Avoid SOR risk? I think not! "SOR" = Sequence of Returns

[Mango1956]

I don’t think 100% bonds have ever been recommended although I suppose some here might be 100% fixed income.

More typical strategy starting out conservative recommendation is like 30% stocks with a gradual glide path to higher equity exposure (up to 70%) over a long time period. Basically spending down your fixed income during the early retirement years and letting your equities run. https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

Basically I do whatever it takes to stay invested, and I don’t care about the end score. Just survival before reaching the end. Hedging my bets staying 50/50 seems to work well enough for me, I don’t really care if I am “leaving money on the table” by not having a higher equity allocation.

I also use the % remaining portfolio withdrawal method which tracks recent portfolio performance.

+1

 

[audreyh1]

Agree with you.
Thus I am not really a fan of a rising equity glide philosophy at the start of retirement. This concept can be at odds of a reversion to the mean concept on the other side of the equation.

I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense.

If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

 

[Montecfo]

Asset allocation is part of your SWR selection, it’s not independent. You have to select a given AA to then figure out your SWR for a given portfolio survival statistic goal. I assume most people try out a range of AAs and look at the differences in portfolio survival statistics for a given SWR. Or maybe they’ve decided ahead of time that they are only comfortable with a certain AA and then figure out the SWR they have to accept in order to meet their portfolio survival statistic goal.

Oh I completely agree. And to have a SWR it has to be with respect to a certain AA and time horizon, by definition.

So while I understand SOR risk is a real thing, your SWR analysis has covered that risk, unless you are concerned about market conditions that have never occurred before.

 

[Dtail]

I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense.

If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

Well supposedly the Cape 10 ratio does not predict that well market movements in the short term, so one could still miss out on the first few years of a continued high valuation market depending how wide the equity glide %'s are.

I do buy the notion of one using a 30/70 consistent ratio for example due different preservation vs. growth goals.

 

[tb001]

Interesting ERD. We’ve read the kitces article and have had a hard time wrapping our heads around the glide path concept. The most informative information for us was to look at the success rates with different asset allocations vs biggest drawdowns. DH sleeps better at night than I do with a big hit though. Hitting bad SOR early on wouldnhave me out hustling to find a job!

 

[pb4uski]

I think you are mis-applying the concept. I'll use the same data as you except when retiree B retires in Jan 1995 he carves out $175k in a 5 year CD ladder ($35k/year for the first 5 years from his stash) and invests the remaining $825k in a 70/30 portfolio... in Dec 1999 his $825k has grown to $2,147,849. Effectively, his 58/42 AA at retirement changes to 70/30 after 5 years. In January 2000 he begins inflation adjusted withdrawals of $39,192 from his $2,147,849 and his stash grows to $4,272,053 in Jan 2019.... lower than STC's $4,796,722 but still very healthy growth.

However, I think in this case it is because you somewhat cherrypicked a period where returns were particularly spectacular for the first 5 years.... a 21% CAGR.

I'll cherry pick a different period... beginning in Jan 2000 rather than Jan 1995. Using the same approach STC has $1,157,392 in Jan 2019 and Retiree B has $1,234,723.

Pick your poison.

STC: https://www.portfoliovisualizer.com...location1_1=70&symbol2=VBMFX&allocation2_1=30

Retiree B: https://www.portfoliovisualizer.com...location1_1=70&symbol2=VBMFX&allocation2_1=30

https://www.portfoliovisualizer.com...location1_1=70&symbol2=VBMFX&allocation2_1=30

https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=35,000.00&year1=200001&year2=200412

 

[audreyh1]

Well supposedly the Cape 10 ratio does not predict that well market movements in the short term, so one could still miss out on the first few years of a continued high valuation market depending how wide the equity glide %'s are.

I do buy the notion of one using a 30/70 consistent ratio for example due different preservation vs. growth goals.

Sure, CAPE10 predicts more in the 10 to 15 year timeframe, but with it exceeding 40 way above where it had ever been before, it was flashing red in 1999. That wasn’t the only metric either - the whole dot com valuation thing was obviously nuts. I chose to average in my windfall from divesting company stock over a couple of years and got lucky. That was the only tool in my arsenal at the time to deal with what I viewed as extreme valuations.

I think the Kitces paper presents a perfectly sensible approach starting from 30/70 and allowing equity exposure to increase.

 

[COcheesehead]

I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense.

If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

+1

 

[audreyh1]

Oh I completely agree. And to have a SWR it has to be with respect to a certain AA and time horizon, by definition.

So while I understand SOR risk is a real thing, your SWR analysis has covered that risk, unless you are concerned about market conditions that have never occurred before.

OK good.

