Sequence of Return Risk impact on Retirement

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KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 1:59 pm

remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool

dh
Posts: 244
Joined: Sun Mar 13, 2011 8:01 pm

Re: Sequence of Return Risk impact on Retirement

Post by dh » Wed Jan 10, 2018 2:03 pm

This is a great thread on sequence of return risk. Market timing is a taboo topic; yet, "what happens next" (either when we start saving or when we retire) can make a significant difference. The following youtube clip from a Stanford Online class is illustrative. One can be fortunate, or not so fortunate.

https://www.youtube.com/watch?v=HuLIqNKwnZc

Thesaints
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Re: Sequence of Return Risk impact on Retirement

Post by Thesaints » Wed Jan 10, 2018 2:05 pm

Yes, but as you only sell bonds your risk progressively increases. That's why you recover so much more at the end, except that you are not guaranteed such a positive outcome. The only thing you are guaranteed is a higher volatility.

KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 2:37 pm

Thesaints wrote:
Wed Jan 10, 2018 2:05 pm
Yes, but as you only sell bonds your risk progressively increases. That's why you recover so much more at the end, except that you are not guaranteed such a positive outcome. The only thing you are guaranteed is a higher volatility.
Thesaints,

1) You are correct. The base assumption is that in the long run, stock risk premium will be rewarded.

2) My personal assumption is that any bear market lasting more than 5 years will cause the serious social problem. At that point, money is no longer the number one problem.

3) In view of this risk, paying off a low fixed interest rate mortgage right at retirement may not be such a good idea.. After further reading and research, it is not that clear-cut.

KlangFool
Last edited by KlangFool on Wed Jan 10, 2018 2:45 pm, edited 1 time in total.

remomnyc
Posts: 417
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Re: Sequence of Return Risk impact on Retirement

Post by remomnyc » Wed Jan 10, 2018 2:44 pm

KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
Based on Kitces research, it is not the first few years but the first 10 years has the strongest correlation with positive retirement outcomes. So, yes, if you have 10 years of good returns after retirement, you can relax.

KlangFool
Posts: 7843
Joined: Sat Oct 11, 2008 12:35 pm

Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 2:56 pm

remomnyc wrote:
Wed Jan 10, 2018 2:44 pm
KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
Based on Kitces research, it is not the first few years but the first 10 years has the strongest correlation with positive retirement outcomes. So, yes, if you have 10 years of good returns after retirement, you can relax.
remomnyc,

Thank you for the confirmation.

KlangFool

Admiral
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Re: Sequence of Return Risk impact on Retirement

Post by Admiral » Wed Jan 10, 2018 3:10 pm

KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
I suggest taking a look at longinvest's variable withdrawal plan spreadsheet if you are really worried about sequence risk. Basically you are setting aside "bridge" funds in CDs (or bonds I suppose) for the early years, until you start taking SS. Then you vary your withdrawals according to the model. But really if you plan well this should not be an issue. You can always a) work a little longer and/or b)pick up a side job in retirement, where even modest income will reduce the potential draw/strain of your portfolio.

I assume you have listened to this but if not, it may be helpful:

http://podbay.fm/show/540593710/e/15041 ... utostart=1

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 3:16 pm

Admiral wrote:
Wed Jan 10, 2018 3:10 pm
KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
I suggest taking a look at longinvest's variable withdrawal plan spreadsheet if you are really worried about sequence risk. Basically you are setting aside "bridge" funds in CDs (or bonds I suppose) for the early years, until you start taking SS. Then you vary your withdrawals according to the model. But really if you plan well this should not be an issue. You can always a) work a little longer and/or b)pick up a side job in retirement, where even modest income will reduce the potential draw/strain of your portfolio.

I assume you have listened to this but if not, it may be helpful:

http://podbay.fm/show/540593710/e/15041 ... utostart=1
Admiral,

As per my example, 60/40 at 1.5 million, that person has about 600K in bond. This is about 10 years of expense in bond. If the person does not keep his AA fixed at 60/40 and only spend down the bond, he/she would be protected against the sequence of return risk.

KlangFool

FactualFran
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Re: Sequence of Return Risk impact on Retirement

Post by FactualFran » Wed Jan 10, 2018 3:17 pm

KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.
It depends on whether what happens next is a sufficiently large negative return.

For example, someone who made annual inflation adjusted withdrawals from a Vanguard Wellington fund account starting at the end of 1997 with an initial withdrawal rate of 5.25% would have had at the end of 2007 an account balance equal to the initial account balance adjusted for inflation.

To have had at the end of 2008 an account balance equal to the initial account balance adjusted for inflation, the initial withdrawal rate would have had to have been 2.63%. The nominal account balance would have decreased 25% from the end of 2007 to the end of 2008.

The sequence of return risk is greater when the net amount invested is higher. The net amount invested is the highest at the start of retirement. Making withdrawals during retirement decreases the net amount invested by the amount withdrawal.

Admiral
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Re: Sequence of Return Risk impact on Retirement

Post by Admiral » Wed Jan 10, 2018 3:23 pm

KlangFool wrote:
Wed Jan 10, 2018 3:16 pm
Admiral wrote:
Wed Jan 10, 2018 3:10 pm
KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
I suggest taking a look at longinvest's variable withdrawal plan spreadsheet if you are really worried about sequence risk. Basically you are setting aside "bridge" funds in CDs (or bonds I suppose) for the early years, until you start taking SS. Then you vary your withdrawals according to the model. But really if you plan well this should not be an issue. You can always a) work a little longer and/or b)pick up a side job in retirement, where even modest income will reduce the potential draw/strain of your portfolio.

I assume you have listened to this but if not, it may be helpful:

http://podbay.fm/show/540593710/e/15041 ... utostart=1
Admiral,

As per my example, 60/40 at 1.5 million, that person has about 600K in bond. This is about 10 years of expense in bond. If the person does not keep his AA fixed at 60/40 and only spend down the bond, he/she would be protected against the sequence of return risk.

