My doomsday scenario

[COcheesehead]

I'm not sure 40% is the latest conventional wisdom. People are living longer and inflation is always a risk. I'd ask around and research a bit more if I were you before committing to a particular AA.

I've heard 60% equities for 70 year olds; I'm 66 and still at 60/40, but my risk tolerance is relatively high.

In the end, if losing $1M in a downdraft (like I did in 2008) is going have you standing on a window ledge, do what's best for you.

This is where something like Firecalc can help. It’s all about an individual’s situation. Firecalc tells me I can go down to 25% equities and still have plenty of room to hit my withdrawal goals in retirement. So I don’t think there is a one size fits all allocation based on age alone.

 

[Another Reader]

A HELOC is not a substitute for liquid reserves and an emergency fund. The real estate market is unfortunately correlated to the stock market to a large extent. In the 2008 to 2012 real estate crash, millions lost substantial amounts of equity in their homes. Banks closed down a lot of HELOCs to protect their interests. Imagine losing your liquid reserves as the stock market drops 50 percent or more, especially if you have no pension or Social Security income as a backstop.

 

[daylatedollarshort]

Does anyone ever worry about their portfolio?

We use a matching strategy so no sequence of returns risk for any of the money we need to fund retirement. At even a zero real return, we could withdraw 3.33% (100 / 30 years = 3.33%), a bit more with some real return. Pensions and SS will cover most of our basic retirement expenses and a few frills. If for some reason we needed more money we would downsize or move to a lower cost of living area and keep the same investment strategy. The rent from our house would cover living expenses in a LCOL area.

 

[Dtail]

This is why some on this site start their retirement with ~3%WR instead of ~4%WR, as the 3% can effectively turn into 4% except in the very worst scenarios and one can still be in decent shape.

 

[ejman]

Here's my thinking.

I think my house will likely be paid off, or close to it, when I retire. I recently discovered the amazing world of HELOCs. I found a bank willing to do a HELOC for 10 years (with a 10 year amort. payback at the end with a fixed interest rate) with no loan origination fees or fees of any sort.

My plan would be to (a) reduce my cost of living below the $94k you suggest for those two years... and (b) use my HELOC, dividends, and interest to live... and (c) not sell any stock or bonds at all until the market recovers, then repay my HELOC.

One of my favorite things about having a HELOC is having emergency funds at a reasonable interest rate (even if the emergency is a real estate investment opportunity) without having to sell other investments at an inopportune time.

On joeea's point of view about unretiring... that would also be an option to supplement what I proposed. Just something with group health insurance would be a big deal. The idea of having to go back to work for a couple years in the middle of retirement isn't the worst thing in the world. Although the labor market is likely to be weak in this doomsday scenario you described.

MIMH

Careful with HELOC's - make sure you read and understand the fine print. Back in 2008 when the SHTF many HELOC's were cancelled or modified to where the money was no longer available when needed most.

 

[Scrapr]

You are projecting Stocks go down 40% and inflation picks up so bonds go down as well. I don't think bonds would decline in a bear market. In the Great Recession stocks cratered. But it is only recently that rates are creeping up. Almost 10 years after. QE I & II? I don't know

I am planning on holding cash to get us through

 

[COcheesehead]

You are projecting Stocks go down 40% and inflation picks up so bonds go down as well. I don't think bonds would decline in a bear market. In the Great Recession stocks cratered. But it is only recently that rates are creeping up. Almost 10 years after. QE I & II? I don't know

I am planning on holding cash to get us through

Bonds could/are declining and a bear could happen on the back of that. So it’s possible. I wouldn’t be in a bond fund right now.

Holding individual bonds though until maturity are about as sure as a bet as you will find, if you buy quality.

 

[MarieIG]

Yes, I do worry.

 

[FREE866]

That "conventional wisdom" of putting your age in bonds is horrendous advice.

it really comes down to your time horizon and your cash flow needs.

Like others have stated , someone retiring at age 60 could very easily be looking at a 30 year retirement. If you are overexposed to "safe" investments like CD's, bonds, cash, etc inflation can really erode your portfolio over time.

 

[brewer12345]

Its funny, my doomsday scenarios generally involved pandemics, civil unrest, zombies, etc., not money.


Lots of ways to skin this cat, but they often involve significant costs or giving up a lot of upside. There is no having your cake and eating it too. You pays your money and you takes your chances.

 

[jollystomper]

Sequence of return risk is why many here keep several to 5 years of expenses out of the markets...that way, you can blithely ignore downturns and maintain your standard of living. The cost is, of course, the effects of inflation and low/no returns on your cash/CD investments.

+1

This is our approach. Iit is easier for us as, opposed to the OP's scenario, because I will have a pension. But we currently have 5 years of projected cash expenses in cash/CDs so that we are not forced to sell equities when a downturn occurs.


We will look at wear we end up each year, look and how things are generally, and decided to adjust accordingly. While the returns on cash will be relatively low, it will be money intended to be spent. If things suddenly appear all rosy and rainbows and unicorns, we would consider investing it again.


