What do you do when you run the numbers and don't like the answer that you get?

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randomizer
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What do you do when you run the numbers and don't like the answer that you get?

Post by randomizer » Sun Jul 09, 2017 10:45 pm

I've had a few good years (high income, high savings rate) in a HCOL area, and have been able to save a fair chunk with a view to eventually retiring in a LCOL area. When I "run the numbers", I see that I'll need to accumulate much more than I currently have in order to have a reasonably "certain" retirement. On the other hand, there are a bunch of other factors (including stress, health, contract ending, desire to move near family etc) that pressure me to switch gears and move to the LCOL area before I hit "my number". I'm just hoping that I have a couple of decades of productive employment ahead of me, and that I can somehow figure out how to navigate the grey zone between what I have and what I think I'd need to be "sure" of an eventual safe retirement.

(Concrete numbers: Current investments, about $700k. Current yearly spend in HCOL area: about $120k. Estimated yearly spend in LCOL area $60k, including generous margin for error; real amount may be as low as $45k. 25 times $45 = $1.125m. 25 times $60k = $1.5m. Current savings rate in HCOL area: $200k/year, but my contract is going to end within a year, so that can't continue anyway. In LCOL area expect to have a drastic reduction in savings rate: could easily be as little as $20k/year, which is a 10x reduction even though the cost of living is only 2x less. Might get to $800 or $900k before moving, at which point contributions will reduce to a trickle and I'll be mostly dependent on the market for growth.)

I guess the question I'm asking here is how people cope with the uncertainty over a 20 year time scale, where the numbers are doubtful, and the number of unknowns (even known unknowns) is so large.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by arsenalfan » Sun Jul 09, 2017 10:49 pm

It is either increase your savings or decrease your expenditures (now and in retirement).
A third way depending on your AA is take more risk, but that's...risky.
Play with firecalc or the other retirement calcs. Tweak your inputs to see what will get you to where you want to be.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by TD2626 » Sun Jul 09, 2017 11:21 pm

Here is something that you should NOT do: Adjust the numbers that you are putting into your model until it spits out the answer you want, then somehow feel good about yourself because your decisions are supported by a CAPM/MPT/Monte Carlo based model. People for some reason have a tendency to do this, unfortunately.

Being serious now:
There's one parameter you can change - your savings rate. This has the biggest effect on results, followed by AA, followed by individual security selection. But savings rate's effect on results is so overwhelming that as long as you have a reasonable, broadly diversified, buy-and hold set of funds and a reasonable AA, the savings rate is what could be changed. (Small changes to AA may also be done if very carefully considered and if the evidence suggests that is needed).

At some point, though, if you've done the best you can, and after careful consideration and significant effort can't increase savings further, and have minimized risk through prudent investing, you just have to wait around and bear the risk. All investment is risky, and little that can be done to change that.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by arsenalfan » Sun Jul 09, 2017 11:26 pm

TD2626 wrote:Here is something that you should NOT do: Adjust the numbers that you are putting into your model until it spits out the answer you want, then somehow feel good about yourself because your decisions are supported by a CAPM/MPT/Monte Carlo based model. People for some reason have a tendency to do this, unfortunately.

Being serious now:
There's one parameter you can change - your savings rate. This has the biggest effect on results, followed by AA, followed by individual security selection. But savings rate's effect on results is so overwhelming that as long as you have a reasonable, broadly diversified, buy-and hold set of funds and a reasonable AA, the savings rate is what could be changed. (Small changes to AA may also be done if very carefully considered and if the evidence suggests that is needed).

At some point, though, if you've done the best you can, and after careful consideration and significant effort can't increase savings further, and have minimized risk through prudent investing, you just have to wait around and bear the risk. All investment is risky, and little that can be done to change that.
Uh...I think we're saying the same thing. Take firecalc increase annual saving amounts and drop spend rates as much as is realistically possible, check the results. Hopefully hits 99% of cycles. If better then save more/spend less.

