Market high: scary time to retire?

[foxfirev5]

So I'm liking the idea of discounting the networth 20 or 25% and running those numbers through firecalc.

Should be good to go. I hear doomsdayers talking 50% down for the market, but I'm going to assume proper AA will keep the overall networth at a max risk of 25% or so.

My only concern about this strategy is it runs the risk of being way too conservative leading to more OMY.

As my time to RE gets closer I'm really grappling with the equity issue. I can't simply discount the value of my portfolio by the amount of my 45% equity allocation and retire comfortably. However I could survive a downturn of up to 50% and not suffer too much.
As time goes by I keep running the Firecalc numbers with a more conservative slant. Maybe the one more year syndrome has got me hooked.

 

[rodiy2k]

This is an interesting scenario to me due to close circumstances. Although about five years away I feel the same way especially as an employee of the financial services industry. This is what I can tell you. Timing and some luck play an important role. We bought a house in Canada in 20002 with the USD at 62 cents thus, after conversion, we wound up with enough extra money to put more down than expected (we moved from California). We built new for 230k cad. As luck would have it that was the start of a massive boom in oil and gas that sent all of Canada flocking to Calgary. Only five years later we sold the house in two days for 550k cad (it was fully paid off thanks to overtime mostly my wife's). When we sold and moved back to the US the USD had risen to almost 90 cents so converting back to USD meant not only did we buy low and sell high, we also had favorable currency rates for each conversion. Good planning? Nope; lucky timing

The Calgary market topped out not higher than we sold six months later and we all know what happened to house values after 2007 (although in Calgary they just leveled off).
So there we were back in California with lots of cash to invest but still nothing near the cash value of a suburban California house. We rented for a year and in 2008 and we decided to buy, not really knowing the full extent of the market crash yet and having the entire 550K almost all in the market. Not wanting a long mortgage we put 400k down for a 15 year mortgage and then we both started 401k plans a few months from the market bottom. We max out the 401ks and two Roth's.

Fast forward to now. We have just passed 100% gain in investment values since 2008 thanks to dollar cost averaging and the start of new investment accounts in the beginning of a new bull market. We have surpassed what we had after we sold the first house. So due to timing that I didn't really plan, we got almost all of our cash out of the market and into home equity and missed the wosrt of the 47% downfall. Timing . Lucky Again with a little bit of hopeful planning

So we are ahead of where I expected but would never push up our committed ER date of a 2017 at age 52 and 47. But we will be using the current house proceeds to buy an immediate annuity, move to Malysia and live on that until pensions and 401k/Roths are available. So what happens if the market drops 47% again? We still have five years but how would that affect it? Should we be scared of the market top? One big difference between now and 07 is there are no toxic assets waiting to kill global markets. But I can tell you that capitals markets worldwide have recovered mostly thanks to global interest rate reductions and liquidity infusions by central banks. Especially the Fed. I guarantee there will be another big drop: there always is. But I'd be more worried about interest rates rising and markets weaning off free credit and going baclk to fundamentals and supply/demand than the arbitrary number in an index. The Financial press loves to make everyone panic at market tops. It's part of the game.

Based on my knowledge I fully expect a hold on low interest rates thru the next election. So back to timing. I expect to retire at a time when rates finally begin to rise whcih should bode very negatively but we will be living on an annuity anyway (guaranteed income purchased with cash we don't otherwise need). Should the market plummet right at the start I would probably annuitize some more of our retirement cash but not that much. I don't ever obsess over market highs or lows but rather: I stay diversified; plan all scenarios including what I would do in a large drop and try to always stay fully invested. The new economy is never going to support 5% unemployment and maybe not even 6.5% like the fed is waiting for unless they fudge the numbers. So I would expect a pullback this year but not a disaster barring some political or unforeseen tragedy in the world that shatters markets. I remain in 55% equity with heavy weighing on developed Asia and emerging markets but stay very diversified with my fixed income because outside of another total meltdown ,not everything will go down at one time and the idea during a large pullback is capital preservation with some room for growth, my basic strategy for all scenarios. Hopefully we'll all be sipping pina coladas by that time.

 

[mountaintosea]

Any time you decide to retire there's reason not to retire. But wait until there's absolutely no doubt and leave. My limit was management. I decided on a Wednesday and retired that Friday. I was going to wait one more year then decided it was time to leave. That was in 2007. I have not been sorry. So I would suggest you sit on it and let it simmer awhile more. You will know when it's time.

 

[67walkon]

Having the 2 to 3 years worth of cushion will likely deal with any swings. Yes, the market will go down. Then it will go up. Then it will go down. Long term, it has always gone up, so if you can weather a few bad years, I wouldn't try to time the market.

At least that's what I'm telling myself with an April 1, 2013 quit date.

