How Many Here Have Experienced a Sustained Net Portfolio Decrease Since Retiring?

[haha]

I believe that the typical self-funded member here uses a retirement withdrawal technique that involves an SWR, rather than a commitment to preserve principal. These plans are designed to liquidate the corpus of retirement assets over a time that is assumed to be longer than the lifespans of those who expect to be supported passively by these assets.

But I have not yet seen anyone talk about having a smaller retirement asset base than when they retired, except during big market stress like 2007-2009. I believe most assume that thse drawdowns are going to be reversed by a reasonably prompt upswing. And certainly this faith has proved well founded as we prepare to close out 2013.

Is this benign behavior of our asset bases something that can be expected, or is it just luck, likely to be reversed by the inexorable drain of living expenses from a variable portfolio that will no longer have any capital inflows? People will say if things get tight I will cut back, but when we have threads about expenses, there appear to be about as many people spending at very low levels already, than large budgets that could at least theoretically be cut back meaningfully.

Do people try to do thought experiments to see how they would likely feel if their asset base was no longer increasing, but instead seemed to be losing out to demands on it?

As I see it, if someone chooses a withdrawal rate that in Firecalc does not get below zero, but is high enough that it experiences drawdowns at times there is an unknown level of risk that you run out of money before you run out of life. Or more likely, the portfolio declines to where its owner is anxious and can think of almost nothing else than how his security is challenged. Remember how vulnerable old people are to fears and anxieties?

My basic question is this: is there anyone here who at this high point in stock and bond prices, has nevertheless seen his or her portfolio decline meaningfully since s/he retired? Any comments would also be interesting.

I will confess that the situations I am asking about would likely terrify me, and damage my feelings of safety and well being.

Ha

 

[NW-Bound]

I believe there are people whose stash has shrunk over the years. Usually, they simply do not feel good to post about it, compared to ebullient people whose portfolio has grown. Obviously, I belong in the latter group. And when there are more frugal types who talk about getting richer, it would make the former group defensive, and they remain in the background.

Not to say what is right or wrong, but it is just human nature.

 

[audreyh1]

If you take inflation into the picture - that is look at the "real" growth in the portfolio, quite a few have admitted they haven't kept up with inflation after retiring, although the picture is improving for them compared to a year or two ago.

 

[haha]

If you don't take inflation into the picture, you are kidding yourself. "My personal inflation rate" makes no sense, you never really know when you need medical care which is not under anyone's control, and which in the fullness of time we will be spending more and more of our own money on, rather than conning the government (other less favored taxpayers) into paying.

I have limited my exposure to rent increases by buying a condo, but in offset I have new exposures like property taxes, unexpected upkeep, sidewalk repairs, etc.

Still, I have never seen a post about how "I have much less money any more, what will become of me as time goes on?"

Maybe that is just not happy talk, and thus not suitable for an early retirement board?

Ha

 

[audreyh1]

I like this calculator for tracking inflation so I can calculate our real return - InflationData.com's Cumulative Inflation Calculator.

The official CPI-U probably won't help you track a big jump in medical expenses. And my personal inflation rate hasn't been anywhere near the CPI-U and for me it's the personal inflation that really counts.

However, I still track my net worth against the "official" inflation - i.e. CPI-U. If I break even, I'm delighted. If I run slightly behind - that's OK too because overall we intend to spend down our portfolio.

 

[kcowan]

Sure, in the 11 years since retirement, our nest egg has dropped. It is primarily because we are reducing our equity exposure and the yields on fixed income are so bad. We are counting on some reversal in that trend and so we are still OK with our assumptions going forward.

We are using 4% as our personal inflation rate.

 

[braumeister]

If I run slightly behind - that's OK too because overall we intend to spend down our portfolio.

This seems to be the key issue.
Some want to leave a legacy, either to the next generation or to worthwhile causes. Others don't.

 

[arky]

If you don't take inflation into the picture, you are kidding yourself. "My personal inflation rate" makes no sense, you never really know when you need medical care which is not under anyone's control, and which in the fullness of time we will be spending more and more of our own money on, rather than conning the government (other less favored taxpayers) into paying.

