When do you actually "know" that sequence of return risk may impact a portfolio?

[youbet]

Y'know....sometimes you have to make your best plan and then....just jump and figure out the rest along the way.

Yep. Since we only have a finite amount of time to work with, sometimes ya just gotta join the fray and have at it. A flexible attitude and a good dose of street smarts and common sense might turn out to be more important than a "plan" worked out to the fourteenth decimal point! There are way too many assumptions to be made concerning far distant events to ever think you'll never have to make significant changes along the way.

 

[audreyh1]

I think the timeframe that started with 2000 might be one of those few that's destined for failure. At least, for me. I put a bunch of data into a spreadsheet awhile back, using my actual gains and losses for each year, and also the actual rate of inflation for each year. If I had started off with $1M on 12/31/1999, a 4% withdrawal rate would have me at $287,553 at the end of 2017. While I wouldn't be out of money, at that rate what's left wouldn't last much longer.

A 3% withdrawal rate would have me at $817,293. I think even that would have me a little leery. Although, for a 30 year retirement, at this point there would only be 12 years left, so that might work out. But for, say, a 40 year or more timespan, I might be a bit apprehensive.

As for that 2000-2002 timeframe, If I was retired, I probably would have started scaling back on my spending over the summer of 2001. As I recall, 2000 actually wasn't all that bad for the most part, and I only ended up down about 5.4%. The early part of 2001 actually seemed optimistic, and I hit a new all-time peak in May of that year...of course, I was (and am) still adding investments, and not having to draw anything out yet. But, as things cooled down over the summer, I would've begun to worry. And then, the 9/11 tragedy hit. I ended up down about 30.4% that year. And I went on to lose another 23.1% in 2002.

It hasn’t been for me. I retired in 1999, but my effective withdrawal rate was far lower than 4% and I had the planned “luck” to average in over two years the large amount from diversifying away from company stock. I picked two years because the late 1999 stock market scared the heck out of me. I was lucky Plus I still had a pretty good chunk of company stock, and it didn’t get hammered that hard - probably because it hadn’t run up like the dot coms. So I was able to divest more over the next many years and finance our living expenses.

Still - when I look at our total net worth, it is ahead of inflation in spite of us living off it for almost 18 years, so 1999 was not the horror for us that it may have been for others.

 

[pb4uski]

Really, shouldn’t your life expectancy come into play, if I get to 90 and have 80% still available, if I adjust my WR at all, it would go up.

Yup... judgemental... considering relevant facts and circumstances... my reponse was thinking more towards the first 10 years which are the most critical in terms of risk of ruin in most circumstances.

 

[gcgang]

When do you actually "know"...? Like,biblically "know"? I'd say when you look up from your 4% inflation adjusted spending path, and you see you've only got about 10 years of assets left. You're "knowed".

 

[Live And Learn]

Excellent question with equally excellent conversation.

I've gone with the "hindsight is 20/20" method and did not ER until I had 100% success in Firecalc and was at a 3% WR based on my budget.

The downside is that the 3% WR "only" included $30k / year in medical expense and based on current conditions I may need more like $50k / year (for 2 - includes hitting OOP max for both). The upside is that the 3% WR made no provision for HC expenses eventually going down (at least for awhile) or for taking SSI.

My theory is that I may not know if it looks like SOR risk has bitten me, but I will certainly be able to tell if I can "blow that dough" in another 10 or 15 years while I will still be fairly young enough to enjoy it.

 

[RenoJay]

I think the point of 4% SWR is to weather SOR risk. That said, for me it’s more about percentage drops. If we drop 20% or so from peaks, my internal regulator sort of goes off and says, “eat at home tonight and skip the restaurant.”

 

[Jonesee]

As a mitigating factor; has anyone ever run the numbers assuming a multi-year cash cushion.

Having sufficient cash to forgo any withdrawals for 3 years. Would that effectively protect a portfolio?

 

[SecondCor521]

As a mitigating factor; has anyone ever run the numbers assuming a multi-year cash cushion.

Having sufficient cash to forgo any withdrawals for 3 years. Would that effectively protect a portfolio?

It's a commonly considered strategy. Short term cash piles obviously insulate you from market downturns if you draw them down in a bad market. Long term cash is a drag on returns and likely will lag inflation.

The trick to me has always been creating a good set of rules for deciding when to draw down the cash buffer vs withdrawing from the portfolio, and when and how to replenish the cash buffer once you've used it.

You can run your own simulations using online tools like FIREcalc to see if you think it would protect a portfolio, but they will generally just be able to simulate a 3 year cash buffer that just sits there. It won't be able to reflect any rules that you might come up with for draw down and replenishment.

