Risky now or safe later?

[Finance Dave]

Ok, this is a variation of the "one more year" topic...but let me put a different slant on it.

I'm in a position where I have two choices (actually I have about 20 choices, but for this argument let's assume only 2).

1) I can retire at age 50, follow all the rules about 4% W/D rate, asset allocation of 60/30/10, and LBYM and probably be ok.

2) Retire at age 51, and invest in a much more conservative portfolio of perhaps 20% equities and 80% laddered CDs/MM funds.

For this argument, let's assume the two outcomes produce the same income in retirement.

The obvious con of #1 is that, depending on your risk tolerance, you may have trouble sleeping at night if the market drops precipitously. The upside is obviously one more year of FIRE.

On the other side, option #2 gives you "peace of mind" about much more steady returns...in exchange for working "just one more year."

Another way to look at this is that some of us are complaining today about rates being very low on CDs/MM funds....but with my one extra year of work, this would not be an issue...even at very low rates I'd have enough income...without the volatility of an equity-laden portfolio.

This is not my exact situation...but this type of thinking does enter in. Do I work slightly longer to significantly reduce the volatility/risk in my portfolio?

Dave

 

[arebelspy]

Search the forums for "one more year" for endless discussion on this.

As you note, depends on your risk tolerance and the amount of desire you have to quit working.

 

[Andre1969]

I don't have an answer for you, but I can relate. I think this "one more year" syndrome probably hits a lot of people, as they get closer to pulling the plug. I think the age you intend to retire at might make a big difference. For instance, if you're 40 and pushing it to 41, that's no big deal, but if you're 60 and thinking of pushing it out to 61, you might feel that you don't have such a long life left, and the free time might be worth more than one more year's worth of wages.

In my case, my goal is to retire in 2016, at 46. However, with some erosion in the portfolio, and a few expenses that reared their ugly heads, I'm beginning to re-think that. Firecalc says I have an 86.6% chance of making it if I retire at 46, and start taking SS at 62. But if I push it to 47, I have a 96.3% chance.

With this still being around 5-6 years away, at this point I'll just wait until we get closer, and see how my portfolio is, what my frame of mind is (how much I love/hate my job), etc.

 

[haha]

Ok, this is a variation of the "one more year" topic...but let me put a different slant on it.

I'm in a position where I have two choices (actually I have about 20 choices, but for this argument let's assume only 2).

1) I can retire at age 50, follow all the rules about 4% W/D rate, asset allocation of 60/30/10, and LBYM and probably be ok.

2) Retire at age 51, and invest in a much more conservative portfolio of perhaps 20% equities and 80% laddered CDs/MM funds.

For this argument, let's assume the two outcomes produce the same income in retirement.

The obvious con of #1 is that, depending on your risk tolerance, you may have trouble sleeping at night if the market drops precipitously. The upside is obviously one more year of FIRE.

On the other side, option #2 gives you "peace of mind" about much more steady returns...in exchange for working "just one more year."

Another way to look at this is that some of us are complaining today about rates being very low on CDs/MM funds....but with my one extra year of work, this would not be an issue...even at very low rates I'd have enough income...without the volatility of an equity-laden portfolio.

This is not my exact situation...but this type of thinking does enter in. Do I work slightly longer to significantly reduce the volatility/risk in my portfolio?

Dave

If your job is not driving you toward suicide, yes, work one more year, or 2 more, or ...

Ha

 

[Finance Dave]

I'm 49, and had already planned to wo*k to 52...so this would push me to 53. Still considering.

Of course the other option is working two more years and buying a new sports car.

Or three more and buying a boat. Hey wait a minute...this is stretching out too far.

 

[ERD50]

It's hard to see how one more year can alter your position so much. Maybe, maybe if you have a very high income, and a very high savings rate, and very low retirement expenses. I would think it would take at least an added 10% to my portfolio to change my 'feelings' - can you add that (OK, 6% if you factor not taking the 4% out that year). So you'd need to save 1.5x what your retirement expenses are. I guess that is possible with a high income, low working expenses.

And what makes you think 20% Equities would be safer? Run FIRCALC with that and see. Below 40% Eq is starting to get 'risky' again, from what I've seen. I don't think an extra 10% in the portfolio would positively offset the lower gains from fixed income (as shown by FIRECALC).

