Current precarious equity environment for a retiree

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dachshund
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Current precarious equity environment for a retiree

Post by dachshund » Fri Nov 17, 2017 3:07 pm

I know it's taboo to talk about market timing here, but I am worried about the current market situation. Please note that this pertains only to a retirement situation, not an accumulation one. My concern is that the current environment is one of high valuations with those valuations seemingly propped up by investor enthusiasm due to recent low volatility and low inflation and investor seeking of higher returns due to the Feds stimulus moves to the last recession. I fear that if a market correction begins, these investors will flee in droves leading to possibly a real plunge. While there may be some sitting on the sidelines who will start buying with the dive, will there be enough of them to pull the market up relatively quickly? Will the panicked investors come back? What ammunition does the Fed still have to combat bad events that may ensue. Would it be better to be among those on the sidelines with the resources to re-invest a some point during the fall. I realize it's impossible to determine in real time when the bottom has been reached, but at least one might avoid some potentially devastating losses if one reduces one's equity holdings in advance, especially if future equity returns are not crucial to success.

alex_686
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Re: Current precarious equity environment for a retiree

Post by alex_686 » Fri Nov 17, 2017 3:17 pm

Dachshund, I am not exactly against market trimming exactly. If the market's expectations of risk and return bounce around, but one's risk tolerance is static, one should update their AA to match expectations. The problem that we currently face is that the market is expecting a long period of low returns and high volatility for both stocks and bonds. So you don't have any good choices.

On the Fed, if the market sags I don't expect them to do anything. Technically they don't care and they are not going to prop up a overvalued market. If the market crashes hard then, and only then, will they cut rates. Of course with bond rates so low it would only provide a modest boost for bond funds.

WhyNotUs
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Re: Current precarious equity environment for a retiree

Post by WhyNotUs » Fri Nov 17, 2017 3:22 pm

Lots of possible scenarios, including the one that you describe. If you have a big cushion and are confident in your analysis, then you know what you need to do.

Personally, I predict too many downturns to be able to act on them. Occasionally, I am even correct! :D
I mostly just stay the course but not at retirement yet.

Best wishes, I understand what a challenge it is for retirees in this environment with high PE ratios and low bond yields.
I own the next hot stock- VTSAX

livesoft
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Re: Current precarious equity environment for a retiree

Post by livesoft » Fri Nov 17, 2017 3:26 pm

I am retired. I don't consider the current environment precarious at all. It seems pretty normal to me after all the years that I have been observing markets and investing.

I most certainly have resources to invest in equities when they drop. That's called rebalancing and I would do so by exchanging from bond fund shares to equity fund shares in order to maintain my asset allocation. A 50% drop in equities wouldn't change my lifestyle at all and my portfolio wouldn't even drop all that much anyways. That is, because of my asset allocation, there is really no way I would experience devastating losses. Sure, I would experience losses, but they would not be devastating.
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hirlaw
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Re: Current precarious equity environment for a retiree

Post by hirlaw » Fri Nov 17, 2017 3:29 pm

Aside from the market valuation issue, some lower their equity allocation close to or in early retirement in order to address sequence of return risk.

delamer
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Re: Current precarious equity environment for a retiree

Post by delamer » Fri Nov 17, 2017 3:34 pm

There will be a market correction, probably multiple corrections, in my remaining lifetime.

The timing, amount, and duration of them won't be known until they have run their course.

The dividends on stocks make up a substantial portion of total return -- about 1/3 for the S&P 500. So if I reduce my market exposure, I instantly reduce my return.

The above are the things that I know to be true. They tell me that I need to find an asset allocation that I am comfortable holding and stick with it, with the caveat that that allocation may become more conservative as I age.

KlangFool
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Re: Current precarious equity environment for a retiree

Post by KlangFool » Fri Nov 17, 2017 3:57 pm

OP,

For the past 10+ years, I have no job security. I could be forced into permanent unemployment and/or under-employment. I could be forced into early retirement at any time. As a result, I planned for the worst with my AA. I could survive a recession/downturn with unemployment lasting 5 years at any time. This is the only way that I could "Sleep Well At Night" (SWAN).

So, what is the problem? If a person is worried enough, he/she should adjust the AA to survive X number of years of recession. The person should choose the number of X to be a number that let them SWAN.

Hope for the best. Plan for the worst.

