Worst Possible Retirement Date?

[ziggy29]

The person who retired in 2000 has also been hit by 2008.

Note I said "properly diversified."

Properly diversified people did NOT get hit hard by the 2000-2002 market.

Small caps and REITs were WAY higher. Emerging markets did well. Developed non-U.S. stocks didn't fall as hard as U.S. large caps.

For these people, 2000-07 overall was a good period, and 2000-02 was a mild correction in a long bull market from 1982-2007. With nothing more than broad diversification, I lost about 10% in that whole terrible market despite being 70% invested in equities, and fully participated in the recovery off the 2002 lows.

Note that for people properly diversified, there IS no refuge from getting creamed this time. Everything sucks and nothing works. As well as diversification worked in 2000-02, it's failing here -- at least where equity asset classes are concerned.

 

[FinanceDude]

Note I said "properly diversified."

Properly diversified people did NOT get hit hard by the 2000-2002 market.

Small caps and REITs were WAY higher. Emerging markets did well. Developed non-U.S. stocks didn't fall as hard as U.S. large caps.

For these people, 2000-07 overall was a good period, and 2000-02 was a mild correction in a long bull market from 1982-2007. With nothing more than broad diversification, I lost about 10% in that whole terrible market despite being 70% invested in equities, and fully participated in the recovery off the 2002 lows.

Note that for people properly diversified, there IS no refuge from getting creamed this time. Everything sucks and nothing works. As well as diversification worked in 2000-02, it's failing here -- at least where equity asset classes are concerned.

When the market hit the frothy highs in 1999, there were only 30 COMPANIES that were driving the market at that time, so a slowdown was already happening.........

 

[youbet]

If you have the money to retire today, seems like today is the BEST time to retire. Chances are your nest egg has no other place to go but up!

Some of the comments regarding retiring now vs a year ago are confusing the circumstances. Most folks have suffered sugnificant portfolio losses this past year.

I agree, I'd rather retire with $1M today than $1M last year in terms of portfolio survivability. But I'd be less enthusiastic about retiring with $0.7M today vs $1M last year.

The statement

If you have the money to retire today

is interesting hypothetically, but who on the verge of retirement hasn't been touched by the current pullback?

 

[Rustic23]

If you run, or ran, firecalc in the past few weeks and your retirement scenario still works, then it would seem you have the money to retire today. The market is down 40% or so. Your portfolio is most likely down something. It seems to me, that if your retirement plans still work, then you are in good shape and this is a good time to retire. The market could go down another 40%, but the odds are against it, and besides, firecalc would say you could still survive a great depression type turn down from here.

 

[youbet]

If you run, or ran, firecalc in the past few weeks and your retirement scenario still works, then it would seem you have the money to retire today. The market is down 40% or so. Your portfolio is most likely down something. It seems to me, that if your retirement plans still work, then you are in good shape and this is a good time to retire. The market could go down another 40%, but the odds are against it, and besides, firecalc would say you could still survive a great depression type turn down from here.

I understand what you're saying Rustic. I'm just pointing out that not everyone approaching RE is doing so with a huge cushion (ie., worked extra years) so that a portfolio reduced by 20% - 40% would still survive.

Firecalc tests using historical data. A larger portfolio, all other things being equal, will give higher survival results everytime.

But, yes, if you test your currrent plan (current portfolio, investment style, other income, withdrawals) Firecalc back-testing is just as good today as it was last year, or at any time for that matter.

 

[ERD50]

.
But I'd be less enthusiastic about retiring with $0.7M today vs $1M last year.

But, yes, if you test your current plan (current portfolio, investment style, other income, withdrawals) Firecalc back-testing is just as good today as it was last year, or at any time for that matter.

I've been meaning to post on this - and those two statements touch directly on the point, so here goes:

FIRST) For any discussion of the FireCalc results, we have to assume the future is no worse than the worst of the past. You can add a comfort factor on top of that (and I suggest it), but that is going beyond FireCalc.

With that in mind, if we assume the drop from a $1M portfolio to a $0.7M portfolio fits a historical pattern, then I think you are absolutely NO WORSE off retiring now with $0.7M today, if you had $1M a year ago.

