Stocks too generous for too long?

[mickeyd]

The baby boomers stretch over 20 years from 1946-1964

18 years (generation), but who's counting.

 

[haha]

Someone once said "All generalizations are false including this one". About sums up my input on where the market is headed.

Les

What a statement! All of science is generalizations. All of mathematics is generalizations.

Ha

 

[Andre1969]

How much of a dip did the dow and S&P take back around the May-June timeframe last year? I think my overall portfolio dipped about 8%. Factoring out savings bonds, checking account, and my emigrant account, it would've been something like 10-11%.

Thankfully, everything bounced back within a few months, and I recovered that 10-11% and then went on another 13% beyond that. Also, my funds saw an incredibly fast run-up early on in 2006, so even with that 10-11% drop in May/June, it still left me about even for the year at that point.

 

[W2R]

I am not worried about a market correction for a lot of the reasons already mentioned here, especially the high liquidity, and dropping P/E's which means fundamentals are aligned with what's happening on the technicals. Also, a correction is just an opportunity to buy more than usual, because the market will come back in relatively (less than 2 years) short order.

My concern is more about a bad 10 year run that could start around 2010 or 2011 where equities don't gain anything for a 10 year period. The baby boomers are spending at their peak years and even if they shift a lot more money into equities to try to catch up, the fundamentals will get worse since that money won't be going into the earnings of companies. The data at www.hsdent.com is something I find interesting and explains more details about why I'm worried about 2010 to 2020. I'm just wondering if there's a strategy out there if we enter such a period? Is the standard diversification and allocations still the only way to go in such an environment? ..or is there something more to do in such a situation?

Going 10 years without any returns on my equities, like the 1970's, would be really painful for any FIRE person.

I am assuming that I won't be able to withdraw for the first ten years after I retire, just to be safer. I'll be interested in reading responses to your questions. I plan to have enough in money market, CD's, bonds, and perhaps a small fixed immediate annuity to get through such a scenario on a shoestring without withdrawing, if it "only" lasts 10 years.

It would be pretty rugged if social security collapsed at the same time, but from what I am reading it looks like that probably will not happen.

 

[Slarty]

Want2retire, Can you share your plan for how you won't need to withdraw from equities for 10 years if necessary? Is it that you have a pension you can fall back on, or is it that you have saved an extra buffer to get through such an event, or something else? If you were planning on such a buffer for something like $80k/yr income then you'd be looking at a $800k safety buffer, which is a lot.

Either way, I like your thinking. As we know from all the monte carlo and historical simulations, the failure modes come from the first critical 5 or so years after retirement. If we had a growth metric that would indicate if we are on a successful trajectory during those first critical years after retirement, then there would be time to go back to work to correct the trajectory. Going back to work a few years may be a better option than saving the extra $400k to $800k that might be needed to ensure you don't have to go back to work. If I had the time, then I bet I could work out a leading indicator that would further mitigate the risk of running out of money, even at slightly higher withdrawal rates.

 

[W2R]

Want2retire, Can you share your plan for how you won't need to withdraw from equities for 10 years if necessary? Is it that you have a pension you can fall back on, or is it that you have saved an extra buffer to get through such an event, or something else? If you were planning on such a buffer for something like $80k/yr income then you'd be looking at a $800k safety buffer, which is a lot.

Either way, I like your thinking. As we know from all the monte carlo and historical simulations, the failure modes come from the first critical 5 or so years after retirement. If we had a growth metric that would indicate if we are on a successful trajectory during those first critical years after retirement, then there would be time to go back to work to correct the trajectory. Going back to work a few years may be a better option than saving the extra $400k to $800k that might be needed to ensure you don't have to go back to work. If I had the time, then I bet I could work out a leading indicator that would further mitigate the risk of running out of money, even at slightly higher withdrawal rates.

I guess "all of the above" might be my answer. I am an early retiree, but not as early as most here (should be age 61.5 to 62). My retirement will be about 24% pension, 34% social security, and 42% investment income. I plan to put some money in laddered CDs or money market to replace investment income for a ten year period, but not up to the full 42%. The amount will be somewhere between that and the amount needed for barebones survival. If the market does well and social security falters, I could use it to replace some of that instead. As the first 10 years pass, if all is going well and the market is good, I can re-evaluate whether or not I can gradually move this money into other, more lucrative funds.

