City-Data Forum Monte Carlo Simulations (pension, social security, depression, respect)
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09-21-2017, 10:20 AM
 2,676 posts, read 1,540,967 times Reputation: 2587

Quote:
 Originally Posted by mathjak107 but all we need is the math from the worst case scenarios that exist . the math says we need a 2% average real return the first 15 years to hold 4% . what else do you need to test for ? all the back testing is used for now that we have powerful computers is to determine the math that caused the failures . we know all that now that kitces crunched the numbers . we have the results of the failure , the math that caused it and how to monitor ourselves . it is basically done . even if we had 1,000 more sample cycles that were worse , the math is the math and we already know what that math is that leads to failure . any condition that falls below 2% real returns during the first 15 years will have to have a pay cut or risk failure if drawing 4% inflation adjusted .. it was different before the numbers were crunched and converted to a common denominator that caused all failures to happen .when we worked off a percentage of pass vs failure based on sample size more samples would be better. but today once we identified the conditions that caused the failure basically we are done. think of it as analyzing all the diseases we ever had that had fevers that led to death . once we learned that if the human body goes over x-amount of temperature it fails , we can stop analyzing diseases to find the link between disease and temperature ..
What "math" are you talking about? How does "math" cause a "failure"?

09-21-2017, 12:06 PM
 71,535 posts, read 71,712,424 times Reputation: 49120
in order to support 4% inflation adjusted mathematically you need to have at least a 2% real return to support that .

all the failures where the retiree ran out of money before they ran out of time had 2 common denominator .

they not only all fell below 2% but they all were destroyed in the first 15 years . the spending left them in every case with so little left that even the greatest bull market in history could not save them .

every single failure in history was determined by the 15th year .

https://www.kitces.com/blog/what-ret...ly-based-upon/

Last edited by mathjak107; 09-21-2017 at 01:16 PM..

09-21-2017, 01:18 PM
 71,535 posts, read 71,712,424 times Reputation: 49120
here are the failures

suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since

so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding.

09-21-2017, 01:33 PM
 2,676 posts, read 1,540,967 times Reputation: 2587
I see, thanks. In my book, the math is working fine. What "failed" is either the market or the strategy, maybe both. If only we coud predict the future!

09-21-2017, 01:45 PM
 71,535 posts, read 71,712,424 times Reputation: 49120
that is the point , no need to predict the future .

now that we know what it takes just monitor things . if i was 5 years in and below a 2% real return average a red flag should go up . 7-10 years in an alarm should be going off .

so you don't need to predict . now that the math was done for us all we have to do is monitor .

09-21-2017, 01:52 PM
 Location: Central Massachusetts 4,800 posts, read 4,846,832 times Reputation: 6379
I think the real important point here is that as a retiree that depends on savings to supplement other income ie. SS, pensions, annuities and the like should be flexible enough to adjust draws and spending to accommodate fluctuations in those retirement accounts.

09-21-2017, 02:11 PM
 71,535 posts, read 71,712,424 times Reputation: 49120
well the whole idea of a safe withdrawal rate is to create a pensionized income that is , safe , secure and consistent .

in reality you are trying to create your own pension .

the same way you don't want your pension to be a variable amount you can't count on each month , is the same logic here .

the whole idea is not to take a pay cut and to most likely have to take raises under more normal conditions .

that does not mean you have to spend your portfolio like a robot , but it does mean you should be able to count on it the same way you would count on a pension not being reduced in bad times ..

09-21-2017, 03:12 PM
 12,825 posts, read 20,138,510 times Reputation: 10910
Quote:
 Originally Posted by mathjak107 here are the failures suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like : 1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64-- 1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69-- 1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82 1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38 for comparison the 140 year average's were: stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23% so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years. so lets look at the first 15 years in those time frames determined to be the worst we ever had. 1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64% 1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69% 1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82% 1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38% it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding.
This is why, for me, there is no such thing as "enough retirement savings." In order to deal with periods like the above, the only method is brute force, a huge war chest.

09-21-2017, 03:18 PM
 71,535 posts, read 71,712,424 times Reputation: 49120
but the flip is 90% of every 30 year time frame since 1926 you ended 30 yeara later with more than you started. so 25x what you hope to draw from just the portfolio has been more than enough .

09-21-2017, 03:33 PM
 Location: Haiku 4,060 posts, read 2,572,689 times Reputation: 5989
Quote:
 Originally Posted by mathjak107 well the whole idea of a safe withdrawal rate is to create a pensionized income that is , safe , secure and consistent . in reality you are trying to create your own pension .
That is a very good way of thinking of retirement investment. However, one way the pension analogy breaks down is that a pension has an infinite time horizon and it is pooled money. While it is paying out distributions, part of that is funded by investment returns but part is also funded by new capital coming in from people who are not yet retired, just paying into the pension fund. It also has no end date, so everything in in looks like a very-long term investment. The shorter an investment horizon is, the harder it becomes. That is a problem for a personal investor with our finite life span but not for a pension.
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