SORR Mitigation Strategies

[RetiredAt49]

Thought I would share my personal SORR (sequence of returns risk) mitigation strategy - which has worked pretty well. Would enjoy reading others personal experiences too…

I retired at age 49 on January 3rd, 2022. In case anyone has forgotten, that’s the date which ended the longest bull market in history (I believe that’s accurate) so my timing couldn’t have been worse.

With an asset allocation of 100% in equities (excluding rental properties and a business buyout which covers about 50% of our expenses), we dipped a little into our 100% stock portfolio but we did the following to mitigate SORR:

1) Cut back a little on non essential expenses (e.g. vacations)
2) Acquired a 21 month, interest free credit card for many expenses
3) Ditched our AUM “wealth management company” - kudos and thanks to many of you who helped us through that transition!
4) Took out a HELOC on our primary home (which is paid for)… really haven’t used this option yet and will not unless the market drops again in 2023.

 

[SecondCor521]

The easiest one for a lot of people here is to just retire with a WR% that is 100% safe (or "125% safe"). Then SORR doesn't matter as long as you agree to stipulate that the future won't be worse than the worst of the past.

I FIREd with a ~2% WR at 46. Before the cool kids started talking about SORR. When I heard the term, I learned about it. It's not a new concept. It's been mentioned in the FIRE literature for literally decades, just not by that term. Now I'm at about a 1% WR. I know about the concept of SORR but worrying about it takes up exactly 0% of my mental bandwidth.

 

[FLSUnFIRE]

The easiest one for a lot of people here is to just retire with a WR% that is 100% safe (or "125% safe"). Then SORR doesn't matter as long as you agree to stipulate that the future won't be worse than the worst of the past.

I FIREd with a ~2% WR at 46. Before the cool kids started talking about SORR. When I heard the term, I learned about it. It's not a new concept. It's been mentioned in the FIRE literature for literally decades, just not by that term. Now I'm at about a 1% WR. I know about the concept of SORR but worrying about it takes up exactly 0% of my mental bandwidth.

To say it doesn't matter is a bit dismissive IMO. If back testing was predictive then perhaps one could dismiss it once they knew which line they were on; but it is not. I doubt the 2020, or 21, or 22 performance plots follow a prior year used in back testing for SW perfectly and certainly wouldn't count on them continuing to do so if the coincidentally did. There is still SORR. With a low starting WDR one probably does not need to overly stress though. However if one starts at 3% "SWR" and now is at a 4.5% WD (making up the numbers) one should certainly be concerned and would be wise to consider options if the market and inflation continue to beat them up early in their draw period.


My trailing 12mo expenses are tracking about 2.3% of my invested assets right now (1.95% @FIRE in 2021) but I'm not feeling "rich" as inflation is still very high relative to what I've experienced during my adult life. I am probably a bit more reluctant to splurge than I might have been if my actual WDR was less than planned. Generally, I have pretty frugal habits and am not "cutting back" but as I plan a few trips I do find that I am putting more thought in how to reduce the cost and considering trade offs I might not otherwise have done. If my WDR hits 3% due to market performance and inflation, I suspect that I will start being concerned and consider taking action -realistically, it would likely be incremental and subtle as it crept up.

 

[COcheesehead]

I went with Kitces bond tent or rising equity glide path strategy. Retired in 2020 in one bear market, now living through a second. I have as much today as the day I retired.
No need for HELOC, cutting expenses and really doing much else other than just follow the strategy. Having yields increase as much as they did only enhanced the return of our bond ladders.

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

 

[GravitySucks]

Retired into a rising market 2013. Highly recommend it.
Still keep a bond ladder to cover essential expenses

 

[Montecfo]

I always found concerns about SORR for folks who were using a SWR to be needless handwringing. I mean, you already back-tested your strategy against the worst markets in history.

But what if the future is worse than worse??

All you can do is withdraw less.

but what if that is STILL too much ??

Now having plans for what to do if you encounter turbulence is wise including some of the things the OP noted.

But you can never be 100% sure your withdrawal rate is safe.

 

[FREE866]

I retired at age 50 on 1/6/17


In hindsight I was so burnt out from 28 years of selling I just wanted out and took a chance.



I've gotten lucky I guess, I'm essentially all equity and my WR has been ~3-5% and my portfolio is up over 40% since 1/6/17. I can always cut expenses so that's my "mitigation strategy" if we have some cataclysmic market downturn that lasts for years.

