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

[robnplunder]

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.

Good luck and best wishes to you! I will be following your footsteps soon (this or next year will likely be my last year at work, market top or not).

 

[Totoro]

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?

I think we've been posting in the same threads the last few days

I'm in a similar situation (WR below 4%) and have the same challenge, interesting to read perspectives from others who took the plunge already!

As an extra, I currently have 40% in equities which I want to move to 85% but for the same reason I'm postponing that too. Happy with the overall reduced return in the mean time as long as I have an income, but in FIRE I want to have it at 85%.

I'll probably work a year or two more, change career again. Most jobs I found can be tolerated for at least a year while there is novelty in them

 

[nash031]

I'm targeting Jan 1, 2020. If the bull run continues until then, and I'm just at my number, I won't feel comfortable. If I am, say 10 or 20% over it, I would. So perhaps the suggestion to take 20% right off the top of your stash and run FIRECalc is a good one...?

In my personal case, DW wants to keep working anyway, so that's my backup plan.

 

[haha]

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

Not hard at all. Other than pensioners, most people retire during high markets, where net worth, quotes and confidence are also high. Like several people have pointed out, we can't say that it is a market top until the market declines meaningfully. We can say without fear of being wrong, that the market is quite high.

Ha

 

[sanfanciscotreat]

left the office in 2010 when I thought I had enough $$$. Market and company stock have gone up significantly since then and I have a big cushion especially since we have spent so much on travel, moving and upgrading our new home in the past six months. A lot of room to spend less, though my legal advisor was greatly surprised when he saw our NW and thinks we are not spending enough.

 

[ejman]

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?

Sounds to me like the perfect time to ER and rebalance to an AA you feel comfortable with including a significant cash reserve to tide you over wtshtf as it surely will sometime along the way. I ER'd December 2002, the end of a three year bear market as it turned out but I didn't know that at the time. During the prior three years I re positioned my AA to my sleep well point (50/50) so the 2000-2002 bear market didn't hurt as much and I felt comfortable that I could make it. And so it has been so far...

 

[springnr]

Upon bailing into retirement earlier this year my AA ended up such that the fixed income could carry me for quite a while.
AKA - How I became a dirty market timer.

It helped ease the transition, the 40% AA for equities will move higher over the next couple years. Any significant pullbacks/corrections will make good re-balancing points. Meanwhile I miss out on some gains, not great but works for me.

 

[CaliforniaMan]

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.

I agree that the key is to have enough (relatively small WR) to absorb the hit. But how would one ever know if they were retiring into a market bottom or market top? Whether the market had risen 25% or fallen 25% before retirement, it could still fall 25% the next year and then continue falling.

For me to be on the "safe" side, I assume a 10% decline in stocks and a 5% decline in bonds even before calculating the withdrawal. I also test for a 30% decline and see if my WR is still livable. But in the end who knows? And this is my first year of retirement so for me it's all theoretical at this point anyway.

 

[ERD50]

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.

This is why I like to shoot for 100% success in FIRECalc , w/o any adjustments. That means your retirement would have survived at any point in history, and those failures will occur at market peaks. So when you retire should have no major concern with timing (assuming your future is not worse than the worst of the past).

You could look at reducing some of the discretionary if the market tanks, but I think people generally underestimate how much an after-the-fact adjustment can make. You can investigate this by entering an offsetting income in year five (or whatever), and see what that does to your success rate.

-ERD50

 

[audreyh1]

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.

Good point - that is my minimum allocation to cash+equities myself: another statistic I compute on my retirement portfolio along with the current AA.

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

We also did this - in addition to the retirement portfolio.

Belt and suspenders

 

[tuixiu]

I get 95% success from FireCalc but with Bernecki box checked.

Ooh I used to love the Bernecki box, man did that make everything so much easier. I finally stopped checking it a couple years ago to bite the bullet on a fixed expense model, figure if Ty was right and I'm just sitting there drooling instead of spending then it is a bonus and I'll buy the best gold-plated drool cup I can.

 

[nash031]

I agree that the key is to have enough (relatively small WR) to absorb the hit. But how would one ever know if they were retiring into a market bottom or market top? Whether the market had risen 25% or fallen 25% before retirement, it could still fall 25% the next year and then continue falling.

For me to be on the "safe" side, I assume a 10% decline in stocks and a 5% decline in bonds even before calculating the withdrawal. I also test for a 30% decline and see if my WR is still livable. But in the end who knows? And this is my first year of retirement so for me it's all theoretical at this point anyway.

Both you and rob pointed this out: as I said in another post this thread, we'll only know if it's a high (or a low) after the fact. So I agree that having some % (whatever you're comfortable with) over your "number" is the way to go. If you think you need $2M to get by, get to $2.5M and call it. (And enjoy that OMY syndrome!!)

 

[tuixiu]

If you think you need $2M to get by, get to $2.5M and call it. (And enjoy that OMY syndrome!!)

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.

 

[Katsmeow]

I believe in the Bernicke concept but I think it is safer not to use that method to calculate success chances

 

[photoguy]

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 ER'd this year and I'm very concerned with a possible bear market or entering a long period of stagnant returns. To combat this I've planned for under 3% WR (ERD's criteria of 100% in FIRECALC yields roughly 3.5% for the default portfolio) and also have 10+ years in fixed income (includes cash). Basically this is layering enough extra safety factors such that if we enter a bear market I feel that we would be ok.

A few other posters have mentioned cutting spending. One thought I've had is that since I will have control of income (due to roth conversion), I can control the amount of ACA subsidy. Given the amount we've budgeted for health care, this could be a substantial decrease in expenses (at the cost of spending down taxable faster than tax deferred accounts).

Currently we are renting/traveling. But a deep bear market will likely result in depressed real estate. So if this happens we could lock in housing expenses at a much lower cost than we are budgeting (for a future home purchase). Of course this requires adequate fixed income/cash reserves to be able to buy the home and last through the bear.

 

[nash031]

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.

 

[daylatedollarshort]

We follow more of a Zvi Bodie approach, so we don't rely on returns from stocks for any of our baseline retirement expenses.

 

[audreyh1]

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.

 

[NW-Bound]

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.

 

[Golden sunsets]

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.

 

[W2R]

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.

 

[clifp]

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.

 

[Willers]

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 ******** 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.

 

[Live And Learn]

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 !

 

[Live And Learn]

1) Start with what ERD mentioned, 100% success in FireCalc and ******** with constant spending power. .

I get many more failures with ******** because of the treatment of bonds