Does portfolio size matter when considering Sequence of return risk?

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Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 8:18 am

Emergency funds: 10000

Debt: 0

Tax Filing Status: Single

Tax Rate: 33% Federal, 5.75% State

State of Residence: VA

Age: 46

Target Retirement Age: 55

Current Asset allocation: 49.91% Stocks / 49.75% bonds / 0.34% Cash

Desired Asset allocation: 65% stocks / 35.00% bonds / 0.00% cash

Total portfolio: Mid 7 figures

Current retirement assets

Taxable
23.40% - FIDELITY TOTAL MARKET INDEX FUND - FSKAX - 0.015%
6.10% - VANGUARD TOTAL STOCK MKT IDX ADM - VTSAX - 0.04%
6.55% - iShares Core S&P Total U.S. Stock Market ETF - ITOT - 0.03%
0.58% - ISHARES US TECHNOLOGY ETF - IYW - 0.42%
0.44% - SPDR S&P500 ETF TRUST TRUST UNIT DEPOSITARY RECEIPT - SPY - 0.0945%
39.70% - VANGUARD INTERM-TERM TX-EX INV - VWITX - 0.17%
10.05% - T. ROWE PRICE VIRGINIA TAX FREE - PRVAX - 0.51%
0.23% - PROSHARES TR/PROSHARES ULTRAPRO - UPRO - 0.92%
0.14% - DIREXION SHS ET/DAILY 20+ YR T BULL - TMF - 1.09%
0.58% - Verizon - VZ


His 401k
8.93% - U.S. Large Company Index Fund - UPEC - 0.0171%


His Roth IRA at Fidelity
0.14% - VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF - TMF - 1.09%
0.19% - PROSHARES TR PROSHARES ULTRAPRO S&P 500 - UPRO - 0.92%


His Executive Deferral Plan at Fidelity
2.63% - U.S. Large Company Index Fund - UPEC - 0.0171%

Contributions

New annual Contributions

~57000/yr - Megabackdoor Roth + 401k (19500 pretax)


~60000/yr Bond Income (from VWITX/PRVAX) --> ITOT
~60000/yr Contributions from Paycheck --> ITOT
~106000/yr into EDP (Tax Deferred) --> U.S. Large Company Index Fund - UPEC - 0.0171%
~120000/yr into company stock (sell) --> ITOT
6000/yr into IRA --> Roth IRA --> TMF/UPRO 45%/55%
4000/yr into 529

Available funds

Funds available in his 401(k)
Target Funds - 2020 - 2060 - 0.5384%
REIT Income and Invest - 0.4073%
Small cap - 0.0248%
US Large - 0.0171%
US Large Co - 0.3878%
US Small Co - 0.6557%
Bond funds - N/A
Private Global RE - 0.6644%


Questions:
1) Does portfolio size matter when considering Sequence of return risk?
2) Is it better do keep the bond/stock ratio where it is to avoid Sequence of return risk or
just sell bonds to hit AA now? If I use my contributions to get to AA it will take until 2024.
3) Is using bond income to buy ITOT an efficient way to spend the income? (This relates to question 2, sell since I don't need the income now.)

More info: After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
Last edited by hornet74 on Sat May 16, 2020 8:27 am, edited 1 time in total.

User avatar
Nicolas Perrault
Posts: 209
Joined: Thu Sep 27, 2018 12:33 pm
Location: Oxford, UK

Re: Does portfolio size matter when considering Sequence of return risk?

Post by Nicolas Perrault » Sat May 16, 2020 8:23 am

1) Sequence of return risk happens when you input money in the system. If you don’t, there is no sequence of return risk regardless of the size of the portfolio. In other words, it does not matter (for the end wealth) whether you get your bad years first or last when you don’t contribute. And when you do contribute, sequence of return risk has more to do with the relative size of your portfolio and your contributions than on the size of either in the absolute.
Last edited by Nicolas Perrault on Sat May 16, 2020 8:27 am, edited 1 time in total.

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 8:27 am

Nicolas Perrault wrote:
Sat May 16, 2020 8:23 am
1) Sequence of return risk happens when you input money in the system. If you don’t, there is no sequence of return risk regardless of the size of the portfolio
Thanks for the response, but what does that mean? After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.

User avatar
Nicolas Perrault
Posts: 209
Joined: Thu Sep 27, 2018 12:33 pm
Location: Oxford, UK

Re: Does portfolio size matter when considering Sequence of return risk?

