Growth assumptions in your models/spreadsheets

Hoenir

michaels said:

OldScientist said:

Cus said:

Linton said:

The purpose of assumptions in retirement planning is not to accurately predict the future which is impossible, but rather to give you the confidence to jump.  So there is no right answer  as to what those should be, it's very much up to you as to what rassurance you need.. 

You have to accept that there will always be global circumstances when your retirement plan will fail. The best you can hope for is that you will be in a no worse position than everybody else.  If there is a global crash that lasts 20-30 years the absence of real profits in global industry would imply that vast numbers of people are unemployed across the world. 

20-30 years of failure to beat inflation could well arise in individual countries, but to assume that it could occur globally is in my view more a plot for a disaster movie than a realistic scenario that needs to be, or can be, planned for.  These considerations do illustrate that diversification in countries across the world is essential.

Unfortunately, diversifying across all countries using an all market index still leaves you exposed to one country -US, with 64% of your investment. And also exposed/more invested into a couple of single companies based there, more than any individual country investments.

Research in the 60s suggested that  8-10 stocks was sufficient diversification although more recent research suggests 30 to 50. Concentration risk in FTSE world index (and others) is definitely heading towards the lower of those two ranges.

But aren't stocks that make up a large proportion of the global tracker likely to be highly correlated (because they are in the same sector) so may not really represent a diversification?

More likely to be correlated as the indices are based on a stock’s free float-adjusted market capitalisation. The biggest global stock market is in the US. No great surprise that the companies that operate the indices are themselves American. Morgan Stanley, Standard and Poors. MAGA. 

MK62

While running out of money is potentially the ultimate failure (although I doubt many would stick rigidly to a 30yr withdrawal plan if, after say 20 years it looked like running out), it's not the only one..........some might see that living off a lower income than you needed to in your prime retirement years is also a fail, and statistically, that's the most likely outcome from following the SWR strategy alone.....there is no rewind button on your life.
In the end, it's a tradeoff of probabilities, so perhaps for some, a more balanced approach is warranted.....both in asset allocation and drawdown strategy.....or else scratch the drawdown only approach and buy an annuity with all or part of your portfolio.

Bostonerimus1

michaels said:

Bostonerimus1 said:

I started using average US stock market returns (~7%) and then did projections with lower returns to see the effects.
But this did not account for annual variations and so I took the average and StDev of the returns and generated a Gaussian distribution and randomly chose from the weighted probability of returns and did this many times. I used data from Wade Pfau. I also used the various "Monte Carlo" based online retirement estimators.

How do your lower bounds compare to an SWR (historic data) approach?

With the randomized return the average annual return implied is almost always smaller than the simple arithmetic average. I automated the calculations and ran them over and over again and basically confirmed the SWR 4% with only a few failures. The exercise helped me get comfortable with the important parameters, but I realized that the online calculators were a lot easier to use. 

OldScientist

michaels said:

OldScientist said:

Cus said:

Linton said:

The purpose of assumptions in retirement planning is not to accurately predict the future which is impossible, but rather to give you the confidence to jump.  So there is no right answer  as to what those should be, it's very much up to you as to what rassurance you need.. 

You have to accept that there will always be global circumstances when your retirement plan will fail. The best you can hope for is that you will be in a no worse position than everybody else.  If there is a global crash that lasts 20-30 years the absence of real profits in global industry would imply that vast numbers of people are unemployed across the world. 

20-30 years of failure to beat inflation could well arise in individual countries, but to assume that it could occur globally is in my view more a plot for a disaster movie than a realistic scenario that needs to be, or can be, planned for.  These considerations do illustrate that diversification in countries across the world is essential.

Unfortunately, diversifying across all countries using an all market index still leaves you exposed to one country -US, with 64% of your investment. And also exposed/more invested into a couple of single companies based there, more than any individual country investments.

Research in the 60s suggested that  8-10 stocks was sufficient diversification although more recent research suggests 30 to 50. Concentration risk in FTSE world index (and others) is definitely heading towards the lower of those two ranges.

But aren't stocks that make up a large proportion of the global tracker likely to be highly correlated (because they are in the same sector) so may not really represent a diversification?

While much of the top 10 (20% of the global index) is 'technology' it is not all the same type of technology (e.g., apple and microsoft are not the same as amazon (retail) are not the same as tesla etc.). The next 10 stocks (5.5% of the index) are more diverse in terms of sector (but not by country!). There are 'passive' alternatives to cap weighting or there is active.

Probably getting a bit off topic.

optoutDB

MK62 said:

While running out of money is potentially the ultimate failure (although I doubt many would stick rigidly to a 30yr withdrawal plan if, after say 20 years it looked like running out), it's not the only one..........some might see that living off a lower income than you needed to in your prime retirement years is also a fail, and statistically, that's the most likely outcome from following the SWR strategy alone.....there is no rewind button on your life.
In the end, it's a tradeoff of probabilities, so perhaps for some, a more balanced approach is warranted.....both in asset allocation and drawdown strategy.....or else scratch the drawdown only approach and buy an annuity with all or part of your portfolio.

