"Plan B" is an ambiguous idea

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"Plan B" is an ambiguous idea

Postby tadamsmar » Fri Dec 21, 2012 11:29 am

I have noticed that Bogleheads use "Plan B" to mean two different things.

Meaning #1:

"Plan B" is used for alternative goals in case your portfolio has extreme under performance:

http://www.bogleheads.org/wiki/Investme ... _Statement

Larry Swedroe elaborates on this idea:

http://www.cbsnews.com/8301-505123_162- ... -for-them/

Meaning #2:

A good many threads seem to assume that Plan B is a different portfolio, a portfolio that (as far I can tell) you arrive at by selling low in a serious way:

viewtopic.php?t=32591
viewtopic.php?t=30085
viewtopic.php?t=32624

I am pointing this out because I have long been confused by this ambiguity and I never took Plan B seriously, but I just noticed the ambiguity today. Meaning #1 of Plan B is an important concept. In particular, if you can't come up with a realistic Plan B then perhaps your overall plan is too risky. I highly recommend the link to Larry's article.
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Re: "Plan B" is an ambiguous idea

Postby pkcrafter » Sat Dec 22, 2012 2:52 pm

Plan B has been confusing because of various meanings. I don't consider a plan B at all because if you have incorporated a contingency into your plan, it is part of your investment policy, not a secondary option. Worth noting that Larry's Plan B does not include selling. Larry's plan is more about planning beforehand to move forward after a big loss. Of course, those who have a plan B to sell will also sustain a big loss, but then they will have to figure a plan to move forward after the fact, and they are also faced with when to get back in. The market has always recovered after every crash so Larry's approach may be better, but I wonder what might happen to either group if a drop goes right past 50%. The surprise may cause impulsive bad decisions. Because of the uncertainties, I'd suggest investors close to 10 years from retirement make a substantial cut back on risk if they don't have much wiggle room with the needed withdrawal rate.

One thing that concerns me is Adrian's 50% loss rule of thumb because it really has no basis other than the last three panic crashes have been about 50% loss, but we should not forget that we have also experienced one of ~90%.
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Re: "Plan B" is an ambiguous idea

Postby richard » Sat Dec 22, 2012 3:25 pm

My understanding of plan B is that it's an answer to the question: what do you do if things get so bad that your existing portfolio looks like it will not be enough to provide the funds you need. Possible answers are

1) Reduce your needs - cut spending

2) Get more money - for example, return to work or move to a smaller house

3) Alter your portfolio - which most likely means selling stocks when they are low. If memory serves, Taylor had some quotes from Jack Bogle to the effect that when you can't stand more decline, you have no choice but to get out. This isn't emotional panic selling, it's reducing risk. For example, if you sold stocks and bought bonds, you would have enough to cover needs, but if you stayed in stock and they went down, you would not. It likely implies that you had more than enough before the decline
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Re: "Plan B" is an ambiguous idea

Postby nisiprius » Sat Dec 22, 2012 3:53 pm

The phrase emerged in the depths of 2008-2009. It has been controversial all along. To me, it is encapsulated in John C. Bogle's comment:
Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out,
People fall into two categories--those to whom a statement like this is a truism; and those to whom it is a meaningless question, like the one about the irresistible force and the inanimate object, because how can you define a point at which "you can't afford to lose another penny or another nickel?"

(Perhaps there also a tension between those who think that even acknowledging the possibility of failure increases the probability of failure, and those who think acknowledging the possibility of failure reduces the probability of failure.)

It is unhelpful to say "if you've planned well, you should never reach that point." People overestimate their risk tolerance and do reach that point, all the time. It's also a little self-contradictory to say that a prudent person will have a plan B, because a prudent person's plan A would have been designed in such a way that it would not reach the point at which a plan B were needed.

Unfortunately, I have seen people who basically had adequate retirement savings and lost it all because it was mostly in company stock, and at every point in the company's collapse they could not bear the thought of locking in and acknowledging the loss of 1/4, 1/3, 1/2, 2/3 of their retirement savings. There was always some story making the rounds about why it was absolutely impossible for the price to drop further. The brand-new CEO was a turnaround expert who'd rescued other companies and said flatly that he "had never seen a $5 billion company that couldn't be turned around." They had military contracts and the government wouldn't let them fail. The price was already lower than the book value of the assets. Etc. etc. etc.