KlangFool

staythecourse
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Re: Current precarious equity environment for a retiree

Post by staythecourse » Fri Nov 17, 2017 3:58 pm

dachshund wrote:
Fri Nov 17, 2017 3:07 pm
I know it's taboo to talk about market timing here, but I am worried about the current market situation. Please note that this pertains only to a retirement situation, not an accumulation one. My concern is that the current environment is one of high valuations with those valuations seemingly propped up by investor enthusiasm due to recent low volatility and low inflation and investor seeking of higher returns due to the Feds stimulus moves to the last recession. I fear that if a market correction begins, these investors will flee in droves leading to possibly a real plunge. While there may be some sitting on the sidelines who will start buying with the dive, will there be enough of them to pull the market up relatively quickly? Will the panicked investors come back? What ammunition does the Fed still have to combat bad events that may ensue. Would it be better to be among those on the sidelines with the resources to re-invest a some point during the fall. I realize it's impossible to determine in real time when the bottom has been reached, but at least one might avoid some potentially devastating losses if one reduces one's equity holdings in advance, especially if future equity returns are not crucial to success.
I think you need to spend less time thinking about these worries and more time on how to build a portfolio that will sustain your retirement. It isn't difficult. Just take your monthly liabilities and figure out how much SS, pensions, and SPIAs cover that. If there isn't enough then buy more SPIA. Then put the rest in an asset allocation where you don't freak out, i.e. 30/70- 50/50. Then just adapt. It isn't like when you worked you could not have been fired at any time so you should be ready to adapt if something goes wrong. See it isn't difficult. Folks just make it more difficult then they need to make it.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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JoMoney
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Re: Current precarious equity environment for a retiree

Post by JoMoney » Fri Nov 17, 2017 4:00 pm

Market prices are supply and demand. You don't necessarily need a lot of new money to push prices up after a big fall, but you do need people who want to buy and hold a business (not just flip stocks in the market), and that are able to sit and wait for a price that looks reasonable to them (not overextended with leverage and forced to sell due to margin call and the like).
If there are people looking to buy, and there aren't a lot of willing sellers at whatever prices are being offered at, prices will go up until people start getting interested in selling.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

chevca
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Re: Current precarious equity environment for a retiree

Post by chevca » Fri Nov 17, 2017 4:01 pm

Isn't the equity environment always precarious? :happy

I'd say if a retiree is overly stressed about the equity side of things, they may have too much in equities and an AA change may be needed.

Cipro
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Re: Current precarious equity environment for a retiree

Post by Cipro » Fri Nov 17, 2017 4:03 pm

I understand your quandary. With just a few years of accumulation left for me I've decided to decrease equity exposure. My advice is consistent with others, adjust AA and rebalance as needed.

MikeG62
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Re: Current precarious equity environment for a retiree

Post by MikeG62 » Fri Nov 17, 2017 4:16 pm

Early retired two years ago. As others have said, you need to have an asset allocation that allows you to sleep at night. That does not necessarily mean significant underweight to equities (you need to find a balance).

OP, if you pull money from equities, where is it going to go? If to fixed income, you would be moving money to an equally richly valued asset class (maybe an even more richly valued asset class). If cash, you likely won’t keep pace with inflation. Bottom line, there is no panacea.
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SimplicityNow
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Re: Current precarious equity environment for a retiree

Post by SimplicityNow » Fri Nov 17, 2017 4:36 pm

If you are worried about the current market situation then your asset allocation isn't correct.

Your analysis might be correct. It might be incorrect. There is no way to know until you are looking in the rear view mirror.

If you are newly retired and worried about sequence of return risk then your asset allocation should have been adjusted to accommodate that.

If you market time realize you most likely will get out at the wrong time and get back in at the wrong time.

Have a cup of tea, relax and stop watching the talking heads.

Watch a few interviews of Jack Bogle instead.

dachshund
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Re: Current precarious equity environment for a retiree

Post by dachshund » Fri Nov 17, 2017 6:39 pm

Thanks for all the replies. I know the mantra is "This time is not different." But I guess part of my question is: Could this time be different, especially for a retiree facing sequence of returns risk? Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)? I realize this is impossible to predict, and at least two responders do not think so. Unlike livesoft (apparently), I do not have a huge nest egg. However, my expenditures in retirement have been fairly modest. Allowing for a yearly inflation rise of 3%, I should be able to cover my expenses with SS + RMD (from cash equivalents) for 10-15 years or more. The potential big black hole is LTC and other unanticipated expenses. That leads to the second part of my question: If you've won the game, why keep playing? Staythecourse said retirement isn't like when you worked because you no longer have the risk of job loss. It's also unlike when you worked because you no longer get a paycheck every two weeks. Thanks SimplicityNow. I know, "Don't just do something, stand there!" One of the talking heads I have listened to is Robert Shiller. JoMoney's last sentence was very helpful.

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David Jay
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Re: Current precarious equity environment for a retiree

Post by David Jay » Fri Nov 17, 2017 6:58 pm

A rising-equity glide path is one way to control sequence of returns risk.

