My firecalc need for certainty

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frugalhen
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My firecalc need for certainty

Post by frugalhen »

:)

I think firecalc is a great tool, but I notice I have a psychological need to manipulate things to achieve the closest level of certainty of success.

I plug in my current savings, estimated spending, years to retirement and investigate the likelihood of having $500k In my portfolio at my death at age 90. I find it interesting that I "feel" so much better when I up my annual savings rate to achieve a 97.3% success rate rather than a 96.4% rate. Am I the only person who feels better when I feel like I am doing everything possible to achieve financial objectives when statistically my contribution makes a negligible difference at best?
"get out and live, you are dead an awfully long time" - Jimmy Demaret
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interplanetjanet
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Re: My firecalc need for certainty

Post by interplanetjanet »

I would ask how accurate your prediction of expenses really is, and how flexible it is. Being able to downsize your expenditures to some degree if necessary will probably do more to increase your likelihood of avoiding a portfolio crash than many other things.

When failure is not an option, success can get expensive.
freebeer
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Re: My firecalc need for certainty

Post by freebeer »

No you are not the only one.

What I find especially funny is the lack of longevity-awareness on the part of many Bogleheads. To me it's easy to grok that a 90% chance of "success" to age 100 is arguably enough... if I have a 10% chance of making it to 100 (optimistic) then a 90% chance of portfolio "success" out to that age really means that in that future year I will have a 90% chance of being dead, a 9% chance of being alive and rolling in dough, and a 1% chance of being alive and broke. Do I really want to defer a vacation or work more years to drop that 1 chance in 100 to 1 chance in 200? Especially given that it doesn't seem SO bad compared to the 90% case... and let's not even discuss the likelihood of a male 100 year old being able to physically or mentally enjoy life. As, working longer and/or deferring spending is what going from 90% success to 95% success implies - TANSTAAFL. And the stress of so doing could easily decrease that 10% chance of getting to 100 to say 8%, which would dwarf any "increased safety". One could argue that it's more "efficient" in the holistic sense to spend MORE now - on personal trainer, nutritional counseling, relaxing vacations, and organic vegetables and fresh fish!
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smiley
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Re: My firecalc need for certainty

Post by smiley »

freebeer wrote:No you are not the only one.

What I find especially funny is the lack of longevity-awareness on the part of many Bogleheads. To me it's easy to grok that a 90% chance of "success" to age 100 is arguably enough... if I have a 10% chance of making it to 100 (optimistic) then a 90% chance of portfolio "success" out to that age really means that in that future year I will have a 90% chance of being dead, a 9% chance of being alive and rolling in dough, and a 1% chance of being alive and broke. Do I really want to defer a vacation or work more years to drop that 1 chance in 100 to 1 chance in 200? Especially given that it doesn't seem SO bad compared to the 90% case... and let's not even discuss the likelihood of a male 100 year old being able to physically or mentally enjoy life. As, working longer and/or deferring spending is what going from 90% success to 95% success implies - TANSTAAFL. And the stress of so doing could easily decrease that 10% chance of getting to 100 to say 8%, which would dwarf any "increased safety". One could argue that it's more "efficient" in the holistic sense to spend MORE now - on personal trainer, nutritional counseling, relaxing vacations, and organic vegetables and fresh fish!

here's how i see it.....

i'm 40 now.
"expectation of life" for a 40 year old based on 2008 data (http://www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_03.pdf page 10) is 40.1 years. (80.1 years total)

male life expectancy all races 40 years ago was 67.1 years total.

a 13 year increase in expected life expectancy over the past 40 years. i assume much of this is related to advances in medical care. when I'm in my 80s, what will my life expectancy be?

in using firecalc, i choose to be a little more optimistic with regards to my longevity.

:happy
tacster
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Re: My firecalc need for certainty

Post by tacster »

smiley wrote:
here's how i see it.....

i'm 40 now.
"expectation of life" for a 40 year old based on 2008 data (http://www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_03.pdf page 10) is 40.1 years. (80.1 years total)

male life expectancy all races 40 years ago was 67.1 years total.

a 13 year increase in expected life expectancy over the past 40 years. i assume much of this is related to advances in medical care. when I'm in my 80s, what will my life expectancy be?

in using firecalc, i choose to be a little more optimistic with regards to my longevity.

:happy
Most of that 13 year increase is due to the fact that you actually survived to age 40. A bit of Googling found that life expectancy for an 85 year old male in 1900 was 3.8 years, while in 1997 it had only risen to 5.5 years, a surprisingly small increase imo.
INSERT PITHY QUOTE HERE
Saving$
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Re: My firecalc need for certainty

Post by Saving$ »

No, you are not the only one. I've fiddled with it so that I can get it to 100%. I REALLY need certainty.

However, even with Firecalc returning 100%, that is no certainty
1. Per previous posts on this forum, Firecalc has not been updated in years, so it does not include any data from the 2008 meltdown or since.
2. Even if Firecalc were updated to last month, and returning 100%, there is no certainty that future markets will mimic past markets.
derosa
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Re: My firecalc need for certainty

Post by derosa »

You might also consider working on the certainty of success of your health? And be sure to look both ways when crossing the street?

