Percent Confidence in Planning Scenario

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retiresoon222
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Percent Confidence in Planning Scenario

Post by retiresoon222 » Wed May 16, 2018 10:00 am

For starters, I was not sure where to post this, so please advise if I'm in the wrong place.

When running scenarios for a retirement plan in say Personal Capital or in a Monte Carlo simulation done at (gasp) a brokerage firm, what is good enough?

For instance, in one scenario on Personal Capital, I have a 96% chance that my portfolio will support my spending needs of $75,000 a year. Sounds pretty good? In said scenario, my desired monthly spending is $6,250/month. My "projected" (in the median case scenario) would allow $11,000/month in spending.

The Portfolio would grow to $7.9m by age 95, on average. Or shrink to $1.3m in a poor market (10th percentile). I guess there are a few scenarios (the 4th percentile) that would spend to zero.

Obviously this is all statistics and we would be able to adjust spending in down markets and likely be fine. My question is this. Do you attempt to get the 96% to 100%? or is that just being overly conservative?

Thanks in advance for your help!

ExitStageLeft
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Re: Percent Confidence in Planning Scenario

Post by ExitStageLeft » Wed May 16, 2018 10:43 am

I have a couple years to go before I am eligible to retire, but I am approaching that stage where I need to decide if my retirement plan is adequate, or will I work One More Year? In my research efforts I have focused on the tools that use historical market trends; FIRECalc and CFIRESim.

I am comfortable with a 95% success rate, comparing my spending plan against the market returns from 1871 onwards. This is with planning for my wife and I to both live to be 99. We could trim back the spending by a few dollars a month and boost the success rate up to 98%. But that is a somewhat pointless exercise, as the things we can't anticipate will have an order of magnitude greater impact on our plan than our assumed spending in 40 years. One of us could die in the next ten years, the state pension could have a financial crisis, etc.

So I have come to accept that there is great uncertainty in everything, even in plans with a 100% success rate. Rather than work ourselves to death, we are willing to go forward with a plan that will likely have us dying as millionaires but runs the chance that we will have to make adjustments along the way. One reason I can be so glib about the uncertainty is the fact that we both have good pensions and social security to fall back on. If you are going to be wholly dependent upon a retirement nest egg, your perspective may differ.

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Epsilon Delta
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Re: Percent Confidence in Planning Scenario

Post by Epsilon Delta » Wed May 16, 2018 12:19 pm

Getting from 96% and 100% is essentially gaming the model. The errors in the model are almost certainly greater than 4%.

In other words the unknown unknowns are much greater than the known unknowns, so over-optimizing the known unknowns is pointless.

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Pajamas
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Re: Percent Confidence in Planning Scenario

Post by Pajamas » Wed May 16, 2018 1:25 pm

retiresoon222 wrote:
Wed May 16, 2018 10:00 am
Obviously this is all statistics and we would be able to adjust spending in down markets and likely be fine. My question is this. Do you attempt to get the 96% to 100%? or is that just being overly conservative?
Those calculators use data from the PAST for just a few factors.

Whether you actually have enough money to meet your needs in practice will be highly dependent on many FUTURE variables, including inflation, investment returns, taxes, spending, health, lifespan, etc., all things that will certainly vary tremendously and none of which you can predict with any reasonable certainty. The calculators are a fun toy to play with but they are just that. There are plenty of single events that could happen that would change everything instantly regardless of any of the other factors.

I cringe when I read about young people who think they are set for life spending 4% and so they retire on a $12k budget with $300k in resources. At least it is not an irrevocable decision for them.
Last edited by Pajamas on Wed May 16, 2018 3:38 pm, edited 1 time in total.

livesoft
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Re: Percent Confidence in Planning Scenario

Post by livesoft » Wed May 16, 2018 1:33 pm

What would you actually change from what you are doing if you decided to use a confidence level below 85%? Below 75%? I suspect you wouldn't change a thing anyways, so it probably doesn't matter what you use.

In other words, why not calculate the point of indifference to you?
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alex_686
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Re: Percent Confidence in Planning Scenario

Post by alex_686 » Wed May 16, 2018 1:43 pm

Epsilon Delta wrote:
Wed May 16, 2018 12:19 pm
Getting from 96% and 100% is essentially gaming the model. The errors in the model are almost certainly greater than 4%.
Or one could go the other way and not game the model. One can get much closer to 100% by investing heavily in TIPS, the ultimate low risk low return asset. To get downside protection one needs to give upside growth. To extend, one of the reasons why annuities are so expensive is the conservative models they use. They model a 30 year payout using 10 year bonds, mostly treasuries.

delamer
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Re: Percent Confidence in Planning Scenario

Post by delamer » Wed May 16, 2018 1:44 pm

There is no 100%.

