Avoid SOR risk? I think not! "SOR" = Sequence of Returns

[audreyh1]

Quote:

Originally Posted by USGrant1962 *Side note, I just checked CAPE10 and it happened to go back over 30 just today per multpl.com. Though it is going to automagically roll off about 2.5 points this year as the 2008/2009 earnings crash rolls out of the window.

Earnings are still from Sept 2018 at multpl.com - the third quarter, so I’m curious to see what numbers look like when all the Q4 earnings are in.

[Dtail]

Quote:

Originally Posted by GravitySucks I thought the Kitce paper had a lot of merit and if I had seen it before retiring I may have gone the Glide Path route. In fact I've recommended it to DS who is much more conservative than me. Luckily I didn't see it as I would have missed a great run up. I did address SOR as I had two accounts. I was living off the 401k the first five years and I kept that invest between 20/80 and 40/60, balancing to my overall AA by keeping the IRA higher in equities.

Bolded - okay then. Still not really sold on the rising glide path.
We have many recent retirees on this site. How many have stated that they are using a rising glide path with the Cape at ~30?

[audreyh1]

Quote:

Originally Posted by Chuckanut +1 Thanks to the last quarter of 2018 my VPW has me withdrawing about 2,300 less in 2019. Can anybody spare 25¢ so I can get a cup of coffee on this cold Winter morning? I retired in late 2012 after the market had started the runup that may or may not be ending at this time. My AA has slowly creeped up to where I want it (60/40) as I have burned through some cash that I kept aside in the event of a bad sequence of returns in my early years. If I had known the market would have continued up for at least 5 more years I would have made a different choice. OTOH, I have slept well at night and have no problems spending on things that enhance the quality of life for me and my loved ones.

We also took a pay cut in Jan 2019. Fortunately it still covers our budget. And, as it happens, our withdrawal has already been recouped by the run up since. But things like that can turn on a dime.

[audreyh1]

Quote:

Originally Posted by Chuckanut +1 The point is we play the game to win. And for most of us winning is not having the biggest possible pile of cash so as to impress the peasants. Winning is running out of time before we run out of money. And, perhaps, leaving something to others. Balance is needed.

Yep.

Staying invested is key. If someone gets nervous because they see wild swings or big drops in their portfolio, the worst thing they can do is bail at the bottom. So each individual has to figure out what lets them sleep at night plus meets long term goals of survival and keeping up with inflation.

[Totoro]

Emotions.

If I put DM 70% into equity followed by a down draft straight away, that may have caused her to run for the hills. Not to mention there were other uncertain factors like pension, health etc .. that

Now, I started with 30% and slowly put her in an upward glide path when it makes sense. Still only at 40%. She's used to the gyrations now of the market too.

Do we leave money on table? On average, yes. Does she sleep well? Certainly.

No regrets.

[ERD50]

OP here. Just had some time after my errands. I have only skimmed the replies, will try to look closer later, but for now:

My skimming gives me the impression that the intention of my post was lost. Perhaps I was not clear, or maybe it was misread, I don't know. But it was not intended to be a debate over aggressive versus conservative AA. I've said many times that I have little to say about that, as long as people are clear that they understand the pros/cons of each. Mainly, that a conservative AA has not historically been 'safe' - less volatile, yes, but not necessarily 'safe'. But if your WR is low enough, it's a personal choice.

What it was intended to be, was a review of the idea that a somewhat aggressive investor (70/30 in this example) can be conservative for the first 5 years, and this somehow sidesteps the SOR risk.

My feeling was, the SOR risk still exists. The question is now, is the 'first-five-year-conservative-retiree' prepared for that next SOR hit?

I used the 100% bond portfolio to represent staying conservative. I did not show the move to something like 70/30 at year five, you can visualize that for yourself. As I said, clearly if you are behind at year 5, you are less prepared for a bad sequence after year 5.

You can rerun the linked version if you want to change the AAs, but it's actually pretty easy to visualize a mix. To do a gradual change in AA, you will need another tool.

Also, 1995 was not cherry-picking, it was just an illustration of the idea. Change the year if you like, report back. But I think 1995 is enlightening, there had been a sharp rise in the past few years, a time when many would be thinking of getting conservative. Sure, other times the conservative approach would be better, but I don't think enough times to make it anything close to a slam dunk. Maybe not even a good idea.

