Recession-proofing a retirement

[Nords]

Linda Stern has a lot of freelance financial-management articles regurgitated on Reuters & MSN.com. She's no evangelical Scott Burns but I like her writing.

Here's a review of T. Rowe Price's retirement/recession statistics and suggested methods for retiring into one.

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There are about four billion retirement calculators out there, and they all agree on one thing: It's bad when you have to retire into a recession. Folks who start out their non-working years by losing money in the market can fall irretrievably behind.

Recession-proofing retirement | Money | Reuters

Not surprisingly they recommend delaying retirement (if that's an option), staying calm (also optional), deferring or cutting spending, and rebalancing.

Guaranteed bad ideas include blissfully following the fixed Trinity-method 4% SWR (with inflation increases) and going to cash/bonds...

[Milton]

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If you've just retired, chances are you've already got some idea of what you'll live on going forward.

Well, I would hope so, anyway! But there are a lot of clueless people out there ...

[jIMOh]

This makes sense to me.

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"Poor market performance or outright losses in the first five years significantly increase the chances of a retired person outliving his money during a 30-year retirement," the study said.

Firecalc (past results) can show what happens in the past. I have read where if 2000-2002 came before 1997-2000, the amount of money people would have would be much less. Meaning just take returns from 2002, then 2001, then 2000 then 1999 etc and run them backwards, and planning with a tool like firecalc is giving only a partial picture.

It's not the 4% SWR which is being questioned. It's the impact of the down market early in the withdraw cycle- it's pointing towards firecalc and related calculators.

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The T. Rowe Price analysis, and much of the company's retirement advice, is based on the idea that retirees will take 4 percent of their account's value in withdrawals during their first year of retirement and then increase their withdrawals by 3 percent a year to cover the rising cost of retirement living. That's a fairly conservative formula. It aims to give retirees 30 years of rising income and doesn't count on any other financial relief, like income from selling a home or decreased spending in later years of retirement.

[DblDoc]

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-- Make little changes, not big ones. If you've just retired, chances are you've already got some idea of what you'll live on going forward. If you feel like you're running out of money too fast, make adjustments around the edges, but don't dramatically alter your plan. Time and time again, the market rewards those who stick with their investment plans and avoid the urge to take drastic action.

This is probably one of the more important tips but likely the hardest one to follow.

DD

[jIMOh]

it should be noted in some ways what is a problem for a normal retirement might be catastrophic for FIRE. Or FIRE might be less of an issue because there is more money there to begin with with more time to make up the gains (40-50 years instead of 30?).

I plan to recession proof my FIRE with about 9 years expenses in cash. Goal is 5 for normal retirement, so 9 when I FIRE gives me a 4 year cushion if it's a bad bear.

If market goes up, I'll spend one and reinvest another, knocking me down to 7. If it goes up again I will spend a third and reinvest another, knocking me down to 5. It market goes down, just spend one and not reinvest the other

[Bestwifeever]

Not having retired yet but also not having received a raise in several years, it will be relatively easy for us to leave out the second part of this calculation re increasing withdrawals:

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retirees will take 4 percent of their account's value in withdrawals during their first year of retirement and then increase their withdrawals by 3 percent a year to cover the rising cost of retirement living

Also, some people on this board have the majority if not all of their retirement assets in cash and/or bonds or the equivalent, not in equities, which the article implies is a course for disaster. Right now about half our retirement assets are in equity index funds and we'll probably keep it at that--someone who is 100 percent in cash/bonds already probably would keep it at that, I imagine?

[A854321]

I was watching a serious news discussion last night and the guest was discussing taxes and the next administration.

Get ready- higher taxes across the board are predicted. Another factor to consider in retirement planning.

[Patrick]

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Originally Posted by Bestwifeever Not having retired yet but also not having received a raise in several years, it will be relatively easy for us to leave out the second part of this calculation re increasing withdrawals: Also, some people on this board have the majority if not all of their retirement assets in cash and/or bonds or the equivalent, not in equities, which the article implies is a course for disaster. Right now about half our retirement assets are in equity index funds and we'll probably keep it at that--someone who is 100 percent in cash/bonds already probably would keep it at that, I imagine?

Even Bogle was on CNBC a couple weeks ago saying that this is a good time to be in bonds.

[DblDoc]

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Originally Posted by Patrick Even Bogle was on CNBC a couple weeks ago saying that this is a good time to be in bonds.

Bogle would advocate always being in bonds as part of your AA. I doubt very much he was telling everyone to sell all their equities and buy bonds instead.