As someone said earlier, there are unknown unknowns that could blow any plan up.

soccerrules
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Re: Percent Confidence in Planning Scenario

Post by soccerrules » Wed May 16, 2018 1:48 pm

agree with other posters.
I will add that when I was with a FA 3-4 years ago and we ran the Monte Carlo, he said - "Get to $1.6M by age 60". That has stuck in my head.

Since I have left the FA and joined the BH movement with more education along the way-- the number is probably not a bad target. The FA focus on getting over 80% success rate as the "green" zone. I am not sure if the feedback in retrospect is that 80% using Monte Carlo simulation really proved a much higher success rate in real life.

I have adjusted my target to $2M to allow for contingencies and the increase sleep at night factor. I think I can get there but I won't know until I get closer or run smack into $2M and I don't know what the future holds further down the road after reaching it.
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Re: Percent Confidence in Planning Scenario

Post by Tal- » Wed May 16, 2018 2:00 pm

The short answer: 96% is fine. No need to get to 100%.

The longer answer is that these calculators inherently take an series of unknowable factors (future inflation, future spending, life expectancy, future contributions, sometimes taxes, etc.) an assumes that they are static, final, and finite. Typically, the only factor that can vary is future market returns (also unknowable). The model then takes and attempt to quantify them to generate a probability of success.

To say it another way, insofar that the estimates on the unknowable factors are accurate, the probability of success is also accurate. But, I'd bet a dollar to donuts that there is a lot of error in these estimates...

So, how do you counteract that?
For me, the solution is to build in flexibility to your assumptions while maintaining a probability of >90%. For example, if you will only spend $75K/year, build the model to spend $85K/year. If you think you'll live to 99, build the model to live until 110. This may be overly conservative, but that's what I'm doing :)
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DR
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Re: Percent Confidence in Planning Scenario

Post by DR » Wed May 16, 2018 2:10 pm

From what I've heard and read, with that kind of planning tool, 90% is considered pretty good by most people. The problem with MC analysis is assuming that past markets are going to be a valuable indicator of future markets. I prefer to assume some nominal or real rate of return that is very conservative instead of using recent or even long-term market performance as the basis of my projection. There's spending behavior too, which you also mention--and indeed, you'd probably not spend aggressively through a down market. I don't like stating my own "what I need to live on" number as exogenous static variable in the model, but prefer instead a calculator that discovers or reveals available spending as endogenous. That way you are not building your model on your druthers and left with a percentage as the "answer." I know there's value in Monte Carlo analysis, but it just strikes me as a very roundabout way at building a useful model.

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Conch55
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Re: Percent Confidence in Planning Scenario

Post by Conch55 » Wed May 16, 2018 2:47 pm

Reiterating a familiar point, you don't know what future markets will offer. Save as much as possible, choose an allocation you can live with and plan to adjust as necessary. Then be confident you have done what you can.

retiresoon222
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Re: Percent Confidence in Planning Scenario

Post by retiresoon222 » Wed May 16, 2018 3:31 pm

OP here. Thank you all for the responses. I can't say that you did not confirm what I already know.

Being the planners and savers that we are, it is not surprising that we all put a great deal of thought into how we plan for the future. There are no guarantees!

Best we can do is choose the "appropriate" allocation and be in a position to adjust spending/withdrawals as needed.

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...

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DR
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Re: Percent Confidence in Planning Scenario

Post by DR » Wed May 16, 2018 3:51 pm

retiresoon222 wrote:
Wed May 16, 2018 3:31 pm

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...
I think that's a very legit concern.

retiringwhen
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Re: Percent Confidence in Planning Scenario

Post by retiringwhen » Wed May 16, 2018 4:05 pm

livesoft wrote:
Wed May 16, 2018 1:33 pm
What would you actually change from what you are doing if you decided to use a confidence level below 85%? Below 75%? I suspect you wouldn't change a thing anyways, so it probably doesn't matter what you use.

In other words, why not calculate the point of indifference to you?
That is an interesting question. I have been playing with these models too and always felt queasy looking at the difference between 95 and 100% success rates and in practice not having a tangible way of saying I can accept the 5% risk.

