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Old 06-10-2014, 12:36 AM   #41
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Throwing another half million into the pot might take enough years to take more time than some are willing to take. If I was 50 years old and firecalc said I had finally reached 100% success with my 2 million portfolio, I sure wouldn't be pleased thinking I might have to work until I was 54-55 to get it to 2.5 million.

I'd much rather be doing like someone mentioned, figure out how much I could reasonably live comfortably on by reducing my spending if early bumps in stock market road.

Yeah that half mil was totally arbitrary. To each their own! I plan on walking away with 100% and maybe a rad more.
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Old 06-10-2014, 01:10 AM   #42
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We follow more of a Zvi Bodie approach, so we don't rely on returns from stocks for any of our baseline retirement expenses.
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Old 06-10-2014, 10:16 AM   #43
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If you are really worried about high equity prices, consider starting with 35% equity exposure, and then allowing it to rise very gradually over the decades in retirement. Kitces and Pfau have shown that this "rising equity glide path" approach improves retirement fund survivability over maintaining a straight AA over the same period, mainly because it handles bad early years better.

Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better? | Kitces.com

If they had published this approach in the late 90s, I might have considered it.
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Old 06-10-2014, 10:24 AM   #44
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With 25% in cash and a 3% WR, I should be able to survive several years of famine. Even a bad stretch of Biblical proportion was only 7 years, right?

If that should happen, it is most likely I would get scared and draw SS early. Younger ER's who are too far from SS do not have that choice, but hey, that's the price if you want to goof off early.
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Old 06-10-2014, 11:55 AM   #45
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My "insurance" is that my cash+fixed income allocation is 10 years of expenses - I figure if I'm not forced to sell equities I can ride out most traumatic scenarios.
+1. This is the bucket approach and works well particularly from a psychological standpoint. The equities are in the bucket that is not to be touched for at lease 5 years, enabling one to ride out even the biggest bear market.

DH retired on 7-1-2008. We watched our portfolio drop by 25% between then and 3/9/2009. We didn't sell and rebalanced back into equities (not an easy thing to do). Fortunately, I had not retired and covered our cash needs without withdrawing from our portfolio. If I had not been working, we would have been fine as our FI + Cash was ample. It would have been difficult though to watch it all without this income, so I identify with the OMY. It's hard to know how one will react in such a market until one lives through it.
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Old 06-10-2014, 12:58 PM   #46
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Currently doing OMY to pad my RE fund. I should be able to RE now but the current market got me concerned. It'd give me a lot of stress if RE now and market goes into a bear market run. For those of you who RE'd at (then) the top of the market, how was it? Were you concerned about market turning south? What strategy did you use to safeguard potential market downturn?
No matter what the market conditions, IME eventually you get to the point where you are so determined to retire, and have your finances so well in order, that a supreme confidence develops that you can, and WILL, retire on schedule come h*ll or high water and nothing can stop you. Once you feel that way, then nothing can stop you as you charge towards your goal like an unstoppable locomotive.

BTW, I retired in 2009 and had I not felt as described in the previous paragraph, I never would have dared to retire. Financial writers were saying "this time is different"; some predicted an extended double dip, and others even predicted complete economic collapse. I don't remember any consensus that we would experience a smoothly thriving bull market for the next five years.
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Old 06-10-2014, 03:25 PM   #47
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Currently doing OMY to pad my RE fund. I should be able to RE now but the current market got me concerned. It'd give me a lot of stress if RE now and market goes into a bear market run. For those of you who RE'd at (then) the top of the market, how was it? Were you concerned about market turning south? What strategy did you use to safeguard potential market downturn?
I was quite confident when I did my retirement trial run in Summer 1999 that we were closer to a top than a bottom. By Jan 2000 I was convinced of it and made a major shift from tech stocks to bonds.

I was much more fortunate than you are today, in that Muni bonds were paying 5% at time. (I would later find out the hard way that Muni bonds can and often are called during dropping interest rates those exposing you to reinvestment interest rate risk). TIPs bond were pay 3.5-3.9% which I bought in my IRA. Thus my fixed income provide enough for a for bare bones retirement. I later discovered dividend investing and once I had sufficient income from dividends and interest to fund my retirement I stopped worrying even while the bear market of 2001-2003 hit.

So I guess my advice is even if you are a total return investor, calculate how much income your portfolio generates without dipping into the principal and see how close that is to your needs. If it is close you are good to go.
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Old 06-10-2014, 03:57 PM   #48
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I am in the same boat and plan to leave at the end of this year or mid next year. Thanks for starting the thread because I'm looking for other ideas. I share your concerns and here is where I landed (so far):

1) Start with what ERD mentioned, 100% success in FireCalc and cFIREsim with constant spending power. I too believe that I'll spend less as I get older, but I just can't get myself to plan for that.
2) Add a 5% cushion to that 100% portfolio number (if I can stand work that long)
3) Reduce my equity allocation from 65%-70% to 50% (I'm at 100% success with both allocations). This will allow me to better absorb an early sequence of returns problem. I'll increase that over 5 years or so to about 60% and stay there.
4) My plan is to take SS at 70. I'll take it earlier if the above still aren't enough.

