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Old 09-17-2015, 09:55 AM   #41
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The easiest way to adjust for that major market downturn risk is to have less money in stocks. SP500 was down about 50% during the 2008-2009 meltdown but Wellington which is 60/40 was "only" down 32%.

My allocation of funds which is also 60/40 in total was only down 28%.
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Old 09-17-2015, 10:15 AM   #42
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Much more worried about the spending phase and losing 50% when I want to stop working.
According to the theory of diminishing marginal utility, a loss of 50% hurts much more than a corresponding gain brings pleasure. That may not be true for everyone, but we know that is true for us. We didn't want to have to experience the sick feeling we got in 2008 ever again.

We realized we could have a pleasant and less stressful retirement on what we had saved, our pensions and SS using a liability matching strategy instead a diversification approach. One of my hobbies in retirement has been reading books on the science of happiness and positive psychology. While these ideas may not be true for everyone, many of the suggestions really do fall under the best things in life are free categories. I don't think more money at this point would bring us significantly more happiness, but for us worrying about the stock market every day and potentially losing a big chunk or our savings would make us very sad.
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Old 09-17-2015, 10:16 AM   #43
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I just thought of a good reason to use an income approach to withdrawals, ie only spend divs. Sequence of return risk is zero if you assume divs don't get reduced. Even if you relax this assumption I would guess the chances of a material div reduction is less than a material market decline. Also, div paying stock is on average less volatile.
So if you are worried about sequence of return risk but don't want to increase your FI allocation, this approach might reduce your risk while keeping the upside?
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Old 09-17-2015, 11:49 AM   #44
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The easiest way to adjust for that major market downturn risk is to have less money in stocks. SP500 was down about 50% during the 2008-2009 meltdown but Wellington which is 60/40 was "only" down 32%.

My allocation of funds which is also 60/40 in total was only down 28%.
+1
I changed AA last December to 40/60 knowing I would be retiring this year. I believe it's Dirk Cotton who confirms your point that reducing equities near/just after retirement helps to mitigate SOR. Depending on PF value, I will probably increase AA to perhaps 50/50 in 5-10 years (no, this is not a glide path, as the 50/50 AA would thereafter not be changed).

Along this line of thinking, I am influenced by this thinking:

MutualFunds.com

From the article:

Quote:
if youve reached the point where your personal marginal utility of wealth is low, then your portfolio should be dominated by high-quality fixed-income assets.
As Pascal demonstrated, there are some risks that are just not worth taking. This was a lesson the market taught many investors in 2008.
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Old 09-17-2015, 11:58 AM   #45
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If you believe in the SWR data- whatever number you think is the S," and whatever you think the "S" stands for- Safe or Sustainable, AND you believe we have seen the worst (the Great Depression, the stagflation of the 1966-1974 period, the Tech meltdown, the Great Recession,etc.), there is an interesting observation about what you should be able to set your SWR.

It should be "S" to withdraw at a rate based on whatever the PEAK value of your portfolio was- NOT based on the value on the day you retire.
Example:
If you accumulate $1M with a plan to spend $35,000/year and adjust up each year for inflation and on the day after you retire the market tanks-- you should be able to still spend as before and make it 30 years....historically this worst case scenario still works out. But this should be true even if the market tanks the year before you retire and drops your $1M down to $600,000. You should be able to spend $35,000/year and adjust up for inflation even though technically you are spending at a starting rate of 5.8%. That is because the SWR is based on the worst case scenarios in the past when you retire at a portfolio peak and then your portfolio falls. Historical returns are lower after peaks. If it falls before you retire, history suggests historically returns will be better and thus support the higher initial rate. (Really still just the old 3.5% SWR, but as if in year 1 you did not make a withdrawal).

Weird and true and yes, not something with which any of us would likely be comfortable. But interesting.


