Sequence of returns risk & fear of retiring into a bear market

[Leks]

I’m not retired yet so I’ll defer to the ample wisdom already given out about many important things that you should keep in mind.

I’d like to get back to your original concern about sequence of returns risk and the options you have in addition to working and saving a bit longer.

A few bits of advice were already given earlier. Three good strategies are:

1) Change to a less risky asset allocation right before you retire and slowly increase the risk over the first ten years if you wish.

2) Reduce the amount of money you withdraw during a major down market if it happens during the first ten years.

3) Have a separate cash fund to cover living expenses so you don’t have to sell investments during a down market.

The thing to note here is that these can all be combined. Lets look at some numbers then.

The change in asset allocation is your first defense. A good place to explore this is a site called PortfolioCharts.com. Looking there I see that a standard 60% stocks / 40% bonds portfolio would have suffered a maximum drawdown of 34% during the worst sequence of returns entry for all 30 year investment periods since 1970. It would have taken 12 years for that portfolio to fully recover:

https://portfoliocharts.com/portfolio/classic-60-40/

So to keep your retirement nest egg safe, you could reduce your withdrawals by 34% but that could be tough if you are already on a tight budget.

However, click over to the ‘Permanent Portfolio’ and you will see that the reported maximum drawdown was just 14% and lasted 5 years. Of course, this portfolio grows slower in the long term but now you would only have to reduce your spending by 14%. Also, notice that the peak is reached within the first two years. For years 3, 4 and 5, the portfolio recovered enough that you can go back to withdrawing more again:

https://portfoliocharts.com/portfolio/permanent-portfolio/

Your second line of defense is then reducing your withdrawals but doing so against a less risky portfolio which requires a smaller reduction.

Your third line of defense would then be having a separate pile of cash to use during the down years so you don’t have to sell stocks at a bad time. But you may not need 3 years of full expenses (120K in your case). Instead, you only need the difference between your reduced withdrawals and your normal amount:

So with the permanent portfolio, your 40,000 / year withdrawal would be reduced by 14% to 34,000. Then you use 6,000 from your cash bucket to make up the shortfall. So 5 years of shortfall money would be 30,000 (though you should increase the 6K/year by some inflation amount).

Then of course there is international arbitrage, side gigs and perhaps other strategies.

 

[jjonas]

OP.....this thread is now 5 pages long and I feel has turned "confrontational" in nature. No one is trying to "convince" you one way or another if your plan for ER will work or not. Honestly, no one here knows you... we are all anonymous so no one really cares. However, I think you have gotten some good advice especially related to future healthcare costs.

And while you may " enjoy" doing your own landscaping and plumbing and car service, what choice do you have if the funds are not available to have someone else do these chores? I cut my own grass for 25 years but hired a landscaper to free up my time from this mundane chore. And yes we take cruises and eat out often....because we can. Not a brag. Just a fact. It's all about having choices when one is retired. And having enough money available gives one choices.
.

My apologies, didn't mean for it to sound confrontational at all. I was just making the point that our life style is much different than some people so our expenses are very low. You hire out your landscaping because you said it's mundane but I happen to enjoy taking care of our house and yard so I'm able to save money. We cook, you eat out. I'm not saying it's right or wrong. Our life style may change someday, who knows. Right now, it's easy for us to live on 40k per year. Once the mortgage is paid, our monthly expenses will decrease by $815 per month. We can use that $815 per month on health care if necessary.

I know the state of the ACA is up in the air right now but according to the quotes I've been getting on the exchange, if my wife and I are making less than 30k per year, our monthly health insurance premiums for a gold plan is about $450 per month. Sure, this may go up next year or may even go down (wishful thinking?), I don't know but it's not near the $800-$1000 per month that a couple people have mentioned. Maybe some years, if one of us gets hurt or sick, and we have to pay some money out of pocket, we might get close to that $800-$1000 per month figure but in a typical year when we're both healthy, we won't be paying an average of $800 per month. I also have money in an HSA that I left out of our total net worth figure.

I have received a lot of great advice from many people. I really appreciate everyone taking the time. I look forward to reading more suggestions and comments.