It is meaningless to say you should always stick to your plan because, a) whether you should or not, you will not. That is the meaning of risk tolerance. Everyone has a point at which they will not stick to the plan. I've seen throwaway comments in a Chuck Jaffe column and elsewhere that "the average investor will panic-sell when their portfolio is down about 20%." I haven't been able to find a source so I don't know if it's based on research. Given that many investors have been guided into portfolios of >40% stocks, I'd say that if true that's cause for concern. b) Certainly in the case of single-company stock, always sticking to the plan no matter how low the stock goes can be a very bad plan. Whether this is true for a broadly diversified sample of a national or global stock market is an interesting topic for debate.
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Re: "Plan B" is an ambiguous idea

Postby foxfirev5 » Sat Dec 22, 2012 4:50 pm

pkcrafter wrote:Plan B has been confusing because of various meanings. I don't consider a plan B at all because if you have incorporated a contingency into your plan, it is part of your investment policy, not a secondary option. Worth noting that Larry's Plan B does not include selling. Larry's plan is more about planning beforehand to move forward after a big loss. Of course, those who have a plan B to sell will also sustain a big loss, but then they will have to figure a plan to move forward after the fact, and they are also faced with when to get back in. The market has always recovered after every crash so Larry's approach may be better, but I wonder what might happen to either group if a drop goes right past 50%. The surprise may cause impulsive bad decisions. Because of the uncertainties, I'd suggest investors close to 10 years from retirement make a substantial cut back on risk if they don't have much wiggle room with the needed withdrawal rate.

One thing that concerns me is Adrian's 50% loss rule of thumb because it really has no basis other than the last three panic crashes have been about 50% loss, but we should not forget that we have also experienced one of ~90%.


I agree, my plan B has always been in place to avoid collapse of my portfolio not a reaction to a drop in the market
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Re: "Plan B" is an ambiguous idea

Postby SP-diceman » Sat Dec 22, 2012 5:05 pm

I think only Bogleheads worry about “Plan B”
as most non-Bogleheads don’t even have a Plan A.

:)
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Re: "Plan B" is an ambiguous idea

Postby richard » Sat Dec 22, 2012 5:11 pm

nisiprius wrote:The phrase emerged in the depths of 2008-2009. It has been controversial all along. To me, it is encapsulated in John C. Bogle's comment:
Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out,

That's the Bogle quote I was thinking of in the post above.

nisiprius wrote:[snip]It is meaningless to say you should always stick to your plan because, a) whether you should or not, you will not. That is the meaning of risk tolerance. [snip]

There are two meanings of risk tolerance, psychological risk (aka panic selling) and economic risk (not having enough money to eat).

A fair amount of confusion arises from using the same term for different meanings.
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Re: "Plan B" is an ambiguous idea

Postby foxfirev5 » Sat Dec 22, 2012 5:33 pm

richard wrote:
nisiprius wrote:The phrase emerged in the depths of 2008-2009. It has been controversial all along. To me, it is encapsulated in John C. Bogle's comment:
Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out,

That's the Bogle quote I was thinking of in the post above.

nisiprius wrote:[snip]It is meaningless to say you should always stick to your plan because, a) whether you should or not, you will not. That is the meaning of risk tolerance. [snip]

There are two meanings of risk tolerance, psychological risk (aka panic selling) and economic risk (not having enough money to eat).

A fair amount of confusion arises from using the same term for different meanings.


The comment above is the only thing that I disagree with Bogle about. The one time when stay the course rang true - He waffled. No doubt about it in my mind
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Re: "Plan B" is an ambiguous idea

Postby Ed 2 » Sat Dec 22, 2012 5:37 pm

SP-diceman wrote:I think only Bogleheads worry about “Plan B”
as most non-Bogleheads don’t even have a Plan A.

