Retiring When Market is High

[FreeBear]

I retired at a market high in 2015, after the big 2013-2014 run up. Fortunately, for me, we're now close to a new market high! Maybe another 3-4 years of this and most of my sequence of returns risk will be behind me.

We're holding 8% cash. We sell index funds twice yearly to raise cash. I confess to market timing when choosing the precise dates to cash out.

With the rising equity market, every time my stocks go up roughly 3-5%, I cash out 6 month's expenses, up to twice a year. In practice, I cashed out when the S&P crossed 2800 and 2900. Now I'm good for awhile and can just let it ride. I hold the cash in an online savings account or short term bonds.

At some point, we may do this just once a year, basically pulling out our yearly SWR in one chunk. Perhaps I'm better off selling on fixed dates, but I can't resist the temptation to market time to at least avoid local minima while halfheartedly chasing peaks. The 3-5% guideline keeps me from waiting forever, always chasing the next peak.

 

[Sunset]

10% cash for me would equal almost 6 years of income. To me that is overkill. Would rather have cash flow from a variety of resources that do not require equity sales, unless I want to tax loss harvest.

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Since our stocks pay some dividends, we keep a number of years of cash in CD's , knowing that at a rough 2% dividend, the stocks will pay out a nice chunk each year, reducing the amount of cash needed.

 

[haha]

Here’s where it gets interesting. Say I retire to day with a 1 million dollar portfolio, expecting to withdraw $34,500 per year (3.45%). However, tomorrow the stock market tanks, falling 30%. My portfolio would be worth $820,000 (70% of $600,000 + $400,000), but my new SWR would be 4.99%, allowing me to withdraw about $40,900 per year. In other words, a falling market gives me the strange result of having more money per year! This happens because my portfolio of 60% stocks falls by only 18%, but the SWR rises by 45%.

This is but one of many things to which one should be sure to apply the commonsense test.

Ha

 

[audreyh1]

I think it would be only natural to cut back on a WR after a major drop in stock prices especially if that happened early after retirement. I would target discretionary and entertainment spending first.

This is also why that bucket system would be important. You could use the cash account and hopefully wait for stocks to recover before needing to sell any equities.

I think proper retirement planning would mean you’d be prepared for these worst case scenarios. Of course, that doesn’t mean I wouldn’t be concerned.

% of remaining portfolio, say x% of the Dec 31 value for the next year income. I am not actually cutting my withdrawal rate. But the $ income certainly drops.

 

[jebmke]

Glad to meet you jebmke !

Yes; I tried to be clear that I don't know anyone - not that I don't know of anyone.

 

[Navigator]

This is but one of many things to which one should be sure to apply the commonsense test.

Ha

As Yogi Berra said, ‘It's tough to make predictions, especially about the future.’ The results shown here do make sense if you note that predicted changes in future returns (as the market drops) are multiplied in an exponential over a 30 year period. This exponential increase over time more than compensates for the immediate arithmetic decline in portfolio value.

It may not be prudent to increase withdrawals as the market drops, but the results do indicate that market drops do not need to be a cause of great concern.

 

[davidbeitz]

I actually calculate what we need and back calculate our WR. Based on retiring at the (near) the end of a bull market. I'm staying under 3% to be safe.

 

[SumDay]

I don’t see anyone mention having 10% in cash always in a disciplined way. IOW, behave as if you only have the 90% to invest.

I’m not retired yet but would like to do this. Anyone doing this? Any tips on the cash generation?

Yes, we are. I used this as a starting point: https://www.theretirementmanifesto.com/our-retirement-investment-drawdown-strategy/

 

[catii]

An interesting post. Thanks.

 

[NW-Bound]

"Retiring When the Market is High"...

This reminds me of the song "The Tide is High" by Blondie (Debbie Harry) released in 1980.

"The tide is high but I'm holding on..."

Did a research, and what do you know, the song was written by a Jamaican group called The Paragons, and recorded in 1967. So, it was not an original song by Blondie. Isn't the Web great?

 

[RIGM]

The results shown here do make sense if you note that predicted changes in future returns (as the market drops) are multiplied in an exponential over a 30 year period. This exponential increase over time more than compensates for the immediate arithmetic decline in portfolio value.

