Sequence of Returns Risk

[rodi]

This is something I've been thinking about for a while... How far into retirement (in years) do you have to get before you can relax about sequence of returns risk. (SoRR)

5 years? 10 years? Worry forever?

I'm 3 years in - and have kept my withdrawals fairly low (<3%) just as a safety measure because of my worry about SoRR... I'm wondering if I can expand my spending a bit after some arbitrary number of years because I've passed the portfolio risk of early bad markets on my retirement....

 

[REWahoo]

I'm not sure there is a specific "safe" time limit as there are too many factors involved - your age, the number of years you will continue to be dependent on your nest egg, etc. I know that at 12 years in and age 70, I've reached the point where I'm less concerned and have loosened up the purse strings a bit. That started happening around year 5 or 6, when it became clear the Great Recession was just that, not the end of the financial world as we knew it.

 

[walkinwood]

I think sequence of return risk (for a given AA & SWR) only diminishes with the reduction of years remaining in your retirement - not years into your retirement.

So, 10 years into retirement, SORR will be lower for an 80 year old retiree than a 50 year old early retiree.

I look at SWR studies that show a higher SWR for shorter retirement periods to back up my assertion.

However - we all know (or should) that these studies just look at historical returns.The future, as always, is unknown.

 

[W2R]

I'm not sure there is a specific "safe" time limit as there are too many factors involved - your age, the number of years you will continue to be dependent on your nest egg, etc. I know that at 12 years in and age 70, I've reached the point where I'm less concerned and have loosened up the purse strings a bit. That started happening around year 5 or 6, when it became clear the Great Recession was just that, not the end of the financial world as we knew it.

I don't have an exact number of years either. This article on Kiplinger says,

Any market volatility at all is going to hurt, but if it occurs in the first five years after you begin taking income, there’s a significant chance you could run out of money much faster than you planned.

Other articles say anything from a couple of years to a decade.

I know that personally, I felt like it was less of a worry after the first five years of retirement in a bull market. This was for two reasons: (1) my portfolio actually grew during that time, and (2) I had five fewer years for it to fund.

It helps my peace of mind that I use the "percent of 12/31 portfolio value" withdrawal method. If my portfolio tanks due to market conditions, my withdrawal method would have me spending less and that should protect me regardless of what returns I am getting.

 

[rodi]

Thanks for that link, W2R.

Walkinwood: - I'm relatively young... retired at 52, currently 55... so 3 years in... but still hoping for 40 more good years. (Probably not realistic that I'll live to 95... but one grandparent made it to 91 - the other 3 died less than 80, as did both parents.)

 

[ERD50]

I think sequence of return risk (for a given AA & SWR) only diminishes with the reduction of years remaining in your retirement - not years into your retirement.

So, 10 years into retirement, SORR will be lower for an 80 year old retiree than a 50 year old early retiree.

I look at SWR studies that show a higher SWR for shorter retirement periods to back up my assertion.

However - we all know (or should) that these studies just look at historical returns.The future, as always, is unknown.

I think that's a pretty good view of it. I've always questioned the thinking that SORR is only a factor at the start. Never really got my head around it, but it never really clicked with me. I think walkinwood's comments help.

I also think that the historical look back is just reflective of typical economic cycles. You don't normally have a big-drop "bust" unless there was a preceding big-bump-up "boom". So historically, portfolios that saw the "bust" in later years, also benefited from the preceding "boom". So you don't see those portfolios fail with the later bust, but only because they also experienced the boom.

So this goes against some thinking that we should have a conservative AA in the early years - that means we may not take part in the "boom", yet still experience some "bust" later? Ouch!!

So if the future becomes just a slog down from a plateau, without a big preceding boom cycle, I think it's going to hurt, even if it happens 10 years or so into retirement.

-ERD50

 

[Meadbh]

Of course there is no sudden toggle switch at a specific year. The sequence of returns risk diminishes gradually with time. Most articles on this subject identify a period of 5-10 years before and after retirement, because it's easier to plan with a number in mind.

I went back to Moshe Milevsky's original 2006 paper, in which he shows, in Exhibit 5.2, the dramatic difference in the risk of "ruin" between the first, second and third decade of retirement.

http://www.math.yorku.ca/~salt/preprints/IFIDriskZoneReport27SEPT200final.pdf

Mentally, I am beginning to relax as I see my portfolio holding its own after 4-5 years of ~3.5% WR, so I may loosen the purse strings a little after 5 years. By the time I get to 10 years, a couple of income streams will reduce the required withdrawal rate from my portfolio, but I may go wild and leave it alone!

 

[NW-Bound]

I think sequence of return risk (for a given AA & SWR) only diminishes with the reduction of years remaining in your retirement - not years into your retirement...

Yes.