I have limited my exposure to rent increases by buying a condo, but in offset I have new exposures like property taxes, unexpected upkeep, sidewalk repairs, etc.

Still, I have never seen a post about how "I have much less money any more, what will become of me as time goes on?"

Maybe that is just not happy talk, and thus not suitable for an early retirement board?

Ha

Since retiring in Jan 2008, my liquid net worth has managed to thread water overall (including inflation), so it is in the back of my mind. In about 2 years I will reach FRA for SS, so that will stave off fears for a few more years, but you are correct, seeing my "stash" shrink is an ongoing thought process that will probably become more uncomfortable with time.

 

[haha]

However, I still track my net worth against the "official" inflation - i.e. CPI-U. If I break even, I'm delighted. If I run slightly behind - that's OK too because overall we intend to spend down our portfolio.

This highlights what may be my underlying issue, and it may be mainly generational. I kind of feel that if I am not preserving real principal, I should probably be taken out and shot. Given that I was divorced after retirement, doing this has presented some formidable challenges.

I think I got to thinking about this now because some poster referred to "having the game won". I think unless I had very secure COLA pension (ideally federal) and or large SS I could not feel that the game was over, or even that is a game. And yes, I want to leave money to my kids, even though one of them has way more than I do, and the other is doing very well. I already gave them the legacy of good brains, good character, and a sense of realism which may be most helpful in our totally nutso world.

And what would I want to spend money on? Maybe after my hip is fixed a few long stays in chosen European countries, but no one will ever get me on a cruise or a country to country foreign tour. Certainly not a second home. I am ok with winter here, and I love the other seasons, so why take on the hassle and expenses of another home? Some friends had a home in the San Juans. A few times I went out there with them. Much of the time was spent repairing storm damage since the last visit, finding out what had been stolen or blown away, then walking on the beach until it was time to go wait in the ferry line. Well I can walk on beaches right here in Seattle and avoid the ferry and storm repairs.

I guess I just don't have many or perhaps any unsatisfied consumer wants.

Ha

 

[audreyh1]

This seems to be the key issue.
Some want to leave a legacy, either to the next generation or to worthwhile causes. Others don't.

We don't have children. We are gifting NOW to family and charities - while we are alive and can enjoy that. It's part of our annual budget.

 

[daylatedollarshort]

you never really know when you need medical care which is not under anyone's control, and which in the fullness of time we will be spending more and more of our own money on, rather than conning the government (other less favored taxpayers) into paying.

My plan to control medical costs is to move outside the U.S. Medical care in the U.S. is many times more expensive than every other country in the entire world, including those with more highly rated health care systems and universal care.

 

[RunningBum]

My dad retired about 16 years ago. Early on, they were growing more than they were spending. Now they are at about 75-80% of what they started with, I think. It looks to me like they will do ok. We talked a bit about money and they didn't seem stressed about it at all, and I don't think they ever expected not to have to dip into it.

 

[robnplunder]

I haven't RE'd but fully intend to spend down when I do. I came into this world with nothing, and won't take anything with me when I croak. (In reality, I will probably leave a good chunk of my asset to DS ). I have to be careful though. All the years of managing my finance will likely get me in trouble of increasing asset after RE .

 

[FIREd]

This highlights what may be my underlying issue, and it may be mainly generational. I kind of feel that if I am not preserving real principal, I should probably be taken out and shot.

Which parameters do you use to determine whether your real principal is being preserved? I espouse the idea of real principal preservation but struggle with this question. In order to achieve such preservation, I must take some market risk and by doing so I open myself to volatility. One year it looks like I'm doing great, the next not so much. When do I decide it's time to be taken out?

 

[Katsmeow]

DH retired in 2010 and I semi-retired. We knew that for a period of 5-6 years we would have high expenses and the portfolio would decline because we still had adolescent kids at home and to get through college. At this point, the amount of the decline has been much less that one might have anticipated since the market has been so high. For example this year, we withdrew what was much more than 4% of our portfolio, but we still end the year with the portfolio up.

