When do you actually "know" that sequence of return risk may impact a portfolio?
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?
For example. Take a retiree with a $1,000,000 portfolio with 50% invested in the S&P 500 and 50% in interm. bonds. Further assume this is all in a taxable account and the retiree is withdrawing 4% annually ( total return with dividends at 2% and withdrawal from earnings at 2%).
Now , we have a scenario akin to the start of the "lost decade" , the first 3 years of the 2000's where the S&P 500 had losses of 9, 12, and 22%.
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."
Does this occur after 1 qtr? Six months? The full year? I would hate to wait until the end of the year of 2002 when the S&P 500 tanked for 22% already. How does one distinguish between a "drop" in the market and the start of a true bear market which is where sequence of return becomes an issue?
Curious what others think.
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?
For example. Take a retiree with a $1,000,000 portfolio with 50% invested in the S&P 500 and 50% in interm. bonds. Further assume this is all in a taxable account and the retiree is withdrawing 4% annually ( total return with dividends at 2% and withdrawal from earnings at 2%).
Now , we have a scenario akin to the start of the "lost decade" , the first 3 years of the 2000's where the S&P 500 had losses of 9, 12, and 22%.
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."
Does this occur after 1 qtr? Six months? The full year? I would hate to wait until the end of the year of 2002 when the S&P 500 tanked for 22% already. How does one distinguish between a "drop" in the market and the start of a true bear market which is where sequence of return becomes an issue?
Curious what others think.