The rising equity glidepath has been discussed quite a bit recently, with moderate equity allocations early in retirement, rising over time. ERN took an extensive look at it here: https://earlyretirementnow.com/2017/09/ ... lidepaths/
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delamer
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Re: Current precarious equity environment for a retiree

Post by delamer » Fri Nov 17, 2017 7:01 pm

dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Thanks for all the replies. I know the mantra is "This time is not different." But I guess part of my question is: Could this time be different, especially for a retiree facing sequence of returns risk? Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)? I realize this is impossible to predict, and at least two responders do not think so. Unlike livesoft (apparently), I do not have a huge nest egg. However, my expenditures in retirement have been fairly modest. Allowing for a yearly inflation rise of 3%, I should be able to cover my expenses with SS + RMD (from cash equivalents) for 10-15 years or more. The potential big black hole is LTC and other unanticipated expenses. That leads to the second part of my question: If you've won the game, why keep playing? Staythecourse said retirement isn't like when you worked because you no longer have the risk of job loss. It's also unlike when you worked because you no longer get a paycheck every two weeks. Thanks SimplicityNow. I know, "Don't just do something, stand there!" One of the talking heads I have listened to is Robert Shiller. JoMoney's last sentence was very helpful.
I am not unsympathetic to your concerns, but as you said above the answers you are hoping for are "impossible to predict." No one knows the future.

If you are more comfortable with the risk of not keeping up with inflation (by holding more cash/bonds) than you are with the risk of the sequence of returns, then you should keep more cash/bonds. Just acknowledge to yourself that you are not eliminating risk, but trading one type for another.

livesoft
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Re: Current precarious equity environment for a retiree

Post by livesoft » Fri Nov 17, 2017 7:14 pm

dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Allowing for a yearly inflation rise of 3%, I should be able to cover my expenses with SS + RMD (from cash equivalents) for 10-15 years or more.
If the above is true, then you have a more than huge nest egg.
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pkcrafter
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Re: Current precarious equity environment for a retiree

Post by pkcrafter » Fri Nov 17, 2017 7:51 pm

dachshund wrote:
Fri Nov 17, 2017 3:07 pm
I know it's taboo to talk about market timing here, but I am worried about the current market situation. Please note that this pertains only to a retirement situation, not an accumulation one. My concern is that the current environment is one of high valuations with those valuations seemingly propped up by investor enthusiasm due to recent low volatility and low inflation and investor seeking of higher returns due to the Feds stimulus moves to the last recession.
A simpler explanation is investors are getting in with high equity allocations because of high returns. Total market index funds are very hard to beat in markets like this.
I fear that if a market correction begins, these investors will flee in droves leading to possibly a real plunge.
Expect a sizable plunge. We are near a tipping point, so if a catalyst comes along the crash will be even more dramatic.
While there may be some sitting on the sidelines who will start buying with the dive, will there be enough of them to pull the market up relatively quickly?
What is quickly?
Will the panicked investors come back?
Yes, but many won't get back in until the market is once again showing good returns. Keep in mind that the majority of retail investors are woefully misinformed.
What ammunition does the Fed still have to combat bad events that may ensue.
Don't count on the fed.
Would it be better to be among those on the sidelines with the resources to re-invest at some point during the fall. I realize it's impossible to determine in real time when the bottom has been reached, but at least one might avoid some potentially devastating losses if one reduces one's equity holdings in advance, especially if future equity returns are not crucial to success.
Now we are getting to the heart of the matter. It appears you may be newly retired, right?
Did you experience 2008? What did you do?
Age and withdrawal rate?
What is your overall asset allocation now?

It's very difficult to provide useful suggestions without this information.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

AlohaJoe
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Re: Current precarious equity environment for a retiree

Post by AlohaJoe » Fri Nov 17, 2017 8:16 pm

dachshund wrote:
Fri Nov 17, 2017 6:39 pm
If you've won the game, why keep playing?
You haven't won the game. The game isn't over until you're dead. Until then you are still playing.

Put everything in (nominal) bonds? Now you're exposed to inflation risk which, historically, has been far worse than equity risk.

Put everything in TIPS to avoid even inflation risk? Now you're exposed to longevity risk and personal inflation risk. (There's plenty of evidence that the CPI used for TIPS is wrong for retirees.)

Have a super huge pile of TIPS that covers longevity and personal inflation risk? You could still have a "spending shock" -- maybe your grand daughter is diagnosed with a very expensive disease and you suddenly discover you need to spend $50,000 more a year. Or maybe your house is hit by a hurricane/earthquake/wildfire. Or you are driving a car (despite your advanced age) and hit someone because you have slower reflexes and poorer vision and the medical and legal expenses cost you $500,000.

There is no "winning the game".

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Re: Current precarious equity environment for a retiree

Post by carolinaman » Sat Nov 18, 2017 7:59 am

chevca wrote:
Fri Nov 17, 2017 4:01 pm
Isn't the equity environment always precarious? :happy

I'd say if a retiree is overly stressed about the equity side of things, they may have too much in equities and an AA change may be needed.
+1. Either OPs AA is too risky or he/she is obsessing too much about it. Align your risk tolerance with your AA and ignore financial porn.