DD

[Patrick]

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Originally Posted by DblDoc Bogle would advocate always being in bonds as part of your AA. I doubt very much he was telling everyone to sell all their equities and buy bonds instead. DD

Could be. He wasn't explicit. He and the host were talking about how bad stocks had done recently. She asked him what to do now and he said it's a good time to be in bonds. He didn't say sell your stocks. He just looked kind of defeated.

[Rich_by_the_Bay]

Actually, it's a lot less stressful if you have piled up on cash in pre-recession years.

Times like this validate my stodgy plan. Got about 10-12 years in cash and bonds, just working on topping off the totals as I approach semi-FIRE.

Recession proof? No way, but no sense of urgency either.

[Patrick]

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Originally Posted by Rich_in_Tampa Actually, it's a lot less stressful if you have piled up on cash in pre-recession years. Times like this validate my stodgy plan. Got about 10-12 years in cash and bonds, just working on topping off the totals as I approach semi-FIRE. Recession proof? No way, but no sense of urgency either.

Are you keeping your cash anywhere special to maximize returns?

[Rich_by_the_Bay]

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Originally Posted by Patrick Are you keeping your cash anywhere special to maximize returns?

Lots of short term federal bonds, some MMF; moving up the scale to "real bonds" I don't go out longer than about 5 yrs; have a dollop of TIPS for that occasion.

[youbet]

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Originally Posted by jIMOh it should be noted in some ways what is a problem for a normal retirement might be catastrophic for FIRE. Or FIRE might be less of an issue because there is more money there to begin with with more time to make up the gains (40-50 years instead of 30?). I plan to recession proof my FIRE with about 9 years expenses in cash. Goal is 5 for normal retirement, so 9 when I FIRE gives me a 4 year cushion if it's a bad bear. If market goes up, I'll spend one and reinvest another, knocking me down to 7. If it goes up again I will spend a third and reinvest another, knocking me down to 5. It market goes down, just spend one and not reinvest the other

Assuming your 9 yrs of expenses in cash represents about 25% of your assets, you might be opening yourself up to the risk of sustained high inflation........

[Notmuchlonger]

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Originally Posted by youbet Assuming your 9 yrs of expenses in cash represents about 25% of your assets, you might be opening yourself up to the risk of sustained high inflation........

Thats the key. Get more than you really need to ever spend. Slap it in fixed income. Wallah! problem solved

[kumquat]

While I can't really argue with their suggestions, I thought the 4% rule would survive ~95% of historic recessions/depressions. Can they see the future?

[Rich_by_the_Bay]

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Originally Posted by kumquat While I can't really argue with their suggestions, I thought the 4% rule would survive ~95% of historic recessions/depressions. Can they see the future?

Yes, it probably would. Easy to forget that in a recession, your startup 4% would be less than what it would be at a peak market; that humbling of the withdrawals should give you some buffer. If you can live off that you will feel rich when the market recovers. If not, I'd hold off or find an income stream.

Most of us will probably run into this again someday long after we retire or have income options.

[DblDoc]

The other thing to remember is that alot of those 4% + inflation SWR projections are "static" and don't take into consideration strategies like Rich and jIMOH have in place to further push the odds in their favour. You should have a plan for dealing with a bear market - especially one that strikes early in retirement - and doubly so if you have no COLA'd pension to fall back on.

DD

[youbet]

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Originally Posted by Notmuchlonger Thats the key. Get more than you really need to ever spend. Slap it in fixed income. Wallah! problem solved

Yeah..... It does seem like some of the folks suggesting high cash or near-cash allocations are also advocating having more than 25X spending plan at retirement time. That is, having a FIRE portfolio that is 25X spending plan PLUS 5 - 10 years of cash. Well...... duh..... I'd have to agree. Having more money helps!

[youbet]

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Originally Posted by DblDoc You should have a plan for dealing with a bear market - especially one that strikes early in retirement - and doubly so if you have no COLA'd pension to fall back on.

And you should have a plan for dealing with high, sustained inflation. When doing FireCalc runs, I like to do some testing where I override the default CPI choice and plug in some high numbers just to see how historically my AA would have done with high inflation beyond the period of high inflation we had in the 70's/80's.

FireCalc is a super tool for back testing your plans. But it is an historical test, back testing, not projecting. Personally, I think the average rate of inflation going forward for my retirement years is going to be higher than historical trends. So I'm neverous about carrying large percentages of cash in my AA.

I went into retirement about 60/35/5. The 60 contains some effort to be defensive vs inflation. The 35 contains significant relatively stable (vs. equities) fixed investments including instruments with maturity dates and the 5% is cash/near cash.