 

[ziggy29]

Keep in mind that the Dow also broke 14,000 in 2000 and 2007. Both times these were followed by a "thud" but that won't always be the case. And the economy and overall corporate earnings are greater than they were in 2007 and considerably greater than in 2000, so in relative terms the valuation of this "all time high" is much saner than it has been in the past.

 

[dtbach]

Keep in mind that the Dow also broke 14,000 in 2000 and 2007. Both times these were followed by a "thud" but that won't always be the case. And the economy and overall corporate earnings are greater than they were in 2007 and considerably greater than in 2000, so in relative terms the valuation of this "all time high" is much saner than it has been in the past.

Well put. In 13 years the market has basically gone nowhere. Does anyone believe that in another 13 years the market will still be at 14,000? I'd bet on 30,000.

 

[bamsphd]

So w*rk is bogus, and I'm itchy.

This good market is playing games with my head.

+1

Back in 2008 I wrote:

We were so close. If our portfolio had gone up just another 5% last year around the high, we would have both retired. Our portfolio is pretty aggressive, targeting between 28% and 30% bonds, the rest in stocks.

Now as I watch our portfolio's value decline, I measure the decline in terms of years of salary. Through mid-summer, we had lost about 2 years of combined salary since the peak. Not wonderful, but not enough to really bother me. Now, with our greater losses and lower salary, we are down by almost 10 years of salary!

On my sad days, I figure I could easily end up working for another decade. On my happier days, I figure when I do ultimately retire, I'll probably have a wealthier retirement than I expected.

So four years later, my portfolio is definitely back, though our expenses have also grown, and I too am getting very itchy. One of my co-workers says when I start seriously considering retirement, he knows a bear market is on the way.

My new years resolution was to try to live as if retired financially, and if the market was still holding up in May give my notice to leave in June. However, even just writing this makes me feel nervous as well as excited.

Letting a rising stock market trigger retirement seems to be similar to the retired person who re-runs FireCalc every day their portfolio spikes higher, and then "re-retires" using the new higher FireCalc withdrawal rate. Both approaches seem to significantly increase the risks one will encounter the worst case scenario. On the other hand, I'm unlikely to finally hit "my number" during a bear market.

However, retiring at a market top is definitely not reassuring. Though as nervous as the recent market highs make me, I would probably be even more nervous or depressed if the market had spent the first part of 2013 going down!

 

[audreyh1]

+Letting a rising stock market trigger retirement seems to be similar to the retired person who re-runs FireCalc every day their portfolio spikes higher, and then "re-retires" using the new higher FireCalc withdrawal rate. Both approaches seem to significantly increase the risks one will encounter the worst case scenario. On the other hand, I'm unlikely to finally hit "my number" during a bear market.

Not, really - not if you're willing to take the pay cut after a bad year.

 

[audreyh1]

Keep in mind that the Dow also broke 14,000 in 2000 and 2007. Both times these were followed by a "thud" but that won't always be the case. And the economy and overall corporate earnings are greater than they were in 2007 and considerably greater than in 2000, so in relative terms the valuation of this "all time high" is much saner than it has been in the past.

Good points - especially the corporate earnings part.

But crashes seem to come in "threes" during these secular bear markets, so I tend to expect one more round before we pull out of this one. But since I don't know when, or how bad/mild, I stick with my normal AA.

 

[dtbach]

Good points - especially the corporate earnings part.

But crashes seem to come in "threes" during these secular bear markets, so I tend to expect one more round before we pull out of this one. But since I don't know when, or how bad/mild, I stick with my normal AA.

I've never heard of this phenomenon. Can you tell me where this came from?

 

[bamsphd]

Letting a rising stock market trigger retirement seems to be similar to the retired person who re-runs FireCalc every day their portfolio spikes higher, and then "re-retires" using the new higher FireCalc withdrawal rate. Both approaches seem to significantly increase the risks one will encounter the worst case scenario. On the other hand, I'm unlikely to finally hit "my number" during a bear market.

Emphasis added above.

Not, really - not if you're willing to take the pay cut after a bad year.

I suppose a dynamic withdrawal would equate to going back to w*rk if the market dropped after retirement in my analogy.

 

[audreyh1]

I've never heard of this phenomenon. Can you tell me where this came from?

I've just seen lots of graphs of secular bull and bear periods, and sometimes the pattern of threes is pointed out. They all look a bit different, of course - not evenly spaced or equivalent in severity or duration. And who knows if history will repeat itself, either.

If you google you might catch one of those graphs. I don't have a reference link handy.

 

[photoguy]

Letting a rising stock market trigger retirement seems to be similar to the retired person who re-runs FireCalc every day their portfolio spikes higher, and then "re-retires" using the new higher FireCalc withdrawal rate. Both approaches seem to significantly increase the risks one will encounter the worst case scenario. On the other hand, I'm unlikely to finally hit "my number" during a bear market.

I agree there's definitely bias here and resetting one's withdrawal numbers when markets go up should increase failure probability (higher valuations -> lower expected returns). This is one reason I think it's dangerous to interpret FIRECALC success rates as probabilities and to take too much confidence in the numbers.

