Define "good"

[palomalou]

Not a philosophical question, although interesting!
I have always read that of the market does "well" in the first few years of your retirement, you are much better off. But I am not sure what "well" means: 10%, 15%, keeping your bottom line stable rather than going down? And what is meant by a "few" years--2, 5?
I have a couple of part-time jobs and am pondering how long I will keep each. Adored Spouse has the same situation.

 

[sengsational]

Rather than years, one might use fraction of retirement; five years of "good" means a lot more to a 68 year old retiree (first 20% of retirement in the good range) than it would to a 48 year old retiree (first 10% of retirement in the good range).

I think the idea is that if you have a rough patch right after retiring, you're need to eat into your nest egg too harshly, and so no as much to compound upon.

As to the "good" question, I always thought it was more along the lines of "not bad". In other words, keeping up with inflation or better would be "good".

 

[REWahoo]

Not a philosophical question, although interesting!
I have always read that of the market does "well" in the first few years of your retirement, you are much better off. But I am not sure what "well" means: 10%, 15%, keeping your bottom line stable rather than going down? And what is meant by a "few" years--2, 5?
I have a couple of part-time jobs and am pondering how long I will keep each. Adored Spouse has the same situation.

This may help.

Below is a chart from the front page of FIRECalc giving examples of a 750,000 starting portfolio withdrawing $35k per year. "Good"(green - retired in 75), "OK" (blue - retired in 74) and "Lousy"(red - retired in 73). You can check out how the market performed in the first few years following each retirement to see what "good" looks like.

 

[aaronc879]

As to the "good" question, I always thought it was more along the lines of "not bad". In other words, keeping up with inflation or better would be "good".

I agree. As long as you are not getting a negative return in the first 2-3 years, you should be 'good'.

 

[W2R]

I agree. As long as you are not getting a negative return in the first 2-3 years, you should be 'good'.

+1

I'm no expert but those are my thoughts as well. The better the return, the better it is. I guess higher returns would go beyond 'good' to 'terrific' or 'spectacular'.

 

[Fermion]

I agree. As long as you are not getting a negative return in the first 2-3 years, you should be 'good'.

Uh oh. 2015 is our first year and a 600 point drop right now would put us in the negative return area. I think we are only up 2% YTD right now which is a negative real return.

 

[NW-Bound]

Not a philosophical question, although interesting!
I have always read that of the market does "well" in the first few years of your retirement, you are much better off. But I am not sure what "well" means: 10%, 15%, keeping your bottom line stable rather than going down? And what is meant by a "few" years--2, 5?
I have a couple of part-time jobs and am pondering how long I will keep each. Adored Spouse has the same situation.

I think that as long as your stash stays constant despite your withdrawal, you are in good shape. If that is true after inflation is accounted for, all the better.

And if it even goes up after your expenses, hallelujah!

 

[jimandthom]

I think that as long as your stash stays constant despite your withdrawal, you are in good shape. If that is true after inflation is accounted for, all the better.

And if it even goes up after your expenses, hallelujah!

Yep--the above method is what we are using to determine a good/bad year.

We are down about $5k for the year. But considering-- 1 kidney stone surgically removed, 1 yearly colonoscopy, 2 sets of glasses, 1 set of contacts, a healthy dental bill and a small vacation-- we still call it a good year.

 

[Independent]

Not a philosophical question, although interesting!
I have always read that of the market does "well" in the first few years of your retirement, you are much better off. But I am not sure what "well" means: 10%, 15%, keeping your bottom line stable rather than going down? And what is meant by a "few" years--2, 5?
I have a couple of part-time jobs and am pondering how long I will keep each. Adored Spouse has the same situation.

Of course these are fuzzy words. Any answer requires some arbitrary cut-off.

I used ******** with the default assumptions - $1 million portfolio, $40k CPI adjusted withdrawals, 75/25 stocks/bonds, 30 year horizon, 115 historical starting points.

I compared CPI-adjusted ending portfolios for the first 5 years to the lowest CPI-adjusted portfolios over the 30 year period.

