Retiring in a down market

[Callitaday2022]

Driving to Mecum auction yesterday and listening to Jill on money podcast from father's day.
Her guest said that if you retired in 2000 with a million dollars and took 6% withdrawals you would now be out of money! We all know not to take 6%, but what if you had to?
He did say that 3 years earlier (1997) or 3 years later (2003) than 2000, and at 6% withdrawal you would have 1.5 million!
I am a 2022er, but if I absolutely had to could push it back a little if in major recession. Could also just live off pension and no travels or major purchases until the market returns.

 

[Meadbh]

It's called the sequence of returns. It has been discussed many times here and elsewhere.

Sequence Risk vs. Investment Risk

 

[COcheesehead]

It's a bad example. Anyone that "needs" 6% shouldn't retire or they get what they deserve for making a dumb decision.

 

[Markola]

The idea is to retire when the trampoline bounce is at maximum depth and about to spring up, not when gravity is just about to take over near the top of the bounce. Simple enough but the problem is, no one knows for sure what part of the bounce they are in.

 

[W2R]

Her guest said that if you retired in 2000 with a million dollars and took 6% withdrawals you would now be out of money! We all know not to take 6%, but what if you had to?

(emphasis mine)
Had to? If I "had to" withdraw 6% every single year for sixteen years, well then I'd "have to" go get a job.

It's sort of like what would happen if I had to withdraw 25% every single year, y'know?

Earlier in retirement, like say, 2001 or 2002 in this case, the retiree could either (1) get a job, or (2) cut back on spending. You can't just continue to withdraw an unrealistic amount that isn't working for you, every year for 16 years.

 

[NW-Bound]

He did say that 3 years earlier (1997) or 3 years later (2003) than 2000, and at 6% withdrawal you would have 1.5 million!
I am a 2022er, but if I absolutely had to could push it back a little if in major recession. Could also just live off pension and no travels or major purchases until the market returns.

A $1M in Jan 1997 grew to more than $2M in Jan 2000 if invested in the S&P, and no withdrawal.

A $1M in Jan 2000 shrank to $620K in Jan 2003 with no withdrawal.

So, a $1M in bubbly stocks in 2000 is not worth the same as $1M in 1997 or in 2003.

 

[tdv2]

The idea is to retire when the trampoline bounce is at maximum depth and about to spring up, not when gravity is just about to take over near the top of the bounce. Simple enough but the problem is, no one knows for sure what part of the bounce they are in.

I can't predict what the market will do in the short term. If your withdrawal plan survives retiring in 1966 or 1967 and 30 years later you still have funds, you would have survived the two worst years to start retirement. Most good retirement calculators will simulate many early years of down market conditions producing a very bad sequence risk. My plan has some flexibility in spending if necessary, so I feel I can weather the storm if something bad happens early on.

 

[NW-Bound]

By the way, let's look at more recent market performance.

A $1M in Jan 2009 has grown to $2.75M today.

Using a considered safe withdrawal rate of 3% a year, if you retire today and expect to spend $82.5K or about 3% each year, your prospects are nowhere as good as a guy who spent $30K out of $1M in 2009.

The guy who spent only $30K in 2009, if he only increased his spending to match inflation, would be spending $34K today. His stash would not grow to $2.75M which required no withdrawal, but it should be a lot higher than his old $1M. So, he would be sitting on a lot of assets.

Now, if you were that guy, you would want to spend more than $34K now. Fine, I would to also. But if you spend less than $82.5K (3% of $2.75M), then your prospect would be better than the guy who just retired and spends 3% of the $2.75M.

The less you spend, the more secure you will be. It's a trade-off. Enjoy life or be a secure miser? There are infinite levels of gray in between.

 

[RenoJay]

I always think these examples are silly because you likely wouldn't have a million dollars in 1997 or 2003. If you had a mil in 2000, you probably had something like $600k in 1997 and the stock market did three years of heavy lifting for you. Or in 2003 you'd have a lot more because that was a big year for stocks. So to assume that the starting balance would be consistent sort of ignores reality.


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[Major Tom]

Gosh, you know, this is why we have Firecalc

 

[DrRoy]

Had to? If I "had to" withdraw 6% every single year for sixteen years, well then I'd "have to" go get a job.

Earlier in retirement, like say, 2001 or 2002 in this case, the retiree could either (1) get a job, or (2) cut back on spending. You can't just continue to withdraw an unrealistic amount that isn't working for you, every year for 16 years.

+1 The answer is don't retire if your income is not sustainable for your situation. Yes, timing can hurt you, so make your decision right.

 

[marko]

Gosh, you know, this is why we have Firecalc

I just ran Firecalc (no great tweaking; just a quickie) with $1M and a $60K withdrawal (6%). Got a 50.9% success rate with about 10% of the lines running out at 18 years.

Withdrawals of 4% ($40K) yielded a 94.8% success rate.