We anticipate that for the next 3 years the portfolio will decrease. However, we have anticipated this and so if the decrease is in the range we expect (or even somewhat above it), we are OK about it. Psychologically, I don't really like to see the decline even though financially I expect it and know that it is within our plan. But, I recognize that is just irrational queasiness.

Now once these next 3 years are over I don't expect to see large decreases in the portfolio except in the inevitable market downturns in the future.

 

[samclem]

I kind of feel that if I am not preserving real principal, I should probably be taken out and shot.

Yes, the question is "what is preserving principal?" Some people want to live on dividends and interest, never selling stock, but they clearly aren't preserving principal if the underlying stock value of their "solid" dividend payers declines 75%. Or, are we reading that wrong--they still own the same % of these same companies, so in that sense they have preserved their principal.
I'll probably use a method like Audrey's: compare my portfolio to CPI-U to see if it is keeping pace or losing ground. Smoothing (e.g. taking a 5-10 year average) will help eliminate the peaks and valleys and make the exercise more meaningful. We'll take withdrawals as "X% or year end portfolio value", so it is impossible to go broke, but it is very possible to withdraw at a rate that dramatically increases the chance of an eroding real value of annual withdrawals over time. So, better to catch that early.

In answer to the OP: We're not retired yet, so can't answer. Like virtually everyone, our portfolio did decrease in value dramatically in 2008, but we didn't sell any equities and are now well back in the black. For now . . .

 

[bjorn2bwild]

I imagine we have all run some multiple of the thought experiment -
'If I have $1.5M, I can spend $50,000 per year for 30 years' worst case scenario, I'm golden. In reality, a protracted draw down would make me very uncomfortable.
With no heirs to consider, the idea of an annuity is very appealing to me. I suspect the generation of self-run retirement planning will be testing this reality.

 

[W2R]

Do people try to do thought experiments to see how they would likely feel if their asset base was no longer increasing, but instead seemed to be losing out to demands on it?[...]My basic question is this: is there anyone here who at this high point in stock and bond prices, has nevertheless seen his or her portfolio decline meaningfully since s/he retired? Any comments would also be interesting.

I retired in 2009, and so far the market has been skyrocketing so I haven't experienced a significant portfolio decline (yet).

But yes, I do this type of thought experiment a lot. The first thing I would do in the event of a market crash, is to claim my SS immediately. Also, I could cut my expenses quite a bit. I already know that I would cancel my cable TV and use an antenna instead, or get basic cable at the very most. I would cancel my landline, switch my cell phone to a "dumb phone" with no data charge at a cheaper cellular service than Verizon, and stop eating out so much. I might even cancel the gym and work out in my exercise room at home, instead. I would start shopping in bulk at the cheaper grocery store across town instead of at my convenient chain grocery store down the street (a local chain with prices similar to Kroger or Safeway). There are so many more expenses that I could minimize or don't really need.

I don't really need to be thinking about cutting my expenses at this point. However, I want to think about it. Like many I am a little bit of a "security junkie" and it makes me feel more secure to know that I could live on a lot less without significantly impacting my happiness in retirement.

 

[haha]

Yes, the question is "what is preserving principal?" Some people want to live on dividends and interest, never selling stock, but they clearly aren't preserving principal if the underlying stock value of their "solid" dividend payers declines 75%. Or, are we reading that wrong--they still own the same % of these same companies, so in that sense they have preserved their principal.

Not in any sense that I would recognize. This might be preservation of imaginary principle I guess.

Which parameters do you use to determine whether your real principal is being preserved? I espouse the idea of real principal preservation but struggle with this question. In order to achieve such preservation, I must take some market risk and by doing so I open myself to volatility. One year it looks like I'm doing great, the next not so much. When do I decide it's time to be taken out?

I am along way from doing these things in an optimal way. One thing that has to be remembered is that if you get too strict about time and tolerances, you drive yourself nuts for no good reason.. The way I have done it is to wait until my portfolio makes a significant decline from a high, then compare the peak to the prior peak, values CPI corrected. I don't sweat a small slippage, because markets are cyclical, and now especially markets are manipulated. To me, the idea and attention are key, not that everything always works according to plan, because it won't.

