Market high: scary time to retire?

[JoeWras]

No pension here and I do have challenges getting HI, pay an exorbitant price. I sleep well because my downside here is quite well defined, so there is nothing more or new to worry about on those fronts. I also stopped working 12/99, just as the recession and stock market decline of '01 and '02 were getting underway. My portfolio took a major hit. Recovering from that is what led me to see I didn't need to go back to work and could retire.

The one big difference is I stopped listening to cnbc in that same time period and did focus more on a couple of financially oriented forums. That really helped me.

Yes, reading the collective experience of you and others from 2007 timeframe gives us all some confidence.

As for CNBC, I need to find something else to put on the tube while I prepare for w*rk. Perhaps back to music.

At least on this show it is some truth in advertising. SQUAWK, squawk, squawk! BLAH, blah, blah!

 

[HFWR]

In other words, stay flexible, observe and adjust...

Or, as unclemick might say, "agile, mobile, and hostile"...

Good for linebackers and FIREees...

As for CNBC, I need to find something else to put on the tube while I prepare for w*rk. Perhaps back to music.

I watch Squawk Box, mostly to [-]ogle Becky[/-] have some semi-interesting noise on while drinking coffee. Only a few guests are worth listening to; most are talking their/a book...

 

[Andre1969]

Here's some irony. I was too heavily weighted in cash. (Duh-oh! Missed the market run up!) The market has actually brought my portfolio into more of the balance I want with equities. I still have a lot of cash, I don't want to generate any more.

In that case, you might be in a better position to retire than you might think. It'll still be scary going out when the market is at such a peak. However, if a lot of your portfolio was in cash, then you most likely got to your threshold the "old fashioned way", for lack of a better word. Slow and steady.

In my case, I had very little in cash in 2007 As a result, when I bottomed out in the "Great Recession", I lost a little over half of everything. From year end 2007 to year end 2008 I was only down about 42%. But if I measure from my peak of October 2007 to roughly Thanksgiving 2008, I was down a bit over half. The bottom of the "Great Recession" was officially something like March 9, 2009, but I bottomed out a few months earlier.

Since then, I've bounced back and then some, and have cashed out a bit during the upswings and bought back in during the downturns. I feel like I've got too much in cash right now, but I just ran the numbers, and it's only about 12-13%.

I might cash out a bit today. If the market takes a downturn, I'll buy some back. If the market keeps shooting up, then I'll throw it towards the mortgage.

 

[pb4uski]

.....I guess I just have to keep the faith and stay the course.

Spot on!

The other thing to consider, particularly since you have so much in cash, is even if we had a 30% drop in equities a la the late 2000s financial recession followed by a recovery, would you even need to access your equities before the recovery occurs? By my reckoning from peak to trough and back was only about 3 years, and a pretty unprecedented three years at that - usually peak to trough and back are shorter periods.

My point is that if you have 3-4 years of living expenses in stable investments and don't need to tap equities, you could be patient and wait it out. While it might be a nerve-wracking wait, history suggests that the dip would be short lived. Even at today's near record high levels, valuations are relatively reasonable and balance sheets are in very good shape.

And if you have some flexibility in your living expenses that makes it better still.

 

[Tyro]

There's no "rule" that I'm aware of that suggests "safe" investments have to be in taxable accounts.

I'm not disagreeing with anyone; I'm confused by an apparent contradiction of theories, and seeking clarification. For those of us not yet 59.5 (you may be over 59.5 - I don't know, and that might explain the difference), using TD accounts for the "safe" investments (to live off of while weathering a market downturn) would incur penalties, AFAIK.

 

[ziggy29]

I'm not disagreeing with anyone; I'm confused by an apparent contradiction of theories, and seeking clarification. For those of us not yet 59.5 (you may be over 59.5 - I don't know, and that might explain the difference), using TD accounts for the "safe" investments (to live off of while weathering a market downturn) would incur penalties, AFAIK.

