Your retirement year and how sequence risk has played out so far

[hesperus]

A recent thread about sequence of return risk had me evaluating how things have gone since retiring in 2011, and how things might look until I hit the decade mark. Since 2011 the market has done remarkably well, and inflation has been low, so if the first decade is a critical period (as kitces says) I'm more than halfway through this period. Feeling good so far, but still a ways from having a decade behind me. I have some concerns that with the current market highs and CAPE numbers such as they are that I'm not out of the woods yet. Anybody else have a similar time frame with their retirement, and how are you feeling about this particular risk?

 

[audreyh1]

I retired in 1999, and so it's now over 18 years and two nasty bears and net worth is still up 75% (knock on wood).

But I don't feel like I'm out of the woods in terms of sequence of risk until of make it to 70 maybe - still another 12 years.

What is the sequence of risk time frame really for an early retiree? Is it really just 15 years? Maybe 15 corresponds to a 30 year "normal" retirement.

 

[DrRoy]

I retired six months ago. I have a plan to slowly reduce my equity AA as/if the market continues to rise.

 

[SheitlQueen]

I retired two years ago and also plan to slowly reduce my equity AA as I get older.

 

[pb4uski]

A recent thread about sequence of return risk had me evaluating how things have gone since retiring in 2011, and how things might look until I hit the decade mark. Since 2011 the market has done remarkably well, and inflation has been low, so if the first decade is a critical period (as kitces says) I'm more than halfway through this period. Feeling good so far, but still a ways from having a decade behind me. I have some concerns that with the current market highs and CAPE numbers such as they are that I'm not out of the woods yet. Anybody else have a similar time frame with their retirement, and how are you feeling about this particular risk?

I retired in late 2011... last day of work was just before Christmas 2011 and I remained on payroll through February 1 "on vacation".

Until this year we have lived off taxable accounts... late last year my pension, which is about 18% of our annual spending, started. When I retired our WR was about 4.5%. Since retiring we have not only lived off our nestegg, but also bought a winter condo (8.6%), replaced our 1-car garage with a 2-car garage (2.5%) and bought a new truck for cash (1.7%) and our nestegg is still 23% higher than when I retired.

It sort of hangs together.... the Vanguard Lifestrategy Moderate Growth (which is our benchmark) has grown from $10k to $16k from 1/1/2012 to now... that is 60%... less 26% for 5 3/4 years of living expenses, 8.6% for the condo, 2.5% for the garage and 1.7% for the truck plus 1% for my pension income is ~22%... in the ballpark with the 23% increase since I retired.

Sometis I think that I need to pinch myself and see if it is all true!

 

[Danmar]

I retired in 2006. So 2008-2009 was scary. I still had a lot of outstanding options at that point. Stayed the course and everything worked out. Portfolio up a fair bit since I retired.

 

[flyingaway]

I retired in late 2011... last day of work was just before Christmas 2011 and I remained on payroll through February 1 "on vacation".

Until this year we have lived off taxable accounts... late last year my pension, which is about 18% of our annual spending, started. When I retired our WR was about 4.5%. Since retiring we have not only lived off our nestegg, but also bought a winter condo (8.6%), replaced our 1-car garage with a 2-car garage (2.5%) and bought a new truck for cash (1.7%) and our nestegg is still 23% higher than when I retired.

It sort of hangs together.... the Vanguard Lifestrategy Moderate Growth (which is our benchmark) has grown from $10k to $16k from 1/1/2012 to now... that is 60%... less 26% for 5 3/4 years of living expenses, 8.6% for the condo, 2.5% for the garage and 1.7% for the truck plus 1% for my pension income is ~22%... in the ballpark with the 23% increase since I retired.

Sometis I think that I need to pinch myself and see if it is all true!

These things are unlikely to be reproduced if someone retires today.

 

[pb4uski]

Perhaps... definitely not what I expected when I retired... if you had told me then I would have said no way.

 

[RunningBum]

I retired in early 2011. I don't know what the future holds, but I'm very glad I didn't worry about sequence of returns then and invest more conservatively over these past few years. Missing out on some of the serious gains that took place, and finally getting fully invested around now, when things do seem overpriced, would not have been a good combination.

Personally I believe you should have a system (better than gut feel or listening to the TV hucksters) for market timing, or you should stick with an asset allocation you are comfortable with and will stick with in both good and bad times.

Trying to guess an early time frame in retirement that you should be more conservative really doesn't make sense to me as you don't know how long you'll live, much less how the market will behave in the next few years.