Again, just a quick and dirty review, no big adjustments or adding SS or anything

Also, IMO a bit of cherry picking: The past 17 years included 2000 and 2008; some really notable market drops.

YMMV

 

[Turn_the_Page]

The idea is to retire when the trampoline bounce is at maximum depth....

Great analogy. The key is to be able (and willing) to adjust the withdrawals if the market tanks on you. There are different ways to do this. One thing that may get you in trouble is setting a WD% that's too high and inflation adjusting it annually without considering the underlying portfolio value.

Scott Burns has a column on this where he proposes the following - take 4% the first year, then after that take the maximum of either 6% of the portfolio or 90% of last years withdrawal each year. You can't ever exhaust the portfolio this way.

Here's data using this approach, starting with a million $, 4%WD the first year, 50% stock portfolio, and the starting retirement year of 1929 (about the worst data there is)....

1. Year 1 WD = $40,000, Portfolio = $1,000,000
2. Year 5 WD = $41,094, Portfolio = $508,020
3. Year 10 WD = $42,272 Portfolio = $602,926
4. Year 20 WD = $35,786, Portfolio = $596,430
5. Year 30 WD = $50,647, Portfolio = $844,133

Contrast this to a 4% starting WD adjusted inflation upwards annually by 2% (other assumptions the same):

1. Year 1 WD = $40,000, Portfolio = $1,000,000
2. Year 5 WD = $43,297, Portfolio = $532,322
3. Year 10 WD = $47,804 Portfolio = $616,986
4. Year 20 WD = $58,272, Portfolio = $414,753
5. Year 30 WD = $71,034, Portfolio = $ 77,590

 

[NW-Bound]

Scott Burns has a column on this where he proposes the following - take 4% the first year, then after that take the maximum of either 6% of the portfolio or 90% of last years withdrawal each year. You can't ever exhaust the portfolio this way.

Here's data using this approach, starting with a million $, 4%WD the first year, 50% stock portfolio, and the starting retirement year of 1929 (about the worst data there is)....

1. Year 1 WD = $40,000, Portfolio = $1,000,000
2. Year 5 WD = $41,094, Portfolio = $508,020
3. Year 10 WD = $42,272 Portfolio = $602,926
4. Year 20 WD = $35,786, Portfolio = $596,430
5. Year 30 WD = $50,647, Portfolio = $844,133

Contrast this to a 4% starting WD adjusted inflation upwards annually by 2% (other assumptions the same):

1. Year 1 WD = $40,000, Portfolio = $1,000,000
2. Year 5 WD = $43,297, Portfolio = $532,322
3. Year 10 WD = $47,804 Portfolio = $616,986
4. Year 20 WD = $58,272, Portfolio = $414,753
5. Year 30 WD = $71,034, Portfolio = $ 77,590

Yes, you can stretch out your stash by spending less. The problem is that you may be extremely curtailing your spending.

In the example above, if $71,034 in the 30th year is equivalent to the initial $40K due to inflation, then the $50,647 in the surviving method is only worth $28,520 in terms of the initial dollar. That's a huge reduction in spending, and most people cannot cut back so drastically.

If the retiree is older and closer to SS age, then SS and Medicare will kick in and help to even out the income. Really young retirees are at more risk.

 

[MichaelB]

Driving to Mecum auction yesterday and listening to Jill on money podcast from father's day.
Her guest said that if you retired in 2000 with a million dollars and took 6% withdrawals you would now be out of money! We all know not to take 6%, but what if you had to?
He did say that 3 years earlier (1997) or 3 years later (2003) than 2000, and at 6% withdrawal you would have 1.5 million!
I am a 2022er, but if I absolutely had to could push it back a little if in major recession. Could also just live off pension and no travels or major purchases until the market returns.

RADDR looked at this and did the math, based on a 4% withdrawal rate, and has been updating on a yearly basis. here's the thread discussion Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update It is a very interesting discussion that explores the complexity of this issue much more thoroughly than any journalist I have read. The theoretical retiree is in a tough spot, but not broke.

We retired in '00, have faced severe market declines twice, and have a different experience from "Mr. Hypothetical", because these analyses are static and do not consider many variables that affect us in real life. We rebalance. When equity markets are down sharply we shift allocation from fixed income to equities, and when equities are pricey we lower our equity risk. We invest in equity markets around the world, not just S&P 500. Our withdrawal rate is now lower than it was in '00, and I'm not sure why, because I have the sense that our standard of living is the same.

 

[jkern]

I always think these examples are silly because you likely wouldn't have a million dollars in 1997 or 2003. If you had a mil in 2000, you probably had something like $600k in 1997 and the stock market did three years of heavy lifting for you. Or in 2003 you'd have a lot more because that was a big year for stocks. So to assume that the starting balance would be consistent sort of ignores reality.


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+1

 

[YVRRocketSurgery]

<snip>
I am a 2022er, but if I absolutely had to could push it back a little if in major recession. Could also just live off pension and no travels or major purchases until the market returns.