Not talking about juicing portfolio return numbers: I always assume equities return 3% real

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Watty » Sun Jul 09, 2017 11:35 pm

In addition to all uncertainty in the numbers and your future investing returns you will likely have all other sorts of unexpected twists and turns in your personal life. You may also run into future opportunities that you would have never even thought of.

It sounds like you don't really need to decide on much of anything until you get near the end of your current contract and you know what your options are.

When I was looking at my retirement numbers before I retired one of the things that I considered was that If I needed to I could cut my spending back by 10% with little real pain and even 20% and still have a comfortable lifestyle. Know that i could cut back a lot was one of the way I allowed for all the uncertainty.

randomizer wrote:Current investments, about $700k......Might get to $800 or $900k before moving, ....

In LCOL area expect to have a drastic reduction in savings rate: could easily be as little as $20k/year,....

Estimated yearly spend in LCOL area $60k, including generous margin for error; real amount may be as low as $45k. ....
:oops: Saving $20K a year is probably more than 99% of people in a low cost of living area save. It might not be what you were saving before but it is still pretty fantastic for someone that expects to retire on $60K a year or less.

If those expense figures are right then you also need to consider how much Social Security you will get at different starting ages. If you will be be getting $30K a year in Social Security then you would need somewhere between $30K and $15K a year from your investments which would be a lot easier to fund.

You didn't mention your age but bridging the gap between when you stop working and when you start Social Security sounds like the biggest challenge.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by nanoanalyzer » Mon Jul 10, 2017 12:40 am

1. Panic. Not the best idea, certainly a character flaw of mine.
2. Frantically search for low-to-mid hanging fruit to reduce spending or improve overall cashflow.
3. Deep breaths. Everything will be okay. There are people who literally live on social security and medicare.
....
12. Look for cheap money. Credit card and bank bonuses, refinance bonuses, 5%+ low risk accounts and investments, etc.
....
83. Work longer or harder. Realize that steps 3-82 are all small money solutions to a big money problem, with no way to predict the outcome.
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by onourway » Mon Jul 10, 2017 5:10 am

I guess I’m a little confused. You have ~$700k now and seem to be projecting to retirement in 20 years. You say you need ~$1.5M to fund ~$65k in yearly expenses. Even if you never save another dime, in 20 years you will almost certainly reach your number. $700k at 6% over 20 years is ~$2.4M. If you save just an additional $20k annually, that number jumps to $3M.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Rose » Mon Jul 10, 2017 6:03 am

In addition to what others have said, is there an option to be elsewhere where you can save more than you would at LCOL and possibly closer to family (MCOL)? In other words , have you checked other cities for possible employment?

Good luck !

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by dratkinson » Mon Jul 10, 2017 2:14 pm

You may be worrying unnecessarily. Why? If I understand you correctly... you have $700K saved now for retirement, and expect to save $20K/yr going forward.

Assuming 5% market return and working 18 more years, then your terminal retirement savings should be ~$2.2M (HP12C: n=18, i=5, pv=-900K, pmt=-20K, fv=2.2M, mode=end). If you believe you'll need ~$1.5M to begin retirement, then it looks like you're covered. Lather, rinse, repeat with better numbers.

See online HP12C: https://epxx.co/ctb/hp12c.html



If your retirement numbers are not good, then you need a Plan B. I went back and looked at my offline Plan B notes.
My Plan A. My pension, SS, and investment returns will completely support my retirement plans. Why? Because, until retirement, I will:
--Live below my means.
--Pay myself first (direct deposit to investments before receiving residue as check for current living expenses).
--Invest wisely (follow BH principles).
--Delay SS until age 70 as a self-funded LTC (long-term care) annuity.


Plan B. If Plan A does not support my retirement plans, then changes must be made somewhere.