If you are that worried about portfolio survival, I wouldn't be looking at 4% WR at age 50. That 'SWR' rate means 5% failures by age 80, historically. It's likely to look worse with 20% equities.

-ERD50

 

[LARS]

IF working one more year would drop your investment "risk" from 60% equities to 20% to realize your desired income level then I would say it is a no-brainer to work one more year.

Whether you choose to make your portfolio "less risky" once in retirement is a different decision.

 

[youbet]

And what makes you think 20% Equities would be safer? Run FIRCALC with that and see. Below 40% Eq is starting to get 'risky' again, from what I've seen.
-ERD50

+1

Low equity allocations lead to risks of their own. And historically, as shown by FireCalc runs, lower volatility doesn't necessarily lead to "safer" outcomes. I did a number of trial runs where I modified my model with successively lower equity allocations all the way to zero. As I recall, the distribution tightened up for a while but the slope downward of the bottom lines became steeper eventually resulting in some failures where I'd had none with a 50/50 AA.

Perhaps it's the fact that I was only using the standard S and P 500 and 5 yr Treasury investments and using TIPS or some other fixed investments might have helped.

 

[2soon2tell]

I vote for door # 1.

The future is unknowable so if you can afford to retire now then I would do it. You can always go back to work on a part-time basis if income becomes an issue.

Just my $.02 but I gusess with inflation soon to rear it's ugly head it will soon be a nickel.

2soon2tell

 

[chinaco]

Given the information provided and no reason to expect an early death... I would choose option 2.

 

[FIREd]

One extra year of work might allow you to cut your equity allocation from 60% to maybe 58-59%... But 20%? I don't think so. Or at least, you shouldn't expect a similar outcome.

If you can't stand the job anymore, take the risk. If you want peace of mind, keep working.

 

[W2R]

A lot depends on your personal risk tolerance, and nobody but you can predict what that would be.

Now if I were in your position, I'd keep working. I am way, way, WAY too much of a security junkie to want to maintain that type of AA into retirement. Part of what makes me happy in retirement is not having to worry about whether or not I will have the money to cover my bare bones expenses next month on into the foreseeable future.

At least, not yet. Now in the (hopefully unlikely) event that SS completely craters and we have massive inflation, I might need to get inventive.

 

[Moemg]

I would vote for staying another year or two to pad your portfolio .It's easier to stay at the job then quit and realize it was a mistake and find another job.

 

[neihn]

Or three more and buying a boat. Hey wait a minute...this is stretching out too far.

I would work three more years and buy a boat. A retireee with a boat, wow ;-)

 

[GregLee]

1) I can retire at age 50, follow all the rules about 4% W/D rate, asset allocation of 60/30/10, and LBYM and probably be ok.

2) Retire at age 51, and invest in a much more conservative portfolio of perhaps 20% equities and 80% laddered CDs/MM funds.

Does Door #2 preclude Door #1? That is, if you were to decide to work an extra year, but something bad at work happened, could you change your mind and not do that extra year? If it's not an irrevocable decision, that makes #2 more attractive.

 

[easysurfer]

I FIRE'd at 47. If I roughed it out for three more years (til end of 2011) I would have been better off as far as benefits and pension. But for me, the extra three years felt like an eternity so when the window of opportunity presented itself, I jumped through the window.

I think the key is to have a talk with your "heart of hearts" (yourself, not someone who says you "should or shouldn't do this or that") and knowing that whichever path you choose it was your call, your decision.

It's kind of like the constestants on "Who Wants to Be a Millionare?" Given the choice, do you stick around and try and play one more round to get some more loot? Or do you cash in your chips on the table? Either way, find peace in your choice.

 

[Coolius]

I retired in April at 60. I had been working part time for a few years prior to that, but was offered a job that paid well and was what I liked. That was in 2007.

Fast forward 3 years, I was really exhausted with the 45 minute commute, late evening conference calls, ( I was managing the company's Asia Pacific business ), and long travel. The last 6 months were especially tough, I kept telling myself that I would work one more week, and then when Friday arrived, I told myself one more week, and so on, and so on....

The final straw was when a friend who had been postponing his retirement ( like me ) had a heart attack and died at his desk. He never got to realize his dream of traveling and just doing low stress volunteer work. His wife never got the chance to have her husband completely to herself.