I didn't list cutting expenses because I really don't want to. Of course I will if I need to, but at this point I'd rather work and extra year or two. I'm usually have a pretty decent risk tolerance but, as has been mentioned before, you only get one shot at this.
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Old 06-10-2014, 05:21 PM   #49
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With 25% in cash and a 3% WR, I should be able to survive several years of famine. Even a bad stretch of Biblical proportion was only 7 years, right?

If that should happen, it is most likely I would get scared and draw SS early. Younger ER's who are too far from SS do not have that choice, but hey, that's the price if you want to goof off early.
is your 3% calculated only on your equity / fixed income portoflio, or do you include your cash in the portfolio before calculating the 3%.

To the OP - I have exactly the same worry as you. To combat this I want a 3% WR at todays market value, a 3.5% after a 20% equity and 10% bond hit, and 100% in FIRECALC at todays market value. I also have 5 years of cash and short term bonds (which I do include in my WR calcs, which is why I asked NW-Bound the question I did). I only have 5% in vacation budget so I wouldn't be able to reduce my WR to 3% after the proposed 20% / 10% hit. I know I'd kick myself in the butt repeatedly and often even with the safeguards. Hence my TMY syndrome which ends in less than a year !

The heart of the question is "will we be able to live with oursevles if the market has a 20% set back right after we ER".

BTW - I get a 93% success rate in FIRECalc with my proposed 20% / 10% hit. Its not horrible but the first zero value is at 26 years which makes me age 76 ... way too young to be broke !
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Old 06-10-2014, 05:24 PM   #50
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1) Start with what ERD mentioned, 100% success in FireCalc and cFIREsim with constant spending power. .
I get many more failures with cFIREsim because of the treatment of bonds
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Old 06-10-2014, 05:30 PM   #51
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is your 3% calculated only on your equity / fixed income portoflio, or do you include your cash in the portfolio before calculating the 3%.
I include the 25% cash in the denominator. That cash is earning a bit above 2% now. It is really I-bonds, stable value fund, etc..., and not 100% true cash.
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Old 06-10-2014, 05:36 PM   #52
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I am in the same boat and plan to leave at the end of this year or mid next year. Thanks for starting the thread because I'm looking for other ideas. I share your concerns and here is where I landed (so far):

1) Start with what ERD mentioned, 100% success in FireCalc and cFIREsim with constant spending power. I too believe that I'll spend less as I get older, but I just can't get myself to plan for that.
2) Add a 5% cushion to that 100% portfolio number (if I can stand work that long)
3) Reduce my equity allocation from 65%-70% to 50% (I'm at 100% success with both allocations). This will allow me to better absorb an early sequence of returns problem. I'll increase that over 5 years or so to about 60% and stay there.
4) My plan is to take SS at 70. I'll take it earlier if the above still aren't enough.

I didn't list cutting expenses because I really don't want to. Of course I will if I need to, but at this point I'd rather work and extra year or two. I'm usually have a pretty decent risk tolerance but, as has been mentioned before, you only get one shot at this.
I am with you on 2 (in the form of house equity), 3 & 4. It's 1 that keeps me doing OMY. I get 95% from FIRECalc with Bernicke spending model. But I admit my expense is bloated (large "misc" section).
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Old 06-10-2014, 06:51 PM   #53
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BTW - I get a 93% success rate in FIRECalc with my proposed 20% / 10% hit. Its not horrible but the first zero value is at 26 years which makes me age 76 ... way too young to be broke !
I don't know if we can really use FIRECalc in the deterministic sense that we would like to. It can only tell us the rough WR that we can expect. Too much tweaking, and we are actually expecting the future to duplicate the past, which I am sure it will not (however, it may rhyme).

Just for kicks, instead of using the default portfolio of Total Market/Treasury in FIRECalc, I played with the more detailed "Mixed Portfolio", and was able to get a higher WR without going negative. Try the following portfolio: "30% US Small Value, 30% US Large Value, 40% 1-month Treasury". That last one is almost like cash. FIRECalc will say you can get up near 4.4%WR without going broke in 30 years.

Along the same vein, I posted some other results in this past thread: Optimal FIRECalc Portfolio. Take all these with a grain of salt, per the earlier caveat.
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Old 06-10-2014, 07:13 PM   #54
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Why not just go a bit more cash for awhile until you get comfortable. Next time PenFed has 5 year 3% CDs, grab a few years of those to cover living expenses.

