Sequence of Returns Risk

[Looking4Ward]

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....

I retired the same time as you at about the same age as you and I've been wondering the same thing.

This year my WR is working out to about 2.3% while my portfolio continues to rise substantially. If I include SS at 62, Firecalc indicates I could spend three times as much or more at 100% success.

But I don't because of exactly what you asked about (SRR). My worry has lessened over the last three years, and articles like this that I read this morning encourage me:

Why the bull market can go on for years

Ultimately, though, I don't think I'll start to be less concerned about SRR until I'm within spitting distance of SS benefits because I consider those my safety lever in the event of market crash.

 

[googily]

For those retiring with a number of years before 59.5, do you look at your subset of asset allocations as distinct entities? For instance, the after-tax and inherited IRA monies I have technically only have to "last" until I get access to my 401k and IRA, followed by a meager pension and SS. So those "current" pools are more conservatively invested, while keeping my 401k at 80-20 since there's eight-plus years before I get to it. But my overall AA is about 65-35.

It's kind of like approaching it as planning to retire twice.

 

[Looking4Ward]

For those retiring with a number of years before 59.5, do you look at your subset of asset allocations as distinct entities? For instance, the after-tax and inherited IRA monies I have technically only have to "last" until I get access to my 401k and IRA, followed by a meager pension and SS. So those "current" pools are more conservatively invested, while keeping my 401k at 80-20 since there's eight-plus years before I get to it. But my overall AA is about 65-35.

It's kind of like approaching it as planning to retire twice.

Yes, I do. Roughly 60% of my portfolio is after tax while 40% is tIRA. I consider the after tax to be my first bucket while the tIRA can continue to grow for another decade or more.

 

[RunningBum]

For those retiring with a number of years before 59.5, do you look at your subset of asset allocations as distinct entities? For instance, the after-tax and inherited IRA monies I have technically only have to "last" until I get access to my 401k and IRA, followed by a meager pension and SS. So those "current" pools are more conservatively invested, while keeping my 401k at 80-20 since there's eight-plus years before I get to it. But my overall AA is about 65-35.

It's kind of like approaching it as planning to retire twice.

I don't, but the bulk of my assets are in after tax so I'm not worried about making it to 59.5, 62, 65, or 70. I don't know that I'd do anything different otherwise. Even if you have more aggressive investments in taxable and have to sell them for living expenses, you can buy back the aggressive investments in your IRA or tIRA--but make certain you don't run afoul of wash sales, because you'll lose the tax loss, not just defer it.

 

[googily]

Yes, I do. Roughly 60% of my portfolio is after tax while 40% is tIRA. I consider the after tax to be my first bucket while the tIRA can continue to grow for another decade or more.

My %s are similar. This would then seem to have some amount of SORR mitigation, or at least a "reset" button, if your true retirement monies are considered enough on their own if you were waiting until retirement age to stop working. Because then the spend horizon is much shorter for that money, plus the arrival of pensions and SS in just a few years after that reset point).

 

[Looking4Ward]

My %s are similar. This would then seem to have some amount of SORR mitigation, or at least a "reset" button, if your true retirement monies are considered enough on their own if you were waiting until retirement age to stop working. Because then the spend horizon is much shorter for that money, plus the arrival of pensions and SS in just a few years after that reset point).

True. I'll often run Firecalc scenarios where all I include is my after-tax assets for 13-14 years until age 70. Then I'll run the same period using my tax advantaged with no withdrawals to see what it could possibly grow to. Many more cycles can be included for analysis when only looking at 13-14 year periods. My thought process is if I can survive any SORR with after-tax until I can max out SS and growth of after-tax then I'll have plenty of goofy money when I turn 70 and won't care about SORR

 

[RunningBum]

Another reason I don't treat the types of accounts distinctly is that I think it can skew the "when to take SS" decision. I think some people feel like they have to skimp a bit before taking SS, so they want to take it at 62 so they can splurge a bit more. But I factor in that SS will be coming, and I can spend more out of my accounts more, since I'll have to take less out of them later. I don't want to take this down the "SS at 62 or 70" rabbit hole because I know there are very valid reasons for either and everything in between, but I don't think that being able to spend more once you get it is one of them.

 

[googily]

Another reason I don't treat the types of accounts distinctly is that I think it can skew the "when to take SS" decision. I think some people feel like they have to skimp a bit before taking SS, so they want to take it at 62 so they can splurge a bit more. But I factor in that SS will be coming, and I can spend more out of my accounts more, since I'll have to take less out of them later. I don't want to take this down the "SS at 62 or 70" rabbit hole because I know there are very valid reasons for either and everything in between, but I don't think that being able to spend more once you get it is one of them.

I think that's true if the pre-retirement monies are a bit tight or, conversely, if the after-retirement pool is small and it's the current pool that has to do the heavy lifting the whole way. Both of those are where SORR is understandably concerning. That is where a bad market right as you pull the rip cord can muck with one's plans, make someone need to take SS at 62, etc.

But, in my case, as I said above, I really do look at it like two retirements. If all of my pre tax money went up in a puff of smoke over the next eight years, could my 401k, tIRA, pension, and SS get me from 59.5 to whenever?

 

[sengsational]

For those retiring with a number of years before 59.5, do you look at your subset of asset allocations as distinct entities? For instance, the after-tax and inherited IRA monies I have technically only have to "last" until I get access to my 401k and IRA, followed by a meager pension and SS. So those "current" pools are more conservatively invested, while keeping my 401k at 80-20 since there's eight-plus years before I get to it. But my overall AA is about 65-35.

That is what I did. The overall AA was is calculated with everything, of course, but the bucket I was planning to spend out of was constrained to be something that wasn't as volatile. I didn't calculate separate AA's, though, for the different tax categories...I was under the impression that the overall AA was the only thing that mattered. So of course if the spending bucket was constrained to have, say, no equities, then of course the non-spending buckets had more equities. Sometimes the account fiduciary will calculate your asset allocation. That might appear out of whack, but I just ignore it because it's only a subset.

 

[flyingaway]

I am not an expert. But I think that depends on how many remaining years you need the money. If someone retires today and knows for sure he will die next year, he would not worry about the sequence of returns risk.
For anyone with no sure finishing date, every year starts a new year, thus starts a new sequence of returns risk, if you worry about that.
Of course, you have fewer years to support. But you do not know exactly how many years remaining.

 

[GravitySucks]

Yes.







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

By the time we can stop worrying about SORR, we'll wish we still did.