Sequence of Returns Risk

[atmsmshr]

Thank you to the forum members who have shared their FIRE insights! You continue to be an education for me while approaching retirement. The different perspectives and experiences shared is one of the best features of the forum.

I am 56 and hope to pull the plug for DW and I between 58-59.

One of my top risks to navigate the SRR. This article by Wade Pfau on the subject is a wonderfully concise write up on the topic.

https://retirementresearcher.com/everyone-experience-different-retirement-income-outcomes/

Now nearing the peak of the window for vulnerability on the bell curve, should I go all in for risk management with a 50-50 portfolio and sell megacorp matching stock (which would guarantee another year at work) or let it ride and completely derisk only when putting in the retirement papers (which could mean another 2-3 years at work if a big stock selloff arrives)?

I work for a utility (electricity remains a popular product) with a steady paycheck and am inclined to keep the accelerator pressed down on stock allocation a bit longer - but have been taking steps to diversify out of S&P 500 index after 30 years.

Comments or real experiences?

 

[jonat]

See also https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/ and subsequent parts.

 

[pb4uski]

If I understand you correctly, you are asking about transitioning from a 100% stock portfolio to a blended portfolio. If so, what I did was when I was in my early-40s I started putting new money and reinvesting dividends in bond funds to migrate my then 100/0 allocation to 60/40 when I retired and what I still use.

While 50/50 is popular, I am a bit more of a risk-taker and prefer 60/40. You could start putting new money (contributions) into bonds as well as reinvesting dividends in bonds to transition to a less risky portfolio.

That said, I think a 100/0 portfolio is very aggressive for a 56 year old so it would be better to start sooner rather than later. Also, make sure that you are not overly concentrated in employer stock (think Enron, WorldCom, etc).

While Pfau indicates that peak vunerability is reached at the retirement date, i think it is much sooner than that... it is earlier because of possible RIF due to age and difficulties for older workers to find similar work.

 

[RunningBum]

We've got about a dozen threads on this. Pull down Search, go to Advanced Search, type in "Sequence" in the keyword search and select Search Titles Only.

Here are the two most recent.

http://www.early-retirement.org/for...ear-of-retiring-into-a-bear-market-86664.html
http://www.early-retirement.org/forums/f28/freaking-out-over-sequence-of-returns-risk-86502.html

 

[Independent]

Now nearing the peak of the window for vulnerability on the bell curve, should I go all in for risk management with a 50-50 portfolio and sell megacorp matching stock (which would guarantee another year at work) or let it ride and completely derisk only when putting in the retirement papers (which could mean another 2-3 years at work if a big stock selloff arrives)?

You don't explain why selling stock would guarantee another year of work.

If you're in a position where some company rules generate unusual costs for selling stock today, but you really want to reduce your exposure to equity risk, someone on this board can probably give you a derivative strategy (puts, calls, swaps) that allows you to get off the risk without actually selling.

 

[Danmar]

If you have a good DB pension that might have an impact on your decision? Also how close you are to FI or perhaps well past it. Will your expenses in retirement be high and fixed or low and variable?

 

[atmsmshr]

Thank you for the links to previous threads - good readings to internalize.

Have 1M investable with 30% in company stock showing ridiculously good ROE over 10 years. A huge risk to hang onto - but NUA is terrific option. Last month swapped 30% to a Vanguard target retirement fund so 100k of the 401k is now bonds. Last December plowed 30% into international large stocks index for diversification.

My pension is cash balance 350k; I have been mentally accounting that pension as a bond giving me a current 67/33 split including the Vanguard bond percentage. Once the pension annuity option is exercised access to the cash option is gone we will have to rebalance the 401k to a 60/40 split. Lucky enough to have gotten a medical pension vested (A fading benie in the public sector)

We can still sleep at night, but it looks like optimization of risk from SRR is from a very personal point of view.

And I still have not figured it out.

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[REWahoo]

Have 1M investable with 30% in company stock showing ridiculously good ROE over 10 years. A huge risk to hang onto...

Absolutely. I know two individuals who, despite warnings of the risk, held far too much company stock and it came back to bite them.

 

[atmsmshr]

You don't explain why selling stock would guarantee another year of work.

If you're in a position where some company rules generate unusual costs for selling stock today, but you really want to reduce your exposure to equity risk, someone on this board can probably give you a derivative strategy (puts, calls, swaps) that allows you to get off the risk without actually selling.

A bit more on that -If going to a 50/50 split in the 401k halves the ROE, I would arithmetically work at least 6 more months - which would then make me stick around a few months more for the annual bonus payout.