 

[FREE866]

The whole notion of "Now that I'm retired I should have lower equity exposure" is not good advice ESPECIALLY if you're an early retiree and looking at a 30-40 year time horizon in retirement. If you look at any historical 30 year time frame stocks outperformed bonds 100% of the time and usually by a landslide.

Allocation should depend on time frame ( which you should consider very long), cash flow needs from portfolio as well as expected return.

 

[Souschef]

I retired in 2009, and almost 100% in equities. That being said, if I calculated the equivalent on my SS and pension as a fixed income, my AA would drop to about 50/50

 

[audreyh1]

The whole notion of "Now that I'm retired I should have lower equity exposure" is not good advice ESPECIALLY if you're an early retiree and looking at a 30-40 year time horizon in retirement. If you look at any historical 30 year time frame stocks outperformed bonds 100% of the time and usually by a landslide.

Allocation should depend on time frame ( which you should consider very long), cash flow needs from portfolio as well as expected return.

It's perfectly fine to have a large allocation to bonds even if you are an early retiree. The AA sweet spot is aprox 40% equities to 75% equities. It doesn't matter if the end result will be higher, what matters is what happens in between: annual volatility and portfolio survival. Those AAs have have good survival characteristics considering inflation. So there is nothing wrong with someone reducing to 50/50 or 60/40 as they retire. If someone is living off investments alone and has no pension and not yet pulling social security, there is nothing wrong with reducing volatility. They just have to have enough exposure to equities to cover inflation - something which FIRECALC models very well.

So even if higher equity exposure means the portfolio is bigger at the end - well, the retiree is dead at the end! I'm sure the heirs will appreciate it.

And the last thing you want is a retiree scared out of the market because their equity exposure is too high.

 

[FREE866]

It's perfectly fine to have a large allocation to bonds even if you are an early retiree. The AA sweet spot is aprox 40% equities to 75% equities. It doesn't matter if the end result will be higher, what matters is what happens in between: annual volatility and portfolio survival. Those AAs have have good survival characteristics considering inflation. So there is nothing wrong with someone reducing to 50/50 or 60/40 as they retire. If someone is living off investments alone and has no pension and not yet pulling social security, there is nothing wrong with reducing volatility. They just have to have enough exposure to equities to cover inflation - something which FIRECALC models very well.

So even if higher equity exposure means the portfolio is bigger at the end - well, the retiree is dead at the end! I'm sure the heirs will appreciate it.

And the last thing you want is a retiree scared out of the market because their equity exposure is too high.

Over long periods of time bonds are just as volatile and if there is inflation that can eat up a lot of the return. And yes, you don't want to have to sell in a down market which is why cash flow needs are a big part of determining an asset allocation.

I see too many people blindly assuming "high stock exposure= bad" in retirement and , as i said, if you have long time frame not having enough stock exposure can actually be a bigger issue

 

[KCGeezer]

I'm only 2 1/2 years into my first decade but I am hopeful.

From one of Kitces' articles, "Extremely low real returns (e.g., below 0%) are highly damaging to the sustainable spending level (and in fact any compounded real returns below about 3% are still in the 4% to 5.5% safe withdrawal rate range). "

My real returns are better than 3% so (theoretically) I have some breathing room.

 

[YVRRocketSurgery]

Bengen's AMA on Reddit is pretty apropos on this topic.

"My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970's, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree's worst enemy."

One thing I think current retirees have over previous retirees is the fact that many Central Banks have implemented an inflation targeting strategy. The Bank of Canada adopted the strategy in the early 90's while I think the Feb adopted it in 2012. While we all have to ride out the gyrations of the markets, I don't suspect we'll see the double digit inflation levels of the 70's which combined with the the bear markets at the time to make it the worst period to start retirement and limit a SWR to 4% (or 4.5% per Bengen in his AMA session).

 

[Jerry1]

I retired in early 2011. I don't know what the future holds, but I'm very glad I didn't worry about sequence of returns then and invest more conservatively over these past few years. Missing out on some of the serious gains that took place, and finally getting fully invested around now, when things do seem overpriced, would not have been a good combination.

Personally I believe you should have a system (better than gut feel or listening to the TV hucksters) for market timing, or you should stick with an asset allocation you are comfortable with and will stick with in both good and bad times.

Trying to guess an early time frame in retirement that you should be more conservative really doesn't make sense to me as you don't know how long you'll live, much less how the market will behave in the next few years.