 

[Johanson]

My post was in regard to your comment that you didn't want to work for anybody or apply for a job. So I said to work for yourself.
My kid's business is hard because she is trying to doubling her revenue, but she could take it easy and work at home and make less. She has an office and the rent needs to be paid. People who work for her also need to be paid. Venice beach is not cheap. But of course you don't have to do all this and still can do something to your liking.

I've often wondered about turning a hobby into a "job" for financial reasons. For example, starting a Youtube channel for underwater shipwreck videography. I don't do that now but I do dive deep cold water shipwrecks and it's very expensive. I could then write off all the costs to generate those views on Youtube even though the real reason I'd be doing it is to enjoy diving the wrecks.

 

[Digger1000]

I am newly retired. My plan is for right around a 2.9% withdrawal rate. The other night after reading this thread I did an interesting exercise. I took my total current available investable assets and acted as if they are 100% in the S&P 500 Index and went back to 2000 and acted as if I retired then. I then went year by year from 2000 to today inserting my current withdrawal amount in dollars(2.9% of the starting money) and also inserting the yearly S&P 500 return. At 1 point my assets were at 50% less than the starting point however today the assets would be 25k or so more than they were at the start. I did increase the dollar amount of withdrawals late in the cycle, up to 20% more actually. Also I did not reduce my withdrawal percentage below 2.9% at anytime, in fact at 1 point it was over 6% in this exercise since the assets had dropped 50% at 1 point.

 

[Toocold]

I have received a lot of great advice from many people. I really appreciate everyone taking the time. I look forward to reading more suggestions and comments.

I find that this forum skews boomers and MMM forum skews millennials, so people's advice reflects this. Many on this forum have more experience in economic downturns and are naturally more conservative. But I would argue that their reality is not yours, and OP needs to understand this.

There is an almost implicit belief in both communities that once you FIRE you should expect never to generate any more income, and if you retire 55+ this is probably a good assumption.

But for a 30 something I think that's not always the case. Those who pursue FIRE at a young age are usually smart, disciplined, and entrepreneur, which make them perfect candidates to find other sources of income -- someway somehow, even if it's not perfectly known or planned.

Given your situation, I suggest rather than delaying ER, start working on a future lifestyle that you would not want to retire from. If you love the beach, perhaps try to find opportunities to build a part-time business or work in beach resorts that you'd enjoy or if you love the outdoors, identify new opportunities to become a ski instructor or a tour guide. For your situation I think this is the best approach to managing sequence of returns risk.

 

[LRDave]

It is easy to think being healthy in your 40's will continue throughout your life. However, this is not realistic at all.

We (age 57 and 61) are extremely healthy for our age. We exercise, eat healthy, no smoking and have no major health problems nor take any prescription drugs. All of our friends and family around the same age group are taking between 1 and 11 drugs daily. None of them have a major disease but they are not healthy by any means.

After tracking our expenses in Quick Books for 3 years we know what our actual expenses are today and which ones might continue into retirement. We have no mortgage and no debt and live in a low cost of living state. We live a nice life and enjoy low cost activities like hiking, cycling and tent camping. Like you we cook and eat at home most of the time.

Currently we pay 21,000 a year for health insurance through the ACA and during our retirement this will be 1/3 of our expenses. This cost for health insurance is most likely going to increase for people our age. This cost does not include the additional 500-1000 yearly for dr or dentist visits. We pay everything out of pocket due to a 6500 per person high deductible plan.

No supplement?

 

[littleb]

LRDave

No, we are retiring this year and our income is too high for subsidies. Next year would be our first year under ACA with subsidies but we all know how that plays out.

 

[youbet]

My question is why do people want to retire too early, like in 30s and 40s..

What's "too" early for you is just right for others. It's a very individual thing and people don't have to fit the mold you cast for yourself.

It's great when people can live their own lives, spend their own precious time, as they wish and whether that's how someone else would do it or not. Right?

 

[FIREd]

What's "too" early for you is just right for others. It's a very individual thing and people don't have to fit the mold you cast for yourself.

It's great when people can live their own lives, spend their own precious time, as they wish and whether that's how someone else would do it or not. Right?

+1

Back to the OP, I try to mitigate the sequence of return risk by using a conservative withdrawal rate (which means either working longer -full time or part time- and/or spending less in retirement).