When I attended his funeral, the CEO of the company gave a long speech about Bob's incredible loyalty commitment and work ethic, the long hours, the deadlines met time & again. He said that the best thing the company could do was to ensure Bob's legacy would be kept alive by making the product line he was managing, a success.

Just about walked out of there in disgust. No mention about the wife and the children. No mention about their loss, and the fact that the company took away the husband and father from that family, left to carry on without a loved one. It was all about the product, the company.

None of us know when our earthly journey will end. Disease, accident, crime, or whatever - we just don't know when the final breath will come.

I say, if you feel comfortable retiring now, and calculations support it ....take it. You work hard in the accumulation phase, make sure you take time to enjoy what you built up.

 

[Nords]

Do I work slightly longer to significantly reduce the volatility/risk in my portfolio?

No, because the rewards are still less than the incremental reduction in volatility risk.

In the first place, you're limiting your choices to the constraints of a retirement calculator that doesn't account for variable spending, let alone the possibility of part-time work.

Second, if you're that close to the ragged edge of retirement ruin, maybe it's worth annuitizing part of your income to insulate you from most of the volatility risk.

Finally you're contemplating another year of workplace stress, of not being around for your family as much as you want, of further compromising your health, and of missing all the opportunities that retirement affords. Or at least the opportunities it should afford, if only you knew how much time you had left.

But then I kept my mortgage in ER, too.

 

[haha]

The final straw was when a friend who had been postponing his retirement ( like me ) had a heart attack and died at his desk. He never got to realize his dream of traveling and just doing low stress volunteer work. His wife never got the chance to have her husband completely to herself.

I definitely understand your disgust with the funeral. Funerals are good at that .

But blaming the company for his MI seems like a stretch. Heart disease is more common among society's losers than among its winners. My former grass cutter keeled over at his mower. You don't get paid for doing nothing, and it seems that whatever you do there is some stress involved, if only dodging bill collectors and trying to hold your head high when your neighbors have all been checking and know that you are behind on your proerty taxes. (Thanks board for educating me about this little passtime)

Ha

 

[Finance Dave]

IF working one more year would drop your investment "risk" from 60% equities to 20% to realize your desired income level then I would say it is a no-brainer to work one more year.

Whether you choose to make your portfolio "less risky" once in retirement is a different decision.

Thanks...yes one year makes a big difference in my situation.

+1

Low equity allocations lead to risks of their own. And historically, as shown by FireCalc runs, lower volatility doesn't necessarily lead to "safer" outcomes. I did a number of trial runs where I modified my model with successively lower equity allocations all the way to zero. As I recall, the distribution tightened up for a while but the slope downward of the bottom lines became steeper eventually resulting in some failures where I'd had none with a 50/50 AA.

Perhaps it's the fact that I was only using the standard S and P 500 and 5 yr Treasury investments and using TIPS or some other fixed investments might have helped.

I have run it through FIREcalc and it plays out. If I did work an extra year, then I'd be investing at about 2-3% safe returns, and would not be spending all I made...I'd continue to push some of the earnings back into retirement savings.

One extra year of work might allow you to cut your equity allocation from 60% to maybe 58-59%... But 20%? I don't think so. Or at least, you shouldn't expect a similar outcome.

If you can't stand the job anymore, take the risk. If you want peace of mind, keep working.

It's quite extraordinary the difference. Yes I have a high income, so one year makes a huge difference. Also, that's one less year I have to rely on my savings for. My DW also works and makes a very good income. Let me say it this way....by extending one more year, I can easily add $230k to my savings amount. Of this, $80k is from our salaries (yes, we save $80k/year), $50k is from amounts our employers contribute to our retirement accounts, and $100k is anticipated growth from our portfolio. Combine that $230k additional to the fact that all FIREcalc numbers require one fewer year of support...then the math works.

A lot depends on your personal risk tolerance, and nobody but you can predict what that would be.

Now if I were in your position, I'd keep working. I am way, way, WAY too much of a security junkie to want to maintain that type of AA into retirement. Part of what makes me happy in retirement is not having to worry about whether or not I will have the money to cover my bare bones expenses next month on into the foreseeable future.

At least, not yet. Now in the (hopefully unlikely) event that SS completely craters and we have massive inflation, I might need to get inventive.

My risk tolerance has been quite high most of my life...but I'm finding as I get closer to rehirement, I am rapidly changing. Currently we're about 80% equities at age 49, and I plan to dial back to 60% over the next 12 months...and possibly further depending on what we decide.