 

[YVRRocketSurgery]

Even though it's kind of arbitrary, I'd probably just reassess on a yearly basis at the end of the year to see what my numbers are projecting.
I would then consider making adjustments to spend and but also asset allocation. Realistically, I'd rather work towards being in a situation where we can be flexible with our spend and hopefully build up a cash buffer to smooth spending.

 

[SecondCor521]

I've been retired about 2 years. My answer to the original question:

My written policy is to monitor my withdrawal rate twice per year. If I exceed what I consider to be a safe withdrawal rate (4%), then my policy says I should start implementing contingency plans (either reducing expenses or increasing income or both). I have a written list of about 5 expense reduction plans and about 21 income increasing plans.

In reality, I check my withdrawal rate every few days, and I get nervous if it gets up above about 3.5%. I also get nervous when the market gyrates like it has the past few weeks. However, I don't actually take any action except to rebalance or make banana bread.

 

[Dtail]

I've been retired about 2 years. My answer to the original question:

My written policy is to monitor my withdrawal rate twice per year. If I exceed what I consider to be a safe withdrawal rate (4%), then my policy says I should start implementing contingency plans (either reducing expenses or increasing income or both). I have a written list of about 5 expense reduction plans and about 21 income increasing plans.

In reality, I check my withdrawal rate every few days, and I get nervous if it gets up above about 3.5%. I also get nervous when the market gyrates like it has the past few weeks. However, I don't actually take any action except to rebalance or make banana bread.

So effectively you are checking your expenses every few days, or more so really monitoring the WR from the Market denominator? I actually check expenses every day, but don't think of it in WR terms. I monitor it on a YTD basis vs. budget for the year.

 

[NW-Bound]

Several people have mentioned the failure rate in FireCalc as a good measure of success. FireCalc will say that if you have $1000 left in your account after 10 years that is a success. This is way too simplistic a view.

I think that FireCalc should show some of those worst case declines in a better way. But it's a tool that has not been improved on.

VPW is a far better tool to use. It can also be converted to display the worst case scenarios for a different withdrawal strategy (such as the 4% with inflation rule). One does have to know a bit about spreadsheets though.

With FIRECalc, you can ask it for a SWR that will leave at least X dollar amount at all time. Usually, that lowest dollar amount happens at the end of the 30-year run.

So effectively you are checking your expenses every few days, or more so really monitoring the WR from the Market denominator? I actually check expenses every day, but don't think of it in WR terms. I monitor it on a YTD basis vs. budget for the year.

Being an active investor, I check my portfolio every day, actually several times a day, but not for the purpose of seeing what I can spend on groceries.

Several times a year, I look at the 12-month trailing expenses to detect if I suffer from lifestyle creep. So far, the expenses have been going down while the stash grows. Yep, Bernicke was not wrong.

 

[audreyh1]

As a mitigating factor; has anyone ever run the numbers assuming a multi-year cash cushion.

Having sufficient cash to forgo any withdrawals for 3 years. Would that effectively protect a portfolio?

I’ve run the numbers on the % remaining portfolio withdrawal method with 50/50 AA to see how far income could drop over many years, and the amount of extra cash reserves needed outside the portfolio to supplement reduced income would be substantial, if you tried to maintain 100% real spending, but quite a bit less if you could drop to 80% and then to 70% real spending for a few years.

That is a different model and doesn’t cease withdrawals, but rather supplements lowered income from withdrawals due to the portfolio shrinking.

I modeled this to figure out how much of my short-term cash buffer should be set aside to supplement low portfolio income years if needed. Theoretically the rest can be splurged.

I don’t worry about cash drag. As long as my AA rebalanced portfolio is large enough, I know it should provide reasonable inflation-adjusted withdrawals in the long run, even if there is a nasty period in the interim.

 

[audreyh1]

I've been retired about 2 years. My answer to the original question:

My written policy is to monitor my withdrawal rate twice per year. If I exceed what I consider to be a safe withdrawal rate (4%), then my policy says I should start implementing contingency plans (either reducing expenses or increasing income or both). I have a written list of about 5 expense reduction plans and about 21 income increasing plans.

In reality, I check my withdrawal rate every few days, and I get nervous if it gets up above about 3.5%. I also get nervous when the market gyrates like it has the past few weeks. However, I don't actually take any action except to rebalance or make banana bread.

Are you looking at some kind of annualized withdrawal rate here? Are you just checking your annual or YTD spending against your portfolio? As opposed to taking out the funds you need for a given year?

I just look at my portfolio Dec 31, pull out my target % then. Rebalance as needed on Jan 2, and then don’t worry about it until the next year.

The funds are already withdrawn, I can spend them as I like, I don’t have to worry about contingency spending strategies until the next year.