I'll try to look through the posts and links in more detail later.

-ERD50

[COcheesehead]

"What it was intended to be, was a review of the idea that a somewhat aggressive investor (70/30 in this example) can be conservative for the first 5 years, and this somehow sidesteps the SOR risk."


I was originally going to make a comment about the 5 year window which is completely inadequate, but I didn't think that was the point you were trying to make. So maybe after all this, I agree with you.

[GravitySucks]

Well one is five years closer to getting SS and five years closer to not needing money any more.
I think you might read that Kitce article instead of your 100% non changing bond allocation.
A rising glide path is very conservative and should probably only be used by the I already won the game crowd.

[HI Bill]

I have two SORR timelines that matter.

1) The first is the period from my retirement at age 53, to the age I take SS at 70, a duration of 17 years. I want to ensure that at least 60% of my assets (inflation adjusted) survive to that age, when SS kicks in. With the goal of retiring as early as possible, I'm looking at a "SWR" of 4.7%. This means that typically in FIRECALC, the earliest possible failure is about 17 to 20 years out, but with only a 1 to 3% chance. That's why I'm keeping three years of cash in VMFXX.

2) Let's say I've avoided great losses of >40% to age 70. SS kicks in, and then I have it made? Not really, unless I've lowered my withdrawal rates. I still need my money to last through my age 106, so that my wife doesn't have the possibility of running low on funds. The twenty-year 'rolling window of risk' is still there.

If I'm missing something in my pseudo-analysis, please let me know!

[Andre1969]

"My feeling was, the SOR risk still exists. The question is now, is the 'first-five-year-conservative-retiree' prepared for that next SOR hit?"


I do agree, that the risk is still there. But, even with a conservative portfolio, if you did it right, it should still be worth a bit more at the end of the 5 year period than when you started, although you would have given up the gains of a more aggressive one.


And, if you decide to go more aggressive in the 6th year, and that's when the market tanks, you still have five less years to worry about funding, since you're five years closer to death.


So there's peace of mind in that, I guess.

[audreyh1]

Quote:

Originally Posted by Clone Has the game changed with the relationship between bonds and equities? I thought (many years ago) that the concept was that bonds got better when equities declined, and vice versa. Has the world of ZIRP changed that? Now, bonds look like stuffing money under the mattress,and equities go up and down. If that is the case, then rather than a percentage, it would make sense to hold x number of years in fixed, and the balance in equities. That way you would have a shield over being forced to sell stocks in a down market (at some point, you still need to sell, and when you decide to sell it becomes market timing). This past ten years it has been a situation where the overweight in stocks has improved portfolio performance. Unless bonds begin to appreciate when stocks falter, then all you are doing is averaging the performance of stocks towards 0 (or whatever the yield is on bonds).

They still do. No ZIRP didn’t change that. The swings may not be as dramatic but they are still there. Just look at the sudden and powerful flight to quality in Dec 2018. Some bond funds that had been negative for the year actually turned positive.

[Sandman62]

I haven’t gotten through this whole thread yet. But for now, I’ll share that I did reduce to 30/70 a year or two before I retired last year.

My philosophy is that I don’t need to make another $x+y when the $x we already have is plenty. OTOH, $x-y would’ve meant working several more years.

My 2 cents.

[pb4uski]

STC in FIRECalc with $1 million, $35k spending, 70% equities, 40 year time horizon:

Quote:

Here is how your portfolio would have fared in each of the 108 cycles. The lowest and highest portfolio balance at the end of your retirement was $-233,044 to $11,726,566, with an average at the end of $2,795,636. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 3 cycles failed, for a success rate of 97.2%.

Retiree B under FIRECalc with $825,000 ($1 million with $175k carveout for first 5 years of spending in a CD ladder), $35k spending, 70% equities and 40 year time horizon and withdrawals beginning in 5 years (2024 rather than 2019):

Quote:

FIRECalc looked at the 108 possible 40 year periods in the available data, starting with a portfolio of $825,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 108 cycles. The lowest and highest portfolio balance at the end of your retirement was $-177,413 to $10,836,920, with an average at the end of $2,686,575. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 2 cycles failed, for a success rate of 98.1%.