UncleLongHair
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Re: Current precarious equity environment for a retiree

Post by UncleLongHair » Sat Nov 18, 2017 8:11 am

I know this is somewhat speculative and everyone has an opinion on the market, but I do think that the stock market is overdue for a correction. Some signs that are common to previous peaks -- high valuations in historic terms (average P/E, ratio of market value to GDP), some popular stocks consistently trading at P/E of 100-500 (NFLX, AMZN, CRM), areas of outright speculation (BitCoin, Tesla), huge inflows of "dumb money" into the market (ETF's have created "robotic" cash inflows to stocks, and low bond yields / interest rates encourages moving money from bonds to stocks), etc.

People toss the term "bubble" around loosely, I don't think we are in a speculative bubble like 2000 or 2007 that is going to pop, but we are 8 years into a bull market with barely a hiccup. Historically the market has always recovered, in the past 30-40 years usually within a year or two, even after 2008 it recovered after 5 years. So this isn't necessarily cause for panic but if for example I were planning to retire in the next year or two or had my kids going to college, and had 100% of those funds in equities, I think there would be cause for concern.

However, if you're retiring and plan on sticking around for 10-20 years and have enough income and cash to cover your expenses, there is probably not much to worry about with a market decline because it will likely recover before you need those funds.

brak
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Re: Current precarious equity environment for a retiree

Post by brak » Sat Nov 18, 2017 8:56 am

Livesoft - would you be willing to share the details of your asset allocation? It would be quite helpful to me.

dbr
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Re: Current precarious equity environment for a retiree

Post by dbr » Sat Nov 18, 2017 10:09 am

AlohaJoe wrote:
Fri Nov 17, 2017 8:16 pm
dachshund wrote:
Fri Nov 17, 2017 6:39 pm
If you've won the game, why keep playing?
You haven't won the game. The game isn't over until you're dead. Until then you are still playing.

Put everything in (nominal) bonds? Now you're exposed to inflation risk which, historically, has been far worse than equity risk.

Put everything in TIPS to avoid even inflation risk? Now you're exposed to longevity risk and personal inflation risk. (There's plenty of evidence that the CPI used for TIPS is wrong for retirees.)

Have a super huge pile of TIPS that covers longevity and personal inflation risk? You could still have a "spending shock" -- maybe your grand daughter is diagnosed with a very expensive disease and you suddenly discover you need to spend $50,000 more a year. Or maybe your house is hit by a hurricane/earthquake/wildfire. Or you are driving a car (despite your advanced age) and hit someone because you have slower reflexes and poorer vision and the medical and legal expenses cost you $500,000.

There is no "winning the game".
Excellent. And I would go even further and suggest it isn't a game and you can't, as you say, stop playing.

Also, I hate investing by metaphor.

livesoft
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Re: Current precarious equity environment for a retiree

Post by livesoft » Sat Nov 18, 2017 10:12 am

brak wrote:
Sat Nov 18, 2017 8:56 am
Livesoft - would you be willing to share the details of your asset allocation? It would be quite helpful to me.
Is this thread enough detail:
viewtopic.php?t=150267
?
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Dottie57
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Re: Current precarious equity environment for a retiree

Post by Dottie57 » Sat Nov 18, 2017 10:22 am

I have 50/50 stock fixed income allocation. I am most worried about sequence of events before I take SS at 70.

Returns will guide the percentages of stock and FI I withdraw. FI includes bond funds , stable returns funds and cd's . After I have SS, i will move towards heavier allocation of stocks. 60/40?

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Re: Current precarious equity environment for a retiree

Post by midareff » Sat Nov 18, 2017 10:30 am

I would suggest you revisit your asset allocation %'s if you are getting nervous about market behavior. I retired 6 years ago with a smidgen over my minimum number and as the market progressed it took almost yearly re-balancing from equities to bonds to retain my desire to SWAN. My last rebalance was earlier this month, back to 45% equities with the rest in bonds, cash and CDs. If your getting nervous about what might happen it may be time to be more conservative. Think about your need, ability and willingness to take risk.

When I don't think about money and portfolio at night I know it's just right, for me!

dbr
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Re: Current precarious equity environment for a retiree

Post by dbr » Sat Nov 18, 2017 10:50 am

midareff wrote:
Sat Nov 18, 2017 10:30 am
I would suggest you revisit your asset allocation %'s if you are getting nervous about market behavior. I retired 6 years ago with a smidgen over my minimum number and as the market progressed it took almost yearly re-balancing from equities to bonds to retain my desire to SWAN. My last rebalance was earlier this month, back to 45% equities with the rest in bonds, cash and CDs. If your getting nervous about what might happen it may be time to be more conservative. Think about your need, ability and willingness to take risk.

When I don't think about money and portfolio at night I know it's just right, for me!
The people who are nervous about the stock market are the same people who worry about a bubble in bonds. Worry is not about financial issues.

