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you are correct you can't use a calculator to predict a thing,especially a simple how long will my money last type using averages that mean nothing.
at least calculators like firecalc are based on real worst case numbers that represent returns of less than 1.5% real returns .
think those are awful numbers and we will never see 15 year returns that low ? then the numbers only go up from there.
those are pretty meaningful numbers to take with you. you at least have a low water mark to watch for.
no predicting , no needing to know the future . just a reference point that you can use to bench mark actual events as they unfold as you go through the unknown.
while i can't predict the future i certainly do know if i am doing better than 2% real returns i can most likely count on the income firecalc gives me as A FLOOR , i may even go higher.
the closer i get to the all to critical 15 year mark and keep my head above water the greater the odds that i will be passed the danger point and not worry nearly as much the second 15 years about my finances.
it is a matter of learning to understand how to use the information these better more complex calculators give you.
to bad there are no instructions on how to do that. that is why the likes of kitces and pfau and their work is so critical to learning what to do with all this data .
what would the fact a group of retirees in 1966 failed using a 70/30 mix ever mean to any of us ? zero since our answer would be who ever knows if that would duplicate itself again..
but the real value is in the returns that over and over caused those failures. thats the important stuff because a real return is a real return is a real return forever .
doesn't matter what gets you there , if you are that low at anytime you are there.
like i said if i was 7-10 years into my retirement and not even averaging a 2% real return a red flag should pop up and go danger danger.
that is the value in these researchers and their studies. it is for understanding what things can kill you and you should avoid more than predicting when you will die.
Last edited by mathjak107; 03-28-2014 at 05:49 PM..
I have used the Firecal just to see what it predicts under various conditions. Even so I do not trust it. First the calculations are hidden and fairly complex. Next the basis is highly suspect. Again, I mistrust using ancient data to predict the future. I would at least remove the inputs from the Roaring Twenties, from the Great Depression, anything prior to the end of the gold standard, etc.
A simple calculator is easy to understand and can provide useful information. As you have pointed out, for the 4% rule to work, it seems necessary to have an investment gain of 2% more than inflation. This is easy to verify with a simple calculator. Put in a set number for inflation, such as the past average of 3.5%, and also input 5.5% for earnings. Sure enough, the calculator will show that you run out of money in about 30 years. Everyone expects high variation in gains and inflation over the long haul, but at least we see the outcome for relatively small short term fluctuations around the averages. Next we can test the outcomes of different sorts of scenarios. For example I think we have a couple of more years of solid performance from the stock market and after that point I plan on moving my allocation away from stocks. After a couple more good years I suspect we will have a few years with low gains and higher inflation. The market might even have a serious setback but that would have little impact on me because my allocation will be low at that time. I can easily use a simple calculator for this. I would input a 2% inflation factor. I would input my gain rate from the past couple of years, minus a little in case the market starts to cool and to compensate for my plan to start selling stocks. I can see exactly where I will be in a couple of years. I can take my position at that point and input new data for gains and inflation and then look down the road a few more years to see where I will be. Of course if my guesses are not accurate, I would be running back to the calculator with new inputs to see the outcomes. No these simple calculators do very little to help predict the future, but they can help test scenarios that you believe are likely and will give you accurate data on what would have happened under those conditions.
In a severe market downturn would you ever bail out of the market. Do you set
a stop loss on your investments? I guess the hard part is knowing when to get back in.
I am not sure what this has to do with determining withdrawal rates, but, no I would not try to bail.
When there is a severe market downturn, you do not "bail." You start buying and you keep buying as the market goes down. By the time the market is recovering you should already be at your maximum desired allocation. Severe downturns tend to be very sharp and sudden because panic sets in quickly.
Increasing markets tend to be slower with lots of minor ups and downs. There is never any sudden panic buying although there are times when small investors jump in because they don't want to miss out on the good times. When that happens it would be a good idea to accelerate selling off stocks.
Since predicting peaks and valleys is difficult, the best strategy is to rebalance; i.e., you sell stocks when the market is moving up and you should be buying when the market is dropping. Both of these go against human nature. Buying into a sinking market is especially difficult. For most of us, we are a bit too slow and end up buying a bit too late when the market is well past bottom. I know in 2008 when the market crashed I already had a lot of my assets out of the market sitting in CDs. That was great, but I was slow getting back in and never increased my stock allocation to the level I should have.
So I went with a very simple calculation that would make financial planners shudder. Amount of savings/investments divided by 30 years. THAT is how much I can withdraw/spend each year and hopefully I can get by with less. If I earn money on the investments, all the better. If inflation eats away at the value of my dollars, then I won't be able to buy as much with the money I have - same as working people who don't make enough money to support themselves much less save. If the stock market and my 401k drops by half again, hopefully I won't need to access that account until it recovers and will still have enough in my cash accounts to get me through. Last resort if this doesn't work out is to move in with my son.
