global market cap. Why can't it happen here? In 10 years or 20? For whatever reason. Some international diversification has historically improved returns and decreased volatility.

It could.  But it would also probably happen after an unbelievable stock run-up.  For context, for the S&P 500 to reach the same p/e valuation as the Nikkei in 1989, it would have to go up more than fivefold from current levels.

It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.

http://www.economist.com/node/9370662

The market is at a CAPE of 27--right where it was a few months before Black Tuesday and the following Great Depression. And quite a few people on this forum are getting ready to retire now. Who knows what will happen. Maybe CAPE doesn't mean now what it used to. If people are willing to sacrifice returns to buy some portfolio stability by owning bonds they should be willing to maintain or increase returns and increase portfolio stability by owning cheap international funds too.

Oh I don't disagree with that.  I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever.  Although international equities are a strange beast - they have had lower returns than US markets, with higher risk.  They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.

That's definitely been the case for the TSP's international (I) fund (which tracks the EAFE index):

http://www.tspfolio.com/tspfunds

The risk-adjusted return simply hasn't been worth owning it, when compared to the Small Cap (S) and S&P 500 (C) funds.  That being said, I've still got 5% in it.

brooklynguy

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Re: CFireSim Success Rate
« Reply #52 on: May 06, 2015, 08:32:05 AM »
Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in.  The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge.  The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.

I still think it's reasonable to think that valuation plays an important role in SWR.  Perhaps broad US markets have never reached the valuation levels needed to see that effect.  We know, however, that international markets have seen such an effect, at least at very high valuation levels.

Yes, I agree with all that.  My point is just that, while it's tempting to conclude that lower market valuations necessarily (as a logical truth) increase the safety of your portfolio, as your analysis demonstrated, that simply isn't true (in the same way that wrapping an egg to be thrown off a roof in additional bubble wrap does not "increase the safety" if it has already been wrapped in more than enough to keep it from breaking).

beltim

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Re: CFireSim Success Rate
« Reply #53 on: May 06, 2015, 08:40:12 AM »
Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in.  The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge.  The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.

I still think it's reasonable to think that valuation plays an important role in SWR.  Perhaps broad US markets have never reached the valuation levels needed to see that effect.  We know, however, that international markets have seen such an effect, at least at very high valuation levels.

Yes, I agree with all that.  My point is just that, while it's tempting to conclude that lower market valuations necessarily (as a logical truth) increase the safety of your portfolio, as your analysis demonstrated, that simply isn't true (in the same way that wrapping an egg to be thrown off a roof in additional bubble wrap does not "increase the safety" if it has already been wrapped in more than enough to keep it from breaking).

Sure.  I'll amend my initial statement to:
"It doesn't take much thought to realize that a huge asset bubble can reduce your safe withdrawal rate"

brooklynguy

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Re: CFireSim Success Rate
« Reply #54 on: May 06, 2015, 08:48:03 AM »
Sure.  I'll amend my initial statement to:
"It doesn't take much thought to realize that a huge asset bubble can reduce your safe withdrawal rate"

Thanks - just in case my posts came across the wrong way, note that I wasn't being hypertechnical for the sake of being a prick.  It's just that I was (and continue to be) astounded by the results of the analysis you did in that thread, which struck me as incredibly counterintuitive, and your initial statement presented a good opportunity to use this thread as a platform for sharing those results with others who may not have seen that thread.

beltim

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Re: CFireSim Success Rate
« Reply #55 on: May 06, 2015, 08:58:34 AM »
Sure.  I'll amend my initial statement to:
"It doesn't take much thought to realize that a huge asset bubble can reduce your safe withdrawal rate"

Thanks - just in case my posts came across the wrong way, note that I wasn't being hypertechnical for the sake of being a prick.  It's just that I was (and continue to be) astounded by the results of the analysis you did in that thread, which struck me as incredibly counterintuitive, and your initial statement presented a good opportunity to use this thread as a platform for sharing those results with others who may not have seen that thread.