As it happens, we have been underspending our annual withdrawals anyway, so we have had extra available for the next year if needed. Contingency strategy number 1 without really trying.

 

[Lsbcal]

With FIRECalc, you can ask it for a SWR that will leave at least X dollar amount at all time. Usually, that lowest dollar amount happens at the end of the 30-year run.

....

I haven't run FIRECalc in some years now but did use that feature. I wonder if the people reporting high success percentages use it.

VPW uses a table format for reporting as well as charts. It's a pity FIRECalc never gets the update attention it needs. There was an effort started to update it some years back but that seems to have died.

 

[SecondCor521]

So effectively you are checking your expenses every few days, or more so really monitoring the WR from the Market denominator? I actually check expenses every day, but don't think of it in WR terms. I monitor it on a YTD basis vs. budget for the year.

Are you looking at some kind of annualized withdrawal rate here? Are you just checking your annual or YTD spending against your portfolio? As opposed to taking out the funds you need for a given year?

Here's what I do. It works for me; I am not recommending it to anyone else.

I track my finances with Quicken. Every few days I semi-manually copy my account balances and my expenses over the last six months from Quicken to an Excel spreadsheet. I then use those numbers to calculate my WR - twice my last six months' expenses divided by my FIRE stash (which is my net worth adjusted for various things - I subtract my house value and my kids' college funds, and add in a NPV for SS, for example).

And yes, I do that every few days. Waaaaay overkill. Perhaps I'll relax about it in a few years.

As to your second question @audreyh1, I have a cash buffer that I intend to keep between 2 months and 5 months of expenses. Every [-]quarter[/-] few days I look at it and make sure there's enough to get me through the next quarter. If there isn't, I would refill it from investments.

 

[Dtail]

Are you looking at some kind of annualized withdrawal rate here? Are you just checking your annual or YTD spending against your portfolio? As opposed to taking out the funds you need for a given year?

I just look at my portfolio Dec 31, pull out my target % then. Rebalance as needed on Jan 2, and then don’t worry about it until the next year.

The funds are already withdrawn, I can spend them as I like, I don’t have to worry about contingency spending strategies until the next year.

As it happens, we have been underspending our annual withdrawals anyway, so we have had extra available for the next year if needed. Contingency strategy number 1 without really trying.

Various WR strategies have been mentioned on this site, but I believe the bolded above strategy mentioned above is what I will strive to implement starting at the end of this year.
As mentioned in a past post, I will probably modify it to incorporate the Clyatt 95% rule.
It might take awhile though to build up the funds outside the investment portfolio to eventually supplement the down years if the 95% rule needs to be implemented on many consecutive years.

 

[Dtail]

Here's what I do. It works for me; I am not recommending it to anyone else.

I track my finances with Quicken. Every few days I semi-manually copy my account balances and my expenses over the last six months from Quicken to an Excel spreadsheet. I then use those numbers to calculate my WR - twice my last six months' expenses divided by my FIRE stash (which is my net worth adjusted for various things - I subtract my house value and my kids' college funds, and add in a NPV for SS, for example).

And yes, I do that every few days. Waaaaay overkill. Perhaps I'll relax about it in a few years.

As to your second question @audreyh1, I have a cash buffer that I intend to keep between 2 months and 5 months of expenses. Every [-]quarter[/-] few days I look at it and make sure there's enough to get me through the next quarter. If there isn't, I would refill it from investments.

Hey, I keep track of expenses on a daily basis, so also is overkill and perhaps will also will relax about it in a few years. However, it was needed so I could reduce expenses by 60% over 3 years in order to FIRE.

 

[YakGrl]

I am about to make the leap to retire at 59. I have been planning and thinking of this since the 2008 crash and trying to prepare. I know I am much better prepared than most of the people I know. I know if I thought it was a permanent move I would stay paralyzed and never take the retirement step. I am now moving my thinking to a stepped plan. I will retire at 59 and plan to review the plan again and make additional decisions when I reach 62 (do I start pension or delay to 65?) at 65 (do I collect SS or wait to 67 or 70?) at 70 decisions on aging housing plans.
I would like to delay pension until 65, and SS until 70 but that will in part depend on market conditions, my health prospects, and family obligations.
As a final back up plan I could find some work and cut some luxuries.
Thirty years ago, I had no idea how I would be living now, so I don't think it is realistic to think I will know absolutely how I will be living 30 years from now. I have always thought I needed to have an available plan B- plan C and plan D. Thanks to this forum for helping me put these thoughts and plans in order.

 

[youbet]

As a mitigating factor; has anyone ever run the numbers assuming a multi-year cash cushion.

