How long until sequence of returns risk no longer a concern?

[Andre1969]

Quote:

Originally Posted by garyt I thought the 4% rule took into effect sequence of returns risk? So I guess I'd say you don't have to wait. That's why many people say 4% is too cautious. Having said that I just retired last year and having such a great year this year sure makes me feel better. Another up year ( just decent) will go a long way to make me feel really good.

It does take sequence of returns risk into account. That's why 4% adjusted for inflation for 30 years gives you a 95% chance of success, and not 100%. 5% of the cycles that were back-tested failed. Most likely, those were cycles that had a bad sequence of returns early in the cycle.

If you run that calculation through FireCalc, it has 119 30 year cycles to pull data from. 6 of them failed, and 113 passed. However, it should be noted that, at the end of 30 years, a good deal of the cycles are trending steadily downward, and even though they're technically a "success" for 30 years, they're pretty much guaranteed to be doomed to failure a few years later.

[TheWizard]

After you start SS at age 70, SoR risk becomes much less of a concern.
I had seven years of retirement prior to age 70 and if a crash had happened early in that span, it would have upset my plan.
Fortunately, things worked out fine and I have now won the game...

[COcheesehead]

I heard a good guide on a Deep Pockets podcast not too long ago.
When your expenses as a percentage of your portfolio starts to approach the dividend rate of your portfolio, you can move more into equities.

[Chuckanut]

Quote:

Originally Posted by RxMan To me, the bigger worries or threats to prosperity are the more gradual but constant destroyers of wealth such as inflation and/or taxes. Those can eat up a large percentage of wealth and/or buying power and they are much more of a constant yearly threat rather than a singular major market correction assuming there isn’t a massive long term downturn in the markets.

+1

[big-papa]

Quote:

Originally Posted by Andre1969 It does take sequence of returns risk into account. That's why 4% adjusted for inflation for 30 years gives you a 95% chance of success, and not 100%. 5% of the cycles that were back-tested failed. Most likely, those were cycles that had a bad sequence of returns early in the cycle. If you run that calculation through FireCalc, it has 119 30 year cycles to pull data from. 6 of them failed, and 113 passed. However, it should be noted that, at the end of 30 years, a good deal of the cycles are trending steadily downward, and even though they're technically a "success" for 30 years, they're pretty much guaranteed to be doomed to failure a few years later.

Others have said it, but just to repeat it. It only gives you the probability of success if you had both started and completed a retirement in the past. It is not a law-of-the-universe type of concept. Not every possible sequences of returns (or more importantly, reasons for those sequences) have occurred in the past.

[audreyh1]

Since I retired a bit over twenty years ago, you’d think I feel like SORR is passed (especially surviving 2000-2002 and 2008/9). But I don’t, because I just turned 60, so I still have a potentially long retirement and don’t want to run out of money. High valuations for markets always makes me nervous.

Our portfolio has grown significantly since retiring, including after inflation. We use a variable income method, the simple constant %remaining portfolio method for withdrawals. Even though our portfolio has grown so much, so proportionally have our withdrawals. We are protected from SORR due to our withdrawals which will drop with portfolio losses, but I still had to carefully study the issue to determine how low our portfolio could possibly drop and thus our income. It typically comes down to something like a potential inflation adjusted drop of 55% or even more depending on rate and AA - and it can take well over a decade to get there - 17 years in some scenarios!

So you have to take a hard look at how to handle this varying income stream. Having a high percentage of discretionary expenses (being able to cut back aggressively when necessary) is certainly a good idea, as is perhaps not ramping up your spending as aggressively as your portfolio grows during the good times, and perhaps allowing excess income to accumulate to help tide over the bad times.

Anyway, I never trusted using the inflation adjusted income traditional method, and opted for a method that rises and falls with the portfolio. And then I had to come up with ways (that I felt comfortable with) to reasonably handle the income variability including a potentially nasty sequence of shrinking income over a long period. Potential for that last part never goes away, but is at least mitigated by the retirement period gradually shortening.

