How concerned are you with Sequence of Returns Risk?

[TheQuestionGuy]

This is the scenario where PersonA and PersonB start off with the same amount of money.
PersonA retires when the market is good, has various returns then near the 20 year mark has a few bad years of returns.
PersonB retires when the market starts off with a few bad years, has various returns and near the 20 year mark the market retire is good.

Basically they both start with the same amount.
After 20 years, PersonA still has a decent some of money, but PersonB runs out.

Lots about $300k YTD. This "Sequence of Returns Risk" is blinking in my mind like a bright red warning sign.
Wife and I talked of retiring but slamming on the breaks.
Going to see what happens at the end of the year.

Anyone change retirement plans based on the market with the Sequence of Returns Risk in mind?

 

[audreyh1]

No, and I retired mid 1999, ha ha.

 

[Cassius King]

Plan is to have 2-5 years of expenses in cash or cash like investments to help protect against this.

 

[Flieger]

This is the scenario where PersonA and PersonB start off with the same amount of money.
PersonA retires when the market is good, has various returns then near the 20 year mark has a few bad years of returns.
PersonB retires when the market starts off with a few bad years, has various returns and near the 20 year mark the market retire is good.

Basically they both start with the same amount.
After 20 years, PersonA still has a decent some of money, but PersonB runs out.

Lots about $300k YTD. This "Sequence of Returns Risk" is blinking in my mind like a bright red warning sign.
Wife and I talked of retiring but slamming on the breaks.
Going to see what happens at the end of the year.

Anyone change retirement plans based on the market with the Sequence of Returns Risk in mind?

Already retired, but reviewing investments.

What are you invested in with a loss of $300K YTD? What percentage is that?

Flieger

 

[Sunset]

Since I had lost my crystal ball, I retired, but kept about 5 years worth of spending in CD/bonds/cash , so that I could outlast a SORR.

My income if needed during those years would have been (my dividends + some from the 5 years worth).

Happy it was never needed yet !

 

[MarieIG]

I am aware of it, but since there was nothing I could do to prevent it, I prepared for it.

 

[Lorenzo]

Anyone change retirement plans based on the market with the Sequence of Returns Risk in mind?

No. The idea is to develop a plan that mitigates SORR before the day you pull the trigger on retirement and be ready on that day if the market throws a curveball. There are various strategies. An interesting one is the "Bond Tent" strategy developed by Michael Kitces, discussed here and likely in some other threads as well: Kitces: A bond tent

 

[Chuckanut]

I was concerned when I first retired since my wealth was not as great as many here. So I kept a healthy reserve aside in the event of a sustained market downturn of 3-5 years.

Now, with SS at 70 and my capped COLA-lite pension giving me yearly increases, I feel that things would have to very very very bad for me not to be able to pay the rent and put food on the table.

And the 3-5 years of reserves have grown. Now I can partially BTD and enjoy some additional fun and comfort,

 

[ut2sua]

Anyone change retirement plans based on the market with the Sequence of Returns Risk in mind?

IMO, all new retirees should be aware of and plan for SORR unless their SWR is very low (in the 2%ish or below) or their retired income is > expenses.
Back to the above question, one can plan so SORR won't impact their retirement. Having a bucket of fixed income (CD's, Treasuries' etc.) that will cover 3->10 years of expenses will largely mitigate this concern. A person with a 60/40 AA at the start of retirement essentially has 10 years of expenses in fixed income (using a SWR of 4%).

 

[braumeister]

Since you've already said you're at 100% success in FIRECalc, you know that you would have survived the worst possible SORR scenario that has ever happened. I wouldn't sweat it too much,

 

[RetiredHappy]

We set aside 7 figures of liquid (cash-like) assets to be spent in the first few years of retirement, while the rest of the savings stayed invested. Bucket strategy or whatever you call that. We did that not because of SORR but rather that we have income streams that would start fully in 7 years which would take care of about 60% of our expenses. We have now been retired for 10 years.

 

[CalBird]

SORR will make difference on SWR, but you will only know afterwards.

 

[Flyfish1]

Having lived through multiple market crashes when I was working I take SORR seriously. My personal approach, rather than holding 3 years of cash aside, was to move into income investing. That is certainly not the norm on this forum but that is what I did. So, rather than stress on the actual value of my portfolio I focus on the income. I have lots of fixed income investments and a good chunk outside of the market in real estate.

Before I retired I hired a Financial Coach - not a Financial Advisor to help me build a plan. He had a great quote which I will attempt to paraphrase. "Bear markets are the best time to retire. Because, the best predictor of the next market cycle is the present cycle. In other words, bulls follow bears, so if you can afford to retire in a bear cycle then do it, because bull years lie ahead in your future."