Options:
--Delay retirement by working longer.
--Get a second job.
--Reduce spending (travel, entertainment, charities, home improvements,…). (Kids can get education loan, you can't get a retirement loan.)
--Sell unneeded assets to convert to needed cash, simplify management, and reduce expenses.
--Get a reverse mortgage.
--Move to a cheaper home. (Reset may affect homestead tax exemption.)
--Move to a cheaper community.
--Move to a cheaper, no-income-tax state (Texas, Wyoming, Florida,...).
--Consider an SPIA for stable income. (Sometimes used as a bridge to get to SS at age 70.)
--Delay taking social security until age 70 to maximize benefit.


A Plan B is only required if you do not consider all Plan A possibilities. A poorly constructed Plan A almost guarantees a Plan B will be required. It's better to fix Plan A than to depend upon Plan B.
Last edited by dratkinson on Mon Jul 10, 2017 2:22 pm, edited 1 time in total.
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Pajamas » Mon Jul 10, 2017 2:22 pm

You can change what you are doing that affects the numbers or you can accept the numbers and change what you do to fit them, or both.

I have never had a dollar goal for investments, just have spent money carefully (for the most part) and then invested whatever was left. Specific dollar goals would not have affected that.

Life is uncertain in most aspects. It helps to accept that.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Hub » Mon Jul 10, 2017 2:27 pm

I typically just quit being so conservative on my expected real rate of return. Crank it up to 6 or 7% and see where that gets me. Then I tell myself I can always go back to a job with a pretty low income and still cover current living expenses need be. Of course I'm not close to pulling the plug or moving yet so I still get to play mental gymnastics to keep myself motivated / entertained.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Abe » Mon Jul 10, 2017 2:51 pm

If you don't have a financial calculator, I suggest you get one and learn how to use it. I use the Texas Instrument BAll Plus which you can buy at Walmart for about $30. You can also use a spreadsheet or use an online calculator. My calculator tell me that $700k invested at 6% will grow to $2,245,000 in 20 years. If you save an additional $20k per year, it grows to almost $3 million. There will always be uncertainty, but I don't see any reason why you shouldn't reach or exceed your goal.
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by nedsaid » Mon Jul 10, 2017 2:55 pm

Hate to say it, but the current retirement model is a bit unrealistic. Raising a family and putting kids through college are both quite expensive. Not everyone is going to be retirement millionaires. There are also things that come up that the retirement calculators don't take into account. In my case, I got laid off at age 55 from a job I was hoping to retire from. My work during the 2 1/2 years since has been spotty but I haven't had to dip into savings. I am doing okay but obviously am not able to put big sums of money away.

Do the very best you can. Save as much as you can and invest it as well as you can. Manage taxes as best as you can. The reality is that many of us won't achieve the nest eggs that we had hoped for. Life is very uncertain. To bad it doesn't work like the retirement calculators.

You have $700,000 now in investments. I would say that $700,000 plus Social Security is not life in hell. Plus you have potentially another 20 years of work and your investments will not only grow but you will be able to add to them with additional savings. You are doing okay. Don't stress. Do the very best you can.
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by hand » Mon Jul 10, 2017 2:58 pm

Recognize that failure of a $60k / year spending plan can take one of two forms:
1) Blind $60k / year withdrawal until you run out of money
2) Slow adjustment lower of your annual withdrawals as it becomes clear your risk of outliving your savings increases.

Assuming you choose the latter approach, "failure" at $60k may just be success at $50k a year after you adjust.
While this is an academic failure, in practice, the difference in lifestyle is nowhere near as dramatic as the word "failure" indicates.

People retire happily all the time on less than $1.5M. To put it in perspective, absolute certainty of $60k / year is a luxury most don't have

Also - are you including social security?

