How hard is it to RE at the market top (2014)?

[robnplunder]

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?

 

[audreyh1]

How do you know we are at the top of the market?

I retired in Aug 1999, and by late 1999 the market was far more overvalued than now. Since I sold a huge chunk of company stock to fund my retirement, I averaged in to my new AA over two years. But if I had already been invested in mutual funds, I probably would only have rebalanced, or perhaps gradually shifted over to a more conservative AA over the two years prior to retiring.

 

[kcowan]

Retired in 2002 after the big swoon following 2000 bubble. Had to watch market very closely and every trade counted. By the time the 2008 swoon happened, we were able to absorb it and hang in for the recovery. Right now we have a big buffer.

I would recommend that you work the numbers such that you can survive your worst case scenario. If you can do that, you should be fine. If not then keep working until you are sure.

 

[athena53]

I retired a month ago- company politics turned bad really fast and I decided to cut out 3.5 years ahead of schedule, and that also means that we've got a higher % in equities than we probably should have. The market has pretty much gone straight up since! On one hand, I'm happy. Our YTD net gain (in excess of what we put in) is about 5 X what I think we'll need to withdraw before the end of the year. There's enough cash in the accounts that we wouldn't need to sell anything at distress-sale prices if the market tanked.

OTOH, yes, I know we're overdue for a correction. Not much we can do. I'm confident in the investments we've got. I saw our portfolio lose nearly $1 million during the financial crisis and I saw it recover because we stayed the course. If the market really tanks the way it did a few years ago (and I don't see that happening), we have a few tactics we can use. One is to just cut back on spending. Our fixed expenses are pretty low but we'd avoid travel that includes airfares and expensive hotels, for example. That would allow us to reduce our withdrawal rate. I'm 61 and could file for SS at 62, also reducing the withdrawal rate, but I'd have to take a hard look at the math. People in my family live forever and I'm probably better off waiting.

Finally, DH and I are likely to downsize in the next year and we have enough equity in our home that we could buy the new place for cash, or close to it. If the market sinks and I believe there are bargains to be had, I might take out a traditional mortgage instead and move the cash released by the sale of the house into the market gradually.

It's good when borrowing can be a strategic decision instead of a necessity!

 

[dtbach]

You can always do a OMY. It's "always" a market top. Who knows?? This could turn into a bear market next week. . . . OR continue making market tops for the next 5 years. So, do you feel lucky?? Or do a OMY?

Just take the plunge. The water is fine in ER.

 

[pb4uski]

I would suggest this. What failure rate does Firecalc say for you based on your nestegg today? The lop off 20% and re-run and what is the failure rate? If you can live with the pessimistic scenario, then pull the trigger and let the fun begin.

A bear market is why I keep target 6% in cash - I can go as much as two years without having to sell into a bear.

 

[robnplunder]

You can always do a OMY. It's "always" a market top. Who knows?? This could turn into a bear market next week. . . . OR continue making market tops for the next 5 years. So, do you feel lucky?? Or do a OMY?

Just take the plunge. The water is fine in ER.

I've never learned to swim .

Pb4uski: I get 95% success from FireCalc but with Bernecki box checked. However, I have some major expenses (entertainment, downsizing) I can shed if faced with bear market.

 

[NW-Bound]

Well, you can always discount the possible market top (I say possible because I like to see it goes higher and higher out of sight) by planning on a lower WR.

My last 12-month expenses are down to less than 3% of today's portfolio. The ratio used to be 3.5%.

 

[fh2000]

I would recommend that you work the numbers such that you can survive your worst case scenario. If you can do that, you should be fine. If not then keep working until you are sure.

I am in the same situation as OP. I used to think of it as One More year till 2014. Now, it is 2014 already. I am working on my One More Quarter since I think my 4% withdrawal may not be enough when/if markets starts to go down.

 

[nash031]

How do you know we are at the top of the market?

This is a good point and one I think of often when reading my investing forums. For the last year, really, people have been concerned with an overvalued market and that we can't keep setting records. That is, however, the nature of the stock market.

Years ago, S&P 1000 was "unthinkable." On this board last summer, I read a post who said he didn't believe we'd ever see S&P 2000, yet I pointed out that below average stock market returns from the day he made his comment through to the year 2020 would yield S&P 2000.

Anyway, as it pertains to the OP, I'd be concerned retiring early at what I perceived as a market high, but we'll never really know until it's too late!

 

[ziggy29]

There is no way to know. Different people approaching retirement approach this in different ways. Some may ease their AA a little bit to sleep better, knowing a 1973-74, 2000-02 or 2008-09 style crash won't devastate them. Some may just plan to work longer (yuck) if the market crashes to replenish their portfolio and their "safe withdrawal" becomes high enough again with a prudent allocation. Some may even purchase protective "put" options as insurance, knowing they will expire worthless if the market doesn't fall but could save their butt in a crash. None of these are for everyone.

But in the end it's all a crapshoot. As for valuation now, sure, a nearly 17000 Dow seems high but relative to earnings it's still a lot lower than a 14000 Dow was in 1999. And the 1982-99 bull market seemed long in the tooth even by the early 1990s, but had several years of explosive growth left even when valuations were getting a bit high.

 

[GrayHare]

Something that bodes well for stock prices: stock ownership as a % of global assets is at a 50-year low according to this link
http://www.marketwatch.com/story/no...t-people-in-stocks-2014-06-05?dist=beforebell

 

[nash031]

AAPL is a great example of this, too. Last year, it was trading at PE 12 (below the mkt average), but because the price was around $500/share, people still thought it was expensive. It dropped all the way below $400 and PE 10 (well below the mkt avg). This morning, it split 7 ways putting it at about $95/share, but PE is around 16 (still just below the mkt avg)... now, of course, the stock looks "hot."

