FIRECalc in Bull vs. Bear Market (move, state, retiree, psycho)
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Many people get confused by the 4% rule. The rule does not mean you spend 4% of your portfolio every year. I means you calculate the 4% amount at the beginning of your retirement and then increase that amount each year by the rate of inflation.
For your money to last you need to make a 2% annual return. Plus you need to cover the rate of inflation.
Not to sound ignorant but can you explain what you mean by the 2% real return line. You used it a couple of times and I don't remember ever seeing that anywhere.
If I was to guess what it is. I would have to say that it is the rate above your draw plus inflation. If you are making 6% and drawing 4% with 1.5% inflation that is a losing rate and that is what you mean by that. Am I close?
real return is your return after inflation adjusting .
so when you look at the 5 or 6 worst case failures we had to date they all failed when the real return average for the first 15 years fell below 2% . once it did that even the greatest bull markets after wards could not salvage them so the money lasted 30 years . to much gets spent down drawing 4% inflation adjusted when you fail to achieve even a 2% real return over the first 15 years
Many people get confused by the 4% rule. The rule does not mean you spend 4% of your portfolio every year. I means you calculate the 4% amount at the beginning of your retirement and then increase that amount each year by the rate of inflation.
For your money to last you need to make a 2% annual return. Plus you need to cover the rate of inflation.
pretty much the idea but you don't have to have an up year every year . you will have down years , but the main thing is the "average" for the 15 years have to be a real return of at least 2% .
hopefully you won't have a bunch of down years up front .
Many people get confused by the 4% rule. The rule does not mean you spend 4% of your portfolio every year. I means you calculate the 4% amount at the beginning of your retirement and then increase that amount each year by the rate of inflation.
For your money to last you need to make a 2% annual return. Plus you need to cover the rate of inflation.
The 4% rule I have. That one is not that complicated. I was just unfamiliar with the 2% threshold to achieve over the first 15 years.
Quote:
Originally Posted by mathjak107
pretty much the idea but you don't have to have an up year every year . you will have down years , but the main thing is the "average" for the 15 years have to be a real return of at least 2% .
hopefully you won't have a bunch of down years up front .
so with a portfolio that grows at least 2% every year or more for the majority of the first 15 years in spite of drawing 4% inflation adjusted income from it is more or less the minimum to make it in retirement?
Presumably the question of how to draw from a large portfolio, vs. how it affects one’s income, is especially salient for early retirees. For “conventional” retirees (age 65+), there’s Social Security, and perhaps other defined-benefit sources of income, that cushion the harshness of potential market gyrations.
Likewise, for an early-retiree who’s keenly motivated on preserving his/her capital for perpetuity, it only makes sense to calibrate annual spending to market-performance. A particularly brutal year would perhaps imply un-retiring and resuming full-time employment (if possible).
Human nature being what it is, I can't imagine - for anyone, regardless of age or circumstances - NOT to reduce annual spending during bear-markets, or to splurge in a particularly heady bull-market.
Quote:
Originally Posted by mathjak107
...To understand the impact of inflation during this period,look at the CPI over the 60 year period before and after 1965. Inflation was largely predictable before 1965 and after the early 80s. However, the transition was painful. Between 1965 and 1982 prices would triple....
I've seen multiple versions of such charts, and most aren't quite as dire. But if we take the above-quoted chart literally (which BTW ignores dividends!), there was ZERO cumulative inflation-adjusted gain from 1900 through 1980! That is harrowingly harsh.
Quote:
Originally Posted by mathjak107
keep in mind that when talking statistic probability and success rates , one thing left out of all these calculators is the fact most of us will not last 30 years in retirement ....
throw in the fact so many studies show you don't need inflation adjusting yearly as we age as the things we no longer buy or do pay for what goes up and that improves success rates even more .
This makes sense for older people, whose decline in health and activity ought to imply decline in spending-needs (except of course for health care). The situation is totally different say for a superstar lawyer who has an 8-figure payout in a spectacular case, who then retires at 40.
The 4% rule I have. That one is not that complicated. I was just unfamiliar with the 2% threshold to achieve over the first 15 years.
so with a portfolio that grows at least 2% every year or more for the majority of the first 15 years in spite of drawing 4% inflation adjusted income from it is more or less the minimum to make it in retirement?
yes . but remember it does not have to grow 2% after inflation every year , it has to average at least that over the first 15 years . there will be years you are down .
Presumably the question of how to draw from a large portfolio, vs. how it affects one’s income, is especially salient for early retirees. For “conventional” retirees (age 65+), there’s Social Security, and perhaps other defined-benefit sources of income, that cushion the harshness of potential market gyrations.
Likewise, for an early-retiree who’s keenly motivated on preserving his/her capital for perpetuity, it only makes sense to calibrate annual spending to market-performance. A particularly brutal year would perhaps imply un-retiring and resuming full-time employment (if possible).