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Re: Current precarious equity environment for a retiree

Post by ruralavalon » Sat Nov 18, 2017 10:52 am

dachshund wrote:
Fri Nov 17, 2017 3:07 pm
I know it's taboo to talk about market timing here, but I am worried about the current market situation. Please note that this pertains only to a retirement situation, not an accumulation one. My concern is that the current environment is one of high valuations with those valuations seemingly propped up by investor enthusiasm due to recent low volatility and low inflation and investor seeking of higher returns due to the Feds stimulus moves to the last recession. I fear that if a market correction begins, these investors will flee in droves leading to possibly a real plunge. While there may be some sitting on the sidelines who will start buying with the dive, will there be enough of them to pull the market up relatively quickly? Will the panicked investors come back? What ammunition does the Fed still have to combat bad events that may ensue. Would it be better to be among those on the sidelines with the resources to re-invest a some point during the fall. I realize it's impossible to determine in real time when the bottom has been reached, but at least one might avoid some potentially devastating losses if one reduces one's equity holdings in advance, especially if future equity returns are not crucial to success.
dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Thanks for all the replies. I know the mantra is "This time is not different." But I guess part of my question is: Could this time be different, especially for a retiree facing sequence of returns risk? Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)? I realize this is impossible to predict, and at least two responders do not think so. Unlike livesoft (apparently), I do not have a huge nest egg. However, my expenditures in retirement have been fairly modest. Allowing for a yearly inflation rise of 3%, I should be able to cover my expenses with SS + RMD (from cash equivalents) for 10-15 years or more. The potential big black hole is LTC and other unanticipated expenses. That leads to the second part of my question: If you've won the game, why keep playing? Staythecourse said retirement isn't like when you worked because you no longer have the risk of job loss. It's also unlike when you worked because you no longer get a paycheck every two weeks. Thanks SimplicityNow. I know, "Don't just do something, stand there!" One of the talking heads I have listened to is Robert Shiller. JoMoney's last sentence was very helpful.
You are over thinking this.

Stop listening to the talking heads and all the media noise. There is always fear and concern in the stock market.

Being on the sidelines, and not invested, is not an answer.

If your living expenses are covered by Social Security and Required Minimum Distributions you will probably be alright.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Current precarious equity environment for a retiree

Post by ruralavalon » Sat Nov 18, 2017 10:56 am

dachshund wrote:
Fri Nov 17, 2017 3:07 pm
I know it's taboo to talk about market timing here, but I am worried about the current market situation. Please note that this pertains only to a retirement situation, not an accumulation one. My concern is [emphasis added] that the current environment is one of high valuations with those valuations seemingly propped up by investor enthusiasm due to recent low volatility and low inflation and investor seeking of higher returns due to the Feds stimulus moves to the last recession. I fear [emphasis added] that if a market correction begins, these investors will flee in droves leading to possibly a real plunge. While there may be some sitting on the sidelines who will start buying with the dive, will there be enough of them to pull the market up relatively quickly? Will the panicked investors come back? What ammunition does the Fed still have to combat bad events that may ensue. Would it be better to be among those on the sidelines [emphasis added] with the resources to re-invest a some point during the fall. I realize it's impossible to determine in real time when the bottom has been reached, but at least one might avoid some potentially devastating losses if one reduces one's equity holdings in advance, especially if future equity returns are not crucial to success.
dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Thanks for all the replies. I know the mantra is "This time is not different." But I guess part of my question is: Could this time be different, especially for a retiree facing sequence of returns risk? Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)? I realize this is impossible to predict, and at least two responders do not think so. Unlike livesoft (apparently), I do not have a huge nest egg. However, my expenditures in retirement have been fairly modest. Allowing for a yearly inflation rise of 3%, I should be able to cover my expenses with SS + RMD (from cash equivalents) for 10-15 years or more. [emphasis added] The potential big black hole is LTC and other unanticipated expenses. That leads to the second part of my question: If you've won the game, why keep playing? Staythecourse said retirement isn't like when you worked because you no longer have the risk of job loss. It's also unlike when you worked because you no longer get a paycheck every two weeks. Thanks SimplicityNow. I know, "Don't just do something, stand there!" One of the talking heads I have listened to is Robert Shiller. JoMoney's last sentence was very helpful.
You are over thinking this.

Stop listening to the talking heads and all the media noise. There is always fear and concern in the stock market.

Being on the sidelines, and not invested, is not an answer.

If your living expenses are covered by Social Security and Required Minimum Distributions you will probably be alright.
Last edited by ruralavalon on Sat Nov 18, 2017 11:03 am, edited 3 times in total.
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Re: Current precarious equity environment for a retiree

Post by midareff » Sat Nov 18, 2017 11:01 am

dbr wrote:
Sat Nov 18, 2017 10:50 am
midareff wrote:
Sat Nov 18, 2017 10:30 am
I would suggest you revisit your asset allocation %'s if you are getting nervous about market behavior. I retired 6 years ago with a smidgen over my minimum number and as the market progressed it took almost yearly re-balancing from equities to bonds to retain my desire to SWAN. My last rebalance was earlier this month, back to 45% equities with the rest in bonds, cash and CDs. If your getting nervous about what might happen it may be time to be more conservative. Think about your need, ability and willingness to take risk.