Absolute price (or index value) doesn't really matter, but everyone seems to think it does!

 

[Animorph]

I retired around Nov 2007 (actually it was a big layoff about a half year short of my target.) I was worried about the negative savings rate mostly, but expecting a downturn. I'm normally 100% equities, but I went to about 30% cash and added some bear market stuff to hedge some of the remaining equities. I broke even on the bear market stuff, bailing out early. But the cash was used for living expenses, and since DW refused to retire I was able to reinvest while the market collapsed.

If you pull out a little extra cash, or extra fixed income, at the start of retirement and then spend it in the first years, without touching the rest of your portfolio, the impact on your portfolio gains are pretty minimal. Your AA is more conservative, but only for the first few years.

I'm not sure how the market is going to behave in the next couple of years, but my normal portfolio process has me in quite a bit of cash now, with the next two to three years of expenses covered. That might be a good way to kick off retirement now. Just don't forget to spend it. A continuous cash buffer is a drain on performance.

 

[Dd852]

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.

 

[pb4uski]

I've never learned to swim .

Pb4uski: I get 95% success from FireCalc but with Bernecki box checked. However, I have some major expenses (entertainment, downsizing) I can shed if faced with bear market.

95% using 100% of assets? If you're comfortable with then try a scenario with 80% of assets and non-discretionary expenses and see how that "feels".

 

[eytonxav]

If your afraid to leave during a favorable market period, isn't that preferable vs leaving when blood is in the streets. I think with a reasonable allocation, you should be able to ride out most storms, otherwise maybe you don't really have enough cushion to RE in the first place.

 

[robnplunder]

95% using 100% of assets? If you're comfortable with then try a scenario with 80% of assets and non-discretionary expenses and see how that "feels".

I get 95% success rate without counting home equity ($300k). That's my another RE padding. I think the question is more on psychological impact than practical. I'd feel more comfortable to RE just after market went through a serious correction, and with cash to go back into market.

 

[nash031]

If your afraid to leave during a favorable market period, isn't that preferable vs leaving when blood is in the streets. I think with a reasonable allocation, you should be able to ride out most storms, otherwise maybe you don't really have enough cushion to RE in the first place.

The effects of a market downturn in the first year or few years of the withdrawal phase can be marked, to the point that in some scenarios, your portfolio never recovers. It makes sense to me that if you RE at market bottom and still have a high success chance, you're good to go, whereas if you retire at market high, and undergo a 10-25-40% correction, you could be screwed. The key in that case is to have enough to absorb the hit.

 

[robnplunder]

The effects of a market downturn in the first year or few years of the withdrawal phase can be marked, to the point that in some scenarios, your portfolio never recovers. It makes sense to me that if you RE at market bottom and still have a high success chance, you're good to go, whereas if you retire at market high, and undergo a 10-25-40% correction, you could be screwed. The key in that case is to have enough to absorb the hit.

This was the impetus for starting this post. Another way to ask the same question is, am I fooling myself that I can RE now when much of my confidence (and increased NW) is outcome of the recent 5 year Bull run? If market takes a breather, I can manage. If market goes into 3 year bear run of significant drop, I may survive but at what cost? One of the responders mentioned having a cash/fixed asset to last 10 years of expense. I was thinking more like 2.5 - 3 years tops.

 

[heeyy_joe]

Retire with at least a two year cash cushion and sleep well at night. Market top smarket-top.

 

[Moemg]

I retired in Jan. 2008 and proceeded to lose 30% of my nest egg . It was an awful feeling. I seriously considered returning to work . I hung in there and after a few dumb moves my nest egg survived & bounced back to much more than the original value. The good thing is I now feel stronger for future downturns . I do have a survivor pension so that made cutting back manageable . I also have learned to keep several years in cash .

 

[eytonxav]

The effects of a market downturn in the first year or few years of the withdrawal phase can be marked, to the point that in some scenarios, your portfolio never recovers. It makes sense to me that if you RE at market bottom and still have a high success chance, you're good to go, whereas if you retire at market high, and undergo a 10-25-40% correction, you could be screwed. The key in that case is to have enough to absorb the hit.

Tops or bottoms are never known until after the fact, so this becomes plain old guessing. Again, have a good allocation and safety net to ride out a potential bear market.

 

[nun]

If a 25% drop in stocks would destroy your ER plans then you either spend too much, haven't saved enough or have the wrong AA.

I retired in March 2014 at age 52.5 and I made sure I had enough in cash and my 457 Stable Value account to fully fund my expenses until 59.5. I figure that 7 years will be enough time to recover from any nasty down turns. Over the last 3 months my net worth is up $40k; this ER stuff is easy

 

[rodi]

I'm hoping we're not at market top - I gave notice today and retirement starts in 2 weeks.
What gives me optimism is that I've run every calculator and can maintain my current (not so lavish) lifestyle with 100% success from the calculators.

Now if the market collapses more than it has in the past - or we have another long downturn - I'll probably cut back my spending, and consider a part time job. My grandmother did just that in the 70's. My grandfather had retired with a pension - and the 70's inflation ate into their income... she became a "shop girl" part time at a high end gift shop in La Jolla. I am not averse to taking a part time job if the situation becomes dire. I don't think it will come to that.

But if the market collapses, I'm still retiring. I'll just remain flexible to all my options - reducing spending, adding income streams, etc.