Human nature being what it is, I can't imagine - for anyone, regardless of age or circumstances - NOT to reduce annual spending during bear-markets, or to splurge in a particularly heady bull-market.
I've seen multiple versions of such charts, and most aren't quite as dire. But if we take the above-quoted chart literally (which BTW ignores dividends!), there was ZERO cumulative inflation-adjusted gain from 1900 through 1980! That is harrowingly harsh.
This makes sense for older people, whose decline in health and activity ought to imply decline in spending-needs (except of course for health care). The situation is totally different say for a superstar lawyer who has an 8-figure payout in a spectacular case, who then retires at 40.
most retirements are based on 30 years . parameters are different for more than 30 .
for someone drawing 4% from their portfolio it is what is .ss and pension income merely get added on top of it so it really has little effect on the volatility. no matter how much ss we get it plays no part in the portfolio volatility .
hypothetically for a 100k income , if the portfolio is responsible for 60k a year in a 60/40 mix and ss is 40k that 40k has no effect on the portfolio volatility at all .
most of us automatically react emotionally to markets . we tend to be freer spending more when we are in a bull and less freer with money when things are down .
i prefer a variable draw system myself so i enjoy more automatically when we are up and there is a slight hit when down .however because most years are up you are drawing from a higher base then a standard 4% draw would be . so that slight hit in a down year may still be more than the 4% constant dollars method
Last edited by mathjak107; 09-26-2018 at 02:51 AM..
mark cortazzo was on consuelo mack's show and he was illustrating just how crucial sequence risk is when spending down .
the order you get those gains and losses coming in as well as valuations when you start can have totally different outcomes and hence the reason it is so hard to answer the proverbial question "how much do i need "
he calls them the three brothers . all three brother had 1 million dollar portfolio's but retired on different dates . they all tried drawing 5% (5% was used so some of the portfolio's would deplete illustrating the difference )
brother #1 retired in 1997 just as the tech bubble got under way . by 2017 ,20 years later he had 2.10 million dollars left and averaged 8% .
brother #2 retired in 2000 at the peak . by 2017 he was broke
brother #3 retired in 2003 when the credit bubble started , 14 years in he also had over 2 million and a 10% average return .
so you can see the spread and outcomes can vary wildly for the same draw and same savings .
most retirements are based on 30 years . parameters are different for more than 30 .
for someone drawing 4% from their portfolio it is what is ...
That’s a useful point, and at the risk of misdirecting this thread, I’d like to use this point for a digression.
Retirement can mean the withdrawal from steady remunerative labor, associated with old-age, for purposes of which, money is accumulated during one’s traditional working-years. Or, it could mean a lifelong pursuit of material affluence, where one seeks to amass sufficient capital, that return on capital comes to greatly exceed any conceivable direct remuneration on one’s labor. In the latter case, (1) “retirement” is merely a bonus and a side-benefit resulting from one’s affluence; (2) the whole philosophy is one of ever increasing one’s capital throughout one’s life, so that on one’s deathbed, one has more money than on the day of one’s formal retirement.
A conventional retiree, who aims to save over the decades to afford a comfortable and well-financed old age, worries about sequence-risk and the like. It would be most disadvantageous and jarring, to have to reduce one’s spending if/when the market gyrates. The goal is to manage one’s capital to be a more reliably funded consumer.
But the second kind of retiree may in fact reengage in the workforce, or start a business, or undertake whatever drastic or venturesome means, in response to debilitating market-conditions. The initial exit from the workforce was after all merely a cost-benefit calculation; why work for $50/hour, when during a normal bull-market a stock index fund averages out to $500/hour “income”? Not so in dire times.
The first kind of retiree uses money to keep him/herself clothed and fed and happy. The aim is happiness, so that if capital makes poor return, that may be passively lamented, but ideally would have no effect on one’s actual behavior. The capital is allowed to deplete, serving the higher purpose of keeping one happy. The second kind of retiree clothes and feeds himself and so forth, to continue as an instrument of growing and nurturing his capital. The aim is significance, and not necessarily happiness. A dwindling fortune generally means diminished significance – an unacceptable outcome! This retiree will do whatever it takes to retain significance, even if it means reentering the workforce.
So… for the “usual” 30-year retirement, perhaps the best strategy is some variant of the 4% rule, maybe conservatively reduced to say 3.5%, for the more skittish among us; assuming, of course, an investment-allocation with good odds of the sort of performance assumed by the 4% rule. Yes? But an “unusual” retirement warrants an unusual response.
I thought this was an excellent video. But I believe a couple of points really needed more emphasis. The main warning is to not be like the brothers...100% in stocks and totally dependent or committed to withdrawing the same fixed amount regardless of market performance. Every single financial plan at any age needs to consider an emergency fund. Retirees should not only be included but the fund might need to be even bigger than during the working years. Another point that needed more emphasis was poor and emotional investment behavior.
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