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

[Blue Collar Guy]

The military folks are another group that I can think of that people retire early, my husband was working at the USAF base before he retired. I think it depends on the rank, one has to get out after so many years.

You would know better than I, But i dont think the military has a 20 year half pay retirement like was offered to us. My enlistment date was 7 July 1979. My own pension system has changed to 22.5 years for half pay(up from 20 years) but you have to wait to your 25th anniversary to start collecting it. Early studies show that more will retire on a more lucrative disability pension before reaching their 25th anniversary, costing the system more money.

 

[Fedup]

I know of a major who retired after 21 or 22 years, I think he told me it was $30k pension a year. Going by memory.

 

[braumeister]

i dont think the military has a 20 year half pay retirement like was offered to us.

The military retirement system has changed over the years, and is still changing, but under the system when I was in, you got half your base pay at 20 years, and 75% after 30 years, prorated in between.

Base pay, for most of us, amounted to something around 80% of your actual total pay, so it was really about a 40% pension. But the beauty was that you started drawing it on your first day out of uniform, and it had the same COLA as Social Security.

I consider it the best retirement plan around, and the only requirement is that you have to let people try to kill you for 20 years or more.

 

[Fedup]

The military retirement system has changed over the years, and is still changing, but under the system when I was in, you got half your base pay at 20 years, and 75% after 30 years, prorated in between.

Base pay, for most of us, amounted to something around 80% of your actual total pay, so it was really about a 40% pension. But the beauty was that you started drawing it on your first day out of uniform, and it had the same COLA as Social Security.

I consider it the best retirement plan around, and the only requirement is that you have to let people try to kill you for 20 years or more.

Guess where the major I know retired to? South Korea. He was elated when he got a civilian job there, his wife is a Korean.

 

[jjonas]

I know everyone means well and I did come here for advice but I feel that some of you (not all) are little too pessimistic. If it's not one thing it's another.

"You should be more concerned with health care costs and not the markets"
"What will you do with such a long retirement. You'll get bored and feel under utilized"
"You won't want to work part time jobs making much less doing menial tasks"
"There's no way you'll have enough income with inflation"

I think some people feel that the only way to retire early is like a "normal" early retiree, somewhere in your 50's, preferably around age 55. In my opinion, working at a job that you don't enjoy until you're 50 years old is insanity, especially if you have the financial means and a well thought out, disciplined budget that provides you with an enjoyable life style. The thing we both want to avoid is the "we'll pad the bank account another year" syndrome or we'll "stick it out" another two years and then retire. If the markets drop and we hit a recession during the time while I'm "sticking it out" or "padding my net worth" then I'll feel like I have to keep working and wait until the markets rebound. Before you know it, I'll be over 50.

I have factored in inflation into my planning. Rising health care costs are a concern and I have room in my budget to allocate more toward health care. I certainly won't get bored during retirement or feel unimportant.

My biggest concern is retiring into a long bear market or some black swan like event that takes many years to recover from. I guess this is a concern that any retiree, young or old must face. Based on some of the FIRE calculators people have recommended, my plan works out 90-100% of the time. I know, I know, some of you will poke holes in these calculators too. Retirement planning is not an exact science and there's no bullet proof plan unless of course I wait until my late 50's and accumulate another 2 million dollars and then call it quits. That's just not happening.

 

[Ready]

You have come to a board that is known for generally being conservative with regards to planning for ER. Many of us want to be 100%+ on FIRECalc with lots of room to spare. The numbers you have given for your savings and expenses are outside of the range that many of us are used to seeing here, and that is why you are getting this feedback. People are trying to be helpful to you. They are not attacking or criticizing and I would suggest you not see it as such.

It's your life to live any way you wish, and if you are comfortable, that's all that matters. Take the collective wisdom from this board for what it's worth, knowing that all that matters is that you feel good about your plan.

 

[Blue Collar Guy]

The military retirement system has changed over the years, and is still changing, but under the system when I was in, you got half your base pay at 20 years, and 75% after 30 years, prorated in between.

