Okay, I now have a consumption that is smoothed out; but what if I want to be conservative with my consumption and consume less than the recommended amount. (I have an agressive portfolio and so want to be defensive in my spending.)
Do I lower my Max Indeptedness?
Or lower Living Standard?
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Both of those things would be conservative moves--or ways to a model a more conservative approach. You could also create a more conservative asset allocation (sounds like you are using the monte carlo feature). You could also create a reserve fund to put aside money. But ideally, I think you want to model the kind of portfolio you are comfortable with. Those are some ideas to experiment with.
Dan
My thoughts are that since I can comfortably live on less in the early years, I can "afford" the luxury of a higher performing/higher risk portfolio. Should it play out with a lower than anticipated return, I'm fine (if I model my living standard downwards) but still meeting my basic living standard; if the stock market (and related equity investments) perform up to historic standards, then my heirs and my later quality of life can enjoy the bonus.
Plan for the worse, but invest for max (high) returns.
I find that if I throttle back my recommended consumption with the living stnadard variable for about 5 years, it greatly increases the probabilty of superb returns (the five years is also the standard minimum investment horizon for stocks, which appears to be pretty accurate with the Monte Carlo simulations).
Yes, that sounds right to me too. I suppose too that this approach will reveal more as you recalculate each year.
I posted the response below to a question in the "Monte Carlo" forum, but I'm going to repeat it here, verbatim, because I'd love as much feedback on this as I can get (because I'm still not quite comfortable with it).
If I understand your question correctly, you want to figure out a way to use ESPlanner, but you want to consume more conservatively than the program recommends, because the recommended consumption is based on mean returns, and you want to plan for low returns, to be safe.
I struggled with this same problem for quite some time before I came up with a solution. It's a solution I'm still not quite comfortable with, but I posted it in an earlier post in this forum, and got a reply from Larry that indicated it's not completely off base.
This may seem complicated at first, but bear with me.
My "ah-ha" was when I decided to think of it from ESP's perspective - what would happen if I spent more conservatively in 2008 than the program recommended (because I want to plan for low returns), but I actually got the mean returns in 2008 that the program is planning for? Well, I would have more money in the bank at the start of 2009 than the program was expecting (since I hadn't spent it). So if I re-ran the program in 2009, the program would tell me I could spend more in 2009 - it would give me a raise.
So I incorporate a "raise" each year in my planning. I use the standard of living tab to adjust my future standard of living by a certain percentage. This lowers my current recommended consumption (which was the desired result, right?).
So how much of a raise do I give myself? That was my second "ah-ha". I use the “Percentile Distribution of Living Standard" graph from the Monte Carlo runs. Ordinarily (without the raise), the Recommended Trajectory runs across the “Percentile Distribution of Living Standard†chart horizontally, and the 25th percentile, for example, slopes downward. The amount of raise I give myself is enough to tilt the whole "Percentile Distribution of Living Standard" graph counter-clockwise just enough that my desired level of risk runs horizontally across the graph. In other words, if I'm willing to accept a risk that there's a 25% chance my living standard will be lower than planned for, and a 75% chance it will be higher, then I tilt the graph until the 25% line runs horizontal. This approach makes some sense, because if my investments do better than the 25th percentile I’m planning for, I really should be able to give myself a raise each year.
For me personally, 25% is too high and 5%, is to low, so I linearly interpolate between the two to get to my desired level of risk (this is easy, because the output is Excel, so I can add equations to the results sheets).
A benefit of this approach is that I can evaluate different portfolios for risk vs reward by implementing a new set of portfolios, running the program, then finding the new standard of living growth rate that tilts the graph to make my desired level of risk horizontal. This allows me to compare the same percentile distribution of living standard between two different asset allocation strategies. If the reward is worth it, the *recommended consumption* will be higher. If the risk is too great, it will be lower, even if the portfolio would return more with mean values. If I were to chose a different level of risk, the results would be different.