... So, 10 years into retirement, SORR will be lower for an 80 year old retiree than a 50 year old early retiree...

Is your example a bit too extreme? Most 80-year-olds I know worry more about their health problems than SORR.

 

[Blue Collar Guy]

Is your example a bit too extreme? Most 80-year-olds I know worry more about their health problems than SORR.

Hahahah, Or who they are going to leave their wealth to.

 

[RunningBum]

I think that's a pretty good view of it. I've always questioned the thinking that SORR is only a factor at the start. Never really got my head around it, but it never really clicked with me. I think walkinwood's comments help.

I also think that the historical look back is just reflective of typical economic cycles. You don't normally have a big-drop "bust" unless there was a preceding big-bump-up "boom". So historically, portfolios that saw the "bust" in later years, also benefited from the preceding "boom". So you don't see those portfolios fail with the later bust, but only because they also experienced the boom.

So this goes against some thinking that we should have a conservative AA in the early years - that means we may not take part in the "boom", yet still experience some "bust" later? Ouch!!

Exactly! And my experience, and I'm rodi's age but with 3 more years of ER, is that since I wasn't conservative with my AA, I took part in the nice market returns we've been having, and I'm not really worried about SORR risk anymore. Had I gone more conservative, I'd have just been kicking the SORR can down the road and it would still be a concern.

 

[flintnational]

Rodi, we are also 3 years in, have a 3% WR and are about your age. Using historical models (like firecalc) I believe SORR has decreased for at least two reasons. 1) We are 3 years older and have a shorter retirement horizon. 2) We have been fortunate to retire into a rising market and our assets are higher than when we retired. I just don't know how to quantify the diminished SORR.

On the other hand, if the future ends up being worse than the past, I think SORR could be a problem throughout retirement unless there are pensions or non investment income to mitigate market downturns/collapse.

 

[JoeWras]

Frequent topic and a good one. Especially since some of us feel our "bubble detectors" going off.

We're at literal OMY and really have committed to ER 2018, but SORR is scary. My plan is to go with 3% for the first few years. I think we can still do a lot of extra stuff, like travel, with that. We may have to delay the remodel project though. That might go better during a building downturn anyway.

One more thing about this: we have some local "advisors" who purchase weekend radio shows, and these guys are putting the full court press on this fear (without using the term). They all speak of "guaranteed" income for a half hour, without ever explaining what that means. "Call us." Blah, blah. Must be annuity salesmen.

 

[ERD50]

Frequent topic and a good one. Especially since some of us feel our "bubble detectors" going off.

We're at literal OMY and really have committed to ER 2018, but SORR is scary. My plan is to go with 3% for the first few years. I think we can still do a lot of extra stuff, like travel, with that. We may have to delay the remodel project though. That might go better during a building downturn anyway. ....

Do you have SS and/or pensions coming in the future? If so, then my view is to look at the WR as an average. You can have higher than 3% now, and be fine, if SS/pension means dropping the rate later.

What I do to try to 'normalize' this for WR discussions here, is to plug those variable income/spending into a calculator like FIRECalc, get to X% success, and then compare that to a straight-no-changes WR at the same success rate. Then I use that 'straight' number as my "weighted WR".

-ERD50

 

[sengsational]

I agree that it's more about years remaining than years of retirement. But this is one exercise where "expected age" is going to be better than the "I don't want to eat dog food" age. In other words, the middle of the expected age bell curve minus your current age is a good number of years for this exercise.

Calculate the number of years you can "run lean" without selling equities. So any market dip that lasts a shorter amount of time than that can be ignored from a sequence of returns point of view, right? I mean, the market tanks, you live off non-equities, a few years later, the market comes back to where it was, and you didn't experience any bad returns.

So now you have a worst-case scenario, where you have 30 years left, the market tanks, you go 5 years without touching equities, but the market doesn't come back and you have to sell low for 2 years of your remaining 25. So there will be 25 years of compounding you miss out on.

Contrast that to someone with 15 years left. They have to sell low for 2 years out of 10 years remaining. Only 10 years of compounding missed.

 

[atmsmshr]

I'm not sure there is a specific "safe" time limit as there are too many factors involved - your age, the number of years you will continue to be dependent on your nest egg, etc. I know that at 12 years in and age 70, I've reached the point where I'm less concerned and have loosened up the purse strings a bit. That started happening around year 5 or 6, when it became clear the Great Recession was just that, not the end of the financial world as we knew it.

REWahoo sums it up for me. A lot of variables to consider but to summarize - a 10 years SORR planning window and liability to asset matching look appealing. Right now its academic since I'm 56 and have a steady paycheck from a job I like. As a result, keeping the pedal to the floorboards on stock allocation and up 17% in the 401k this year. That's the conundrum- sequence of returns cuts both ways. In a rising market - holding too many bonds reduces the upside if you are still accumulating. If the inevitable correction occurs before FIRE - I will work a little longer. Kind of like betting on black in roulette.