Well, if you're not 59 1/2 this "penalty" (unless you use Rule 72t) is applicable to any kind of distribution from a conventional IRA; it matters not whether it's in stocks, bonds or cash.

Keep in mind also that Roth contributions are always available for withdrawal tax-free and penalty-free as well.

 

[JoeWras]

Spot on!

The other thing to consider, particularly since you have so much in cash, is even if we had a 30% drop in equities a la the late 2000s financial recession followed by a recovery, would you even need to access your equities before the recovery occurs? By my reckoning from peak to trough and back was only about 3 years, and a pretty unprecedented three years at that - usually peak to trough and back are shorter periods.

My point is that if you have 3-4 years of living expenses in stable investments and don't need to tap equities, you could be patient and wait it out. While it might be a nerve-wracking wait, history suggests that the dip would be short lived. Even at today's near record high levels, valuations are relatively reasonable and balance sheets are in very good shape.

And if you have some flexibility in your living expenses that makes it better still.

You know what, pb4? You have a very, very good point there. I didn't think about it that way.

I've regretted having too much cash (it snuck up on me). And over the last 2 years have been slowly weighting some to equities. But we're still pretty heavy, so if I did pull the plug, I could let equities ride for quite a few years.

I hadn't thought about it from that angle. That's a really good point. We have about 4 to 5 years worth. We could let the equities ride. I still hope to get equities to 60% while still having that cushion. Assuming no crashes greater than 10%, we can even accomplish that.

You all are making me feel better and less nervous.

 

[pb4uski]

Even if your WR is 4%, 4 years of expenses would only be 16% in stable value investments (cash and short term investments).

I target 1 year of expenses (~3.5% in my case) in online savings and another year in a short term bond fund and sleep well at night.

 

[Tyro]

Well, if you're not 59 1/2 this "penalty" (unless you use Rule 72t) is applicable to any kind of distribution from a conventional IRA; it matters not whether it's in stocks, bonds or cash.

Yes, which is why it seems to make sense to keep the safe money to weather market downturns in a taxable account. YMMV.

 

[ziggy29]

Even if your WR is 4%, 4 years of expenses would only be 16% in stable value investments (cash and short term investments).

I target 1 year of expenses (~3.5% in my case) in online savings and another year in a short term bond fund and sleep well at night.

True. And if one had a 60/40 allocation and it "hit the fan" again, depending on how they chose to draw it down and rebalance, you have (in theory) 10 years of investments outside of equities to draw from before you'd have to touch stocks at low prices. Of course, at that point you aren't really using a true AA model with defined rebalancing, but more of a "buckets" approach and a gut feeling about when it was time to reload the "safe stuff" bucket in the future.

 

[Dawg52]

And don't forget, med's help during market down turns.

 

[Bogie]

Well..

An optimist would say that the economy is great, as good as it can get...

And the pessimist thinks he's right

 

[Meadbh]

You know what, pb4? You have a very, very good point there. I didn't think about it that way.

I've regretted having too much cash (it snuck up on me). And over the last 2 years have been slowly weighting some to equities. But we're still pretty heavy, so if I did pull the plug, I could let equities ride for quite a few years.

I hadn't thought about it from that angle. That's a really good point. We have about 4 to 5 years worth. We could let the equities ride. I still hope to get equities to 60% while still having that cushion. Assuming no crashes greater than 10%, we can even accomplish that.

You all are making me feel better and less nervous.

I too have ~5 years' worth of living expenses in cash, albeit in a corporate account. I plan to let my other investments to their own devices during most of that time. They will go up and down, but hopefully will at least be worth what they are now at the end of that time. After the first 5 years of retirement have passed, the risks of running out of money due to an early market crash go down.

 

[walkinwood]

It depends on what your SWR, your age, and how much head-room are you leaving yourself to make course corrections on the downside.