Sequence of returns is one reason I kept working even though FA's were saying for years I could retire. I have always factored in a drop, and based our projections on the expected drop. During the great recession, our overall savings/investments was down less that 25% (I forgot now the exact number) with an AA that was a little more aggressive than it is now. So I wanted to retire with a nice cushion in anticipation of a big drop. From my modelling, including my pension, losing half our current nest egg would only require around a 15% cut in our planned budget, moving it from "luxuriously comfortable" to "comfortable". And that is without including SS.

 

[street]

Interesting thread but I personally don't worry about doomsday. My plan was to live off of cash and not have to touch my investments ever. I just run some numbers to see what I'm looking for years left and I will never live long enough to spend the liquid funds with SS involved in the equation.

I don't want to see this strategy as an type of bragging etc.. I just want to say what my plan was and I'm working that plan now for two years. I'm not eligible yet for SS.

Some will say my plan is an over kill and don't need that amount of money making very little and not in the markets. My liquid funds I live of off is at 14% on my portfolio. For me it works and that way I don't have to worry about what happens. I should be able to weather the storm for the long haul and that was my plan in bear markets and through the weak earning years. I hope any way this plan works.

 

[Mark24609]

Wow thanks for all the replies. Definitely sequence of returns risk. Yes would have to cut back on spending and maybe vacations. Here is my thought process. First losing that amount of money does make me nervous.

So I thought doing the laddered CDs/Treasury Bills route, and to maintain only about 20% in equities. I need some equity exposure for inflation. I also thought about buying an investment property for rental purposes in California for a passive income flow, but I am now rethinking that since there is a rent control initiative on the ballot for California a la San Francisco.

 

[Mark24609]

Oh and I will definitely look at the links others have posted

 

[Mark24609]

You are projecting Stocks go down 40% and inflation picks up so bonds go down as well. I don't think bonds would decline in a bear market. In the Great Recession stocks cratered. But it is only recently that rates are creeping up. Almost 10 years after. QE I & II? I don't know

I am planning on holding cash to get us through

The yield on bonds will go up, but the overall return will be negative because prices decline in an inflationary environment. In the Depression bond returns did very well because we were in a deflationary environment. But I do like the idea of having everything in cash, I just need a little bit of equity for some inflation hedge.

 

[Mark24609]

Interesting thread but I personally don't worry about doomsday. My plan was to live off of cash and not have to touch my investments ever. I just run some numbers to see what I'm looking for years left and I will never live long enough to spend the liquid funds with SS involved in the equation.

I don't want to see this strategy as an type of bragging etc.. I just want to say what my plan was and I'm working that plan now for two years. I'm not eligible yet for SS.

Some will say my plan is an over kill and don't need that amount of money making very little and not in the markets. My liquid funds I live of off is at 14% on my portfolio. For me it works and that way I don't have to worry about what happens. I should be able to weather the storm for the long haul and that was my plan in bear markets and through the weak earning years. I hope any way this plan works.

i don’t consider it bragging especially here. Living off cash if you can afford the loss in purchasing power is great. I already know several people who do that. One seems to be on vacation somewhere in the world with his wife every other week.

 

[REWahoo]

So I thought doing the laddered CDs/Treasury Bills route, and to maintain only about 20% in equities. I need some equity exposure for inflation.

FIRECalc says less than 35-40% in equities has a high failure rate. Note how the 30 year success rate stays below 90% until your equity exposure hits that level or above:

 

[Mark24609]

FIRECalc says less than 35-40% in equities has a high failure rate. Note how the 30 year success rate stays below 90% until your equity exposure hits that level or above:

But I would suppose that depends on your spending rate. My intention is not to withdraw more than 2% max 3% from my portfolio especially when Social Security kicks in.

 

[Mark24609]

Ditto this. I'm ~100 days from ER (54 1/2) and worry about sequence of returns risk a LOT. For that reason and that reason alone, I'm downshifting my equity allocation and increasing cash. Unfortunately, I didn't do as much of this as I planned for tax and other reasons and now have a 'bunny market' that is making re-allocation much more difficult.

3-year brokered CDs are pushing 3%, and the interest from our cash allocation + dividend paying stocks is pretty much all we need to pay (most of) the bills. Plus, DW is ~5 years from SS which will also help with cashflow. I'd love to make a ton more $$ on the upside so that I can travel a lot, buy whatever toys I'd like, etc, but 100 days from RE I'm all about protecting the downside and what we've already accumulated.

I realize cash won't make us rich, but am 50+% cash on our overall PF. (That'll pretty much get you laughed off the board on Bogleheads, but is what makes me comfortable). Most of that is in CDs. Some in MM. Either way, we can survive a pretty long bear without selling a single dollar in our investment portfolio. Still keeping $1M+ "invested" but at over 50% cash I feel a whole lot better about what might come.

All that said, I still get stressed about the "total number" on the spreadsheet. It's comforting to see a relatively safe # before ER. If that # were to drop precipitously right before ER, that'd suck and stress me out to the max..but at least we have our cash kitty to fall back on - and we're already covering the majority of our expenses through dividend paying stocks and interest from brokered CDs.