:)


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Re: "Plan B" is an ambiguous idea

Postby tadamsmar » Sat Dec 22, 2012 5:55 pm

Let's consider a good Boglehead who plays by the rules. He's 67 and just retired. has 1 million in his nest egg. Age in bonds. Planned for a 4% withdrawal rate. Owns a paid off house.

Let's do the sort of analysis that Larry talked about in the OP link. If there was a 90% drop in the stock market. The good Boglehead now has about $703,000 and a paid off house. To stick with the 4% rule he needs to cut his expenses by $11,880. If he was also a good Swerdoehead, the he has a credible plan to do that.

Now suppose he decides he can't lose another cent or nickel. Sells out to CDs. He might have to cut his expenses by another $7,000 or so permanently I guess if he stays in CDs. Or he could go back to a Boglehead plan later I guess.
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Re: "Plan B" is an ambiguous idea

Postby patrick » Sat Dec 22, 2012 6:29 pm

pkcrafter wrote:One thing that concerns me is Adrian's 50% loss rule of thumb because it really has no basis other than the last three panic crashes have been about 50% loss, but we should not forget that we have also experienced one of ~90%.


If you are referring to the US stock market, a 90% loss didn't really happen. The loss in US stocks during the Great Depression was only about 80% if you include dividends and adjust for inflation. However, you can find a 90% drop if you look at the history of Japan's stock market in the 1940s.
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Re: "Plan B" is an ambiguous idea

Postby VictoriaF » Sat Dec 22, 2012 6:49 pm

If plan-B means accounting for a 90% market drop, the drop would not happen in isolation. Pension funds would become bankrupt, state and local taxes would rise, speculators would lose everything (and more) on margin calls, and probably other calamities would happen such as housing decline and unemployment.

A hypothetical retiree would not only lose a large part of his assets, but his taxes will likely rise, thus squeezing his discretionary spending. A younger retiree may try to find a job, but it's unlikely under the circumstances; his other option is to move to a cheaper area or even abroad. An older retiree would be stuck. While it's impossible to foresee every eventuality, having a large safety margin and diversifying across investments and pensions is prudent.

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Re: "Plan B" is an ambiguous idea

Postby umfundi » Sat Dec 22, 2012 9:16 pm

I believe what Jack Bogle says, but it should not get to that point.

If you read Zwecher, Otar, and others, there is the idea of a "floor", which is sufficient to ensure your basic needs. That, you should cast in concrete. Or, at least know what that floor is. What's left is optional, discretionary, for your enjoyment or your legacy.

If you have not done that, and the market collapses, you may reach a point where all that you have is only sufficient to fund the floor. Then, I agree with Mr. Bogle, you have to get out.

Plan A: Have assured the floor, and have some discretionary amount.
Plan B: Discretionary amount goes to zero. I'll get by.

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Re: "Plan B" is an ambiguous idea

Postby pkcrafter » Sat Dec 22, 2012 11:31 pm

patrick wrote:
pkcrafter wrote:One thing that concerns me is Adrian's 50% loss rule of thumb because it really has no basis other than the last three panic crashes have been about 50% loss, but we should not forget that we have also experienced one of ~90%.


If you are referring to the US stock market, a 90% loss didn't really happen. The loss in US stocks during the Great Depression was only about 80% if you include dividends and adjust for inflation. However, you can find a 90% drop if you look at the history of Japan's stock market in the 1940s.


That's the thing about the Bogleheads, if you cut a corner you're gonna get called on it. :happy
The fact is from the initial drop in 1929 to the low point in 1932, the market dropped 89%. Maybe that didn't include dividends or inflation, but I'd guess that was a small comfort to those experiencing it.


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Re: "Plan B" is an ambiguous idea

Postby freebeer » Sun Dec 23, 2012 1:35 am

umfundi wrote:I believe what Jack Bogle says, but it should not get to that point.

If you read Zwecher, Otar, and others, there is the idea of a "floor", which is sufficient to ensure your basic needs. That, you should cast in concrete. Or, at least know what that floor is. What's left is optional, discretionary, for your enjoyment or your legacy.

If you have not done that, and the market collapses, you may reach a point where all that you have is only sufficient to fund the floor. Then, I agree with Mr. Bogle, you have to get out.