Don't worry - I didn't think you were being hypertechnical nor did I think you were being a prick.  I very much enjoy these conversations, and this one is no exception.

beltim

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Re: CFireSim Success Rate
« Reply #56 on: May 06, 2015, 09:02:01 AM »
It is worth noting that the Nikkei increased in value ~6.5-fold over a 6 year period.  The biggest jump in the S&P over a 6 year period was ~3.5-fold (perhaps unsurprisingly, the 6-year period that ended in 2000).

beltim

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Re: CFireSim Success Rate
« Reply #57 on: May 06, 2015, 09:14:41 AM »
The market is at a CAPE of 27--right where it was a few months before Black Tuesday and the following Great Depression. And quite a few people on this forum are getting ready to retire now. Who knows what will happen. Maybe CAPE doesn't mean now what it used to. If people are willing to sacrifice returns to buy some portfolio stability by owning bonds they should be willing to maintain or increase returns and increase portfolio stability by owning cheap international funds too.

Also, the CAPE for Japan in 1990 was about 96.  There is simply a huge difference between Japan's peak valuation and anything the US has ever experienced.

forummm

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Re: CFireSim Success Rate
« Reply #58 on: May 06, 2015, 09:41:54 AM »
Oh I don't disagree with that.  I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever.  Although international equities are a strange beast - they have had lower returns than US markets, with higher risk.  They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.

I think it's likely that long term returns will be similar for US/Intl. A Random Walk shows a long period where adding Intl at ~20% increased returns and lowered volatility. The future may be different. The last 7 years have been. Emerging markets could explode or implode. Who knows!

Chuck

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Re: CFireSim Success Rate
« Reply #59 on: May 06, 2015, 09:43:19 AM »
Sol's perspective on success rates is something I've been digesting over the past few days. I collect a (small) pension that is independent of market returns, and I've thought that would give me some leeway within the 4% rule.

Now I'm starting to think that 5% might be acceptable to me. That's pretty incredible, as it cuts a significant amount of time before I could FIRE. I need to discuss it with my wife.

forummm

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Re: CFireSim Success Rate
« Reply #60 on: May 06, 2015, 09:55:07 AM »
It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.

As recently as two months ago I would've agreed with this statement as being tautologically true, but, as you (beltim) recently pointed out here, as counterintuitive as it seems, retiring in the wake of a large market run-up has historically had zero impact on portfolio success rate.

Now, as we recognized in the linked thread, there are flaws in the statistical analysis you conducted that prevent us from drawing statistically significant conclusions (most prominently, the lack of sufficient data in the historical record), and perhaps if we run the same analysis again a few years from now (when the more recent market crashes are included in the data set) that answer will change.  But it just isn't true that retiring on a stash equal to a given withdrawal-multiple after a big market run-up is necessarily less safe than retiring on a stash equal to the same withdrawal-multiple before a big market run-up, because both options may turn out to be 100% safe -- the problem is that it's impossible to ever know whether that's the case in advance, before we have benefit of hindsight to confirm it for us.

Ben Graham would say that higher prices are more risky, de facto.

forummm

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Re: CFireSim Success Rate
« Reply #61 on: May 06, 2015, 09:58:27 AM »
Oh I don't disagree with that.  I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever.  Although international equities are a strange beast - they have had lower returns than US markets, with higher risk.  They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.

That's definitely been the case for the TSP's international (I) fund (which tracks the EAFE index):

http://www.tspfolio.com/tspfunds

The risk-adjusted return simply hasn't been worth owning it, when compared to the Small Cap (S) and S&P 500 (C) funds.  That being said, I've still got 5% in it.

Don't fall prey to recency bias. Sometimes US > Intl, sometimes the other way around. There's no reason to believe that large developed economies will lag over the long run just because they are outside the US borders. They are lagging due in large part to austerity policies pursued after the 2008 crash. In the US we had much better economic policy and recovered more quickly. The next time around, we could be the policy dolts.

forummm

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Re: CFireSim Success Rate
« Reply #62 on: May 06, 2015, 10:06:23 AM »
Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in.  The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge.  The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.

I still think it's reasonable to think that valuation plays an important role in SWR.  Perhaps broad US markets have never reached the valuation levels needed to see that effect.  We know, however, that international markets have seen such an effect, at least at very high valuation levels.

Yes, I agree with all that.  My point is just that, while it's tempting to conclude that lower market valuations necessarily (as a logical truth) increase the safety of your portfolio, as your analysis demonstrated, that simply isn't true (in the same way that wrapping an egg to be thrown off a roof in additional bubble wrap does not "increase the safety" if it has already been wrapped in more than enough to keep it from breaking).