When I don't think about money and portfolio at night I know it's just right, for me!
The people who are nervous about the stock market are the same people who worry about a bubble in bonds. Worry is not about financial issues.
As they say....... "It is what it is."

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Re: Current precarious equity environment for a retiree

Post by heyyou » Sat Nov 18, 2017 1:58 pm

This time is not much different than history with its booms and busts built into the retirement spending calculations. Portfolio failure takes a long time to develop. The Variable Percentage Withdrawal (VPW) developed by some of the posters here, shows the ending annual portfolio values for the worst case retirement year, so that would be a marker of if your portfolio is shrinking so fast that it will later fail, whether you choose that WD method or not.

Michael H. McClung did 30-40 year retirement spending calculations using recent data by wrapping the end of current data to include starting over from 1926. His theoretical 1995+ retirees experience the 2000 Crash, the 2008 Crash, then the 1929 Crash. He suggests having enough steady income (SS, a bond ladder, later annuities) to almost cover your necessary expenses, using portfolio withdrawals (WDs) mostly for discretionary spending. Those WDs are based on a set % of the recent annual portfolio value but the % is slowly adjusted for remaining longevity as you age.

Here we are all in the same boat, but we can each control some of our spending.
DW and I now have 40 years of experience at living within our means, including a decade of retirement. We were spending about 2/3 of our income just prior to retirement and that became our early retirement budget so the transition was easy in 2005. Others could do the same.

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Re: Current precarious equity environment for a retiree

Post by brak » Sat Nov 18, 2017 4:35 pm

livesoft - thanks for the link.

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Re: Current precarious equity environment for a retiree

Post by tibbitts » Sat Nov 18, 2017 4:51 pm

dachshund wrote:
Fri Nov 17, 2017 3:07 pm
I know it's taboo to talk about market timing here, but I am worried about the current market situation. Please note that this pertains only to a retirement situation, not an accumulation one. My concern is that the current environment is one of high valuations with those valuations seemingly propped up by investor enthusiasm due to recent low volatility and low inflation and investor seeking of higher returns due to the Feds stimulus moves to the last recession. I fear that if a market correction begins, these investors will flee in droves leading to possibly a real plunge. While there may be some sitting on the sidelines who will start buying with the dive, will there be enough of them to pull the market up relatively quickly? Will the panicked investors come back? What ammunition does the Fed still have to combat bad events that may ensue. Would it be better to be among those on the sidelines with the resources to re-invest a some point during the fall. I realize it's impossible to determine in real time when the bottom has been reached, but at least one might avoid some potentially devastating losses if one reduces one's equity holdings in advance, especially if future equity returns are not crucial to success.
I think there is a reasonable chance that you will fail no matter what you do. Sometimes the only possible outcome is failure. The good news is that you might die before you fail.

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Re: Current precarious equity environment for a retiree

Post by tadamsmar » Sat Nov 18, 2017 5:22 pm

dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Thanks for all the replies. I know the mantra is "This time is not different." But I guess part of my question is: Could this time be different, especially for a retiree facing sequence of returns risk? Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)? I realize this is impossible to predict, and at least two responders do not think so. Unlike livesoft (apparently), I do not have a huge nest egg. However, my expenditures in retirement have been fairly modest. Allowing for a yearly inflation rise of 3%, I should be able to cover my expenses with SS + RMD (from cash equivalents) for 10-15 years or more. The potential big black hole is LTC and other unanticipated expenses. That leads to the second part of my question: If you've won the game, why keep playing? Staythecourse said retirement isn't like when you worked because you no longer have the risk of job loss. It's also unlike when you worked because you no longer get a paycheck every two weeks. Thanks SimplicityNow. I know, "Don't just do something, stand there!" One of the talking heads I have listened to is Robert Shiller. JoMoney's last sentence was very helpful.
I think there are 3 options (1) stress test (2) paranoia (3) regret avoidance

1. You can stress test your plan. Like replay the last 10 years. Or maybe something worse. Have your done scenarios for the LTC thing?

2. You can bailout to investments that don't depend on the stock market.

3. When reading your initial post, I could not tell if you were just worrying about loss aversion or about not passing a stress test.

If you can't pass a stress test, then make some adjustment. The rest is between yourself and you.

You might want to cut back on stocks or increase your emergency fund if you are losing sleep.