KlangFool
You only need the bond (or CD) portion in the bridge years: retirement age to SS collection, which replaces the bond monies. If you stop work at 62, that would be 5 years at FRA (67, unless yours is 66) or 8 years at 70 (assuming you wanted to delay).

randomguy
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Re: Sequence of Return Risk impact on Retirement

Post by randomguy » Wed Jan 10, 2018 4:00 pm

KlangFool wrote:
Wed Jan 10, 2018 1:55 pm
Folks,

Let's start with a baseline of 60/40, 1.5 million, and with 60K per year.

Let's assume that the stock market crash 50% and stay down for 5 years. The bond stays at 0%.

Option 1) This person rebalances to 60/40 every year.

Year 0 -> 1.5 went down to 1.05 million
Year 1 -> 990K
Year 2 -> 930K
Year 3 -> 870K
Year 4 -> 810K
Year 5 -> 750K

After year 5, the stock market doubles. The portfolio went up 60%. 750K * 1.6 = 1.2 million

Option 2) Only sell bond

Year 0 -> 1.5 went down to 1.05 million = 630K stock and 420K bond.
Year 1 -> 990K
Year 2 -> 930K
Year 3 -> 870K
Year 4 -> 810K
Year 5 -> 750K

After year 5, the portfolio consists of 630K stock and 120K bond. After year 5, the stock market doubles. Portfolio size = 630K X 2 +120K = 1.38 million.

KlangFool
That isn't the reverse glide path though that most people talk about. You never reduce the risk. You just keep upping it. Do something like go 30/70 and over the next 10-15 years move back to 60/40. Lets take your example and make the bad period 15 years instead of a mere 5.
30/70 = 1.05 million bonds + 225k in stocks. Sell 900k of bonds
a)105k bonds +225k stocks

Compare that to you

b) 105k 63/42
c) 105k 100% stocks

Stocks now double
a) 555k
b) 166k
c) 210k

Now on average the reverse glide path on average will leave you with a lot less money. That is expected because of lower market allocations. The questions is what risk you are you taking on by avoiding market risk. If the market goes up 6x over the first 15 years. and then drops 50% will you be ok with a rising AA? The theory is yes in that you will have enough bonds (40% of a big number can be bigger than 70% of a small one) and a short enough time frame left that things work out.

Or of course what if your bonds have large negative returns early while stocks are positive and the get hit by stocks having negative returns while bonds have positive ones:). For example imagine you were investing in German bonds in 1918 and US stocks and over the next 10 years you slowly dropped your german bond allocation while upping your US stock allocation.:)

KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 4:03 pm

Admiral wrote:
Wed Jan 10, 2018 3:23 pm
KlangFool wrote:
Wed Jan 10, 2018 3:16 pm
Admiral wrote:
Wed Jan 10, 2018 3:10 pm
KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
I suggest taking a look at longinvest's variable withdrawal plan spreadsheet if you are really worried about sequence risk. Basically you are setting aside "bridge" funds in CDs (or bonds I suppose) for the early years, until you start taking SS. Then you vary your withdrawals according to the model. But really if you plan well this should not be an issue. You can always a) work a little longer and/or b)pick up a side job in retirement, where even modest income will reduce the potential draw/strain of your portfolio.

I assume you have listened to this but if not, it may be helpful:

http://podbay.fm/show/540593710/e/15041 ... utostart=1
Admiral,

As per my example, 60/40 at 1.5 million, that person has about 600K in bond. This is about 10 years of expense in bond. If the person does not keep his AA fixed at 60/40 and only spend down the bond, he/she would be protected against the sequence of return risk.

KlangFool
You only need the bond (or CD) portion in the bridge years: retirement age to SS collection, which replaces the bond monies. If you stop work at 62, that would be 5 years at FRA (67, unless yours is 66) or 8 years at 70 (assuming you wanted to delay).
Admiral,

You are right.

KlangFool

Lloydo
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Re: Sequence of Return Risk impact on Retirement

Post by Lloydo » Wed Jan 10, 2018 4:10 pm

Admiral wrote:
Wed Jan 10, 2018 3:23 pm
KlangFool wrote:
Wed Jan 10, 2018 3:16 pm
Admiral wrote:
Wed Jan 10, 2018 3:10 pm
KlangFool wrote:
Wed Jan 10, 2018 1:59 pm
remomnyc wrote:
Wed Jan 10, 2018 1:43 pm
I entered your data into cfiresim.com. Retirement start 2022 (age 62), end 2055 (age 95). Portfolio value $1.6M, 60/40. Spending $60k adjusted for inflation. Rebalance until 2022. Then target asset 100% equities start 2022 (at retirement), end 2030 (8 yrs later, to simulate spending down all bonds). Lowest portfolio is $560,778. No failures. It appears the rising equity path saves you in the years with bad sequence of returns.
remomnyc,

<<It appears the rising equity path saves you in the first few years after retirement with bad sequence of returns.>>

This is my understanding. Please correct it if I am wrong. If a person has 5 to 10 years of good return after retirement, it pretty much does not matter what happened next.

KlangFool
I suggest taking a look at longinvest's variable withdrawal plan spreadsheet if you are really worried about sequence risk. Basically you are setting aside "bridge" funds in CDs (or bonds I suppose) for the early years, until you start taking SS. Then you vary your withdrawals according to the model. But really if you plan well this should not be an issue. You can always a) work a little longer and/or b)pick up a side job in retirement, where even modest income will reduce the potential draw/strain of your portfolio.

I assume you have listened to this but if not, it may be helpful:

http://podbay.fm/show/540593710/e/15041 ... utostart=1
Admiral,

As per my example, 60/40 at 1.5 million, that person has about 600K in bond. This is about 10 years of expense in bond. If the person does not keep his AA fixed at 60/40 and only spend down the bond, he/she would be protected against the sequence of return risk.

