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Old 04-27-2017, 04:38 PM   #21
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I'm asking you all what strategies you may have implemented to mitigate this risk. .
I FIRE'd in mid-2006 and shortly thereafter met the Great Recession face-to-face. My portfolio needed to support about 50% of our expenses at the time which meant a WR of about 2%

My 55/44/1 portfolio had almost zero cash cushion. Total portfolio value eventually dropped about 30%. I never had to sell equities while they were down, not even close. Dividends, interest and a tiny amount of selling (actually I recall a bond maturing) covered our needs. No cut back in spending whatsoever.

It all worked out fine. Having a large cash cushion would have been a waste in 2008/2009. Next time, who knows? Perhaps the recovery will not be as fast and as steep.
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Old 04-27-2017, 04:49 PM   #22
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Will SS be affected by WEP and/or GPO? State pension may affect SS
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Old 04-27-2017, 06:37 PM   #23
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You're all set. Your WR is ~ 3.2% [(85-47)/(800+375)]. Your 40% of bonds and cash would last 12 years with return equal to inflation (40%/3.2%). Most stock market declines are for a few years at most.

Also see this other thread: http://www.early-retirement.org/foru...ml#post1847572
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Old 04-27-2017, 07:59 PM   #24
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Thanks Oldshooter, Should have been clearer. Looking at all of our buckets, pre and after tax included, we are very diversified at 60/35/5 Stocks/Bonds/Cash and will likely go to 50 stocks when we stop. TIPS are included as well. And though Inflation is a concern, given the pension is non-cola'd, some of the risk is reduced, in my mind, by having a very low rate mortgage that has another 27 years to run. That P&I is one very big expense that is NOT subject to inflation risk.

My overall concern is having to withdraw too much principal and risk running out in 20 years if the market is soft or much worse at the beginning. If there is something else I can now to reduce that risk, I want to do it.


What DH & I did is accumulate 3 years of cash flow needs in short-term bonds/cash accounts. The average market downturn lasts 18 months so we felt 3 years was an adequate cushion. About 55% of our spending is mandatory so 45% can be cut or reduced if need be. We have reduced before when we needed to save more or reduce debt so we can certainly do it again if necessary.
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Old 04-28-2017, 12:57 AM   #25
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Don't freak.

You've excellent annuitized income streams and a low WR on portfolio to get desired lifestyle. Sequence risk shouldn't be much of a problem.

If you're going to freak, freak over DW's premature death. Get >$500k life insurance on her, that should make up over 1/2 of the income loss.
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Old 04-28-2017, 03:39 AM   #26
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The correct option if you can't stand the risk is to move to a place where you can easily live on her pension. There's TONS of those places in the USA.
+1. Or at the very least, consider that a back up plan.

If you had to could you:
1. Downsize to a smaller/cheaper home/apt.
2. Get down to one vehicle.
3. Give up luxuries (vacations, eating out, expensive clothes) for a year or two.
4. Put off planned home improvements for a year or two.
etc.
Not do you WANT to live like that, but could you?

We consider such options the worst case scenario. We could do it, and would if needed. Knowing that helps to sleep better.
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Old 04-28-2017, 04:05 AM   #27
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calculators like firecalc only hold true if you don't get whacked early on up front in an extended down turn .

we really have not had that happen as most severe down turns seem to end soon enough like 2008 that they become moot points .

but it can happen and having that extended down turn early on can be like a trader having a string of losses day 1 . they can be quite painful when spending down prior to a good up cycle..

two ways to really protect against that . a rising glide path in to stocks .

you cut allocations going in to retirement early on to about 30% or so and add 2% a year more to stocks getting to your ultimate allocation and then stopping the increase .

or an immediate annuity , so you have a base income that is not sensitive to markets .
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Old 04-28-2017, 04:16 AM   #28
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calculators like firecalc only hold true if you don't get whacked early on up front in an extended down turn .
FIRECalc models based on actual historical market cycles, and that does include periods of extended downturns.
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Old 04-28-2017, 04:33 AM   #29
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nope , nothing extended at the very beginning before an up cycle . even the unlucky great depression retiree recovered in dollar terms in under 5 years .

many periods had downturns early on , but not extended . v-shapped is very different than u-shapped . we have not had a bad u-shaped one early on .

anything longer than 5 years can have pretty long term effects on outcomes . in 2000 bonds ran with the ball and saved them .

today these low rates and high valuations can produce a different story .
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Old 04-28-2017, 04:39 AM   #30
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nope , nothing extended at the very beginning before an up cycle . even the unlucky great depression retiree recovered in dollar terms in under 5 years .

most periods had downturns early on but not extended . v-shapped is very different than u-shapped
I'm not sure if I understand your point. FIRECalc simulations include all historical market performance. So, if you are saying that it doesn't include market cycles that never happened, we agree.