We ER'd in mid 2008 and had to course correct almost immediately, but we had enough head room to do that (and we worked for a year too). Also, we had decided on a percentage of actual portfolio withdrawal method instead of the traditional inflation adjusted SWR methodology.

 

[Animorph]

Yes, which is why it seems to make sense to keep the safe money to weather market downturns in a taxable account. YMMV.

You can put safe assets or cash anywhere you want. If you have all stocks in the taxable account, sell some shares to get the cash you need. Buy the same shares with the cash in your IRA. With mutual funds you can do this simultaneously at the same price with no commissions. The net effect is that you just transferred cash from IRA to taxable without making an IRA withdrawal, and your AA is the same as it was, minus the cash. Do be carefull to avoid the wash rule if you sell at a loss in your taxable account.

 

[samclem]

Originally Posted by ziggy29
Well, if you're not 59 1/2 this "penalty" (unless you use Rule 72t) is applicable to any kind of distribution from a conventional IRA; it matters not whether it's in stocks, bonds or cash.

Yes, which is why it seems to make sense to keep the safe money to weather market downturns in a taxable account. YMMV.

Edited to add: Opps--cross-posted with Animorph
From a tax efficiency standpoint, the cash/CD's other "safe" money could be in an IRA or other tax deferred account (since their gains are taxed at the (high) regular income rate). The stocks can be kept in a regular after-tax account. Then, if the market dives and you need the money for living expenses for a few years, sell enough shares to meet the living expenses (maybe logging some nice losses to reduce taxes). Then, use the "safe" money in the tIRA to buy very similar (but not "substantially identical") shares like the ones you just sold (or roll the dice and wait 30 days and buy the exact same stocks/ETFs/MFs you sold). Your allocation stays the same and you've saved money on taxes vs keeping the cash in an after-tax account.

 

[pb4uski]

Edited to add: Opps--cross-posted with Animorph
From a tax efficiency standpoint, the cash/CD's other "safe" money could be in an IRA or other tax deferred account (since their gains are taxed at the (high) regular income rate). The stocks can be kept in a regular after-tax account. Then, if the market dives and you need the money for living expenses for a few years, sell enough shares to meet the living expenses (maybe logging some nice losses to reduce taxes). Then, use the "safe" money in the tIRA to buy very similar (but not "substantially identical") shares like the ones you just sold (or roll the dice and wait 30 days and buy the exact same stocks/ETFs/MFs you sold). Your allocation stays the same and you've saved money on taxes vs keeping the cash in an after-tax account.

+1

 

[Texas Proud]

Edited to add: Opps--cross-posted with Animorph
From a tax efficiency standpoint, the cash/CD's other "safe" money could be in an IRA or other tax deferred account (since their gains are taxed at the (high) regular income rate). The stocks can be kept in a regular after-tax account. Then, if the market dives and you need the money for living expenses for a few years, sell enough shares to meet the living expenses (maybe logging some nice losses to reduce taxes). Then, use the "safe" money in the tIRA to buy very similar (but not "substantially identical") shares like the ones you just sold (or roll the dice and wait 30 days and buy the exact same stocks/ETFs/MFs you sold). Your allocation stays the same and you've saved money on taxes vs keeping the cash in an after-tax account.

Agree with this....

Plus... I think there is a difference between accumulation and spending phases...

IOW, I am accumulating... I will stick to the higher income investments in IRAs... but when I RE, I will do what is necessary to have cash in the taxable accounts... like what is suggested above... hoping to minimize taxes along the way...

 

[jollystomper]

I'm sure I'm being overcautious, but to deal with the heady market my simple strategy has been:

1. Plan what our retirement expenses will be (this month in fact is another "test run" of living on them).

2. Since I am fortunate enough to have a pension, I subtract that from our projected expenses and keep the difference in cash.

3. invest the rest into a stock/bond mix and continue to dollar cost average into them, with an emphasis on dividend-producing stock/bond investments (but not exclusively).