My target is 2022 also, for various reasons. One of them is to push my targeted withdrawal rate closer to 3% to provide more of a safety factor to cover various scenarios. I feel this would allow us to limit spending cuts to our optional spend.
Everyone's got to figure out their own risk tolerance, risk mitigation strategy, and issue plans of action.

 

[Lsbcal]

I ran one VPW simulation for starting in the year 2000. It says one could take 4.5% in 2000. Increasing the withdrawal rate to 6.1% in 2016, the portfolio is down from $1M to $700k.

The assumptions for this were AA = 50/50, last withdrawal age 100, $34k in SS for a couple retiring at age 62.

Here are some of the VPW results:

 

[W2R]

The idea is to retire when the trampoline bounce is at maximum depth and about to spring up, not when gravity is just about to take over near the top of the bounce. Simple enough but the problem is, no one knows for sure what part of the bounce they are in.

That's so true.

I think some (or maybe a lot?) of us have calculated our annual withdrawal as a percentage of our March, 2009 portfolio size. It's interesting and if reasonable, can reassure us that all is well.

 

[Looking4Ward]

As of Friday my portfolio is 2.5% higher than it was when I ER'd a little over two years ago. I hope that means I didn't retire into a down market.

 

[Markola]

Lsbcal, Thanks for that VPW Table sample. I Googled the source on Bogleheads and want to experiment with it as it's one of the few calculators I've seen that includes international equities.

I have not FIREd yet but am planning for it. With apologies to the OP if this is slightly off-point, I have lately been enamored of what I understand is Audreh1's quite straightforward SWR method. Essentially, you withdraw 4% of a balanced portfolio's value every year. In up years, whatever the leftover is of 4%-less-expenses can be parked in cash, building in time a couple of years expenses in a cash cushion. Obviously, the key to this is LBYM by, in this case, having living expenses that are somewhat less than 4% of initial portfolio value.

In down years, any gap between the 4% SWR and your living expenses can be made up for by tapping the cash cushion and spending dividends and interest, and making lifestyle adjustments.

Once you have an ample cash cushion, you could reduce the 4% further to your actual living expenses, making the portfolio even more sustainable.

This approach appeals to me. It lets you start FIRE with a full 4% SWR, which I think we'll need at first, rather than something skimpier. In theory, I think the portfolio can never be depleted if annual returns of a 60/40 or so portfolio average north of 4%. If you think returns will be lower than that, you could start the fixed SWR at 3% or whatever covers your living expenses.

It seems safer than some other approaches because there is no inflationary adjustment upward to the SWR, which has always seemed random to me because some inflation is manageable through substitution effects so that the national rate might not apply to our personal situation. Rather than an inflationary adjustment, unavoidable spending inflation is met through compounding of the portfolio.

I hope I have that method right but, if I don't, please pardon my attribution, Audreyh1. Even if I screwed it up, I still like it because I like keeping my finances very simple, though I'd welcome the smart people here identifying the shortcomings in it.

 

[Lsbcal]

Markola, what I like about VPW is that it is self contained and the data is all made available to us. It can be modified too though that is not necessary.

One could probably fairly easily modify VPW to test a scheme of 4% annual withdrawals or some such method. The year 1968 was a fairly bad start year in modern times so it's a good one to check.

 

[NW-Bound]

No matter how one implements his withdrawal method, financial survival is still about not overdrawing the long-term return of his portfolio (a higher withdrawal rate is permitted if a draw-down of the principal is acceptable).

All different ways of withdrawal for survival revolve around not increasing one's spending too much during boom years, in order to build up a buffer for lean years. Even so, in consecutive lean years, some cutbacks may be advisable. One can move around his money from one place to another or earmarking it in some ways, but if that money does not multiply because of poor market returns, no method will get you more money to spend.

 

[mathjak107]

RADDR looked at this and did the math, based on a 4% withdrawal rate, and has been updating on a yearly basis. here's the thread discussion Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update It is a very interesting discussion that explores the complexity of this issue much more thoroughly than any journalist I have read. The theoretical retiree is in a tough spot, but not broke.

We retired in '00, have faced severe market declines twice, and have a different experience from "Mr. Hypothetical", because these analyses are static and do not consider many variables that affect us in real life. We rebalance. When equity markets are down sharply we shift allocation from fixed income to equities, and when equities are pricey we lower our equity risk. We invest in equity markets around the world, not just S&P 500. Our withdrawal rate is now lower than it was in '00, and I'm not sure why, because I have the sense that our standard of living is the same.

There is a difference in results when bonds are used vs the cash in raddr's numbers . I don' t really know anyone who would have been in equity's/cash instead of equity's bonds

 

[ripper1]

Talk about a trampoline bounce and still going up. Retired date June 30, 2010.....DOW 9774....S and P.....1031......;