DCA into Retirement?

[wabmester]

We all know that volatility is the enemy of retirement, right? That's why I chose to DCA into my stock allocation over a few years. My theory is:

1) A market crash soon after retirement is the worst thing that can happen to you (SWR-wise)

2) So far, bear markets haven't lastest more than a few years at a pop

3) Even if you hit a bear right after your DCA tops out, you'll typically have made some early gains that improve your chance of surviving the bear

So, here's my question: has anybody made a calc or completed a study of the SWR effect of DCA'ing into your stock allocation over, say, the first 3-years of retirement?

 

[brewer12345]

We all know that volatility is the enemy of retirement, right?   That's why I chose to DCA into my stock allocation over a few years.    My theory is:

1) A market crash soon after retirement is the worst thing that can happen to you (SWR-wise)

2) So far, bear markets haven't lastest more than a few years at a pop

3) Even if you hit a bear right after your DCA tops out, you'll typically have made some early gains that improve your chance of surviving the bear

So, here's my question: has anybody made a calc or completed a study of the SWR effect of DCA'ing into your stock allocation over, say, the first 3-years of retirement?

I think there is a simple answer here. What you are basically doing is setting up three mini-SWR portfpolios. Each year, you set up a mini port with target asset allocation, WR, etc. One would think that the total of all three would have results closer to that of the average in the study compared with plunging in all at once, no?

 

[wabmester]

I'm not sure I follow you. Let's say I want a 25% stock allocation in year 1, 50% in year 2, and 75% in year 3-30. I don't see how averaging anything will allow me to approximate the effects.

In FIREcalc, it's the worst 30-year sequence that determines your SWR. Assume the worst is 1930-1960, for example. DCA'ing at the start of that sequence should have the double benefit of reducing portfolio exposure to the the crash and buying more stock at value prices. So, either the SWR would go up, or some other sequence would become the worst (in which case, the SWR should still go up).

 

[sgeeeee]

We all know that volatility is the enemy of retirement, right?   That's why I chose to DCA into my stock allocation over a few years.    My theory is:

1) A market crash soon after retirement is the worst thing that can happen to you (SWR-wise)

2) So far, bear markets haven't lastest more than a few years at a pop

3) Even if you hit a bear right after your DCA tops out, you'll typically have made some early gains that improve your chance of surviving the bear

So, here's my question: has anybody made a calc or completed a study of the SWR effect of DCA'ing into your stock allocation over, say, the first 3-years of retirement?

Hi wab,

I'm not sure I understand the question. Where was the money prior to retirement? If you weren't in equities at a level near your target allocation, you were likely slowing your progress toward your target portfolio value. No?

I guess the question seems more relevant if on retirement you recieved some large lump sum payment(s) (selling off a business, cashing stock options, getting a lump sum pension payment, . . .)

In that case, it would be interesting to do the analysis. I don't know how to do it, but it would be interesting. There is a theoretical possibility that you could make things worse. For example, if 1929 was the worst case without DCAing into retirement equity allocation, you might make 1927 an even worse year when you DCA'd for 3 years since you would miss the major runup of stocks that took place just before the crash.

 

[wabmester]

If you weren't in equities at a level near your target allocation, you were likely slowing your progress toward your target portfolio value. No?

Is there one among us who didn't tweak their port right around retirement time? Personally, I went from capital growth mode to capital preservation mode. And I'm sure a number of people get lump-sum pension buy-outs just before retirement. In any case, the question about lump-sum vs DCA into stocks for retirement comes up pretty frequently around here, so I thought it would be interesting to find a definitive answer. (Maybe DCA is the wrong term; feel free to suggest something better that means "ramping up your stock allocation.")

In that case, it would be interesting to do the analysis.

Yeah, I think so too

I'm *almost* curious enough to try to hack intercst's spreadsheet to run the numbers, but I was secretly hoping intercst or dory36 would step up to the plate and volunteer

It could lead nowhere, or it could blow the the famous 4% number out of the water. If my guess is correct, the 4% SWR is heavily influenced by worst-case sequences in which your initial nest-egg is devastated by a bear market just as you retire.

Perhaps by taking it slow on the initial stock allocation, you can improve worst-case survival at the cost of some best-case upside on your post-mortem port value. And who really cares about missing some upside after you're dead?