I just figure that should the market go down, I can avoid withdrawing from it for long enough to recoup. I look at "what would happen if my investments dropped 20% (which is what it did in 2008)", and I can live with that total and be patient.

Not a brilliant strategy, but one that lets me sleep easily at night. I'm not swinging for the fences, I'm happy with stringing together a few singles.

I do expect a correction. After all, just last year stocks had a run up early in the year, pulled back by June and was negative for the year, and then gained for the balance of the year after that. I expect something similar this year and will just stay the course.

 

[clifp]

Buffett was on CNBC Monday. He felt that on a relative basis stocks were a good value right now, compared to bonds, farmland, REIT and most other assets.

He said stocks will be higher in the future, although as always he said he had no idea if they will be higher or lower in the next year or so.

To be honest if I was retiring right now I be far more afraid of the record low interest rates for bonds than the stock market which maybe 20% overvalued or so.

 

[Midpack]

Buffett was on CNBC Monday. He felt that on a relative basis stocks were a good value right now, compared to bonds, farmland, REIT and most other assets.

He said stocks will be higher in the future, although as always he said he had no idea if they will be higher or lower in the next year or so.

To be honest if I was retiring right now I be far more afraid of the record low interest rates for bonds than the stock market which maybe 20% overvalued or so.

Don't get me wrong, I think Buffett is a rare genius, with an investing record to prove it. But has he ever been less bullish on equities vs any other asset class? I'd never get out of equities altogether (OK, maybe at age 90) thanks in part to people like Buffett.

 

[Hamlet]

He cashed out his original investing partnership in the late 60's because he felt that equities were wildly overvalued.

He piled up an awful lot of treasuries in the late 90's as well, because he had trouble finding value in the equity market. He actually bought a big pile of silver around that time, which turned out pretty well.

I remember reading an article in the late 90s by him explaining why stocks were likely to underperform the expectations people had for them at the time.

Don't get me wrong, I think Buffett is a rare genius, with an investing record to prove it. But has he ever been less bullish on equities vs any other asset class? I'd never get out of equities altogether (OK, maybe at age 90) thanks in part to people like Buffett.

 

[clifp]

Don't get me wrong, I think Buffett is a rare genius, with an investing record to prove it. But has he ever been less bullish on equities vs any other asset class? I'd never get out of equities altogether (OK, maybe at age 90) thanks in part to people like Buffett.

Yup in July 1999, in a speech to a bunch of movers and shakers in Sun Valley. He told them that stocks were badly overvalued.

At the time he predicted that next 17 years we would see equities return 6% at the time the average investor felt stocks would return 13-22% a year. FYI the S&P hit 1400 that month. A 4% return (after subtracting out 2% for dividends) means it needs to get to 2800 by July 2016.

If you haven't read his biography Snowball is long but worthwhile read. Or you can read this long excerpt of the meeting here. So yes Buffet is not a perma bull.

 

[Stanley]

Then this morning on Squawk Box, the panel was making all sorts of noise about how we need to reduce SS benefits. More lack of sleep ahead.

Interesting. I heard an interview with Simpson of Bowles/Simpson. He claims SS can be fixed by raising the retirement age by 1 year over the next 40 and then 1 more year over another 25 years.

Sounds simple to me.

 

[explanade]

Edited to add: Opps--cross-posted with Animorph
From a tax efficiency standpoint, the cash/CD's other "safe" money could be in an IRA or other tax deferred account (since their gains are taxed at the (high) regular income rate). The stocks can be kept in a regular after-tax account. Then, if the market dives and you need the money for living expenses for a few years, sell enough shares to meet the living expenses (maybe logging some nice losses to reduce taxes). Then, use the "safe" money in the tIRA to buy very similar (but not "substantially identical") shares like the ones you just sold (or roll the dice and wait 30 days and buy the exact same stocks/ETFs/MFs you sold). Your allocation stays the same and you've saved money on taxes vs keeping the cash in an after-tax account.

But you're limited to low annual contribution limits for IRAs ....