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Old 04-25-2016, 04:32 PM   #41
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The year before I retired, I started moving to cash to cover what would be needed in the following year. I also had several individual bonds that would mature within 18 months. During the first retirement year, I continued moving to cash for the next year, with the idea to always have one year of cash on hand. I've kind of revised this in year 3, only having cash on hand to cover 2 quarters, as more income sources come online. Once we make it through year 3, sequence risk goes down for us as we can forego withdrawing from retirement investments if we need to do so and 5 years later, income sources are projected to exceed expenses. So for us, the first 2 years were very critical and we lucked out with them being good years.


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Old 04-25-2016, 04:46 PM   #42
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True, but OTOH it might not be there when you most need it. That happened to some people during the financial crisis.
Not if you arrange a line of credit
The bank is obligated under its terms
My line is for only 50% of my homes value
I can withdraw cash the week after a hurricane destroys the house because the bank requires homeowners insurance
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Old 04-25-2016, 05:08 PM   #43
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As the least savvy of all who post here, no thoughts except survival for the next 8 to 10 years. Have confessed ignorance, I wonder if the next recession, dip, adjustment or whatever... will have the same type of recovery as we've seen in the past several downturns.

This article deals with inflation and debt as a percent of GDP. Will the current level of debt make for a different kind of recovery?

Article from 2014
Inflation And Economic Recovery | Investopedia

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If the U.S. continues to increase its debt and continues to borrow money via Treasury issues, it may have to deliberately inflate its currency to eventually retire those obligations. Investors, retirees or anyone with fixed income investments will in effect be paying down those obligations, as their holdings decrease in value as prices rise.
Noticed that no one spoke of gold.
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Old 04-25-2016, 05:42 PM   #44
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I ER'ed in 2013 at 50. My strategy has been to budget for a spend rate of about 3.5% for the next 10 years or so and to create an additional buffer with a little part time w**k to cover 10-20% of my spend (thereby depressing my withdrawal rate to 3% or less), in case the market would get truly bad. (And the w**k is only stuff I really want to do, i.e. it is fun-work for me.)
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Old 04-25-2016, 05:56 PM   #45
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Not if you arrange a line of credit

The bank is obligated under its terms

My line is for only 50% of my homes value

I can withdraw cash the week after a hurricane destroys the house because the bank requires homeowners insurance

I really don't think the bank is obligated. They can pull the line. They did during the financial crisis. The house isn't insured against Lehman 😟


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Old 04-25-2016, 06:02 PM   #46
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Not if you arrange a line of credit
The bank is obligated under its terms
My line is for only 50% of my homes value
I can withdraw cash the week after a hurricane destroys the house because the bank requires homeowners insurance
Perhaps the bank is obligated, but you may not be able to get the money when you need it and you won't have the funds to sue them to enforce the contract so you could be SOL.

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In 2008 major home equity lenders including Bank of America, Countrywide Financial, Citigroup, JP Morgan Chase, National City Mortgage, Washington Mutual and Wells Fargo began informing borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner. Falling housing prices have led to borrowers possessing reduced equity, which is perceived as an increased risk of foreclosure in the eyes of lenders. On January 27, 2010, a federal judge refused to dismiss a class action lawsuit against Chase for freezing HELOC loans. Courts have held that a bank may freeze a HELOC in instances where a home's value decreases substantially, which is deemed by courts as a 50% reduction in value.
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Old 04-25-2016, 08:13 PM   #47
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That's not the case with us. We still had huge equity in 2008, the bank was Washington mutual and it decided to close it because it had zero balance.


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Old 04-25-2016, 09:00 PM   #48
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Although it wouldn't surprise me if someone could model a clever strategy that seems to offer some benefit.
Done. https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

You can vary all sorts of parameters to your heart's content. SWR, cash bucket size, asset allocation, etc. Most importantly, *** Rule for refilling cash bucket ****.
BTW, that last -- refilling the cash bucket after you draw it down -- is the killer.