STC has higher upside and higher average balance, but Retiree B has better success rate, which was his reason for grading from 52/48 to 60/40 to begin with.... to me all in, six of one or a half dozen of another, but if it allows Retiree B to sleep better at night then that is great.

[pb4uski]

Same as above but with a 4% WR/$200k carveout to try to differentiate the strategies more.

STC:

Quote:

FIRECalc looked at the 108 possible 40 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 108 cycles. The lowest and highest portfolio balance at the end of your retirement was $-1,047,806 to $10,718,171, with an average at the end of $2,093,993. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 17 cycles failed, for a success rate of 84.3%.

Retiree B:

Quote:

FIRECalc looked at the 108 possible 40 year periods in the available data, starting with a portfolio of $800,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 108 cycles. The lowest and highest portfolio balance at the end of your retirement was $-984,227 to $9,701,433, with an average at the end of $1,969,352. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 17 cycles failed, for a success rate of 84.3%.

Still pretty similar.

[jollystomper]

Quote:

Originally Posted by COcheesehead There is always one thing that gets lost in discussions on here about AA, or SOR or risk in general and that is not everyone is trying to maximize their returns. Some want to preserve with steady returns and are OK with leaving a little on the table.

+1

That is my approach. I am happy with singles, I do not need to swing for the fences. If others choose to, though, that is fine by me.

[Chuckanut]

Keep in mind that SOR problems that occur after the early years of retirement may be less serious since the assets don't have to last as long. Thus, we should focus on avoiding SOR problems early in our retirement.

I'll leave 'early' to be defined by each individual.

[audreyh1]

Usually the first 15 years is suggested as the danger zone for the retiree. Kitces work was trying to address that specifically.

[SecondCor521]

I agree with @Montecfo that doing an SWR and then going more conservative to account for SORR is double-counting.

I assessed my longevity and risk appetite and then calculated my SWR three years ago - 40 years at 90/10 at 4%. That gave me 100% safety in about 5 different retirement calculators. Any historical SORR is already covered at that point. Any future-is-worse-than-the-past SORR is not covered, but was never intended to be by historical tools anyway (which are the gold standard IMNSHO).

[RobLJ]

1. I was going to chime in, then saw this: this is pretty close to what we are doing, although I'll average up at SS.

Quote:

Originally Posted by USGrant1962 Having retired in 2017 when CAPE10 was >30* I did adopt a muted rising glidepath. I started at 55/45 and plan to follow Age In Stocks until approximately SS time. I haven't settled on my final AA, I'll probably stop at 65/35 - if it is good enough for Wellington it is good enough for me.

On valuations, I was sufficiently scared by US valuations in '97 that I took Fid Contra gains and moved 2/3 to Fid LowPrice. Also housing & valuations in '06 scared me enough to move from 95-5 to 63-25-12. As big a factor was the realization I was almost 50 and was taking on risk that, in the event of a recession, would take a long time to recover. The Great Recession was worse than I expected, of course. I'm pretty much done with market timing, having run out the string of luck--although if I see extreme valuations like '97, I'll do it again.

[Doc0]

SOR is related to taking money out of a portfolio when the stocks are in the red. It's a buy high sell low problem. If you look at the graph on the FIREcalc homepage it is 1973 1974 and 1975 SOR. If you retired in 73 you flamed out. In 74 you had money but not growth. In 75 you pulled the golden ring. The solution is to put some money in a separate low risk portfolio something like a 20/80 which happens to be the tangent portfolio most gain for least risk. Leave the rest of the portfolio alone except for re-balancing. If you need 40K/yr stick 120K in the 20/80 and leave the rest at 60/40 or 70/30. When the market is down say 25% (or more than the SD of the portfolio) live off the 20/80 money. This effectively re sequences your portfolio to a better SOR. If you lived 3 years off the 20/80 in a 1973 retirement you would have converted it to a 1975 retirement. You really only need to do this once so no real need to refill the resequence account. The reason is by the time your "next" crash comes along you'll be closer to death and you'll run out of life before the bad SOR has a chance to manifest. 2 things are certain you will experience bad SOR and you will die so by re-sequencing you dramatically mitigate your risk