My reasoning is, bad times follow good times. Otherwise, it would just be an extended bad time in FireCalc data - and that would be determining your success/fail rate. So, those failures in FC are based on entering the start of a bad time with $X in the portfolio. Which also means, you just came off a relatively good time, since bad times follow good times.

So - if $1M was good enough a year ago, and you retired, you would just be 'living' one of those FC 'bad times' today, and you could say - history and FC say I should be OK (OK defined as whatever % success you were 'OK' with originally). And, your portfolio would be down around $0.7M. Actually, a bit lower since you would have drawn it down. Sooooo....

I guess a person is actually BETTER OFF retiring now after a market drop, than retiring at the peak, and living through the market drop? The opposite of what you said.

There was probably a much better way to state that - it's actually pretty simple, but it seems to take me a lot of words to get it out. I should probably post a graph.

Another way to say all that - FC looks forward (applying historical data to a 'pretend' future), but it does not ask you for YOUR history. Are you retiring AFTER a BOOM, after a DROP, or after a flat-line. I think that is relevant to the pattern.

Sorry for getting so long on that.

Regardless, I agree with you that from an emotional standpoint, retiring now with a shrunk portfolio is going to feel discomforting to most people. But the numbers indicate the opposite (I think - please anyone, correct me if I'm misapplying FC).

-ERD50

 

[CuppaJoe]

How could this thread have drifted so far from the topic title, “worst possible retirement date”? Okay, IMO, meeting new people at the coffee shop is better than online dating. You can go really slow and observe them over time.

 

[ziggy29]

Okay, IMO, meeting new people at the coffee shop is better than online dating. You can go really slow and observe them over time.

Not if you are a relatively short and bald guy. Our best chance is to have the ladies fall for us from the inside-out, because first impressions from the outside-in sure aren't going to get her attention...

 

[Gardnr]

I've been meaning to post on this - and those two statements touch directly on the point, so here goes:

FIRST) For any discussion of the FireCalc results, we have to assume the future is no worse than the worst of the past. You can add a comfort factor on top of that (and I suggest it), but that is going beyond FireCalc.

With that in mind, if we assume the drop from a $1M portfolio to a $0.7M portfolio fits a historical pattern, then I think you are absolutely NO WORSE off retiring now with $0.7M today, if you had $1M a year ago.

My reasoning is, bad times follow good times. Otherwise, it would just be an extended bad time in FireCalc data - and that would be determining your success/fail rate. So, those failures in FC are based on entering the start of a bad time with $X in the portfolio. Which also means, you just came off a relatively good time, since bad times follow good times.

So - if $1M was good enough a year ago, and you retired, you would just be 'living' one of those FC 'bad times' today, and you could say - history and FC say I should be OK (OK defined as whatever % success you were 'OK' with originally). And, your portfolio would be down around $0.7M. Actually, a bit lower since you would have drawn it down. Sooooo....

I guess a person is actually BETTER OFF retiring now after a market drop, than retiring at the peak, and living through the market drop? The opposite of what you said.

There was probably a much better way to state that - it's actually pretty simple, but it seems to take me a lot of words to get it out. I should probably post a graph.

Another way to say all that - FC looks forward (applying historical data to a 'pretend' future), but it does not ask you for YOUR history. Are you retiring AFTER a BOOM, after a DROP, or after a flat-line. I think that is relevant to the pattern.

Sorry for getting so long on that.

Regardless, I agree with you that from an emotional standpoint, retiring now with a shrunk portfolio is going to feel discomforting to most people. But the numbers indicate the opposite (I think - please anyone, correct me if I'm misapplying FC).

-ERD50

Agreed. Another way to look at it is that you should theoretically be able to have a higher SWR if starting retirement just after a large market correction than just before, since you can reasonably expect higher returns (based on history, but not guaranteed, of course). There was a study from the Journal of FP that was posted here a while back that posited just that, using PE10 as an indicator of what your SWR could be.