Perhaps the caution then is that if someone picks a very conservative AA they need to run the SWR models and make sure they aren’t shooting themselves in the foot. They might have to live with a lower SWR to survive long term. If they can, then it’s really their choice whether or not to be more conservative but take a lower income.

 

[pb4uski]

I think taking a rising equity glide path as a new retiree when equity market valuations seem extreme makes plenty of sense.

If I had had Kitces paper before I retired in 1999, I certainly would have seriously considered it.

(emphasis added)

+1

+2 but I retired at the end of 2011 so I probably would not have used it or would ahve used it in a muted form... if I was retiring today, I would probably use a muted from of it.

 

[Montecfo]

OK good.

Perhaps the caution then is that if someone picks a very conservative AA they need to run the SWR models and make sure they aren’t shooting themselves in the foot. They might have to live with a lower SWR to survive long term. If they can, then it’s really their choice whether or not to be more conservative but take a lower income.

Agree. I think it can become a bit of a tail-chasing exercise.

 

[USGrant1962]

(emphasis added)



+2 but I retired at the end of 2011 so I probably would not have used it or would ahve used it in a muted form... if I was retiring today, I would probably use a muted from of it.

Having retired in 2017 when CAPE10 was >30* I did adopt a muted rising glidepath. I started at 55/45 and plan to follow Age In Stocks until approximately SS time. I haven't settled on my final AA, I'll probably stop at 65/35 - if it is good enough for Wellington it is good enough for me.

I know that this is so muted it is probably just for show, but maybe I can't "don't just do something - stand there!"

But once SS kicks in my "Income Allocation" will be something like 40/25/35 stock/bond/SS. Or looked at another way, 40/60 stock/fixed income.

*Side note, I just checked CAPE10 and it happened to go back over 30 just today per multpl.com. Though it is going to automagically roll off about 2.5 points this year as the 2008/2009 earnings crash rolls out of the window.

 

[GravitySucks]

I thought the Kitce paper had a lot of merit and if I had seen it before retiring I may have gone the Glide Path route. In fact I've recommended it to DS who is much more conservative than me. Luckily I didn't see it as I would have missed a great run up.
I did address SOR as I had two accounts. I was living off the 401k the first five years and I kept that invest between 20/80 and 40/60, balancing to my overall AA by keeping the IRA higher in equities.

 

[Chuckanut]

Yup, and reducing it when the market is tanking is even more effective. Think VPW.

+1

Thanks to the last quarter of 2018 my VPW has me withdrawing about 2,300 less in 2019. Can anybody spare 25¢ so I can get a cup of coffee on this cold Winter morning?

I retired in late 2012 after the market had started the runup that may or may not be ending at this time. My AA has slowly creeped up to where I want it (60/40) as I have burned through some cash that I kept aside in the event of a bad sequence of returns in my early years. If I had known the market would have continued up for at least 5 more years I would have made a different choice. OTOH, I have slept well at night and have no problems spending on things that enhance the quality of life for me and my loved ones.

 

[Chuckanut]

Perhaps the caution then is that if someone picks a very conservative AA they need to run the SWR models and make sure they aren’t shooting themselves in the foot. They might have to live with a lower SWR to survive long term. If they can, then it’s really their choice whether or not to be more conservative but take a lower income.

+1

The point is we play the game to win. And for most of us winning is not having the biggest possible pile of cash so as to impress the peasants. Winning is running out of time before we run out of money. And, perhaps, leaving something to others.

Balance is needed.

 

[audreyh1]

*Side note, I just checked CAPE10 and it happened to go back over 30 just today per multpl.com. Though it is going to automagically roll off about 2.5 points this year as the 2008/2009 earnings crash rolls out of the window.

Earnings are still from Sept 2018 at multpl.com - the third quarter, so I’m curious to see what numbers look like when all the Q4 earnings are in.

 

[Dtail]

I thought the Kitce paper had a lot of merit and if I had seen it before retiring I may have gone the Glide Path route. In fact I've recommended it to DS who is much more conservative than me. Luckily I didn't see it as I would have missed a great run up.
I did address SOR as I had two accounts. I was living off the 401k the first five years and I kept that invest between 20/80 and 40/60, balancing to my overall AA by keeping the IRA higher in equities.

Bolded - okay then. Still not really sold on the rising glide path.
We have many recent retirees on this site. How many have stated that they are using a rising glide path with the Cape at ~30?

 

[audreyh1]

+1

Thanks to the last quarter of 2018 my VPW has me withdrawing about 2,300 less in 2019. Can anybody spare 25¢ so I can get a cup of coffee on this cold Winter morning?

I retired in late 2012 after the market had started the runup that may or may not be ending at this time. My AA has slowly creeped up to where I want it (60/40) as I have burned through some cash that I kept aside in the event of a bad sequence of returns in my early years. If I had known the market would have continued up for at least 5 more years I would have made a different choice. OTOH, I have slept well at night and have no problems spending on things that enhance the quality of life for me and my loved ones.