Base pay, for most of us, amounted to something around 80% of your actual total pay, so it was really about a 40% pension. But the beauty was that you started drawing it on your first day out of uniform, and it had the same COLA as Social Security.

I consider it the best retirement plan around, and the only requirement is that you have to let people try to kill you for 20 years or more.

This is why i think military pensions are well deserved, and hard earned.

 

[Another Reader]

"My biggest concern is retiring into a long bear market or some black swan like event that takes many years to recover from."

That is a major concern. Those events are disruptive to employment and prospects for employment as well. Tough to job hunt for most folks in 2009.

In your shoes, I would pay the house off and then go. It might take a couple of years, but losing that payment (and the extra $400 you are throwing at the mortgage because you want to pay it off) puts you in a much more secure position.

 

[Fedup]

Just do it and come back and tell us in 10 years. Ignore the old folks.

 

[OldShooter]

I know everyone means well and I did come here for advice but I feel that some of you (not all) are little too pessimistic. ...

Well, I can only speak for myself. My standard disclaimer is: All opinions guaranteed worth price paid.

... My biggest concern is retiring into a long bear market or some black swan like event that takes many years to recover from. ...

You made that clear in the OP but I hope you have at least gotten the idea that there are other things that should also be high on your concern list, like black swan inflation and black swan health problems. (BTW if you have not read some of Taleb's books, I recommend it.)

... Based on the responses here and the Fidelity planning tool, I think we'll really have to consider "partial" FIRE where we both work 2-3 days a week at jobs with lower pay but are much less stressful and feels less like an actual job. This would bring our withdrawal rate down about 2.5% annually. ...

Actually I liked it a lot when you wrote this waaay back on Page 1.

Maybe you have had formal risk management training, & this is a refresher: There are three dimensions to risks: impact, probability, and cost to mitigate. The reason I liked your statement is that it is an excellent mitigation strategy against most of the many risks you face. It gives you flexibility, maybe even to the point of taking (or keeping) jobs that you actually like, but reducing their demands on your life. It also gives you flexibility to react to financial risks like the black swans and not being able to stick to your spending plan.

So, you're getting pessimistic advice? Maybe. But even paranoids have enemies.

 

[Dog]

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

I understand your concern with sequence of returns. I believe you mentioned being concerned with a 5% drop in the market and the impact to your nest egg. I would suggest looking back at the bear markets in just the past 25 years. I specifically remember the dot.com bust in 2000 and the Great Recession in 2008. See how you would feel with those market declines (and how they also affected employment opportunities). Not to be negative but I worked an extra 5 years to pad investments, savings and pay off all debts before retiring in 2014 at 56 after seeing the impact those events had on my portfolio. No regrets either.

 

[audreyh1]

I pursued all those while still working and raising kids. The only thing I didn't do is take off for 4 months at a time like I did last year. I wouldn't take off a week of vacation while my kids were in school, I didn't want to disrupt their schooling. So that's the only hindrance. We did a lot things when we were single too. We didn't have to be in retirement mode to do it.
I personally think it's sad to wait until retirement to do all those things. It's not a binary choice.

I depends how much time and energy your job requires. With only 2 weeks of vacation a year (if I even took that!) I couldn't even begin to do the stuff I wanted.

Sure - not having kids made it much easier to retire very young as we didn't have to worry about kids being in school and could take off whenever we wanted. And we did!

 

[daylatedollarshort]

I know everyone means well and I did come here for advice but I feel that some of you (not all) are little too pessimistic. If it's not one thing it's another.

