Thoughts on risk and the 4% guidance

[NW-Bound]

Quote:

Originally Posted by Katsmeow ...Some of the failures did involve situations like you are talking about. They typically had a huge drop in the market in the first 3 years after retirement and the portfolio never recovered. But, a surprising number of failures didn't involve that situation at all. In some of them things looked fine in the first several years after retirement and the problems occurred many years later in the 30 year period. I don't disagree with the general concept that one should be wary in retiring when there is a market run up. I just disagree that failures only happen in that situation.

There were cases that failed immediately, and there were indeed cases that failed after a few years. With the latter cases, what happened was that the market condition caused the portfolio to stay relatively flat, and not be able to build up a surplus to withstand the later onslaught.

For example, had the market stayed flat from 1990 to 2000 or barely eked out enough return for a 4% WR, then someone who retired in 1990 would be in the same shoes as someone who retired in 2000 when the market tanked in 2003. However, in the earlier case, one was able to enjoy a few more years of serene retirement before panic set in. In the end, we all have to take a leap of faith if we do not want to work till we die.

I guess what we can take from this is that after a good year like 2013, we must not be complacent and should bank the gain for possible lean years ahead.

[Katsmeow]

Quote:

Originally Posted by NW-Bound There were cases that failed immediately, and there were indeed cases that failed after a few years. With the latter cases, what happened was that the market condition caused the portfolio to stay relatively flat, and not be able to build up a surplus to withstand the later onslaught.

I agree...to a point. However, I think it would be misleading to think that failures only occur when there has been a market run up. It is indeed possible to have a retirement occur when there wasn't been a big run up and for subsequent events to cause a failure.

[Ready]

If you are worried about a correction early on in retirement, just model it in Firecalc. Assume a 30% bear market is coming tomorrow, calculate your new net worth, and see what level of expenses you can incur and still have 100% success. If you can live on this number, I'd say you are in pretty good shape for ER.

[Live And Learn]

Quote:

Originally Posted by NW-Bound Well, I will not be doing that much better as I am basing my 3.5% WR on a high portfolio value at a possible market top. One cannot do OMY forever, so has to call it done at some point. But I cannot help noticing there are more new posters looking to retire soon than in the 2009-2012 period. This plus people asking if the 4%WR is too conservative gets me a bit leery. The market always has a way of making fools out of the majority of the people.

Very astute. As you know, I am one of those who has destined to do OMY x 2 (one of which is already over ! so theoretically I now really do only have OMY - well, 14 months but who's counting). The market run-up and the rising confidence levels in our economy and the market make me a bit more leery and have me sticking it out even tho FIRECalc gives me 100% and I have a WR of 3.25%. DH and I are 55 and 51, with no pensions, so I can justify the conservatism to myself. Buffet is right when he says "be greedy when others are scared, and scared when others are greedy". I have to wonder if we're entering "greedy" territory soon (or perhaps are already there).

[Ready]

So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up.

And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down.

Makes perfect sense to me.

[Live And Learn]

Quote:

Originally Posted by Ready So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up. And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down. Makes perfect sense to me.

Get out of my head please !

[REWahoo]

Quote:

Originally Posted by Ready So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up. And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down. Makes perfect sense to me.

That about sums it up.

[NW-Bound]

Quote:

Originally Posted by Live And Learn ... The market run-up and the rising confidence levels in our economy and the market make me a bit more leery and have me sticking it out even tho FIRECalc gives me 100% and I have a WR of 3.25%. DH and I are 55 and 51, with no pensions, so I can justify the conservatism to myself. Buffet is right when he says "be greedy when others are scared, and scared when others are greedy". I have to wonder if we're entering "greedy" territory soon (or perhaps are already there).

Regarding the risk of retiring into a market top, seriously, that is already taken care of by using a low WR. If we were to retire in a bad year, then a higher WR would be permissible. Of course all this is based from past data which shows that the market would rebound. If it doesn't, we are all deadmeat.

Still, when the market tanks, a lot of hurts comes from seeing our stash getting pummeled. A WR of 3% or 5% will make a difference in the long term, but matters little when the portfolio drops 30-40% in a year. This sense of loss is what I fear, while I should know that it's the time to buy, buy, buy...

I love investing for the fact that you are fighting yourself all the time. Some people think that investing is like a gamble, which it is not. Conquering one's internal greed and fear is hard.

[Options]

Quote:

Originally Posted by REWahoo That about sums it up.

+1

[Chuckanut]

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Originally Posted by REWahoo Your thoughts are typical of someone about to pull the plug, having second thoughts and succumbing to the JOMY syndrome. My advice: keep working until you can no longer stand it or your health fails. Those are both guaranteed cures for JOMY.

Alas, these are also great ways to spend some of the best years of your life grinding away at a job instead of enjoying the remainder of your life.

[Surfdaddy]

Quote:

Originally Posted by Katsmeow I agree...to a point. However, I think it would be misleading to think that failures only occur when there has been a market run up. It is indeed possible to have a retirement occur when there wasn't been a big run up and for subsequent events to cause a failure.