Ouch! My point is that there is no certainity in anything of course.
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coachz
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Re: My firecalc need for certainty

Post by coachz »

to me 90% is not great because it's 1 in 10 chance of failure. For me I would prefer better odds like 1 in 40 chance or better.
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smiley
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Re: My firecalc need for certainty

Post by smiley »

tacster wrote: Most of that 13 year increase is due to the fact that you actually survived to age 40. A bit of Googling found that life expectancy for an 85 year old male in 1900 was 3.8 years, while in 1997 it had only risen to 5.5 years, a surprisingly small increase imo.
but a look at the cdc numbers from the link above (page 46) shows life expectancy from birth went from 67 years in 1970 to 75.6 years in 2008 - still almost a 10 yr increase.

admittedly i fudged the numbers a little at first.

your point is well taken, but i want to believe that it's quite possible that the likelihood of reaching age 90-100 will be different in 40 years. and if i'm wrong, i'm wrong.

:happy
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mhc
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Re: My firecalc need for certainty

Post by mhc »

Saving$ wrote: However, even with Firecalc returning 100%, that is no certainty
1. Per previous posts on this forum, Firecalc has not been updated in years, so it does not include any data from the 2008 meltdown or since.
From a previous post, here is an updated version. I have only played briefly with it, so I do not know how good it is.

http://www.cfiresim.com/input.html
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
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Ged
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Re: My firecalc need for certainty

Post by Ged »

tacster wrote: Most of that 13 year increase is due to the fact that you actually survived to age 40. A bit of Googling found that life expectancy for an 85 year old male in 1900 was 3.8 years, while in 1997 it had only risen to 5.5 years, a surprisingly small increase imo.
It's interesting to me because it's an example of how misleading some statistics can be.

The life expectancy of a male born in 1900 was 46.3. The life expectancy of a male born in 1998 is 73.8.

However the change in life expectancy of older people changed little.

What is happening here is that death rates due to infant and childhood mortality fell precipitously due to improved public health - mainly from the introduction of chlorinated drinking water. Secondarily due to improvements in medicine such as vaccination, antibiotics and so forth.

It's a little known fact (at least in the US - in England they learn about John Snow in school, but not so much in the US), but the introduction of chlorination of drinking water is the number one health advance in human history. The improvement in lifespan from this outweighs all of modern medicine, combined, at least to date.

One of the other consequences of this is that the idea that you hear proposed from time to time that the retirement age should be increased because of average lifespan increases is in actuality based on incorrect understanding of statistics. In reality people who reach retirement age are not living that much longer than they used to. It's that fewer are dying at a young age that accounts for the increase in the average. Really the demographic problem of the boomer generation needs to be solved some other way.
Last edited by Ged on Fri Sep 06, 2013 8:29 pm, edited 1 time in total.
etarini
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Re: My firecalc need for certainty

Post by etarini »

smiley wrote:but a look at the cdc numbers from the link above (page 46) shows life expectancy from birth went from 67 years in 1970 to 75.6 years in 2008 - still almost a 10 yr increase.
Yes, but if you include life expectancy from birth, you get all sorts of confounding aspects of birth-related changes. If you really want to see the right numbers, consider the projected life expectancy only from 65 forward. After all, aren't you considering the difference in RETIREE longevity only?

Eric
etarini
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Re: My firecalc need for certainty

Post by etarini »

Firecalc, even if it had up-to-the-minute updates, wouldn't be good enough for me. I'm way too conservative to accept anything less than 100%. I use RetireCalc, which is really just a nice free calculator that makes it easy to do what you could also do on an Excel spreadsheet. I plug in the starting amount of my pile of money, enter my expected inflation rate, my expected earnings rate, and it tells me how much I can take out each year (inflation-adjusted). Notice I don't need to know anything about what the markets will do or did in the past. So, if I try a number of combinations, assuming I retire and then live for 35 years, I find:

- I can take out about 1.66% per year if my earnings are 3 percentage points behind inflation (i.e., I earn 3% but inflation is 6%; or I earn 1% but inflation is 4%, etc., averaged over a range of cases.

- I can take out 1.83% if I am 2.5% points behind inflation, or
- 2.01% if I'm only 2% points behind,
- 2.2% if I'm 1.5% points behind,
- 2.41% if I'm 1% behind inflation.

Then I think about what the LEAST that I could safely earn is, and and it shows me how far BEHIND inflation I can be and still not run out of money.
Of course, if I match or beat inflation, it lasts even longer, or I can take out a higher rate. If I only match inflation, I can take out 2.86%; if I beat it by 1%, I can take out 3.36%. Add the annual distribution of my pile of money to Social Security benefits, subtract expected expenses, and we have a pretty good idea.

And it's a nice conservative way to figure it out - just the way I like it. Us scaredy cats can't fool around too much with that risky stuff. Even the name Monte Carlo makes me feel like it's Retirement Russian Roulette!