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Old 09-17-2015, 12:17 PM   #46
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While not exactly on the point of sequence of returns, I looked this morning at the Quicken graph of investment holdings over the last 15 years and noticed that the current portfolio value is almost exactly 10X the value 15 years ago. (I have the data going back to 1995). From 2000 to 2004, the angle of increase is about 25-30 degrees, then afterwards it steepens to close to a 45 degree angle. This is a factor of both increased savings, due to raises and extra retirement, but much of it is the compounding effect. Quicken doesn't provide the overall annual return (like Money used to do), but I'm pretty sure I was lucky to outperform the market, although not over the last 5 years (from 2000 to 2010 definitely).
The 2009 market collapse is noticeable as a pronounced dip, but we were back to the previous peak by September of '09 due to no withdrawals and increased contributions. Retiring then would have been the mother of sequence return hits; the portfolio now is more than double the peak before the Crash. We were lucky in terms of "sequence" in that I would turn 50 in 2008 and so in 2003 or '04 had begun to ponder the implications of this and shift the allocation from 80-90% stocks, to a significantly increased allocation to bond and cash. I also had begun to worry about a housing crash in late '05, so I accelerated what had been a gradual reallocation to bonds/cash in '06 and particularly '07 and moved the majority of bonds to Treasury funds.

In terms of minimizing sequence of returns, I think bonds and cash play a big role here. I have moved to an allocation of a bit more than 3 years in cash and short-term bonds to minimize the impact of a significant correction, although I don't expect an event as severe as 2008. This would be more Treasuries but don't like them intermediate term, so cash and other bonds are higher than usual.

As a result of this compounding effect over the last 10 years, I felt able to semi-retire this year at 57 (working about half-time online), while DW is working online after we moved to Reno two months ago, and we are on a glide path to full retirement. She eventually (or sooner) will change jobs at a much lower payscale, while I can withdraw from the 403b at a 5-6% withdrawal rate if needed, until I draw SS. Also, I consider taking early SS at 62 as an "option" in the event of a stock collapse. Basically, we are on the glide path to full early retirement.

The stock allocation now is 60-66%, and if/as the market goes higher, I will gradually decrease that allocation to 50-55%. (I would accelerate if a bond ladder were available in our tax deferred accounts.) Why play if you are winning the game, as I think Bernstein asks? If interest rates go up, I'll look at annuity, both deferred and immediate, but they are rich priced right now, but a deferred annuity that kicks in at 75 or so might be attractive as and if the cash component grows.
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Old 09-17-2015, 04:06 PM   #47
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If you believe in the SWR data- whatever number you think is the S," and whatever you think the "S" stands for- Safe or Sustainable, AND you believe we have seen the worst (the Great Depression, the stagflation of the 1966-1974 period, the Tech meltdown, the Great Recession,etc.), there is an interesting observation about what you should be able to set your SWR.

It should be "S" to withdraw at a rate based on whatever the PEAK value of your portfolio was- NOT based on the value on the day you retire.
Example:
If you accumulate $1M with a plan to spend $35,000/year and adjust up each year for inflation and on the day after you retire the market tanks-- you should be able to still spend as before and make it 30 years....historically this worst case scenario still works out. But this should be true even if the market tanks the year before you retire and drops your $1M down to $600,000. You should be able to spend $35,000/year and adjust up for inflation even though technically you are spending at a starting rate of 5.8%. That is because the SWR is based on the worst case scenarios in the past when you retire at a portfolio peak and then your portfolio falls. Historical returns are lower after peaks. If it falls before you retire, history suggests historically returns will be better and thus support the higher initial rate. (Really still just the old 3.5% SWR, but as if in year 1 you did not make a withdrawal).

Weird and true and yes, not something with which any of us would likely be comfortable. But interesting.


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+1

I think I read a similar analysis in one of the financial books in May. The numbers quoted here are probably not exactly right. It compared two people, one retiring one year with $1M, and the second retiring one year later after a 15% market drop who now has $850 K. It said the $850K person effectively had a higher SWR rate than the $1M person had the year before because the market was lower and therefore future market results would be better.