Plan A: Have assured the floor, and have some discretionary amount.
Plan B: Discretionary amount goes to zero. I'll get by.

Keith


What does "get out" mean? Or "cast in concrete"? Because if you for example liquidate into cash then you have inflation risk: there is no free lunch. And what does "assured the floor" mean during accumulation when most of us haven't yet saved enough to have any such assurance? And as always the idea of going to uber safe investments like TIPS is not a free lunch either: lower real returns means you have to work longer and harder. OK you can "get out" to inflation-adjusting annuity but again low returns and you also give up option of bequest.

I think this "Plan B" concept is - for most retirement savers and retirees - merely the notion of irrational psychological capitulation resulting in worse expected future returns. For someone wealthy like Jack Bogle that's another story - they have much more than they need to spend and can indeed decide to go zero-risk. I think posts on this forum often conflate the two situations.
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Re: "Plan B" is an ambiguous idea

Postby umfundi » Sun Dec 23, 2012 5:58 am

freebeer wrote:
umfundi wrote:I believe what Jack Bogle says, but it should not get to that point.

If you read Zwecher, Otar, and others, there is the idea of a "floor", which is sufficient to ensure your basic needs. That, you should cast in concrete. Or, at least know what that floor is. What's left is optional, discretionary, for your enjoyment or your legacy.

If you have not done that, and the market collapses, you may reach a point where all that you have is only sufficient to fund the floor. Then, I agree with Mr. Bogle, you have to get out.

Plan A: Have assured the floor, and have some discretionary amount.
Plan B: Discretionary amount goes to zero. I'll get by.

Keith


What does "get out" mean? Or "cast in concrete"? Because if you for example liquidate into cash then you have inflation risk: there is no free lunch. And what does "assured the floor" mean during accumulation when most of us haven't yet saved enough to have any such assurance? And as always the idea of going to uber safe investments like TIPS is not a free lunch either: lower real returns means you have to work longer and harder. OK you can "get out" to inflation-adjusting annuity but again low returns and you also give up option of bequest.

I think this "Plan B" concept is - for most retirement savers and retirees - merely the notion of irrational psychological capitulation resulting in worse expected future returns. For someone wealthy like Jack Bogle that's another story - they have much more than they need to spend and can indeed decide to go zero-risk. I think posts on this forum often conflate the two situations.

If you read Michael Zwecher's book, "Retirement Portfolios", you'll get a better idea of what I mean.
OK you can "get out" to inflation-adjusting annuity

Yes. And, I disagree with your statement on "irrational psychological capitulation", but that's not worth arguing about.

If you are young and still accumulating, your required income from your portfolio is zero, and I do not believe the concept of Plan B applies. If you are within five years of retirement or beyond, it does.

If you do not have enough savings to retire, you can't. If you have plenty of resources, perhaps like Mr. Bogle, it does not matter. In between is where the problem lies.

As an example, (inflation and bequests aside), suppose that in addition to all other sources of income, pensions and Social Security, you are in your mid-60s and need 3% of your portfolio to sustain your needs. Most people would say you are probably good for 25 or 30 years, so you are set.

But, after a couple of years of market declines, that amount is now 5% of your portfolio. I would say you are screwed. A few years of 5% withdrawals, even if the market later comes back, and you are done.

I think Mr. Bogle means, now you have to "get out". Liquidate your portfolio to provide assured income, SPIAs, TIPS, short term bonds, whatever. Yes, it's a disaster. You may have to lower your income and you have lost the opportunity to participate in a market recovery.

I (and I believe Zwecher) would say it never needed to come to that. You need 3% of your portfolio as income. For ever. You can get an SPIA that yields 7%. In other words, take 3/7 (43%) of your portfolio and buy an SPIA. Now, your income needs from the remaining 57% of your portfolio are zero! What do you care if the market goes south for five years or more?

The remaining part of your portfolio is available to be invested, and should be used in future years to buy supplementary SPIAs to compensate for inflation, if you are still alive.
and you also give up option of bequest

If you are prepared to put your retirement at risk to leave a bequest, you need a better plan. Tell your children, "I bought an SPIA. It is insurance that I will not run out of money and have to move in with you when I am 85."