 

[audreyh1]

Emphasis added above.


I suppose a dynamic withdrawal would equate to going back to w*rk if the market dropped after retirement in my analogy.

If you are adequately padded, save some from the fat years for the lean years, you can probably make it through. The drops don't last forever. There is no rule that says you have to spend everything the year you withdraw it.

 

[explanade]

Is the economy better now than in 2007? Lot of homes are still underwater and unemployment is higher.

Also, isn't consumer spending down?

 

[clifp]

Is the economy better now than in 2007? Lot of homes are still underwater and unemployment is higher.

Also, isn't consumer spending down?

Which economy? The US is probably worse and so is much Europe but the story for the rest of the world is much much better.

In 2007 China had GDP of 3.5 trillion in 2011 it had more than doubled to 7.3 trillion in 2012 growth dropped to a mere 7.5% or roughly 7.9 trillion. Now 7.9 trillion is only 1/2 the US economy but nothing to sneeze amount. India grew almost as fast since 2007 ending at 2.5 trillion trillion last year.

You figure that almost all of the DOW stocks, have more than 1/2 their revenue and even more of their profits overseas and the numbers are almost as dramatic for the S&P 500.

For instance, KFC sells way more in China than the US, GM sells more car in China than in the US, and either 2012 or 2013 China will buy more computer than the US. Corporations have reduced payrolls and costs and are making record profits, which translates into higher stock prices.

So the short answer to your question is the world economy is doing better now than 2007 and is expected to grow between 3.5-4%

 

[jollystomper]

Which economy? The US is probably worse and so is much Europe but the story for the rest of the world is much much better.

In 2007 China had GDP of 3.5 trillion in 2011 it had more than doubled to 7.3 trillion in 2012 growth dropped to a mere 7.5% or roughly 7.9 trillion. Now 7.9 trillion is only 1/2 the US economy but nothing to sneeze amount. India grew almost as fast since 2007 ending at 2.5 trillion trillion last year.

You figure that almost all of the DOW stocks, have more than 1/2 their revenue and even more of their profits overseas and the numbers are almost as dramatic for the S&P 500.

For instance, KFC sells way more in China than the US, GM sells more car in China than in the US, and either 2012 or 2013 China will buy more computer than the US. Corporations have reduced payrolls and costs and are making record profits, which translates into higher stock prices.

So the short answer to your question is the world economy is doing better now than 2007 and is expected to grow between 3.5-4%

+1

This is why U.S. unemployment is and the housing situation does not have the impact on the financial markets as it did in the past. Large companies are global, and in fact increase their profits by reducing U.S. and European workers and increasing workers in other parts of the world. As the volume of business increases outside fof the U.S., so do the revenues and profit margins. Its why financial advisors are recommending increasingly ones exposure to international stocks. The markets have become much more reflective of the global economy.

 

[rodiy2k]

For instance, KFC sells way more in China than the US, GM sells more car in China than in the US, and either 2012 or 2013 China will buy more computer than the US. Corporations have reduced payrolls and costs and are making record profits, which translates into higher stock prices.

So the short answer to your question is the world economy is doing better now than 2007 and is expected to grow between 3.5-4%

And as you travel you can see evidence of this even in places that do not have the growth of Asia. We visited Ecuador last year and were quite surprised to see that American cars are the number one choice of the middle class. All built in South America

 

[rodiy2k]

Is the economy better now than in 2007? Lot of homes are still underwater and unemployment is higher.

Also, isn't consumer spending down?

The economy is different than pre bubble days. The US has seen the end of 5 to 6% growth. This can't be achieved when an economy previously based in manufacturing has shifted mostly to technology supported mostly by a few markets like Silicon Valley . Slow growth is here to stay and will be the norm US companies have long since known and adapted their business models to reflect this. The new growth is in Asia

As for US housing this is a separate issue. Most people interested in this forum are probably not underwater on their mortgages. As for wall street the topic was actually the scariness if market tops. Markets have long sine adapted to the change in the global economy which is why jobs report and housing numbers move US stocks less mainly limited to certain sectors. The market is high due mostly to the liquidity infusion created by the worlds central bank monetary policies. At some point it may return to what we all learned drives the market (fundamentals and supply/demand) but in the US markets that will not happen until they allow cheap credit to stop and force companies to produce actual profits based totally on growth

To me,consumer spending and the US economy are an oxymoron. As most on this forum know if u follow what the US government wants you to do (overextend yourself) you wind up with an economy that heats up and bursts aka 2007. Sadly a large part of US wealth pre crash was driven by unsustainable credit. Firm an economic point of view this is false growth. Only about 20% of the population will live at those means, have an emergency fund, pay credit cards in full, prepay their mortgage and max out their retirement plans. And that is the ER segment.

If I spent at levels that supported the previous US boom Id be working another 25 years. No thanks