Thoughts on risk and the 4% guidance

[Live And Learn]

So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up.

And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down.

Makes perfect sense to me.

Get out of my head please !

 

[REWahoo]

So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up.

And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down.

Makes perfect sense to me.

That about sums it up.

 

[NW-Bound]

... The market run-up and the rising confidence levels in our economy and the market make me a bit more leery and have me sticking it out even tho FIRECalc gives me 100% and I have a WR of 3.25%. DH and I are 55 and 51, with no pensions, so I can justify the conservatism to myself. Buffet is right when he says "be greedy when others are scared, and scared when others are greedy". I have to wonder if we're entering "greedy" territory soon (or perhaps are already there).

Regarding the risk of retiring into a market top, seriously, that is already taken care of by using a low WR. If we were to retire in a bad year, then a higher WR would be permissible. Of course all this is based from past data which shows that the market would rebound. If it doesn't, we are all deadmeat.

Still, when the market tanks, a lot of hurts comes from seeing our stash getting pummeled. A WR of 3% or 5% will make a difference in the long term, but matters little when the portfolio drops 30-40% in a year. This sense of loss is what I fear, while I should know that it's the time to buy, buy, buy...

I love investing for the fact that you are fighting yourself all the time. Some people think that investing is like a gamble, which it is not. Conquering one's internal greed and fear is hard.

 

[Options]

That about sums it up.

+1

 

[Chuckanut]

Your thoughts are typical of someone about to pull the plug, having second thoughts and succumbing to the JOMY syndrome. My advice: keep working until you can no longer stand it or your health fails. Those are both guaranteed cures for JOMY.

Alas, these are also great ways to spend some of the best years of your life grinding away at a job instead of enjoying the remainder of your life.

 

[Surfdaddy]

I agree...to a point. However, I think it would be misleading to think that failures only occur when there has been a market run up. It is indeed possible to have a retirement occur when there wasn't been a big run up and for subsequent events to cause a failure.

I don't believe anybody suggested that failures occur ONLY after market runups. My hypothesis was that failures would, however, be more likely in this situation, due to reversion to the mean.

 

[Koolau]

My take on the 4% rule (or any other name we wish to ascribe to our feeling good about pulling the trigger) is that it was intended to help plan WHEN to retire. I don't personally USE it to dictate my spending. IOW when FireCalc says you have reached 100% (or whatever you are comfortable with) success rate at 3.89% WDR, you have a good indicator that your "number" is sufficient to pull the trigger - assuming you can live on about 3.89% WDR. From then on, you are more-or-less on your own about spending. Many of us curtail spending in bad times and open the purse strings in good times. Others may "blindly" withdraw the 3.89% every year and find a way to spend it. I think in the 10 or so years I've followed the forum, I've only heard one person admit to total "failure" at ER and IIRC there were reasons other than FireCalc involved.

My suggestion (not advice) is to do your planning around a certain "number" but have 2 or 3 back-up plans in case things are worse than they have been in the past. (I've never actually done a back-up plan for things being BETTER than planned.) I personally have a back-up plan that would be "acceptable" retirement on 1/3 of what I spend now. IOW, I would not need to go back to w*rk nor eat dog food.

Personally, I would never pull the trigger the day FireCalc was "favorable" if I needed every dollar FireCalc said I could draw just to stay retired. Naturally, YMMV.

 

[Hermit]

As we are approaching our retirement "number", a number of thoughts come to mind, mainly related to "is that still really enough?".

Seems to me that there are a number of risks:

1 - What will our expenses be? (we still have kids in college, don't know whether they'll find jobs, etc.)
....

Back to the OP's questions: You may have a large unknown here. My son will put in at least 6 years on his undergraduate. I didn't know it would go past 5 until a couple months after I retired. I can afford it, but if I were closer to 4%, I would be pulling my hair out (and there isn't much left up there.)

 

[haha]

I don't believe anybody suggested that failures occur ONLY after market runups. My hypothesis was that failures would, however, be more likely in this situation, due to reversion to the mean.

This simply has to be true. How could it not be?

