What figures for fund performance models
eric100
Posts: 15 Forumite
I'm trying to get a better understanding on the impact of market downturns on my pension if I were to transfer out of my final salary scheme. So I currently have the majority of information in a spreadsheet and can see the effect of performance/costs/inflation on the fund in addition to my expected withdrawals.
However, I'm generally using consistent numbers for most of the variables. For example, I have inflation running at an average of 2.7%. I have a consistent withdrawl figure adjust by inflation each year. I know the percentage costs so that should be OK. The area which I guess is most difficult is growth or otherwise. So again I've used a consistent number of either 3% or 4%.
My question really is whether there is a better way to model the ups and downs of the funds performance - I would imagine that on some years growth would be higher maybe even 10% but also downturns of 25% will occur. How many, how big and how often are the unknowns.
Anyone have a better suggestion on how to deal with performance figures when trying to model this - does applying a flat 3% cator on average for both ups and downs?
Should I throw in a 25% downturn once every 10 years and then what about the other years?
BTW - I am already talking with IFAs but also want to model something myself
Any thoughts geatly appreciated
Thanks
However, I'm generally using consistent numbers for most of the variables. For example, I have inflation running at an average of 2.7%. I have a consistent withdrawl figure adjust by inflation each year. I know the percentage costs so that should be OK. The area which I guess is most difficult is growth or otherwise. So again I've used a consistent number of either 3% or 4%.
My question really is whether there is a better way to model the ups and downs of the funds performance - I would imagine that on some years growth would be higher maybe even 10% but also downturns of 25% will occur. How many, how big and how often are the unknowns.
Anyone have a better suggestion on how to deal with performance figures when trying to model this - does applying a flat 3% cator on average for both ups and downs?
Should I throw in a 25% downturn once every 10 years and then what about the other years?
BTW - I am already talking with IFAs but also want to model something myself
Any thoughts geatly appreciated
Thanks
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The are some tools which model historic actual returns (albeit using US data) to help you gauge the potential outcomes and whether your approach could handle the sequence of returns risk that you might get.
If you search this forum you will find references to cFIRE Sim and FIRECalc as being a couple of products well-liked by the Financial Independence / Retire Early community.0 -
Thanks
I've tried out cfiresim but didn't find the tool particularly intuitive.......does this automatically cator for downturns in market, if so, maybe I need to revisit. Any easy to follow guides other than the various posts from James and others on this forum?0 -
Thanks
I've tried out cfiresim but didn't find the tool particularly intuitive.......does this automatically cater for downturns in market, if so, maybe I need to revisit. Any easy to follow guides other than the various posts from James and others on this forum?
That is its purpose !!
The idea is, you input your starting amount, your withdrawal rate or amount and a few other assumptions, and then it models what would happen to your lump sum and if it would run out, using data from around the past 120 stock market periods.
For example, it will model what would happen if you retired with a lump sum, and the stock market behaved as it did from 1900, eg using the ups and downs from 1900,1901,1902 and so on (but in this case if you started in (say) 2030, 2031,2032 etc.
Then it will model again but starting using data from 1901 onwards.
And again from 1902 and onwards and so on.
If you model for 30 years, it will use data from 1900-1929, 1901-1930, 1902-1931 and so on for about 120 periods.
For example, lets say that the numbers were like this (made up)
1900 +10%
1901 -30%
1902 +5%
1903 +5%
1904 +5%
1905 +5%
You can see that if you retired in 1902 you'd be OK for a few years, if you retired in 1901 your savings would take an immediate hit. So people retiring in 1900,1901 and 1902 would have seen quite different returns over the next 30 years.
Firecalc and firesim show the returns using this real data but as if it would be like that in the future. So, if your lump sum can withstand all or most of the worst periods so far, then you can be reasonably confident going forward that your plans are good.
OTOH if in say 30% of scenarios you run out of money then you need a bigger lump sum, spend less money (or take a bigger risk).
HTH0 -
Thanks.....I'll have to give another go0
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How do people view this calculator.
Pinch of salt and nice to view only, or strong enough to base a decision on.
https://www.tidewaywealth.co.uk/l/calculator_drawdown0 -
I'd view it as hopelessly naive, not fit for purpose and worse, likely to be highly misleading since it gives the impression that stock market growth is a straight line.
Firesim and similar give more options and the ability to see how your plans would have survived both good and bad periods in the market.0 -
AnotherJoe wrote: »I'd view it as hopelessly naive, not fit for purpose and worse, likely to be highly misleading since it gives the impression that stock market growth is a straight line.
To be fair, it's not much different to the drawdown calculators provided by Hargreaves Lansdown and other sites.0 -
I know its up to individuals to make decisions, but if these calculators so freely available on reputable company websites are apparetly not fit for purpose, isn't there something amiss here in an "industry" that's supposed to have information scrutinised by regulatory authorities etc.
Why have areas that are tight with rules, only to have very loose assumptions elsewhere in other areas?0 -
How can anybody have a calculator that predicts the future? All of these things are just very simple rule of thumb illustrations that make simple projections. As I've posted before, I looked at some of my projections from pension providers from the early 90s and they are laughably incorrect.
cFIREsim will at least give you some insights based on what has happened in the past. Like it says, it allows you to evaluate if your money will last in retirement if the market does no worse than the great depression, 1970's stagflation, or the dotcom bust. However, that will not allow for how things will shape up in the future given the geopolitical risks we are now facing, the growth of AI and economic trends like sustained periods of low interest rates.
I've run several cFIREsim simulations and I get 100% success rates but that still doesn't make me feel secure. But then I am very risk averse.0
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