 

[COcheesehead]

It all comes down to do you have enough and then is it resilient enough. The retirement answer man has some recent podcasts with guests who had enough, but it was not resilient enough - meaning the downturn put them into a dangerous position to continue their retirement without reducing their withdrawals which in turn meant big lifestyle changes. Nobody wants to do that just into their retirement years.

 

[MarieIG]

I retired a few days before OP. I have always been the belt and suspenders type. I had a list of things that I wanted finalized prior to retirement, including selling the marital residence (and moving into house inherited from my parents). Overhead expenses were still high (due to a HCOL area) but this provided some breathing room - thank goodness.

There was also a cash bucket set up to avoid the necessity to sell for living expenses - and also a plan which was somewhat flexible, for example, with Roth conversions, and not rushing to buy our "retirement home."

Concerning "discretionary" spending, we are still buying quality food for ourselves, the doggo, supplementing DS' family, and giving family gifts. Charity falls somewhere between mandatory expenses and discretionary, i.e. I have to pay mandatory, but I rather bump off a frivolous expense before cutting donations.

My spending on me things has slowed dramatically which is in part because I have time to slow down and think about whether I really want/ need the purchase, already have something comparable at home, or can find a good substitute. But - that may have happened no matter the market. I had an urge to fix up my parents' house, which I quashed, as it would involve expense and inconvenience, and our plan is to eventually sell the house and move out of state.

 

[jebmke]

Thought I would share my personal SORR (sequence of returns risk) mitigation strategy - which has worked pretty well. Would enjoy reading others personal experiences too…

I retired at age 49 on January 3rd, 2022. In case anyone has forgotten, that’s the date which ended the longest bull market in history (I believe that’s accurate) so my timing couldn’t have been worse.

With an asset allocation of 100% in equities (excluding rental properties and a business buyout which covers about 50% of our expenses), we dipped a little into our 100% stock portfolio but we did the following to mitigate SORR:

1) Cut back a little on non essential expenses (e.g. vacations)
2) Acquired a 21 month, interest free credit card for many expenses
3) Ditched our AUM “wealth management company” - kudos and thanks to many of you who helped us through that transition!
4) Took out a HELOC on our primary home (which is paid for)… really haven’t used this option yet and will not unless the market drops again in 2023.

I may be wrong but the March. 2020 - January, 2022 may not have been the longest bull market in history.

 

[ncbill]

There are no guarantees but the "never refilled" cash bucket strategy mentioned here worked just fine in backtesting:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

Note it essentially means you save 27.5x instead of 25x expenses to cover 30 years.

 

[clifp]

I retired at age 49 on January 3rd, 2022. In case anyone has forgotten, that’s the date which ended the longest bull market in history (I believe that’s accurate) so my timing couldn’t have been worse.

With an asset allocation of 100% in equities (excluding rental properties and a business buyout which covers about 50% of our expenses), we dipped a little into our 100% stock portfolio but we did the following to mitigate SORR:
[reduce expenses]

Those are all reasonable things, and as a member of Class of 2000 retirees (arguable the worst class since 1966), when the second bear market in 8 years hit in 2008, I did similar things.

But by far the smartest thing you did is the bolded actions. You don't have 100% portfolio, I suspect if you really added up the value of your portfolio is closer to 50/50 or maybe 60/40. All assets went down in 2022, real estate went done less, and more importantly from a cash flow, very few landlords had to lower their rents. Since most of were struggling to raise our rents fast enough from 2020 and 2021.

Compared to 2008/9 where I lost some sleep, the 2022/3 bear market has been a non-event because I've diversified my portfolio away from 100% equities the last dozen years.

 

[monte1022]

I went with Kitces bond tent or rising equity glide path strategy. Retired in 2020 in one bear market, now living through a second. I have as much today as the day I retired.
No need for HELOC, cutting expenses and really doing much else other than just follow the strategy. Having yields increase as much as they did only enhanced the return of our bond ladders.

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

I you don't mind my asking, how low did you go on equity % and how fast are you moving back up?

 

[SecondCor521]

Then SORR doesn't matter as long as you agree to stipulate that the future won't be worse than the worst of the past.

Emphasis added.

To say it doesn't matter is a bit dismissive IMO.

You seem to have disregarded the bolded part of what I wrote. The rest of your post seems to be a version of "what if the future is worse than the past?"

Yes, the future might be worse than the past. That is why I qualified my statement.

 

[COcheesehead]

I you don't mind my asking, how low did you go on equity % and how fast are you moving back up?