Having sufficient cash to forgo any withdrawals for 3 years. Would that effectively protect a portfolio?

We've had several interesting discussions on this and there are articles by the pundits available via Google and most seem to say that the opportunity cost of carrying large amounts of cash is more detrimental than the risk of some amount of unfortuitous SOR risk.

I think it's a matter of "it depends." How bad and how long are the market dips? How is your portfolio constructed in terms of AA and pre and post tax funds? How flexible is your budget? Are you fairly skilled at manipulating your portfolio? Etc.

I had been FIRE'd for about 2 years when the Great Recession of 2008 and 2009 hit. I carry close to zero cash in my AA. My WR is low and by simply taking my divs, int and MF CG's in cash plus a bit of asset selling (not everything was down!), I was able to not sell a single share of an equity at less than pre-recession values. And we left our budget intact since most of the discretionary spending was on age-dependent activities we didn't want to postpone for fear of not wanting to do them when we were older.

OTOH, I understand that if someone is at a full 4% WR and has 100% of their retirement portfolio invested in an S and P 500 index fund, then they're going to have to sell about 2.7% (4% WR minus 1.7% divs) of their equity position each year, even if the shares are down. But really, how many of us are in that position? A few have mentioned being 100% equities, but not many.

Tools like FireCalc which use historical data and backtest already have SOR built in. To answer your question, do some FireCalc runs with no cash levels and some with high cash levels and see how your failure rate responds.

Personally I worry more about stagflation than relatively short (like 2008 - 2009) dips in the equity market.

 

[Dtail]

We've had several interesting discussions on this and there are articles by the pundits available via Google and most seem to say that the opportunity cost of carrying large amounts of cash is more detrimental than the risk of some amount of unfortuitous SOR risk.

I think it's a matter of "it depends." How bad and how long are the market dips? How is your portfolio constructed in terms of AA and pre and post tax funds? How flexible is your budget? Are you fairly skilled at manipulating your portfolio? Etc.

I was FIRE'd for about 2 years when the Great Recession of 2008 and 2009 hit. I carry close to zero cash in my AA. My WR is low and by simply taking my divs, int and MF CG's in cash plus a bit of asset selling (not everything was down!), I was able to not sell a single share of an equity at a loss due to the recession.

OTOH, I understand that if someone is at a full 4% WR and has 100% of their retirement portfolio invested in an S and P 500 index fund, then they're going to have to sell about 2.7% (4% WR minus 1.7% divs) of their equity position each year, even if the shares are down. But really, how many of us are in that position?

Tools like FireCalc which use historical data and backtest already have SOR built in. To answer your question, do some FireCalc runs with no cash levels and some with high cash levels and see how your failure rate responds.

Although not using nor intend to use a 4% WR, I do keep a decent % in cash in my investment portfolio for ACA criteria, plus I would have to otherwise sell from a mainly TIRA portfolio.

 

[daylatedollarshort]

Hey, I keep track of expenses on a daily basis, so also is overkill and perhaps will also will relax about it in a few years. However, it was needed so I could reduce expenses by 60% over 3 years in order to FIRE.

We did the same with our expenses. I wish we would have done that a lot sooner and retired earlier. I think we have an improved lifestyle now with a much lower run rate.

I still keep track of expenses pretty close to stay under the ACA income limits.

 

[audreyh1]

I haven't run FIRECalc in some years now but did use that feature. I wonder if the people reporting high success percentages use it.

VPW uses a table format for reporting as well as charts. It's a pity FIRECalc never gets the update attention it needs. There was an effort started to update it some years back but that seems to have died.

I don’t think so, because in that case failure is reported as going below that value, I think.

 

[audreyh1]

And yes, I do that every few days. Waaaaay overkill. Perhaps I'll relax about it in a few years.

As to your second question @audreyh1, I have a cash buffer that I intend to keep between 2 months and 5 months of expenses. Every [-]quarter[/-] few days I look at it and make sure there's enough to get me through the next quarter. If there isn't, I would refill it from investments.

Well, I suspect your constant checking may be related to having little buffer for short term needs.

 

[audreyh1]

We've had several interesting discussions on this and there are articles by the pundits available via Google and most seem to say that the opportunity cost of carrying large amounts of cash is more detrimental than the risk of some amount of unfortuitous SOR risk.

More detrimental how? That you might not have a bigger pile at the end? I never get this point as my goal is not to die with the most money.

You could also mention the “opportunity cost” of not being 80% stocks. People will have a larger stash at the end that way too. But most folks prefer not to live with that much volatility.

IMO you only need to make sure you have enough invested in long-term funds with a reasonable AA to meet your long term goals and income needs. What you do with the rest of your money doesn’t matter one tiny bit.