This guy gets it. 

optoutDB

Just catching up with this thread,

The values being used for growth in this thread match what I've been using up to now, but I would call them my pessimistic scenario.   All the Youtube (not)financial advisors seem to go for 100% equities until near retirement and assume 5% growth or so. So maybe I expected some more like that. But I get why caution would be the standard.

I would prefer realism though. and I think the caution should come in to where you put your wealth.

I wouldn't mind getting hold of the historic data by asset class, so I can go though the process of doing sequence analysis. Running all previous time spans does seem a reasonable way, compared to running pessimistic values.

BUT,  any model with non-adaptive expenditure looks near worthless to me. The scenario that anyone would put eg 80% into equites and then spend themselves into oblivion through a market crash is not worth looking at, and that's what your X% chance of failure due to sequencing is modelling. I've only looked at one online DC pot model, so maybe there are better ones.

Even if my equities go to zero over the next 10years, I won't run out of money in 30 years time because I will spend less.  

The target of my modelling has always been how much can I spend next year given that I want to maximise the total spend before I die, but with a front loaded profile. It's easy to do low spend and assume growth to get a big pot when you are 80.

Bostonerimus1

MK62 said:

While running out of money is potentially the ultimate failure (although I doubt many would stick rigidly to a 30yr withdrawal plan if, after say 20 years it looked like running out), it's not the only one..........some might see that living off a lower income than you needed to in your prime retirement years is also a fail, and statistically, that's the most likely outcome from following the SWR strategy alone.....there is no rewind button on your life.
In the end, it's a tradeoff of probabilities, so perhaps for some, a more balanced approach is warranted.....both in asset allocation and drawdown strategy.....or else scratch the drawdown only approach and buy an annuity with all or part of your portfolio.

I don't necessarily agree that spending more money equates to retirement success. Of my regrets none of them are about spending money.

MK62

Bostonerimus1 said:

MK62 said:

While running out of money is potentially the ultimate failure (although I doubt many would stick rigidly to a 30yr withdrawal plan if, after say 20 years it looked like running out), it's not the only one..........some might see that living off a lower income than you needed to in your prime retirement years is also a fail, and statistically, that's the most likely outcome from following the SWR strategy alone.....there is no rewind button on your life.
In the end, it's a tradeoff of probabilities, so perhaps for some, a more balanced approach is warranted.....both in asset allocation and drawdown strategy.....or else scratch the drawdown only approach and buy an annuity with all or part of your portfolio.

I don't necessarily agree that spending more money equates to retirement success. Of my regrets none of them are about spending money.

That's OK......everyone is different, and I did say "for some".

There are degrees of success though........in my view, while all 30yr plans which end with a positive balance can be viewed as a success in terms of not running out of money, they won't all have the same degree of success in terms of maximising income during that 30yr retirement........so I suppose it depends on your priorities. There's also the question of income stability to consider too........though again, this might be less of a priority for some than others.

Fink_Nottle

OldScientist said:

While much of the top 10 (20% of the global index) is 'technology' it is not all the same type of technology (e.g., apple and microsoft are not the same as amazon (retail) are not the same as tesla etc.). The next 10 stocks (5.5% of the index) are more diverse in terms of sector (but not by country!). There are 'passive' alternatives to cap weighting or there is active.

Probably getting a bit off topic.

Even further off-topic, but according to a few sources (e.g. Motley Fool) Amazon are generally thought to make more profit from cloud services than retail now (and on a substantially lower revenue base). 

That aside. I fully agree with your point. Tech stocks are so diverse that the category itself is not necessarily that useful. Take Alphabet and Meta. Tech stocks, but they make a lot of their money from advertising - like non-tech firms such as ITV or Reach or other notionally old-fashioned publishers/broadcasters.

michaels

MK62 said:

Bostonerimus1 said:

MK62 said:

While running out of money is potentially the ultimate failure (although I doubt many would stick rigidly to a 30yr withdrawal plan if, after say 20 years it looked like running out), it's not the only one..........some might see that living off a lower income than you needed to in your prime retirement years is also a fail, and statistically, that's the most likely outcome from following the SWR strategy alone.....there is no rewind button on your life.
In the end, it's a tradeoff of probabilities, so perhaps for some, a more balanced approach is warranted.....both in asset allocation and drawdown strategy.....or else scratch the drawdown only approach and buy an annuity with all or part of your portfolio.

I don't necessarily agree that spending more money equates to retirement success. Of my regrets none of them are about spending money.

That's OK......everyone is different, and I did say "for some".

There are degrees of success though........in my view, while all 30yr plans which end with a positive balance can be viewed as a success in terms of not running out of money, they won't all have the same degree of success in terms of maximising income during that 30yr retirement........so I suppose it depends on your priorities. There's also the question of income stability to consider too........though again, this might be less of a priority for some than others.

So what would be your plan, perhaps some sort of tranches of risk, so annuity (plus DB/SP) for a floor income, low average return lower risk for the next tranche and then high average return high volatility for the 'fun' tranche?

What sort of risk level would you want for each tranche?  80% success for the low risk tranche and 50% for the fun tranche?  That still means that 1 in 5 retirements are spent at floor income.  All sounds like casino retirement to me TBH.