Nestegg Cycle © SOLVE for Cash Reserve, Given a Target Crash-Point (CP2)

Posting Date: Dec.19, 2024    By: Fred P Davidson, Founder of NesteggCycle.com


INTRODUCTION:
Sections of This Posting -- Click to Toggle between  SHOWING / HIDDEN  Then scroll down to view the  SHOWING  Sections:


You provide five inputs:
  Portfolio Yield, NET of inflation
  Target Crash-Point CP2
  Crash-Point Length in Years
  YEARS Money needs to Last
  Annual PAYOUT as PERCENT of your PRINCIPAL, your nestegg

SOLVER: CP2 ==> Cash Reserve




  Calculated Stress Test Report: BEST viewed from Desktop or Laptop
  where you can Resize by dragging lower right corner, JUST ABOVE.
  On a PHONE, rotate to LANDSCAPE and use Height/Width buttons below for sizing.
Height: 10% - 20% - 40% - 80%           

Width: 50% - 65% - 80% - 95%           

DISCLAIMERS: This is just math.
The calculations know NOTHING ELSE about your situation, other than the inputs entered or defaulted here.
Real-world markets can and do have unexpected complications.

Please share these reports with a trusted financial advisor and do your own due diligence.

We are not responsible for the performance of your investments.

We assume that during crash times, you are keeping up with inflation "somehow", possibly by moving the money to a money market fund.
This greatly simplifies the math, but you MUST keep this in mind as you consider these reports.
If you were NOT keeping pace with inflation, the crash results would be more severe than what's shown here.

A Crash-Point is NOT the same thing as a likelihood of success or failure!

All we can say is that they clearly work in the same direction, but NOT by how much!
A portfolio protected to a crash-point of 0.50 (or 50%) could obviously fail where protection to 25% would succeed,
but it would require empirical experience to find out how much difference this actually makes.

For example, a 3 year Crash-Point of 0.25 (or 25%) means that your portfolio COULD SURVIVE a three year drop from the initial million dollars, to 250,000, make full payouts during those crashed years, and then still be able to continue expected payouts after recovery.
BUT absolutely NOTHING is implied about how likely this is to occur,
NOR whether this is sufficient protection for you.

Real-world data connecting a crash-point to an actual probability of success is still very sparse.
We CAN say that the conditions of Bill Bengen's "4% Rule" for 30 year retirements, produce a Crash-Point value of 31.07% or 0.3107
And CAN map that to a very high probability of success, since it did work for 50 actual years in a row, for 30 year retirements with starting years from 1926 thru 1976.

BUT we make no assurances nor assumptions as to how a given crash-point value extends to different portfolio constructions.

For any given portfolio construction however, we are quite confident that the trade-off between crash-point versus payout (when CP1), or cash reserves (when CP2) is mathematically solid.

The math for extrapolating crash-points across different retirement terms is also strong, for any given portfolio construction, but will require real-life data for confirmation, and might need further refinement at that time.

IMPORTANT: AFTER surviving such a pre-specified worst-case crash,
your portfolio has NO ADDITIONAL protection left, and would be vulnerable to a NEXT crash, should one occur.

For more background about Crash-Points, please see THIS ARTICLE


Instructions for the Calculator

SEE ALSO: CALCULATOR section for important Disclaimers. SITE LINKS section for additional resources.

We assume, for purposes of the reporting, that your nestegg contains 1 million dollars.
This means that if you specify let's say, a 5.5% payout, the output will show this as 55000 per year.
EX 1: If you have 250,000, you would need to divide the reported dollar amounts by 4: 55000/4 is 13750.
EX 2: If you have 1,500,000, you would need to multiply the reported dollar amounts by 1.5: 55000 * 1.5 is 82500.

Percentages and Crash-Points stay as-is.
This keeps your actual balance totally private because it never gets entered. 

		Tour of a report from this tool
		Lines beginning with "+++" are descriptive notes, NOT part of the actual report
	
CP2 / RESERVE SOLVER at:  2024-12-19 18:13:16   Results for: 
	PAYOUT 4.5%; YIELD 4%; TERM 40 years; Target CP2 0.25000; Crash Years 3.0000; 
NET ANNUAL PAYOUT DESIRED: 45000.00
		+++ above: Description of the tool; timestamp; input parameters

3 yrs of CRASH with NO INTEREST / 37.0000 yrs of post_crash (PC)
		+++ above: years specified for crash; retirement years remaining after the crash

Add-On RESV needed (PRE Crash): 100354.012 for 3.00 yr; for CP2: 0.25000
	Add-On RESV as pct: 10.0354
		+++ above: Percentage of Principal to be added as a Cash Reserve

Carve-Out RESV needed (PRE Crash): for 3.00 yr; for CP2: 0.25000
	Carve-Out has SAME pct of RESV as does Add-On, but all amounts are scaled down to: 0.90880
	Carve-Out PRINCIPAL: 908798.432; RESERVE: 91201.568
	Carve-Out ANNUAL PAYOUT: 40895.929
		+++ above: Cash Reserve in same proportion but WITHOUT adding new money

Haircut RESV needed (POST Crash!): 401416.046 for 3.00 yr; for CP2: 0.25000
	Haircut ANNUAL PAYOUT: 24030.20 for remaining 37.0000 years of retirement!
	Haircut as pct: 46.5996
	Ratio of Haircut vs Add-On: 4.644
		+++ above: Last ditch alternative with NO up-front Reserve

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