The USA can't survive another major downturn so it will not happen. A 50% drop in the market would wipe out the fragile gains of most of the public pension funds and collapse the government. There are not a lot of ways to bail out this time. Conclusion: The people that are able to keep the market running along will do so.

There may be a 10% or 20% correction, but nothing much more than that.
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Old 06-10-2014, 07:18 PM   #55
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And how about this FIRECalc portfolio: "30% US Small Value, 25% US Large Value, 45% 1-month Treasury"? You can go up to 4.5% WR on that for 30 years.

Do you believe that? See how a bit of tweak can change things quite a bit? We should not take it too far either with Monte Carlo or historical simulations like FIRECalc. A guideline is all we can get.
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Old 06-10-2014, 07:21 PM   #56
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If you are really worried about high equity prices, consider starting with 35% equity exposure, and then allowing it to rise very gradually over the decades in retirement. Kitces and Pfau have shown that this "rising equity glide path" approach improves retirement fund survivability over maintaining a straight AA over the same period, mainly because it handles bad early years better.

Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better? | Kitces.com

If they had published this approach in the late 90s, I might have considered it.
+1
I intend to do just that. Reduce equities to 40% and increase perhaps another 5% 5 years into retirement. What is hardest about retiring into a market top, should it turn out to be that later, is sequence of returns risk. First 5, 10 years into retirement are crucial for PF returns. That said, a low withdrawal rate cures a multitude of portfolio ills...
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Old 06-10-2014, 07:21 PM   #57
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I don't know if we can really use FIRECalc in the deterministic sense that we would like to. It can only tell us the rough WR that we can expect. Too much tweaking, and we are actually expecting the future to duplicate the past, which I am sure it will not (however, it may rhyme).

Just for kicks, instead of using the default portfolio of Total Market/Treasury in FIRECalc, I played with the more detailed "Mixed Portfolio", and was able to get a higher WR without going negative. Try the following portfolio: "30% US Small Value, 30% US Large Value, 40% 1-month Treasury". That last one is almost like cash. FIRECalc will say you can get up near 4.4%WR without going broke in 30 years.

Along the same vein, I posted some other results in this past thread: Optimal FIRECalc Portfolio. Take all these with a grain of salt, per the earlier caveat.
I like this approach NW-Bound. Let's reconvene in another 10,000 years - by then we might have enough data points to reach some meaningful conclusions
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Old 06-10-2014, 07:37 PM   #58
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And how about this FIRECalc portfolio: "30% US Small Value, 25% US Large Value, 45% 1-month Treasury"? You can go up to 4.5% WR on that for 30 years.

Do you believe that? See how a bit of tweak can change things quite a bit? We should not take it too far either with Monte Carlo or historical simulations like FIRECalc. A guideline is all we can get.
I noticed using 'Mixed portfolio', FireCalc calculates 49 cycles instead of 114 cycles with 'Total Market'. Maybe the smaller sample size favors Mixed Portfolio option.
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Old 06-10-2014, 08:26 PM   #59
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Here are some articles on stocks in retirement that have influenced our thinking:

How to avoid sequence-of-return risk - Robert Powell's Retirement Portfolio - MarketWatch

The Biggest Urban Legend in Finance
https://www.researchaffiliates.com/O...an_Legend.aspx

We're more in the won the game why keep playing camp. The Fidelity RIP shows us chugging along at ages 100+ with no financial issues, yet the Fido planner recommends a riskier AA mix. I don't remember the exact worst year right now, but I think the worst year loss for the portfolio they recommended was something like 50%. I can't see risking losing half our life savings early on in retirement when there is no need to do so.

(Note: I use an inflation adjusted annual expense amount based on my own retirement budget estimates and looking at the Consumer Expenditure Survey and not their health cost projections.)
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Old 06-10-2014, 09:37 PM   #60
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I like this approach NW-Bound. Let's reconvene in another 10,000 years - by then we might have enough data points to reach some meaningful conclusions
As I said, a 3 to 4%WR is all we can get from these simulations. To my 3% WR, our SS will be the reserve, and then our home values. If it comes down to that, I will be hitting the road in my small motorhome. A vagabond life is adventurous and fun, though my wife does not agree to it yet. So, me worry?

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I noticed using 'Mixed portfolio', FireCalc calculates 49 cycles instead of 114 cycles with 'Total Market'. Maybe the smaller sample size favors Mixed Portfolio option.
The sectored market performance data in FIRECalc is more limited than the total market history, hence the smaller number of cycles. However, there have been studies showing that conservative value stocks historically outperformed growth stocks. And as the total market encompassed growth stocks, it also trailed value stocks. It's something to keep in mind.

Of course, if one can pick just the right growth stock, he will do very well for a while. However, no stock can grow to the sky like Jack's bean stalk, so timing is important.
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