After retirement, the picture changes completely. Human capital is at an ebb and risk management is king. Boggleheads forums have some great threads on SORR after retirement. Googling Pfau and Kites turns up some good perspectives and focus on the first decade of retirement. After FIRE, liability matching with income (pension, SPIA annuity and SS) appear to be a way to help sleep at night. The balance can then go to a riskier portfolio knowing that discretionary income is variable.

For example, our plan is to not pay off the 3.125% mortgage and annuitize around 5.5% with a 1035 exchange after FIRE. Similarly, we are thinking about a LTC annuity with a 1035 swap to completely avoid taxes. DW is disabled and this approach avoids medical underwriting.

YMMV

Atom

 

[mickeyd]

I have never considered SoRR to be much of an issue. Been retired about 15 years and my stash is far greater than when I finally to realized that w**k was not a thing that I needed to be doing on a regular basis.


Simplicity.

 

[atmsmshr]

Hahahah, Or who they are going to leave their wealth to.

BCG - with that beautiful pension you are at the extreme end of the spectrum and will never have to worry about SORR.

On the other hand, there are precious few people who have the fortitude to do what you accomplished.

Thank you for your service.

 

[Blue Collar Guy]

BCG - with that beautiful pension you are at the extreme end of the spectrum and will never have to worry about SORR.

On the other hand, there are precious few people who have the fortitude to do what you accomplished.

Thank you for your service.

Im humbled by your kind words. A deep and sincere thank you.

 

[aja8888]

Yes.

Most 80-year-olds I know worry more about their health problems than SORR.

This kind of sums it up for folks with not too many years left to worry about SORR. As long as an 80 year (or thereabouts) old has the "bases covered"; SS, pension, good remaining stash, paid for home, etc, staying alive is the highest priority.

If you made it this far and have most of the above, you are not reading the articles mentioned above.

 

[JoeWras]

Do you have SS and/or pensions coming in the future? If so, then my view is to look at the WR as an average. You can have higher than 3% now, and be fine, if SS/pension means dropping the rate later.

What I do to try to 'normalize' this for WR discussions here, is to plug those variable income/spending into a calculator like FIRECalc, get to X% success, and then compare that to a straight-no-changes WR at the same success rate. Then I use that 'straight' number as my "weighted WR".
-ERD50

Good point. We want to delay SS as late as possible as part of our longevity risk plan. No pension of significance ($100/mo or so). SS will be good, assuming the govt delivers since we've both been paying nearly 40 years, with 30 of them good income years.

Calculate the number of years you can "run lean" without selling equities. So any market dip that lasts a shorter amount of time than that can be ignored from a sequence of returns point of view, right? I mean, the market tanks, you live off non-equities, a few years later, the market comes back to where it was, and you didn't experience any bad returns.

Good plan. It is going to take discipline to do that.

I try to picture myself 4 years from now in the middle of a 2008-9 downturn, and wonder what my discipline would be.

 

[Blue Collar Guy]

I try to picture myself 4 years from now in the middle of a 2008-9 downturn, and wonder what my discipline would be.

If it happens, call me I'll try to talk you off the ledge. I know my good fortune might turn at any moment. I have been looking at the 2008-2009 posts. Some guys in here provided good counsel to those that were wringing their hands.

 

[kcowan]

We retired in 2002 so we had the "benefit" of the dot com swoon to factor into our plans. I think it was 2008 that any residual free went away. Also in 2008, we discovered how much we could save by living in Mexico if necessary.

 

[Lsbcal]

This is something I've been thinking about for a while... How far into retirement (in years) do you have to get before you can relax about sequence of returns risk. (SoRR)

5 years? 10 years? Worry forever?

I'm 3 years in - and have kept my withdrawals fairly low (<3%) just as a safety measure because of my worry about SoRR... I'm wondering if I can expand my spending a bit after some arbitrary number of years because I've passed the portfolio risk of early bad markets on my retirement....

My approach has been to run VPW and keep my particular results for reference. So when someone starts mentioning this stuff I can go back and review why I shouldn't worry too much and enjoy the spending.

What would you do now with another half percent spending per year? If the answer really excites you, then you have only to do the homework to see how that spending level would have done in past awful market periods (like start years 1966 or 1929).

 

[FREE866]

I don't have an exact number of years either. This article on Kiplinger says,
Other articles say anything from a couple of years to a decade.

.

Good grief...that article is written by an insurance salesman...so many classic fear tactics employed in that article...everyone's situation is different , but be very careful of articles like that "You might run out of money...and gee I have just the insurance product for you"...

 

[Another Reader]

Don't you love how an insurance salesman has a company with wealth management in the name? Yep, he's managing wealth - his wealth.