The SWR was calculated with historical data to see what % withdrawal would allow for 95% portfolio success. Now you are using the same historical data and picking specific years when equities were overpriced and seeing that portfolios mostly succeeded. Yes, because the SWR was calculated using that same data. Of course. In the future, we're not sure what's going to happen. Given a set portfolio withdrawal rate, it is definitely more risky to start retirement when assets are overpriced than when they are underpriced. If you look historically, the SWR for different retirement years (in retrospect) is higher for years when assets were underpriced and lower for years when assets were overpriced. That's where a high CAPE comes into play.

brooklynguy

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Re: CFireSim Success Rate
« Reply #63 on: May 06, 2015, 10:08:38 AM »
Ben Graham would say that higher prices are more risky, de facto.

Yes, I think any investor following any investment philosophy would say so, but that's only because it's impossible to know what amount constitutes "enough" until the future has become the past.  If you retire on a given WR-based stash after prices have shot up instead of the same WR-based stash before prices have shot up, that is by definition "riskier" because it's impossible for the latter portfolio to outperform the former.  But, if the future ends up telling us that both stashes turned out to be "safe", then was one of them really safer than the other?  Is a $100M stash any "safer" than a $50M stash if your projected spending is only $25k?  Or see the bubble-wrapped egg analogy above.

This is all philosophical hairsplitting, but (originally) in service of highlighting the fact that, per beltim's analysis in the linked thread, in the U.S., the safety of a 4% WR was completely unaffected by retiring after a run-up in the S&P 500 in the five years prior to commencing retirement, which is completely at odds with the assumptions most of us (I think) have about historical portfolio performance.

Eric

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Re: CFireSim Success Rate
« Reply #64 on: May 06, 2015, 10:15:26 AM »
Oh I don't disagree with that.  I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever.  Although international equities are a strange beast - they have had lower returns than US markets, with higher risk.  They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.

That's definitely been the case for the TSP's international (I) fund (which tracks the EAFE index):

http://www.tspfolio.com/tspfunds

The risk-adjusted return simply hasn't been worth owning it, when compared to the Small Cap (S) and S&P 500 (C) funds.  That being said, I've still got 5% in it.

Don't fall prey to recency bias. Sometimes US > Intl, sometimes the other way around. There's no reason to believe that large developed economies will lag over the long run just because they are outside the US borders. They are lagging due in large part to austerity policies pursued after the 2008 crash. In the US we had much better economic policy and recovered more quickly. The next time around, we could be the policy dolts.

Definitely!  The fact that International has trailed US lately is the exact reason to invest internationally.  These trends do not continue long term.  This was my one main take away from Four Pillars of Investing.

Similar chart as in the book:

« Last Edit: May 06, 2015, 10:21:54 AM by Eric »

brooklynguy

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Re: CFireSim Success Rate
« Reply #65 on: May 06, 2015, 10:31:27 AM »
The SWR was calculated with historical data to see what % withdrawal would allow for 95% portfolio success. Now you are using the same historical data and picking specific years when equities were overpriced and seeing that portfolios mostly succeeded. Yes, because the SWR was calculated using that same data.

No, this isn't what's going on; beltim's analysis shows that the subset of historical retirements that commenced after a five-year market run-up were not only still mostly successful, but that they were just as likely to be successful as any retirement commencement year in the full data set.  I would have expected to see the opposite result (which is what your quoted statement above implicitly assumes as well) -- that the 5% failure cases would be clustered around the start years that witnessed a previous market run-up, leading to a lower success rate than the overall success rate.  But that wasn't the case.

sol

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Re: CFireSim Success Rate
« Reply #66 on: May 06, 2015, 02:02:55 PM »
the subset of historical retirements that commenced after a five-year market run-up were not only still mostly successful, but that they were just as likely to be successful as any retirement commencement year in the full data set.

This observation aligns neatly with our previous discussion about how the best time to invest in the stock market has always been right after it achieves an all-time high.

And, in another way, with the dual momentum investing thread that argued that you can use these kinds of run-ups as momentum signals to buy, though in that case they were suggesting shorter lookback periods.

arebelspy

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Re: CFireSim Success Rate
« Reply #67 on: May 06, 2015, 02:08:51 PM »
Good discussions, subscribing.

