How do you mitigate "sequence of retuns" risk early on?

[audreyh1]

I wonder if Audrey calculated her SWR with all her cash buckets, etc. if she would have a very low SWR. It sounds like she has a more fixed expenditure than her withdrawal method allows. I think most of us would tighten our belt somewhat in a major down market leading to the same results.

Maybe in the 2.75% or so range. Not nearly as low as 2%.

I have much less fixed expenditure than my withdrawal method supports. We still tend to underspend our withdrawal by quite a bit which implies that even with a pretty bad down year we might still have enough. Income taxes vary quite a bit which makes it tricky, but taxes tend to drop quite a bit after down years which means more of the withdrawal is available for living expenses under the bad market scenarios.

 

[Fedup]

I have a question about the cash bucket. How big should it be and what happens when it gets too big. I mean like what is the multiple of this cash bucket to your expense, what happens when it get too big.


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[Gone4Good]

I have a question about the cash bucket. How big should it be and what happens when it gets too big. I mean like what is the multiple of this cash bucket to your expense, what happens when it get too big.

Is there such a thing as too big a cash bucket?

I keep track of a 3.25% of portfolio withdrawal in one of my spreadsheets and compare it to actual spending. If I were using that methodology my cash bucket would have grown from $0 in 2010 to just over 5 years expenses today.

If I were actually using that methodology, I think I'd probably build a TIPS ladder with that cash bucket and just keep adding to it or subtracting from it until it covered my entire life expectancy.

 

[audreyh1]

I have a question about the cash bucket. How big should it be and what happens when it gets too big. I mean like what is the multiple of this cash bucket to your expense, what happens when it get too big.


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Why does that matter? Spend more?

You either use money now, put it away for an uncertain future, or pass it along to someone else when you are gone.

 

[Fedup]

Is there such a thing as too big a cash bucket?



I keep track of a 3.25% of portfolio withdrawal in one of my spreadsheets and compare it to actual spending. If I were using that methodology my cash bucket would have grown from $0 in 2010 to just over 5 years expenses today.



If I were actually using that methodology, I think I'd probably build a TIPS ladder with that cash bucket and just keep adding to it or subtracting from it until it covered my entire life expectancy.

I'm thinking in the two commas club, if I get my commas right? This is over a long term like 10-20 years, not 5 years. It certainly can happen.


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[Fedup]

How do you mitigate "sequence of retuns" risk early on?

Why does that matter? Spend more?

You either use money now, put it away for an uncertain future, or pass it along to someone else when you are gone.

I notice I don't spend more, not because of frugality either, I mean I've reached a limit. The only thing I can think of is LTC.


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[audreyh1]

I notice I don't spend more, not because of frugality either, I mean I've reached a limit. The only thing I can think of is LTC.


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Can't quite see a limit, personally, even though I can see how it might be hard to spend more on oneself without making some big changes. But there are lots of other things that can be done with it.

We like to travel, and it's easy to spend a lot of money on travel. We aren't where we routinely buy first class air fare tickets yet, but we definitely have been upgrading the travel experience each year. That seems to be working for us as our enjoyment has been increasing.

We do a lot of gifting as well.

And we might be ready to buy a new car - a nice one.

What do people with "too much" money do? Well, I think some of them start to see themselves more as stewards of these funds, and try to figure out how to put it to good use. Or you could just let your heirs figure it out, lol!

If you are in this situation, you have choices!

 

[Gone4Good]

I'm thinking in the two commas club, if I get my commas right? This is over a long term like 10-20 years, not 5 years. It certainly can happen.

Still no problem . . . lifetime TIPS ladder. Or hookers.

 

[bingybear]

We, by nature, reduced our spending this last year during the volatility... I would expect this is what we would do during real down turns. This is nothing conscious. We also have a modest cash buffer that could last several years. It also helps to have a lower than normal withdraw rate.
That said, I really don't focus on "staying within budget" as we should be able to increase the WR quite a bit without issue... but will have to fight nature to do so.

 

[Ken11]

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 .

Thats understood. In a very depressed market id take the loan (todays rate very low)
The loan is 10 years intrerest only.
Id bet that with a 10 yesr horizon equities would outperform cumulatively at some point during that time If so this far outperforms the alternative of selling low from the portfolio.

 

[Markola]

How do you mitigate "sequence of retuns" risk early on?

Yes, I currently use a steady 3.5%. But that doesn't include our IRAs which we have left in 100% equities for the past several decades don't intend to touch until our 70s. Including the IRAs the withdrawal rate is around 3%, so it's pretty conservative (we're 56 and 60).



I will probably let the withdrawal rate drift higher over time once we are both in our 60s, and perhaps more aggressively when we are in our 70s, depending on how things are looking then. By 70s we will be drawing from the IRAs too (RMDs) so our rate will bump up automatically anyway. Of course we might just reinvest and/or gift that money - who knows. We have options.



I usually have at least two years of expenses set aside by each January in high yield savings and 1 year CDs. Any additional cash that has built up over the years is in various short-term instruments.