If you have enough to plan on leaving a bequest in 30 years, you are like Mr. Bogle. It doesn't matter.

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Re: "Plan B" is an ambiguous idea

Postby freebeer » Fri Dec 28, 2012 8:18 pm

umfundi wrote:As an example... you are in your mid-60s and need 3% of your portfolio to sustain your needs. Most people would say you are probably good for 25 or 30 years, so you are set.

But, after a couple of years of market declines, that amount is now 5% of your portfolio. I would say you are screwed. A few years of 5% withdrawals, even if the market later comes back, and you are done.

I think Mr. Bogle means, now you have to "get out". Liquidate your portfolio to provide assured income, SPIAs, TIPS, short term bonds, whatever. Yes, it's a disaster. You may have to lower your income and you have lost the opportunity to participate in a market recovery...


I would not presume to speak for Mr. Bogle but I can't imagine that he was intending the term "Plan B" and its implication of a major "reset" in asset allocation to reflect any event that would fall within the expected statistical variance of sequence of returns at the start of execution of a decumulation strategy, which your scenario might well fit (since your post spok of 100% equities, and a 40% decline in portfolio value, which is well within expectations for bear markets, turns 3% withdrawal into 5% withdrawal). Not to mention that a 5% withdrawal for someone presumably now aged 67+ isn't necessarily totally crazy: if a male, average life expectancy is 13 years, 90th percentile probably 23 years. Your chances of being alive and broke would be quite small, and certainly still many times less than your chances of being dead and solvent. I'm not suggesting going with an SPIA is bad idea but also it has its own risks - that 7% return of which you speak is certainly not inflation-indexed. Nor that cutting spending would be a bad idea. But "liquidation"/"disaster"? I don't think so. Missing the opportunity to participate in a market recovery? That would be the real disaster. And the main point is that if you are going to go with a 100% equity portfolio, which isn't totally unreasonable given you only need 3%, then you'd better buy in to the possibility of this outcome up front, and presumably do so for a good reason (like bequest motive).
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Re: "Plan B" is an ambiguous idea

Postby umfundi » Sat Dec 29, 2012 1:34 am

freebeer wrote:I would not presume to speak for Mr. Bogle but I can't imagine that he was intending the term "Plan B" and its implication of a major "reset" in asset allocation to reflect any event that would fall within the expected statistical variance of sequence of returns at the start of execution of a decumulation strategy, which your scenario might well fit (since your post spok of 100% equities, and a 40% decline in portfolio value, which is well within expectations for bear markets, turns 3% withdrawal into 5% withdrawal). Not to mention that a 5% withdrawal for someone presumably now aged 67+ isn't necessarily totally crazy: if a male, average life expectancy is 13 years, 90th percentile probably 23 years. Your chances of being alive and broke would be quite small, and certainly still many times less than your chances of being dead and solvent. I'm not suggesting going with an SPIA is bad idea but also it has its own risks - that 7% return of which you speak is certainly not inflation-indexed. Nor that cutting spending would be a bad idea. But "liquidation"/"disaster"? I don't think so. Missing the opportunity to participate in a market recovery? That would be the real disaster. And the main point is that if you are going to go with a 100% equity portfolio, which isn't totally unreasonable given you only need 3%, then you'd better buy in to the possibility of this outcome up front, and presumably do so for a good reason (like bequest motive).


freebeer,

I think we agree, except for some details.

I think "Plan B" is what applies in the tails of probable expectations. I was not thinking of "Black Swan" events.

In my scenario, each year of 5% withdrawals lops an additional year off the life of the portfolio. Plan A, in my view, has become unsustainable.

However, given my scenario, I think we both agree Plan A could be much more robust. And, in my view, if a bequest is so important, take that money off the table and make a plan for your life that excludes the bequest.

By the way, I have often heard Jack Bogle say, on TV and in print and once in person, that for some people, if the market drops enough they have to get out. My own question, and perhaps yours, is, if so, should they not have been there in the first place?