My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).

I probably worked too long.  But I enjoyed it, so I'm okay with it.
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brooklynguy

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Re: CFireSim Success Rate
« Reply #68 on: May 06, 2015, 02:38:20 PM »
This observation aligns neatly with our previous discussion about how the best time to invest in the stock market has always been right after it achieves an all-time high.

Which discussion was that?  Unless I'm misunderstanding you, this doesn't sound right -- there have been plenty of times (too many to count) when it would have been better to wait for the market to fall back below its peak before investing.  Or did you not mean it literally?  More like the tree-planting analogy - the best time to invest was decades ago, but the next best time is today?

Quote
And, in another way, with the dual momentum investing thread that argued that you can use these kinds of run-ups as momentum signals to buy, though in that case they were suggesting shorter lookback periods.

Yeah, and it's the lookback period that determines success or failure of that strategy - I think the proponents in that thread were misconstruing our doubts about the predictive-signaling reliability of any particular lookback period for doubt that momentum exists in the marketplace (which it obviously does).

My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).

But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)?  If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)

arebelspy

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Re: CFireSim Success Rate
« Reply #69 on: May 06, 2015, 02:42:37 PM »
My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).

But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)?

Correct.  I should have at least a 25% savings rate in FIRE, even using conservative numbers for my real estate expenses.

If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)

That is the eventual goal/plan for many real estate investors--get big enough to become a REIT. I don't have a desire to do that, what I have is more than enough for me.  :)
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forummm

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Re: CFireSim Success Rate
« Reply #70 on: May 06, 2015, 02:52:29 PM »
My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).

But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)?  If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)

How will I choose whether to invest my life savings in BGC or in ARSC?

brooklynguy

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Re: CFireSim Success Rate
« Reply #71 on: May 06, 2015, 02:58:52 PM »
How will I choose whether to invest my life savings in BGC or in ARSC?

That's easy - you buy both.  Remember the first four words of your own post upthread:  you have to diversify!

arebelspy

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Re: CFireSim Success Rate
« Reply #72 on: May 06, 2015, 03:13:09 PM »
My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).

But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)?  If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)

How will I choose whether to invest my life savings in BGC or in ARSC?

It's actually not ARSC, it's ARebelSpyEndowment.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

forummm

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Re: CFireSim Success Rate
« Reply #73 on: May 06, 2015, 03:13:54 PM »
How will I choose whether to invest my life savings in BGC or in ARSC?

That's easy - you buy both.  Remember the first four words of your own post upthread:  you have to diversify!

Touche, good sir! <Tip of the top hat>

forummm

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Re: CFireSim Success Rate
« Reply #74 on: May 06, 2015, 06:58:21 PM »
The SWR was calculated with historical data to see what % withdrawal would allow for 95% portfolio success. Now you are using the same historical data and picking specific years when equities were overpriced and seeing that portfolios mostly succeeded. Yes, because the SWR was calculated using that same data.

No, this isn't what's going on; beltim's analysis shows that the subset of historical retirements that commenced after a five-year market run-up were not only still mostly successful, but that they were just as likely to be successful as any retirement commencement year in the full data set.  I would have expected to see the opposite result (which is what your quoted statement above implicitly assumes as well) -- that the 5% failure cases would be clustered around the start years that witnessed a previous market run-up, leading to a lower success rate than the overall success rate.  But that wasn't the case.

I read through that thread and I don't think the analysis says what you think it does. See my string of posts on that other thread, including an alternate analysis starting here: http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/msg653490/#msg653490

forummm

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Re: CFireSim Success Rate
« Reply #75 on: May 06, 2015, 06:59:47 PM »
My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).

But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)?  If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)

How will I choose whether to invest my life savings in BGC or in ARSC?

It's actually not ARSC, it's ARebelSpyEndowment.

Where did you pull that name from?

arebelspy

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Re: CFireSim Success Rate
« Reply #76 on: May 06, 2015, 07:29:27 PM »
Where did you pull that name from?

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Re: CFireSim Success Rate
« Reply #77 on: December 03, 2016, 10:01:31 AM »
Even after reading this thread, as a fairly risk-averse person and engineer (safety factor and all), I was targeting 90+% success rate, in part because we are close to 80% now, and with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's. 


Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced.  With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced).  We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare. 
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%. 

arebelspy

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Re: CFireSim Success Rate
« Reply #78 on: December 03, 2016, 04:46:38 PM »
with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's.
...
Now I'm thinking we'll probably target 100%

It's your call, I'd just make sure to ask yourself how many years of your life you're willing to sell (literally) for a few meaningless percent on a calculator that tells you very limited numbers about a very limited past.

Quote
Medical expenses that hit 6 figures would turn a 100% success rate into 0%.

So then what are you selling the years for, instead of FIREing and focusing on fitness?  ;)
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Re: CFireSim Success Rate
« Reply #79 on: December 03, 2016, 06:03:38 PM »
Even after reading this thread, as a fairly risk-averse person and engineer (safety factor and all), I was targeting 90+% success rate, in part because we are close to 80% now, and with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's. 


Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced.  With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced).  We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare. 
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%.

With a timeline of 50-60 years and all the potential political and economic uncertainties associated with that much time, compounded by the uncertainties associated with assuming that the past predicts the future, the difference between 90-95% and 100% is completely meaningless. (As an engineer, you should know that ;) ).  When you're FIREing that early, you have to plan on being flexible and maintaining your ability to earn some dough should the circumstances require it, regardless of how high your success rate is.

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Re: CFireSim Success Rate
« Reply #80 on: December 04, 2016, 04:22:29 AM »

Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced.  With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced).  We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare. 
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%.

Right? Even with the ACA, healthcare spending in the USA has gone up by the largest percent since 2007. The current system does make it hard to be positive about future expenses.

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Re: CFireSim Success Rate
« Reply #81 on: December 04, 2016, 07:13:33 AM »
@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?

50% is crazy.  Would you get on an airplane with a 50% chance of a good landing?  If the consequences of failure are catastrophic you better shoot for 95% or 98% success.

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Re: CFireSim Success Rate
« Reply #82 on: December 04, 2016, 07:21:46 AM »
@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?

50% is crazy.  Would you get on an airplane with a 50% chance of a good landing?  If the consequences of failure are catastrophic you better shoot for 95% or 98% success.

You realize you have control over the chance it succeeds, right?  You can spend less in a given year, earn some side gig money, etc.

The calculations assume an idiot in a vacuum blindly withdrawing each year and increasing for inflation, regardless of what's going on with their portfolio value.

50% blind vacuum probability is probably closer to 80% reality probability, and if you're willing to go back to work for a year or two (without needing to view that as ER "failure"--especially because by going for more percent than that, you're putting in those years anyways--would you consider that failure?), probably closer to 100%.
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Re: CFireSim Success Rate
« Reply #83 on: December 04, 2016, 07:22:07 AM »
@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?

50% is crazy.  Would you get on an airplane with a 50% chance of a good landing?  If the consequences of failure are catastrophic you better shoot for 95% or 98% success.

Then I guess that it's good that early retirement failure is neither as quick nor as catastrophic as a plane crash.

lifeanon269

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Re: CFireSim Success Rate
« Reply #84 on: December 05, 2016, 12:44:16 PM »
One thing to keep in mind however is to think about your ability/desire to find work later in life after years/decades of being retired.

When you retire with a FIRE success rate of 80% or lower, you're essentially guaranteeing yourself that if you ever come across an economic calamity that was similar to the ones we've seen in the past, then you're going to have to find another source of income to supplement your savings so that you don't run dry.

Now, if you retired early in true "mustachian" fashion, your expenses should be very low, so ultimately you'd only really have to find cheap and abundant work for supplemental income. But, you'll need to find work none-the-less. Also, you'll certainly always be in a better position than typical Americans who are overloaded with debt and work 9-5 and are dependent upon their salary incomes to stay afloat on their debt. So that's good too.

However, this all comes down to a decision of whether you want to look for cheap work during times of economic stress during your retirement so that you can ensure your 75% "success rate" turns out to be 100% successful. Or, do you want to just work 2-3 extra years during your young career working years so that you have a 100% "success rate" so that you can ensure your savings amount will sustain you through even the harshest times that may lie ahead?

If you work a couple of extra years to pad your savings to a 100% "success rate", then you can think of it like self-insuring yourself against economic calamity. Sure, you might have worked a couple extra years for nothing (if there never ends up being an economic calamity), but that insurance will still provide some peace of mind for you during retirement.