"You should be more concerned with health care costs and not the markets"
"What will you do with such a long retirement. You'll get bored and feel under utilized"
"You won't want to work part time jobs making much less doing menial tasks"
"There's no way you'll have enough income with inflation"

I think some people feel that the only way to retire early is like a "normal" early retiree, somewhere in your 50's, preferably around age 55. In my opinion, working at a job that you don't enjoy until you're 50 years old is insanity, especially if you have the financial means and a well thought out, disciplined budget that provides you with an enjoyable life style. The thing we both want to avoid is the "we'll pad the bank account another year" syndrome or we'll "stick it out" another two years and then retire. If the markets drop and we hit a recession during the time while I'm "sticking it out" or "padding my net worth" then I'll feel like I have to keep working and wait until the markets rebound. Before you know it, I'll be over 50.

I have factored in inflation into my planning. Rising health care costs are a concern and I have room in my budget to allocate more toward health care. I certainly won't get bored during retirement or feel unimportant.

My biggest concern is retiring into a long bear market or some black swan like event that takes many years to recover from. I guess this is a concern that any retiree, young or old must face. Based on some of the FIRE calculators people have recommended, my plan works out 90-100% of the time. I know, I know, some of you will poke holes in these calculators too. Retirement planning is not an exact science and there's no bullet proof plan unless of course I wait until my late 50's and accumulate another 2 million dollars and then call it quits. That's just not happening.

Why don't you look up digital nomad kinds of jobs that pay well and see if you can find a good fit. It is not work if you find something you love to do, especially if you only have to do it part-time. With low overhead and a high paying tech skills you wouldn't have to work too much to make up the shortfall in your income, especially if you are both willing to work part-time or do contract work. Learn something hard that is in demand and not a lot of people know how to do and you probably won't have a hard time finding contracts or part-time work.

 

[Fedup]

I understand your concern with sequence of returns. I believe you mentioned being concerned with a 5% drop in the market and the impact to your nest egg. I would suggest looking back at the bear markets in just the past 25 years. I specifically remember the dot.com bust in 2000 and the Great Recession in 2008. See how you would feel with those market declines (and how they also affected employment opportunities). Not to be negative but I worked an extra 5 years to pad investments, savings and pay off all debts before retiring in 2014 at 56 after seeing the impact those events had on my portfolio. No regrets either.

5% drop is a joke. How about 40% drop? That is truly black swan event.

 

[Corporateburnout]

5% drop is a joke. How about 40% drop? That is truly black swan event.

The stock market was down 54% from October 2007 to March 2009. A 50% stock allocation would wipe out a quarter of a portfolio.

 

[evilanne]

Almost twenty years is too long to go without having any income coming in. I talked to the Mrs last night and decided it would make more sense to leave our jobs in 2018, travel for 6 months and then work part time 3 days a week. I'm thinking that even part time employment might be enough to pay our monthly expenses so we may not even need to touch our assets for a while.

With your attitude, I'm sure you will be able to handle any challenges that arise.

One thing I was considering prior to retiring was to find a way to reduce work hours, increase days off or leave without pay to get better work/life balance. Is there any possibility of reducing your hours at your current job(s) to reduce your stress?

Someone recommended that you have alternative plan in the event of a downturn. Is relocation to lower cost of living area a possibility?

 

[respond2u]

HI--I suggest you use Crowdsourced Financial Independence and Early Retirement Simulator/Calculator or some other calculator to plot things out.

You can put in your wife's pension, your social security, etc. and it will tell you how much you can spend.

there's also firecalc.com as an alternative.

earlyretirementnow.com has another tool to quickly calculate your odds in this high CAPE time. He has a long multi-part series on withdrawal rates you might find beneficial.

 

[jjonas]

With your attitude, I'm sure you will be able to handle any challenges that arise.

One thing I was considering prior to retiring was to find a way to reduce work hours, increase days off or leave without pay to get better work/life balance. Is there any possibility of reducing your hours at your current job(s) to reduce your stress?

Someone recommended that you have alternative plan in the event of a downturn. Is relocation to lower cost of living area a possibility?

Thank you. My current job won't allow me to work less hours. There's some flexibility with the time of day I can work as long as you're hitting their unreasonably high stretch goals but reducing the number of days you work is not an option.

