Avoid SOR risk? I think not! "SOR" = Sequence of Returns

[ERD50]

Quote:

Originally Posted by RunningBum Dropping your equities for the first 5 or 10 years due to SOR worries makes no sense to me either, especially for early retirees. .... I'm not going to debate anyone in favor of cutting equities early unless they can explain how I wouldn't still be exposed now had I done it 8 years ago. To me, that's the crux of the argument.

You got my point. Thank you!

-ERD50

[DayDreaming]

Quote:

Originally Posted by ERD50 ... Now I know people will say this is cherry-picked data, but I think it stands as an illustration...

To further cherry-pick that data, here is the exact same analysis that the OP did, except I changed the starting year from 1995 to 2000. In this case, the 100% bond investor comes out looking pretty good. I think the moral of the story is to not base your plans on cherry-picked data?

[ERD50]

Quote:

Originally Posted by JoeDreaming To further cherry-pick that data, here is the exact same analysis that the OP did, except I changed the starting year from 1995 to 2000. In this case, the 100% bond investor comes out looking pretty good. I think the moral of the story is to not base your plans on cherry-picked data?

The moral was intended to be - sure, some years it will be better to go conservative early, but it isn't clearly better on average. If we run more scenarios, I suspect that the conservative-early approach will lose most of the time. It just becomes market timing.

-ERD50

[donheff]

It seems like cherry picking a bad sequence is helpful for estimating your pucker factor for SOR. I added a 50/50 to the above and would feel much more comfortable right about now with that rather than with 100% equities going into the 2000 double dip period. I also would have been more comfortable with the 2009 50/50 dip. My actual 60/40 was more extreme but still within tolerances.

[Dtail]

Quote:

Originally Posted by RunningBum Dropping your equities for the first 5 or 10 years due to SOR worries makes no sense to me either, especially for early retirees. The only logic behind it that makes sense is that for a 30 year or less retirement you only have 20 or 25 years left. But many of us have much longer retirements. In other threads I tried to say how if I retired at 49 and cut way back on my equities for 10 years, at 59 the strategy would have me back at my full AA, while a new retiree at 59 would be cutting way back. I was told these were not the same situations, but we are still looking at the same retirement span. Nobody ever could explain how they were different, so I don't buy it. I'm so glad nobody was able to convince me of this questionable strategy when I retired 8 years ago. Obviously a down turn would've hurt me, but as it stands I'm in much, much more solid shape to weather one now. Had I cut my equities back at the start of retirement I'd still be facing SOR risk. I'm not going to debate anyone in favor of cutting equities early unless they can explain how I wouldn't still be exposed now had I done it 8 years ago. To me, that's the crux of the argument.

Agree with you.
Thus I am not really a fan of a rising equity glide philosophy at the start of retirement. This concept can be at odds of a reversion to the mean concept on the other side of the equation.

[Mango1956]

Quote:

Originally Posted by audreyh1 I don’t think 100% bonds have ever been recommended although I suppose some here might be 100% fixed income. More typical strategy starting out conservative recommendation is like 30% stocks with a gradual glide path to higher equity exposure (up to 70%) over a long time period. Basically spending down your fixed income during the early retirement years and letting your equities run. https://www.kitces.com/blog/should-e...tually-better/ Basically I do whatever it takes to stay invested, and I don’t care about the end score. Just survival before reaching the end. Hedging my bets staying 50/50 seems to work well enough for me, I don’t really care if I am “leaving money on the table” by not having a higher equity allocation. I also use the % remaining portfolio withdrawal method which tracks recent portfolio performance.

+1

[audreyh1]

Quote:

Originally Posted by Dtail Agree with you. Thus I am not really a fan of a rising equity glide philosophy at the start of retirement. This concept can be at odds of a reversion to the mean concept on the other side of the equation.

I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense.

If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

[Montecfo]

Quote:

Originally Posted by audreyh1 Asset allocation is part of your SWR selection, it’s not independent. You have to select a given AA to then figure out your SWR for a given portfolio survival statistic goal. I assume most people try out a range of AAs and look at the differences in portfolio survival statistics for a given SWR. Or maybe they’ve decided ahead of time that they are only comfortable with a certain AA and then figure out the SWR they have to accept in order to meet their portfolio survival statistic goal.

Oh I completely agree. And to have a SWR it has to be with respect to a certain AA and time horizon, by definition.

So while I understand SOR risk is a real thing, your SWR analysis has covered that risk, unless you are concerned about market conditions that have never occurred before.

[Dtail]

Quote:

Originally Posted by audreyh1 I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense. If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

Well supposedly the Cape 10 ratio does not predict that well market movements in the short term, so one could still miss out on the first few years of a continued high valuation market depending how wide the equity glide %'s are.

I do buy the notion of one using a 30/70 consistent ratio for example due different preservation vs. growth goals.

[tb001]

Interesting ERD. We’ve read the kitces article and have had a hard time wrapping our heads around the glide path concept. The most informative information for us was to look at the success rates with different asset allocations vs biggest drawdowns. DH sleeps better at night than I do with a big hit though. Hitting bad SOR early on wouldnhave me out hustling to find a job!

[pb4uski]

I think you are mis-applying the concept. I'll use the same data as you except when retiree B retires in Jan 1995 he carves out $175k in a 5 year CD ladder ($35k/year for the first 5 years from his stash) and invests the remaining $825k in a 70/30 portfolio... in Dec 1999 his $825k has grown to $2,147,849. Effectively, his 58/42 AA at retirement changes to 70/30 after 5 years. In January 2000 he begins inflation adjusted withdrawals of $39,192 from his $2,147,849 and his stash grows to $4,272,053 in Jan 2019.... lower than STC's $4,796,722 but still very healthy growth.

