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I used to work in financial services. I wasn't client-facing but because I had experience with financial modelling so I got roped into these discussions...in my

I used to work in financial services. I wasn't client-facing but because I had experience with financial modelling so I got roped into these discussions...in my experience, everyone gets this wrong. Advisers get it less wrong but I have still seen comical errors from people who should know better. But most people significantly overstate future returns (particularly now), they significantly understate the effect that volatility can have on strategies with withdrawal rates (any strategy involving withdrawals has to optimise for returns AND volatility...this is counter to the "time in the market" logic that most people read so can end up going very wrong), and they model for average final period wealth rather than 5th percentile (generally speaking, this happens everywhere in finance...modelling percentile outcomes is tricky...so most people just don't do it). I am not in the US but health costs seem to be an issue, inflation is another "black swan" that tends to go unconsidered. In my experience, the FIRE group are the most difficult to convince because the whole concept is a lifestyle or way of thinking not an actual strategy. I also don't understand what is so appealing about doing nothing...but that is maybe just me (I have had times in my life when I was doing nothing, those weren't choices and they weren't fun).

klipklop 6y ago
I feel it is more about escaping the corporate machine than "doing nothing." For many the modern office workplace is insufferable. You could argue they should go into business for themselves and some appear to do so.
sokoloff 6y ago
Tools like cFireSim get this much more correct than what you describe above and takes literally just a few minutes to do basic modeling. They're still limited by historical returns, which is both good and bad, but certainly model very prominently the risk-of-ruin. https://www.cfiresim.com/ https://www.cfiresim.com/ (no connection, other than very occasional user)
- hogFeast 6y ago
  From what I can see, that doesn't look too good. There are likely issues with the data, which is not easily solvable given that complete databases are expensive. And there are likely issues with the modelling, it looks like the model is just scenario analysis. This is better than a misspecified parametric model (most advisers don't do scenario analysis either, so it is definitely valuable...although requires market knowledge to parse fully) but relies on good data...the data is not good. The correct way to do it is a Monte Carlo simulation using either: a good parametric model (this is very tricky, something like a T distribution is least worst...but is still bad, the ideal is some kind of regime model, proper volatility modelling, and something that models expectation accurately between regimes...tricky), or using block bootstrap on good historical data (more robust quantitatively...but again, good long-term data costs $100k+). So...it is straightforward if you have good data and understand how to build a proper event-based backtesting system (or code something good enough)...but, as said, 99.99% of advisers do not have the resources for this. In most cases, they are unable to buy software implementing this or even know they need it (I have seen this software but it is usually at advisers that require liquid wealth of $10m+...it isn't only the cost of the software but most advisers below this level have no quantitative skills/staff so don't understand why it is necessary). Again, I would be cautious about any numbers that come out, and focus on the 5th percentile (and understand that it is a wild over-estimate if the data isn't good).
  - sokoloff 6y ago
    I think there's a reasonable question of whether a Monte-Carlo simulation is better or worse than applying actual sequential returns from all 100+ starting years (which is what cFIREsim does and the data of which is available to all). For me, I'd rather backtest against all the actuals than to look to a Monte-Carlo sim with a distribution which is the same as the per-year returns, because I don't believe that sequence of returns year to year are entirely independent, but rather have a relationship to each other because of the longer-term business cycles. This is naturally accomplished by using sequential year actuals. I agree with you on focusing on the low-end/worst-case outcomes. I'm planning our family's retirement based on a 98% success rate as a minimum (and where the 2% cases can be managed by scaling down lifestyle rather than by starving).
regularfry 6y ago
It's not "doing nothing" it's "choosing to do nothing for anyone else", which is very different.
- hogFeast 6y ago
  It is the same. What is the point of being alive if you aren't providing value to other people? Just sitting on your mountain of gold, and count it all day long.
  - kelnos 6y ago
    If that's your view of early retirement (or retirement in general), you are very very mistaken. There can be more to life than working for a paycheck, regardless of what we've been socially conditioned to believe from childhood.
enimodas 6y ago
So what's a safe withdrawal rate then?

klipklop 6y ago

I feel it is more about escaping the corporate machine than "doing nothing." For many the modern office workplace is insufferable. You could argue they should go into business for themselves and some appear to do so.

sokoloff 6y ago

Tools like cFireSim get this much more correct than what you describe above and takes literally just a few minutes to do basic modeling. They're still limited by historical returns, which is both good and bad, but certainly model very prominently the risk-of-ruin. https://www.cfiresim.com/ https://www.cfiresim.com/ (no connection, other than very occasional user)

hogFeast 6y ago
From what I can see, that doesn't look too good. There are likely issues with the data, which is not easily solvable given that complete databases are expensive. And there are likely issues with the modelling, it looks like the model is just scenario analysis. This is better than a misspecified parametric model (most advisers don't do scenario analysis either, so it is definitely valuable...although requires market knowledge to parse fully) but relies on good data...the data is not good. The correct way to do it is a Monte Carlo simulation using either: a good parametric model (this is very tricky, something like a T distribution is least worst...but is still bad, the ideal is some kind of regime model, proper volatility modelling, and something that models expectation accurately between regimes...tricky), or using block bootstrap on good historical data (more robust quantitatively...but again, good long-term data costs $100k+). So...it is straightforward if you have good data and understand how to build a proper event-based backtesting system (or code something good enough)...but, as said, 99.99% of advisers do not have the resources for this. In most cases, they are unable to buy software implementing this or even know they need it (I have seen this software but it is usually at advisers that require liquid wealth of $10m+...it isn't only the cost of the software but most advisers below this level have no quantitative skills/staff so don't understand why it is necessary). Again, I would be cautious about any numbers that come out, and focus on the 5th percentile (and understand that it is a wild over-estimate if the data isn't good).
- sokoloff 6y ago
  I think there's a reasonable question of whether a Monte-Carlo simulation is better or worse than applying actual sequential returns from all 100+ starting years (which is what cFIREsim does and the data of which is available to all). For me, I'd rather backtest against all the actuals than to look to a Monte-Carlo sim with a distribution which is the same as the per-year returns, because I don't believe that sequence of returns year to year are entirely independent, but rather have a relationship to each other because of the longer-term business cycles. This is naturally accomplished by using sequential year actuals. I agree with you on focusing on the low-end/worst-case outcomes. I'm planning our family's retirement based on a 98% success rate as a minimum (and where the 2% cases can be managed by scaling down lifestyle rather than by starving).

regularfry 6y ago

It's not "doing nothing" it's "choosing to do nothing for anyone else", which is very different.

hogFeast 6y ago
It is the same. What is the point of being alive if you aren't providing value to other people? Just sitting on your mountain of gold, and count it all day long.
- kelnos 6y ago
  If that's your view of early retirement (or retirement in general), you are very very mistaken. There can be more to life than working for a paycheck, regardless of what we've been socially conditioned to believe from childhood.

enimodas 6y ago

So what's a safe withdrawal rate then?