We love New England. The only place we would consider moving is the Pacific Northwest which has an even higher cost of living. We've back packed all over Central America before we took full time jobs so we've talked about living in a less developed nation for a while.

We have a friend who lives in Panama. He builds and sells houses to rich Americans and Canadians. His cost of living for a family of four with a villa very close to the beach is about $1700 per month. He loves it down there and said the health care is not what people assume. Doctors are less likely to push medication on you but if you need medication it's very inexpensive.

If we wanted to live down there full time we could easily retire right now. So a temporary relocation is not out of the question.

 

[exnavynuke]

I know everyone means well and I did come here for advice but I feel that some of you (not all) are little too pessimistic. If it's not one thing it's another.

"You should be more concerned with health care costs and not the markets"
"What will you do with such a long retirement. You'll get bored and feel under utilized"
"You won't want to work part time jobs making much less doing menial tasks"
"There's no way you'll have enough income with inflation"

I think some people feel that the only way to retire early is like a "normal" early retiree, somewhere in your 50's, preferably around age 55. In my opinion, working at a job that you don't enjoy until you're 50 years old is insanity, especially if you have the financial means and a well thought out, disciplined budget that provides you with an enjoyable life style. The thing we both want to avoid is the "we'll pad the bank account another year" syndrome or we'll "stick it out" another two years and then retire. If the markets drop and we hit a recession during the time while I'm "sticking it out" or "padding my net worth" then I'll feel like I have to keep working and wait until the markets rebound. Before you know it, I'll be over 50.

I have factored in inflation into my planning. Rising health care costs are a concern and I have room in my budget to allocate more toward health care. I certainly won't get bored during retirement or feel unimportant.

My biggest concern is retiring into a long bear market or some black swan like event that takes many years to recover from. I guess this is a concern that any retiree, young or old must face. Based on some of the FIRE calculators people have recommended, my plan works out 90-100% of the time. I know, I know, some of you will poke holes in these calculators too. Retirement planning is not an exact science and there's no bullet proof plan unless of course I wait until my late 50's and accumulate another 2 million dollars and then call it quits. That's just not happening.

I'm 40 currently and plan on retiring in the next 7 years right now. I can afford to retire today, if I want to stay home everyday in retirement. I don't, so I'm currently working to get to the point where I can maintain or slightly increase my quality of life outside of work when I retire.

I don't know your current insurance situation, you could be paying out of pocket for it now and thus it's already included in your current spending or your $3,300 could include the cost of insurance you've already priced out. In either of those cases I see no problem with your current plan (do a partial retirement to some part-time work for a while starting now/soon). If, however, you're planning on not having any insurance when you retire or you aren't including the cost of paying for your own insurance then I would suspect that you're taking a massive risk. The fact that I went from "maybe a Tylenol a couple times a year" to "significant health issue requiring thousands of dollars worth of medication every month" after a physical in my late 20's makes me grateful for my insurance situation (VA pays for everything) and wary of the costs others can suddenly find themselves having to pay for.

That said, everyone who retires is taking some risk. How much risk a person is willing to take is up to their personal preferences. Some of the people on this site worked way too long imo, but that's what they were comfortable with. Some didn't work long enough (more than one over the years has been forced by their finances to go back to work). If you're willing to accept the risk associated with your retirement plan then that's your prerogative. I'm sure if you really want to you could find a way to make it work even in that other 10% if you're willing to do what would be necessary.

 

[littleb]

Thank you. My current job won't allow me to work less hours. There's some flexibility with the time of day I can work as long as you're hitting their unreasonably high stretch goals but reducing the number of days you work is not an option.

We love New England. The only place we would consider moving is the Pacific Northwest which has an even higher cost of living. We've back packed all over Central America before we took full time jobs so we've talked about living in a less developed nation for a while.

We have a friend who lives in Panama. He builds and sells houses to rich Americans and Canadians. His cost of living for a family of four with a villa very close to the beach is about $1700 per month. He loves it down there and said the health care is not what people assume. Doctors are less likely to push medication on you but if you need medication it's very inexpensive.