I like it. Why? It's real time, it works with your specific 30 retirement years.
It gives you a number to start with in year one. 3.33% or $2778 per month based on a million dollars
in savings/investments. No different than the calculators that tell you to start with 4% or 3% or 3.33%.
One problem I see with all calculations is the way in which human beings may not follow the numbers the calculator gives them. If allotted $33,300 for the year and come December 28 all your friends decide spending New Years in Vegas would be fun, we think why not When retired it only takes a keystroke to move money from investment account to checking to pay for that trip. But there goes the budget for the year.
So knowing that about ourselves and knowing unexpected expenses come up we really cant put a lot of value on the allowance we give ourselves for the year. So back to the 30 year plan stated above.
We gave ourselves $33300 for the year we spent $38500 the portfolio gain was 4% so now in year 2 we need to come up with a new number (divided by 29 years) and we probably wont stick to that either. But in year 3 we may have excess. So every year is a new number based on whats left divide by the number of years left. This to me is reality, we splurge, we adapt. Just like when we have a job and are broke 2 days before payday. We make it work. As far as living for more than 30 years thats unlikely but when you reach 80 if your running a 5 minute mile then rebalance whats left for a longer time period. Trial and error from today going forward.
I have used the Firecal just to see what it predicts under various conditions. Even so I do not trust it. First the calculations are hidden and fairly complex. Next the basis is highly suspect. Again, I mistrust using ancient data to predict the future. I would at least remove the inputs from the Roaring Twenties, from the Great Depression, anything prior to the end of the gold standard, etc.
A simple calculator is easy to understand and can provide useful information. As you have pointed out, for the 4% rule to work, it seems necessary to have an investment gain of 2% more than inflation. This is easy to verify with a simple calculator. Put in a set number for inflation, such as the past average of 3.5%, and also input 5.5% for earnings. Sure enough, the calculator will show that you run out of money in about 30 years. Everyone expects high variation in gains and inflation over the long haul, but at least we see the outcome for relatively small short term fluctuations around the averages. Next we can test the outcomes of different sorts of scenarios. For example I think we have a couple of more years of solid performance from the stock market and after that point I plan on moving my allocation away from stocks. After a couple more good years I suspect we will have a few years with low gains and higher inflation. The market might even have a serious setback but that would have little impact on me because my allocation will be low at that time. I can easily use a simple calculator for this. I would input a 2% inflation factor. I would input my gain rate from the past couple of years, minus a little in case the market starts to cool and to compensate for my plan to start selling stocks. I can see exactly where I will be in a couple of years. I can take my position at that point and input new data for gains and inflation and then look down the road a few more years to see where I will be. Of course if my guesses are not accurate, I would be running back to the calculator with new inputs to see the outcomes. No these simple calculators do very little to help predict the future, but they can help test scenarios that you believe are likely and will give you accurate data on what would have happened under those conditions.
aaaahhh yes!.. the simple calculator. yep once we know the real return we need which thanks to michael kitces and the data we love to hate that fire calc and the trinity uses we need nothing more than a simple calculator to know how we are doing in real time through our own retirement.
further more we know that mathamatically the floor you get from firecalc or any of the trinity studies will hold true as your minimum.
BINGO! THAT IS THE POINT I HAVE BEEN TRYING TO GET ACROSS.
it becomes a simple process now ,with a simple calcultor to see if you are holding on track for at least the minimum floor .
but none of this could have been possible without the data actually being quantified into numbers that are meaningfull which thankfully now they have.
folks love to argue and hate these studies and are always bringing up how its the past and means nothing as we can't predict but they never get the point it really does not matter if you are using the info in a meaningful way as it is ALWAYS TRUE regardless.
if your real return equals less than x the first 15 years of your retirement then mathamatically the minimum floor the 4% rule gives you will likely not hold true no matter what the circumstances are .
that is data anyone of us can easily use now and put in a simple calculator and monitor through retirement.
if every time the temperature goes below 32 water freezes ,who cares if every day , week and year weather patterns are different and no one can predict next years weather.
it never matters what repeats , the only thing that matters is if you have tempertures below 32 water will freeze.
there is no predicting water will freeze it is a fact.
the same is true with this other data once you understand how to quantify and use that data.
Last edited by mathjak107; 03-29-2014 at 04:40 AM..
I like it. Why? It's real time, it works with your specific 30 retirement years.
It gives you a number to start with in year one. 3.33% or $2778 per month based on a million dollars
in savings/investments. No different than the calculators that tell you to start with 4% or 3% or 3.33%.
One problem I see with all calculations is the way in which human beings may not follow the numbers the calculator gives them. If allotted $33,300 for the year and come December 28 all your friends decide spending New Years in Vegas would be fun, we think why not When retired it only takes a keystroke to move money from investment account to checking to pay for that trip. But there goes the budget for the year.