Spoiler: Cash bucket does nothing good financially. The benefit is purely emotional. Kitces said it all in an article: Cash bucket is a mirage, which does nothing significant. Simply doing an annual rebalance accomplishes everything that the cash bucket is purported to do.
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Old 04-26-2016, 08:23 AM   #49
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Perhaps the bank is obligated, but you may not be able to get the money when you need it and you won't have the funds to sue them to enforce the contract so you could be SOL.
During 07/08 my local real estate market declined less than 30%
With only 50% of value covered by the line of credit the risk of the bank pulling the credit seems a second order concern. However its not zero risk as you point out.
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Old 04-26-2016, 08:43 AM   #50
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Our approach will be much like others mentioned. No pension and should retire at 57/56. HELOC to cover one year of free spending (3 of hunker down), and drawdown assets via fixed percentage withdrawals from an 75/25 portfolio. The fixed percentage will ease much of the sequence of return risk.

We have flexibility because our initial retirement spending (if we quit today) would be 2/3 to 3/4 discretionary; spending less as markets fluctuate will not be difficult--we are comfortable now with discretionary spending far less than we plan for retirement.
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Old 04-26-2016, 08:52 AM   #51
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Sequence of return risk is why we have a 4% SWR "rule of thumb" instead of a 7% SWR.

4% is less than the historic average real return of a 60/40-type investment portfolio. The reason the "SWR" is less than the average expected real return is to compensate for sequence of return risk.

So the way most folks deal with sequence of return risk is to draw less from their portfolio than it's expected return.

Other ways include having a Plan B (to spend less money if a downturn occurs) and a Plan C (a way to earn some extra income if Plan B looks insufficient).

Having retired at 38, we started with a low WR (Plan A), had lots of ways of cutting costs (Plan B), and kept up some freelance gigs just to keep Plan C viable.

Now after having experienced massive equity returns for the first six years of our retirement, Plan C is kind of withering on the vine. Meanwhile, Plan A is more robust than ever. But to compensate for our loss of Plan C and to further reinforce Plan A we're now reducing our equity exposure to lower our sequence of return risk going forward.

So my view is that the way to deal with sequence of return risk and other retirement uncertainties is to construct a flexible plan with lots of levers to pull and then actively manage that plan as events unfold.
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I will retire next year and my investments will need to cover 65% of my expenses first year, and rising after that. However, I have waited until my initial WR is ony 1.5% so I feel that is protection against market declines. My AA is currently 65% equities, but I will bring that down another 5-10% before RE.
Going back to work may or may not be an option depending upon age, health, and the state of the economy. Another poster on another thread made the point that the type of economic scenario that may require you to rejoin the workforce may also include a paucity of jobs. So, me, personally, I don't like to put too much faith in that one. However, I'm 62, and that's a different situation than someone retiring in their 30s or 40s.

Personally, I like the idea of waiting until you have a low SWR. I wish I could live happily on the 1.5% that DrRoy has managed. I'm more like 3.4%, along with a sensible allocation, so that I can avoid selling off equities before a recovery.

And of course, Gone4Good's Plan B, cutting costs if need be. And that's about it.
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Old 04-26-2016, 09:56 AM   #52
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It's much easier to cut expense. I've done that before. I'm sure that's how the term "staycation" was invented during the Great Recession.


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Old 04-27-2016, 04:49 AM   #53
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Sequence of return risk is why we have a 4% SWR "rule of thumb" instead of a 7% SWR.

4% is less than the historic average real return of a 60/40-type investment portfolio. The reason the "SWR" is less than the average expected real return is to compensate for sequence of return risk.

So the way most folks deal with sequence of return risk is to draw less from their portfolio than it's expected return.

Other ways include having a Plan B (to spend less money if a downturn occurs) and a Plan C (a way to earn some extra income if Plan B looks insufficient).

Having retired at 38, we started with a low WR (Plan A), had lots of ways of cutting costs (Plan B), and kept up some freelance gigs just to keep Plan C viable.