I don't believe anybody suggested that failures occur ONLY after market runups. My hypothesis was that failures would, however, be more likely in this situation, due to reversion to the mean.

[Koolau]

My take on the 4% rule (or any other name we wish to ascribe to our feeling good about pulling the trigger) is that it was intended to help plan WHEN to retire. I don't personally USE it to dictate my spending. IOW when FireCalc says you have reached 100% (or whatever you are comfortable with) success rate at 3.89% WDR, you have a good indicator that your "number" is sufficient to pull the trigger - assuming you can live on about 3.89% WDR. From then on, you are more-or-less on your own about spending. Many of us curtail spending in bad times and open the purse strings in good times. Others may "blindly" withdraw the 3.89% every year and find a way to spend it. I think in the 10 or so years I've followed the forum, I've only heard one person admit to total "failure" at ER and IIRC there were reasons other than FireCalc involved.

My suggestion (not advice) is to do your planning around a certain "number" but have 2 or 3 back-up plans in case things are worse than they have been in the past. (I've never actually done a back-up plan for things being BETTER than planned.) I personally have a back-up plan that would be "acceptable" retirement on 1/3 of what I spend now. IOW, I would not need to go back to w*rk nor eat dog food.

Personally, I would never pull the trigger the day FireCalc was "favorable" if I needed every dollar FireCalc said I could draw just to stay retired. Naturally, YMMV.

[Hermit]

Quote:

Originally Posted by Surfdaddy As we are approaching our retirement "number", a number of thoughts come to mind, mainly related to "is that still really enough?". Seems to me that there are a number of risks: 1 - What will our expenses be? (we still have kids in college, don't know whether they'll find jobs, etc.) ....

Back to the OP's questions: You may have a large unknown here. My son will put in at least 6 years on his undergraduate. I didn't know it would go past 5 until a couple months after I retired. I can afford it, but if I were closer to 4%, I would be pulling my hair out (and there isn't much left up there.)

[haha]

Quote:

Originally Posted by Surfdaddy I don't believe anybody suggested that failures occur ONLY after market runups. My hypothesis was that failures would, however, be more likely in this situation, due to reversion to the mean.

This simply has to be true. How could it not be?

Only if returns are random, with no rtm tendency, or connection to assets and inherent earning powers of the firm/

Ha

[John_Q_Public]

Having kids in college and then still helping them out later on is rough .The best plan is one where you can live OK on the 4% model of withdrawal . And able to take less during down market years . Few have that luxury though . Some folks have a defined pension plan, or two, to support them and eventually Social Security and Medicare to look forward to . Some of us have all of the preceding to the point they continue investing during retirement years. And reinvest their IRA RMD's into their taxable stock and bond funds as well .

[MooreBonds]

Quote:

Originally Posted by Ready So when the markets are down we practice OMY because our portfolios have lost value and we want to keep working until we make it up. And when the markets are up, we practice OMY because we fear a correction is coming soon and we won't have the full current value of our portfolio to count on when we begin the draw down. Makes perfect sense to me.

You have to remember that for the most part, the only recent "down market" was a very extreme ~40% drop in 2008-2009. (I don't know for a fact, but I get the impression that a majority of the ERs on the forum retired after 2003?)

Having such an extreme drop is certainly understandable with testing someone's resolve in making a nearly permanent decision on walking away from current high earnings and taking a leap that future returns will not be worse than in the past US history or worse than other countries' returns. It's not like we had a 5%-10% correction and people were going crazy fretting over safe withdrawal rates and OMY(x2/x3/x4).

[brewer12345]

Mentally masturbate all you like and stay at work continuing to pay taxes. Eventually you will either decide to take the leap, or die with your boots on. Or... Make the best plan you can, build in plenty of fat, and make sure you have plans B, C and D lined up and then get on with life. Your choice. Personally, I am tired of the slog and will take my chances.

[daylatedollarshort]

I don't count on 4% WR and we don't have a big stock allocation, so I don't really worry too much about a bear market.

We just focus on low expenses and also have hobby jobs, pensions and eventually SS for other retirement income streams. Plus I think I am going to freshen up my tech skills so if we ever do need extra money I could do contract work. I was looking at online classes today. Years ago when I did something similar I had to physically go to various colleges evenings and weekends to find state of the art classes. Now everything is online and free or fairly cheap, and I want to do something to keep my brain active anyway, so why not keep up to date job skills as a fallback plan.

[Meadbh]

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Originally Posted by obgyn65 +1. This is one of the reasons why I got cold feet this year and did not FIRE. Building up the financial cushion instead.

I had a feeling this would happen.

[ERD50]

Quote:

Originally Posted by daylatedollarshort I don't count on 4% WR and we don't have a big stock allocation, so I don't really worry too much about a bear market. ... .

Do you worry about inflation?

-ERD50