KlangFool
You only need the bond (or CD) portion in the bridge years: retirement age to SS collection, which replaces the bond monies. If you stop work at 62, that would be 5 years at FRA (67, unless yours is 66) or 8 years at 70 (assuming you wanted to delay).
This is getting close to what I was asking earlier... Assuming i have enough money in taxable, Is there any difference between selling equities (even if value has dropped considerably) in taxable to fund the “bridge” and rebalancing bonds into equities in tax deferred vs building up a bond/cd holding in taxable to avoid selling devalued equities?

Thanks.

Lloyd

randomguy
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Re: Sequence of Return Risk impact on Retirement

Post by randomguy » Wed Jan 10, 2018 4:20 pm

Lloydo wrote:
Wed Jan 10, 2018 4:10 pm


This is getting close to what I was asking earlier... Assuming i have enough money in taxable, Is there any difference between selling equities (even if value has dropped considerably) in taxable to fund the “bridge” and rebalancing bonds into equities in tax deferred vs building up a bond/cd holding in taxable to avoid selling devalued equities?

Thanks.

Lloyd
At a high level selling 100k of bonds and buying 100k of stocks and selling 100k of stocks is the same as just selling 100k of bonds. There are some tax differences and other details (RMDs) that tweak the problem slightly.

BigJohn
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Re: Sequence of Return Risk impact on Retirement

Post by BigJohn » Wed Jan 10, 2018 4:38 pm

I agree with comments that it’s difficult to have a formulaic glide path. My current plan started retirement at 35/65 about 3 years ago. Since the market has been kind to me, I’ve sold stock annually to rebalance back to that target. If there isn’t a bear market in the first 10 years of retirement, I’ll keep doing this and then decide if and by how much I want to begin increasing my stock allocation.

If we get a major correction in stocks I’ll sell only bonds as needed for living expense to avoid the sell low problem. Hard to predict exactly what my AA will do. If the correction is big enough, my bond allocation will go above target. Not sure if I’d rebalance and buy stocks are that point or not. I suspect I’d probably split the difference and let bonds climb at least somewhat but take partial advantage of buying stocks on sale. In this scenario, exactly where I go after 10 years depends on too many unknowns to say for sure but in general I’d be looking to let my stock allocation drift up.

I recognize I’m likely giving up return will this approach and that’s OK. I’m comfortable playing defense and am willing to accept a lower return to manage the sequence of return risk.

dbr
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Re: Sequence of Return Risk impact on Retirement

Post by dbr » Wed Jan 10, 2018 4:40 pm

KlangFool wrote:
Wed Jan 10, 2018 10:51 am


The question here is if I would create a glide path AA for retirement, what would it be based on? Portfolio size as a ratio of retirement expense? Years after retirement? We can go down to the specific much later. But, what would this AA be based on?

https://www.goodreads.com/quotes/187-i- ... omptly-and

I don't know the answer to your question. I don't know that it is established that there is a clearly recommended answer.

In the following paper Pfau explores a glide path based on selecting the best outcomes in terms of withdrawal rate or alternately years supported for the worst failures, etc. In this paper Pfau considers a straight line increase in stock allocation starting at retirement and ending 30 years later. He compares the results for a wide range of starting and ending asset allocations. You can decide if that tells you that this is a glide path plan you would want to implement. One can conceive of so many different ways you could design a glide path that it would be very difficult to test all of them. You or someone who wants to write it up here is going to have to track down and review all this literature and decide if there is some clear recommendation to make.

https://www.kitces.com/blog/should-equi ... ly-better/

The Wizard
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Re: Sequence of Return Risk impact on Retirement

Post by The Wizard » Wed Jan 10, 2018 5:57 pm

I prefer to discuss mitigation strategies for poor investment returns in retirement.

Obviously, retiree #1 with sufficient income from SS, pensions, and payout-phase annuities is highly immune to SOR risk. His portfolio is strictly for discretionary purchases and the next generation.

Retiree #2 funds his retirement almost entirely from portfolio withdrawals and therefore could have high SOR risk if portfolio is heavy in stocks. #2 can mitigate his risk by having more $$ than needed and a low withdrawal rate, at least initially...
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Sandtrap
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Re: Sequence of Return Risk impact on Retirement

Post by Sandtrap » Wed Jan 10, 2018 6:06 pm

The Wizard wrote:
Wed Jan 10, 2018 5:57 pm
I prefer to discuss mitigation strategies for poor investment returns in retirement.

Obviously, retiree #1 with sufficient income from SS, pensions, and payout-phase annuities is highly immune to SOR risk. His portfolio is strictly for discretionary purchases and the next generation.

Retiree #2 funds his retirement almost entirely from portfolio withdrawals and therefore could have high SOR risk if portfolio is heavy in stocks. #2 can mitigate his risk by having more $$ than needed and a low withdrawal rate, at least initially...
Yes.
No mater how one might strategize or slice and dice a portfolio, it still represents a SPOF. Single point of failure.
Retirees and senior retirees, and super seniors, are running out of time. There's only so many years to go thru a recovery of unknown duration.
thus.
Multiple and diversified income streams.
Why not use everything in the toolbox if one is able to?
SS, Pension, SPIA, Portfolio, Rental Income, etc, etc, etc.

j :D

KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 6:12 pm

Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool

The Wizard
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Re: Sequence of Return Risk impact on Retirement

Post by The Wizard » Wed Jan 10, 2018 6:17 pm

Sandtrap wrote:
Wed Jan 10, 2018 6:06 pm

Multiple and diversified income streams.
Why not use everything in the toolbox if one is able to?
SS, Pension, SPIA, Portfolio, Rental Income, etc, etc, etc.

j :D
That's especially true for folks with Just Enough retirement savings who might otherwise need to maximize safe portfolio withdrawals.

