"Is sequence risk really a big deal for retirees?"

[audreyh1]

What is "failure" defined as in the failure rate?

My personal definition is having less then about half of our current portfolio after inflation adjusting.

Many people seem to use near zero as a "failure". That is totally unrealistic.

Our %remaining portfolio withdrawal method has a 51% real portfolio remaining worst case after 30 years (and interestingly about same after 40 years) at a 4.35% withdrawal rate. I’ve considered that acceptable. On average 100% of the portfolio remaining which is way more than acceptable. That’s for a portfolio of 50% total stock market, 50% 5 year treasuries.

 

[Lsbcal]

Our %remaining portfolio withdrawal method has a 51% real portfolio remaining worst case after 30 years (and interestingly about same after 40 years) at a 4.35% withdrawal rate. I’ve considered that acceptable. On average 100% of the portfolio remaining which is way more than acceptable. That’s for a portfolio of 50% total stock market, 50% 5 year treasuries.

What about at the minima which might occur somewhere in the middle of the sequence? Your numbers do sound very safe indeed.

During this pandemic I notice how little we need to have a comfortable life at far below our normal spending rate. Not saying I want to do this but it can still be pleasant. So a 2% reduction in spending is ok for us but not part of the planning.

 

[audreyh1]

What about at the minima which might occur somewhere in the middle of the sequence? Your numbers do sound very safe indeed.

During this pandemic I notice how little we need to have a comfortable life at far below our normal spending rate. Not saying I want to do this but it can still be pleasant. So a 2% reduction in spending is ok for us but not part of the planning.

The 4.35% rate experiences a worst case real income drop of 60% before recovering*. It’s a very slow gradual decline over more than a decade. Ironically, because your initial withdrawal rate is so much higher, the actual $ amount at lowest income is still higher than if you selected a lower withdrawal rate. So you get down to a bit above the same $ amount, but you had much more income received during the early years. With more conservative withdrawal rates you still see a potential large income drop - up to 49% real with a 3% withdrawal rate, for example. The average ending portfolio for the lower withdrawal rates are higher - so that’s the main advantage of a lower withdrawal rate - more remaining.

The main issue with this method - other than deciding how low you want to let your portfolio go - is what strategies to use to handle highly variable annual income and a potential long streak of dropping real income.

*just to be clear this is the same as the max real drawdown of the portfolio since you are taking a fixed % out every year.

 

[NW-Bound]

I actually define failure as portfolio value dropping below 100% of inflation adjusted portfolio value!

Below 100% at the 30-year end, or at any point in the 30 years period?

If at any point, then the failure rate would very high, somewhere between 1/3 and 1/2.

One can see this easily by running FIRECalc with a portfolio of 1 million, 0% WR, retirement period of 2 or 3 years.

Quite often, the portfolio immediately drops below 1 million after the 1st year even with no withdrawal. At the end of Year 3, it could be below $700K for a 50/50 portfolio.

 

[RunningBum]

Below 100% at the 30-year end, or at any point in the 30 years period?

If at any point, then the failure rate would very high, somewhere between 1/3 and 1/2.

One can see this easily by running FIRECalc with a portfolio of 1 million, 0% WR, retirement period of 2 or 3 years.

Quite often, the portfolio immediately drops below 1 million after the 1st year even with no withdrawal. At the end of Year 3, it could be below $700K for a 50/50 portfolio.

Right, you'd have to retire with more than 100% of what you want as your lowest point.

 

[Navigator]

My issue with SORR is that it doesn't seem to factor in early retirement. For a 30 year plan of a 65 yo retiree, it might make sense, but not so much for 40 or 50 years of an early retiree.

Take two people, both 45. Person A retires at 45, and sets their AA conservatively due to SORR risk, with a glide path of 10 years. After 10 years of low to moderate gains, they feel they have avoided SORR and go with their planned 50/50 or 60/40 AA.

Person B is now 55 as well, and just starting ER. They have the same amount of investments as Person A, and the same expenses. Since they are just starting, they reduce their equity investment due to SORR.

So both A and B have the same future in front of them, but A thinks they are clear of SORR, while B thinks they are exposed. How does that make sense?

Personally, I don't think it matters to me anymore. I retired nearly 10 years ago, and this has been a great run to give me a lot of buffer. Even though I'm 58 with hopefully plenty of years to go, I'm not worried about SORR. I've got enough non-equities to get me through a few years of a down market, and my VPW plan will throttle me back through the down years. I don't recall SORR being aware of SORR in 2011. I can't say for sure what I would've done.

I believe SORR risk is always present, but only for withdrawal rates that are on the edge of being viable. For early retirees, I suspect the withdrawal rates are usually well below nonviable withdrawal rates, as in your case. It might be interesting, though, to see what historical SWRs are for number of retirement years left.