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by dbr » Mon Jul 10, 2017 3:03 pm

randomizer wrote:
I guess the question I'm asking here is how people cope with the uncertainty over a 20 year time scale, where the numbers are doubtful, and the number of unknowns (even known unknowns) is so large.
Retirement, like the rest of life, is a matter of successive approximations. There is even more uncertainty that you don't even know about yet compared to that which you do. Life is about having a flexible attitude and taking advantage of what arises rather than about engineering a project. Retirement planning can help you to sort out level headed things to do and to avoid things that are foolish but you can't take it too literally.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Jack FFR1846 » Mon Jul 10, 2017 3:07 pm

I don't see if it's just you, single or are you married with a family. There is a huge difference. If you're single, I don't see an issue at all. If you're married with children and the sole provider, not as good.
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by The Wizard » Mon Jul 10, 2017 4:23 pm

I never did projections of future portfolio value, at 6% or otherwise.
I had a retirement income number that I wanted and early on, I wasn't there so I knew I needed to save more.
2008 was not so good a year; my portfolio did NOT increase by 6% or even 1%, even with new contributions included, so I soldiered onward.

Eventually, I got to a decent place moneywise and retired in 2013.
There was no plan immediately to relocate to a LCOL place and thus far I've not...
Attempted new signature...

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by alex_686 » Mon Jul 10, 2017 5:00 pm

onourway wrote:I guess I’m a little confused. You have ~$700k now and seem to be projecting to retirement in 20 years. You say you need ~$1.5M to fund ~$65k in yearly expenses. Even if you never save another dime, in 20 years you will almost certainly reach your number. $700k at 6% over 20 years is ~$2.4M. If you save just an additional $20k annually, that number jumps to $3M.
I will second that. I assumed a 3% real return and saving 20k a year, and I got 11.4 years until hitting your goal. For somebody who "I'm just hoping that I have a couple of decades of productive employment ahead of me" you seem to be in excellent shape.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by KlangFool » Mon Jul 10, 2017 5:08 pm

randomizer wrote: (Concrete numbers: Current investments, about $700k. Current yearly spend in HCOL area: about $120k. Estimated yearly spend in LCOL area $60k, including generous margin for error; real amount may be as low as $45k. 25 times $45 = $1.125m. 25 times $60k = $1.5m. Current savings rate in HCOL area: $200k/year, but my contract is going to end within a year, so that can't continue anyway. In LCOL area expect to have a drastic reduction in savings rate: could easily be as little as $20k/year, which is a 10x reduction even though the cost of living is only 2x less. Might get to $800 or $900k before moving, at which point contributions will reduce to a trickle and I'll be mostly dependent on the market for growth.)
randomizer,

Pardon my ignorance. What is the problem? As long as you are employed in the LCOL area, you can coast your way to the finish line. So, where is the problem?

Did you plan to retire at the LCOL area?

KlangFool

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by englishgirl » Mon Jul 10, 2017 5:10 pm

If the market returns 6%, which is entirely possible, your money should double in 12 years (rough calculation using the "rule of 72"). You have 20 years. So, let's assume that you immediately start saving $0 per year from now on, but are able to get a job that covers your expenses so you don't have to touch the money. Your $700k will become $1.4M, which is enough to retire by your own calculation at some point in the next 10-20 years. Yes, that's uncertain, but it's good enough for me. You can retire even if you save nothing from now on. If you're lucky, you'll find a job that enables you to continue to save some money and then you come out way ahead.

Use the remaining year of your contract to look for employment in your preferred LCOL area. Move near family. Stress less. Boom.
Sarah

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by DonCamillo » Mon Jul 10, 2017 5:29 pm

What I did was work longer. It is amazing how much you can save after you start collecting SS at age 70 and you are still working. But it is also true that most of us do not really get to choose when we retire. Hearing difficulties, loss of energy and cognitive decline contributed to my decision to retire this year.
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by randomguy » Mon Jul 10, 2017 6:12 pm

randomizer wrote:
I guess the question I'm asking here is how people cope with the uncertainty over a 20 year time scale, where the numbers are doubtful, and the number of unknowns (even known unknowns) is so large.
As other people have pointed out, it seems unlikely you have any problems. Just stayed employed enough to make ends meet and you will be find in 10-20 years.