I would work three more years and buy a boat. A retireee with a boat, wow ;-)

LOL

Does Door #2 preclude Door #1? That is, if you were to decide to work an extra year, but something bad at work happened, could you change your mind and not do that extra year? If it's not an irrevocable decision, that makes #2 more attractive.

No, it does not preclude. I could "duck out" any time I like. There are some significant "timing" issues in that we earn variable compensation annually that's paid out in March...and if you don't stay until after the payout date, you get ZERO...so it's highly unlikely I'd FIRE in the latter half of the year or prior to March the following year...April/May is the perfect time to FIRE!

 

[Finance Dave]

I retired in April at 60. I had been working part time for a few years prior to that, but was offered a job that paid well and was what I liked. That was in 2007.

Fast forward 3 years, I was really exhausted with the 45 minute commute, late evening conference calls, ( I was managing the company's Asia Pacific business ), and long travel. The last 6 months were especially tough, I kept telling myself that I would work one more week, and then when Friday arrived, I told myself one more week, and so on, and so on....

The final straw was when a friend who had been postponing his retirement ( like me ) had a heart attack and died at his desk. He never got to realize his dream of traveling and just doing low stress volunteer work. His wife never got the chance to have her husband completely to herself.

When I attended his funeral, the CEO of the company gave a long speech about Bob's incredible loyalty commitment and work ethic, the long hours, the deadlines met time & again. He said that the best thing the company could do was to ensure Bob's legacy would be kept alive by making the product line he was managing, a success.

Just about walked out of there in disgust. No mention about the wife and the children. No mention about their loss, and the fact that the company took away the husband and father from that family, left to carry on without a loved one. It was all about the product, the company.

None of us know when our earthly journey will end. Disease, accident, crime, or whatever - we just don't know when the final breath will come.

I say, if you feel comfortable retiring now, and calculations support it ....take it. You work hard in the accumulation phase, make sure you take time to enjoy what you built up.

Yes, I know how that goes....I work for a Fortune250 company and have seen a dozen or so people pass before their time...near the time they should be leaving the wo*kforce. I'm only 49, so it's not like I'm contemplating rehiring at 70...but a year is a year...point well taken.

No, because the rewards are still less than the incremental reduction in volatility risk.

In the first place, you're limiting your choices to the constraints of a retirement calculator that doesn't account for variable spending, let alone the possibility of part-time work.

Second, if you're that close to the ragged edge of retirement ruin, maybe it's worth annuitizing part of your income to insulate you from most of the volatility risk.

Finally you're contemplating another year of workplace stress, of not being around for your family as much as you want, of further compromising your health, and of missing all the opportunities that retirement affords. Or at least the opportunities it should afford, if only you knew how much time you had left.

But then I kept my mortgage in ER, too.

I'm no where near the edge of retirement ruin...not sure where that came from. My plan does include annuitizing a portion of my income. I plan to annuitize the portion needed to support BASIC expenses such as food/utilities/housing/medical premiums, and the rest would be left to float...and yes I'd employ a variable spending philosophy either way. It's just that with the high equities strategy, the variable piece could move considerably, which may cause my lifestyle to also swing...whereas the other option would give me a much lower swing of portfolio values.

 

[Nords]

I'm no where near the edge of retirement ruin...not sure where that came from.

Sorry, missed this last time through.

My point wasn't limited specifically to your situation. My point is that if any retirement plan is jeopardized by a single point of failure (whatever that may be) then it's worth annuitizing a portion of the portfolio to provide a safety net. For some that may be just Social Security. For others, particularly in Otar's "red light zone", it may be a substantial portion of their assets.

Only after taking the annuity step to adding a margin of safety, if the plan still had too high a risk of failure, would I consider "just one more year" a good idea.

 

[Finance Dave]

Sorry, missed this last time through.

My point wasn't limited specifically to your situation. My point is that if any retirement plan is jeopardized by a single point of failure (whatever that may be) then it's worth annuitizing a portion of the portfolio to provide a safety net. For some that may be just Social Security. For others, particularly in Otar's "red light zone", it may be a substantial portion of their assets.

Only after taking the annuity step to adding a margin of safety, if the plan still had too high a risk of failure, would I consider "just one more year" a good idea.

Thanks for clarifying Nords