[big-papa]

Quote:

Originally Posted by audreyh1 Since I retired a bit over twenty years ago, you’d think I feel like SORR is passed (especially surviving 2000-2002 and 2008/9). But I don’t, because I just turned 60, so I still have a potentially long retirement and don’t want to run out of money. High valuations for markets always makes me nervous. Our portfolio has grown significantly since retiring, including after inflation. We use a variable income method, the simple constant %remaining portfolio method for withdrawals. Even though our portfolio has grown so much, so proportionally have our withdrawals. We are protected from SORR due to our withdrawals which will drop with portfolio losses, but I still had to carefully study the issue to determine how low our portfolio could possibly drop and thus our income. It typically comes down to something like a potential inflation adjusted drop of 55% or even more depending on rate and AA - and it can take well over a decade to get there - 17 years in some scenarios! So you have to take a hard look at how to handle this varying income stream. Having a high percentage of discretionary expenses (being able to cut back aggressively when necessary) is certainly a good idea, as is perhaps not ramping up your spending as aggressively as your portfolio grows during the good times, and perhaps allowing excess income to accumulate to help tide over the bad times. Anyway, I never trusted using the inflation adjusted income traditional method, and opted for a method that rises and falls with the portfolio. And then I had to come up with ways (that I felt comfortable with) to reasonably handle the income variability including a potentially nasty sequence of shrinking income over a long period. Potential for that last part never goes away, but is at least mitigated by the retirement period gradually shortening.

With a fixed percentage of remaining portfolio method, you don't have SORR. You have SOIR (see my post upstream).

SORR usually refers to risk of prematurely depleting your portfolio. SOIR (which started being used on bogleheads recently) refers to having a withdrawal below your minimum required to pay your bills in any year. Not quite standard terminology yet, I know, but I like it.

[audreyh1]

Quote:

Originally Posted by COcheesehead I heard a good guide on a Deep Pockets podcast not too long ago. When your expenses as a percentage of your portfolio starts to approach the dividend rate of your portfolio, you can move more into equities.

Why would you let your withdrawal % drop?

I suspect I’ll let mine go up as I get older.

[audreyh1]

Quote:

Originally Posted by big-papa With a fixed percentage of remaining portfolio method, you don't have SORR. You have SOIR (see my post upstream). SORR usually refers to risk of prematurely depleting your portfolio. SOIR (which started being used on bogleheads recently) refers to having a withdrawal below your minimum required to pay your bills in any year. Not quite standard terminology yet, I know, but I like it. (BTW, it looks like you hit "return" before getting to the end of your last sentence)

That’s right, I was still editing and accidentally touched the post button. So you could always update the quote if you wanted.

[COcheesehead]

Quote:

Originally Posted by audreyh1 Why would you let your withdrawal % drop? I suspect I’ll let mine go up as I get older.

The key being expenses or your base amount you need to get by, not total withdrawals. I agree those should go up as we get older.

[pb4uski]

Quote:

Originally Posted by RunningBum I don't see how it can be X number of years in an ER world. It's got to be longer for a healthy 40 yo than a 60 yo. A strong bull market could end SORR for all but not a so-so run. I would look at how many years left as the guide.

I don't think so RB.... go back and look at post #11. SORR is principally that returns are below average during the first 5 or so years... say 5-10 years because if returns are average then each year the portfolio is building so therates of withdrawals is becoming progressively lower because withdrawals grow at inflation but the portfolio grows at 2-3 times inflation... so after a number of years of normal growth the withdrawals are much lower.

So I'm thinking if you start out at 4% WR and adjust withdrawals for inflation after 5-10 years of average returns you are golden.

[Dtail]

Quote:

Originally Posted by pb4uski I don't think so RB.... go back and look at post #11. SORR is principally that returns are below average during the first 5 or so years... say 5-10 years because if returns are average then each year the portfolio is building so therates of withdrawals is becoming progressively lower because withdrawals grow at inflation but the portfolio grows at 2-3 times inflation... so after a number of years of normal growth the withdrawals are much lower. So I'm thinking if you start out at 4% WR and adjust withdrawals for inflation after 5-10 years of average returns you are golden.