Someone with several extra Millions from selling a business has a lot more safe reserves, no matter how invested...
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Sandtrap
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Re: Sequence of Return Risk impact on Retirement

Post by Sandtrap » Wed Jan 10, 2018 6:26 pm

The Wizard wrote:
Wed Jan 10, 2018 6:17 pm
Sandtrap wrote:
Wed Jan 10, 2018 6:06 pm
j :D

Multiple and diversified income streams.
Why not use everything in the toolbox if one is able to?
SS, Pension, SPIA, Portfolio, Rental Income, etc, etc, etc.

j :D
That's especially true for folks with Just Enough retirement savings who might otherwise need to maximize safe portfolio withdrawals.

Someone with several extra Millions from selling a business has a lot more safe reserves, no matter how invested...
Very true :D
Currently restructuring MIL's portfolio for this very reason. One old senior friend is 84 and done well with SPIA ladders and a 50/50 allocation. No matter the asset size, everyone benefits from optimizing what they have with all the tools available and shared in "Bogleheadville".
mahalo nui loa

The Wizard
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Re: Sequence of Return Risk impact on Retirement

Post by The Wizard » Wed Jan 10, 2018 6:27 pm

KlangFool wrote:
Wed Jan 10, 2018 6:12 pm
Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool
I'm close to five complete years in retirement and yes, I'm letting my equity percentage increase to as high as 60% from a starting point closer to 50%.

But my reason for doing this is that I've survived my risky first half decade in good shape and will be starting age 70 SS in 26 months, at which point my portfolio becomes very much more discretionary.

Situations vary...
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Sandtrap
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Re: Sequence of Return Risk impact on Retirement

Post by Sandtrap » Wed Jan 10, 2018 6:30 pm

KlangFool wrote:
Wed Jan 10, 2018 6:12 pm
Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool
Re: SRR in retirement. Consider VWR in "longinvest's" thread?
viewtopic.php?t=120430
Also, isn't raising equity allocation somewhat antithetical to Kitce's "bond tent" in the "retirement red zone"? Or are you addressing the time period after that?
You bring up a good point. I'd like to know as well.
thanks,
j :D

KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 6:37 pm

Sandtrap wrote:
Wed Jan 10, 2018 6:30 pm
KlangFool wrote:
Wed Jan 10, 2018 6:12 pm
Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool
Re: SRR in retirement. Consider VWR in "longinvest's" thread?
viewtopic.php?t=120430
Also, isn't raising equity allocation somewhat antithetical to Kitce's "bond tent" in the "retirement red zone"? Or are you addressing the time period after that?
You bring up a good point. I'd like to know as well.
thanks,
j :D
Sandtrap,

As per my understanding raising equity allocation is equivalent to "bond tent". I need smarter folks to correct me if I am wrong. I could understand the concept better with an example.

KlangFool

KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 6:42 pm

The Wizard wrote:
Wed Jan 10, 2018 6:27 pm
KlangFool wrote:
Wed Jan 10, 2018 6:12 pm
Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool
I'm close to five complete years in retirement and yes, I'm letting my equity percentage increase to as high as 60% from a starting point closer to 50%.

But my reason for doing this is that I've survived my risky first half decade in good shape and will be starting age 70 SS in 26 months, at which point my portfolio becomes very much more discretionary.

Situations vary...
The Wizard,

My situation is somewhat similar. If I retire with 1.5 million before 62 years old, it is about 25 times the current annual expense = 60K. If and when I withdraw SS, SS could cover about 50% of my annual expense. Then, 1.5 million would be about 50 times retirement expense.

So, my plan for my retirement AA was 60/40. The same as before retirement.

KlangFool

dbr
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Re: Sequence of Return Risk impact on Retirement

Post by dbr » Wed Jan 10, 2018 6:44 pm

KlangFool wrote:
Wed Jan 10, 2018 6:37 pm
Sandtrap wrote:
Wed Jan 10, 2018 6:30 pm
KlangFool wrote:
Wed Jan 10, 2018 6:12 pm
Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool
Re: SRR in retirement. Consider VWR in "longinvest's" thread?
viewtopic.php?t=120430
Also, isn't raising equity allocation somewhat antithetical to Kitce's "bond tent" in the "retirement red zone"? Or are you addressing the time period after that?
You bring up a good point. I'd like to know as well.
thanks,
j :D
Sandtrap,

As per my understanding raising equity allocation is equivalent to "bond tent". I need smarter folks to correct me if I am wrong. I could understand the concept better with an example.

KlangFool
No, the bond tent means raising the bond allocation as one approaches retirement then reducing it again after retirement. There are any number of choices of how far ahead to start, how for to go, and how fast to come back down. A single strategy that should clearly be adopted does not exist.

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Re: Sequence of Return Risk impact on Retirement

Post by The Wizard » Wed Jan 10, 2018 6:44 pm

This is the Kitces bond tent article:
https://www.kitces.com/blog/managing-po ... -red-zone/
Attempted new signature...

dbr
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Re: Sequence of Return Risk impact on Retirement

Post by dbr » Wed Jan 10, 2018 6:47 pm

The Wizard wrote:
Wed Jan 10, 2018 6:44 pm
This is the Kitces bond tent article:
https://www.kitces.com/blog/managing-po ... -red-zone/
And here is the statement in that presentation that says he doesn't know and no one knows exactly how the tent should be structured or even if matters a lot:

"Notably, there’s still far more research to be done to optimize the exact shape and the slope of the V-shaped equity glidepath and the bond tent. It’s not entirely clear how quickly during the pre-retirement red zone the bond allocation should build (i.e., the pre-retirement glidepath), nor how quickly it should be liquidated in the early retirement years. It may be that the equity exposure should be shaped more like the letter U than a V, such that the bond tent would have a wider roof – an extended period of time where greater bond allocations are held as a reserve. And the exact height of the bond tent – how high the bond allocation should reach – may be further optimized as well, especially given today’s low-yield environment (where bonds are less appealing to hold relative to historical standards, but still better than holding equities with even greater volatility and sequence risk). And of course, there are other fixed income alternatives besides traditional bonds that might be considered as “volatility dampeners” and “diversifiers” as well."