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Re: "Plan B" is an ambiguous idea

Postby tadamsmar » Sat Dec 29, 2012 11:43 am

pkcrafter wrote:
patrick wrote:
pkcrafter wrote:One thing that concerns me is Adrian's 50% loss rule of thumb because it really has no basis other than the last three panic crashes have been about 50% loss, but we should not forget that we have also experienced one of ~90%.


If you are referring to the US stock market, a 90% loss didn't really happen. The loss in US stocks during the Great Depression was only about 80% if you include dividends and adjust for inflation. However, you can find a 90% drop if you look at the history of Japan's stock market in the 1940s.


That's the thing about the Bogleheads, if you cut a corner you're gonna get called on it. :happy
The fact is from the initial drop in 1929 to the low point in 1932, the market dropped 89%. Maybe that didn't include dividends or inflation, but I'd guess that was a small comfort to those experiencing it.


Paul


It might be small comfort in some sense, but it leaves your portfolio twice as big at the bottom. It's important to anyone who is diligently going through the planning process that Larry recommends in the OP link.
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Re: "Plan B" is an ambiguous idea

Postby tadamsmar » Sat Dec 29, 2012 11:53 am

I am not so interested in the cases where a retiree has 100% in stocks or the guy with too much in his company's stock.

What about the Boglehead who has age in bonds and a plan for a 4% withdrawal rate? When would they need to sell low, if ever? Is the risk high enough require changes to their plan now? What changes are best?

If a investor went through Larry's planning process, then I feel sure they would not end up in all company stock, and a 67 year old who could barely make it on 3% would not be in all stock.
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Re: "Plan B" is an ambiguous idea

Postby umfundi » Sat Dec 29, 2012 2:15 pm

tadamsmar wrote:I am not so interested in the cases where a retiree has 100% in stocks or the guy with too much in his company's stock.

What about the Boglehead who has age in bonds and a plan for a 4% withdrawal rate? When would they need to sell low, if ever? Is the risk high enough require changes to their plan now? What changes are best?

If a investor went through Larry's planning process, then I feel sure they would not end up in all company stock, and a 67 year old who could barely make it on 3% would not be in all stock.

tadamsmar,

I think Larry Swedroe says it quite well:
The discussion should focus on what, if any, actions would be taken if financial assets fall to such a degree that the investor runs an unacceptably high level of risk that their portfolio may run out of assets if Plan A isn't adapted to the existing reality. It might also be that an investor has an important bequeath goal that he or she doesn't want to put at risk (for example, a special needs child).

Plan B should list the actions that would be taken if financial assets were to drop below a predetermined level. Those actions might include remaining in or returning to the work force, reducing current spending, reducing the financial goal, selling a home, and/or moving to a location with a lower cost of living.

In a sense, "Plan B" is a thought experiment of what you might do if Plan A is not working well.

You say 4%. Of what? Do you have an idea of a "predetermined level" to which, if your portfolio drops, you feel you would need to do something different?

Personally, I favor monitoring and adjusting Plan A so that Plan B never becomes necessary as a major course correction. Set up Plan A, and run the Monte-Carlo simulations. Each year, make your withdrawal, and then re-run the simulations with updated data. You will easily sense if things are going off track.

Do the thought experiment: Suppose your 4% is $50,000 and you have 30% in stocks. Well, if the market drops 50%, that withdrawal is now $42,500. Is that a real problem? If it then drops another 50%, that withdrawal is $38,750. What might you then do?

The purpose of this is not to drive yourself crazy. It is to gain some idea of what you might do, so you are better mentally prepared.

My own mental accounting goes something like this: For the longer term, I am comfortable with 40 / 60% bonds / stocks. My plan is for 30 years, but I want 7 years assured: 2 years in cash, 5 years in short term treasuries and bonds. So, I have 2 parts cash, 5 parts bonds, and 23 parts 40 / 60. That works out to 7/ 47 / 46 % cash / bonds / stocks. And, I have this mental idea that I have enough cash equivalents to ride out a few years of a bad market.

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Re: "Plan B" is an ambiguous idea

Postby tadamsmar » Sun Dec 30, 2012 9:41 am

You say 4%. Of what? Do you have an idea of a "predetermined level" to which, if your portfolio drops, you feel you would need to do something different?


