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Old 03-29-2018, 01:07 PM   #21
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I wasn't worried before, but now...
Old 03-29-2018, 01:27 PM   #22
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I wasn't worried before, but now...

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If I'm not mistaken, the 4% system is generally said to have a 95% success rate (for 30 years, but that's another issue I won't get into). Not 100%. So there is also a 5% failure rate "baked in" to these studies. Guess when those failures are most likely to happen? In poor sequence of return situations is my guess. So yes, SOR is baked in, as a very possible failure.
My understanding is the same as yours. The 4% system works 95% of the time, which translates into "fails 5% of the time". Is a 95% success rate good enough? I dunno! But read on...

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Nobody is going to be sympathetic that your plan should have worked 95% of the time.
Again, you are right. But the same can be said for a 99% success rate, if you are part of the unlucky 1%. So, what's the acceptable risk level? I repeat: I don't know. It's probably unique to each individual.

Certainly, if we are about to embark on a period of bad SORs, then the risk level won't be 1%, or even 5%. So how do we detect this early in the cycle? (Notice how smoothly I segued back to the OP's question? Pretty slick, eh?) Once again: I don't know!

Really, I have no idea. And it's precisely because I can't know in advance what's unfolding that I shouldn't start monkeying with the plan. (My record of decision-making in times of worry isn't good.) Start out with a sensible AA, a sensible WR, and then trust it.
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Old 03-29-2018, 01:45 PM   #23
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121G...Now that's funny!
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Old 03-29-2018, 01:59 PM   #24
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Unfortunately, it's out of stock.

Great link.
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Old 03-29-2018, 02:16 PM   #25
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Sequence of return risk is probably the number one factor which worries me about the "health" of my retirement portfolio. My question is : when does one know or realize that sequence of return risk is taking place?

For example. Take a retiree with a $1,000,000 portfolio with 50% invested in the S&P 500 and 50% in interm. bonds. Further assume this is all in a taxable account and the retiree is withdrawing 4% annually ( total return with dividends at 2% and withdrawal from earnings at 2%).

Now , we have a scenario akin to the start of the "lost decade" , the first 3 years of the 2000's where the S&P 500 had losses of 9, 12, and 22%.

When does the light bulb go off and the retiree says" Hey I need to reduce my withdrawal rate....take more from bonds/cash......reduce expenses , etc."

Does this occur after 1 qtr? Six months? The full year? I would hate to wait until the end of the year of 2002 when the S&P 500 tanked for 22% already. How does one distinguish between a "drop" in the market and the start of a true bear market which is where sequence of return becomes an issue?

Curious what others think.
The light bulb ought to go off before you retire. When does the light bub go off that it can be dangerous to cross city streets against the light? Judging by the number of pedestrian deaths, not soon enough.

I wonder if some of these questions are posed mainly to elicit conversation, because it is fairly clear that negative outcomes will not necessarily occur in a way that is same as the past.

Ha
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Old 03-29-2018, 02:30 PM   #26
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My understanding is the same as yours. The 4% system works 95% of the time, which translates into "fails 5% of the time". Is a 95% success rate good enough? I dunno! But read on...



Again, you are right. But the same can be said for a 99% success rate, if you are part of the unlucky 1%. So, what's the acceptable risk level? I repeat: I don't know. It's probably unique to each individual.

Certainly, if we are about to embark on a period of bad SORs, then the risk level won't be 1%, or even 5%. So how do we detect this early in the cycle? (Notice how smoothly I segued back to the OP's question? Pretty slick, eh?) Once again: I don't know!

Really, I have no idea. And it's precisely because I can't know in advance what's unfolding that I shouldn't start monkeying with the plan. (My record of decision-making in times of worry isn't good.) Start out with a sensible AA, a sensible WR, and then trust it.
OK, good, we agree that it can fail, though the odds are small.

IF you happen to be on a failure path, at some point you will have to monkey with the plan. That's just a given. You can't acknowledge that there is a failure possibility but pretend it can't happen.

Maybe for you that's "wait until it is broke", which means you simply do not have enough to withdraw that 4%+inflation. At that point you'll be cutting expenses way beyond the bare bones. Nearly all of us will have some kind of social security or similar program providing some income, but that may mean living in section 8 house, living on Ramen noodles, etc. I mean, if you really say stick to the plan, that's what it'll come down to, right?