 

[youbet]

+1

Back to the OP, I try to mitigate the sequence of return risk by using a conservative withdrawal rate (which means either working longer -full time or part time- and/or spending less in retirement).

FIRE financial outcomes are much less predictable than many folks would like! Sure, you might mitigate the risk of running out of money by either working longer or having fewer experiences in retirement (spending less), but if sequence of returns puts you on one of those rising lines in the FireCalc output graph, that means you worked longer or spent less for nothing. And, of course, the opposite is true as well.

When I look at the FireCalc output graph and marvel at the wide, wide range of possible outcomes, it makes me glad I'm relatively risk tolerant. If the future is similar to the past, there are outcomes where mid-stream adjustments will be ineffective either in correcting a failing portfolio or in upping spending to not leave a fortune on the table. That's the way it has been and, likely, how it will continue to be. Yet, the most popular discussion topics here on the forum involve trying to find ways to take variation out of play.

 

[FIREd]

FIRE financial outcomes are much less predictable than many folks would like! Sure, you might mitigate the risk of running out of money by either working longer or having fewer experiences in retirement (spending less), but if sequence of returns puts you on one of those rising lines in the FireCalc output graph, that means you worked longer or spent less for nothing. And, of course, the opposite is true as well.

When I look at the FireCalc output graph and marvel at the wide, wide range of possible outcomes, it makes me glad I'm relatively risk tolerant. If the future is similar to the past, there are outcomes where mid-stream adjustments will be ineffective either in correcting a failing portfolio or in upping spending to not leave a fortune on the table. That's the way it has been and, likely, how it will continue to be. Yet, the most popular discussion topics here on the forum involve trying to find ways to take variation out of play.

Leaving a fortune on the table is no concern of mine (I do not even consider it a risk). I have no interest in maximizing my lifetime spending. A failing portfolio is the only risk that I have an interest in mitigating (I understand that it cannot be completely eliminated, hence my choice of word). When considering retirement in one's 30s or 40s, as the OP is, working a few years longer than necessary to reduce the downside risk is a pretty small price to pay IMO.

 

[youbet]

When considering retirement in one's 30s or 40s, as the OP is, working a few years longer than necessary to reduce the downside risk is a pretty small price to pay IMO.

I'd tend to agree with you there. But it's really a "value of time" question more than a money question. At 40, spending 2 of your remaining years buying some financial security seems cheap. At 60, well, that's another question. At 60, those could be pretty expensive years (expensive in terms of one's subjective valuation of life's precious minutes) if you turn out not to be a long liver.

In any case...... I think we all have a lot less control over the specifics of financial outcomes than we like to think. There is variation that we may not be able to override mid-stream.

Leaving a fortune on the table is no concern of mine (I do not even consider it a risk).

BTW, I also am not concerned with "spending it all." But, if I could overcome my fear of portfolio failure, we'd add up to $20k/yr to our travel budget. In most scenarios, we'd still leave significant money on the table and we'd get to do some more of the travel we'd like to do. But, looking at that lowest line on the FireCalc output graph says stick to our current plans to be 100%+ sure of success.

There is a difference between lowering your projected success from 100%+ to 95% and then being able to do something completely discretionary you'd like to do vs. "spending it all."

 

[Fedup]

What's "too" early for you is just right for others. It's a very individual thing and people don't have to fit the mold you cast for yourself.

It's great when people can live their own lives, spend their own precious time, as they wish and whether that's how someone else would do it or not. Right?

You are right as long as I don't see any thread from Mr Mustachio's website bitching about the new proposal health insurance then I'm ok. But I waded over there and the thread is ugly. It's almost a form of begging. Somebody in society has to subsidize for these young retiree's health insurance. Thats would be everybody in my immediate families. Of course, you bet, I know my opinion is not popular in the early retirement forum. But I don't think you should expect people to subsidize your leisure life.

 

[pb4uski]

.... I don't think you should expect people to subsidize your leisure life.

+1 if one does expect that then they are not FI.

OTOH, if the government provides a subsidy that is useful and I legally qualify for, then I will take full advantage of it.

 

[jjonas]

You are right as long as I don't see any thread from Mr Mustachio's website bitching about the new proposal health insurance then I'm ok. But I waded over there and the thread is ugly. It's almost a form of begging. Somebody in society has to subsidize for these young retiree's health insurance. Thats would be everybody in my immediate families. Of course, you bet, I know my opinion is not popular in the early retirement forum. But I don't think you should expect people to subsidize your leisure life.