However, I think in this case it is because you somewhat cherrypicked a period where returns were particularly spectacular for the first 5 years.... a 21% CAGR.

I'll cherry pick a different period... beginning in Jan 2000 rather than Jan 1995. Using the same approach STC has $1,157,392 in Jan 2019 and Retiree B has $1,234,723.

Pick your poison.

STC: https://www.portfoliovisualizer.com/...location2_1=30

Retiree B: https://www.portfoliovisualizer.com/...location2_1=30

https://www.portfoliovisualizer.com/...location2_1=30

https://data.bls.gov/cgi-bin/cpicalc...1&year2=200412

[audreyh1]

Quote:

Originally Posted by Dtail Well supposedly the Cape 10 ratio does not predict that well market movements in the short term, so one could still miss out on the first few years of a continued high valuation market depending how wide the equity glide %'s are. I do buy the notion of one using a 30/70 consistent ratio for example due different preservation vs. growth goals.

Sure, CAPE10 predicts more in the 10 to 15 year timeframe, but with it exceeding 40 way above where it had ever been before, it was flashing red in 1999. That wasn’t the only metric either - the whole dot com valuation thing was obviously nuts. I chose to average in my windfall from divesting company stock over a couple of years and got lucky. That was the only tool in my arsenal at the time to deal with what I viewed as extreme valuations.

I think the Kitces paper presents a perfectly sensible approach starting from 30/70 and allowing equity exposure to increase.

[COcheesehead]

Quote:

Originally Posted by audreyh1 I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense. If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

+1

[audreyh1]

Quote:

Originally Posted by Montecfo Oh I completely agree. And to have a SWR it has to be with respect to a certain AA and time horizon, by definition. So while I understand SOR risk is a real thing, your SWR analysis has covered that risk, unless you are concerned about market conditions that have never occurred before.

OK good.

Perhaps the caution then is that if someone picks a very conservative AA they need to run the SWR models and make sure they aren’t shooting themselves in the foot. They might have to live with a lower SWR to survive long term. If they can, then it’s really their choice whether or not to be more conservative but take a lower income.

[pb4uski]

Quote:

Originally Posted by audreyh1 I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense. If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

(emphasis added)

Quote:

Originally Posted by COcheesehead +1

+2 but I retired at the end of 2011 so I probably would not have used it or would ahve used it in a muted form... if I was retiring today, I would probably use a muted from of it.

[Montecfo]

Quote:

Originally Posted by audreyh1 OK good. Perhaps the caution then is that if someone picks a very conservative AA they need to run the SWR models and make sure they aren’t shooting themselves in the foot. They might have to live with a lower SWR to survive long term. If they can, then it’s really their choice whether or not to be more conservative but take a lower income.

Agree. I think it can become a bit of a tail-chasing exercise.

[USGrant1962]

Quote:

Originally Posted by pb4uski (emphasis added) +2 but I retired at the end of 2011 so I probably would not have used it or would ahve used it in a muted form... if I was retiring today, I would probably use a muted from of it.

Having retired in 2017 when CAPE10 was >30* I did adopt a muted rising glidepath. I started at 55/45 and plan to follow Age In Stocks until approximately SS time. I haven't settled on my final AA, I'll probably stop at 65/35 - if it is good enough for Wellington it is good enough for me.

I know that this is so muted it is probably just for show, but maybe I can't "don't just do something - stand there!"

But once SS kicks in my "Income Allocation" will be something like 40/25/35 stock/bond/SS. Or looked at another way, 40/60 stock/fixed income.

*Side note, I just checked CAPE10 and it happened to go back over 30 just today per multpl.com. Though it is going to automagically roll off about 2.5 points this year as the 2008/2009 earnings crash rolls out of the window.

[GravitySucks]

I thought the Kitce paper had a lot of merit and if I had seen it before retiring I may have gone the Glide Path route. In fact I've recommended it to DS who is much more conservative than me. Luckily I didn't see it as I would have missed a great run up.
I did address SOR as I had two accounts. I was living off the 401k the first five years and I kept that invest between 20/80 and 40/60, balancing to my overall AA by keeping the IRA higher in equities.

[Chuckanut]

Quote:

Originally Posted by Cut-Throat Yup, and reducing it when the market is tanking is even more effective. Think VPW.

+1

Thanks to the last quarter of 2018 my VPW has me withdrawing about 2,300 less in 2019. Can anybody spare 25¢ so I can get a cup of coffee on this cold Winter morning?

I retired in late 2012 after the market had started the runup that may or may not be ending at this time. My AA has slowly creeped up to where I want it (60/40) as I have burned through some cash that I kept aside in the event of a bad sequence of returns in my early years. If I had known the market would have continued up for at least 5 more years I would have made a different choice. OTOH, I have slept well at night and have no problems spending on things that enhance the quality of life for me and my loved ones.

[Chuckanut]

Quote:

Originally Posted by audreyh1 Perhaps the caution then is that if someone picks a very conservative AA they need to run the SWR models and make sure they aren’t shooting themselves in the foot. They might have to live with a lower SWR to survive long term. If they can, then it’s really their choice whether or not to be more conservative but take a lower income.

+1

The point is we play the game to win. And for most of us winning is not having the biggest possible pile of cash so as to impress the peasants. Winning is running out of time before we run out of money. And, perhaps, leaving something to others.

Balance is needed.