When do you actually "know" that sequence of return risk may impact a portfolio?

[RunningBum]

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.

 

[Dtail]

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.

 

[capjak]

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.

 

[mickeyd]

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.

 

[Dtail]

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.

 

[CardsFan]

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.

 

[pb4uski]

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.

 

[gauss]

Check out the two books by Henry K. (Bud) Hebeler, I believe his methodology automatically accounts for this in his withdrawal strategy.

-gauss

 

[NW-Bound]

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.

 

[youbet]

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!

 

[Lsbcal]

We are up 14% in inflation adjusted balances since 2003. Portfolio survival is critical but having a good time runs a close second.

 

[NW-Bound]

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.

 

[cooch96]

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.

 

[FREE866]

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...he-tech-bubble-and-the-2008-financial-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

 

[daylatedollarshort]

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.

 

[DrRoy]

You could try running Firecalc with 90% of your assets, 80%, etc, and see where it gets into trouble.

 

[MrLoco]

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.

This makes a lot of sense and looks at the overall picture. Thank you pb4uski.
Also thank you to those that mentioned VWR. Will have to study that more.

Appreciate the exchange of ideas and opinions. I am always learning something new.

 

[Islandtraveler]

I have devised my own withdrawal strategy that works on a sliding scale based on market performance. In good years, I withdraw a higher percentage and in down years, a lower percentage. I put the excess funds in up years into my short term bond fund or draw from it in down years. This fund will range from one to three years of living expenses and grow or shrink based on market conditions. My theory is that this will give the account more time to recover losses in down years and harvest gains during the better years thus buffering the dreaded “sequence of returns” demon. As to the original question of when does one know the problem is taking place? I think the answer is similar to the question of the definition of pornography. You’ll know it when you see it.

 

[DEC-1982]

One needs to think of financial formulas and the resultant conclusions as a reasonably confident guess. 95% success for the 4% rule, 90% success in FIDO, FIRECalc etc they can easily produce wrong results for us BECAUSE we put in numbers that are best guesses about our future. There are so many unknowns about life in future years. Health, car or other accidents, divorce, remarriage, children coming back home ... There are lots of other bad situations that one can think of as reasonably possible, all of which can affect what will happen to one financially. We are fooling ourselves if we think 100% in the financial tool we ran guarantees anything.

 

[pjigar]

I think most people will adjust instinctively and unconsciously unless they never check their portfolio balance.

 

[marko]

There are so many unknowns about life in future years. Health, car or other accidents, divorce, remarriage, children coming back home ... There are lots of other bad situations that one can think of as reasonably possible, all of which can affect what will happen to one financially. We are fooling ourselves if we think 100% in the financial tool we ran guarantees anything.

Y'know....sometimes you have to make your best plan and then....just jump and figure out the rest along the way.

 

[RunningBum]

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.

OK, looks like you're probably right, the 4% rule is pretty certain to have survived the 2000 start. If you want to put blind faith in it and say "stay the course, no matter what", go ahead. There's no guarantee the future will follow the track of any historical track. Many others here are indicating that they'd make adjustments or at least reassess after a bad start, which makes sense to me.

There's also factors like, you might hit unexpected large expenses later or you might live longer than 30 years that would make me very uncomfortable to stick rigidly to a plan that may be cutting it close.

 

[Independent]

... and the retiree is withdrawing 4% annually
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."

Let's suppose, instead, that the retiree is withdrawing 3.5% annually.

In that case, if the future is no worse than the worst case in the last 100 years, the light bulb never needs to go off. This retiree has been conservative enough with the initial withdrawal plan that no SOR pattern can create a failure.

(This was the original goal of the 4% guideline. It was intended to tell people that if they wanted simple, level incomes they would need to start their retirements with conservative withdrawals.)

Using FireCalc, 4% fails about 5% of the time. Again, if we trust backtesting, FireCalc allows you to download the year-by-year results for every one of its historic possibilities. Look at the failure cases, find their common characteristic (probably ratio of current to beginning assets < some trigger), and rerun FireCalc, testing step-downs. (FireCalc won't let you imput a trigger, so you just do the step-down for all years and see if you get 100% success.)

Eventually, you'll come up with some step-down trigger and amount that gets you through every year. Next, then see how many years you would have stepped down, based on that trigger, when you didn't need to.

This allows you to back into an example (better yet, two or three examples) of decisions that could have worked. However, most people here would say it gives too much weight to historic quirks to call it a "rule". I'd agree with that, it's just some samples to get a feel for the sensitivity.

And, as others have said, there are many other complications in planning beyond SOR risk.

 

[Lsbcal]

Several people have mentioned the failure rate in FireCalc as a good measure of success. FireCalc will say that if you have $1000 left in your account after 10 years that is a success. This is way too simplistic a view.

I think that FireCalc should show some of those worst case declines in a better way. But it's a tool that has not been improved on.

VPW is a far better tool to use. It can also be converted to display the worst case scenarios for a different withdrawal strategy (such as the 4% with inflation rule). One does have to know a bit about spreadsheets though.

 

[teejayevans]

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.

Really, shouldn’t your life expectancy come into play, if I get to 90 and have 80% still available, if I adjust my WR at all, it would go up.