I assume to do this calculation you would assume the same cost (or point of indifference) = retirement funds available, and the fixed cost is the residual (legacy) at death and the variable cost is annual SWR? then you can basically trade-off between retirement and legacy as part of the trade on accepting a safe withdrawal weight?

does that sound right?

retiresoon222
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Re: Percent Confidence in Planning Scenario

Post by retiresoon222 » Wed May 16, 2018 4:17 pm

DR wrote:
Wed May 16, 2018 3:51 pm
retiresoon222 wrote:
Wed May 16, 2018 3:31 pm

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...
I think that's a very legit concern.
Thanks - you're not helping! :oops:

Actually we likely have Two very legit concerns
1 Retire earlier than we should have and run out of money
2 Work too long and have too much money

:confused :confused :confused

livesoft
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Re: Percent Confidence in Planning Scenario

Post by livesoft » Wed May 16, 2018 4:17 pm

I was thinking that if you were saving/investment 50% of your gross income (before taxes) and your success rate was 95%, that you would still save/invest 50% of your gross income if your success rate was 80%. I did not think you had to do a fancy precision-less calculation.
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delamer
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Re: Percent Confidence in Planning Scenario

Post by delamer » Wed May 16, 2018 4:26 pm

retiresoon222 wrote:
Wed May 16, 2018 4:17 pm
DR wrote:
Wed May 16, 2018 3:51 pm
retiresoon222 wrote:
Wed May 16, 2018 3:31 pm

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...
I think that's a very legit concern.
Thanks - you're not helping! :oops:

Actually we likely have Two very legit concerns
1 Retire earlier than we should have and run out of money
2 Work too long and have too much money

:confused :confused :confused
We have a retirement budget that will allow us to live comfortably. We also have a retirement budget that will allow us to do pretty much whatever we want.

So where does the $75,000 fall for you?

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onthecusp
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Re: Percent Confidence in Planning Scenario

Post by onthecusp » Wed May 16, 2018 4:30 pm

I've run a bunch of different assumptions through Firecalc. One thing I notice is that when retiring well before taking Social Security (my only source or "fixed income"), then what failures I get come early. This is because the spending from assets is front loaded and more subject to sequence of events.

I'm not as comfortable with that, as I am with steadier spending patterns where the 5% of failures come at the end of 30 years. So I'm on one more year, and plan on part time work for a few years to keep the calculated minimum way above zero. In Firecalc this results in 100% success, but of course there is no guarantee.

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Re: Percent Confidence in Planning Scenario

Post by dbr » Wed May 16, 2018 4:31 pm

retiresoon222 wrote:
Wed May 16, 2018 3:31 pm
OP here. Thank you all for the responses. I can't say that you did not confirm what I already know.

Being the planners and savers that we are, it is not surprising that we all put a great deal of thought into how we plan for the future. There are no guarantees!

Best we can do is choose the "appropriate" allocation and be in a position to adjust spending/withdrawals as needed.

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...
An alternative is to retire when you want to and make do with what you have. You can use the planning model as a check on how much trouble you are or are not in. To retire with certainty of having a certain income is probably not the best way to make that decision. There is very little else in life where decisions are made according to what income one will have.

retiringwhen
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Re: Percent Confidence in Planning Scenario

Post by retiringwhen » Wed May 16, 2018 4:34 pm

livesoft wrote:
Wed May 16, 2018 4:17 pm
I was thinking that if you were saving/investment 50% of your gross income (before taxes) and your success rate was 95%, that you would still save/invest 50% of your gross income if your success rate was 80%. I did not think you had to do a fancy precision-less calculation.
Ahh, I am at the other end of the tunnel. We're sitting on a pile and wonder if we can walk away. My regulars savings goals are pretty well set, but actually going up these days as my costs go down for now (until my old sorry IT skills get me kicked to the curb...)

Saving 100% of my salary right now would hardly the move the needle on a success rate unless i work for 5 years and I am doing the "one more year drill?"

Back to my idea, doing to reasonable trade on "safe" withdrawal rate vs. size of legacy can put an additional set of bounds on what is acceptable I believe. Or course a legacy target of zero makes this an irrelevant question....

retiresoon222
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Re: Percent Confidence in Planning Scenario

Post by retiresoon222 » Wed May 16, 2018 4:42 pm

delamer wrote:
Wed May 16, 2018 4:26 pm
retiresoon222 wrote:
Wed May 16, 2018 4:17 pm
DR wrote:
Wed May 16, 2018 3:51 pm
retiresoon222 wrote:
Wed May 16, 2018 3:31 pm

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...
I think that's a very legit concern.
Thanks - you're not helping! :oops:

Actually we likely have Two very legit concerns
1 Retire earlier than we should have and run out of money
2 Work too long and have too much money

:confused :confused :confused
We have a retirement budget that will allow us to live comfortably. We also have a retirement budget that will allow us to do pretty much whatever we want.