That article, distinct from the previous one, also does not even publish any quantification of the benefit or list a reference to where such a thing is done. Anyone who wants definitive answers about this area has a lot of work they need to do.

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Re: Sequence of Return Risk impact on Retirement

Post by The Wizard » Wed Jan 10, 2018 6:51 pm

dbr wrote:
Wed Jan 10, 2018 6:44 pm

No, the bond tent means raising the bond allocation as one approaches retirement then reducing it again after retirement. There are any number of choices of how far ahead to start, how for to go, and how fast to come back down. A single strategy that should clearly be adopted does not exist.
Alternately, this means reducing your stock allocation percentage just before and especially after your retirement date to reduce the potential impact of stock market declines.

But the exact stock percentages before, during and after the bond tent depend on things like your personal risk tolerance and your other income streams...
Attempted new signature...

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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 7:29 pm

dbr wrote:
Wed Jan 10, 2018 6:44 pm
KlangFool wrote:
Wed Jan 10, 2018 6:37 pm
Sandtrap wrote:
Wed Jan 10, 2018 6:30 pm
KlangFool wrote:
Wed Jan 10, 2018 6:12 pm
Folks,

I know that there are several other methods/tools to mitigate the risk of SRR during retirement. I guess the question is whether raising equity allocation could be one of the tools. And, if the answer is yes, what would be the parameters used to set the AA?

KlangFool
Re: SRR in retirement. Consider VWR in "longinvest's" thread?
viewtopic.php?t=120430
Also, isn't raising equity allocation somewhat antithetical to Kitce's "bond tent" in the "retirement red zone"? Or are you addressing the time period after that?
You bring up a good point. I'd like to know as well.
thanks,
j :D
Sandtrap,

As per my understanding raising equity allocation is equivalent to "bond tent". I need smarter folks to correct me if I am wrong. I could understand the concept better with an example.

KlangFool
No, the bond tent means raising the bond allocation as one approaches retirement then reducing it again after retirement. There are any number of choices of how far ahead to start, how for to go, and how fast to come back down. A single strategy that should clearly be adopted does not exist.
dbr,

If one spends from the bond, then, the equity portion will raise as a percentage of the portfolio.

From the bond standpoint, increasing before retirement and reducing after retirement. Aka, "bond tent".

From the stock standpoint, decreasing before retirement and increasing after the retirement.

They are equivalent and identical to each other. That was my understanding from Kitces' article. Was I wrong?

KlangFool

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Re: Sequence of Return Risk impact on Retirement

Post by pkcrafter » Wed Jan 10, 2018 8:04 pm

If, at age 62 with retirement pending and the retiree needing all of 4% for normal household operations, then I would think something like a 40/60 AA might provide a better chance of keeping the wheels from falling off in the event of an early crash. The problem would be worse right after retirement because some options are off the table.

In an extreme crash of 50% (rare, but possible) the 4% WD rises to 5.7% at 60/40. It rises to 5.0% at 40/60. I think that's a significant difference. The threat of a bad sequence is the downward spiral that an investor cannot recover from. In most cases, there are options to stabilize. I don't think anyone would simply continue with a unsafe withdrawal rate without doing something.

What is the retiree withdrawing 5.7% going to do? Pull wd from bonds and allocate more bonds to stocks to recover target AA?

Paul
Last edited by pkcrafter on Wed Jan 10, 2018 10:01 pm, edited 1 time in total.
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: Sequence of Return Risk impact on Retirement

Post by radiowave » Wed Jan 10, 2018 8:28 pm

KlangFool wrote:
Wed Jan 10, 2018 7:29 pm
If one spends from the bond, then, the equity portion will raise as a percentage of the portfolio.

From the bond standpoint, increasing before retirement and reducing after retirement. Aka, "bond tent".

From the stock standpoint, decreasing before retirement and increasing after the retirement.

They are equivalent and identical to each other. That was my understanding from Kitces' article. Was I wrong?

KlangFool
That's my understanding as well. It is not clear if increasing CDs in a taxable counts towards building a bond tent.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

KlangFool
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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Wed Jan 10, 2018 10:40 pm

radiowave wrote:
Wed Jan 10, 2018 8:28 pm
KlangFool wrote:
Wed Jan 10, 2018 7:29 pm
If one spends from the bond, then, the equity portion will raise as a percentage of the portfolio.

From the bond standpoint, increasing before retirement and reducing after retirement. Aka, "bond tent".

From the stock standpoint, decreasing before retirement and increasing after the retirement.

They are equivalent and identical to each other. That was my understanding from Kitces' article. Was I wrong?

KlangFool
That's my understanding as well. It is not clear if increasing CDs in a taxable counts towards building a bond tent.
radiowave,

It should be counted.

KlangFool

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Re: Sequence of Return Risk impact on Retirement

Post by randomguy » Wed Jan 10, 2018 10:55 pm

radiowave wrote:
Wed Jan 10, 2018 8:28 pm
KlangFool wrote:
Wed Jan 10, 2018 7:29 pm
If one spends from the bond, then, the equity portion will raise as a percentage of the portfolio.

From the bond standpoint, increasing before retirement and reducing after retirement. Aka, "bond tent".

From the stock standpoint, decreasing before retirement and increasing after the retirement.

They are equivalent and identical to each other. That was my understanding from Kitces' article. Was I wrong?

KlangFool
That's my understanding as well. It is not clear if increasing CDs in a taxable counts towards building a bond tent.
CD is the same idea. So is breaking your portfolio into buckets that don't get refilled.There are slight differences depending on your rebalancing rules depending on how you allocate stuff (i.e. a 30/70 portfolio that you increase stocks by 2% year for 15 years isn't quite the same as 7.5 years in stocks, 7.5 years in bonds, and 10 years in a tent where you only rebalance between the stocks and bonds and take money out of the tent despite them starting with the same AA.).