For me, since I enjoy my current job, I'll gladly work a couple extra years to pad my savings while I can and ensure that I won't ever have to supplement my passive income during retirement. That doesn't mean I won't adjust my withdrawal rate according to how well the economy is doing, but merely ensuring that I won't ever need to go back to work again. That's why I'm willing to work a couple of extra years to achieve a "100% success rate".
« Last Edit: December 05, 2016, 01:06:05 PM by lifeanon269 »

boarder42

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Re: CFireSim Success Rate
« Reply #85 on: December 05, 2016, 02:54:52 PM »
One thing to keep in mind however is to think about your ability/desire to find work later in life after years/decades of being retired.

When you retire with a FIRE success rate of 80% or lower, you're essentially guaranteeing yourself that if you ever come across an economic calamityin the first 5 years or so that was similar to the ones we've seen in the past, then you're going to have to find another source of income to supplement your savings so that you don't run dry.

Now, if you retired early in true "mustachian" fashion, your expenses should be very low, so ultimately you'd only really have to find cheap and abundant work for supplemental income. But, you'll need to find work none-the-less. Also, you'll certainly always be in a better position than typical Americans who are overloaded with debt and work 9-5 and are dependent upon their salary incomes to stay afloat on their debt. So that's good too.

However, this all comes down to a decision of whether you want to look for cheap work during times of economic stress during your retirement so that you can ensure your 75% "success rate" turns out to be 100% successful. Or, do you want to just work 2-3 extra years during your young career working years so that you have a 100% "success rate" so that you can ensure your savings amount will sustain you through even the harshest times that may lie ahead?

If you work a couple of extra years to pad your savings to a 100% "success rate", then you can think of it like self-insuring yourself against economic calamity. Sure, you might have worked a couple extra years for nothing (if there never ends up being an economic calamity), but that insurance will still provide some peace of mind for you during retirement.

For me, since I enjoy my current job, I'll gladly work a couple extra years to pad my savings while I can and ensure that I won't ever have to supplement my passive income during retirement. That doesn't mean I won't adjust my withdrawal rate according to how well the economy is doing, but merely ensuring that I won't ever need to go back to work again. That's why I'm willing to work a couple of extra years to achieve a "100% success rate".

there i fixed that for you.

boarder42

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Re: CFireSim Success Rate
« Reply #86 on: December 05, 2016, 02:56:09 PM »
But you do realize that even a 100% 'success rate' doesn't mean nothing can possibly go wrong and you are guaranteed to succeed in an (always) uncertain future.
So the question begins to be where is the threshold?

if its 2009 and i've got enough for a 6% SWR i'm quitting ... but that likely meant in 2007 i had enough for a 4% ... either way would have been safe and had piles of money.

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Re: CFireSim Success Rate
« Reply #87 on: December 05, 2016, 06:06:49 PM »
Good chain.  Gets into my interest in the range between 50% and 100% "success" rates people end up choosing.  I've been less interested on the 80% to 100% end because 100% has so little meaning (I think so many think of it as some solid line...but thats just from from past stuff...for future possibilities it is far from such).... my interest is more why one would work even until 80% and not just 51%.  There seem to be such a failure associated with having to return to work that it makes the attempt risky even if success is probable.... but if someone works from 22-32, takes the next 20 years off, raises kids, does other stuff, and then, if they see  they need more money, work from 52-62, have they failed?  I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...

sol

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Re: CFireSim Success Rate
« Reply #88 on: December 05, 2016, 07:37:55 PM »

I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...

Even the smartest of people, when faced with the security of their families, tend to make important decisions based on emotion and instinct instead of math.  We're not as evolved as we like to think we are.

The historical record of US market returns suggests that anybody using a SWR below 6% per year is likely to have too much money for a 30 year retirement, and anybody using a SWR below about 5% is more likely to watch their assets grow indefinitely than be depleted.

Details are here:  http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828
« Last Edit: December 05, 2016, 09:31:51 PM by sol »

arebelspy

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Re: CFireSim Success Rate
« Reply #89 on: December 05, 2016, 09:22:57 PM »
Details are here:  http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828

That graph always makes me think that we really should all be talking about a 6-7% WR, and then discussing the little things we can do (earn some side-gig income, cut spending in bad years, etc.) to make sure we're in the half of those runs that succeeds.