Said differently, a drop in the market increases the chances that it will grow more strongly in the future. So the SWR, which is tied to how strong market returns will be, can be higher in the future as well. The math just turns out that the % increase in the SWR is higher than the % drop in the portfolio value, and so the actual withdrawal dollar amount is higher.

Emotionally, most of us would pull back spending, and it might be prudent to do so in the event that the market continues to drop, but the calculation is interesting. Thanks for sharing that.

I have started looking at the Shiller CAPE to inform me about how aggressive I should be. Call that my form of market timing. I’m risk-seeking and was near 100% equities most of my accumulation years, dropping to about 75% as my wife added bonds in her 401k in the last 15 or so years. In the past 6 months I moved assertively to a 55/45 equity/fixed ratio (fixed is mostly GNMA) because the CAPE is high historically. Yes, it can be affected by the low inflation/bond rates, and the remnants of the Great Recession, and so it might be fine that it is historically high. Yet I recall in 1999 many saying, “This time it is different [commenting on the historically high PE’s of that time].” Nobody can say where the market is headed, of course, and yet the high CAPE could imply that probabilistic market gains from here might be less than probabilistic market losses. At least that is what Shiller would say (and on the other hand he also has said that the CAPE can stay historically high for years).

There’s an interesting, more general question: if you have “enough,” do you go more into equities because any loss won’t really affect your lifestyle and over the long run you probably will gain more than being in bonds, or do you go mostly into bonds because you still can live your desired lifestyle and don’t have to worry about out-living your money. I recall reading an article in Fortune 15 years ago, about a Hienz ketchup heir or heiress who was 100% invested in muni’s to avoid federal tax and market fluctuations. That person chose the latter option above. In my own small way, I’ve moved in that direction, just not fully so.

 

[RobLJ]

I'm at 13.5%. Got up to 16.5% a few years ago when the S&P & CAPE was particularly wacky. The last couple years as the market flattened, the valuations have turned, well, closer to average.

My allocation is 10% but when the market valuations are lower, I'm willing to go down to 5-6% cash.

I don’t see anyone mention having 10% in cash always in a disciplined way. IOW, behave as if you only have the 90% to invest.

I’m not retired yet but would like to do this. Anyone doing this? Any tips on the cash generation?

 

[NW-Bound]

I don’t see anyone mention having 10% in cash always in a disciplined way. IOW, behave as if you only have the 90% to invest.

I’m not retired yet but would like to do this. Anyone doing this? Any tips on the cash generation?

I never had less than 20% cash, meaning low-yield instruments that do not fluctuate like bonds.

That has caused a drag on portfolio return, as I missed out on the bond run in past years.

Currently at 25.316% cash, according to Quicken.

 

[I am He]

I intend to be a broken record and will repeat often.

Where in any of these calculations have we sat at stupidly low interest rates? Bond rates are no where near the historical ones. Granted, inflation may not be, either, but most are talking about withdrawals, not (definitely inflation adjusted).

I say drop historical returns by -2% and run some estimations. God knows it's going to throw a wrench into a lot of peoples bubbles. I wish this forum had a section where we could go back and look at posts of FI people starting 2008-2010. Right now we have too many "geniuses" from the bull run. Man, I hope I'm wrong.

 

[Dtail]

I intend to be a broken record and will repeat often.

Where in any of these calculations have we sat at stupidly low interest rates? Bond rates are no where near the historical ones. Granted, inflation may not be, either, but most are talking about withdrawals, not (definitely inflation adjusted).

I say drop historical returns by -2% and run some estimations. God knows it's going to throw a wrench into a lot of peoples bubbles. I wish this forum had a section where we could go back and look at posts of FI people starting 2008-2010. Right now we have too many "geniuses" from the bull run. Man, I hope I'm wrong.

On your sig line, it says you left the game, but your stock allocation is 70%, or am I reading it wrong?

 

[I am He]

70 Stocks, 30 liquid...haven't figured out the bond thing, yet, and at least s/t bills paying >2%.

I meant the world of employment.

 

[Dtail]

70 Stocks, 30 liquid...haven't figured out the bond thing, yet, and at least s/t bills paying >2%.

I meant the world of employment.

Okay understand now. The retirement world is wonderful. Many of us are nervous somewhere along the way. You will be fine.