Since my pension is so small, I am also considering putting a fifth to a fourth of my nestegg into an immediate fixed annuity, which I can get at a pretty good rate at 62; that way I might not need much or any in CDs/money market for survival purposes during bear markets. I haven't made up my mind yet.

I can be very happy while spending very little, but I do not want to ever take charity for survival purposes. So, I'd rather sacrifice a little income to get by those crucial first ten years successfully.

 

[haha]

So, I'd rather sacrifice a little income to get by those crucial first ten years successfully.

I have a question about "those crucial first ten years". I have never understood the concept. Say I retired 20 years ago, and you are retiring today, that we are both 62 and both have $1.5MM. How does the universe know that the next ten years are crucial for you, but that I am already in phat city?

Ha

 

[Slarty]

There are more nuances to it than I can write in a note, but I'll give you my basic perspective..... The date of retirement is important only because of the performance of your investments the first few years of your retirement. If those years are bad years then they cause more damage than if they happen later in your retirement. That's because you are living off the "critical mass" of your investments. If the amount of your stash goes down a lot at first then its really hard to recover later in later years as you try to build it back up while withdrawing from it. If you look at monte carlo simulation outputs or historical data analysis you might get a better feel for this. It has to do with initial conditions being critical.

Another way I'll try to explain is this. If you gain a certain percentage on your investments then you make a lot more dollars if that percentage is based on a larger amount of investment. This creates momentum in the right direction. If you lose a certain percentage and then you lose more dollars for a larger investment amount. If you lose too much in the initial years, then you don't have enough critical mass of investment to sustain the rest of your retirement. It's a very non-linear effect.

 

[Lsbcal]

Here is a guess at the answer to the interesting question posed by HaHa:
If you happen to have the bad luck of retiring near a market peak then you might have a long ride down before the market reverses to its "typical" long term pattern of upward and to the right. But if you've been in the market for a long time (like the person who retired 20 years previously) supposedly you've enjoyed the big run up that preceded the peak. In that case you would be ahead of your withdrawal needs and have some fat to afford in a market downturn.

With regards to the example given this would mean that the person who retired at 42 was withdrawing at a lower rate then the person who just retired. This would be because his portfolio went up a lot faster then his withdrawal rate (after adjusting for inflationary increases).

In my case I retired in 2003. My portfolio has increased about 20% beyond the inflation corrected 2003 portfolio even though I withdrew at about a 4% rate and increased it for inflation. So my current effective withdrawal rate is now well below 4%, about at 3.3%. If you compared me to another person retiring with my current portfolio value the only difference would be that their beginning rate of withdrawal would be 4% whereas mine is 3.3%. If things got really bad in the coming years I might survive whereas the person who just retired might deplete his nest egg.

Obviously if we both had the same withdrawal rates then there would be no difference in the situations.

Les

 

[jdw_fire]

I have a question about "those crucial first ten years". I have never understood the concept. Say I retired 20 years ago, and you are retiring today, that we are both 62 and both have $1.5MM. How does the universe know that the next ten years are crucial for you, but that I am already in phat city?

Ha

It will only be the same if both withdraws plans (i.e. your age 62 WD & the formula for changing WD yr to yr) and investments are the same. If you are 20 yrs into retirement the odds are that your WD plan will be different than someone retiring now, however if it is the same and you both live just as long, both outcomes will be the same.

 

[audreyh1]

I have a question about "those crucial first ten years". I have never understood the concept. Say I retired 20 years ago, and you are retiring today, that we are both 62 and both have $1.5MM. How does the universe know that the next ten years are crucial for you, but that I am already in phat city?

Ha

The difference would be that someone retired 20 years would likely have a much different effective %SWR than the person just starting out, due to the growth (or shrinkage?) of the portfolio over that time period. In most cases, the effective SWR would be dropping because the portfolio would be growing faster than the inflation adjusted withdrawals. But we also know the opposite can occur, causing the %SWR to get alarmingly high at times.

Which is why some of us use a fixed percent of portfolio and never adjust for inflation.

Audrey