Although I understand the logic, I personally would still be wary of adjusting SWR using this logic. YMMV.
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Old 09-19-2015, 10:11 AM   #48
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Sequence of return risk has only become a common problem since the introduction of DC retirement plans and the increasing direct reliance of people on the returns from equities and bonds. If it is such a potential problem we should be discussing alternative income streams and greatly reducing risk in a portfolio......but you'll have to give up return in most cases.
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Old 09-19-2015, 11:22 AM   #49
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Sequence of return risk has only become a common problem since the introduction of DC retirement plans and the increasing direct reliance of people on the returns from equities and bonds. ...

I don't really agree - the DB plans just shifted the risk onto the provider - it isn't really a solution, though the pooling might help average things out some over time. But I still don't like relying on a 'promise', I'd much rather have control of my own money.

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If it is such a potential problem we should be discussing alternative income streams and greatly reducing risk in a portfolio......but you'll have to give up return in most cases.
Everyone has that option - they can choose whatever AA they feel comfortable with, but just like the typical non-COLA DB plans, inflation can get'cha.

I do think the govt could offer annuities. They could pool the money and the risk, and they don't need to make a profit. They could allow 401K, IRA rollovers etc, maybe some other contributions. But I don't think they should guarantee any specific return, just make payouts based on some reasonable projection. If people start living longer than their actuaries counted on, for example, lower the payments accordingly to keep it solvent. Don't try to get blood from a stone, adapt.

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Old 09-19-2015, 03:05 PM   #50
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I don't really agree - the DB plans just shifted the risk onto the provider - it isn't really a solution, though the pooling might help average things out some over time. But I still don't like relying on a 'promise', I'd much rather have control of my own money.
I should have been more specific. Sequence of returns risk was once only a worry for pension funds and institutional investors. With DC plans being used as the foundation for retirement income it's become a direct risk for everyone.
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I do think the govt could offer annuities. They could pool the money and the risk, and they don't need to make a profit. They could allow 401K, IRA rollovers etc, maybe some other contributions. But I don't think they should guarantee any specific return, just make payouts based on some reasonable projection. If people start living longer than their actuaries counted on, for example, lower the payments accordingly to keep it solvent. Don't try to get blood from a stone, adapt. -ERD50
That's been proposed by some economists as a way to avoid people making dumb investment choices and reduce risks of a market collapse destroying people's retirement savings. Of course it would never happen because of the investment industry lobby.
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Old 09-19-2015, 07:07 PM   #51
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I just thought of a good reason to use an income approach to withdrawals, ie only spend divs. Sequence of return risk is zero if you assume divs don't get reduced. Even if you relax this assumption I would guess the chances of a material div reduction is less than a material market decline. Also, div paying stock is on average less volatile.
So if you are worried about sequence of return risk but don't want to increase your FI allocation, this approach might reduce your risk while keeping the upside?
Only drawback is that your WR is low so you may never save enough to be able to retire, but other than that...... good plan.
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Old 09-19-2015, 07:11 PM   #52
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trying to spend only dividends or only interest is really not my idea of a retirement income .

the issue is dying with to much money unspent may not be the greatest plan either . ideally you want to enjoy your money and spend some of it down while still leaving legacy money for heirs .

this is what a good retirement withdrawal plan does .

what about inflation adjusting ? dividends may not track your personal rate of inflation which can differ vastly from the cpi ?

you still have sequence risk . the value of your dollars compounding after each dividend payment will be less at the gate each quarter unless you are offsetting the decrease in share price from the dividend being paid out by a enough of a gain . in an extended down turn this can be an issue .

in reality getting a 6% total return with a 2% dividend and 4% appreciation is no different than drawing that 2% against a portfolio that has 6% appreciation and no dividend . they both are effected by the same thing .
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Old 09-19-2015, 07:25 PM   #53
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While it has worked out well for me (retired at the end of 2011 and our 60/40 portfolio is up by 4-5 years of withdrawals despite recent market correction) so I think i'm out of the woods .... if I knew then what I know today I might have been more conservative (say 40/60 rather than 60/40) to mitigate sequence of returns risk and then transition back toward 60/40.
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Old 09-19-2015, 07:57 PM   #54
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trying to spend only dividends or only interest is really not my idea of a retirement income .

the issue is dying with to much money unspent may not be the greatest plan either . ideally you want to enjoy your money and spend some of it down while still leaving legacy money for heirs .