 

[dtbach]

I never did. If I need more dough than the dividends and SS are providing I call my broker and have him sell some stuff and send me the dough.

Why not! It will work as long as it works, LOL

 

[NW-Bound]

When I need money, I just log onto my broker Web site, click on "transfer", and the money instantly jumps from an investment account to my checking account.

And I do this whenever I see that my checking balance is low, and not by any fixed period (my expenses are lumpy). It is nice when the asset keeps regenerating itself.

Imagine if you had a chicken that could grow new wings after you harvested them to make Buffalo wings.

 

[2177V]

70 Stocks, 30 liquid...haven't figured out the bond thing, yet, and at least s/t bills paying >2%.

I meant the world of employment.

I agree. Please note short term government bonds are pretty liquid per the following useful link on how bonds perform in a crash:

https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/

Liquidity is a "must "during retirement. Liquidity is not important before retirement because your paycheck provides liquidity.

This is why I like short term government bonds and short term corporate bonds to compliment my cash and CD.

People who have the wrong type of bonds because they wanted performance may get a rude surprise that their bonds were not as safe as cash, CD, short term government and short term corporate bonds.

 

[kgtest]

I don’t see anyone mention having 10% in cash always in a disciplined way. IOW, behave as if you only have the 90% to invest.

I’m not retired yet but would like to do this. Anyone doing this? Any tips on the cash generation?

DF does. Just keeps it in his WF MM, Vanguard MM and checking/savings accounts. Earns minimally, and eventually he plows some back into the Broker taking gambles on individual Equities. BUT, he can afford to gamble.

Occasionally his Mr Market Timer mentality comes out and I have to keep him in check. He will admit in one sentence it is REALLY hard to time the market consistently, followed by a statement of "I am thinking of going 50% cash". Drives me nuts lol Settle on an A/A and stick with it. Capital Preservation and all, but if it looks like it and smells like it.

Imagine if this was the 80s...and we still have like 20 years before another .com BUST? You never know.

 

[2177V]

I don’t see anyone mention having 10% in cash always in a disciplined way. IOW, behave as if you only have the 90% to invest.

I’m not retired yet but would like to do this. Anyone doing this? Any tips on the cash generation?

Cash is good for liquidity. Before retirement, your paycheck acts as your liquidity asset.

Per internet....1 year CD is now paying over 2.5%. This is less risky than stock or bonds but better than a savings account which is hardly anything.

I am retired and I like to have 7-1/2 years of a rainy day fund (liquidity) based on the following link:

https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html

Note that 7-1/2 years is the longest bear market and recovery time since WW2. However, each retiree has their own prospective on a rainy day fund. I can only suggest balancing liquidity with performance since I have yet a single investment to find anything that does both. You do both by portfolio allocation such as 50% stock, 40% bond, 10% cash or CD.

 

[FreeBear]

Also holding about 7 yrs cash/bonds. Check out online only savings banks like Ally, 2.2%, cd's even better.

 

[2177V]

FYI. Here is a link to the latest LEI or Leading Economic Indicators for May 20, 2019....

https://www.conference-board.org/pdf_free/press/US LEI - Press Release MAY 2019.pdf

Currently the LEI looks OK...because the LEI is currently trending upwards.

However, look at the LEI.....just before the last two recessions: The LEI was trending downward BEFORE the recession actually occur.

I am personally keeping an eye of the LEI since the bull run is 9 years old and I do not expect the bull run to last forever. I will likely re-allocate my portfolio when i see a downward trend. They publish the LEI every month and the next one is scheduled for June 20 2019.

Victor

 

[thepalmersinking]

Here’s where it gets interesting. Say I retire to day with a 1 million dollar portfolio, expecting to withdraw $34,500 per year (3.45%). However, tomorrow the stock market tanks, falling 30%. My portfolio would be worth $820,000 (70% of $600,000 + $400,000), but my new SWR would be 4.99%, allowing me to withdraw about $40,900 per year. In other words, a falling market gives me the strange result of having more money per year! This happens because my portfolio of 60% stocks falls by only 18%, but the SWR rises by 45%.

If the market falls by 30%, how does that change the individual items that are sold in portfolio to generate the withdrawal?