Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

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WyomingFIRE
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Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by WyomingFIRE » Fri Oct 12, 2018 7:46 am

Curious if the following sounds right to everybody:

So our NW ($3.5M) dropped about $140K the past 48 hours. AA is about 85% equities/12% bonds/2% RE (our home)/1% cash.

Last week, the Personal Capital retirement planner had our probability of success at 93%. This morning, it is down to 90%. That seems like a pretty significant change for what I consider to be normal market gyrations for our AA. I'm focused on the 3% drop, not the difference between 93% and 90% which I understand is meaningless from the 10,000-foot level.

Did my probability of retirement success really drop 3% between Tuesday and this morning? That sounds too high, and makes me wonder if the retirement calculator is too sensitive.

Dandy
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by Dandy » Fri Oct 12, 2018 8:06 am

85% equity allocation in retirement is quite aggressive. With 3.5 million in assets it seems, without further information, not necessary. The recent days of bad markets is a bit scary but not that unusual, when corrections often reach 20% and more with some frequency.

I would look to your need to be that aggressive vs looking for flaws in the software predicting your future success.

3funder
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by 3funder » Fri Oct 12, 2018 8:08 am

Dandy wrote:
Fri Oct 12, 2018 8:06 am
85% equity allocation in retirement is quite aggressive. With 3.5 million in assets it seems, without further information, not necessary. The recent days of bad markets is a bit scary but not that unusual, when corrections often reach 20% and more with some frequency.

I would look to your need to be that aggressive vs looking for flaws in the software predicting your future success.
+1

WyomingFIRE
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by WyomingFIRE » Fri Oct 12, 2018 8:10 am

Dandy wrote:
Fri Oct 12, 2018 8:06 am
85% equity allocation in retirement is quite aggressive.
Thank you very much.

I'm ten years away from retirement.

And your point is still valid. I think we're too aggressive. Still, the retirement calculator outcome seems peculiar.

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jharkin
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by jharkin » Fri Oct 12, 2018 8:14 am

WyomingFIRE wrote:
Fri Oct 12, 2018 8:10 am

I'm ten years away from retirement.
Wow, what are your annual expenses/retirement target? If I had 3.5MM I could put it all in money market and retire tomorrow.........

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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by AlohaJoe » Fri Oct 12, 2018 8:20 am

WyomingFIRE wrote:
Fri Oct 12, 2018 7:46 am
Did my probability of retirement success really drop 3% between Tuesday and this morning? That sounds too high, and makes me wonder if the retirement calculator is too sensitive.
I don't know anything about how Personal Capital works. But a 3% change seems fine to me. Your portfolio dropped by 4% or so and is mostly made of equities. It isn't that it is "too sensitive", it is more about false precision. Last week you weren't really at 93%. More likely you were at 86-100%. And now you're at 83-97%.

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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by KlangFool » Fri Oct 12, 2018 8:21 am

WyomingFIRE wrote:
Fri Oct 12, 2018 8:10 am
Dandy wrote:
Fri Oct 12, 2018 8:06 am
85% equity allocation in retirement is quite aggressive.
Thank you very much.

I'm ten years away from retirement.

And your point is still valid. I think we're too aggressive. Still, the retirement calculator outcome seems peculiar.
WyomingFIRE,

<<I'm ten years away from retirement. >>

How do you know? It could go very well or very bad.

A) Very well and your portfolio doubles in 5 years. Would you still retire in 10 years?

B) Your portfolio drop by half in 5 years. Would you still retire in 10 years?

C) Or, life happened and you have to retire immediately.

Change your AA to less aggressive. Then, you could retire at any time when you hit your number.

KlangFool

Walkure
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by Walkure » Fri Oct 12, 2018 8:23 am

WyomingFIRE wrote:
Fri Oct 12, 2018 7:46 am
Did my probability of retirement success really drop 3% between Tuesday and this morning? That sounds too high, and makes me wonder if the retirement calculator is too sensitive.
What does the calculator mean by success? If it just refers to "Not Failing" aka completely running out of money before you die, then 3% would be an extreme movement. But if it indicates sustaining a specified annual income >$100k (ballpark guess based on 3.5 mil in assets) for an indefinite period of time, I can see how the recent sequence of returns could throw it off at the margins, especially since 93% is so high to begin with. If you imagine the distribution of possible outcomes, they cluster around the median with really bad sequences on the left tail and really good sequences on the right tail. Because the relative density of outcomes in the tails is so thin, a slight leftward shift in the range of projected outcomes due to this week's string of RBDs might have that kind of sudden effect.

cherijoh
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by cherijoh » Fri Oct 12, 2018 8:34 am

WyomingFIRE wrote:
Fri Oct 12, 2018 7:46 am
Curious if the following sounds right to everybody:

So our NW ($3.5M) dropped about $140K the past 48 hours. AA is about 85% equities/12% bonds/2% RE (our home)/1% cash.

Last week, the Personal Capital retirement planner had our probability of success at 93%. This morning, it is down to 90%. That seems like a pretty significant change for what I consider to be normal market gyrations for our AA. I'm focused on the 3% drop, not the difference between 93% and 90% which I understand is meaningless from the 10,000-foot level.

Did my probability of retirement success really drop 3% between Tuesday and this morning? That sounds too high, and makes me wonder if the retirement calculator is too sensitive.
WyomingFIRE wrote:
Fri Oct 12, 2018 8:10 am
I'm ten years away from retirement.
AA is way too aggressive for someone hoping to retire in 10 years. Especially since you may not be in control as to when you actually end up retiring. A significant recession in the next couple of years could mean involuntary retirement. Or a deterioration in your or a family member's health could mean the same.

