Scary SORR Numbers

[Navigator]

Some time ago ER Eddie asked how many years does someone need to be retired before they don’t need to worry about sequence of return risks. It was a good question, but after thinking about it, I realized that I didn’t know the answer. Recently, I took a look at one of the worst years for SORR, 1937, where a 60/40 portfolio would be down in 4 of the first 5 years. Attached is a graph that shows portfolio values per year. The portfolio starts with $1 million and is exhausted at the end of 30 years. The bottom line with square data points is the portfolio value using actual returns from 1937 – 1966, using a 4.5% withdrawal rate. The top line with triangular data points is a reference that uses a constant 2.22% return and 4.5% withdrawal rate.

The results are pretty scary. The SWR for a 30-year retirement was 4.5%, but the portfolio value would be down to about half its initial value after 6 years. I’m a pretty by the numbers person, but even I would be drastically cutting spending if that happened to my portfolio. Even 17 years into retirement, the portfolio value was 35% below its expected value. So the answer to the question of when you don’t need to worry about SORR would seem to be “when you wouldn’t worry if your portfolio value dropped in half in the next 6 years.” For those that keep large wads of cash on hand to spend during market downturns, it looks like you would need 9 years of cash to weather the storm.

 

[CardsFan]

I consider myself fortunate (lucky?) to have retired 5 years ago.

After 5 years of spending, the egg is up 45%. Current WR is 2.5% to 3.5%, but when SS kicks in in a year or two, it will be less than 2% and closer to 1%.

Now at a 55/45 AA, the market would need to drop to zero, and stay there, to really cause a problem. And, if that happened, I suspect the value of our portfolio would be the least of our worries.

 

[OldShooter]

... Attached is a graph that shows portfolio values per year. The portfolio starts with $1 million and is exhausted at the end of 30 years. ...

So mechanically selling equities even into down markets starts to get a little dicey at a 4.5% withdrawal rate when you go out 30 years? Do I understand that right? Is that scary? It seems pretty good to me.

The conclusion I see is that one doesn't have to be very a good at all with SORR market timing to somewhat mitigate that slide. Stop buying when you get a good drop, start buying again when you feel better. And while you're uncomfortable you can spend a little less too.

Another point, if the market fully recovers in 4-5 years, then probably it is mostly recovered in 3-4 years, and so on. It does not drop, then stay down until the recovery year. So, again, timing doesn't have to be very precise to be useful. There is also nothing magic about the market recovering exactly to some totally arbitrary number like its last peak.

 

[corn18]

Did you use real dollars and returns? Wouldn't want to mix those. If all real or all nominal, then a 4.5% WR survives 30 years with the worst starting point in history. That looks like good news to me. I wonder what 4% WR would look like?

 

[Lewis Clark]

Interesting analysis from Early Retirement Now article titled: "When Can We Stop Worrying about Sequence Risk?"

https://earlyretirementnow.com/2020...rying-about-sequence-risk-swr-series-part-38/

Some highlights from this article:

* Strictly speaking, Sequence Risk will be around until you’re done with your withdrawals.

* The conclusion of this exercise is that only about one-third of the variation in the Safe Withdrawal Rate is (statistically) explained by the average return over the retirement horizon, while the other two-thirds come from the sequence of returns.

The 10-year portfolio value gives you a pretty good indicator on the 30-year outcomes (assumes $1 million initial portfolio):

* If after 10 years your portfolio has dropped by more than 50% (in CPI-adjusted terms) you can pretty much kiss “Good Bye” to the idea of vast riches at the end of your retirement. But I was positively surprised that the risk of running out of money increased from 1.8% (unconditionally) to “only” 13.9%. So even with extreme financial stress, you still have a large chance of making it for another 20 years! But chances are you will exhaust more than 50% of your initial capital. That’s fine for traditional retirees, probably not acceptable for early retirees who have to tag on another 20-30 after that initial 30-year window!

* If you’re down between 25 and 50%, you still have a 5% chance of running out. but quite surprisingly, you also had a 10%+ chance of getting all the way up to $2m at the end of the horizon!

* If your portfolio dropped only slightly, by 0-25% after 10 years, you still had a minute probability (0.6%) of running out of money. But you also face a 10%+ probability of severely depleting your portfolio (0-$250k left after 30 years).

* If you manage to preserve or even slightly grow your capital, you’re definitely out of the woods. There were no historical instances where your portfolio fell into the $1-1.25m range after 10 years and you still run out of money.
* Even better, there were no historical cohorts where the portfolio dropped to below $250k after another 20 years!

* And finally, if after 10 years you grow your portfolio by more than 25%, you should definitely splurge a little bit more. Or “risk” a vast overaccumulation of assets after 20 more years!

* So, long story short, if after 10 years you still preserved your capital or at least 75% of it, you should be safe from completely running out of money after 30 years. But again, you still face a vast risk of where your final portfolio will eventually land. That’s due to both average future returns and – even more so – the sequence of returns!