Only if returns are random, with no rtm tendency, or connection to assets and inherent earning powers of the firm/

Ha

 

[John_Q_Public]

Having kids in college and then still helping them out later on is rough .The best plan is one where you can live OK on the 4% model of withdrawal . And able to take less during down market years . Few have that luxury though . Some folks have a defined pension plan, or two, to support them and eventually Social Security and Medicare to look forward to . Some of us have all of the preceding to the point they continue investing during retirement years. And reinvest their IRA RMD's into their taxable stock and bond funds as well .

 

[MooreBonds]

So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up.

And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down.

Makes perfect sense to me.

You have to remember that for the most part, the only recent "down market" was a very extreme ~40% drop in 2008-2009. (I don't know for a fact, but I get the impression that a majority of the ERs on the forum retired after 2003?)

Having such an extreme drop is certainly understandable with testing someone's resolve in making a nearly permanent decision on walking away from current high earnings and taking a leap that future returns will not be worse than in the past US history or worse than other countries' returns. It's not like we had a 5%-10% correction and people were going crazy fretting over safe withdrawal rates and OMY(x2/x3/x4).

 

[brewer12345]

Mentally masturbate all you like and stay at work continuing to pay taxes. Eventually you will either decide to take the leap, or die with your boots on. Or... Make the best plan you can, build in plenty of fat, and make sure you have plans B, C and D lined up and then get on with life. Your choice. Personally, I am tired of the slog and will take my chances.

 

[daylatedollarshort]

I don't count on 4% WR and we don't have a big stock allocation, so I don't really worry too much about a bear market.

We just focus on low expenses and also have hobby jobs, pensions and eventually SS for other retirement income streams. Plus I think I am going to freshen up my tech skills so if we ever do need extra money I could do contract work. I was looking at online classes today. Years ago when I did something similar I had to physically go to various colleges evenings and weekends to find state of the art classes. Now everything is online and free or fairly cheap, and I want to do something to keep my brain active anyway, so why not keep up to date job skills as a fallback plan.

 

[Meadbh]

+1. This is one of the reasons why I got cold feet this year and did not FIRE. Building up the financial cushion instead.

I had a feeling this would happen.

 

[ERD50]

I don't count on 4% WR and we don't have a big stock allocation, so I don't really worry too much about a bear market.

... .

Do you worry about inflation?

-ERD50

 

[daylatedollarshort]

Ooops! I can't change it now but I meant day job for a back up, not date job!

 

[haha]

+1. This is one of the reasons why I got cold feet this year and did not FIRE. Building up the financial cushion instead.

Did you invite Guinevere to share your castle as you had earlier said you would?

 

[haha]

Ooops! I can't change it now but I meant day job for a back up, not date job!

Not to worry, date jobs likely pay better anyway.

Ha

 

[daylatedollarshort]

Do you worry about inflation?

-ERD50

From what I have read, there have been decades where stocks have not kept up with inflation but real interest rates are usually positive. This article says stocks for growth is the biggest urban legend in finance -

The Biggest Urban Legend in Finance

I don't use Firecalc much. I have my own spreadsheet that assumes -1% real for a couple of years and then moves up to 1% real return after the easing gradually ends. One percent real isn't hard to get with TIPS bought at auction and held to maturity. The thirty years on the secondary market on Fidelity are showing around a 1.6% real yield lately and that should improve as rates creep up. I do have some stocks just not nearly as much as most people who post here.

 

[6miths]

So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up.

And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down.

Makes perfect sense to me.

Perfect!

 

[ERD50]

From what I have read, there have been decades where stocks have not kept up with inflation but real interest rates are usually positive. This article says stocks for growth is the biggest urban legend in finance -

The Biggest Urban Legend in Finance

I don't use Firecalc much. I have my own spreadsheet that assumes -1% real for a couple of years and then moves up to 1% real return after the easing gradually ends. One percent real isn't hard to get with TIPS bought at auction and held to maturity. The thirty years on the secondary market on Fidelity are showing around a 1.6% real yield lately and that should improve as rates creep up. I do have some stocks just not nearly as much as most people who post here.

