Hi Guys,
A few days ago I posted on the topic of a safe retirement withdrawal rate. I made a few innocuous observations. I ended my submittal with a Link to an easy to use Monte Carlo simulator that is helpful for estimating portfolio survival likelihoods. For completeness, I repeat that linkage here:
http://www.moneychimp.com/articles/volatility/montecarlo.htmThe referenced MoneyChimp calculator does a very commendable job. However, one of its few shortcomings is a lack of flexibility for retirement planning purposes.
I was not entirely happy with my recommendation which was made in real-time while composing my post. Upon reflection, more flexible and more sophisticated sites are readily accessible for retirement planning that permit options with regard to drawdown schedules and returns variability.
One such site, that I trusted when planning my retirement two decades ago, is from FIREcalc. Note that ex-WSJ writer Jonathan Clements endorsed it. Here is the Link to that resource:
http://www.firecalc.com/The FIREcalc site offers many options not available on MoneyChimp. The user gets to choose how many of these options he will explore and incorporate into his retirement assessment.
The user Menu Bar near the top of the introduction page defines the various options. I recommend that you review each and every one, then select those that you wish to utilize.
For example, you might want to make a lump sum withdrawal at a specified time during the retirement cycle. That perturbation can be accommodated in the “Portfolio Changes” section of the website.
I particularly like the numerous ways that FIREcalc allows the user to project future market returns. The options are contained and accessed in the “Your Portfolio” section. You get to choose the market data period start date to estimate returns. You get to choose from among a random Monte Carlo based option and other options that use historical market return sequences with various starting dates.
After you have considered all the input options, simply hit the submit button available on any screen, and the calculation is launched.
Computational results are quickly completed and displayed in a graphic format. The accompanying text summaries the probability of portfolio success. What-if alternate scenarios are conveniently evaluated.
I recommend you consider visiting this fine retirement calculator. The FIREcalc formulation provides a better retirement planning tool. Add it to your financial toolkit. Enjoy.
Best Regards.
Comments
The reason this comes up from the FIRECALC website is that for the scenario I set up the success probablility peaked when I had about 87% invested in stocks. I would think one would be feeling more than a little "exposed" with 87% in stocks in a retirement portfolio at, say, 75-80 years old, but I guess if one wanted the highest possible success ratio chance and one could live with a 1998 style collapse, then maybe that is what one would do.
Joe
You like to use Monte Carlo... I use Murphy.
With respect to establishing the income requirements, we kept close track of all actual expenditures, divided into various categories, for at least a five-year run so as to be able to see what was an essential requirement and what was optional. Then I ran those out for 30 years, applying a variable annual compounding rate for inflation.
Turned out that I actually figured the worst-case on the conservative side- even with 2008 things are just fine. However, we took maximum advantage of all IRA and 403b opportunities since the early 70's, and both have decent defined benefit pensions and SS. Most younger folks will not have defined benefits pensions, and that is going to make things much, much harder.
http://www.bogleheads.org/wiki/Retirement_calculators_and_spending
For those that want to explore various various Spending Models in Retirement, FireCalc 3.0 (as MJG pointed) and Flexible Retirement Calculator looks good. Fidelity Retirement Income Planner is also pretty good.
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I personally have access to Financial Engines Monte Carlo Simulator through my 401k plan. This simulator is freely available through many 401k plans (it may be called several names) to 401k participants. There are some differences between free vs full and free vs free depending on which 401k plan/site you are accessing through. Vanguard also offers it to investors if they have $50K or more assets:
https://personal.vanguard.com/us/insights/retirement/financial-engines
If you buy the following book from the CIO of Financial Engines, the book comes with a code for 1 year trial use of Financial Engines. The book itself is useful too to introduce Portfolio Management/Design using Monte Carlo simulation techniques.
http://www.amazon.com/The-Intelligent-Portfolio-Practical-Investing/dp/0470228040
Also, as I mentioned above Fidelity has its own Monte Carlo Simulator called Retirement Income Planner. If you have an account at Fidelity, it is a useful tool to use:
https://www.fidelity.com/calculators-tools/retirement-income-planner
Fidelity has another MC tool for those that are in the accumulation phase. I believe these two are driven from the same MC engine.
https://www.fidelity.com/calculators-tools/retirement-quick-check
Thank you for your contributions to this topic.