That's not for me. I'd rather make small adjustments early, trade filet for sirloin and salmon for tilapia, and hang onto that aging car for a little longer or replace it with an older used car than I planned. Hold off on the big trips. Or find a new way to make some income, like getting a job somewhere. If things stay bad, I can continue doing that, but I'm not going to wind up living under a freeway ramp unless it gets horrendous. If it gets better, I can resume my previous lifestyle and put the leaner days behind me. That's what the OP is asking, when does it get to the point where you can't just close your eyes and hope it all works out by sticking to the plan?

I think it's obvious to everyone that if you start off with a couple double digit gain years, that your chances of success are increased, and you can stay on course. But if you start off with three down years, it seems to me you ought to start giving some very serious thought to altering the plan--specifically, cutting expenses or finding new income. I'm sure I'd do it after two years, if not after the first.
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Old 03-29-2018, 02:33 PM   #27
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My understanding is the same as yours. The 4% system works 95% of the time, which translates into "fails 5% of the time". Is a 95% success rate good enough? I dunno! But read on...



Again, you are right. But the same can be said for a 99% success rate, if you are part of the unlucky 1%. So, what's the acceptable risk level? I repeat: I don't know. It's probably unique to each individual.

Certainly, if we are about to embark on a period of bad SORs, then the risk level won't be 1%, or even 5%. So how do we detect this early in the cycle? (Notice how smoothly I segued back to the OP's question? Pretty slick, eh?) Once again: I don't know!

Really, I have no idea. And it's precisely because I can't know in advance what's unfolding that I shouldn't start monkeying with the plan. (My record of decision-making in times of worry isn't good.) Start out with a sensible AA, a sensible WR, and then trust it.
Just my 2 cents. To the extent one believes strongly in the various calculators, the 5% failures correlating to the 1929, 1965, 1966 etc starting point years caused my decision to seek 100% success. Even though the past doesn't guarantee the future, I wanted to be at 100% especially since retiring last year into high valuation markets. As an aside, it didn't cause me to work longer than I wanted to.
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Old 03-29-2018, 02:49 PM   #28
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I do not believe it makes sense to have a plan that I will take 4% plus inflation no mater what. I think I will be monitoring year to year so I think a Variable Withdrawal Strategy makes sense as described in Michael H. McClungs book "Living off your money".

Now if you have a 2% withdrawal rate and it meets your needs than you likely don't need to fret.
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Old 03-29-2018, 02:55 PM   #29
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Interesting thread. Thanks for cranking it up.

As a recipient of income streams that I receive from both pensions and SS, as well as RMD, it just hit me that SOR is really a slight risk that we are exposed to due to the constant inflow of cash.
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Old 03-29-2018, 03:21 PM   #30
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I do not believe it makes sense to have a plan that I will take 4% plus inflation no mater what. I think I will be monitoring year to year so I think a Variable Withdrawal Strategy makes sense as described in Michael H. McClungs book "Living off your money".

Now if you have a 2% withdrawal rate and it meets your needs than you likely don't need to fret.
capjak,
How do you feel the McClung strategy matches up with the Boglehead's VPW and Clyatt's variable strategies?
Starting to look into a variable WR for next year and potentially going forward.
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Old 03-29-2018, 03:36 PM   #31
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I do not believe it makes sense to have a plan that I will take 4% plus inflation no mater what. I think I will be monitoring year to year so I think a Variable Withdrawal Strategy makes sense as described in Michael H. McClungs book "Living off your money".

Now if you have a 2% withdrawal rate and it meets your needs than you likely don't need to fret.
Sometimes working a bit longer to pad the account is the best strategy. Years ago Megacorp had a "combo 80" plan (age plus years of service) to max out benefits (I would hit it at 58), and I had a dream plan of 55 and out.

Well the combo 80 went away, and I turned 55 in 2010. The numbers said I "could" do it, but coming off the big downturn, I just did not feel comfortable. At the same time I was asked if I would take a new position (well really told, but they like think they asked). It was actually the Project Management job I had desired since joining the company in 1988!

The new job gave me new life in the company. I knew it would be the job I retired from. No more looking for advancement. I liked the international travel and the direct client interaction.

So, 6 months before I hit 60, DW and I sat down and discussed the future again. By then the pot had grown over 80% and we knew it was time.

So, instead of worrying about a 4% WR (actually more than 5% until SS), we settled in at 2.5-3%. Which will drop to 1-1.5% with SS in 4 years.

While it would have been nice to go at 55 (or 58), SOR risks have almost gone away. Sure, there could be a black swan that will take us all down, but other than that I can breathe fairly easy.

We will likely leave a lot on the table for our DS, but that's OK too.
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Old 03-29-2018, 03:42 PM   #32
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I would look at it as the current retirement portfolio balance as a percent of the beginning (when you retired) retirement portfolio balance... if that ratio ever gets to 80%... reassess and be careful.