Ha

 

[ERD50]

I believe that the typical self-funded member here uses a retirement withdrawal technique that involves an SWR, rather than a commitment to preserve principal. These plans are designed to liquidate the corpus of retirement assets over a time that is assumed to be longer than the lifespans of those who expect to be supported passively by these assets. ...

Ha

I don't think anyone mentioned this, but I feel the premise of your second sentence is wrong, or maybe just misstated.

I choose to think in terms of a historically 100% safe WR (though the same concept applies at 95% or whatever), and there is no 'plan' to liquidate my portfolio as I approach my lifespan. The data tells us that in a few cases, the portfolio would have ended close to zero, but those are the exceptions. In the majority of cases (admittedly, through a historic periods that may not be repeated), the portfolio is solidly intact, and often grows by leaps and bounds.


I think a few others touched on this, but I am confused by your statements about not touching principal. Surely your portfolio suffered in the recent down cycle, yet you still pulled the dividends, right? So didn't your principal drop, esp considering inflation?

One retiree might spend divs of a higher div yield portfolio (which I'm assuming, maybe wrongly, would likely be a somewhat lower growth portfolio), and another retiree might spend the lower divs and some of the growth of a more broadly market-based index portfolio. Is one preserving principal while the other is not? I guess this goes back to that other recent thread, I just fail to see any important distinction twixt the two.

But to answer your question - at the end of 2008 I was right at my retirement starting portfolio (end of 2003, no inflation adjustment). I carried on, figuring this was just the kind of dip/peaks that one should expect. I'm up considerably now, but I realize this could easily change and we may see another bear cycle at any time.

I still really have not figured out at what point I'd say - whoah, I gotta cut back spending. I should have this defined up front, but I don't. I think my WR is pretty conservative, and I will have SS and a moderate pension. It sure looks like I'll be able to delay SS to 70. If the stuff hits the fan, I'll figure something out.

-ERD50

 

[haha]

I don't think anyone mentioned this, but I feel the premise of your second sentence is wrong, or maybe just misstated.

I choose to think in terms of a historically 100% safe WR (though the same concept applies at 95% or whatever), and there is no 'plan' to liquidate my portfolio as I approach my lifespan. The data tells us that in a few cases, the portfolio would have ended close to zero, but those are the exceptions. In the majority of cases (admittedly, through a historic periods that may not be repeated), the portfolio is solidly intact, and often grows by leaps and bounds.


I think a few others touched on this, but I am confused by your statements about not touching principal. Surely your portfolio suffered in the recent down cycle, yet you still pulled the dividends, right? So didn't your principal drop, esp considering inflation?

One retiree might spend divs of a higher div yield portfolio (which I'm assuming, maybe wrongly, would likely be a somewhat lower growth portfolio), and another retiree might spend the lower divs and some of the growth of a more broadly market-based index portfolio. Is one preserving principal while the other is not? I guess this goes back to that other recent thread, I just fail to see any important distinction twixt the two.

But to answer your question - at the end of 2008 I was right at my retirement starting portfolio (end of 2003, no inflation adjustment). I carried on, figuring this was just the kind of dip/peaks that one should expect. I'm up considerably now, but I realize this could easily change and we may see another bear cycle at any time.

I still really have not figured out at what point I'd say - whoah, I gotta cut back spending. I should have this defined up front, but I don't. I think my WR is pretty conservative, and I will have SS and a moderate pension. It sure looks like I'll be able to delay SS to 70. If the stuff hits the fan, I'll figure something out.

-ERD50

I think these plans are designed to be agnostic as to liquidation or preservation. It would be stupid to make a make design feature that the portfolio must be liquidated. However, members all the time mention how they wish to die just when they have no more money, or sometimes they lament the difficulty in not leaving money on the table. If this is not liquidation, what would be?

As to your other question, it is addressed in my post just above yours.