Agree here.
Lewis Clark in post #4 gave an excellent example from Early Retirement Now SORR Part 2 blog.
It really shows a great example how the sequence of returns are much more important than the overall average of returns.

[ER Eddie]

OP here. Thanks for the input. I understand that "it depends" on a lot of different factors. I wasn't really asking for a nuanced, complex analysis of all the variables -- although who am I kidding, of course that's what I'm going to get -- and a list of other things I ought to be worried about instead. I was really just looking for a ballpark estimate of how many years before it's not such a big concern -- all other things being equal, with other parameters set to average values.

Anyhow, it sounds like the ballpark answer is somewhere around 5 years, give or take. Thanks. Carry on.

p.s. It's kind of an academic issue for me, since I'm withdrawing at between 2 and 3%. Still, I wondered.

[wanderingwheelz]

The one thing you absolutely do not want to happen is find yourself in a situation where you’re liquidating stocks when they’re at historical lows. That’s what SORR is- not being diversified enough. That’s why a 60/40 to 40/60 portfolio in retirement is what it considered the gold standard. It leaves you plenty of bonds and cash to rebalance back into depressed stocks each year during a protracted bear market.

The LAST thing you want if your time horizon is long(ish) is to be a forced seller in a grinding bear market. Real wealth is built from buying stocks when they’re historically cheap, not selling them when they’re historically cheap.

Be careful out there boys and girls. This market is historically expensive by any measure. Now is when you want to sell, not some point in the future when the market has more sensible values on offer.

[ncbill]

What I finally did was to move to a levelized income model.

Using MaxiFi to age 100 with a real return on all investments of only around 1% it currently tells me I can spend annually twice on discretionary expenses what I have to spend on "fixed" (non-discretionary)...so I'm re-assured I have plenty of "headroom."

[RunningBum]

Quote:

Originally Posted by pb4uski I don't think so RB.... go back and look at post #11. SORR is principally that returns are below average during the first 5 or so years... say 5-10 years because if returns are average then each year the portfolio is building so therates of withdrawals is becoming progressively lower because withdrawals grow at inflation but the portfolio grows at 2-3 times inflation... so after a number of years of normal growth the withdrawals are much lower. So I'm thinking if you start out at 4% WR and adjust withdrawals for inflation after 5-10 years of average returns you are golden.

But i hear people talk of going less equities for the first 5 years to protect against SORR,which means their returns are likely to be below average,probably just above inflation. For a 65 yo that's fine. For a 50 yo, not necessarily.

On vacation, posting from my kindle which is not as easy as my laptop, nor am i posing or reading as much.

[RobbieB]

I can you I'm positively stoked having 90% equities at start of retirement five and a half years ago. It was with great pain that I added 20% bonds. But I caught so much flak from the conservatives that I doubled my muni's.

Am I happy about that? No, but it gives a bit more stability I guess. Maybe by age 70 I'll make it 70% equities -

[COcheesehead]

Quote:

Originally Posted by RunningBum But i hear people talk of going less equities for the first 5 years to protect against SORR,which means their returns are likely to be below average,probably just above inflation. For a 65 yo that's fine. For a 50 yo, not necessarily. On vacation, posting from my kindle which is not as easy as my laptop, nor am i posing or reading as much.

In a prolonged falling to flat market less equities can actually increase your returns. That is your SORR insurance.

[RunningBum]

Quote:

Originally Posted by COcheesehead In a prolonged falling to flat market less equities can actually increase your returns. That is your SORR insurance.

Of course. But it doesn't mean you're in the clear after 5 years,if you're young ish.

[COcheesehead]

Quote:

Originally Posted by RunningBum Of course. But it doesn't mean you're in the clear after 5 years,if you're young ish.

I actually think its 10 years plus with a rising equity glide path. If you follow Kitces, he says 15 years.
https://www.kitces.com/blog/should-e...tually-better/