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AtlasShrugged?
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by AtlasShrugged? » Fri Oct 12, 2018 8:49 am

Did my probability of retirement success really drop 3% between Tuesday and this morning? That sounds too high, and makes me wonder if the retirement calculator is too sensitive.
Wyoming....the answer is no, and no. You can relax now.

The difference in probability here is meaningless, IMHO. What is the qualitative difference between 90% and 93%? Answer: Almost nothing.

IMHO, you are very aggressively allocated. Perhaps moving 2%-3% into bonds each year for the next 10 years as you approach retirement is something you want to seriously consider.

EDIT: As an aside, I rebalanced (livesoft would be pleased, I think) into equity index funds yesterday, and was a buyer this morning of stocks.
“If you don't know, the thing to do is not to get scared, but to learn.”

Random Walker
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by Random Walker » Fri Oct 12, 2018 8:54 am

Stocks decreased in value, which means expected returns increased a bit. I bet your calculator’s input expected returns did not change over the 48 hours but of course the input starting net worth was less. Overall I would say your success rate didn’t meaningfully change. If it’s a Monte Carlo Simulation, then I believe these sorts of returns are accounted for in the many sequences of returns generated.

Dave

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willthrill81
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by willthrill81 » Fri Oct 12, 2018 9:18 am

WyomingFIRE wrote:
Fri Oct 12, 2018 7:46 am
Curious if the following sounds right to everybody:

So our NW ($3.5M) dropped about $140K the past 48 hours. AA is about 85% equities/12% bonds/2% RE (our home)/1% cash.

Last week, the Personal Capital retirement planner had our probability of success at 93%. This morning, it is down to 90%. That seems like a pretty significant change for what I consider to be normal market gyrations for our AA. I'm focused on the 3% drop, not the difference between 93% and 90% which I understand is meaningless from the 10,000-foot level.

Did my probability of retirement success really drop 3% between Tuesday and this morning? That sounds too high, and makes me wonder if the retirement calculator is too sensitive.
The Personal Capital calculator is just a simple Monte Carlo tool. These can be useful in some regards, but there are many noted problems with them, such as the fact that most do not incorporate mean reversion and so predict more significantly more extreme sequences, both positive and negative, than they 'should' than the historical record.

I believe it's TIAA who recommends that Monte Carlo success rates be compared to bands. They classify anything 90% or higher as a very high likelihood of success. This makes more sense to me than worrying about a tiny change in success rates (i.e. +/- 3%).
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delamer
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by delamer » Fri Oct 12, 2018 11:30 am

The S&P500 was down 7.2% from its peak as of yesterday’s close.

So a 3% decline in portfolio success for someone with 85% of assets in stocks seems reasonable.

livesoft
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by livesoft » Fri Oct 12, 2018 11:38 am

I have to laugh if one thinks that any of these "probabilities" have any basis in fact or science. Sure, they have a model they made up based on something, but there are lots of such models out there and most of them have believers that a particular model is OK. But I think none of the models have a precision better than plus-or-minus 20% or more.
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by rkhusky » Fri Oct 12, 2018 4:23 pm

I don't like to use "probability of retirement success" for these types of models. I prefer something that more accurately reflects what the model is doing. For example, for models that use real investment returns from the past, I prefer "fraction of past successful time periods". Most of these models will also tell you in which of the past time periods you would have ran out of money. The next question to ask is "what are the chances that we will experience a similar period, since now everyone recognizes the issues that caused the problems in that time period?"

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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by MIretired » Fri Oct 12, 2018 5:02 pm

This gave me an idea. I think I'll think of this in the inverse. Since the OP is about 10 years from expected retirement.
I will take the inverse description and say you had a 7% chance of failure, and now have a 10% chance of failure. If you were much further from retirement, I'd stick with the chance of success, instead. Because during accumulation, and still far from retirement, the risk dynamic is different than closer to or in retirement and decumulating. In or near retirement it's time til money needed and therefore some amount of preservation of capital or inflation protection.
Closer to retirement using the 10% chance of failure is like the 4% SWR rule. These measures tell you the chance of a 55% drop in stocks the year after you retire, the chance of high inflation the first 10 years of retirement, or something else major.

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JoMoney
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by JoMoney » Fri Oct 12, 2018 5:23 pm

WyomingFIRE wrote:
Fri Oct 12, 2018 7:46 am
...makes me wonder if the retirement calculator is too sensitive.
Yes, they're all "sensitive", minor changes compound exponentially over long periods of time.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by willthrill81 » Fri Oct 12, 2018 7:13 pm

livesoft wrote:
Fri Oct 12, 2018 11:38 am
I have to laugh if one thinks that any of these "probabilities" have any basis in fact or science. Sure, they have a model they made up based on something, but there are lots of such models out there and most of them have believers that a particular model is OK. But I think none of the models have a precision better than plus-or-minus 20% or more.
Image
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by FoolMeOnce » Fri Oct 12, 2018 8:32 pm

Q: I waited 10 minutes for the barista to make my latte. There was a line, but it was short. Is that reasonable?

A: Latte? You know that's mostly milk, right? I'd never order anything but drip. Maybe pour-over.

A: You really shouldn't order coffee with your high blood pressure. (You have high blood pressure, right?)

A: Coffee shops, pah! I make my own espresso at home.

A: Coffee is fake news.

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JoMoney
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Re: Unfortunate Near Real-Time Test of Sequence of Returns Risk v Probability of Retirement Success

Post by JoMoney » Fri Oct 12, 2018 8:49 pm

FoolMeOnce wrote:
Fri Oct 12, 2018 8:32 pm
...
A: Latte? You know that's mostly milk, right? I'd never order anything but drip. Maybe pour-over.
I know, right?! ;)
Why is a cup of coffee $2 and milk free if you pour it yourself, but a cup of milk from the barista with a little bit of coffee in it $4 ?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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