Personally, I can survive a 50% downturn. Remember Adrian Neru? :happy

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Re: Current precarious equity environment for a retiree

Post by dachshund » Sat Nov 18, 2017 5:45 pm

Thanks to those of you with helpful replies. Dear livesoft: I usually tell the truth, at least as far as I know it. My calculations were done using my expenditures for the several years I have been retired, increased by 3%/year for inflation. I should be able to live on SS + RMD for at least 15 years. Again, it is not the size of the RMD, it is the amount I think I will be spending. I follow Thoreau's advice and try to make myself rich by making my wants (relatively) few. A large piece of the cash/cash equivalents portion from which I will make these RMDs is in CDs, one of which allows penalty-free RMDs and the other of which allows any WD penalty-free because I'm older than dirt. Both of those CDs have returns above the current VBTLX return, and I am not willing to go with any FI with more risk than VBTLX. Dear pkcrafter: I may be paranoid but I am reluctant to share too much financial/personal information on the internet. I have been retired for several years now. I did experience 2008, and I did nothing. Mr. Bogle would be proud of me. My age is between 65-75. My "withdrawal rate" is currently and (hopefully) for the next 15+ years my RMD, which is below 4% of total portfolio. I prefer not to give my exact AA, but the equity mutual fund % is greater than 100-my age. Of course, anyone's plans can go off track (another metaphor) with unexpected expenses, especially LTC. The possibility of needing my portfolio for that is what led to my OP question, given what I (but not many others here) see as potential for a bad SOR risk given some concerns expressed by others. UncleLongHair noted some of those concerns in his post. Dear AlohaJoe: You're right, one doesn't know if one won until one dies. Actually one might not even know then if she/he has others counting on his portfolio's performance. Let me re-phrase my metaphor with another one. Suppose you're a football coach, and your team has a lead late in the 4th quarter. You know, of course, that anything's possible, but suppose you think it rather unlikely the other team will be able (on it's own efforts) to overcome that lead in the remaining time. So, when your team has the ball, do you keep flinging passes around all over the field, or do you go to a more conservative offense to try to run off as much clock as possible? Obviously, there is no guarantee either way, and some coaches keep as aggressive as they've been so far in the game, while some will elect the conservative approach. Surely this isn't meant to say that something as important as financing the rest of your life is a game. Tibbits: I don't understand your reply.

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Re: Current precarious equity environment for a retiree

Post by David Jay » Mon Nov 20, 2017 11:44 am

dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)?
Run through some numbers to calm your fears. If you have a 4% withdrawal rate and you have a 60/40 allocation, you can make 10 years of withdrawals from bonds without withdrawing anything from equity.

Could equities drop and remain hugely depressed for 10 years? Yes. But there is no historic precedent in US market history (cue the Japan commentary...).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Current precarious equity environment for a retiree

Post by flyingaway » Mon Nov 20, 2017 11:56 am

MikeG62 wrote:
Fri Nov 17, 2017 4:16 pm
Early retired two years ago. As others have said, you need to have an asset allocation that allows you to sleep at night. That does not necessarily mean significant underweight to equities (you need to find a balance).

OP, if you pull money from equities, where is it going to go? If to fixed income, you would be moving money to an equally richly valued asset class (maybe an even more richly valued asset class). If cash, you likely won’t keep pace with inflation. Bottom line, there is no panacea.
These are typical generic advices from this board, which does not actually help a person in worry. I know there is not better (more specific) advice that one can give.

How to adjust asset allocation? Even 100% bond allocation will keep many retirees up at night.

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Re: Current precarious equity environment for a retiree

Post by pkcrafter » Mon Nov 20, 2017 12:41 pm

dachshund:
I have been retired for several years now. I did experience 2008, and I did nothing. Mr. Bogle would be proud of me.
Yes, and all the Bogleheads are also giving the :thumbsup
My age is between 65-75.

Mine as well.
My "withdrawal rate" is currently and (hopefully) for the next 15+ years my RMD, which is below 4% of total portfolio.
Mine too.
I prefer not to give my exact AA, but the equity mutual fund % is greater than 100-my age.
Mine too, it's 40/60. The thing about AA is ability to take risk, the need to take risk, and the willingness to take risk. If the withdrawal rate is below 4%, there is ability to take a little more risk if desired, but there is also not much need to do so.
Of course, anyone's plans can go off track (another metaphor) with unexpected expenses, especially LTC. The possibility of needing my portfolio for that is what led to my OP question, given what I (but not many others here) see as potential for a bad SOR risk given some concerns expressed by others.

Bad sequence of returns (SOR as you term it) may be a problem for investors who are right near or just retired and they have a 4% or higher withdrawal rate. These investors do not have ability to take on higher risk, at least not at the time of the bad SOR. I don't see it as too much of a problem for you unless your AA is considerably higher than my 40%. If your AA is such that a 40% market drop would raise your withdrawal rate to 5 or higher, then it might be better to lower it.