There is no portfolio that can withstand all theoretical future market conditions and circumstances.
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Old 04-28-2017, 04:41 AM   #31
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correct , we have yet to have an early on extended down turn . it is not the drop like the 2008 retiree had , it is the fact even a modest down turn that extends out in time can be very damaging .

after a decent up cycle that no longer is an issue , but if it happens out of the gate that can be a problem . even the great depression retiree was whole again within 5 years in dollar terms
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Old 04-28-2017, 04:55 AM   #32
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There have been market crashes, but in each one the market recovered in the immediate following years. There have also been extended periods of low performance, but they did not begin with market crashes. There has never been a sharp market decline followed by an extended period of poor performance.

That does not mean it cannot happen, but it does mean it is a low probability event, based on history. The fact that we have fiscal and monetary policy tools that influence the behavior of economies and markets probably has something to do with that.

If the OP is concerned about sequence of return risk, the asset allocation should reflect that.
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Old 04-28-2017, 05:31 AM   #33
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That does not mean it cannot happen, but it does mean it is a low probability event, based on history. The fact that we have fiscal and monetary policy tools that influence the behavior of economies and markets probably has something to do with that.

If the OP is concerned about sequence of return risk, the asset allocation should reflect that.
And FIRECALC also includes periods prior to modern fiscal and monetary policy tools such as a few decades before 1920.
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Old 04-28-2017, 05:37 AM   #34
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Firecalc etc also don't model if the US government collapses, or if WWIII wipes out 90% of major cities, or if rampant hyperinflation makes the dollar virtually useless, or any number of nightmare scenarios that "possibly, could, maybe, potentially" happen.

The likelihood of any "never before seen" nightmare scenario, however, is low enough that most reasonable people discount such things in their planning.
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Old 04-28-2017, 05:44 AM   #35
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Best way too get rid of sequence of returns risk is to only take a percentage of remaining portfolio to spend. If you can do that the problem is solved.

A rising equity glide path starting with low stock allocation, also helps.

Having a HELOC or a reverse mortgage to draw on in down years so that you don't have to sell is also a way to avoid it.

Firecalc doesn't include any periods where interest rates were so low and stock PEs so high as the present so we are in a somewhat uncharted territory.
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Old 04-28-2017, 05:55 AM   #36
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Firecalc etc also don't model if the US government collapses, or if WWIII wipes out 90% of major cities, or if rampant hyperinflation makes the dollar virtually useless, or any number of nightmare scenarios that "possibly, could, maybe, potentially" happen.

The likelihood of any "never before seen" nightmare scenario, however, is low enough that most reasonable people discount such things in their planning.
Those risks are hard to quantify, and one cannot do much about these scenarios anyway.

The OP plans to retire at 55. Here's something that has been quantified. And it is also hard to deal with.

The risk of death in the next 10 years for a 55-year old is 71 in 1000 for one who never smokes. That's 1 in 14. For a smoker, it rises to 178 in 1000, or 1 in 5.6.

Source: https://www.ncbi.nlm.nih.gov/pmc/art...1/figure/fig2/
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Old 04-28-2017, 06:17 AM   #37
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We also have $60K in emergency savings that with her pension, should last us 2 years in a down market if we tighten the belt.

Is that two year cushion enough?

I'm asking you all what strategies you may have implemented to mitigate this risk. And if we are indeed doing all we can do, how do you deal with this uncertainty that keeps me up at night. .
The way I look at it, the Great Recession of 2008 lasted less than a year (according to pundits "the worst financial debacle of our lifetime"). Most of us got back what we 'lost' in about 18 months. If that was the worst, keeping that in mind helps me sleep at night.
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Old 04-28-2017, 06:24 AM   #38
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And FIRECALC also includes periods prior to modern fiscal and monetary policy tools such as a few decades before 1920.
i thought i would be the poster child for poor sequencing pay cuts . the day after i retired china cut their currency value and markets plunged . year 2 was no better . now we seem to be recovered
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Old 04-28-2017, 06:26 AM   #39
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Best way too get rid of sequence of returns risk is to only take a percentage of remaining portfolio to spend. If you can do that the problem is solved.

A rising equity glide path starting with low stock allocation, also helps.

Having a HELOC or a reverse mortgage to draw on in down years so that you don't have to sell is also a way to avoid it.

Firecalc doesn't include any periods where interest rates were so low and stock PEs so high as the present so we are in a somewhat uncharted territory.
last thing i would want is mandatory loan payments in a down turn . in 2008 many helocs were closed so they were not much help when you wanted it .
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Old 04-28-2017, 06:28 AM   #40
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last thing i would want is mandatory loan payments in a down turn . in 2008 many helocs were closed so they were not much help when you wanted it .
Very true. Reverse mortgage is better in that respect.
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