Yes, the conventional financial wisdom is that as retirement approaches, a portfolio’s asset allocation must drift towards a stronger fixed income weighting. The mixed asset date-targeted mutual funds illustrate this standard policy.
Yes, some professional managers and financial advisors are now recommending a divergent strategy. This is an adjustment that acknowledges that current fixed income products do not yield returns that keep pace with inflation, at least for the short to intermediate term.
So the practical answer is that it depends upon market circumstances and individual needs. In the investment world, one size definitely does not fit everybody.
Very often, if you visit a financial consultant, he will either formally (by testing) or informally (by personal interactions) judge your risk aversion. He will outline a portfolio asset allocation based on that risk avoidance assessment.
I believe this downside-up approach is wrongheaded. By nature, education, and experience, I am very pragmatic; you establish a goal and go about satisfying that goal. I mostly buy into the upside-down approach. You first and foremost identify your target return requirements and assemble a portfolio to hopefully produce your anticipated and required returns. That portfolio ultimately accepts whatever risk is tied to that needed portfolio return.
Of course, every effort is made to reduce that risk without compromising the expected rewards too much. That’s the essence of designing a well diversified, efficient frontier portfolio. Using broad ranging classes of assets, experience has proven that risk can be cut in half without seriously degrading expected returns.
Given today’s paltry fixed income returns, it is not surprising that financial advisors currently emphasize an overweighed equity position. Over time, that situation will surely change as the strong reversion-to-the-mean market pull takes command.
Again being pragmatic, those folks who have rather modest portfolios as retirement nears must demand higher returns from that portfolio, and consequently, like it or not, must design a higher risk portfolio or delay retirement.
None of this is rocket science; it is simply commonsense. Indeed, one size does not fit all investors, and that size morphs over time because of personal changes and market dynamics. A single, invariant answer does not exist.
Thanks for your tolerance of my ravings. Thank you all for your many excellent postings that greatly expand the scope and the usefulness of my original submittal. The composite posts amply demonstrate MFO’s worth to individual investors (and maybe even to professionals).
Best Wishes.
Dr. Sharpe talked about this in his book Investors and Markets. His research pointed out that one could hold a 60/40 allocation of stocks/bonds and get higher returns with very little additional risk versus the traditional 50/50 balanced portfolio. There are funds like the American Century One Choice portfolios that do not adjust as you near retirement. They attempt to maintain the same allocation ratio. If I am not mistaken, he pushed the allocation to 65/35 before the risk profile became too much.
As already mentioned, this is just one concept that may or may not fit an individual investors needs or risk profile.
On an entirely different subject, some months ago we had a disagreement regarding the safety of shipping large amounts of crude oil via rail vs pipeline. After the incredibly stupid, negligent and tragic disaster in Canada, I must concede that pipelines, at least as far as I am aware, have not incinerated large numbers of people on the North American continent. Perhaps they are the least of two evils.
http://www.i-orp.com/
Hi OJ,
Thank you.
We share many similar traits and experiences. I really do believe that we are on the same page far more often than either you or I realize.
Historically, there has always been risk in carting stuff from one place to somewhere else. Each situation is different and usually requires an engineering tradeoff study.
Generally, trucking, the rails, and pipelines are candidate approaches, each offering special advantages and varying risk levels. I suspect most engineering assessments would conclude that pipelines usually provide safer transport prospects given continuously improving technology. We’ve made quantum leaps since the successful Roman aqueduct system carried water over hundreds of daunting mountain miles.
Best Wishes.
Hi Ron,
Thank you. I'll need to spend more time with your Link, but it appears to be an exceptionally useful tool.
Best Wishes.