As for LTC, I'm also worried about it, but after a thorough look at the insurance, I am not convinced it's worth it. Insurance companies are in business to make money. Because people are living longer, some companies have dropped LTC insurance because they really don't like it when they have to actually pay out. The other thing they can do is keep raising the rates. No guarantees against this stuff.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Current precarious equity environment for a retiree

Post by jebmke » Mon Nov 20, 2017 12:49 pm

flyingaway wrote:
Mon Nov 20, 2017 11:56 am

How to adjust asset allocation? Even 100% bond allocation will keep many retirees up at night.
Probably good candidates for a SPIA.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Current precarious equity environment for a retiree

Post by dachshund » Mon Nov 20, 2017 6:19 pm

Dear pkcrafter: I think you have the essence of the problem when you say the key to AA is the ABILITY to take risk. I think some who say just set an AA and forget about it and that this time is no different may be overlooking that. I also think those who have said I'm overthinking this maybe don't see that aspect. This is not to say that they don't know a lot more about financial matters than I. Again, I'm not talking about someone with plenty of human capital (and, therefore, time) left. I also know one cannot time the market, and that risk is everywhere, even in not investing. My OP was about MY ABILITY to take risk NOW, and you have identified that. For me, the concern has arisen because I do think significant market losses are coming, and if I have significant unanticipated expenses occur at the same time, while I may not face ruin, I am going to be worried about my future. In terms of LTC insurance, I think it would be too costly for me at this time, there is the risk of default (apparently quite low), I may not need it, and I have back-ups with my home equity and a whole-life insurance policy. I know, buying that insurance was not my best move, but at least I saved that money (less commissions) instead of spending it. My understanding of SOR risk (from articles by Wade Pfau and others) is that it is a factor for about the first half of one's retirement. Obviously, as time passes, the risk becomes less. Someone brought up the possibility of legal costs also being a possible unexpected expense. I do have a fairly hefty umbrella liability policy. Dear jebmke: I am sort of using my cash/cash equivalents as an SPIA, at least for a (hopefully) pretty significant period of time--15+ years. I know I'm not reaping mortality credits, but my understanding is that current SPIAs don't have a good payout due to current low interest rates.

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Re: Current precarious equity environment for a retiree

Post by Dead Man Walking » Mon Nov 20, 2017 7:36 pm

dachshund wrote:
Fri Nov 17, 2017 6:39 pm
Thanks for all the replies. I know the mantra is "This time is not different." But I guess part of my question is: Could this time be different, especially for a retiree facing sequence of returns risk? Could the next market downturn be sufficiently deep or long enough to depress the equity part of a portfolio from which withdrawals are being made so that there is not enough in the way of assets or time to recover (SOR risk)?
I think that I read that this bull market is the second longest of all time. If that is true, this time has been different than all but one of the previous bull markets. I've never bought into the mantra about differences. Mark Twain said, "History doesn't repeat itself, but it rhymes." Determining the rhyme scheme is the tough part! Globalization, the policies of central banks, the decreasing number of stocks, historically low interest rates, etc. are factors that I believe will help determine the rhyme scheme this time. How they will affect the market is unknown to me.

DMW

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Re: Current precarious equity environment for a retiree

Post by pkcrafter » Mon Nov 20, 2017 7:43 pm

For me, the concern has arisen because I do think significant market losses are coming,
Yes, several of them. How long have you been retired? When I retired, I said it felt like suddenly being on a tight rope with no net below. In 2008-09 I was retired and holding the 40/60 portfolio. The market dropped a total of ~53% in 08 and 09 combined, but my portfolio dropped only about 18% in 08, and rebounded some by the end of 2009. My withdrawal rate for this time rose to about 4.8%. I don't think that put me in dangerous territory, but if things had persisted, I could have adjusted my spending. I no longer think I'm on a tightrope.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Current precarious equity environment for a retiree

Post by KlangFool » Mon Nov 20, 2017 7:56 pm

dachshund wrote:
Mon Nov 20, 2017 6:19 pm
My OP was about MY ABILITY to take risk NOW, and you have identified that.
dachshund,

It is very simple.

If your ability to take risk had changed, you need to adjust your AA. This is INDEPENDENT of whether the market will drop tomorrow or a few years from now. So, please do not conflate those 2 separate issues.

KlangFool

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Re: Current precarious equity environment for a retiree

Post by dachshund » Tue Nov 21, 2017 4:12 pm

This discussion has been very helpful for me. Many of you will say "well duh", but I now have a different view on risk--more of a "gut" level one rather than an "intellectual" one. The idea that "this time is not different" is, I think, a platitude. I'm sure I'll get flak for that, but times can be different for individual investors--not because of some fundamental change in market cycles, but because of really fundamental changes in the investor's situation. Before I retired, I never made changes in my AA--at least not changes based upon market expectations. Why? It was because I was still getting paychecks. I wasn't making withdrawals from my portfolio, possibly large ones due to surprise expenses. Now my situation is very different. While I know I cannot predict the future, my current uneasiness has for some reason reduced my risk ability below my risk tolerance. So, as many of you have advised, I have changed it to better sleep at night and to once again stop listening to the talking heads. If the market really crashes, I'll buy back in. I won't futilely try to time the bottom. I think I'll set a target as a certain significant (?) % decline. In the meantime, I'll lose out on any gains, but that doesn't bother me, because I don't think they will make that much difference to my plan (Even Mr. Bogle expects muted returns for the next decade.), and I'm not that greedy.

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