Dear FedUp,

I want to thank you for all the well thought out, intelligent advice that you've given my wife and I through out this thread.

My question is why do people want to retire too early, like in 30s and 40s. I might be considered old here, I retired at 55, but in real life, nobody I know or met retire that young. Except for one guy who graduated from UCLA in engineering and has not found a job since. He is mooching off his mom and rich brother.

We will continue to work so we don't become moochers or beggars.

I'm response to the statement that people decide to quit in their 30s or 40s is because their jobs are not rewarding. Only if you have the money to back up quiting. Otherwise you need to suck it up. Not all jobs are rewarding. Don't kid yourselves.
To me people who don't allocate money properly for health care cost in retirement and then we have thread after thread about worrying about health care cost skyrocketing, is another form of begging. You want to retire on other people's money. No diiference then the guy with a cup on the street with a sign. I see that as nonsense as well.

We will continue to suck it up.

But in real life, I usually let people hang themselves by their using their own ropes.
So I suggest you just do it. Come back and tell us in 10 years.

We will also continue to not have children so that way we won't take advantage of the child tax credit which is essentially mooching off other childless people to pay for their children.

And by not having children we won't have to take advantage of government subsidized student loans for their education.

We will also continue to ride our bikes to work so that way we don't take advantage of government subsidized gasoline, a form of begging so people can afford to fuel their inefficient gas guzzling cars.

And we will continue to try to grow as much food as we can and eat a low meat diet so we don't benefit from the subsidized agriculture in this country...basically like begging the government for food.

We'll also be sure to keep our jobs as long as possible and always have enough assets so we never have to rely on unemployment benefits. Those people who lose their jobs should suck it up. They should have had a back up plan or saved more.

And perhaps if we keep working at our high paying jobs until we're 65, we'll have more than enough assets to just pass on social security and medicare. We'll be able to stay off the government dole entirely. Keep our pride. We'll never have to beg or mooch.

So thank you FedUp. Thanks to your valuable wisdom and advice, I decided to keep on working for another 20 years. Now I no longer have those concerns about sequence of returns. You can stop replying.

 

[daylatedollarshort]

Many posters here are quite happy to qualify for tax credits for health insurance. We just don't know how long we can count on them in the current political environment and what will happen to the rates for households over age 50 or 60.

From the AARP on the AHAC:

"Overall, both the bill’s tax credit changes and 5:1 age rating would result in skyrocketing cost increases for older Americans. In their analysis, CBO found that a 64 year old earning $26,500 a year would see their premiums increase by $12,900 — 758 percent — from $1,700 to $14,600 a year."

AARP: latest changes to AHCA make 'bad bill even worse' -AARP States

 

[respond2u]

From the AARP on the AHAC:

"Overall, both the bill’s tax credit changes and 5:1 age rating would result in skyrocketing cost increases for older Americans. In their analysis, CBO found that a 64 year old earning $26,500 a year would see their premiums increase by $12,900 — 758 percent — from $1,700 to $14,600 a year."

AARP: latest changes to AHCA make 'bad bill even worse' -AARP States

That's good news because it's obviously insane for someone to spend nearly half their income making other people rich and not getting commensurate benefit from it. Maybe once it's gone beyond insane to obviously insane, we as a nation will do a right thing.

[RANT]Government intervention caused the problem with disease care pricing, starting in the '40s with tax-subsidized disease care insurance, doubling-down in the '60s with Medicare and Medicaid, tripling down in the '80s by demanding that hospitals (that means you and me, really) treat anyone that shows up in the emergency room regardless or their ability to pay, and then compounding that by making it illegal for Medicare to negotiate drug prices (part D, anyway). And then teasing us this decade with disease care that would be affordable except there are so many poor sick people that the system is reeling.

All this and over 1/3 of Americans are *already on government-provided single payer*.
Disease care costs the US more than other developed countries per capita, and we get a worse outcome per capita (though a better outcome for us lucky few wealthy enough to afford the very best).