So knowing that about ourselves and knowing unexpected expenses come up we really cant put a lot of value on the allowance we give ourselves for the year. So back to the 30 year plan stated above.
We gave ourselves $33300 for the year we spent $38500 the portfolio gain was 4% so now in year 2 we need to come up with a new number (divided by 29 years) and we probably wont stick to that either. But in year 3 we may have excess. So every year is a new number based on whats left divide by the number of years left. This to me is reality, we splurge, we adapt. Just like when we have a job and are broke 2 days before payday. We make it work. As far as living for more than 30 years thats unlikely but when you reach 80 if your running a 5 minute mile then rebalance whats left for a longer time period. Trial and error from today going forward.
aaaahhh yes!.. the simple calculator. yep once we know the real return we need which thanks to michael kitces and the data we love to hate that fire calc and the trinity uses we need nothing more than a simple calculator to know how we are doing in real time through our own retirement.
further more we know that mathamatically the floor you get from firecalc or any of the trinity studies will hold true as your minimum.
BINGO! THAT IS THE POINT I HAVE BEEN TRYING TO GET ACROSS.
it becomes a simple process now ,with a simple calcultor to see if you are holding on track for at least the minimum floor .
but none of this could have been possible without the data actually being quantified into numbers that are meaningfull which thankfully now they have.
folks love to argue and hate these studies and are always bringing up how its the past and means nothing as we can't predict but they never get the point it really does not matter if you are using the info in a meaningful way as it is ALWAYS TRUE regardless.
if your real return equals less than x the first 15 years of your retirement then mathamatically the minimum floor the 4% rule gives you will likely not hold true no matter what the circumstances are .
that is data anyone of us can easily use now and put in a simple calculator and monitor through retirement.
if every time the temperature goes below 32 water freezes ,who cares if every day , week and year weather patterns are different and no one can predict next years weather.
it never matters what repeats , the only thing that matters is if you have tempertures below 32 water will freeze.
there is no predicting water will freeze it is a fact.
the same is true with this other data once you understand how to quantify and use that data.
I am totally confused by your post. First, Kitces and Firecalc have nothing to do with establishing a "real return" that we need. A simple calculator proves that you need an average 2% gain over inflation. I have no idea what you are saying about a "mathematical floor" that comes from Firecalc. Firecalc tries to use scenarios from the past to predict what will happen in the future. It will indicate some probability of success for a proposed withdrawal scheme and again it does this from estoteric calculations based on the past. A simple calculator does not predict at all. It calculates exactly what happens under certain conditions. Using a simple calculator you can investigate the outcomes for scenarios that you input. Many of us will input average inflation from the past (3.5% or so) and average gains from the past (6-7%) or so and then we will look at the output as a rough guide. When we do this, we know that averages in the future are unpredictable and we also know that there will be large fluctuations which also perturb the outcomes. Finally we also know that what happens in the early years of retirement is very important. This is not some wonderful conclusion from a researcher or from Firecalc. It is totally predictable by inputing scenarios and calculating the outcomes.
It seems that many of us want to plan for ongoing retirement well into the future. Unfortunately our life expectancy at the time of retirement is actually less than 20 years. In case we live longer many of us try to plan for a 30 year retirement. That means on average we spend much less than we have available. Often that means a large inheritance and we don't feel too bad about passing money on....at least I don't. The 30 year planning interval really makes most sense for someone retiring at age 65 or so. If you retire much earlier or later, a different interval would make sense.
So what happens if you are one of the lucky few to outlive the 30 years?? Well, rather than horde resources to try to cover your high nursing home costs, you probably would want to purchase an insurance policy against this risk. To some extent an annuity might help, but really the commercial world does not offer a good policy option. So the Federal government created one. It is called Medicaid. Many of us have paid huge sums into this insurance-type fund. I also have another policy from the Federal government. I paid with two years of my life including one year in a war zone.
The Trinity Study and Firecalc were developed well before the meltdown of 2008. Both were excellent work for their time. But the meltdown has informed most thoughtful people that the plan of 4% SWR, come hell or high water, is just silly, and that we have literally no idea of what's just around the corner in the world of finance. More recently, thoughtful analysis has moved away from the SWR concept, and on to other ways of looking at portfolio draw-down.
But the fundamental problem remains unsolved: there is no way for an individual to derive a safe, inflation-adjusted, predictable stream of retirement income from a portfolio of risky, volatile assets. That's what the SWR method claims to do, whereas in fact it only shifts the sequence-of-returns risk away from variability of the monthly draw and onto the very real possibility of portfolio exhaustion.
By the way, people interested in this kind of stuff would likely be interested also in Dirk Cotton's blog called "Retirement Cafe," as well as Wade Pfau's. See: http://theretirementcafe.blogspot.com/
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