Retirement Readiness Ratio (e.g. Funding Ratio)

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smitcat
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Re: Retirement Readiness Ratio (e.g. Funding Ratio)

Post by smitcat » Sun Dec 01, 2019 3:02 pm

"I am slowly coming to the conclusion that the RR Ratio is really not all that useful and simply using the expected Withdrawal Rate is a better signpost for the viability of the Retirement Plan."

We have found a number of the retirement calculators to be very helpful - prefer the TRP calculator, the extended IORP and the RPM for our use but there were others just as informative.
Most of them typically are near the 25X expenses dependent upon how you set a number for the variables and so is the RR Ratio which we played with for a while.
The rest is more or less a personal psychology issue more than a mathematical aid or accuracy issue in my opinion.

AlohaJoe
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Location: Saigon, Vietnam

Re: Retirement Readiness Ratio (e.g. Funding Ratio)

Post by AlohaJoe » Sun Dec 01, 2019 9:03 pm

WoodSpinner wrote:
Sun Dec 01, 2019 1:44 pm
I think the difference is I am increasing the Cashflow by Inflation (per the 4% Rule).
It is fine to do it this but then it seems like you've mixed up real & nominal rates. In your original post you talked about using 4.5% for stocks and 1.8% for bonds. But those are real rates. Future cashflows should be constant, not increase, if you're using real rates. And virtually nobody is assuming 1% nominal rates for stocks (which would imply -1% real rates, given inflation targeting of 2%).

If you're increasing cashflow by inflation then you should be looking at discount rates more like 8.5% for stocks and 4.8% for bonds, if using historical averages. Even pessimistic forecasts like Bogle say 6% for stocks and 3% for bonds, not 4.5% and 1.8%.

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WoodSpinner
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Re: Retirement Readiness Ratio (e.g. Funding Ratio)

Post by WoodSpinner » Mon Dec 02, 2019 12:03 am

AlohaJoe wrote:
Sun Dec 01, 2019 9:03 pm
WoodSpinner wrote:
Sun Dec 01, 2019 1:44 pm
I think the difference is I am increasing the Cashflow by Inflation (per the 4% Rule).
It is fine to do it this but then it seems like you've mixed up real & nominal rates. In your original post you talked about using 4.5% for stocks and 1.8% for bonds. But those are real rates. Future cashflows should be constant, not increase, if you're using real rates. And virtually nobody is assuming 1% nominal rates for stocks (which would imply -1% real rates, given inflation targeting of 2%).

If you're increasing cashflow by inflation then you should be looking at discount rates more like 8.5% for stocks and 4.8% for bonds, if using historical averages. Even pessimistic forecasts like Bogle say 6% for stocks and 3% for bonds, not 4.5% and 1.8%.
MEA CULPA...

You are correct. Will rework and republish.

WoodSpinner

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WoodSpinner
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Re: Retirement Readiness Ratio (e.g. Funding Ratio)

Post by WoodSpinner » Mon Dec 02, 2019 8:11 pm

Updated charts and spreadsheet to eliminate inflation -- all values in REAL dollars

Link to Retirement Readiness Ratio - Upload Spreadsheet.

30 Year Retirement
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20 Year Retirement
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30 Year 3% Withdrawal Rate
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Hopefully this provides a clearer picture of the calculations....

I am slowly coming to the conclusion that the RR Ratio is really not all that useful and simply using the expected Withdrawal Rate is a better signpost for the viability of the Retirement Plan.

OTOH some of this analysis could help you calculate the expected Withdrawal Ratio for your Retirement Plan -- which can be a bit tricky when you factor in lumpy expenses and changes to Income Streams.

Code: Select all

Withdrawal Ratio = (PV of Cashflow/Number of Years with Negative Cashflow)/Portfolio Value
Thoughts?

WoodSpinner

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