I’m not retired yet so I’ll defer to the ample wisdom already given out about many important things that you should keep in mind.
I’d like to get back to your original concern about sequence of returns risk and the options you have in addition to working and saving a bit longer.
A few bits of advice were already given earlier. Three good strategies are:
1) Change to a less risky asset allocation right before you retire and slowly increase the risk over the first ten years if you wish.
2) Reduce the amount of money you withdraw during a major down market if it happens during the first ten years.
3) Have a separate cash fund to cover living expenses so you don’t have to sell investments during a down market.
The thing to note here is that these can all be combined. Lets look at some numbers then.
The change in asset allocation is your first defense. A good place to explore this is a site called PortfolioCharts.com. Looking there I see that a standard 60% stocks / 40% bonds portfolio would have suffered a maximum drawdown of 34% during the worst sequence of returns entry for all 30 year investment periods since 1970. It would have taken 12 years for that portfolio to fully recover:
https://portfoliocharts.com/portfolio/classic-60-40/
So to keep your retirement nest egg safe, you could reduce your withdrawals by 34% but that could be tough if you are already on a tight budget.
However, click over to the ‘Permanent Portfolio’ and you will see that the reported maximum drawdown was just 14% and lasted 5 years. Of course, this portfolio grows slower in the long term but now you would only have to reduce your spending by 14%. Also, notice that the peak is reached within the first two years. For years 3, 4 and 5, the portfolio recovered enough that you can go back to withdrawing more again:
https://portfoliocharts.com/portfolio/permanent-portfolio/
Your second line of defense is then reducing your withdrawals but doing so against a less risky portfolio which requires a smaller reduction.
Your third line of defense would then be having a separate pile of cash to use during the down years so you don’t have to sell stocks at a bad time. But you may not need 3 years of full expenses (120K in your case). Instead, you only need the difference between your reduced withdrawals and your normal amount:
So with the permanent portfolio, your 40,000 / year withdrawal would be reduced by 14% to 34,000. Then you use 6,000 from your cash bucket to make up the shortfall. So 5 years of shortfall money would be 30,000 (though you should increase the 6K/year by some inflation amount).
Then of course there is international arbitrage, side gigs and perhaps other strategies.
I’d like to get back to your original concern about sequence of returns risk and the options you have in addition to working and saving a bit longer.
A few bits of advice were already given earlier. Three good strategies are:
1) Change to a less risky asset allocation right before you retire and slowly increase the risk over the first ten years if you wish.
2) Reduce the amount of money you withdraw during a major down market if it happens during the first ten years.
3) Have a separate cash fund to cover living expenses so you don’t have to sell investments during a down market.
The thing to note here is that these can all be combined. Lets look at some numbers then.
The change in asset allocation is your first defense. A good place to explore this is a site called PortfolioCharts.com. Looking there I see that a standard 60% stocks / 40% bonds portfolio would have suffered a maximum drawdown of 34% during the worst sequence of returns entry for all 30 year investment periods since 1970. It would have taken 12 years for that portfolio to fully recover:
https://portfoliocharts.com/portfolio/classic-60-40/
So to keep your retirement nest egg safe, you could reduce your withdrawals by 34% but that could be tough if you are already on a tight budget.
However, click over to the ‘Permanent Portfolio’ and you will see that the reported maximum drawdown was just 14% and lasted 5 years. Of course, this portfolio grows slower in the long term but now you would only have to reduce your spending by 14%. Also, notice that the peak is reached within the first two years. For years 3, 4 and 5, the portfolio recovered enough that you can go back to withdrawing more again:
https://portfoliocharts.com/portfolio/permanent-portfolio/
Your second line of defense is then reducing your withdrawals but doing so against a less risky portfolio which requires a smaller reduction.
Your third line of defense would then be having a separate pile of cash to use during the down years so you don’t have to sell stocks at a bad time. But you may not need 3 years of full expenses (120K in your case). Instead, you only need the difference between your reduced withdrawals and your normal amount:
So with the permanent portfolio, your 40,000 / year withdrawal would be reduced by 14% to 34,000. Then you use 6,000 from your cash bucket to make up the shortfall. So 5 years of shortfall money would be 30,000 (though you should increase the 6K/year by some inflation amount).
Then of course there is international arbitrage, side gigs and perhaps other strategies.