The 4% rule is so ridiculously safe in the hands of anyone flexible/willing to adjust to the market, it's silly.
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matchewed

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Re: CFireSim Success Rate
« Reply #90 on: December 06, 2016, 04:42:16 AM »
Details are here:  http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828

That graph always makes me think that we really should all be talking about a 6-7% WR, and then discussing the little things we can do (earn some side-gig income, cut spending in bad years, etc.) to make sure we're in the half of those runs that succeeds.

The 4% rule is so ridiculously safe in the hands of anyone flexible/willing to adjust to the market, it's silly.

The years of looking at this made me realize similar things. I've personally shifted my plan to a 6%. I have many options including but not limited to contract work, hobby income, and just sheer flexibility.

boarder42

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Re: CFireSim Success Rate
« Reply #91 on: December 06, 2016, 05:26:55 AM »
yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success and while everyone's situation may be different 1 extra year of work is all it takes for me to go from 5 to 4% SWR.  and i dont even have to work the whole year ... i actually plan to take a 3-4 month sabatical that year. 

at the end of the day i'm pretty sure i'll have oversaved and worked 1-3 years too long.  but i'm out at 37 assuming my unborn children dont have serious medical issues and health care comes back to earth in the next 4-5 years.

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Re: CFireSim Success Rate
« Reply #92 on: December 06, 2016, 10:04:17 AM »
yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success and while everyone's situation may be different 1 extra year of work is all it takes for me to go from 5 to 4% SWR.  and i dont even have to work the whole year ... i actually plan to take a 3-4 month sabatical that year. 


good point, that's the other end of the equation, what's the cost...how long do you actually have to grit your teeth to get to that next level.  An extra year doesn't seem like much...unless OMY kicks in

boarder42

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Re: CFireSim Success Rate
« Reply #93 on: December 06, 2016, 10:16:22 AM »
yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success and while everyone's situation may be different 1 extra year of work is all it takes for me to go from 5 to 4% SWR.  and i dont even have to work the whole year ... i actually plan to take a 3-4 month sabatical that year. 


good point, that's the other end of the equation, what's the cost...how long do you actually have to grit your teeth to get to that next level.  An extra year doesn't seem like much...unless OMY kicks in

it will for me but i'll have so much FU money i'll be working on my own terms.  i'm part of an employee owned firm with privately held shares and we do out of this world well.  you have to sell when you leave so every year i can hangout on my own terms working 6 months a year is a huge win in asset gains.

sol

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Re: CFireSim Success Rate
« Reply #94 on: December 06, 2016, 11:22:46 AM »
yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success

You have to think of this game like the gamble that it really is.  Your retirement success rate can only be 0% or 100%.  There is no in between for each individual person.

You control your spending level, and thus your backtested probability of lasting a given number of years.  Will you roll the dice when the odds are in your favor?  When you expect a 75% chance of never having to cut expenses?  A 90% chance?  99%?

At some point, additional safety margin based on historical market returns becomes meaningless relative to the other risks, like getting a terminal illness or an unexpected inheritance or an asteroid hitting the earth and ending all human life.  Or being financially ruined by a lawsuit or family medical emergency.  Or nuclear war or global pandemic.  All together the cumulative risk from uncontrollable outcomes probably outweighs the benefit of moving from 85 to 95% success on your SWR.  You're working on the wrong safety margin at that point, if you're still concerned about your investments.

Once you're past about average success on your SWR, I suggest focusing on your family's emergency planning and supplies.  If you're worried about worst case scenarios in the financial markets, you might want to consider worst case scenarios in real life too.

boarder42

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Re: CFireSim Success Rate
« Reply #95 on: December 06, 2016, 11:42:45 AM »
Not worried about worst case market scenarios. Just have golden handcuffs outfitted with large diamonds. So it will be hard to not just work half of omy for 2-3 years after hitting 4% swr

tomsang

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Re: CFireSim Success Rate
« Reply #96 on: December 06, 2016, 01:54:46 PM »
... my interest is more why one would work even until 80% and not just 51%.  There seem to be such a failure associated with having to return to work that it makes the attempt risky even if success is probable.... but if someone works from 22-32, takes the next 20 years off, raises kids, does other stuff, and then, if they see  they need more money, work from 52-62, have they failed?  I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...