80% is judgemental.. could be 90% or 85% depending on how conservative one is... also might vary with WR... 90% if a higher WR like 4% or 80% if a lower WR like 3%.

Ours is 125% after 6 years.... so far, so good.
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Old 03-29-2018, 05:16 PM   #33
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Check out the two books by Henry K. (Bud) Hebeler, I believe his methodology automatically accounts for this in his withdrawal strategy.

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Old 03-29-2018, 05:23 PM   #34
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I would look at it as the current retirement portfolio balance as a percent of the beginning (when you retired) retirement portfolio balance... if that ratio ever gets to 80%... reassess and be careful.

80% is judgemental.. could be 90% or 85% depending on how conservative one is... also might vary with WR... 90% if a higher WR like 4% or 80% if a lower WR like 3%.

Ours is 125% after 6 years.... so far, so good.
You made me look, because I also have 6 years of retirement under my belt.

Current stash is 138% of what it was when my earned income stopped. Inflation not accounted for, but gee, I can't complain.

So, looking good for 24 years left to go? Well, chances are I have less time than that. Maybe for my wife as women live longer.
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Old 03-29-2018, 05:43 PM   #35
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it is fairly clear that negative outcomes will not necessarily occur in a way that is same as the past.

Ha
You're spot on Ha. Discussions here on the FIRE board often revolve around ways of adding certainty to FIRE financial plans. For example, many folks seem hesitant to accept the fact that your financial results will vary dramatically depending on the years you're FIRE'd even if your portfolio and spending habits are the same. Start with a million bux and spend $40k/yr and you may end up broke or with much more than you started with.

To me, it's all about learning to live with risk, variability and uncertainty. Only living the years will reveal how things turn out.

The only predictable thing is that we're all going to die. So, plan a prudent financial path accepting that results could vary wildly depending on the times through which you live. Then, enjoy life!
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Old 03-29-2018, 05:52 PM   #36
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We are up 14% in inflation adjusted balances since 2003. Portfolio survival is critical but having a good time runs a close second.
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Old 03-29-2018, 06:09 PM   #37
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You're spot on Ha. Discussions here on the FIRE board often revolve around ways of adding certainty to FIRE financial plans. For example, many folks seem hesitant to accept the fact that your financial results will vary dramatically depending on the years you're FIRE'd even if your portfolio and spending habits are the same. Start with a million bux and spend $40k/yr and you may end up broke or with much more than you started with.

To me, it's all about learning to live with risk, variability and uncertainty. Only living the years will reveal how things turn out.

The only predictable thing is that we're all going to die. So, plan a prudent financial path accepting that results could vary wildly depending on the times through which you live. Then, enjoy life!
+1

The health risk is a much larger factor, and we cannot do or know a whole lot about that.
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Old 03-29-2018, 07:05 PM   #38
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We're only 18 years into a retirement starting in 2000. Do you know for sure it has survived?

I ran a quick spreadsheet, starting at 40K withdrawal, rising by inflation, with 50/50 stock/bond returns. You'd be at $1.1M and change now. Kind of recovered ($1M in 2000 would be worth nearly $1.5M now) but you are now withdrawing $58,829. Most success graphs show a nice increase in wealth in the early years, often reducing in the later years as you continue increasing your withdrawals to keep up with inflation. You'd probably still make it, but it's not a sure thing, especially since many think the market is poised for another correction.
So if we’re 18 years into a 30yr retirement, then our stash only needs to last 12 more years. $1.1MM divided by 12 is nearly $100k per year. Which makes Withdrawing $58,829 sound darned conservative to me. Which isn’t bad; I’d sleep very well at night. I don’t think anyone has claimed they’re 100% sure of anything in the future.
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Old 03-29-2018, 08:16 PM   #39
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Re: the question on a year 2000 retiree being OK right now, I think Kitces has a post on his site about how they're doing that talks about it.

eta: found it: https://www.kitces.com/blog/how-has-...ancial-crisis/
That article is very encouraging for me.Thanks!
I'm only 15 months into ER and all is well so far, but I like to know what the "floor" is on a safe withdrawal % is
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Old 03-30-2018, 01:34 AM   #40
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Sequence of return risk is probably the number one factor which worries me about the "health" of my retirement portfolio. My question is : when does one know or realize that sequence of return risk is taking place?
We use a matching strategy to minimize sequence of returns risk - relatively safe but limited upside potential and continue to live below our means in retirement for added safety.
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