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Re: Sequence of Return Risk impact on Retirement

Post by Sandtrap » Wed Jan 10, 2018 11:06 pm

randomguy wrote:
Wed Jan 10, 2018 10:55 pm
radiowave wrote:
Wed Jan 10, 2018 8:28 pm
KlangFool wrote:
Wed Jan 10, 2018 7:29 pm
If one spends from the bond, then, the equity portion will raise as a percentage of the portfolio.

From the bond standpoint, increasing before retirement and reducing after retirement. Aka, "bond tent".

From the stock standpoint, decreasing before retirement and increasing after the retirement.

They are equivalent and identical to each other. That was my understanding from Kitces' article. Was I wrong?

KlangFool
That's my understanding as well. It is not clear if increasing CDs in a taxable counts towards building a bond tent.
CD is the same idea. So is breaking your portfolio into buckets that don't get refilled.There are slight differences depending on your rebalancing rules depending on how you allocate stuff (i.e. a 30/70 portfolio that you increase stocks by 2% year for 15 years isn't quite the same as 7.5 years in stocks, 7.5 years in bonds, and 10 years in a tent where you only rebalance between the stocks and bonds and take money out of the tent despite them starting with the same AA.).
Does it work with a substantial CD Ladder in taxable, but not counted as part of the bond allocation?
You have my attention.
mahalo,
j :D

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Re: Sequence of Return Risk impact on Retirement

Post by randomguy » Wed Jan 10, 2018 11:32 pm

Sandtrap wrote:
Wed Jan 10, 2018 11:06 pm
Does it work with a substantial CD Ladder in taxable, but not counted as part of the bond allocation?
You have my attention.
mahalo,
j :D
Define work?:) It isn't like any of the schemes take you from a 4% SWR of a fixed AA to a 5% one. There isn't a radical difference between holding a bond ladder for 10 years and a CD ladder for 10 years. Sometimes one wins and sometimes the other but you rarely get huge differences. What does sucking out a large percentage of your portfolio and not using it for rebalancing do? It results in lower equity allocations during market declines compared to fixed AA. You start say 30/70 and when the market crashes you might end up 25/75. In general we are talking minor difference.

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Re: Sequence of Return Risk impact on Retirement

Post by halfnine » Thu Jan 11, 2018 5:46 am

Sandtrap wrote: ...No mater how one might strategize or slice and dice a portfolio, it still represents a SPOF. Single point of failure.
Retirees and senior retirees, and super seniors, are running out of time. There's only so many years to go thru a recovery of unknown duration.
thus.
Multiple and diversified income streams.
Why not use everything in the toolbox if one is able to?
SS, Pension, SPIA, Portfolio, Rental Income, etc, etc, etc.

j :D
I have a similar philosophy for retirement. Income generated from four different classes and limiting each class to a maximum of 40% to diversify concentration risk. Classes being:

- Property (inclusive of primary home ownership and imputed rent), Rental Income
- Equities
- Fixed Income
- SS, pension, SPIA

Dandy
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Re: Sequence of Return Risk impact on Retirement

Post by Dandy » Thu Jan 11, 2018 7:20 am

A bad sequence of returns near or in early retirement can impact portfolio management and other things

1. "enough" turns to not enough affecting retirement planning
2. do you keep buying equities while they are declining? Much easier when you have lots of human capital
and a company match. (easier in theory than in life)
3. How does the bad sequence affect you company and your employment?
(company stock went from 120 to 8, lost job several years before planned retirement)
4. Loss of human capital - not just a decline - almost no entry level burger flipping jobs available
5. Housing market froze, mortgage continues, maybe HELOC frozen/cancelled. Guess I'm not moving to a lower cost of
living area soon.
6. How's family health? Health Insurance coverage? Got a plan to get to Medicare?
7. Kids in college? Going to keep that expense now?
8. Got a pension coming? Wait to maximize? Will company honor it?
9. Are you going to use fixed income to re balance and to fund living expenses? Or sell depressed equities?
10. Many business contact you might look to for employment might not be employed or able to help.

A bad sequence of returns can have very unpredictable results since it not only affects the investor but the nation as a whole. I lost a job at 52 but the economy was good - found another job paying more in 4 months. Lost a job at 60 in 2008 when further employment was almost impossible. I was lucky to have health insurance and a pension from the first job and no mortgage or other debt and a healthy severance. I can't imagine the stress level if things had been different.

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Re: Sequence of Return Risk impact on Retirement

Post by BigJohn » Thu Jan 11, 2018 7:50 am

For those looking for a formula or plan that guarantees success, Dandy's list is a good reminder of why you are not going to find that in managing sequence of return risk or any other risk for that matter. I think the right questions to ask are what adjustments do you make? If you are worried about a major bear market, hold more non-stock assets (safe bonds, CD, etc). If you have so many nominal bonds you get worried about inflation, use TIPS. No matter what you do, if things go south, know what your subsistence budget is and be prepared to live on that for a while. If you make it past the sequence of return risk window and are sitting pretty, how much stock you hold is probably no longer a matter of survival but rather legacy. At least to me, that's no longer really a risk but an optimization so not something I'm going to give a lot of thought to at this point.

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Re: Sequence of Return Risk impact on Retirement

Post by azanon » Thu Jan 11, 2018 8:16 am

Question for you folks that are better with math (looks like a lot of you); If I choose a retirement withdrawal strategy that resets the percentage annually, like "Constant Percentage" or use the "RMD Method", doesn't that eliminate most of Sequence of Return Risk (I don't know the percent, but I would think at least 80% if not more on average)? Of course, that is assuming I can live with/on the lower withdrawals if I have poor portfolio performance.