Typically for professional type careers, when people retire their income is at the top of the spectrum.  Historically, if you retire and then come back to work, your skill set will most likely warrant a large pay cut.  In my case, if I retired and needed to get back into the work force five years later I would most likely take a 80% to 90% cut in pay.  So I would rather work a year or two extra and have the margin of safety.  Now if I was truly Mustachian, my expenses would be cut by 70% and I would be retired.  I am enjoying what I am doing and potentially going to work a number of extra years so that I have the resources to fund charitable type pursuits.

For those in physically demanding careers, their body may not be capable of sustaining the workload in the future.

One of the biggest areas that I think people should be looking into is the ability to enter the workforce in the future, due to technology taking over or eliminating your job.  I would rather have a stache that owns the companies, so that I am always on the right side of the success line. http://forum.mrmoneymustache.com/welcome-to-the-forum/robots-and-their-impact-on-the-future/     
 

boarder42

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Re: CFireSim Success Rate
« Reply #97 on: December 06, 2016, 02:43:58 PM »
... my interest is more why one would work even until 80% and not just 51%.  There seem to be such a failure associated with having to return to work that it makes the attempt risky even if success is probable.... but if someone works from 22-32, takes the next 20 years off, raises kids, does other stuff, and then, if they see  they need more money, work from 52-62, have they failed?  I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...

Typically for professional type careers, when people retire their income is at the top of the spectrum.  Historically, if you retire and then come back to work, your skill set will most likely warrant a large pay cut.  In my case, if I retired and needed to get back into the work force five years later I would most likely take a 80% to 90% cut in pay.  So I would rather work a year or two extra and have the margin of safety.  Now if I was truly Mustachian, my expenses would be cut by 70% and I would be retired.  I am enjoying what I am doing and potentially going to work a number of extra years so that I have the resources to fund charitable type pursuits.

For those in physically demanding careers, their body may not be capable of sustaining the workload in the future.

One of the biggest areas that I think people should be looking into is the ability to enter the workforce in the future, due to technology taking over or eliminating your job.  I would rather have a stache that owns the companies, so that I am always on the right side of the success line. http://forum.mrmoneymustache.com/welcome-to-the-forum/robots-and-their-impact-on-the-future/   

yes and in my case ... everyone here should understand how compound interest works.  i have to sell off super lucrative shares of a privately held company when i leave ... you dont get to buy them back if you come back so working a couple extra years is insane amounts of return on those shares.  situations are unique but golden handcuffs make OMY happen much more frequently.

lifeanon269

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Re: CFireSim Success Rate
« Reply #98 on: December 07, 2016, 09:29:46 AM »
there i fixed that for you.

I beg to differ. An economic calamity doesn't just have to occur during the first 5 years for it to have disastrous impact on your retirement. You could simply have stagnant growth during your first 5-10 years that prevents your portfolio from growing much while it has its largest potential to grow. Because it failed to grow when it needed to, it could leave you less resilient to failure later down the road.

The way I see it is this. If I work a couple of extra years to build up my portfolio to the point where it would've withstood all scenarios of the past and if those couple of extra years would've been wasted years of work 20% of the time (assuming that those extra couple years boosted my success rate from 80-100%), then I can simply choose to donate the excess after I die to a charity of choice.

So in reality, those extra couple of years I can think of as having a 80% chance of working for charity by choice. Not many people have a choice to be able to dedicate 2 years or so of their working life toward charity and that's pretty cool in my book. At the same time, I gave myself peace of mind in retirement that in the event I needed it (~20% chance), my portfolio was large enough to make it through very difficult economic times without worry.
« Last Edit: December 07, 2016, 09:53:14 AM by lifeanon269 »

brooklynguy

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Re: CFireSim Success Rate
« Reply #99 on: December 07, 2016, 10:34:16 AM »
So in reality, those extra couple of years I can think of as having a 80% chance of working for charity by choice.

This is exactly the logic I use to rationalize my cowardice in setting my retirement-trigger threshold so high (and the same logic nicely articulated in this inspiring post by sol).  If I'm being honest with myself, I realize that the true motivating factor is personal risk aversion, where probable increased charitable giving is merely a happy side benefit (rather than the other way around), but the result is the same either way, I suppose.