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

[pb4uski]

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]

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]

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]

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]

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]

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-...is-a-rising-equity-glidepath-actually-better/

 

[Dtail]

IIRC, I also read as another guidance that one should have at least 60% of their initial portfolio expressed in real terms after 10 years.
Additionally, I believe that for the portfolios which failed the 4%WR after 30 years, each one of them failed to have at least an average yearly return of 2% expressed in real terms.

 

[pb4uski]

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.

Yes, that is one strategy... rising equity glidepath... you carve or bucket out 5 years of spending in a CD ladder or the like and use that in the first 5 years... the remainder grows even if returns are lower than average because there are no withdrawals.

 

[timetraveling]

I enjoyed this post from earlier this month.

http://www.early-retirement.org/forums/f28/probability-of-success-at-varying-equity-aa-101694.html

We are spending 2.75-3.25% of our portfolio each year depending on the year.

Retired early, I think SORR is always present unless one can assume they (and/or their spouse) have less than 30 years of life remaining.

 

[KarenF]

Going to retire this year at 59. I may have waited too long but I don't want to wait any longer. I am worried about SORR though.

 

[Dtail]

Going to retire this year at 59. I may have waited too long but I don't want to wait any longer. I am worried about SORR though.

What's your net WR%
If it is 3% and under, you basically have a perpetual WR% based on historical sequential returns.

 

[pb4uski]

Also, what is your asset allocation?

 

[RobLJ]

I'll turn 62 in a few months, but the worry period was when I semi-retired and moved to Reno at 57. Returns were good enough for me to tell my DW to retire two years ago.
I was sweating the period from then to 66 (full SS retirement age), but I've got 4 years of withdrawals in cash/short term bonds. I probably won't be renewed for my online part-time gig (term is usually no more than 5 years), but with the growth of the portfolio and cash/bonds, I figure we're now good with the cash stash until SS age. When DW qualifies (she's 4 years younger), the problem probably will be how to spend 4% SWR.
I think making it to 65-70 with a SWR probably lessens the risk of overdrawing; several grandparents lived into their 90s and Mom is going strong at 86. My bad habits will probably knock off a couple years, at least.

I'm planning on increasing equity % once I start drawing SS. I scraped off 3% of stock gains a couple weeks ago to build up the cash stash and plan to continue doing so if the market keeps going up. We have a lot of slack in the budget (travel, etc), so I could cut back to a bit over 2% withdrawal rate, but would prefer to spend that dough before I'm too old.

 

[67walkon]

I'm in my 8th year of retirement and just turned 70. I was able to delay SS until 70. The retirement accounts are worth more now than last year and more than 8 years ago. My wife wants to replace our flooring which I'm not sure is necessary, but I told her it doesn't really matter.

We're not all that worried about withdrawal rates or timing. If our accounts go down, we have no mortgages and no debt, so we will just spend less.

 

[NotYourAverageJones]

We aren't worried about SORR in retirement. Shocking I know! But the reason is, SORR will only affect our ability to spend on the fun stuff. We also don't plan to follow some specific % withdrawal rate.

The thought process of withdrawing a specific % of assets each year based on ones account value, never made sense to us. It completely restricts your ability to spend much more in your earlier years of retirement, when you are probably going to be doing more, than when you are in your late 70s, 80s, and even 90s... We don't want our retirement to be held hostage by some set % or limited by SORR (market fluctuations.) "Sorry honey, we can't take that amazing vacation we planned this year because the market was down!" That's not our idea of what our retirement should look like.

Because of that mindset, we decided to go against the status quo and do things a bit differently. We simply did some backwards math and made dang sure we will have enough secure, guaranteed recurring income and money set aside by retirement, to fully fund all of our "minimum required living expense" (housing, utilities, transportation, food and healthcare) plus a little extra $ cushion for any "unknowns" thrown in there for good measure. This plan is fully funded, indexed to inflation, tax managed and will continue until the younger of us turns 93. The rest of our investments and savings income is what we consider our "fun money" and we can spend it as fast as we want and on whatever we want, without regret. And when the balance in those accounts go up or down with market cycles, we won't care because we are comforted in knowing that we have all of our minimum living expenses covered for our lifetimes, and that the income for those expenses is secure and not affected by market fluctuations. It makes our pending retirement a lot less stressful knowing our "overall number" and that we are good to go, regardless of the SORR or having to stick to some arbitrary % withdrawal rate.

That said, we are not oblivious to others situation and understand not everyone will be as fortunate as we have been or will have planned it out using the same thought process we are using. But to each their own, right? Retirement is about spending and enjoying your life and how you chose to do that is your business and all that matters.

 

[devans0]

For us, putting off Social Security means that there is a slight risk until we reach 70.5 yrs old.

 

[audreyh1]

For us, putting off Social Security means that there is a slight risk until we reach 70.5 yrs old.

But that risk is mitigated by the ability to easily start SS earlier if needed.

And it’s 70. You don’t gain anything by waiting until 70.5.

 

[GenXguy]

We don't want our retirement to be held hostage by some set % or limited by SORR (market fluctuations.) "Sorry honey, we can't take that amazing vacation we planned this year because the market was down!" That's not our idea of what our retirement should look like.

Because of that mindset, we decided to go against the status quo and do things a bit differently.

If you're using the 4% rule guideline (or what Bengen later changed to the 4.5% rule), you shouldn't have to cut out a planned vacation just because the market it down. You can draw from other assets instead of your stock funds to help bring the AA back where you want it. Down markets are already factored into the rule.

Also, most people say they aren't spending a rigid 4% every year even if they're using the general concept of the 4% rule. I have my retirement drawdown/spending laid out in a spreadsheet, and I do have more spending "allowed" in my younger years, but even those numbers aren't carved in stone, especially with over half of those years' total spending totals being discretionary spending. I might want to take an expensive vacation one year and do much less expensive things for my entertainment another year. I'm only 42% equities, so I won't have to draw from my stock funds if they're down.

 

[Sunset]

But that risk is mitigated by the ability to easily start SS earlier if needed.

And it’s 70. You don’t gain anything by waiting until 70.5.

Won't they lose some money waiting until 70.5 , as SS doesn't do back pay ?

 

[Sunset]

We aren't worried about SORR in retirement. Shocking I know! But the reason is, SORR will only affect our ability to spend on the fun stuff. We also don't plan to follow some specific % withdrawal rate.

....
Because of that mindset, we decided to go against the status quo and do things a bit differently. We simply did some backwards math and made dang sure we will have enough secure, guaranteed recurring income and money set aside by retirement, to fully fund all of our "minimum required living expense" (housing, utilities, transportation, food and healthcare) plus a little extra $ cushion for any "unknowns" thrown in there for good measure. This plan is fully funded, indexed to inflation, tax managed and will continue until the younger of us turns 93....

Sounds like some combination of SS, pension, and annuity.

If it is that, possible issues are:
SS is not really indexed to inflation. What if it gets cut 20%.
Company pensions can disappear, although some are insured at least partially.
Annuities depend upon the insurance company, failures are rare, but the time horizon is very long.

 

[Animorph]

Only read about half of this thread so far, so just jumping in here.

To me SORR is over when your inflation adjusted withdrawal is something like 2%-3% of your current portfolio, if you are following the normal 4% scheme. You are past the 4% initial stage and your portfolio is growing. You can withstand a normal market downturn.

How you reach that point is a problem. Lots of bonds may never get you there. To many equities may crash early.