If we wanted to live down there full time we could easily retire right now. So a temporary relocation is not out of the question.

Moving to another country is a smart option with the health care premiums and costs hitting all time highs in the US. So many unknowns. Moving to another country is an option we are considering which will allow us to stretch our retirement money.

You back packed through South America and have a friend in Panama so you know what to expect. You seem to have a mentality of living frugal to enjoy the simple things in life with low cost hobbies. I don't see you getting bored at all because your life with be fulfilled with the hobbies you and your wife enjoy. Many of my friends and family became bored after retirement because they sat at home and did nothing. They had no plan in place for activities or hobbies during retirement.

Many people do not understand people who love the outdoors and enjoy the simple things in life. Our hobby expenses might include new trail running shoes or new tires for our bike. Low cost compared to our friends who have the expensive motor homes and travel first class. We camp in a tent and our next adventure is learning to kayak. Nothing wrong with their lifestyle but we are happy with less in life.

We are in the process of selling everything and our retirement future is open and flexible at this point. By being flexible we are confident we can cut our retirement expenses by 1/3 or 1/2. Health care is the dragon we are currently trying to slay.

Panama sounds like a great option for you. Good luck.

 

[jjonas]

Many people do not understand people who love the outdoors and enjoy the simple things in life. Our hobby expenses might include new trail running shoes or new tires for our bike. Low cost compared to our friends who have the expensive motor homes and travel first class. We camp in a tent and our next adventure is learning to kayak. Nothing wrong with their lifestyle but we are happy with less in life.

We are in the process of selling everything and our retirement future is open and flexible at this point. By being flexible we are confident we can cut our retirement expenses by 1/3 or 1/2. Health care is the dragon we are currently trying to slay.

Panama sounds like a great option for you. Good luck.

Yes, you hit the nail on the head. I don't think we could retire with the assets that we have if loving the outdoors wasn't a part of the equation. Many of the things that provide us with entertainment cost the price of gas to get there or the one time purchase of equipment that will last many years. Our best times are hanging out on the beach, hiking, paddle boarding, taking out the bikes etc..

I like your idea of selling everything and being flexible. This is something that we will have to consider. We do like our house a lot but it's always something we could rent on Airbnb and come back to later.

I can also see how people would question our $3300 monthly expenses of if we lived more of a conventional lifestyle. Someone pointed this out to me on another early retirement forum. Many retirees hire people to landscape and mow their lawn, plow their drive way, have 100's of unwatched channels on cable, blast the air conditioning in the summer months, leave the TV and lights on when not in use, go out to breakfast, lunch and dinner several times a week. For entertainment they have time shares, go on cruises, play lots of golf, have expensive boats, doggie day care etc.. All of this stuff adds up quick. Nothing wrong with that lifestyle if that's what you enjoy but we live much differently.

We actually enjoy planning out and preparing our own food. I like landscaping and doing my own plumbing. If I had the time I could probably put a roof on my house. I've already painted the whole thing once. I can do most maintenance on my cars and we'll drive them to about 200k miles.

I think if you enjoy the outdoors as your entertainment, you're not wasteful and try to enjoy the process of doing things, you don't have to spend a lot. This is how my wife will retire before she's 40 years old.

 

[MrLoco]

Yes, you hit the nail on the head. I don't think we could retire with the assets that we have if loving the outdoors wasn't a part of the equation. Many of the things that provide us with entertainment cost the price of gas to get there or the one time purchase of equipment that will last many years. Our best times are hanging out on the beach, hiking, paddle boarding, taking out the bikes etc..

I like your idea of selling everything and being flexible. This is something that we will have to consider. We do like our house a lot but it's always something we could rent on Airbnb and come back to later.