As others have said, it all comes down to your comfort with risk. Bernstein said it best - "if you've won the game, quit playing". My problem is I love investing - the science of it, the research, the return, etc. But I do also think the glory days of the market are behind us for at least the next decade - and that's not good with going into ER this year. How there are people here 60, 70, 80, 90 or even 100% stock is beyond me. Maybe they have not 'won the game' yet but memories of 2008 are still very fresh and a 50% drop in my PF would potentially kill me - so, I prefer to limit the upside and protect the downside. Tortoise and Hare. The Tortoise wins every time.

I agree with you. Once you reach critical mass, why put your money at risk?

 

[unclemick]

Ballpark 60/40 the whole way hand grenade wise. ER 1993 to now and counting.

Stayed the course and cut expenses as main strategy when required. Nervous at times? Big time. About 50/50 now going on age 75.

heh heh heh - nobody says ER has to be boring.

 

[daylatedollarshort]

Wow thanks for all the replies. Definitely sequence of returns risk. Yes would have to cut back on spending and maybe vacations. Here is my thought process. First losing that amount of money does make me nervous.

So I thought doing the laddered CDs/Treasury Bills route, and to maintain only about 20% in equities. I need some equity exposure for inflation. I also thought about buying an investment property for rental purposes in California for a passive income flow, but I am now rethinking that since there is a rent control initiative on the ballot for California a la San Francisco.

You may want to checkout the Boglehead wiki on matching strategies and perhaps consider a TIPS ladder for inflation adjustments.

 

[RunningBum]

I agree with you. Once you reach critical mass, why put your money at risk?

See post #42.

Maybe you have so much money you can afford to let inflation erode it away, if it takes off like it has in the past. I preferred not to keep working so long to build up that much buffer. I built up enough to be able to sleep well at night, and keep my equity exposure at the low end of what the post you referenced said was beyond them. But I'm not RetireSoon. I've been retired for 7 years now, starting in my late 40s.

 

[samclem]

Re: #3, there's another thread running now that claims that short-term belt tightening doesn't help all that much in the long run. Probably still a good idea though in hard times.

That's true, but in the real world we won't know if we have a short-term dip or maybe a long-term decrease in portfolio performance. In the real world if the portfolio drops 50% over the course of 5 years or so, I know I'd have some serious concerns about just how "short term" the situation really was. By taking a "% of year end value" from my portfolio, I'm cutting back my spending in proportion to the size of my portfolio, which makes a lot of sense to me. OTOH, if taking a fixed % of starting portfolio adjusted for inflation, I'm actually taking a larger percentage of my portfolio if it drops. In the case above (a 50% drop in portfolio value), if I started with a 4% WR, my withdrawal rate is 8% after the 5 year slump. If we run FIRECalc with an 8% withdrawal rate, the 30 year survival rate will not be good. And, just being realistic, with the portfolio down 50%, the press filled with gloom and doom, serious economic troubles and questions about the reliability of bond payments and general financial instability, is any retiree going to keep drawing down their nestegg as if nothing were happening just because a FIRECalc run based on previous historical returns indicted things would be okay? I know I wouldn't.
So that's why I'm more comfortable with withdrawals based on % of year-end value (smoothed with the Clyatt 95% rule, if required). I'll increase the annual % as I get older and the grim reaper's likely approach nears.

 

[Golden sunsets]

I agree with you. Once you reach critical mass, why put your money at risk?

To leave a legacy. Some would argue that if you have a critical mass and a low SWR, then you can afford to be more aggressive. We have decided to go no lower than 50% equities, despite having a planned withdrawal rate of less than 1%.


Sent from my iPad using Early Retirement Forum

 

[Dtail]

That's true, but in the real world we won't know if we have a short-term dip or maybe a long-term decrease in portfolio performance. In the real world if the portfolio drops 50% over the course of 5 years or so, I know I'd have some serious concerns about just how "short term" the situation really was. By taking a "% of year end value" from my portfolio, I'm cutting back my spending in proportion to the size of my portfolio, which makes a lot of sense to me. OTOH, if taking a fixed % of starting portfolio adjusted for inflation, I'm actually taking a larger percentage of my portfolio if it drops. In the case above (a 50% drop in portfolio value), if I started with a 4% WR, my withdrawal rate is 8% after the 5 year slump. If we run FIRECalc with an 8% withdrawal rate, the 30 year survival rate will not be good. And, just being realistic, with the portfolio down 50%, the press filled with gloom and doom, serious economic troubles and questions about the reliability of bond payments and general financial instability, is any retiree going to keep drawing down their nestegg as if nothing were happening just because a FIRECalc run based on previous historical returns indicted things would be okay? I know I wouldn't.
So that's why I'm more comfortable with withdrawals based on % of year-end value (smoothed with the Clyatt 95% rule, if required). I'll increase the annual % as I get older and the grim reaper's likely approach nears.

+1000