Investing in retirement

[mathjak107]

twobyfour , typicially we refer to a calculator as firecalc or something like fidelity's RIP.

but the problem is really you need to understand what the results mean , who they apply to and what they should be used for.

none of the data these calculators use was meant to be a life long plan or perhaps even a plan for you.

these numbers took on a life of their own on and are a far cry from the professional intention they were intended to be used for.

i will try to explain as simple as i can.


see this chart



that chart is showing us every rolling 30 year period and simply showing us what each 30 year period would have let some one draw out ,inflation adjust and keep that constant flow going with no cut in pay.

the retirement time frames vary depending on 3 things, each years return , interest rates ,inflation ,and the actual sequence of gains and losses for each 30 year period..


as you can see the average safe withdrawal over history is really up around 6.5% looking at everything.

but you see those low points ? particularly 1966 ?

the whole idea of 4% was based on the fact a withdrawal rate had to be cut down to no more than 4% so most of the worst of times passed through.

we are talking maybe 3or 4 periods where you had to drop to 4% out of 111 rolling 30 year periods to avoid a pay cut. if you are okay with out planning for those absolute worst case scenerio then go higher by all means.

because people are trying to use these results on their own without professional guidance the safe floor to start was based on 4% which represented the low water mark so folks stood a better chance of not hurting themselves left to their own devices.

now what do those worst conditions mean to us since we can't predict the future?


well research has found there was a common denominator to all the worst case conditions that failed .

the combinition of market returns that year, interest rates, inflation and sequences of gains and losses all were under 2% real return for the first 15 years.

that is very useful info , because that means what ever happened in the past to cause whatever it caused does not matter.

everything sums up to whether the first 15 years were averaging at least a real return of 2% or not.

when you monitor things in your retirement if you are finding whatever you are doing is not at least adding up to 2% or better after 7-10 years in you better evaluate things because you are in danger even the floor of 4% will not hold.

these calculators make it seem like one size fits all , here is your withdrawal rate and have a nice life.

your financial life is far more complex and personal to you.

it is okay if you are gun shy to start at 4% but if not go higher , you can always monitor your real return and adjust later.

[Windwalker2]

I find myself wondering at what age I would no longer be able to do complex calculations and choose stocks, mutual funds, etc. wisely. and would I know when I had reached that age? And then would an annuity be best?

[mathjak107]

without extensive questions answered first no one can really evaluate your personal siuation in my opinion.

[NJFRED]

Guys and gals thanks for all the replies. When SS kicks in I will still need around 4% from
the 401k for expenses. I do look at the pensions and SS as my fixed income from total
Portfolio. I don't really like annuities because of losing that principal. I do feel comfortable
with at least a 70% allocation of stocks in the 401k. It seems I do have
other options and will study many of the ideas everyone has provided. Thank you!

[TwoByFour]

Originally Posted by mathjak107

twobyfour , typicially we refer to a calculator as firecalc or something like fidelity's RIP.

but the problem is really you need to understand what the results mean , who they apply to and what they should be used for.

none of the data these calculators use was meant to be a life long plan or perhaps even a plan for you.

these numbers took on a life of their own on and are a far cry from the professional intention they were intended to be used for.

Fidelity's RIP uses a Monte Carlo calculation. If you are not familiar with that term, here is what happens:

Historical returns are used to create a table of values, one for each year. Same with inflation - a table of values is created that matches the historical yearly inflation values.

Now let's say you want to calculate where you will be after 20 years. A series of models are run, one for each 20 year plan. The calculation calculates the return from year 1 adjusts for inflation, feeds that into year 2 which does the same thing, etc. up to year 20. But the return that is used for any one year is a random selection from the historical table of values and the inflation value that is used for any one year is also from the historical table.

The net result is the probability that you will realize a 10% return in any one year of the model is the historical probability for that return. And the probability that you will have an inflation adjustment of 3% (for example) in any one year is the historical probability for that inflation value.

So that is how a single run is made. Now a very large number of runs are done, say 1000. Each run is different because each one is randomly picking returns and inflation. From that you will get a statistical outcome - an average and standard deviation which tell you what the likelihood is of attaining any outcome from the 20 year plan.

The inputs to the model are your own inputs: starting asset value in dollars, allocation, and desired withdrawal amount in dollars. Plus other life events, like selling property in year 5, giving a boost to the portfolio. A good model also accounts for taxes (I cannot remember if Fidelity does). Because the model uses historical values for equity returns (and bond returns) and because it is probabilistic in nature, it accounts very well for the variability in the financial markets.

I believe this is a very good model for someone's personal situation. Much better than trying to do a rule-of-thumb approach, like saying, 4.5% withdrawal will be OK. That does not account at all for one's personal situation or the variability of the economy.

[mathjak107]

i am familiar with fidelity's , yes they do a monte carlo scenerio which instead of taking actual worst case scenerios it creates ones that were possible but never did play out.

personally i would love the numbers fidelity shows in my case to play out but i tend to go with the more conservative numbers i get from firecalc.

even fidelity's poor market numbers look damn good lol.


i am not sure as to what they are actually doing in their alogorithms that make the numbers are higher than firecalcs.

fire calc is pretty straight forward. it is just the summing up of the data each year and in simple math doing the calculation.

you should really enter your taxes as expenses .

but in any case i don't really use the results other than a ballpark. i will be watching for that 2% real return and adjust from there if things go badly. otherwise i will use bob clyatts dynamic method.

[TwoByFour]

Physicists use Monte Carlo calculations a lot, particularly in nuclear and quantum physics. I did a lot of that while in grad school and afterwards. I understand what is going on very well and think it is a good way to arrive at a probabilistic assessment for an outcome that is governed by random events (like the stock market and the economy).

At any rate, everyone should use whatever they feel confident that they understand what it is telling you.

[Windwalker2]

Originally Posted by mathjak107

without extensive questions answered first no one can really evaluate your personal siuation in my opinion.

If this was directed at me, I was not asking for personal advice. I just wanted to point out that all of us are aging and a time will come when we can't manage our money effectively, no matter how good we might be at it when younger. Planning for that time is also important.

[mathjak107]

Originally Posted by Windwalker2

I find myself wondering at what age I would no longer be able to do complex calculations and choose stocks, mutual funds, etc. wisely. and would I know when I had reached that age? And then would an annuity be best?

and then would an annuity be best is usually a request for an answer.