Regarding market timing, I read this in a Kiplinger article today:

According to a Morningstar study, if you were fully invested in the Ibbotson Large Company Stock Index from 1997 to 2016, your annual compounded rate of return would be 7.7%. But if you had the same investments and missed only the 10 best days during all those years, your return would be only 4%. And if you really weren't good at all at market timing and missed the best 40 days, your return would be -2.4%.


Ten to 40 days is all it took to significantly impact a portfolio. I thought that was very interesting.

 

[Alan]

Very fortunate here to have retired in 2010 at the start of the recent bull market, and now at age 62 we have SS available should we need it.

 

[gcgang]

Regarding market timing, I read this in a Kiplinger article today:

According to a Morningstar study, if you were fully invested in the Ibbotson Large Company Stock Index from 1997 to 2016, your annual compounded rate of return would be 7.7%. But if you had the same investments and missed only the 10 best days during all those years, your return would be only 4%. And if you really weren't good at all at market timing and missed the best 40 days, your return would be -2.4%.


Ten to 40 days is all it took to significantly impact a portfolio. I thought that was very interesting.

http://3p5bnx3przb73659la2iupn2.wpe...wp-content/uploads/2016/05/SSRN-id1908469.pdf

Above is an old (2011) article that tries to dispel what the author calls the "Ten Best Days Myth". He basically concludes that while missing the best days deflates returns like you said, missing the same amount of the worst days inflates returns even more. Better than buy/hold would be to miss both best/worst days, and you'd have significantly higher returns than buy/hold.

His math is right on, but I'm skeptical of his recommendation on what to do instead, so I remain a buy/hold investor.

But yeah, retiring in 2013, so far, sequence of returns been bery, bery good to me.

 

[SheitlQueen]

The whole notion of "Now that I'm retired I should have lower equity exposure" is not good advice ESPECIALLY if you're an early retiree and looking at a 30-40 year time horizon in retirement. If you look at any historical 30 year time frame stocks outperformed bonds 100% of the time and usually by a landslide.

Allocation should depend on time frame ( which you should consider very long), cash flow needs from portfolio as well as expected return.

It also depends on one's risk tolerance. Mine is not very high, and I am fortunate to have more money than I'll ever need so I can afford to earn less with it...and I
live WAY below my means.
I don't have heirs, so I don't mind spending every dime

 

[braumeister]

Retired in 2001 and it has been good (although a little scary at times). Equity allocation has been reduced from about 90% back then to 60% today. Confident that I'm in for more of the same.

 

[Senator]

I retired 7/5/2016. I planned for a bit of a buffer. I assumed my expenses would be double whet they actually were, and my revenue half of what it was. It's only been a few months, but the portfolio is up, and rents are up very nicely too.

If you retired on a bare minimum, you are at risk of many things. Inflation, lifestyle creep, changing of laws, etc. Sequence of events is just one event.

Worse case happens, and you run out of money, there are many programs that keep people in shelter, food, and healthy. The only thing better financial planning gets you is choices.

 

[traineeinvestor]

I FIREd in 2013 and addressed sequence of return risk by assuming a arbitrary 20% increase in expenses, that our money would have to last forever and a few other things.

Returns have been in my favour over the last four years. I know they won't always be so good but I'd like to think we're able to withstand a few bad years without losing sleep.

 

[marko]

If you retired on a bare minimum, you are at risk of many things. Inflation, lifestyle creep, changing of laws, etc. Sequence of events is just one event.

Agree. 'Sequence risk' might only apply if you're in the market.

IMO, having all your money in CDs or other vehicles with low potential for good growth is far more risky to long term portfolio survival than sequence risk. Poor money management skills is another.

Having said that, I retired at the start of 2006 and endured the 2008 crash 18 months later without any permanent damage; buy and held (white knuckled some days, but held).

 

[flyingaway]

According to a calculator, the annualized S&P 500 return from January 2000 to September 2017 is only 1.076%. It would be 2.977% with dividends reinvested. So valuation does matter. When you retire does matter. Money should be discounted when the valuation is high.

 

[rodi]

I retired 2014. Earlier this year I posted a thread asking how long do I need to worry about sequence of returns... I still, very much, worry about it... And an keeping my purse strings tightly held. The market gains have been great.... But we all know there are cycles to the market... Including down cycles. I figure we'll be out the worst SOR risk about the time my kids get out of college.... (Freshman and junior in high school now). That's also when we plan to seriously bump up our travel.