20%
3 ish years later I am at about 26%
I likely will never go above 40%

 

[Gumby]

I retired when FIRECalc said we could spend over twice the amount we actually do spend. The future could be worse than the worst of the past, but probably not twice as bad.

 

[DrRoy]

Retired into a rising market 2013. Highly recommend it.

I do too! Good luck with that. My SORR strategy was to RE only needing a 2-3% WR.

 

[retire48in2018]

I retired in Jan 2021. Our plan was to take out in Dec 2021z. When market went down end of 2021, we decided to rely on cash.

Our contingency for SORR - and later down years - was (is) to start with 3 years in cash. In good years, gradually rebuild this bucket for lean years. Also, cut expenses. The 3 year bucket - were stretching to 5 years with budget cuts.

We can live (normal budget, not reduced) on 3% withdrawal rate. But we’re 51 - and we can cut expenses - prefer to live it a little safer these first few years. Especially as we plan to also move to be closer to grand kids (1000 miles now - to - minutes away).

Not what we wanted - but content.

We could definitely increase (return to original budget) - based on Firecalc and virtually all online simulators - but….we are not prepared to pull out $ in down market - at least in beginning of retirement.

- FYI - we have no pensions, (just SS)

 

[USGrant1962]

I retired in Jan 2021. Our plan was to take out in Dec 2021z. When market went down end of 2021, we decided to rely on cash.

I'm not following you - do you mean end of 2022? S&P500 was around 3,800 in Jan 2021 and closed the year north of 4,600. What "market went down" at the end of the year? The end of 2021 was the all time market high and a perfect time to cash out some equities. 2022 kind of sucked.

 

[retire48in2018]

Sorry - we retired early 2021. Leaving payouts was through March 2022 (maturing incentives, etc).

We did not net takeout in 2022, and can use built up cash through 2025 if we have too.

 

[RetiredAt49]

I may be wrong but the March. 2020 - January, 2022 may not have been the longest bull market in history.

Many “experts” claim that the 2020 COVID drop wasn’t a “True Bear Market”…

 

[TheWizard]

I retired when FIRECalc said we could spend over twice the amount we actually do spend. The future could be worse than the worst of the past, but probably not twice as bad.

I didn't use FIRECalc, but this was ruffly my situation also.
Then once I started SS at age 70, the game was over.
Negative withdrawal rate henceforth...

 

[audreyh1]

Thought I would share my personal SORR (sequence of returns risk) mitigation strategy - which has worked pretty well. Would enjoy reading others personal experiences too…

I retired at age 49 on January 3rd, 2022. In case anyone has forgotten, that’s the date which ended the longest bull market in history (I believe that’s accurate) so my timing couldn’t have been worse.

With an asset allocation of 100% in equities (excluding rental properties and a business buyout which covers about 50% of our expenses), we dipped a little into our 100% stock portfolio but we did the following to mitigate SORR:

1) Cut back a little on non essential expenses (e.g. vacations)
2) Acquired a 21 month, interest free credit card for many expenses
3) Ditched our AUM “wealth management company” - kudos and thanks to many of you who helped us through that transition!
4) Took out a HELOC on our primary home (which is paid for)… really haven’t used this option yet and will not unless the market drops again in 2023.

We also retired a few months before a major bear market - the dot com bust. This bear market lasted for almost 3 years. But as it happened close to retirement we had set aside quite a bit of extra cash for travel the first 2 or 3 years. And because of this we did not pull back on lifestyle at all those bear market years. This cash cushion habit has kind of continued, especially now as our portfolio grew enough over the years that we don’t spend all our income. So I guess that’s now our real SORR mitigation strategy. Knock on wood.

 

[Kork13]

I'm not yet retired, and when I do, we will not be highly reliant upon our market investments (due to pensions & rentals, plus DW still working for a while). Once DW also stops working, we might start tapping investments, but likely not much (<1%). However, my intention is to hold at least 2 years of expenses in cash to provide a buffer against selling in a downturn. For what it would actually be needed for, that "2 years" could likely sustain us for at least 5 years of slow withdraw & zero investment sales. Then I can refill that cash bucket anytime a particular set of assets are positive, or anytime pension/rental income is above our needs.

Very simplistic, but functional. As mentioned earlier, having more than you need makes SORR alot less frightening.

 

[Sunset]

We had about 3 years of expenses in cash , and when adding in dividends per year, this money would last ~5 years.

Turns out we didn't need it yet, but it made us feel more comfortable.