I do not think that I have a great method, and certainly not the best method. It is a method, and it does address my personality and my needs, as I assume your plans do with yours.

There are other possibly better ways to address preservation of capital, for example, the smoothed earnings of your portfolio, or better yet the smoothed free cash flow of the portfolio, or perhaps the combined net buybacks and dividends added to net debt paydowns.

Ha

 

[ERD50]

... However, members all the time mention how they wish to die just when they have no more money, or sometimes they lament the difficulty in not leaving money on the table. If this is not liquidation, what would be?

Yes, that would be liquidation. However, I don't think in those terms, so it is rather foreign to me. If I knew the date of my and my spouse's death, and had a solid knowledge of our expenses between then and now, I'd likely plan on some liquidation. But that's not likely. So I just can't relate to the concerns of 'leaving money on the table' - that's is our insurance policy (to a degree), and better than the alternative, IMO. An annuity is a partial solution to this, but those pros/cons have been discussed before.

As to your other question, it is addressed in my post just above yours.

OK, thanks.

... There are other possibly better ways to address preservation of capital, for example, the smoothed earnings of your portfolio, or better yet the smoothed free cash flow of the portfolio, or perhaps the combined net buybacks and dividends added to net debt paydowns.

Ha

I guess I'm usually doing some smoothing when I look at WR assumptions. I feel better plugging in an average of the portfolio form the past few years, rather than its current peak. And I try to be conservative in other areas, so I think it will work out, or I adjust somewhere, somehow.

-ERD50

 

[Alan]

My basic question is this: is there anyone here who at this high point in stock and bond prices, has nevertheless seen his or her portfolio decline meaningfully since s/he retired? Any comments would also be interesting.

Since retiring in 2010 the market rises have meant that our portfolio has continued to climb even though, as planned, we are spending much more than when we were working, doing lots of travel while we are still fit enough to do so and still have have the enjoyment from it. Our withdrawal for this year is 4.77% of the original portfolio value when we retired.

I would like to think that if the markets had been down we would not have slowed our spending as we had amassed a bunch of cash in I-Bonds and CD's prior to retirement for just this purpose. The reality may well have been different if faced with successive negative returns.

Over the next 10 years we have 4 more income streams due to come on line in the form of a private pension, UK SS for me, and US SS for me and DW.

Consequently I would hope to have the fortitude to maintain our current spending levels during multi-year market downturns, but who knows. In a few years time we plan on setting up a permanent residence in the UK and splitting our time between the US and UK. This also gives us access to a more predictable cost of healthcare.

 

[Danmar]

Retired 7 years. Portfolio up 48%(nominal, maybe 32% real) and divs up even more. So much for the dividend portfolios not growing. Trying not to be smug as things will certainly decline at some point. In 2008-2009 portfolio dropped by 50% in 6 months. Pension kicked in a couple years ago. Only spending divs and pension so far. I gotta sell some stock at some point but only 63 so long time (hopefully) to go. I think if you get over the first 5-10 years you are unlikely to run out.

 

[growing_older]

This seems to be the key issue.
Some want to leave a legacy, either to the next generation or to worthwhile causes. Others don't.

I have no desire to leave a legacy, other than getting my kids established and educated. But I am not opposed to the idea and somewhat resigned to the fact that I probably will. For me, I have a strong desire for safety and being sure I do not run out of money in retirement. I'm locked into a couple years of OMY probably because of that. And I'm planning on a lower than 4% SWR to make sure.

In my regular expenditure tracking, I've noticed a couple times when my expenses quickly rose more than official inflation figures would indicate they should have. Perhaps it's my unique choices of goods and services, but it makes me wary that I could experience similar incidents of personal inflation once retired and have no way to easily earn or save my way out of it. So that's another argument for a lower SWR.

By the time I'm done with my safety net and planning to prevent running out of money, I'm sure I'll end up with a portfolio that grows at least nominally, if not inflation adjusted. Which means I do expect to leave a legacy, but my motivation is safety and planning, not a drive for the sake of the legacy. I hope my kids and causes will put it to good use.