 

[Koolau]

Unless the 4.5% is actually required just to survive in ER, there are always strategies to cope with unfavorable SORR. We've built in a number of "nice to have/do" items in our (so called) budget that would drop like 1st period French class if anything went wrong. Also, our AA is pretty light in equities - it's cost us, but hasn't affected our spending.

Not saying SORR isn't an issue, but there are lots of ways of dealing with it. I don't think any of us would slavishly adhere to our WDR if the market dropped precipitously. As always, YMMV.

 

[Dtail]

Interesting analysis from Early Retirement Now article titled: "When Can We Stop Worrying about Sequence Risk?"

https://earlyretirementnow.com/2020...rying-about-sequence-risk-swr-series-part-38/

Some highlights from this article:

* Strictly speaking, Sequence Risk will be around until you’re done with your withdrawals.

* The conclusion of this exercise is that only about one-third of the variation in the Safe Withdrawal Rate is (statistically) explained by the average return over the retirement horizon, while the other two-thirds come from the sequence of returns.

The 10-year portfolio value gives you a pretty good indicator on the 30-year outcomes (assumes $1 million initial portfolio):

* If after 10 years your portfolio has dropped by more than 50% (in CPI-adjusted terms) you can pretty much kiss “Good Bye” to the idea of vast riches at the end of your retirement. But I was positively surprised that the risk of running out of money increased from 1.8% (unconditionally) to “only” 13.9%. So even with extreme financial stress, you still have a large chance of making it for another 20 years! But chances are you will exhaust more than 50% of your initial capital. That’s fine for traditional retirees, probably not acceptable for early retirees who have to tag on another 20-30 after that initial 30-year window!

* If you’re down between 25 and 50%, you still have a 5% chance of running out. but quite surprisingly, you also had a 10%+ chance of getting all the way up to $2m at the end of the horizon!

* If your portfolio dropped only slightly, by 0-25% after 10 years, you still had a minute probability (0.6%) of running out of money. But you also face a 10%+ probability of severely depleting your portfolio (0-$250k left after 30 years).

* If you manage to preserve or even slightly grow your capital, you’re definitely out of the woods. There were no historical instances where your portfolio fell into the $1-1.25m range after 10 years and you still run out of money.
* Even better, there were no historical cohorts where the portfolio dropped to below $250k after another 20 years!

* And finally, if after 10 years you grow your portfolio by more than 25%, you should definitely splurge a little bit more. Or “risk” a vast overaccumulation of assets after 20 more years!

* So, long story short, if after 10 years you still preserved your capital or at least 75% of it, you should be safe from completely running out of money after 30 years. But again, you still face a vast risk of where your final portfolio will eventually land. That’s due to both average future returns and – even more so – the sequence of returns!

Yeah I read this article. Great article and gives a decent assurance of ultimate results for those that trust historical sequencing scenarios.

 

[RobbieB]

I don't worry about this anymore. And the calculators all agree with me. Cool.

When I retired I did the 30 years and the amount of dough I had and they said I was cool at spending level "X". Spending considerably more than this caused me some anxiety.

But now guess what? I'm almost 7 years older and into my retirement. The dough doesn't have to last as long. Adding to this I have more dough than I started with. I can now "safely" spend 30% more!

So, less time and more dough means I can Blow That Dough -

 

[Montecfo]

A truly *safe" withdrawal rate mitigates SORR. Having some flex in your budget also mitigates it.

But no withdrawal rate is guaranteed to be safe, and SORR never goes away.

All the SWR studies already contemplate SORR. Stated differently one major reason the oft mentioned safe withdrawal rate is 4 percent
and not a higher rate is the need to mitigate SORR.

SORR can be further mitigated by carefully planning your WR and by creating a flexible budget.These items are within your control. Market returns and their sequence is not within your control.

For these reasons I tend to not worry too much about SORR. I view it as a worry that combined with a lower withdrawal rate just conspires to cause you to leave huge sums to heirs.

 

[RobbieB]

Yeah, that's me. I was way above 4% for 5 years and I got more dough now than I started with.

Worry? Worry about what?

 

[2017ish]

We have a fixed percentage withdrawal mode, with (so far) the majority of our spending attribured to, by definition, discretionary travel. SORR only affects the icing on the cake--and no matter how much we love it, it is icing.

 

[NW-Bound]

My stash is now 1.8x its value back 8 years ago when I stopped work.

The WR has also gone down significantly due to Bernicke's effects, and also my wife's taking her SS. I am still holding out for my SS.

Dare I say SORR is not longer a problem for me?

 

[Koolau]

For several years, I kept adding "one more year" to my plan (you know, the plan is always for 30 MORE years.) It's actually quite liberating when you realize that you no longer have to make your plan for 30 more years (I'm down to 26 years which would make me 100). SORR be darned! YMMV

 

[audreyh1]

My stash is now 1.8x its value back 8 years ago when I stopped work.