Now after having experienced massive equity returns for the first six years of our retirement, Plan C is kind of withering on the vine. Meanwhile, Plan A is more robust than ever. But to compensate for our loss of Plan C and to further reinforce Plan A we're now reducing our equity exposure to lower our sequence of return risk going forward.

So my view is that the way to deal with sequence of return risk and other retirement uncertainties is to construct a flexible plan with lots of levers to pull and then actively manage that plan as events unfold.
while the swr takes in poor sequence of returns , what it does not cover well is extended down turns early on starting day 1 which can be the most devastating .

drops like 2008 day 1 really were not a problem because the recovery was quick . but modest drops that extend out in time can do far more damage.

that is what scares me most . this is our 2nd year in retirement . year 1 already burned principal and year 2 isn't looking so hot .
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Old 04-27-2016, 05:27 AM   #54
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Perhaps the bank is obligated, but you may not be able to get the money when you need it and you won't have the funds to sue them to enforce the contract so you could be SOL.
the problem with heloc's is you still have to pay to get the money .

a home is only collateral for a loan . you still need to have and be able to pay for that loan .
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Old 04-27-2016, 07:37 AM   #55
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We covered our bridge income with fixed assets (CDs and I-bonds). So we didn't take market risk during the early years of heavy withdrawals.

I think the "increasing equity allocation" is a good defensive strategy. Yes, you miss out on the upside potential, but that's okay for belt-and-suspenders people like me.
Belt and suspenders guy............that's me in a nutshell when it comes to my AA. Where's my rifle?
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Old 04-27-2016, 08:29 AM   #56
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Another poster on another thread made the point that the type of economic scenario that may require you to rejoin the workforce may also include a paucity of jobs.
That may well have been me as well.

And that's why we initially kept ties to the professional world and kept a book of freelance business going even in "Retirement." Those ongoing professional relationships formed the basis of our Plan C. Without them I'd have zero faith in our ability to ramp up earnings on demand, especially when the economy is in the tank. Even with them, Plan C always seemed like our least reliable (and least desirable) option.
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Old 04-27-2016, 08:37 AM   #57
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while the swr takes in poor sequence of returns , what it does not cover well is extended down turns early on starting day 1 which can be the most devastating .
It does take that into consideration as well. But most models (or is it every model?) limit their downside case to the worst return periods in history. So if we experience something worse than that, the models basically break. If not, those bad initial return sequences are in the model too.
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Old 04-27-2016, 08:58 AM   #58
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It does take that into consideration as well. But most models (or is it every model?) limit their downside case to the worst return periods in history. So if we experience something worse than that, the models basically break. If not, those bad initial return sequences are in the model too.
So what you're saying is the FireCalc et al have already figured in a worst case scenario--including sequence risk--except for an incredibly, "once in a century" bad case (in which all bets are off).
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Old 04-27-2016, 08:58 AM   #59
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while the swr takes in poor sequence of returns , what it does not cover well is extended down turns early on starting day 1 which can be the most devastating .

drops like 2008 day 1 really were not a problem because the recovery was quick . but modest drops that extend out in time can do far more damage.

that is what scares me most . this is our 2nd year in retirement . year 1 already burned principal and year 2 isn't looking so hot .
1966 was effectively that due to high inflation.

https://www.kitces.com/blog/how-has-...ancial-crisis/
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Old 04-27-2016, 11:58 AM   #60
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So what you're saying is the FireCalc et al have already figured in a worst case scenario--including sequence risk--except for an incredibly, "once in a century" bad case (in which all bets are off).
FIRECalc specifically models against actual market returns realized over the past ~130 years. Some of those years start off really badly. Those situations are therefore included in FIRECalc results.

Other calculators do things differently. Fidelity models a "down side" scenario that is not identical to anything that has ever happened in the past. It is, however, a bad "sequence of returns" scenario that roughly matches some of those worst-times in history in terms of their impact on a retiree's portfolio.

My own view is that modeling against "worst case in history" returns sounds more conservative than it actually is. For more on that, see this other thread. But that is what most retirement calculators use as the lower limit on their downside scenarios.
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