I can also see how people would question our $3300 monthly expenses of if we lived more of a conventional lifestyle. Someone pointed this out to me on another early retirement forum. Many retirees hire people to landscape and mow their lawn, plow their drive way, have 100's of unwatched channels on cable, blast the air conditioning in the summer months, leave the TV and lights on when not in use, go out to breakfast, lunch and dinner several times a week. For entertainment they have time shares, go on cruises, play lots of golf, have expensive boats, doggie day care etc.. All of this stuff adds up quick. Nothing wrong with that lifestyle if that's what you enjoy but we live much differently.

We actually enjoy planning out and preparing our own food. I like landscaping and doing my own plumbing. If I had the time I could probably put a roof on my house. I've already painted the whole thing once. I can do most maintenance on my cars and we'll drive them to about 200k miles.

I think if you enjoy the outdoors as your entertainment, you're not wasteful and try to enjoy the process of doing things, you don't have to spend a lot. This is how my wife will retire before she's 40 years old.

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.

For me retirement is not just about "scraping by", limiting activities only to those which are free, or having to travel to a third world country for cheaper medical care... but having the funds available to do what we want ....when we want.

But again....good luck whatever you decide to do.

BTW: I would bet that the majority on here with substantial assets rarely blasted the AC in the summer or left the TV and lights on. Saving for retirement for most people probably coincided with watching expenses. The two usually go hand in hand.

 

[daylatedollarshort]

I think if you enjoy the outdoors as your entertainment, you're not wasteful and try to enjoy the process of doing things, you don't have to spend a lot. This is how my wife will retire before she's 40 years old.

Not all, but many posters here live like that. The second chapter of The Millionaire Next Door is titled Frugal, Frugal, Frugal. One of the authors of TMND, the late Thomas Stanley wrote a lot about millionaires often being cheap dates, which is how they got to be millionaires:

"Many of the favorite activities of millionaires are not at all costly. It matters not if you are rich or poor, the best things in life are free or close to it. "
http://www.thomasjstanley.com/2011/05/a-cheap-date/

But that still doesn't change health care or long term care costs in the U.S.. if you intend to retire in the U.S. I've supported kids through college, so I know it is possible to have a pretty fun life living on an even lower budget than what you have outlined - thrift shop furniture, barbecues with friends, days at the beach, jeans and T-shirts for clothes and bikes, long boards and monthly bus passes for transportation. However, health insurance rates go up as people get older, most people don't stay healthy forever no matter how much exercise they get and how many bowls of oatmeal with blueberries and chia seeds they have for breakfast and then die peacefully in their sleep one night.

But as others have said, it is your life to do what you want and take whatever financial risks you are comfortable with.

 

[Fedup]

I think that's another naive assumption. What make you think we didn't enjoy the outdoors when we were younger and enjoy doing our own landscaping. Even at the ripe old age of 50something and 60something, we are not golfing people, nothing wrong with golf, but we did our own landscaping from scratch instead of paying $50k-$60k like my next door neighbors, or all the neighbors in our street.
So many condescending attitude from this thread. 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.

 

[GravitySucks]

One of the conventional strategies to mitigate sequence of returns risk is to have an inverse AA (more bonds than stocks) initially and migrate to a more conventional AA over the first 10 years... or alternatively, a bucket strategy where you use a bond ladder for the first 10 years of spending and then invest the rest in a more conventional AA. So for example, if your WR was 3.5%, start with a 40/60 AA and migrate to 60/40 in the first 10 years... the 60 of bonds is 3.5%*10 years + 40%*[1-(3.5%*10 years)].

You might consider a muni-bond ladder in your taxable account to cover that first 10 years while at the same time giveing you plenty of room to do Roth conversions, and then tapping the Roth once the taxbale funds are depleted.

To your worry about sequence risks, I agree with pb4uski. I have a ten year CD / bond ladder that covers my mandatory spending of taxes, utilities, insurance, mortgage and food. It's not perfect as a high inflation period could kill that plan, but it's a plan that lets me sleep well.
Most members here want a 99% certainty they will not be broke at a point where 99% will be dead. If your risk tolerance is higher than ours than go in peace to enjoy your freedom.