So where does the $75,000 fall for you?
The $75,000 is closer to being able to spend to our current lifestyle. Fixed expenses are less than $35,000. I suppose I just answered my own question. :idea:

delamer
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Re: Percent Confidence in Planning Scenario

Post by delamer » Wed May 16, 2018 4:53 pm

retiresoon222 wrote:
Wed May 16, 2018 4:42 pm
delamer wrote:
Wed May 16, 2018 4:26 pm
retiresoon222 wrote:
Wed May 16, 2018 4:17 pm
DR wrote:
Wed May 16, 2018 3:51 pm
retiresoon222 wrote:
Wed May 16, 2018 3:31 pm

One of my "concerns" is that we end up working much longer than we "need" to (due to our conservative nature) and look back and say, why didn't we stop working sooner? I know that these are first world problems...
I think that's a very legit concern.
Thanks - you're not helping! :oops:

Actually we likely have Two very legit concerns
1 Retire earlier than we should have and run out of money
2 Work too long and have too much money

:confused :confused :confused
We have a retirement budget that will allow us to live comfortably. We also have a retirement budget that will allow us to do pretty much whatever we want.

So where does the $75,000 fall for you?
The $75,000 is closer to being able to spend to our current lifestyle. Fixed expenses are less than $35,000. I suppose I just answered my own question. :idea:
To my mind, there is a difference in worrying about being able to cover basic expenses with an occasional splurge versus worrying about spending on everything that you’d like.

One way to ameliorate concerns about the first is to annuitize your income to cover the basics — meaning to have Social Security, pension, and/or purchased annuities.

Then portfolio survival rates become less anxiety-producing.

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Epsilon Delta
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Re: Percent Confidence in Planning Scenario

Post by Epsilon Delta » Thu May 17, 2018 8:28 am

alex_686 wrote:
Wed May 16, 2018 1:43 pm
Epsilon Delta wrote:
Wed May 16, 2018 12:19 pm
Getting from 96% and 100% is essentially gaming the model. The errors in the model are almost certainly greater than 4%.
Or one could go the other way and not game the model. One can get much closer to 100% by investing heavily in TIPS, the ultimate low risk low return asset. To get downside protection one needs to give upside growth. To extend, one of the reasons why annuities are so expensive is the conservative models they use. They model a 30 year payout using 10 year bonds, mostly treasuries.
The chances of the US defaulting is not zero. The chance of the US not paying all the SS you are expecting is not zero. Relying on these for 100% certainty is still gaming a model.

dbr
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Re: Percent Confidence in Planning Scenario

Post by dbr » Thu May 17, 2018 8:36 am

The simple answer is that a model is not a contract; it isn't even a promise. A model is an estimate and a theory that gives one some idea of what depends on what. This is useful for planning but does not make a model a plan.

Probably the most useful thing to do with % success is to see at what values of various inputs the plan crashes, meaning % success changes from very high to something else. Also, there is a data issue in some models. In FireCalc and similar models, for example, there are about 100 data points used to get % success. Understanding that the peculiar properties of any one or two of those is already an influence of 1%-2% in the data means that 100% vs 99% vs 98% is meaningless. What might be somewhat interesting is how far one is from the point where results change from 100% to starting to go down.

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DR
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Re: Percent Confidence in Planning Scenario

Post by DR » Thu May 17, 2018 9:24 am

dbr wrote:
Thu May 17, 2018 8:36 am
The simple answer is that a model is not a contract; it isn't even a promise. A model is an estimate and a theory that gives one some idea of what depends on what. This is useful for planning but does not make a model a plan.
I agree, dbr. I prefer the concept of a "model" over a "plan" though sometimes I use them interchangeably. One of the useful things in model building for me is that it sometimes reveals that what I think might matter does not and what I think won't matter does. The model building reveals the more important stress points. You can also look at ways--often no risk ways--to optimize a model, getting more lifetime spending out of it without taking on my more risk.

And, yes, it's not a contract. Never throw it in the drawer; rather throw it in the trash and update it annually. If you use conservative assumptions, you'll note that the annual updated model looks very much like last year's model. :)

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Re: Percent Confidence in Planning Scenario

Post by pkcrafter » Thu May 17, 2018 11:39 am

You're good. Life and market behavior are what happen when you're making other plans. At this point, be sure to develop a solid asset allocation, contribute at least 12% to retirement funding, and make adjustments along the way as circumstances change. All of this is full of uncertainties.

