Complex Funding Profiles

6) The sixth tenet of Valuation-Informed Indexing is that in the real world (in contrast to the theoretical world studied by academics) the distinction between the Accumulation Stage and the Distribution Stage is not always entirely clear.

We can never expect our calculators to achieve full realism. But there are things that we can do.

Sensitivity tests come in handy.

The FIRECALC is helpful for looking at complex funding profiles. It allows you to make deposits and withdrawals with and without inflation adjustments, including some with and some without.

The FIRECALC is very easy to use. Its display is easy to understand. Unfortunately, its balances are limited to NOMINAL dollars (that is, without inflation adjustments).

FIRECALC

You can learn a lot by varying the inputs and seeing how they influence the Historical Surviving Withdrawal Rates. We refer to these as sensitivity studies.

One of my early findings was that the total amount of your nest egg is more important than the exact timing of your nest egg. For example, there can be a lot of similarity if you compare starting out with $1000000, withdrawing $40000 (plus inflation) each year, to other deposit and withdrawal profiles from other starting points. The result is similar if you start with $800000 and withdraw $20000 (plus inflation) annually during the first decade, followed by withdrawing $40000 (plus inflation) annually thereafter.

[You withdraw $200000 during the first decade instead of $400000. The difference is $200000. This is also the difference between $1000000 and $800000.]

Results differ. They are not identical. But they are similar.

For those interested in final balances other than zero, take advantage of Professor Robert Shiller’s database. It includes information on inflation. Collecting this kind of data is difficult, but you can do it. Professor Shiller’s database includes P/E10.

Professor Shiller’s Web Site

Have fun.

John Walter Russell
November 11, 2005
Updated: March 16, 2007