randomguy wrote: ↑Sat Jan 22, 2022 3:44 pm
nigel_ht wrote: ↑Sat Jan 22, 2022 2:45 pm
randomguy wrote: ↑Sat Jan 22, 2022 1:11 pm
Marseille07 wrote: ↑Sat Jan 22, 2022 12:32 pm
nigel_ht wrote: ↑Sat Jan 22, 2022 12:30 pm
Not sure how many times that needs to be repeated in a forum where folks regularly post they are spending at 2% of initial portfolio rate and still want more safety…
Imo Ben's example is contrived because the granularity of SWR study is per
year. IOW it doesn't account for a scenario Ben describes, where Investor 3 retires with 2M and a week later their portfolio is 1.5M.
in order to compare apples to apples, Investor 4 needs to retire a year later.
The time thing is a distraction. The SWR for 25 year periods just isn't that different from 30. It isn't remotely enough to account for the difference.
The difference is 5 years of spending at $80K…$400,000.
It’s a huge difference.
For a 25 year period at $80K a year you need $2M.
ONE year makes a difference in outcome because it’s a double bonus…one less year of spending and one more year of saving and growth.
It is an information problem. After the markets drop 50% (either in 1 week or 5 years), your odds of failure for the remaining period are not 5%.
Yep they are…because we aren’t rolling dice (aka Monte Carlo) but looking at historical results.
1929 was followed by 1932. That’s why it’s one of the two worst case scenarios. The events are historically linked and occur together 100% of the time.
If you use some sort of Monte Carlo as the basis of computing SWR you’d end up with a different number.
Even if you believe that things are totally random in the market (they aren't) imagine that to have portfolio failure you need to roll double 6's on a 2 dice . what are the odds? 3%. Now imagine you roll a 6 (i.e. the market dropped 40%). Your partner then joins you and you will share the next dice roll and then they get another roll. What are the odds of failure? Your odds are 1/6 (you have already lost the first dice roll). Your partner though is 1/36.
Your partner already rolled a 6 unless they weren’t in the market so the odds are the same.
If you can generate $1.5M in a week you don’t need to worry about SWR…
-The SWR for 30 years is 4% (95% success). The SWR for 25 years is 4.3%. I consider that a minimal difference. The question is why our guy can only take out 60k instead of 80k. Saving they can take out 65k explains a tiny portion of the difference.
Given that 5 years expenses is $400K then sometime over the course of 5 years the market has dropped $100K for the first investor.
Investor 1 hasn’t experienced the worse case scenario of 1929. It might be 1966 but it’s hard to tell with the information we have.
That means that the 1929 and 1966 outcomes are still as likely for the second investor as the first…so 4.3% with a potential 5% failure rate.
- Yep and that is why your are in trouble. This isn't exactly right but it is close enough to demonstrate the point. There are 100 chances when you retire. 5 of them fail. 75 times the market is up in year 1, 25% the market is down. If the market is up you never fail. If your market is down after year 1, what are your failure chances over the next 29 years? You have gone from 5% (5/100) to 25% (5/25) once you learn that year 1 is a down year.
-Nope. By the rules of the game to go broke if I need to roll one more 6. My partner needs to roll 2 6's to go broke. One is clearly much more likely than the other. If my partner took out 80k instead of 60k, they would have been playing from the start. When they chose to take out 60k they are starting a new game.
No, the sequence of rolls remains the same. It’s not a new game but your partner joining an existing one already started.
The sequence is x, x, x, x, 6 where x is any number not 6.
Investor 2 joins the game at this point for the next 25 rolls.
The next roll will either be a 6 or not. The odds of failure are the same for both.
That’s the way the game works as there is only one stock market.
You can argue that the game resets when two sixes are rolled because valuations get reset to something lower. That doesn’t apply to 1966 though.
Again this is all grossly simplified to make it clearer. You can't get too crazy with historical data. We just don't have enough of it. Just because if the market was up in year 1 and never failed might not transition well in the future.
Yes. And a 80% drop may be less survivable than the 1929 sequence because of inflation or some other factor.
“Worse then historical” is fairly imprecise…but it’s what we have. You can use mathematical models but how often do they actually validate them against real world sequences?