There were 5 failures - ending portfolio below $0. Looking at the lowest of the first 5 years for each of these scenarios, those lowest numbers varied between $755k and $900k. i.e. If the worst ending year in the first 5 was better than $900k, then the portfolio survived the 30 years.

Being a little more general, let:
Low5 = lowest ending value in first 5 years
Low30 = lowest ending value in any of the 30 years.

There were 56 cases where Low5 was below $900k.
In those 56 cases, 21 would have Low30 below $400k,
and of those 21, 5 would have Low30 below $0.

There were 59 cases where Low5 was above $900k.
In those 59 cases, 3 would have Low30 below $400k,
and none of those 3 would have Low30 below $0.

I didn't look at what it took in terms of yields to get an ending value below $900k in the first 5 years. It seems like a constant real return of 2.2% would be right on the border. But, there are obviously many patterns of variable returns that would do it.

 

[walkinwood]

IIRC, Jim Otar, in his book "Unveiling the Retirement Myth" said that if your portfolio was lower than the original value four years into retirement, you had a very high failure rate. (I can't remember if it was in nominal or real terms)

otar retirement calculator

I can't find my copy of the pdf any more to verify what I remember.

 

[REWahoo]

IIRC, Jim Otar, in his book "Unveiling the Retirement Myth" said that if your portfolio was lower than the original value four years into retirement, you had a very high failure rate.

Wow. At the 4 year point (mid 2009) I was down about 25%.

 

[walkinwood]

Wow. At the 4 year point (mid 2009) I was down about 25%.

Please check against the book before you lose any sleep based on my, often faulty, memory.

 

[NW-Bound]

If your portfolio stays the same after 4 years, then your WR is also the same. Of course you will be OK, because while you are drawing for a 26-year retirement, a newbie who starts retirement now still has 30 years ahead of him and he is drawing the same amount as you do. So, this cannot be a requirement.

If your stash is to be depleted linearly with time, then 4 years into a 30-year retirement it would be down about 4/30 = 13%.

That is roughly about the same as what Independent observes earlier, that the breakpoint is about 10% down at the 5-year mark.

 

[UpAnchor]

IIRC, Jim Otar, in his book "Unveiling the Retirement Myth" said that if your portfolio was lower than the original value four years into retirement, you had a very high failure rate. (I can't remember if it was in nominal or real terms)

otar retirement calculator

I can't find my copy of the pdf any more to verify what I remember.

Please check against the book before you lose any sleep based on my, often faulty, memory.

I managed to find mine. His exact quote was:

"Among the three components of the luck factor, the sequence of returns is by far the most important. Two negative years or four flat years at the beginning of retirement can cut the portfolio life by half. There is little one can do to mitigate a bad sequence of returns with buy–and–hold portfolios."

 

[RetireAge50]

I would not base anything on any rules or quotes from someone. Run the numbers for yourself. If you do not have to withdraw as much during down years (lowering your budget, selling other assets like a house, taking SS early, taking a lump sum for a pension, etc) then the sequence of returns is not a killer.

 

[walkinwood]

If your portfolio stays the same after 4 years, then your WR is also the same. Of course you will be OK, because while you are drawing for a 26-year retirement, a newbie who starts retirement now still has 30 years ahead of him and he is drawing the same amount as you do. So, this cannot be a requirement.

Your withdrawals would be higher than the newbie because you've adjusted them for inflation every year. In today's low inflation world that may be a non-issue.

 

[MrLoco]

Isn't this where a "healthy" bucket of cash comes in handy?

If the first few years post-retirement result in negative returns:

-- Reduce the withdrawal rate and supplement from cash accounts.

-- Maintain the same withdrawal rate but do not adjust for inflation
again supplementing from cash accounts if needed.

For time periods such as end 2008......suspend withdrawals and take from cash accounts if possible. Of course this requires a large balance in cash/short term investment accounts.

 

[braumeister]

Please check against the book before you lose any sleep based on my, often faulty, memory.

He just said it was a warning signal.