this is what a good retirement withdrawal plan does .
That is one definition of success, and the one that is used by most retirement advisors. However, some people might want to leave money to heirs or just might not see joy in spending money unnecessarily. Personally my plan does not involve spending dividends, capital gains distributions or interest; they are all reinvested and I hope to leave a large inheritance to my grand nieces and a a bunch to some local charities.
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Old 09-19-2015, 08:01 PM   #55
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While it has worked out well for me (retired at the end of 2011 and our 60/40 portfolio is up by 4-5 years of withdrawals despite recent market correction) so I think i'm out of the woods .... if I knew then what I know today I might have been more conservative (say 40/60 rather than 60/40) to mitigate sequence of returns risk and then transition back toward 60/40.
A friend once said to me that auxilliary verbs have no place when investing. So never say you "should have" done something or "would have if........" there lies madness.
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Old 09-19-2015, 08:03 PM   #56
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trying to spend only dividends or only interest is really not my idea of a retirement income .

the issue is dying with to much money unspent may not be the greatest plan either . ideally you want to enjoy your money and spend some of it down while still leaving legacy money for heirs .
This somewhat gets into the idea does spending more money really equal more happiness? I think for us the happiness studies do hold true and spending more money would not make us significantly happier. We aren't exactly eating cat food now. I know many posters here have multiple retirement income streams and can live well off one or two. I don't need to spend like Bill Gates to have a pleasant retirement.

I like the idea of never having to worry about money while I'm alive and having money leftover to leave to our favorite charities after we are gone. Personally, I would rather see our money go to an elephant sanctuary than a Ferrari dealer.
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Old 09-20-2015, 04:23 AM   #57
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if you got 20k in dividends and they were in your retirement account and you reinvested them and took 20k from cash or bonds instead is that any different ? of course not .

in the end no matter how you generate that income stream it does not matter . trying not to touch principal just means you are taking a low withdrawal rate against your total portfolio but in reality how you comprise that income stream it is the same .

as far as the dividend aristocrats go .

Today's aristocrats are a very different list than what they were back in 1990 . why do you think that is ?

out of the original 26 only 7 are left today .

ten were removed because they either cut or suspended their dividend , so much for that belief , four were removed for reasons that were not listed and the remainder were taken over at some point. So at least ten of the 26 ended up not producing that dividend as expected yearly even though they did for decades . .

basing a retirement income on only that belief would be a poor plan .. of course i would buy them today , but no i would not develop an income stream i had to live on solely off of them . i would have lots of stocks , bonds and possibly reits .

i would just keep a low withdrawal rate if i wanted to preserve principal .

by the way , just drawing the proverbial 4% inflation adjusted off a 60/40 mix has left you with principal untouched 30 years later 90% of every rolling time frame since 1926 and more than 2x what you started with 67% of the time .
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Old 09-20-2015, 09:41 AM   #58
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if you got 20k in dividends and they were in your retirement account and you reinvested them and took 20k from cash or bonds instead is that any different ? of course not . in the end no matter how you generate that income stream it does not matter . .
Taking the dividends from a retirement account means they are taxed as income. From a non retirement account they are treated as dividends
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Old 09-20-2015, 09:44 AM   #59
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in the end no matter how you generate that income stream it does not matter .
I agree with that. I think the different philosophies are some retirees feel that if they don't spend as much as they can then they won't be as happy as they could have been, while others are okay continuing to save money in retirement, whether it is reinvesting interest or dividends or saving money in some other way.
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Old 09-20-2015, 09:52 AM   #60
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Only drawback is that your WR is low so you may never save enough to be able to retire, but other than that...... good plan.
Doesn't need to be though. My equity portfolio is yielding about 4%( was lower before this correction). Over several years probably averaged 3.5-3.75% which might be a reasonable SWR. Real problem is the FI portion of a balanced portfolio which yield is pathetically low now. This doesn't affect me though, because I treat my pension as a FI proxy and don't have FI otherwise.

Surprised more people who are concerned about sequence of return risk don't consider an income approach.
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