Hypothetical Y2K retiree update

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raddr
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Hypothetical Y2K retiree update

Post by raddr »

Now that we have all of the data for 2002 here's an update on the hypothetical retiree who quit his job at the end of 1999. This was the original discussion:

http://nofeeboards.com/boards/viewtopic.php?t=159

Here is is the update:



As you can see, the retiree taking an inflation adjusted 4% per year from the REHP-recommended 75:25 S&P500:Comm. paper portfolio is down a whopping 43.1% in real terms. This means he is now forced to take a 7.0% draw from his portfolio in 2003 in order to keep the equivalent of the inflation-adjusted 4% draw from the 1999 year-end portfolio amount.

Historically this would mean ruin about 58% of the time if carried out another 40 years or 51% of the time if carried out only another 30 years. If real returns on the S&P500 are in the 3.5-4% range as predicted by most valuation models then a simulated series would yield 89% and 78% chances of ruin in 40 and 30 years, respectively.

Not a pretty picture. I feel sorry for anyone who bought the nonsense pedaled over at the REHP 3 or 4 years ago. :(
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FMO
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Post by FMO »

raddr:

Not a pretty picture. I feel sorry for anyone who bought the nonsense pedaled over at the REHP 3 or 4 years ago.


When looking at retire early scenarios, I always use the "significant other" test. I imagine what the response of my wife would be to the volatility inherent to any given strategy. This doesn't come anywhere close to passing the "so?" test. Early retirement would be a bad deal given the harassment I would be subjected to after displaying the results you quote. I can see it now: "But dear, you've lost almost half of our money and it's only been three years. You said you knew what you were doing! What are we going to do now? I'm not going back to work. You got us into this . . . .."

Work could start to look good again. If you are single you can do any damned fool thing you please. It is only you (the great mastermind) that has to live with the results.
FMO

"The mark of a successful man is spending an entire day on the bank of a river without feeling guilty about it."
mhtyler
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I bought REHP...mostly

Post by mhtyler »

I bought REHP propoganda for awhile. I was lazy, and in the heady market of 1999-2000 it seemed reasonable, and saved me some leg and brain work.

I lost only 25-30% because I began backing away from it rather than staying the course. I'f I'd stayed the course, then yeah, I'd be so far down that I'd be back in the work force.

Without doing the math as you gents had done, it seemed a bizarre conclusion that the first 10 years of retirement are the most critical, and yet that is the period when you may be withdrawing the largest percentage.

Then there was the reality that folks like Intercst didn't really follow it themselves. Intercst has NEVER withdrawn 4% because he lives below his means....although I gather these days he's closer to the number because of paper losses.

Although I'm a millionaire, I had about 1/2 of the 3million that Intercst had, and larger expenses because I'm married.

300k+ later in losses I can't afford to lose it because I'd be back in the work force, so I take the Benjamin Graham perspective that A) I do need to understand what I invest in, and B) there are times to reduce equities to 25% of your portfolio because they aren't worth the price and aren't going to be worth the price for quite awhile.

He's dead now, but he's describing 2003 as far as I'm concerned.
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Post by wanderer »

raddr -

per vanguard, vfinx is down 22.15% last year. does the 18.2% reflect the better bond returns?

w
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
raddr
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Post by raddr »

wanderer wrote: raddr -

per vanguard, vfinx is down 22.15% last year. does the 18.2% reflect the better bond returns?

w


Yes, the 18.2% number is calculated thusly: S&P500 return*0.75 + cash return*0.25 - inflation rate for 2002 - expenses
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Post by wanderer »

fmo -

Work could start to look good again. If you are single you can do any damned fool thing you please. It is only you (the great mastermind) that has to live with the results.

i'm glad my wife likes work! it gives us considerable cushion when planning. the health care thing scares me a lot less cause we have the canadian deal and her working 5 years more as fallback positions...

i enjoy greedily thinking of matters financial. which i'm sure she's glad about, too.

personally, i wouldn't want to listen to myself if net assets were down 40%... :wink:

just another reason to diversify...

wanderer
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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ElSupremo
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Post by ElSupremo »

Greetings wanderer :)
i'm glad my wife likes work! it gives us considerable cushion when planning. the health care thing scares me a lot less cause we have the canadian deal and her working 5 years more as fallback positions...