And maybe you noticed I never once talked about health care. That's because we get damned little of it. I'll believe we've become interested in that when I stop paying for other men's viagra and instead am paying for their trip to the yoga studio (or other healthy exercise, diet, or stress reduction program).
[End of Rant]
I feel better now.

 

[Maenad]

I've been trying to figure out how to reply to the accusations of retiring in one's 40s being "too young" and that I just want to mooch off of others.

I found the Retire Early Home Page when I was fresh out of college at 22. For the last 20 years I have worked my plan towards ER, allowing for a few changes in direction. I have watched my spending and fought my hedonic adaptation the whole way, putting up with pressure to spend more from all sides (not DH, thankfully).

Now I find out that the ER I was prepping for in 3 years is at risk. And I'm not allowed to be upset by that because I'm too young? So if I'd mindlessly moved through life, realizing at age 50 that I'd saved a pretty good nest egg, and retired at 55, that would be OK? But my 20 years of work and effort means... nothing?

If I wanted criticism I have plenty of places in the "real world" to find it. I come here for encouragement, enthusiasm, and support on my journey. For the most part I've found it. But I am a real person behind these pixels, and it's hurtful to come to a place I thought was supportive and find more of the same "you're too young" b.s.

I've worked long and hard for this. I've sacrificed for this. I can accept what is out of my control, but I also am allowed to be upset when it negatively affects my plans.

 

[Maenad]

And BTW, when I'm upset by health insurance costs skyrocketing, I'm worried for my self-employed brother, one of those hard-working blue-collar workers everyone loves to idolize, who will end up breaking his body with his work if he can't afford health care.

 

[razztazz]

And BTW, when I'm upset by health insurance costs skyrocketing, I'm worried for my self-employed brother, one of those hard-working blue-collar workers everyone loves to idolize, who will end up breaking his body with his work if he can't afford health care.

Yes, but you see. You're supposed to tell him "Life ain't fair" at that point

None of these problems are caused government this opr government that and doubling down and crap from the 1940s that started it all. the problems are all private sector in origin. Money. When someone's interests are not your interests but they get all the government protection on their side and you get none because they can afford to buy favorable policy that is counter to the general welfare. That is a private sector problem not a government caused problem

What existed before gov did anything was a disgrace that lacked a right to exist except it was profitable. Then gov tried to ameliorate the failure and the efforts were corrupted and shangheid. Because of money. Private sector. But the private sector seems to love sucking of government money. they ain't complaining then.

 

[respond2u]

What existed before gov did anything was a disgrace that lacked a right to exist except it was profitable.

Look at the history of disease care costs. It started rising when "health insurance" started paying for more care and skyrocketing in the '60s when gov't became a payer. Plenty of links on the web for it.

BTW, the only way I can see out of the current mess is complete government-provided single payer for all of us, not just the lucky 1/3. The only reason I can think of why that wasn't ACA is who profited from it being otherwise.

 

[pullmyfinger]

I've been trying to figure out how to reply to the accusations of retiring in one's 40s being "too young" and that I just want to mooch off of others.

If I wanted criticism I have plenty of places in the "real world" to find it. I come here for encouragement, enthusiasm, and support on my journey. For the most part I've found it. But I am a real person behind these pixels, and it's hurtful to come to a place I thought was supportive and find more of the same "you're too young" b.s.

I've worked long and hard for this. I've sacrificed for this. I can accept what is out of my control, but I also am allowed to be upset when it negatively affects my plans.

I too have found these accusations of "mooching" very offensive. I have really enjoyed the wealth of knowledge and support on this forum and hate the thought of losing that.

 

[RobLJ]

I suspect many responses reflect the responder's insecurities and yes I think most on the board assume ER in late 40's/50's as more the "norm." The longer the retirement, the more risk, that can be managed by a lower SDR or part-time work, etc.

I think the OP's plan of part-time work and income (i.e., "Partial Fire") can work. I know I'm still working part-time, so pulling from retirement assets will probably occur at 61/62 rather than the 57 I originally considered when moving to Reno.
I would be worried about health care, and 35K does sound low for New Hampshire, without a paid-for house. I understand the point about outdoors recreation, since I hike and flyfish (but also ski--a year pass is $459 here).

I too have found these accusations of "mooching" very offensive. I have really enjoyed the wealth of knowledge and support on this forum and hate the thought of losing that.