( Not saying we are in a bear market at all - just sharing some IMO wise words)

 

[Kings over Queens]

Pretty sure this topic has been beaten up pretty good in other forums on the site.

To the OP, no, not concerned. Was mentioned earlier, a decent reserve of 2 or 3 years of expenses in cash mitigates any concern.

I also subscribe to the theory that "Men make plans and God laughs."

 

[Aerides]

Lots about $300k YTD. This "Sequence of Returns Risk" is blinking in my mind like a bright red warning sign.

I've lost about 1/5 of that YTD, and I'm already retired. I'd look at your investments as you might have some super volatile stuff in there? I'm in balanced index funds with a boring portfolio.

Either way, if I were down $300k ytd with my mix, I'd do the same thing - nothing, and ride it out as I always have a small amount in liquid/safe.

 

[Montecfo]

No.
Just prepare, don't worry.
Your AA and strategy should be ready for down markets, even down for years.

And of course the 4% rule already contemplated SORR.

 

[Flyfish1]

You know what's frustrating ...I can't find anyone to argue with here because everyone makes sense albeit through different approaches. I think I need to look around for a topic where I can get some tough push back.

Or I could always go on Reddit

 

[Alan]

I understand the concern. I retired February 2010 and had planned to draw down quite a bit for the first 10 years until US and UK SS kicked in for myself and my wife. The portfolio took quite a hit with the 2008-2010 downturn but I had put 3 years of expenses aside in cash and fortunately the market recovered reasonably well.

 

[Dtail]

Since you've already said you're at 100% success in FIRECalc, you know that you would have survived the worst possible SORR scenario that has ever happened. I wouldn't sweat it too much,

+1
Firecalc and its ilk are important concepts which clearly address SORR.
If you don't believe in this concept deep down, then you might keep on working way longer than you need to.
You will come back to us in a few years and wonder why you didn't retire earlier.

 

[TheQuestionGuy]

Since you've already said you're at 100% success in FIRECalc, you know that you would have survived the worst possible SORR scenario that has ever happened. I wouldn't sweat it too much,

Good point.

 

[NW-Bound]

Like others have implied, the most important thing is your portfolio composition. If you are 100% invested but in the S&P500 which is down merely -3% as of last Friday close, then being down 300K YTD means a portfolio of $10M. One should retire comfortably with this stash size, even if the S&P continues to drop like it did after the dot-com and sub-prime crashes. The S&P was down to less than 60c on the dollar in the above events, and one can still be OK with $6M.

On the other hand, if you are concentrated in a sector or heavily in just a few stocks, then we are talking about an individual stock risk, which has little to do with SORR of the entire market. There are always some individual stocks that crash or go bankrupt while the market sails on.

 

[engineernerd]

That down $300k YTD info caught my eye, too. Unless you do have a $10+ million portfolio, it suggests you are not invested in what FIRECalc models, and therefore you're flying blind in regards to how well your portfolio is set up to withstand the things that have happened between 1871 and 2025.

But in answer to your question, I am not as concerned about SORR as about inflation risk.

Out of curiosity a little while ago I used FI Calc to identify the year that produced the worst outcome for a 30-year retirement and a couple of different asset allocations. That year was 1966. I then ran the same inputs in FIRECalc with a request for spreadsheet output for 1966. Looking at the spreadsheet, I saw there were a few years here and there when the market went down (not all at the beginning, though). But there was also a lot of inflation. And inflation is nearly always for keeps. Prices don't rebound down again to restore your purchasing power the same way the stock market bounces back from crashes.

 

[marko]

No. I retired staight into the GR. Severance ended Jan 2008.

Can't say any long term harm was done.

 

[JackJester]

Anyone change retirement plans based on the market with the Sequence of Returns Risk in mind?

No. I ran FIRECALC ... a lot ....leading up to retirement. 1966 was the worst year to retire assuming a 30 year retirement, and if FIRECALC says I can handle that, then most likely I will be OK. There is a deep dive on 1966 in the BH forum if interested:

https://www.bogleheads.org/forum/viewtopic.php?t=360882

But, what I have also discovered through FIRECALC investigation, is that inflation is the biggest hindrance to a successful retirement vs portfolio composition or market long term performance. Right now I'm not liking where inflation is trending or where it might go in the next year or 2 when I start taping my IRA for 90% of my my annual income. Sure, FIRECALC uses historical average CPI as its default, so technically covers the crazy high inflation of the 1970s. But, my glass half empty nature still makes me nervous of having to go through that kind of 70s inflation as I am beginning my 30 year retirement journey.

 

[Flyfish1]

No. I retired staight into the GR. Severance ended Jan 2008.

Can't say any long term harm was done.

Bingo - see my post #13, 2nd paragraph.