Ditto! We have this in common.(Except the Canadian part.) Right now I'm planning on a little surprise and telling my better half to dig in for about ten extra years! :twisted: Good thing posting on these boards has taught me how to duck. :wink:
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mhtyler
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how to duck

Post by mhtyler »

I wish I'd learned that skill a few years earlier, although I'm reminded that few of us successfully ducked the last three years.

The democrats think we should give money to the poor and tax the rich. I'd be in favor of that except that whenever they want to tax the rich it turns out to be me.

Apparently I cut quite a conspicuous dash in my 80,000 dollar house and VW Beetle.

My message to Wifey is: I hope you like this lifestyle...we're going to try and maintain it.

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ataloss
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Post by ataloss »

The democrats think we should give money to the poor and tax the rich. I'd be in favor of that except that whenever they want to tax the rich it turns out to be me.


LOL, I don't mind the soak the rich tax programs except for the fact that I am included.
Have fun.

Ataloss
bubble
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Post by bubble »

[The democrats think we should give money to the poor and tax the rich. ]
The republicans borrow the money and leave it to our kids to pick up the tab. When the rest of the world decides it no longer wants to lend the USA 1.5-1.7 billion $ a day then things will get interesting and you thought the state governments had a problem. [/quote]
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Post by WiseNLucky »

The democrats think we should give money to the poor and tax the rich. I'd be in favor of that except that whenever they want to tax the rich it turns out to be me.


LOL. My younger brother was always as far to the left of center on this issue as I was to the right. Yet now that our incomes are satisfactory (both of us are doing fairly well now after a long-term struggle to get educated and develop skill sets), he is amazed that the rich he always thought should bear the brunt of taxation now includes himself. :)

It was even funnier to see him arguing with himself (I guess it's OK that I pay so much because I've benefited from services in the past). Then he looks again and the tax bill is higher than most of his other bills combined. He correctly pointed out that it makes it hard to accumulate net worth.

Now I'm working on LBYM with him -- hard to do in Raleigh!

WiseNLucky
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I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
hocus
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Post by hocus »

When looking at retire early scenarios, I always use the "significant other" test. I imagine what the response of my wife would be to the volatility inherent to any given strategy.

This is a wonderful comment, FMO, I'm going to put it in my "All Time Favorites" file (a file I keep in one of those 40 magical black binders, for the benefit of anyone listening in from "the other side").

My wife ended up being a huge help in my Retire Early plan. She is fantastic at implementation of spending-reduction plans, which is not at all my strong point. I like thinking the stuff up. But when the actual money question comes up, I tend to say "Oh, what difference does a few dollars make?" My wife never lets me get away with that, and so she added an element that got us to the goal a lot sooner than otherwise would have been possible.

Never in a million years would have the high-risk strategy advertised as "safe" at that other board have flown with her. If we had experienced the sort of drop in assets that would have followed from a 74 percent allocation in stocks for a retirement beginning in August 2000, it would have been all over today, less than three years later.

My favorite spouse story is the way I got her interested in this stuff. I had been talking about it for awhile, and she had been pretending to listen, but she was not really engaged when we took a vacation to North Carolina. One day, it rained, so I visted a bookstore, and I came out with something that answered lots of various mathematical riddles. One of the discussions convinced me that it wasn't such a bad idea to pay off the mortgage.

So, on the ride home, I brought up the idea with her. She thought I was nuts, but she knew better than to get into a back-and-forth discussion with the energizer bunny of retire early conversation during an eight-hour ride in which she wouldn't be able to escape from the car. So she humored me, saying "yeah, that sounds fine, we'll try to pay off the mortgage first and see how that goes."

A not-too-long-a-time later, she was no longer writing that big check each month, and that experience made a big impression on her. From that point, we became an unstoppable team of Retire Early planning and implementation.
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Post by wanderer »

hocus' point re: SO participation/relative efficiencies was true for us, as well. i remember when she and my best friend both sort of ridiculed me for enjoying/being inspired by the terhorst book. twelve bloody but onbowed years later, she enjoys the confidence she feels in her financial position and the fact that she can consider full retirement to a life of children's book writing (two are in various stages of acceptance at this point).

SO's consent will be critical to potential overseas RE plans. Of course, if i were single i suppose that hurdle would not have to be surmounted, but life prolly wouldn't be as busy (although it lately hasn't been quite as fun).

wanderer
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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