For example, if you had a 60/40 AA, a $1 mil portfolio would yield $40K/yr with a 4% WR but after a 33% mkt correction you would have $800K portfolio. You could increase your SWR to 5% to yield the same yearly income. It's really using essentially the same logic as your example, IMO.

Now with all that said most people would not want to do that. Most would be more conservative and wait for the market to recover before pushing up their WR. The same way most would not continue to increase their drawdown for inflation in the face of a severe market correction.

 

[ERD50]

Most would be more conservative and wait for the market to recover before pushing up their WR. The same way most would not continue to increase their drawdown for inflation in the face of a severe market correction.

Thanks for the reply - I agree with being conservative. I'm just trying to point out, that in this regard, FC is already being conservative and assuming the worst.

But then, OTOH, I think people are not conservative enough in many cases, by taking the 95% 'success' (5% FAILURE) as 'good enough', and assuming that 30 years is 'long enough' for an ER. And of course, the future certainly CAN be worse than the past. In fact, it is almost a guarantee. That future may or may not coincide with our retirements though.

-ERD50

 

[harley]

I have a question on retirement timing. I ER three years ago but DW continued to work. I did not take my pension yet as it continues to grow at 6% per year. Is now the time to take it and put it into equities?

FA has thought this would be good as he always wants more investments. 0.95% fee. DW can get another lump sum pension in two years. We are looking ahead at 10 years with no income before SS to start depleting all the pretax accounts converting to Roths starting in 2010. I expect market will not recover until 2011 and this tells me to stick with the 6 % per year until 2010.

I noticed nobody responded to your question. I think it's a good one. I'm going to assume your pre-tax investments will cover you until you reach 59.5, so you won't be needing this pension money in the next 5-10 years.

I tend to agree (partially) with your FA. I think this would be a very good time to take your pension lump sum out. However, I would invest into something like Vanguard, bypassing the .95% FA fee. And since you think the market won't recover until 2011 (reasons?) you could stick your non-invested moneys in some cash investment to help make up for the lost 6%, DCAing with them over the next 2 years.

You seem to be in a brilliant position here to make your retirement money really count. And since you have the other lump sum available in a few more years, you've got a fallback in case things are worse than anticipated. Good luck.

 

[ER_Hopeful]

Now that I have turned 60, I notice stories like this a lot. And here I am, FI but still w*rking. It is so tempting to just go in and quit today! But in another year and three weeks I will have lifetime medical, so I might as well wait.

I remember getting megacorp's dept. broadcast email a few weeks ago about some guy's memorial service. I think he was in his 50's, heart attack. xx number of years dedicated to the company, etc...

 

[cashbalancetrouble]

Harley, thanks for the reply. I think what ever happens while investing you have to analyze the situation and make your choice and then live with it. I know myself and others knew the markets were over sold when the DOW was at 14K+ but the underlying problems were not seen enough to have the strength to bail. So while things are cheap it is time to make hay.

I think I will seek the first lump sum after Jan 1 and possibly do some day trading in ETF on exchange moves based on the volatility moves and will keep close to the bottom for two years. Doing it inside an IRA will keep it all off of taxes and allow us to benefit from our future tax cuts. I also am keeping in mind the 2010 lift of IRA conversion to Roth limit. We plan to do this when we have next to no income.

The games people can play are important before time runs out.

 

[Gardnr]

Thanks for the reply - I agree with being conservative. I'm just trying to point out, that in this regard, FC is already being conservative and assuming the worst.

But then, OTOH, I think people are not conservative enough in many cases, by taking the 95% 'success' (5% FAILURE) as 'good enough', and assuming that 30 years is 'long enough' for an ER. And of course, the future certainly CAN be worse than the past. In fact, it is almost a guarantee. That future may or may not coincide with our retirements though.

-ERD50

Yep. I probably didn't state it as well as I could have, but we agree. I think that people forget that the worst we've seen has been programmed into FC. They also overlook (or ignore) just what that worst case scenario looks like. For a standard 4% WR scenario that portfolio will dip to very uncomfortable levels if the inflation adjusted withdrawal rate is followed thru the dip or if spending is not reduced. All the worse without the benefit of a pension or other annuitized income.