I chose the % remaining portfolio withdrawal method because I wasn't comfortable with the idea of automatically increasing my income with inflation. I prefer to let the portfolio determine how much my income might grow. Over the very long term I have a high enough equity allocation that the portfolio should keep up or exceed inflation. But in the short term, there will be ups and downs. Regardless, I prefer that the portfolio performance determine how much my income rises (on average) over time, not inflation metrics.



On the other hand, the standard SWR method means you might have a large remaining portfolio if you luck out and have a run of good market years. The % remaining portfolio will increase income faster under the "good markets" scenario, leaving a smaller terminal amount on the table - theoretically.

I think the "% remaining method" you use is the same as "Constant %" here, correct?:

https://www.bogleheads.org/wiki/Withdrawal_methods

Things I like about your method and our situation:

1) Emotional: The two year or so cash buffer would let us sleep. Historically, recessions last about 18 months.

2) Steady Income: We are both salaried professionals who budget diligently. With this way, one could let the retirement portfolio (our tIRAs/403bs) generate its 4% spendable in up and down markets. Whatever that $ turns out to be, one can stick to a steady budget by supplementing with the cash in down markets and saving or reinvesting the surplus in up markets. Since 4% even in a deep bear would never be $0, the two year cash buffer might last many years.

3). Our 4% SWR would in reality be less than 4% because our Roth IRAs are now about 10% of our net worth and are 100% equities, which we'll just let run. Also we'd have the cash buffer. And SS is there. And most of our expenses are discretionary, too. So even with a 4% SWR on the core retirement portfolio, we'd have several "insurance policies."

Is that on track with how you do things? Much appreciated for the clarity. I believe in having simple finances, like this strategy.

 

[NW-Bound]

Using a constant percentage WR of the current portfolio, one will not run out of money. The only problem is one must be prepared to live with much less than what he is currently spending. In the past, a 50/50 portfolio has dropped to 60% of its initial value within 5 years, with the so-called "bad sequence of returns".

So, one must analyze his spending and see how much he can truly cut. I have found that my expenses are highly variable. But thankfully, it was due mostly to discretionary items such as charity donation, gifts to children, and home improvements.

This year, my YTD expenses are running about 60% that of last year, simply because the recent non-recurrent expenses are not present. I can cut my expenses down even further if I have to. And then, I will be able to tap SS if need to.

 

[audreyh1]

I think the "% remaining method" you use is the same as "Constant %" here, correct?:

https://www.bogleheads.org/wiki/Withdrawal_methods

Things I like about your method and our situation:

1) Emotional: The two year or so cash buffer would let us sleep. Historically, recessions last about 18 months.

2) Steady Income: We are both salaried professionals who budget diligently. With this way, one could let the retirement portfolio (our tIRAs/403bs) generate its 4% spendable in up and down markets. Whatever that $ turns out to be, one can stick to a steady budget by supplementing with the cash in down markets and saving or reinvesting the surplus in up markets. Since 4% even in a deep bear would never be $0, the two year cash buffer might last many years.

3). Our 4% SWR would in reality be less than 4% because our Roth IRAs are now about 10% of our net worth and are 100% equities, which we'll just let run. Also we'd have the cash buffer. And SS is there. And most of our expenses are discretionary, too. So even with a 4% SWR on the core retirement portfolio, we'd have several "insurance policies."

Is that on track with how you do things? Much appreciated for the clarity. I believe in having simple finances, like this strategy.

Yes that constant % sound like the right one and they spell out one of my major rationales:

Annual withdrawals are not automatically increased for inflation; instead, this method counts on long-term portfolio growth to take care of inflation.

The idea of fluctuating income never bothered me because I recognized quickly that I didn't need to spend all the income I withdrew after good years and could hold some over for the lean years. And as you note, the cash buffer can actually supplement many years of low withdrawals, because it's not like your withdrawn amount is going to drop to zero unless you choose to skip a year.

I found during the 2000-2002 period that having a couple of years after-tax expenses set aside outside of the portfolio really helped me ignore the daily noise, and maintain my asset allocation (by rebalancing) when things looked really scary. Reaffirmed during 2008-2009.

I don't know your ages, but I wasn't comfortable with 4% withdrawal rate until at least crossing the 65 year mark and thus reaching the 30 year survival period. But that would be compared against your IRAs included.

 

[Markola]

audreyh1, No strategy is guaranteed but your strategy appeals to me and I appreciate you sharing your real-life testing and confirmation over many years. It seems like something I could stick with because, like you, the cash buffer would discourage me from tinkering with the AA. I am 50 and DW is 53 and we aim to FIRE in 5 (her) - 7 (me) years. My ideal is to migrate the core retirement portfolio into one simple balanced 60/40 fund, then implement this simple strategy and go live our lives. Maybe we'll even get very lucky and FIRE just after a down market and catch an upswing for the first few years, further reducing SOR risk. Regardless of what adjustments we need to make in lifestyle, I won't be working past 57 y.o. at the latest. Cheers.