But at a high level, people deal with the uncertainty by being conservative. They use bottom 25% returns (say 3% real) during the working years and bottom 5% for retirement. If things work out better than that, you can retire years early (i.e. you get the average 5-6% for 25 years) and die with a pile of large pile of cash (or you start giving it away when you are like 75+). There really isn't any great options out there. There aren't many places where you can trade upside (i.e. you get 4% not matter what but give up the chance to make 6%) for downside protection over long periods of time. Conservative AA have limited impact (they lower volatility along the way but there aren't many 20 year periods where 40/60 beats 60/40 so you don't end up with more cash.) During retirement, you can use annuities to do a bit of that (i.e. inflation adjusted SPIA's basically give you a 4% SWR if you are willing to give up the chance to leave your heirs 2x+ the money you started with) But they tend to only make sense when you have ~20 years of expected lifetime left.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Dottie57 » Mon Jul 10, 2017 7:06 pm

If you don't like the numbers, well either mor money is needed or lower expectations.

I would rather get a second job now, than have a full time one at 70.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by randomizer » Tue Jul 11, 2017 8:48 am

Thanks a lot for all the replies. To summarize, I think there are basically three kinds of response:
  • What are you worried about? Everything is going to be fine!
  • Yeah, worrying is natural: just do your best.
  • Practical advice: save more, spend less.
I think these all have merit in some way.

For the first group, the "what are you worried about?" group, I guess you could say I am worried about the typical "black swan" scenario where I get hit by a (maybe) very unlikely but nevertheless devastating event:
  • What if my $700k turns into $900k over the next few years, but we then suffer a 1929 style crash. Let's imagine that stocks drop 80%, bonds hold the line (for the sake of the argument), and my 75:25 $900k portfolio is now a $360k one. I lose my job due to the economic conditions and my aspirational savings rate of $20k/year ends up being $0k/year, as I scrape by doing whatever odd jobs I can and cutting back expenses drastically. Finally, after 5 years, the economy and the market start to pick up enough that I can get work again, but by then I am 50 years old, less employable, and I can't get enough money to save more than a few K per year. Even though I rebalanced the whole time, I have a huge whole to dig myself out of, and at 4% real, say, the reduced $360k will never climb back to where I started, and certainly not to where I am currently projecting that I "need" to be.
  • What if the economy and the markets are kind, but my mother-in-law's already-bad health takes a turn for the worst. She pension and insurance and they cover her basic needs, but imagine that all of a sudden she requires some expensive, not covered full-time care for the rest of her life, which could be 5, 10, 20, 30 years. Now my projections of living on $45k/year are blown out the water and I actually need $90k or $120k. What if that run of bad luck happened to coincide with some other chronic illness in the family, preventing me or my spouse from working?
I could go on listing scenarios, but you get the picture. Even without going to a dark "black swan" scenario, it is easy to see how things could turn out to be less favorable than one would hope: markets return less than they have in the past, finding/keeping employment is not quite as easy as it used to be, life ends up costing more than one would hope, or a combination of some/all of these and more.

I think the advice remains the same: save/earn as much as you can while you can, keep your costs/expenses/taxes as low as you can, and do your best.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by alex_686 » Tue Jul 11, 2017 10:19 am

randomizer wrote:What if my $700k turns into $900k over the next few years, but we then suffer a 1929 style crash. Let's imagine that stocks drop 80%, bonds hold the line (for the sake of the argument)...
Assuming a 1% return and 20k a year contribution, you hit your minimum goal in 18 years. But I don't think that is the answer you are looking for.

There is a difference between the ability to bear risk and willingness to bear risk. Objectively you can bear the risk. I am not sure what confidence interval you want, but you are going to clear the hurdle 95% of the time. Maybe even 99% of the time.

