Bull market and haircut on assets for portfolio calculations

[Lion Rock]

Seeing the markets rally over the past few years, for your retirement calculations, do you factor in a haircut for the risky assets figure in your portfolio, just to be conservative?

I have around 55% in equities (1/2 US, 1/2 international), and find myself taking a 10% haircut to the current market value of that part, given the run-up in the stock market, before putting this into retirement calculators. Does this make sense?

Thanks for your views.

 

[UnrealizedPotential]

All I can say is you are trying to figure out the unknowable. I think you would be better served if you dropped your equity portion a tad instead of trying to come up with something that can't be known.

 

[razztazz]

I'd say you're thinking real straight as a general principle but 10% might be too little though. The market will surely flounce more than 10%. How big the correction is is not really as important as how long it will take to reach its bottom, how long it will remain there, and how long it will take to sufficiently recover. Those are all unknowables.

The best thing is see if your plan worked in 1966 and 1967.... and I would also throw in, see how you'd be doing now if you had retired in 2000

 

[Blue Collar Guy]

i cant handle the the pretax dollars the calculators hand me. They dont seem real. I put in my pension amount with the post tax value. When i input my portfolio value, i put in 70 % of the value. i took a 30 % tax on the whole pie, Roth's included. this gave me a number that i could spend.

 

[ERD50]

Seeing the markets rally over the past few years, for your retirement calculations, do you factor in a haircut for the risky assets figure in your portfolio, just to be conservative? ...

IMO, it depends on what other "haircuts" you allow for.

If you figured a 100% historically safe WR in FIRECalc, then you survive the worst of the worst in history. Is this market rally worse than that? Who knows?

So maybe we take a more conservative WR than what history says is 100% safe. That's already a haircut. Take a haircut on a haircut? Where does it end?
Bottom line. NO - I'm already being conservative. Alternative is to work until you die - no thanks.

-ERD50

 

[bingybear]

Seeing the markets rally over the past few years, for your retirement calculations, do you factor in a haircut for the risky assets figure in your portfolio, just to be conservative?

The last year has be reasonably good I have to agree. 2015 and early 2016 was not that good from what I recall. So what offset do you use? Remove the last year's growth? Or include the year before drops?

 

[GravitySucks]

Go ahead if it makes you feel safer.
Or lower your SWR to less than 100% safe.
Or my suggestion, just keep working and paying into SS if applicable....

 

[W2R]

Ever since I retired, nothing in my portfolio has been very risky. Broad index funds, Wellesley, and the TSP "G Fund". I have kept the same fraction of each for years. No haircuts.

 

[bingybear]

IMO, it depends on what other "haircuts" you allow for.

If you figured a 100% historically safe WR in FIRECalc, then you survive the worst of the worst in history. Is this market rally worse than that? Who knows?

+1 If you used a decent retirement income planning program (firecalc, RIP, etc), and planned your WR at or below the SWR, then you have taken into account for expected hair cuts.

Go ahead if it makes you feel safer.
Or lower your SWR to less than 100% safe.
Or my suggestion, just keep working and paying into SS if applicable....

I agree with what you mean, but I would say it "Or lower your WR to less than 100% safe." I've read more than enough SWR threads where their WR is significantly below their SWR and some threads with their WR significantly above their SWR. What many people overlook is that taking income at your true SWR will most likely leave you with a significant pile of $ in the end.

 

[Koolau]

Since the future of the markets is unknowable, I'd just cut back on the withdrawal rate by a fraction that makes you feel comfortable. If FIRECalc says you can safely withdraw 3.85%, maybe take 3.35% instead. OR, just be ready to cut back discretionary spending if the market tanks for a couple of years. As long as you have some back-ups in your plan, it's likely you'll come out ahead later in the game. As always, YMMV.

 

[jebmke]

All I can say is you are trying to figure out the unknowable. I think you would be better served if you dropped your equity portion a tad instead of trying to come up with something that can't be known.

I haven't run any calcs since my originals in 2004. I didn't shave the equity in the calcs but after running some scenarios I asked myself if I would be comfortable re-balancing after taking a 40% hit to a 75% equity holding and concluded no so we backed off our equity gradually as we approached ER in 2007.

 

[sengsational]

Seeing the markets rally over the past few years, for your retirement calculations,...

So are you asking if, say, US equities average growth rate is 7% after inflation, and we have experienced higher than that lately, should your retirement plan reduce the 7%? If that's what you're asking, I'd say "yes" only if you only had a few years left in your plan.

 

[pb4uski]

....Does this make sense? ....

I don't think it makes sense because most safe withdrawal rates are essentially based on worst case scenarios, but if it makes you feel better then go for it. I would not chose to work longer if it made a difference.

 

[mrfeh]

Seeing the markets rally over the past few years, for your retirement calculations, do you factor in a haircut for the risky assets figure in your portfolio, just to be conservative?

No. I use firecalc, which includes historically good times to retire as well as bad.

 

[jollystomper]

I do. I have modeled my retirement with a 25% cut of my savings+investments... given my AA that is what a 50% drop in equities would leave us with. I'm still comfortable with that result. I have done this with FireCalc, Fidelity Retirement Income Planner, and Megacorp-provided financial advisors.

 

[Ragna]

Being a belt, suspenders and tape person, I have assessed my portfolio survival with a worst of the worse case scenario. I evaluated whether I could at least squeak by assuming a permanent 50% loss of stocks and 10% loss of bonds in year 1 (=30% portfolio loss); followed by growth=inflation for my remaining years to age 95; 80% payout of Social Security. Very conservative (I think). Regardless, I do think that people put too much weight on the percentages given by calculators like firecalc, essentially treating them as if it is equivalent to a (e.g., 95%) confidence limit or interval. In reality the (e.g, 30-year) cycles overlap and are therefore not independent, potentially leading to an inaccurate survival estimate. The number of independent data points is actually quite small so some caution is warranted, especially if one thinks we are closer to the top of a financial cycle than the bottom.

 

[Koolau]

Being a belt, suspenders and tape person, I have assessed my portfolio survival with a worst of the worse case scenario. I evaluated whether I could at least squeak by assuming a permanent 50% loss of stocks and 10% loss of bonds in year 1 (=30% portfolio loss); followed by growth=inflation for my remaining years to age 95; 80% payout of Social Security. Very conservative (I think). Regardless, I do think that people put too much weight on the percentages given by calculators like firecalc, essentially treating them as if it is equivalent to a (e.g., 95%) confidence limit or interval. In reality the (e.g, 30-year) cycles overlap and are therefore not independent, potentially leading to an inaccurate survival estimate. The number of independent data points is actually quite small so some caution is warranted, especially if one thinks we are closer to the top of a financial cycle than the bottom.

Also belt and suspenders (elastic waist band) kinda guy...

It's been too long since I studied the theory behind the so-called 4% rule plus all the permutations (including FireCalc.) You are correct that there are relatively a limited number of 30 year periods represented. However, IIRC the application of Monte Carlo analysis sort of artificially multiplies the scenarios, taking into account various sequence of returns (ones that have not actually had a chance to happen yet because of the limited number of periods). I think it's that data treatment (some might say data massage) that gives somewhat more confidence in the overall theory. Having said that, anything can happen and we could have worse sequence of returns than any scenario modeled in the original (or updated) study(s). SO... Keep that belt cinched tight and hang onto your suspenders! It could be a bumpy flight. YMMV