I would like to point out that if one is concerned about SORR, then a glide path is not a good strategy. It exposes one to all the SORR risk up front when the stock percentage is high, but eliminates the possibility of portfolio recovery later by lowering the percent stock in a portfolio as time goes by.

 

[RunningBum]

I would like to point out that if one is concerned about SORR, then a glide path is not a good strategy. It exposes one to all the SORR risk up front when the stock percentage is high, but eliminates the possibility of portfolio recovery later by lowering the percent stock in a portfolio as time goes by.

I think I misused the term "glide path". What I meant was someone starting off with a low equity AA, and increasing there AA over the next 10 years to get to their target, trying to avoid SORR in the early years.

 

[intent]

I think I misused the term "glide path". What I meant was someone starting off with a low equity AA, and increasing there AA over the next 10 years to get to their target, trying to avoid SORR in the early years.

I believe Kitces refers to this as a reverse equity glidepath.

 

[Out-to-Lunch]

I think I misused the term "glide path". What I meant was someone starting off with a low equity AA, and increasing there AA over the next 10 years to get to their target, trying to avoid SORR in the early years.

I believe Kitces refers to this as a reverse equity glidepath.

Or, colloquially, as a "bond tent": https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

 

[big-papa]

The 4.35% rate experiences a worst case real income drop of 60% before recovering*. It’s a very slow gradual decline over more than a decade. Ironically, because your initial withdrawal rate is so much higher, the actual $ amount at lowest income is still higher than if you selected a lower withdrawal rate. So you get down to a bit above the same $ amount, but you had much more income received during the early years. With more conservative withdrawal rates you still see a potential large income drop - up to 49% real with a 3% withdrawal rate, for example. The average ending portfolio for the lower withdrawal rates are higher - so that’s the main advantage of a lower withdrawal rate - more remaining.

The main issue with this method - other than deciding how low you want to let your portfolio go - is what strategies to use to handle highly variable annual income and a potential long streak of dropping real income.

*just to be clear this is the same as the max real drawdown of the portfolio since you are taking a fixed % out every year.

Yep, variable withdrawal methods trade off the concept of running out of money prematurely with the possibility of any single year's withdrawal perhaps not being enough to live on if you experience a bad sequence of returns somewhere along the way. Even then there are ways to help mitigate that as well, the simplest one being that you don't actually have to withdraw and/or spend the extra during windfall years when your portfolio did great. The extra can just be kept in the portfolio to (hopefully) grow over time or it can be banked until needed for a rainy day. Not quite as easy if it happens right at the beginning of your retirement - which is another way of saying "save more" before you pull the plug.

Some methods, like PMT-based methods which include VPW over on bogleheads and similar methods which use rough, updated estimates of future returns can be created to computationally result in having exactly $X after Y years. X can then be determined based on wanting to leave a bequest or can can be designed to be $0 if you like. Up to you. Of course the trajectory that your portfolio takes from year zero to Y years from now is wholly unpredictable going forward, but you can at least get a glimpse of what might have happened in the past with such methods.

Cheers,
Big-Papa

 

[audreyh1]

I think I misused the term "glide path". What I meant was someone starting off with a low equity AA, and increasing there AA over the next 10 years to get to their target, trying to avoid SORR in the early years.

Glide Path as I am familiar with it starts with low equity exposure - 30% for Kitces optimum example, and increases with age.

 

[big-papa]

Glide Path as I am familiar with it starts with low equity exposure - 30% for Kitces optimum example, and increases with age.

Before the Kitces article came along, the standard definition of a glidepath used by almost all target date funds was to start off with high equity in the early years of accumulation and reduce it over time. There were discussions about whether the glide path continued on into retirement (so-called "through retirement" glide paths) or whether it froze once retirement started (so-called "to retirement" glide paths. Many articles in the last few years suggesting it's not the best idea around. So many ideas like glide paths are built around the idea of a steady income stream in retirement, like the so-called 4% rule. If that's not what you're using many such ideas make no sense.

For more than you ever really wanted to know about standard glidepaths:
https://www.bogleheads.org/wiki/Glide_paths

Cheers,
Big-Papa

 

[VungTau]

I am reading "Nomadland" now and it will really make you appreciate what all/most of us in this forum have and the sense of security and freedom it gives us. SORR is the last thing the people in the book are worried about. They want to make it thru next month, week or even the day.



I do take issue with one thing in the book - the author calls those with finances able to comfortably handle retirement "lucky". Clearly she needs to come and write about the people in this forum because for most of us, I am willing to bet, luck had nothing to do it with it.