I don't think his conclusion is consistent with calling stocks for growth 'the biggest urban legend in finance'.

He says we can't predict the future (DOH!). Then goes on to predict that stocks will have only a 2-3% premium over fixed, then adjusts that down to 1%.

IMO, the historic data in FIRECalc, with several cycles of boom/bust and related inflation (and deflation), provides a better picture of how things work than any static spreadsheet. And even a 1% premium for stocks is pretty significant when compared to a 1% or even 1.6% baseline.

I'm not sure about your comment on the 30 year bonds in secondary market. If interest rates go up, the NAV will go down. If you hold to maturity, you don't get the higher rates.

-ERD50

 

[haha]

From what I have read, there have been decades where stocks have not kept up with inflation but real interest rates are usually positive. This article says stocks for growth is the biggest urban legend in finance -

The Biggest Urban Legend in Finance

I don't use Firecalc much. I have my own spreadsheet that assumes -1% real for a couple of years and then moves up to 1% real return after the easing gradually ends. One percent real isn't hard to get with TIPS bought at auction and held to maturity. The thirty years on the secondary market on Fidelity are showing around a 1.6% real yield lately and that should improve as rates creep up. I do have some stocks just not nearly as much as most people who post here.

Very interesting article by some very well informed professionals.

I chose this quote that is relevant to heavy users to Firecalc "Nassim Taleb points out that “Black Swans”—unwelcome outliers that exceed the bounds of normalcy—are a recurring phenomenon; the abnormal is, indeed, normal. Our own stock market history is but a single sample of a large and unknowable population of potential outcomes.."

Ha

 

[REWahoo]

I chose this quote that is relevant to heavy users to Firecalc "Nassim Taleb points out that “Black Swans”—unwelcome outliers that exceed the bounds of normalcy—are a recurring phenomenon; the abnormal is, indeed, normal. Our own stock market history is but a single sample of a large and unknowable population of potential outcomes.."

Ha

Far too verbose for what can be succinctly stated in two words: asteroid strike

 

[ERD50]

Very interesting article by some very well informed professionals.

I chose this quote that is relevant to heavy users to Firecalc "Nassim Taleb points out that “Black Swans”—unwelcome outliers that exceed the bounds of normalcy—are a recurring phenomenon; the abnormal is, indeed, normal. Our own stock market history is but a single sample of a large and unknowable population of potential outcomes.."

Ha

Sure, a 'black swan' could come along, but then we could all be in deep doo-doo. Do I work to save up 2x my portfolio, 3x, 4x, .... 10x? Cut spending in half, a third, a quarter, a tenth?

It always comes down to some reasonable balancing act between spending some % of portfolio (which might be the dividend stream), or working until we die.

I'm already going 40 plus years and 100% historical success. I'm comfortable enough with that, and realize there are no guarantees - in anything.


ooops, cross-posted with REWahoo!

-ERD50

 

[daylatedollarshort]

I'm not sure about your comment on the 30 year bonds in secondary market. If interest rates go up, the NAV will go down. If you hold to maturity, you don't get the higher rates.

-ERD50

If I hold to maturity, I don't need the higher rates. I only need 1% real and with that return we still save money each year after inflation in retirement once we no longer have to support the kids and we start collecting SS.

I sold most of the TIPS when interest rates looked like they had no place to go but up, to lock in 20 - 40% gains. Now we are dollar cost averaging buying them back at auction a bit at a time at various yields. The longer terms are not too far off historical yields right now. So future purchases I am hoping will be closer to 2%. If we average 1.75% real with DCAing that is still .75% more than our retirement plan calls for, which doesn't require portfolio income for living expenses anyway, except in the college years and to cover RMD taxes later on.

Our kids grown, downsized, retirement budget is less than our SS and pensions, so for us I am more into capital preservation of the portfolio than taking a lot of risk. Plus we have laptop type hobby jobs that scale so it we need extra money we would just continue to work part time. Personally, I'd rather do that than lose a ton of hard earned money in the stock market, but there are certainly good reasons like the current bull market for taking risks with stocks. I just look at what goes up might come down by the same amount or even more and I don't think that investing style works for us. YMMV.