Good question. I meant 4% per year of your nest egg at retirement, inflation adjusted after the first year. So you you have 1 million at retirement, then you plan to withdraw $40,000 per year inflation adjusted for life. This sort of model was used in the Trinty Study. But it does not address the issue of how much you can cut your expenditures if you lose faith in the success of your plan in a down market.
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Re: "Plan B" is an ambiguous idea

Postby tadamsmar » Sun Dec 30, 2012 10:02 am

That Bogle quote has nothing to do with the idea that a Boglehead would need to engage in a Plan B selloff. It's taken out of context.

John C. Bogle's comment:
Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out.


That's from a October 8, 2008 interview on Squawk Box:

http://www.cnbc.com/id/27083747/Stock_S ... Over_Bogle

He goes on to say:

So if people had done their job of asset allocation and diversification, they shouldn’t be in that situation.


He says investors who are facing a margin call are in that situation.
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Re: "Plan B" is an ambiguous idea

Postby umfundi » Sun Dec 30, 2012 10:11 am

tadamsmar wrote:
You say 4%. Of what? Do you have an idea of a "predetermined level" to which, if your portfolio drops, you feel you would need to do something different?


Good question. I meant 4% per year of your nest egg at retirement, inflation adjusted after the first year. So you you have 1 million at retirement, then you plan to withdraw $40,000 per year inflation adjusted for life. This sort of model was used in the Trinty Study. But it does not address the issue of how much you can cut your expenditures if you lose faith in the success of your plan in a down market.

So, "4%" is not a percentage at all, it's much more like withdrawing a constant dollar amount based on a rather arbitrary date, no matter what.

I think it's a reasonable rule of thumb for planning, but it should not be the basis for a "fire and forget" withdrawal scheme. Other rules of thumb might include 1/(Life expectancy) or the percentage IRS Required Minimum Withdrawal. Personally, I like the idea of 1/(95-age).

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Re: "Plan B" is an ambiguous idea

Postby leonard » Sun Dec 30, 2012 6:04 pm

People need to make "Plan A" conservative enough that they feel no need for a "Plan B".
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Re: "Plan B" is an ambiguous idea

Postby Index Fan » Sun Dec 30, 2012 8:54 pm

The history of 'Plan B' on this board troubles me- a concept introduced during a steep market decline, which was unsettling. And the plan itself is basically, 'sell low when you're at the end of your rope'.

People need to make "Plan A" conservative enough that they feel no need for a "Plan B".


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Re: "Plan B" is an ambiguous idea

Postby tadamsmar » Mon Dec 31, 2012 10:47 am

nisiprius wrote:The phrase emerged in the depths of 2008-2009. It has been controversial all along. To me, it is encapsulated in John C. Bogle's comment:
Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out,
People fall into two categories--those to whom a statement like this is a truism; and those to whom it is a meaningless question, like the one about the irresistible force and the inanimate object, because how can you define a point at which "you can't afford to lose another penny or another nickel?"

(Perhaps there also a tension between those who think that even acknowledging the possibility of failure increases the probability of failure, and those who think acknowledging the possibility of failure reduces the probability of failure.)

It is unhelpful to say "if you've planned well, you should never reach that point." People overestimate their risk tolerance and do reach that point, all the time. It's also a little self-contradictory to say that a prudent person will have a plan B, because a prudent person's plan A would have been designed in such a way that it would not reach the point at which a plan B were needed.

Unfortunately, I have seen people who basically had adequate retirement savings and lost it all because it was mostly in company stock, and at every point in the company's collapse they could not bear the thought of locking in and acknowledging the loss of 1/4, 1/3, 1/2, 2/3 of their retirement savings. There was always some story making the rounds about why it was absolutely impossible for the price to drop further. The brand-new CEO was a turnaround expert who'd rescued other companies and said flatly that he "had never seen a $5 billion company that couldn't be turned around." They had military contracts and the government wouldn't let them fail. The price was already lower than the book value of the assets. Etc. etc. etc.

