Understating Sequence of Return Risk

[nun]

I retired at 52, about 18 months ago, and Ive been spending rental income and cash. I plan to keep doing that until next year when I'll be 55 and my pension will start. If I was spending from my investments this summer's correction would have been slightly worrying, but as I don't ever plan on spending from my investments sequence of return risk doesn't bother me.

 

[Danmar]

I but as I don't ever plan on spending from my investments sequence of return risk doesn't bother me.

Not even divs/interest? If not your heirs will certainly thank you.

 

[Cobra9777]

I retired at 52 two years ago. With interest rates near zero and stocks at lofty valuations, we were quite concerned about sequence of returns risk. In the year leading up to ER, we made the decision to take both pensions as an annuity, pay off the mortgage, buy two rental houses, increase our cash allocation to 5%, and tilt the taxable portfolio to high dividends.

At the moment, DW is still working OMY, but her pension annuity will replace her net pay exactly. So, our early spending is covered by her net pay/pension, my pension, rental income, dividends from the taxable account, and small withdrawals from the cash allocation, mainly just to cover occasional large discretionary items. This should easily carry us to 67-70 when SS and RMDs begin.

These actions probably sacrificed some long-term growth potential. But, with a long time horizon, we feel a lot better about near-term sequence of return risk compared to the alternatives. There's still a growing portfolio of stocks and bonds, sufficient to cover other long-term risks like inflation, longevity, and LTC. Also a monstrosity of a house that will be downsized at some point, further boosting the nestegg and cutting expenses.

I watch our investments and market volatility with interest as always. But with spending covered, I don't fret much about sequence of return risk, interest rate risk, what the Fed might do, price of oil, etc. My biggest problem is just getting past the rookie fears and actually spending some money.

 

[mathjak107]

i retired day 1 of the yaun drop . from that day on markets sucked . i am very concerned about sequence risk early on .

we will adjust our budget downward based on dec 31 balance .

i always thought i would be the unlucky one to pull the plug right on the eve of an extended drop .

bingo ! this is not china's fault , it is mine ha ha ha

the good news is i had a 50/50 allocation in mind but at the last minute decided to do a rising glide path in so i am at about 40% equity's at this point still averaging back in .

 

[nun]

Not even divs/interest? If not your heirs will certainly thank you.

That's the plan; rent, pension and SS checks from the US and the UK will more than cover my expenses.

 

[DEC-1982]

i retired day 1 of the yaun drop . from that day on markets sucked . i am very concerned about sequence risk early on .

we will adjust our budget downward based on dec 31 balance .

i always thought i would be the unlucky one to pull the plug right on the eve of an extended drop .

bingo ! this is not china's fault , it is mine ha ha ha

the good news is i had a 50/50 allocation in mind but at the last minute decided to do a rising glide path in so i am at about 40% equity's at this point still averaging back in .

For anybody retiring in 2015 (including me) these are early days; we need to look at this in years. But think of the people in this forum who retired in 2000 or 2007; I get the impression they have done reasonably well.

Two financial firms (one Goldman Sachs, I can't remember the other), said in the last day or two they are expecting S&P500 to be at 2100 at year end. I also read to watch out for 2017/2018. Apparently most market bottoms occur in the first/second years of a presidential term.

 

[MichaelB]

For anybody retiring in 2015 (including me) these are early days; we need to look at this in years. But think of the people in this forum who retired in 2000 or 2007; I get the impression they have done reasonably well.

+1

I retired just as the '00 crash took off. Missing in the discussion of sequence of returns risk how we respond to unfavorable markets. A balanced, diversified portfolio, and disciplined rebalancing are critical success factors. Another might be not spending too much time watching the day to day movements of the financial markets.

FIRECalc models our portfolio and shows the effect of bad sequence. What we should fear is the sequence not yet modeled. Sitting out in cash while the markets meander for a decade is one such scenario. They are a siren call to destruction.

It is way to early to call this the beginning of a bad sequence.

 

[utrecht]

I retired at 52, about 18 months ago, and Ive been spending rental income and cash. I plan to keep doing that until next year when I'll be 55 and my pension will start. If I was spending from my investments this summer's correction would have been slightly worrying, but as I don't ever plan on spending from my investments sequence of return risk doesn't bother me.

To each his own, but I dont understand this anymore than I understand people like RayinPenn working well past the point where they are completely financially secure.

