Freaking Out over Sequence of Returns Risk

[mbnj77]

Hey all, as the title states, I'm having a real issue with this and just not sure how best to protect ourselves if such protection exists.

Quick snapshot on us. DW and I are almost 53 planning to pull the plug in 2-4 years. On our 55th birthday, based on our savings rate, we should exit with about $800K in 401K and $375K in a diversified brokerage portfolio.

DW is already collecting $47K/yr in a non-cola'd pension. I have an annuity that can start paying about $15K/Yr when I turn 61. (bad decision that but live and learn). SS for both will help out later. The best news is that as she is a retiree from state government, we have health and dental insurance for life at about $100/Month.

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.

So with an annual need of about $80K-85K after taxes, I think we are ok considering her pension will take care of almost have that. BUT, if the market tanks a month after we stop working, I'm worried it will be Home Depot for us. 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. I feel we literally have only one chance in this lifetime to get this right or our retirement will be a hot mess.

Thanks much and please excuse the length of the post.

 

[GTFan]

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.

 

[exnavynuke]

You look like you'd be absolutely fine to me, especially if you can "tighten the belt" that much. Are either of you going to be eligible for SS? If so how much and when? Is the annuity COLAd or fixed?

 

[travelover]

Have you run Firecalc? Sequence of returns is factored in, which is why in most cases you'll die with money left.

 

[RetireAge50]

Our strategy will be to reduce our spending.
If half your income is covered with pensions and the market falls 30% this would only require a 15% reduction. Then when the market recovers you can can go back to the normal spending. Sleep well!!

 

[Lisa99]

I had a fear of running out of money. Last year cured me.

Lost both parents and both beloved dogs in 9 months. The year before I lost a good friend to cancer. She was 47.

Those events shook me up and made me realize that retiring young and healthy was more important to me than "running out of money".

Like you we'll never truly 'run out' due to our income streams but last year made me realize that if things get tight i would rather work later in life, which is a maybe, than give up the freedom I have right now, which is a certainty.

 

[Fedup]

I think you maybe on the cusp. But I agree with Lisa99.

 

[joylesshusband]

What's the survivor's benefit from the wife's pension should either of you kick the bucket the day you retire?

 

[mbnj77]

It's her pension so when I assume room temperature nothing changes.

The state calculated, (somehow), a starting bucket of about 500K. She gets 47K per year which comes from that 500K bucket but once it runs out in about 10 years, the 47K keeps coming until her death. So if she passes before the 500K is depleted, I get what's left in a lump sum. If she passes after the 500k is depleted, I get bupkis.

But frankly, at that point, I will have SS and an annuity and I would downsize as needed so I could get by without the pension. Healthcare at that point is another story....But I believe that will still continue for me.

 

[Blue Collar Guy]

home depot is nice

i prefer to go to the local hardware myself, less confusing. your counting on social security? i think thats the bigger risk, factor social security at 0 then brace urself

 

[OldShooter]

I'm not sure I understand the issue. Is all of your savings invested in stocks? The classic mitigation is an allocation between stocks and fixed income, like 60/40 or 50/50. With that you can ride out a big drop and a several-year market recovery.

When we retired we had more than enough money given recent historical inflation of 2.6% The risk we saw was getting into a period of much higher inflation, which would erode our assets' purchasing power. So we bought a bunch of TIPS, not really as an investment so much as an insurance policy.

I'd suggest that your add inflation to your list of significant risks (sorry!), especially if your non-SS income is fixed in dollar terms. You could easily be looking at a 30 year horizon. At 2.6% inflation, the 30th year buying power of that $47K pension would be down to about $21,800. Less than half.

 

[Blue Collar Guy]

wow, i agree with you 100 %

I had a fear of running out of money. Last year cured me.

Lost both parents and both beloved dogs in 9 months. The year before I lost a good friend to cancer. She was 47.

Those events shook me up and made me realize that retiring young and healthy was more important to me than "running out of money".

Like you we'll never truly 'run out' due to our income streams but last year made me realize that if things get tight i would rather work later in life, which is a maybe, than give up the freedom I have right now, which is a certainty.

i worked 5 years too long just in case, what a huge waste of my life,

 

[Bestwifeever]

I think you may be on the cusp. But I agree with Lisa99.

Me too.

Can you try for a month or two to spend only what is truly necessary and see what your retirement bare bones budget really would be? That will likely reassure you but at least will show you what you need. Then you can decide if you really can or want to tighten your belts or to put in a few more paycheck years.

You are in pretty good shape regardless.

 

[mbnj77]

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.

 

[mbnj77]

Thanks Bestwifeever, I think that is what we need to do. Live on bare bones for a while to make sure we can do it.

 

[kaudrey]

That 35/5 bonds/cash ARE your buffer if the stock markets tank. You use that principal if there is a crash right after you retire, and don't sell the stocks...

 

[Montecfo]

Hey all, as the title states, I'm having a real issue with this and just not sure how best to protect ourselves if such protection exists.

Quick snapshot on us. DW and I are almost 53 planning to pull the plug in 2-4 years. On our 55th birthday, based on our savings rate, we should exit with about $800K in 401K and $375K in a diversified brokerage portfolio.

DW is already collecting $47K/yr in a non-cola'd pension. I have an annuity that can start paying about $15K/Yr when I turn 61. (bad decision that but live and learn). SS for both will help out later. The best news is that as she is a retiree from state government, we have health and dental insurance for life at about $100/Month.

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.

So with an annual need of about $80K-85K after taxes, I think we are ok considering her pension will take care of almost have that. BUT, if the market tanks a month after we stop working, I'm worried it will be Home Depot for us. 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. I feel we literally have only one chance in this lifetime to get this right or our retirement will be a hot mess.

Thanks much and please excuse the length of the post.

I keep more "safe" type money than that. I would prefer to cover 3 years minimum. Plus, my next tier of reinforcements would be my bond funds and conservative equities. How much do you need to feel comfortable?

 

[Corporateburnout]

Run your numbers through FireCalc as it considers sequence of return risk.

With an annual expense of 85K and an income of 47K your WR from your investments is 3.25% then 6 years later your annuity income will drop the rate to 2%. That's pretty conservative.

With SS coming online later and healthcare covered throughout retirement you should be in good shape to withstand any extended negative market returns.

 

[NW-Bound]

I had a fear of running out of money. Last year cured me.

Lost both parents and both beloved dogs in 9 months. The year before I lost a good friend to cancer. She was 47...

Wait till you yourself are diagnosed with a serious illness.

Anyway, I look at my RV as housing of last resort. It's a lot more comfortable than living under a bridge.

 

[daylatedollarshort]

We use a matching strategy with a limited upside but also not much of a sequence of returns risk -

https://www.bogleheads.org/wiki/Matching_strategy

Even at a zero percent real return, if you plan for a 40 year retirement you can safely take out 2.5% a year (100 / 40 years = 2.5%). With a small real return after inflation you can withdraw ~3%. If you plan for 30 years you can withdraw at least 3.33% at zero real return.

We plan our retirement expenses to be <= (2.5% withdrawal rate + pension + Social Security + hobby income).

 

[youbet]

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.

 

[almosttime]

Will SS be affected by WEP and/or GPO? State pension may affect SS

 

[pb4uski]

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/forums/f28/ready-to-build-an-income-plan-85747.html#post1847572

 

[Scuba]

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.

 

[gcgang]

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.