There are folks at work kicking themselves by selling the company stock after age 50. These are the ones who paid attention the most to risks from Enron, TWA, GM, Lucent, etc. However, I have never heard of any co-workers use a derivative strategy and will have to look into that. Thanks

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[atmsmshr]

If you have a good DB pension that might have an impact on your decision? Also how close you are to FI or perhaps well past it. Will your expenses in retirement be high and fixed or low and variable?

We are thinking of exercising a SS levelization pension option of $3k/mo start with a term life insurance on me. Seems to help in early income bridge strategy. The remaining (unmet) piece seems to be saving the cash/CD bucket to bridge to claiming SS between 65 - 67. I have maxed SS earnings for 25 years and should get the top payout. DW is disabled and gets $850/mo until FRA of 67. Her health (and mine - no body lives forever) is a driver for FIRE.

My goal is an income stream of $9000/mo. Have been a contrarian and never paid off the mortgage so that bogey is $2600/mo P&I, taxes, insurance. Second bogey for LTC, taxes, and out of pocket medical is another $2k/mo leaving discretionary $4.4k/mo for everything else including food and utilities. We could halve that last amount in a recession.

 

[Independent]

A bit more on that -If going to a 50/50 split in the 401k halves the ROE, I would arithmetically work at least 6 more months - which would then make me stick around a few months more for the annual bonus payout.

There are folks at work kicking themselves by selling the company stock after age 50. These are the ones who paid attention the most to risks from Enron, TWA, GM, Lucent, etc. However, I have never heard of any co-workers use a derivative strategy and will have to look into that. Thanks

atom

Okay, it make you work longer because you're assuming that, over this relatively short horizon, your company stock will out perform bonds. You might want to think about how much your retirement date will move if the stock price goes down.

Regarding derivatives, the perfect situation might be that there are puts available specifically on your employer's stock. If so, you buy a put today that gives you the right to sell at a pre-determined price at some future date.

But, looking at your post, I dont' see any particular impediment an ordinary sale.

 

[RobLJ]

You may have enough cushion for the risk, but I'll note that 1/3 of my wife's 401k (the company matching piece) was in Dynegy stock pre-Enron.

This was before Congress changed the rules--Enron, Dynegy and other companies were able to mandate the 401k company match in stock. At one point about 18 months before the crash began, I told DW that if I had enough money in a brokerage to hedge a catastrophic fall in value I would, since I couldn't sell.

You know what happened to Enron. We recovered anyway; we had another 15 years to work with.

Thank you for the links to previous threads - good readings to internalize.

Have 1M investable with 30% in company stock showing ridiculously good ROE over 10 years. A huge risk to hang onto - but NUA is terrific option. Last month swapped 30% to a Vanguard target retirement fund so 100k of the 401k is now bonds. Last December plowed 30% into international large stocks index for diversification.

My pension is cash balance 350k; I have been mentally accounting that pension as a bond giving me a current 67/33 split including the Vanguard bond percentage. Once the pension annuity option is exercised access to the cash option is gone we will have to rebalance the 401k to a 60/40 split. Lucky enough to have gotten a medical pension vested (A fading benie in the public sector)

We can still sleep at night, but it looks like optimization of risk from SRR is from a very personal point of view.

And I still have not figured it out.

atom

 

[Koolau]

I too was very heavy in Megacorp stock and rode it up until I was FI. At that point, it started to worry me enough that I averaged most of the stock into index funds (primarily stock - but, of course, diversified.) Not long before I pulled the plug and retired, the stock took a huge hit - it made me glad I kept only about 10% of it - which has now recovered nicely.

No way to know what will work for you. But first principles suggest more than 5 to 10% in one stock is too much. If you do change your portfolio, do it because of the principles involved, not "fear" as such. Just my suggestion, so YMMV>

 

[Mdlerth]

Now nearing the peak of the window for vulnerability on the bell curve...

While Pfau indicates that peak vunerability is reached at the retirement date, i think it is much sooner than that... it is earlier because of possible RIF due to age and difficulties for older workers to find similar work.

I agree with pb4uski: OP's actual peak vulnerability is already behind him due to the danger of involuntary premature retirement. My megacorp's obsession with periodic downsizing would have been rough on me at age 48, but now at 58 a RIF would be a gift. I see a bunch of other 58-62s hanging around hoping for a severance package.

Consider two people at age 55, each with a 1M 401k invested exactly the same. Surely they are equally vulnerable at that instant. One REs, the other doesn't. The market goes nowhere for five years. The retiree is siphoning off his 4% each year, while the still-employed one is adding his 24k.

Five years later, the second one retires, only now he is up to 1.12M. How can he be more vulnerable than he was five years earlier? And how can he be more vulnerable than the ER - whose peak vulnerability was supposedly 5 years ago - who is now down to 800k?