Now as I understand it, methods like longinvest's VPW has zero Sequence of Return Risk because the annual withdrawals are moved to cash to fund that year's expenses. But I am assuming even if I choose a method that doesn't move to cash, but withdrawals directly from the portfolio, as long as my chosen method resets annually based on portfolio performance, I would think that mostly addresses Sequence of Return Risk. Correct or no?

Thanks!

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Re: Sequence of Return Risk impact on Retirement

Post by randomguy » Thu Jan 11, 2018 9:15 am

Sure but now you have not enough money risk. You were planning on 40k and only get 20k so to you still have to sell the house and move in with the kids.

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Re: Sequence of Return Risk impact on Retirement

Post by azanon » Thu Jan 11, 2018 10:28 am

randomguy wrote:
Thu Jan 11, 2018 9:15 am
Sure but now you have not enough money risk. You were planning on 40k and only get 20k so to you still have to sell the house and move in with the kids.
That's funny :mrgreen: But it still helps me knowing that I'm not necessarily going to be hurt and potentially devastated to a zero balance in 15 years or so because I drain my account to nothing. 20K instead of 40k does not sound like a lot of fun, but combine that with even just social security, and you're still looking at a better retirement than the average american retiree, and possibly a higher average household income for a typical american family. In my particular case, I'm a Fed so I'm fortunate to have a pension layer as well.

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Re: Sequence of Return Risk impact on Retirement

Post by vested1 » Thu Jan 11, 2018 10:48 am

Several threads lately and the linked articles have answered the question of reducing SORR repeatedly, and the reluctance to accept that answer is puzzling. Retirees or those close to retirement have fewer options than those with more time to alter their plan, so hopefully this discussion is doing them some good. As many have pointed out the key is a diversified income stream. There are various ways to build those streams, so one method is not universal, but must fit your particular circumstance.

It's kind of like investing in index funds or single stocks. When you invest in single stocks your gain could be much greater, and your loss much worse.

Who would you rather be, both netting 60k a year?
- A retiree with a $1,000,000 portfolio with any given AA, a $1,200 SS benefit, no pension.
- A retiree with a 500k portfolio, a $2,500 SS benefit, a mediocre pension, rental income.

Obviously a bad SORR drastically affects retiree #1, and is a source of justified anxiety. How do you tighten a belt when you can hardly breathe as it is?

The lesson for the younger investor is to take steps to create a greater number of income streams. Have a mixture of tax deferred, taxable, and Roth in your portfolio. Pay down your mortgage. When considering new employment give precedence to those firms that offer a better retirement plan rather than a slightly better salary. Save enough and live below your means to minimize the effects of SORR in retirement.

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Re: Sequence of Return Risk impact on Retirement

Post by OkieIndexer » Thu Jan 11, 2018 12:18 pm

Bear market before retirement and bear market after retirement.

Next worse, bull market before retirement, bear market after retirement.
"In bull markets, people say 'The more risk I take, the greater my return.' But when people aren't afraid of risk, they'll accept risk without being compensated." -Howard Marks, Oaktree Capital

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Re: Sequence of Return Risk impact on Retirement

Post by Sandtrap » Thu Jan 11, 2018 12:36 pm

vested1 wrote:
Thu Jan 11, 2018 10:48 am
Several threads lately and the linked articles have answered the question of reducing SORR repeatedly, and the reluctance to accept that answer is puzzling. Retirees or those close to retirement have fewer options than those with more time to alter their plan, so hopefully this discussion is doing them some good. As many have pointed out the key is a diversified income stream. There are various ways to build those streams, so one method is not universal, but must fit your particular circumstance.

It's kind of like investing in index funds or single stocks. When you invest in single stocks your gain could be much greater, and your loss much worse.

Who would you rather be, both netting 60k a year?
- A retiree with a $1,000,000 portfolio with any given AA, a $1,200 SS benefit, no pension.
- A retiree with a 500k portfolio, a $2,500 SS benefit, a mediocre pension, rental income.

Obviously a bad SORR drastically affects retiree #1, and is a source of justified anxiety. How do you tighten a belt when you can hardly breathe as it is?

The lesson for the younger investor is to take steps to create a greater number of income streams. Have a mixture of tax deferred, taxable, and Roth in your portfolio. Pay down your mortgage. When considering new employment give precedence to those firms that offer a better retirement plan rather than a slightly better salary. Save enough and live below your means to minimize the effects of SORR in retirement.
Outstanding information!
Thanks so much.
mahalo,
j :D

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Re: Sequence of Return Risk impact on Retirement

Post by radiowave » Thu Jan 11, 2018 6:19 pm

The Wizard wrote:
Wed Jan 10, 2018 5:57 pm
I prefer to discuss mitigation strategies for poor investment returns in retirement.

Obviously, retiree #1 with sufficient income from SS, pensions, and payout-phase annuities is highly immune to SOR risk. His portfolio is strictly for discretionary purchases and the next generation.

Retiree #2 funds his retirement almost entirely from portfolio withdrawals and therefore could have high SOR risk if portfolio is heavy in stocks. #2 can mitigate his risk by having more $$ than needed and a low withdrawal rate, at least initially...
So what would the asset allocation be for Retiree 1 and 2?
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Re: Sequence of Return Risk impact on Retirement

Post by mariezzz » Thu Jan 11, 2018 8:53 pm

KlangFool wrote:
Wed Jan 10, 2018 10:10 am
aristotelian wrote:
Tue Jan 09, 2018 11:39 pm
dbr wrote:
Tue Jan 09, 2018 10:11 pm
The answer to that is the serious math you don't want to do. Sequence of returns risk is a reference to a certain piece of mathematical calculation that appears when you try to figure out what happens to portfolios given assumed returns together with contributions or withdrawals. A couple of posters have offered some examples.