Did you work your whole life for the sole purpose of leaving your kids a monstrous sized inheritance? Why don't you spend at least a little of your portfolio and enjoy life? Buy a huge steak. Go white water rafting. Take a hot air balloon ride. Go to Europe. Whatever. Enjoy yourself.

What are your kids going to do? Not touch that money and work their whole lives and then leave all the money to their kids? When does it stop? Someone should be enjoying this money. Life is not all about work, work, work.

 

[Markola]

What if inflation is 2-3 points lower than historical average? Isn't that a rather significant factor in sequence of return calculations?

 

[nun]

To each his own, but I dont understand this anymore than I understand people like RayinPenn working well past the point where they are completely financially secure.

Did you work your whole life for the sole purpose of leaving your kids a monstrous sized inheritance? Why don't you spend at least a little of your portfolio and enjoy life? Buy a huge steak. Go white water rafting. Take a hot air balloon ride. Go to Europe. Whatever. Enjoy yourself.

What are your kids going to do? Not touch that money and work their whole lives and then leave all the money to their kids? When does it stop? Someone should be enjoying this money. Life is not all about work, work, work.

I don't have any kids......I have nieces and charities ear marked for the money. I can buy all those things you mention right now. I just got back from a 2 month vacation riding my bike across the USA and plan to go to Iceland next year. There's beer in the fridge and a movie to see this afternoon and then beers with friends later on so I'm set. I don't plan on spending the investments, but I might have to if a very large capital expenditure comes along, I'm not going to be dogmatic about it. I'm living pretty much like I did when I worked because my ER income is the same as what I spent while working. I don't see any reason to spend more money just because it's there.

 

[daylatedollarshort]

To each his own, but I dont understand this anymore than I understand people like RayinPenn working well past the point where they are completely financially secure.

Did you work your whole life for the sole purpose of leaving your kids a monstrous sized inheritance? Why don't you spend at least a little of your portfolio and enjoy life? Buy a huge steak. Go white water rafting. Take a hot air balloon ride. Go to Europe. Whatever. Enjoy yourself.

What are your kids going to do? Not touch that money and work their whole lives and then leave all the money to their kids? When does it stop? Someone should be enjoying this money. Life is not all about work, work, work.

Many happiness studies show that after a certain point spending more money does not bring more happiness. Others things do - like helping others for one. Personally I don't see leaving money or maybe giving more away when we are older and sure we won't need it to charity as a bad thing. If the studies are right, being a part of the community and giving back might after a certain point of spending actually may bring you more happiness than buying more consumer goods and services.

The mediterranean diet is healthier than steak. We go out to eat frequently now. I have a stack of restaurant Groupons and gift cards we need to use up. I've been whitewater rafting and to Europe many times. We have family in Europe we stay with and a stack of frequent flyer miles so we could go there for free tomorrow if we wanted to. We live within driving distance of many rivers and used to belong, and could rejoin if we wanted, to an outdoor co-op so white water activities are pretty inexpensive for us. I wouldn't want to take a hot air balloon ride.

Why not leave our money to give another abused circus elephant a home at the local animal sanctuary, build a tiny house for a homeless family or support the local legal clinic to help people with criminal records who want to work but can't get jobs? Those are the kinds of projects I would like to support more some day.

 

[Corporateburnout]

I don't understand why people feel compelled to tell us that their sequence of return risk is 0 when they have a 0% WR from their portfolio. It is rather obvious that their sequence of return is not a concern.

As a retiree with no pension I am concerned about the first few years of retirement. Our retirement expenses are covered strictly from our portfolio and if the market declines by 20% over the next year or so we will consider taking SS @62 to reduce reliance on our portfolio.

 

[Danmar]

That's the plan; rent, pension and SS checks from the US and the UK will more than cover my expenses.

If your portfolio is significant you are going to forgo quite a lot of potential spending? Do you have a desire to bequeath a large amount? Curious why you would save this yet never expect to spend it?

You can only do 2 things with money, spend it or give it away. Giving it away can be viewed as spending it, I think. To each their own, but in a thread on sequence of return risk, you appear to have little to add.

 

[hnzw_rui]

What if inflation is 2-3 points lower than historical average? Isn't that a rather significant factor in sequence of return calculations?

We've already seen a history of inflation that isn't just 2-3 points lower than historical average: the Great Depression. So far, 1966 still beats it as worst case due to the 1970s stagflation.