I have no affiliation with RetireCalc, but I've enjoyed using it ever since I discovered it. It's free from American River Software, whoever they are.
http://www.americanriver.com/software_p ... lator.html

Eric
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smiley
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Re: My firecalc need for certainty

Post by smiley »

etarini wrote: Yes, but if you include life expectancy from birth, you get all sorts of confounding aspects of birth-related changes. If you really want to see the right numbers, consider the projected life expectancy only from 65 forward. After all, aren't you considering the difference in RETIREE longevity only?

Eric
sorry, the cdc hasn't yet published life expectancies at age 65 for the year 2038 yet.

there is a 6.43 year difference in life expectancy for a 40 year old between 1970 and 2008 (page 53).

i suppose i expect a moore's law medical equivalent to accelerate this.....but this is all conjecture.

didn't mean to get this thread off topic, my apologies.

:happy
freebeer
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Re: My firecalc need for certainty

Post by freebeer »

coachz wrote:to me 90% is not great because it's 1 in 10 chance of failure. For me I would prefer better odds like 1 in 40 chance or better.
It's 1 in 10 chance of failure over the 30 or 40 or whatever year period. But remember you have less than 1 in 10 chance of living 30 years after retirement so it's not actually 1 in 10 chance of actual failure (while you're still alive, I mean).
jingo
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Re: My firecalc need for certainty

Post by jingo »

I’m a statistician and I like taking my chances.
etarini
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Re: My firecalc need for certainty

Post by etarini »

jingo wrote:I’m a statistician and I like taking my chances.
Well, of course. 95% confidence is the gold standard for you guys. For us chickens, 95% is just the starting point on the journey to achieving that third numeral in the percentage! :happy

Eric
katsmeow
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Re: My firecalc need for certainty

Post by katsmeow »

Saving$ wrote:No, you are not the only one. I've fiddled with it so that I can get it to 100%. I REALLY need certainty.

However, even with Firecalc returning 100%, that is no certainty
1. Per previous posts on this forum, Firecalc has not been updated in years, so it does not include any data from the 2008 meltdown or since.
Actually it did have data through 2010 I believe up until a few days ago. It has apparently been updated a couple of days ago. I think but am not certain that it goes through 2012 now.
etarini wrote:Firecalc, even if it had up-to-the-minute updates, wouldn't be good enough for me. I'm way too conservative to accept anything less than 100%. I use RetireCalc, which is really just a nice free calculator that makes it easy to do what you could also do on an Excel spreadsheet. I plug in the starting amount of my pile of money, enter my expected inflation rate, my expected earnings rate, and it tells me how much I can take out each year (inflation-adjusted). Notice I don't need to know anything about what the markets will do or did in the past. So, if I try a number of combinations, assuming I retire and then live for 35 years, I find:
......

And it's a nice conservative way to figure it out - just the way I like it. Us scaredy cats can't fool around too much with that risky stuff. Even the name Monte Carlo makes me feel like it's Retirement Russian Roulette!

I have no affiliation with RetireCalc, but I've enjoyed using it ever since I discovered it. It's free from American River Software, whoever they are.
http://www.americanriver.com/software_p ... lator.html
RetireCalc isn't conservative at all. It seems to do a straight calculation ignoring volatility. The whole point of safe withdrawal rate research is that you don't get the same return every year. I ran it for a 30 year period with a real return of 5% and it had me taking out 6.1% each year. (with a 2% real return it had me withdrawing 4.34%). The problem is that in real life you don't actually get a real return of 5% each year (or 3% or 2% or 7%). Some years you may get 10% or 20%, but other years you may be down 20% or 30%, etc. You can't just average out. The sequence of returns makes a difference. RetireCalc ignores that so gives results that aren't very helpful.

Oh, and Firecalc doesn't use Monte Carlo simulations. Firecalc is using the actual historical results and telling you how your portfolio would have fared with the actual returns that occurred since, I think, 1871. I think you can run it with a Monte Carlo simulation if you want to. But, that isn't the primary use of Firecalc.
umfundi
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Re: My firecalc need for certainty

Post by umfundi »

Longevity is not all it's cracked up to be. Case in point: Nelson Mandela.

Keith
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YDNAL
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Re: My firecalc need for certainty

Post by YDNAL »

frugalhen wrote:I think firecalc is a great tool, but I notice I have a psychological need to manipulate things to achieve the closest level of certainty of success.
The day firecalc (or anything else) tells you, frugalhen, you will live to 87 years, 3 months, 2 hours, 42 seconds, THAT would be a great tool. Then on that last day you can take an ambulance ride to Vegas and spend a few dollars on the roulette just for the heck of it.

The only certainty of success is to save sufficiently to the point that you take out the least when the paychecks stop.

I think that flexibility and reasonableness are the greatest tools.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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kramer
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Re: My firecalc need for certainty

Post by kramer »

If I recall correctly (and I don't have the stats in front of me), the life expectancy for a 65 year old is increasing at a rate of just under a year per decade. So a good conservative rule of thumb might be to include that into your calculations.
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