If I were presenting this discussion to some math students I would probably have them get into a spreadsheet and work some examples in detail to see how different scenarios work out. That would include that the students would have to devise what kind of calculations are needed to be done. You could start by reproducing the results quoted in the example posted by Thesaints, the one with the 5% withdrawals.
A simple explanation would be that a good sequence enables you to purchase stocks in accumulation when prices are cheap and sell when prices are high. This is what we all hope for. If you buy low and sell low, you are probably OK. If you buy high and sell high, you are probably OK. A bad sequence forces you to buy stock in accumulation when prices are high, and sell stock in retirement when prices are low. You get less for your investment than any other scenario. You could have the same average returns but depending on the sequence you will have very different outcomes.
aristotelian,

Thank you. This is the level of detail that I am looking for.

KlangFool
The answer to the question also depends on where your withdrawals come from. If you have enough in bonds/CD ladders, etc. (or adjust your spending down during the bull market), and don't have to sell equities, that will really mitigate any effect of a bull market when you have to sell.

The OP's initial question struck me as a very artificial question, not representative of reality. I think that's why many people gave answers considering more complex situations.

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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Thu Jan 11, 2018 9:23 pm

mariezzz wrote:
Thu Jan 11, 2018 8:53 pm
KlangFool wrote:
Wed Jan 10, 2018 10:10 am
aristotelian wrote:
Tue Jan 09, 2018 11:39 pm
dbr wrote:
Tue Jan 09, 2018 10:11 pm
The answer to that is the serious math you don't want to do. Sequence of returns risk is a reference to a certain piece of mathematical calculation that appears when you try to figure out what happens to portfolios given assumed returns together with contributions or withdrawals. A couple of posters have offered some examples.

If I were presenting this discussion to some math students I would probably have them get into a spreadsheet and work some examples in detail to see how different scenarios work out. That would include that the students would have to devise what kind of calculations are needed to be done. You could start by reproducing the results quoted in the example posted by Thesaints, the one with the 5% withdrawals.
A simple explanation would be that a good sequence enables you to purchase stocks in accumulation when prices are cheap and sell when prices are high. This is what we all hope for. If you buy low and sell low, you are probably OK. If you buy high and sell high, you are probably OK. A bad sequence forces you to buy stock in accumulation when prices are high, and sell stock in retirement when prices are low. You get less for your investment than any other scenario. You could have the same average returns but depending on the sequence you will have very different outcomes.
aristotelian,

Thank you. This is the level of detail that I am looking for.

KlangFool
The answer to the question also depends on where your withdrawals come from. If you have enough in bonds/CD ladders, etc. (or adjust your spending down during the bull market), and don't have to sell equities, that will really mitigate any effect of a bull market when you have to sell.

The OP's initial question struck me as a very artificial question, not representative of reality. I think that's why many people gave answers considering more complex situations.
mariezzz,

I am not that smart. I need to start with the basics first before we go deeper. But, it looks like we have no agreement even with the basics.

<< If you have enough in bonds/CD ladders, etc. (or adjust your spending down during the bull market), and don't have to sell equities, that will really mitigate any effect of a bull market when you have to sell.>>

In the context of my question, 1.5 million (60/40), the bond portion is 600K = 10 years of annual expense. So, are you saying that it is safe as long as the bear market does not last 10 years? In this case, the person could have a simple strategy of selling down the bond for the first 10 years regardless of the market condition.

KlangFool

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Re: Sequence of Return Risk impact on Retirement

Post by randomguy » Thu Jan 11, 2018 11:37 pm

KlangFool wrote:
Thu Jan 11, 2018 9:23 pm


mariezzz,

I am not that smart. I need to start with the basics first before we go deeper. But, it looks like we have no agreement even with the basics.

<< If you have enough in bonds/CD ladders, etc. (or adjust your spending down during the bull market), and don't have to sell equities, that will really mitigate any effect of a bull market when you have to sell.>>

In the context of my question, 1.5 million (60/40), the bond portion is 600K = 10 years of annual expense. So, are you saying that it is safe as long as the bear market does not last 10 years? In this case, the person could have a simple strategy of selling down the bond for the first 10 years regardless of the market condition.

KlangFool
Well you need to hold like 17 years of bonds historically depending on exactly what your holding:) And you don't do that much better than the person who just held 4something like 40/60. The thing is that with a balanced portfolio, you aren't selling stocks when the markets drop for income. Your selling bonds. In the end you get slight differences as a result of floating asset allocations and rebalancing effects but they tend not to be huge. A lot will also depend when you reblance out of stocks (think about 2000 for the case where you want to be aggressive about getting back to bonds versus 2009 where you want to let the stock gains run)

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Re: Sequence of Return Risk impact on Retirement

Post by KlangFool » Thu Jan 11, 2018 11:44 pm

randomguy wrote:
Thu Jan 11, 2018 11:37 pm
KlangFool wrote:
Thu Jan 11, 2018 9:23 pm


mariezzz,

I am not that smart. I need to start with the basics first before we go deeper. But, it looks like we have no agreement even with the basics.

<< If you have enough in bonds/CD ladders, etc. (or adjust your spending down during the bull market), and don't have to sell equities, that will really mitigate any effect of a bull market when you have to sell.>>

In the context of my question, 1.5 million (60/40), the bond portion is 600K = 10 years of annual expense. So, are you saying that it is safe as long as the bear market does not last 10 years? In this case, the person could have a simple strategy of selling down the bond for the first 10 years regardless of the market condition.

KlangFool
Well you need to hold like 17 years of bonds historically depending on exactly what your holding:) And you don't do that much better than the person who just held 4something like 40/60. The thing is that with a balanced portfolio, you aren't selling stocks when the markets drop for income. Your selling bonds. In the end you get slight differences as a result of floating asset allocations and rebalancing effects but they tend not to be huge. A lot will also depend when you reblance out of stocks (think about 2000 for the case where you want to be aggressive about getting back to bonds versus 2009 where you want to let the stock gains run)
randomguy,

Just for the sake of this discussion, I am preparing for a bear market of 5 years. Will that be sufficient? It is my belief that if the bear market lasted more than 5 years, I will need to proceed to a more drastic adjustment.

KlangFool

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