 

[utrecht]

Many happiness studies show that after a certain point spending more money does not bring more happiness. Others things do - like helping others for one. Personally I don't see leaving money or maybe giving more away when we are older and sure we won't need it to charity as a bad thing. If the studies are right, being a part of the community and giving back might after a certain point of spending actually may bring you more happiness than buying more consumer goods and services.

The mediterranean diet is healthier than steak. We go out to eat frequently now. I have a stack of restaurant Groupons and gift cards we need to use up. I've been whitewater rafting and to Europe many times. We have family in Europe we stay with and a stack of frequent flyer miles so we could go there for free tomorrow if we wanted to. We live within driving distance of many rivers and used to belong, and could rejoin if we wanted, to an outdoor co-op so white water activities are pretty inexpensive for us. I wouldn't want to take a hot air balloon ride.

Why not leave our money to give another abused circus elephant a home at the local animal sanctuary, build a tiny house for a homeless family or support the local legal clinic to help people with criminal records who want to work but can't get jobs? Those are the kinds of projects I would like to support more some day.

Im sure those studies are correct but lets not forget that "after a certain point". In this case he has more than enough money but hasnt increased his standard of living at all even though he can easily. Almost everyone would be happier if they spent a little more money on whatever it is that they enjoy.

We saved, invested and sacrificed during our working years so we could enjoy retirement. Not to just let the money sit there. We spend more than double now what we spent in retirement and we are ALOT happier.

We moved to a much higher cost of living area, that is much nicer. The weather is better. We are by the beach. We are near relatives. All of that makes us happier. Our rent is more than double what our mortgage was.

We have nicer cars (brand new sporty convertible) that make us happier. We bought new furniture, bigger nicer TVs, surround sound systems etc. All of that gives us extra enjoyment. We go on much more frequent vacations and stay in nicer hotels. I dont believe these things would not make people happier. We were happy without them and we dont need them, but we do enjoy them.

We also give things and money to people around us that need it. When we bought new TVs, we gave our old ones to nieces and nephews who were just getting out on their own and need things for their new apts. That makes us happy.

Watching digital numbers on a computer screen that represent increasing investment balances that we will never use, gives us no increased happiness whatsoever.

 

[NW-Bound]

I also don't understand people saving money with the intention of never touching it.

Sequence-of-return risk is real, and should be of most concern to extreme early retirees in the 40s or even earlier. As for those in the mid-to-late 50s and above who already have SS or close to eligibility, bad market returns will hamper one's lifestyle but should not bankrupt him. If that's not the case, he should do OMY or have the ability to cut back spending as needed. A quick run on FIRECalc should tell one the range of outcome to expect.

And one must always be "mobile and hostile", like Uncle Mick is fond of saying. We have not cut back any spending, but if the market keeps on swooning, I do not think I will have a problem convincing my wife to cut back. Gosh, we have been spending a lot more than I expected when I started my retirement.

 

[daylatedollarshort]

Im sure those studies are correct but lets not forget that "after a certain point". In this case he has more than enough money but hasnt increased his standard of living at all even though he can easily. Almost everyone would be happier if they spent a little more money on whatever it is that they enjoy.

Maybe for some people not having to worry every day about the stock market and sequence of returns risks brings more happiness than the ability to spend more money on consumer goods. Bill Bernstein calls it the "when you've won the game it is time to stop playing" approach."

Most happiness studies show that after a certain point, there is not a high correlation between consumer goods and services and happiness levels, as people just tend to adapt to current circumstances:

https://en.wikipedia.org/wiki/Hedonic_treadmill

This might be a good topic for another thread. Does spending more money equal more happiness is a meaty topic in itself. Is enduring sequence of returns risk necessary for a comfortable retirement? One of my latest hobbies is finding ways of cutting back on spending while increasing our levels of happiness, which allows us to live well with a low volatility portfolio.

 

[Danmar]

This might be a good topic for another thread. Does spending more money equal more happiness is a meaty topic in itself. Is enduring sequence of returns risk necessary for a comfortable retirement? One of my latest hobbies is finding ways of cutting back on spending while increasing our levels of happiness.

Meaty indeed. But has been done here many times. People's views line up pretty much with their circumstances which vary greatly.

 

[daylatedollarshort]

Meaty indeed. But has been done here many times. People's views line up pretty much with their circumstances which vary greatly.