However, you are talking about Black Swans. So maybe you want something closer to 99.9% of the time? One can. Check our various life insurance policies. Many Bogleheads will poo poo the idea, saying that they are expensive because of the commission charged by the sales agent. The commission is a expense but that is not the real reason why life insurance policies are expensive. Life insurance insures against many types of tail risk, and moving from a 99 to 99.9% confidence interval is expensive.

You mentioned a 1929 stock market crash where bonds held up. Lets flip that. Can we build a portfolio that will protect you if there is a 70s spike in inflation? Yes, you invest in TIPS. TIPS offer a very low very safe yield, but that yield is very very low.

At this point you might want to consider how much you are willing to pay for safety.

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by staythecourse » Tue Jul 11, 2017 10:38 am

randomizer wrote: I guess the question I'm asking here is how people cope with the uncertainty over a 20 year time scale, where the numbers are doubtful, and the number of unknowns (even known unknowns) is so large.
It's called life. Life is not a math equation. How did you make it from 0-your age now? Was there any guarantees you would have ended up this successful now? Was it an easy shot with no hurdles to overcome? My guess is no on both accounts. It is called adaptation. I am AMAZED how many intelligent folks on this website can not FATHOM not having a guarantee from 50-100 years of age.

Life is about adapting. Heck evolution is about adapting.

Good luck.

p.s. I guess you wanted some advice on your actual situation. The advice is explore options that give you both what you want. Are there jobs working in LCOL areas that you are interested in? If so, what is the income disparity POST tax (Don't make the mistake of comparing gross and net income).
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by KlangFool » Tue Jul 11, 2017 10:47 am

randomizer wrote:Thanks a lot for all the replies. To summarize, I think there are basically three kinds of response:
  • What are you worried about? Everything is going to be fine!
  • Yeah, worrying is natural: just do your best.
  • Practical advice: save more, spend less.
I think these all have merit in some way.

For the first group, the "what are you worried about?" group, I guess you could say I am worried about the typical "black swan" scenario where I get hit by a (maybe) very unlikely but nevertheless devastating event:
  • What if my $700k turns into $900k over the next few years, but we then suffer a 1929 style crash. Let's imagine that stocks drop 80%, bonds hold the line (for the sake of the argument), and my 75:25 $900k portfolio is now a $360k one. I lose my job due to the economic conditions and my aspirational savings rate of $20k/year ends up being $0k/year, as I scrape by doing whatever odd jobs I can and cutting back expenses drastically. Finally, after 5 years, the economy and the market start to pick up enough that I can get work again, but by then I am 50 years old, less employable, and I can't get enough money to save more than a few K per year. Even though I rebalanced the whole time, I have a huge whole to dig myself out of, and at 4% real, say, the reduced $360k will never climb back to where I started, and certainly not to where I am currently projecting that I "need" to be.
randomizer,

1) If we are facing a serious recession, you would last longer that average folk. And, if the condition does not improve over 5 years, money is the last thing that you need to worry about. Most folks would not survive.

2) In a serious recession, there will be deflation. You would need less to live on. So, where is the problem?

KlangFool

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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by user5027 » Tue Jul 11, 2017 1:10 pm

This thread reminded me of today's Dilbert...
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Grt2bOutdoors
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by Grt2bOutdoors » Tue Jul 11, 2017 1:14 pm

Do not waste your life stressing about things that are beyond your control. Stress will most certainly shorten your life, if you want to have a shortened retirement, keep at it. You have to look at the bright side - no one knows what the future holds. You may have a better than expected working life, you may have better returns, you may hit the lottery! No one knows....just keep chugging along and stop stressing.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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wander
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Re: What do you do when you run the numbers and don't like the answer that you get?

Post by wander » Tue Jul 11, 2017 5:24 pm

Your options are to work on what is under your control. Cut spending, for example.

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