It is meaningless to say you should always stick to your plan because, a) whether you should or not, you will not. That is the meaning of risk tolerance. Everyone has a point at which they will not stick to the plan. I've seen throwaway comments in a Chuck Jaffe column and elsewhere that "the average investor will panic-sell when their portfolio is down about 20%." I haven't been able to find a source so I don't know if it's based on research. Given that many investors have been guided into portfolios of >40% stocks, I'd say that if true that's cause for concern. b) Certainly in the case of single-company stock, always sticking to the plan no matter how low the stock goes can be a very bad plan. Whether this is true for a broadly diversified sample of a national or global stock market is an interesting topic for debate.


I want to object again to the claim that selling out to an alternative Plan B portfolio is encapsulated in Bogle's comment:

Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out,


This gives more of the context:

“Unfortunately I think it is going to be bad timing but if you can’t afford to lose another penny or another nickel, you have to get out,” said Bogle on Squawk Box.

He said if investors had stuck to an age-related retirement formula, in which your bond position equals your age, investors could have avoided much of the pain.

“That kind of account is barely affected by this market decline," he said. "Maybe it is off three or four percent, rather then 30 percent. So if people had done their job of asset allocation and diversification, they shouldn’t be in that situation.”


And, if you listen to the full interview, you will see that he gives the example of an investor who faces a margin call:

http://www.cnbc.com/id/27083747/Stock_S ... Over_Bogle

Of course, an investor who faces a margin call and does not have a penny to spare has to sell low.

I don't think nisiprius is correct in characterizing Bogle's remarks as encapsulating the notion that a Boglehead needs to have a plan to sell off his stocks in down market. Bogle said nothing of the kind. One could argue that he took the other side of the argument, since he said that you should not be in this situation if you did your job of proper asset allocation.

Nisiprius says that we either consider his comment a truism or meaningless. But there is another possibility. You can consider it a truism for a guy facing a margin call and not applicable to those who are not in the literal position of not being able to afford another cent. The idea that there is some threshold where a Boglehead needs to sell off, that there is some interpretation of "can't afford another penny or another nickel" that applies to a Boglehead in a down market is only in the mind of the person who hears this out of context associated with a Plan B selloff. This is not something that Bogle meant as a metaphor. This was not meant to be a one line aphorism. This is not Bogle's Pillar of Wisdom #13.

If you want to advocate a sell off in a down market, go for it. But don't drag Bogle in on your side based on this out of context quotation.
Last edited by tadamsmar on Mon Dec 31, 2012 3:34 pm, edited 2 times in total.
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Re: "Plan B" is an ambiguous idea

Postby BruceA » Mon Dec 31, 2012 12:10 pm

Regarding what is Plan B, I agree with the Swedroe article.

I'm curious though why this discussion is only about market declines and not inflation. For those with fixed pensions or annuities, inflation can be as devastating as a market decline.
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Re: "Plan B" is an ambiguous idea

Postby texasdiver » Mon Dec 31, 2012 12:39 pm

Seems to me that those who are constructing a Plan B are doing so because their Plan A was inappropriate. If my plan A at age 60 is a simple age in bonds 60/40 portfolio then my Plan A will have me buying more equities all the way down to the bottom every time I re-balance.

In any event, it helps me to think long term about these things if I imagine my portfolio as a set of separate pools of money. If I'm 60 and just retired, pool A are those funds I'll need for the next 10 years from 60-70, pool B are those funds that I'll need 10-20 years out from age 70 - 80 and pool C are those funds that I'll need 20-30 years out from age 80 - 90 and so forth. I wouldn't actually maintain 3 separate portfolios but it is easier to conceptualize the need for equities and the long-term nature of investing even when retired if one steps back and realizes that a substantial portion of the portfolio is really set aside for use 20-30 years out. I think the 4% rule tends to make us incorrectly conceptualize the portfolio as something we are depending on in its entirety every year.

In any event, my plan B in any serious downturn would be to cut back withdrawals and spending rather than ditching my asset allocation. Use a running 4% withdrawal rate, for example, rather than one fixed to what 4% of the portfolio was during year 1.

It also seems to me that those who can't stomach a major downturn either financially or emotionally would be better off doing something like buying more annuities as part of their plan A so they needn't worry about it.
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