We also took a pay cut in Jan 2019. Fortunately it still covers our budget. And, as it happens, our withdrawal has already been recouped by the run up since. But things like that can turn on a dime.

 

[audreyh1]

+1

The point is we play the game to win. And for most of us winning is not having the biggest possible pile of cash so as to impress the peasants. Winning is running out of time before we run out of money. And, perhaps, leaving something to others.

Balance is needed.

Yep.

Staying invested is key. If someone gets nervous because they see wild swings or big drops in their portfolio, the worst thing they can do is bail at the bottom. So each individual has to figure out what lets them sleep at night plus meets long term goals of survival and keeping up with inflation.

 

[Totoro]

Emotions.

If I put DM 70% into equity followed by a down draft straight away, that may have caused her to run for the hills. Not to mention there were other uncertain factors like pension, health etc .. that

Now, I started with 30% and slowly put her in an upward glide path when it makes sense. Still only at 40%. She's used to the gyrations now of the market too.

Do we leave money on table? On average, yes. Does she sleep well? Certainly.

No regrets.

 

[ERD50]

OP here. Just had some time after my errands. I have only skimmed the replies, will try to look closer later, but for now:

My skimming gives me the impression that the intention of my post was lost. Perhaps I was not clear, or maybe it was misread, I don't know. But it was not intended to be a debate over aggressive versus conservative AA. I've said many times that I have little to say about that, as long as people are clear that they understand the pros/cons of each. Mainly, that a conservative AA has not historically been 'safe' - less volatile, yes, but not necessarily 'safe'. But if your WR is low enough, it's a personal choice.

What it was intended to be, was a review of the idea that a somewhat aggressive investor (70/30 in this example) can be conservative for the first 5 years, and this somehow sidesteps the SOR risk.

My feeling was, the SOR risk still exists. The question is now, is the 'first-five-year-conservative-retiree' prepared for that next SOR hit?

I used the 100% bond portfolio to represent staying conservative. I did not show the move to something like 70/30 at year five, you can visualize that for yourself. As I said, clearly if you are behind at year 5, you are less prepared for a bad sequence after year 5.

You can rerun the linked version if you want to change the AAs, but it's actually pretty easy to visualize a mix. To do a gradual change in AA, you will need another tool.

Also, 1995 was not cherry-picking, it was just an illustration of the idea. Change the year if you like, report back. But I think 1995 is enlightening, there had been a sharp rise in the past few years, a time when many would be thinking of getting conservative. Sure, other times the conservative approach would be better, but I don't think enough times to make it anything close to a slam dunk. Maybe not even a good idea.

I'll try to look through the posts and links in more detail later.

-ERD50

 

[COcheesehead]

"What it was intended to be, was a review of the idea that a somewhat aggressive investor (70/30 in this example) can be conservative for the first 5 years, and this somehow sidesteps the SOR risk."


I was originally going to make a comment about the 5 year window which is completely inadequate, but I didn't think that was the point you were trying to make. So maybe after all this, I agree with you.

 

[GravitySucks]

Well one is five years closer to getting SS and five years closer to not needing money any more.
I think you might read that Kitce article instead of your 100% non changing bond allocation.
A rising glide path is very conservative and should probably only be used by the I already won the game crowd.

 

[HI Bill]

I have two SORR timelines that matter.

1) The first is the period from my retirement at age 53, to the age I take SS at 70, a duration of 17 years. I want to ensure that at least 60% of my assets (inflation adjusted) survive to that age, when SS kicks in. With the goal of retiring as early as possible, I'm looking at a "SWR" of 4.7%. This means that typically in FIRECALC, the earliest possible failure is about 17 to 20 years out, but with only a 1 to 3% chance. That's why I'm keeping three years of cash in VMFXX.

2) Let's say I've avoided great losses of >40% to age 70. SS kicks in, and then I have it made? Not really, unless I've lowered my withdrawal rates. I still need my money to last through my age 106, so that my wife doesn't have the possibility of running low on funds. The twenty-year 'rolling window of risk' is still there.

If I'm missing something in my pseudo-analysis, please let me know!

 

[Andre1969]

"My feeling was, the SOR risk still exists. The question is now, is the 'first-five-year-conservative-retiree' prepared for that next SOR hit?"


I do agree, that the risk is still there. But, even with a conservative portfolio, if you did it right, it should still be worth a bit more at the end of the 5 year period than when you started, although you would have given up the gains of a more aggressive one.


And, if you decide to go more aggressive in the 6th year, and that's when the market tanks, you still have five less years to worry about funding, since you're five years closer to death.


So there's peace of mind in that, I guess.