The WR has also gone down significantly due to Bernicke's effects, and also my wife's taking her SS. I am still holding out for my SS.

Dare I say SORR is not longer a problem for me?

Feels like tempting fate, doesn’t it?

I just point out that we’ve had a very extended bull run in spite of the Mar-May downdraft (yet rapid recovery).

 

[marko]

My stash is now 1.8x its value back 8 years ago when I stopped work.

I'm about 1.8x myself after 15.5 years despite my WR having been in the 5%-6% range for a few of those years, although my average WR is about 4%. (a 10% splurge for 2020 but that was an exception due to building a new house)

 

[Time2]

We've only been retired two years, (living off nest egg). The first two years we spent close to 7%, because of large tuition payments. Even so, after two years I'm Up 23%. One more year of tuition, with the present value of our nest egg, our WR will drop to 2.2%. I can hardly wait.
I might have to join the blow that dough thread.

 

[Trooper]

I consider myself fortunate (lucky?) to have retired 5 years ago.

After 5 years of spending, the egg is up 45%. Current WR is 2.5% to 3.5%, but when SS kicks in in a year or two, it will be less than 2% and closer to 1%.

Now at a 55/45 AA, the market would need to drop to zero, and stay there, to really cause a problem. And, if that happened, I suspect the value of our portfolio would be the least of our worries.

Your experience is vey similar to mine. And you've just reminded me it will be 5 years next month!

We've built in a number of "nice to have/do" items in our (so called) budget that would drop like 1st period French class if anything went wrong.

Love the French class analogy!

 

[NW-Bound]

Feels like tempting fate, doesn’t it?

I just point out that we’ve had a very extended bull run in spite of the Mar-May downdraft (yet rapid recovery).

I would be tempting fate if I maintained the same WR on the stash that has grown to 1.8x. As it is, my WR last year was 0.5%.

What do I do with a 4% WR? Buy his and her fancy new cars each year, and just throw them away next year without bothering to trade them in?

With the current stock AA of 58% and more cash than ever, I kind of like to see a big market correction, so that I can buy low, er, rebalance. It makes life more interesting, when you still cannot travel.

 

[Fermion]

With the prospect now of an additional $4,000 to $10,000 going out to every family I think the party has just started in the stock market.

To keep up with the free money, markets will need to expand. I predict some time this year we see S&P at 4200

 

[OldShooter]

@Navigator, are you less scared now?

 

[corn18]

With the prospect now of an additional $4,000 to $10,000 going out to every family I think the party has just started in the stock market.

To keep up with the free money, markets will need to expand. I predict some time this year we see S&P at 4200

I think it will hit 5,000 before it crashes 40%. Then we'll see how long it takes to recover. Corporate taxes will be raised and earnings will go down driving P/E through the roof.

All the free money coming should drive inflation up and equities down, but they have been saying that for 10 years now. Seems all the free money so far isn't necessarily getting into the hands of the consumer. Maybe the all Democrat everything will change that. Then we should see inflation again. At least that's what I have convinced myself into keeping my 2.75% 30 year mortgage.

 

[NW-Bound]

I'm about 1.8x myself after 15.5 years despite my WR having been in the 5%-6% range for a few of those years, although my average WR is about 4%. (a 10% splurge for 2020 but that was an exception due to building a new house)

I looked back at my records. My annual WR was running high too initially (4%), before it subsided due to Bernicke's effects, plus the bull market, plus my wife starting her SS.

I have 8 years left to live. It's only fair that I can worry less about SORR. In fact, I should be worried about running out of time rather than money at this point.

 

[statsman]

All the free money coming should drive inflation up and equities down, but they have been saying that for 10 years now. Seems all the free money so far isn't necessarily getting into the hands of the consumer. Maybe the all Democrat everything will change that. Then we should see inflation again. At least that's what I have convinced myself into keeping my 2.75% 30 year mortgage.

Good plan. You may look back at this as a wise decision.

 

[audreyh1]

I looked back at my records. My annual WR was running high too initially (4%), before it subsided due to Bernicke's effects, plus the bull market, plus my wife starting her SS.

I have 8 years left to live. It's only fair that I can worry less about SORR. In fact, I should be worried about running out of time rather than money at this point.

8 years guaranteed?

 

[youbet]

I have convinced myself into keeping my 2.75% 30 year mortgage.

I tend to agree. I'm not looking for anything close to hyper-inflation, but wouldn't be surprised to see things move to the 3% - 5% range for awhile.

Other than common stock, I'm short of inflation hedge investments or other financial arrangements. The house is paid off and it seems like too much effort to take out a mortgage. Non-cola pension. 45% in cash and fixed. Having expenses increase faster than the past few years in the future could impose some pain.

Time to do a search on "inflation hedge" threads!