Paul
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ExitStageLeft
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Re: Percent Confidence in Planning Scenario

Post by ExitStageLeft » Thu May 17, 2018 11:59 am

dbr wrote:
Thu May 17, 2018 8:36 am
The simple answer is that a model is not a contract; it isn't even a promise. A model is an estimate and a theory that gives one some idea of what depends on what. This is useful for planning but does not make a model a plan.

Probably the most useful thing to do with % success is to see at what values of various inputs the plan crashes, meaning % success changes from very high to something else. Also, there is a data issue in some models. In FireCalc and similar models, for example, there are about 100 data points used to get % success. Understanding that the peculiar properties of any one or two of those is already an influence of 1%-2% in the data means that 100% vs 99% vs 98% is meaningless. What might be somewhat interesting is how far one is from the point where results change from 100% to starting to go down.
I'm probably like many forum members and have an overly strong compulsion to analyze things in Excel. I have played with FIRECalc to tweak it ad naseum to see what it takes to get to 100%. For my retirement model, with a very few adjustments we could create 99% success by making minor changes in spending, allocation, timing of SS, etc. The one scenario that resisted these tweaks and consistently failed was the 1931 cohort.

Determined to figure out what circumstances would allow one to successfully retire even if faced with the same market history, I modified my inputs further. I'm sure it comes as no surprise, but the one thing that allowed 100% success was boosting the 25x expenses multipler (or whatever the exact value was) by 20%. One could get there by reducing expenses, working longer, or saving more each year.

I don't kid myself that I came up with a bullet-proof retirement plan. Rather, I take away from it the reinforced understanding that the key to your success is the amount you save towards retirement. There's only so much you can effect the outcome in your favor with asset allocation, low cost indexing, etc. If you want to have high confidence you can spend til you die, then the more money you have the more likely that will be.

retiresoon222
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Re: Percent Confidence in Planning Scenario

Post by retiresoon222 » Thu May 17, 2018 12:13 pm

ExitStageLeft wrote:
Thu May 17, 2018 11:59 am
dbr wrote:
Thu May 17, 2018 8:36 am
The simple answer is that a model is not a contract; it isn't even a promise. A model is an estimate and a theory that gives one some idea of what depends on what. This is useful for planning but does not make a model a plan.

Probably the most useful thing to do with % success is to see at what values of various inputs the plan crashes, meaning % success changes from very high to something else. Also, there is a data issue in some models. In FireCalc and similar models, for example, there are about 100 data points used to get % success. Understanding that the peculiar properties of any one or two of those is already an influence of 1%-2% in the data means that 100% vs 99% vs 98% is meaningless. What might be somewhat interesting is how far one is from the point where results change from 100% to starting to go down.
I'm probably like many forum members and have an overly strong compulsion to analyze things in Excel. I have played with FIRECalc to tweak it ad naseum to see what it takes to get to 100%. For my retirement model, with a very few adjustments we could create 99% success by making minor changes in spending, allocation, timing of SS, etc. The one scenario that resisted these tweaks and consistently failed was the 1931 cohort.

Determined to figure out what circumstances would allow one to successfully retire even if faced with the same market history, I modified my inputs further. I'm sure it comes as no surprise, but the one thing that allowed 100% success was boosting the 25x expenses multipler (or whatever the exact value was) by 20%. One could get there by reducing expenses, working longer, or saving more each year.

I don't kid myself that I came up with a bullet-proof retirement plan. Rather, I take away from it the reinforced understanding that the key to your success is the amount you save towards retirement. There's only so much you can effect the outcome in your favor with asset allocation, low cost indexing, etc. If you want to have high confidence you can spend til you die, then the more money you have the more likely that will be.
Thanks ExitStageLeft!

I certainly get that there is no "bullet proof" plan. I am anxious to get out of the "rat race" and that would mean that adding principal to the pile would all but stop. DW wants some sort of "assurance" (not her exact words) that we will be able to continue our lifestyle.

I am sensible enough to know that there is no such assurance. So we both continue to work and add to the pile (somewhere around $100k per year). Mtg is paid off, no debt and the kids are "off the payroll" (hope that last one sticks).

I suppose if we have a few more years of these additions rather than withdrawals, we should feel better about pulling the plug on working as we know it. Who knows what the markets will bring in the meantime?

There may be a logical exit if one of our employers manages to execute a liquidity event in a few years. Otherwise, I am not sure when or how we will determine that we can "exit stage left"???

As always, it is great to get perspectives of others here on this board. It is certainly a wealth of knowledge and really does give some great insight!

THANKS!!!

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