I think the "won the game, time to stop playing" is a relatively recent concept and varies greatly with the standard mutual fund company approach. I know Bill Berstein changed his investment approach for retirees on this post 2008, going so far as to call stocks in retirement nuclear level toxic.

There seems to be no end to the threads on Bogleheads, with Mr. Bernstein himself often contributing, to discussing his new approach.

 

[nun]

If your portfolio is significant you are going to forgo quite a lot of potential spending? Do you have a desire to bequeath a large amount? Curious why you would save this yet never expect to spend it? You can only do 2 things with money, spend it or give it away. Giving it away can be viewed as spending it, I think. To each their own, but in a thread on sequence of return risk, you appear to have little to add.

I've always been frugal and saved. I never planned to not use my investments I just always took the chance to save for the future. I started straight out of college and had the benefit of going to college in the UK back when socialist policies allowed me to get a great education for free. So I left with no debt and a bit of seed capital because Id saved some of my UK Government grant money When I came to the US I chose to keep paying into the UK SS system at the reduced expat rate while also paying into the US system so now I'll get SS checks from both countries. I also started to save into a 403b and I've maxed out 401ks etc in all jobs. I also bought a 2 family home and paid off the mortgage early. Finally my last job had a COLAed DB pension and I also maxed out 403b and 457 and ROTH accounts. So You might say I've ended up with 4 stable income sources; rent, DB pension and two SS checks that will produce about twice my current annual spending. My portfolio is substantial and I could buy a BMW rather than driving a Honda Civic, but it just seems like a waste of money as the Civic works just fine.

My mother saved all through her retirement and left me some money. I intend to do the same for my nieces, a couple of local charities and my old college to support scholarships as they now charge fees.

 

[Meadbh]

If your portfolio is significant you are going to forgo quite a lot of potential spending? Do you have a desire to bequeath a large amount? Curious why you would save this yet never expect to spend it?

You can only do 2 things with money, spend it or give it away. Giving it away can be viewed as spending it, I think. To each their own, but in a thread on sequence of return risk, you appear to have little to add.

+1
....except perhaps generating pension envy.

 

[MichaelB]

I've always been frugal and saved. I never planned to not use my investments I just always took the chance to save for the future.
./.
My mother saved all through her retirement and left me some money. I intend to do the same for my nieces, a couple of local charities and my old college to support scholarships as they now charge fees.

One thing I've always wondered is why frugality and thrift can be positive during work years and then turn negative during retirement. This points to the argument made by Wade Pfau and others of his profession, that money unspent is an undesirable outcome.

Living beneath our means during retirement is a legitimate way to minimize the risk of bad sequence of returns. We don't all share the same level of risk tolerance, nor do we all experience the same marginal utility for spending.

 

[daylatedollarshort]

With regard to pension envy, pensions are not a necessary requirement for avoiding sequence of returns risk using a liability matching instead of a mutual fund total return approach to retirement planning:

https://www.bogleheads.org/wiki/Matching_strategy

 

[Meadbh]

With regard to pension envy, pensions are not a necessary requirement for avoiding sequence of returns risk using a liability matching instead of a mutual fund total return approach to retirement planning:

https://www.bogleheads.org/wiki/Matching_strategy

True. That's why I have long term care insurance and rental properties. If I had pensions, I would not have invested in those.

 

[nun]

True. That's why I have long term care insurance and rental properties. If I had pensions, I would not have invested in those.

For most people that don't retire until SS age they have a bit of a built in liability matching strategy as the SS checks begin. For those that ER liability matching strategies aren't very attractive because interest and annuity rates are so poor that it becomes hard to generate sufficient income from stable fixed income or insurance products. So people look at the potential larger returns from equities and use a total return strategy, this opens them up to sequence of return risk. Back in the days of higher interest rates this would have been seen by many as taking on unnecessary risk.

If you are frugal or have a sufficiently large portfolio maybe a TIPS ladder, some rental income, an SPIA and SS will cover your income needs and insulate you from sequence of returns risk. This is a very conservative and old-fashioned way to fund retirement and obviously does not maximize your potential income.....it minimizes risk. Where we end up on the risk/return spectrum is a very personal choice, although I believe that it's often dictated by the need for income and by projecting historical equity returns into the future. But the income phase is very different than the accumulation phase so maybe the mutual fund AA and rebalancing strategy that got us to retirement needs to be changed a bit more than having a bigger bond allocation to get us through retirement.