 

[MichaelB]

IIRC, Jim Otar, in his book "Unveiling the Retirement Myth" said that if your portfolio was lower than the original value four years into retirement, you had a very high failure rate. (I can't remember if it was in nominal or real terms)

otar retirement calculator

I can't find my copy of the pdf any more to verify what I remember.

Wow. At the 4 year point (mid 2009) I was down about 25%.

These discussions focus on the math of portfolio declines. What matters just as much (or perhaps even more) is not the decline but how one acts afterwards. No one embraces a market shock (except perhaps Warren B) but these early declines are a more of a risk to those that don't have the discipline to rebalance.

REWahoo's graph and thread show that the impact of early declines can be offset and plan integrity maintained by staying diversified and rebalancing after equity prices have fallen.

 

[sengsational]

I agree that the models that are typically run don't adjust spending for down markets. This is a good model for people who's budget include zero discretionary spending, but that's not most of us here. When markets are down / there is an economic slow down, everyone, not just the retired, pull back, so it's not as hard to cut back on discretionary.

The way the models usually work is you plan once, at the beginning of retirement, then blindly do what it says until the end (not realistic). The reality is that we run the model every year, if not more often, and if changes are called-for to stretch it out a bit, those changes can be made.

 

[Andre1969]

Wow. At the 4 year point (mid 2009) I was down about 25%.

I think it's more of a long, steady, year-after-year decline that you have to worry about, rather than one sharp drop. If you retired in mid 2005, was your net worth up by mid 2006, 2007, and possibly even 2008?

A few days ago, I ran a FireCalc scenario of retiring in 1999, with $1M, and a 3% withdrawal rate. As of 2013, the last year in the Excel spreadsheet, the ending balance would have been lowered to $876906. Adjusting for inflation, the 3% initial rate, which would have started you at $30K way back in 1999, would be up to $41,573 for 2013.

2014 was a fairly lackluster year for me. I think my return was about 5.6%. And as of this past Friday, I was only up around 4.2% for this year. So, while those percentages would be enough to offset the 3% SWR rate, the ending balance as of 2015 wouldn't be that much higher than 2013.

So, I'm guessing that the 1999 cycle is one of the few that might not pass the 3% SWR test, and at 4% it would probably be doomed to failure.

Still, considering that cycle contains two serious recessions (I lost about half of everything in 2000-2002 and again in "The Great Recession), it's probably a fairly rare occurence.

 

[REWahoo]

If you retired in mid 2005, was your net worth up by mid 2006, 2007, and possibly even 2008?

Up in 06 and 07, not in 08. By 2013 it did recover to my nominal starting balance.

 

[Andre1969]

Up in 06 and 07, not in 08. By 2013 it did recover to my nominal starting balance.

Yeah, I figured 2008 would be an iffy one. Depending on what part of the year you were picking, it could be possible. For instance, in mid 2008, I was up compared to mid 2007. Sept/Oct/Nov of 2008 took care of that really quickly, though.

 

[Danmar]

I find this an interesting question. The most difficult issue for me is my starting point. Although I retired in 2006 at 56, I still had significant incentive compensation that paid out over the subsequent 5 years. During this period I spent a lot of this comp on real estate My pension started in 2012 when I hit 62 and that is really the beginning of only living off pension and portfolio.

So that is probably the best starting point. Since mid 2012, our portfolio is up about 27%. That makes me feel pretty good.

 

[Independent]

Isn't this where a "healthy" bucket of cash comes in handy?

If the first few years post-retirement result in negative returns:

-- Reduce the withdrawal rate and supplement from cash accounts.

-- Maintain the same withdrawal rate but do not adjust for inflation
again supplementing from cash accounts if needed.

For time periods such as end 2008......suspend withdrawals and take from cash accounts if possible. Of course this requires a large balance in cash/short term investment accounts.

I think the issue is:

"I don't want to reduce spending as soon as the market has a little drop. That's why I started with a 4% SWR, so I'd have some cushion to avoid immediate cuts like that. But, if things are bad enough, long enough, I figure I'll eventually have to bite the bullet. What is 'bad enough'? "

Or maybe, "Historically, if people had started with a 4% SWR, how often would they have found that they had to cut spending at some point?"