Post by Nicolas Perrault » Sat May 16, 2020 8:44 am

hornet74 wrote:
Sat May 16, 2020 8:27 am
Nicolas Perrault wrote:
Sat May 16, 2020 8:23 am
1) Sequence of return risk happens when you input money in the system. If you don’t, there is no sequence of return risk regardless of the size of the portfolio
Thanks for the response, but what does that mean? After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
I’ve never heard of the strategy to increase equity allocation after retirement to avoid sequence of return risk. Do you have links to such posts? On first consideration, it does not sound wise to me because the older you are, the less time you have to recoup your gains if equities go down.

One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age. The allocation you suggest (65/35) is very close to this, so you could consider the three fund portfolio. You would then be able to forget about glide paths. Over the next 30 years, most allocations will probably not be able to beat it on a risk-adjusted basis. Read more about it here: https://www.bogleheads.org/wiki/Three-fund_portfolio

As for sequence of return risk, the only way I know of to mitigate it is to use leverage (borrowed money) early in your career and them deleverage as you get older in a strategy known as “life cycle investing”. I myself would not consider this without having down months of research (and I haven’t).

dbr
Posts: 32811
Joined: Sun Mar 04, 2007 9:50 am

Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Sat May 16, 2020 8:49 am

You might Google for Wade Pfau's paper that talks about the bond tent, read it, and decide what you think the advice should be for your case.

The only way to estimate the prospects for your particular situation is to attempt to model the outcome. I am afraid I am not sure what model to use that allows both the asset allocation and the withdrawal rate to be significantly changed during retirement.

The variable that will mainly affect the result will be the withdrawal rates. I think by portfolio size you really mean to suggest that a large portfolio enables a low withdrawal rate. Sequence of return in the sense of increasing bonds early on should only be a big worry if for the initial years of retirement you have a very high withdrawal rate which is then reduced for the rest of retirement. I don't think Pfau's bond tent effect was very large in more evenly spread cases. Keep in mind that sequence of return effects are largest when portfolio volatility is largest. But reducing portfolio volatility also reduces expected return, so for the long run there is an offset there. Also keep in mind that for low enough withdrawal rates altogether everything is so safe it just doesn't matter what is done with asset allocation as far as worrying about running out of money is concerned.

The important question is what is your expected withdrawal rate over time (expressed as a percent of initial portfolio value increased by inflation annually)?

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 8:51 am

Nicolas Perrault wrote:
Sat May 16, 2020 8:44 am
hornet74 wrote:
Sat May 16, 2020 8:27 am
Nicolas Perrault wrote:
Sat May 16, 2020 8:23 am
1) Sequence of return risk happens when you input money in the system. If you don’t, there is no sequence of return risk regardless of the size of the portfolio
Thanks for the response, but what does that mean? After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
I’ve never heard of the strategy to increase equity allocation after retirement to avoid sequence of return risk. Do you have links to such posts? On first consideration, it does not sound wise to me because the older you are, the less time you have to recoup your gains if equities go down.

One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age. The allocation you suggest (65/35) is very close to this, so you could consider the three fund portfolio. You would then be able to forget about glide paths. Over the next 30 years, most allocations will probably not be able to beat it on a risk-adjusted basis. Read more about it here: https://www.bogleheads.org/wiki/Three-fund_portfolio

As for sequence of return risk, the only way I know of to mitigate it is to use leverage (borrowed money) early in your career and them deleverage as you get older in a strategy known as “life cycle investing”. I myself would not consider this without having down months of research (and I haven’t).
I was referring to this: https://www.kitces.com/blog/managing-po ... -red-zone/

More specifically this statement: "Accordingly, from the bond perspective, the V-shaped glidepath turns upside down, and the prospective retiree actually accumulates extra bonds in the years leading up to retirement, and then spends down that volatility-dampening bond reserve in the first half of retirement. By the end, the retiree will finish with a bond allocation that is higher than it was in the early accumulation years, but less than it was when the portfolio was at its peak value (and therefore peak portfolio size effect risk)."

Then sell them off, which increases equity as a byproduct.

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 8:53 am

dbr wrote:
Sat May 16, 2020 8:49 am
You might Google for Wade Pfau's paper that talks about the bond tent, read it, and decide what you think the advice should be for your case.

The only way to estimate the prospects for your particular situation is to attempt to model the outcome. I am afraid I am not sure what model to use that allows both the asset allocation and the withdrawal rate to be significantly changed during retirement.

The variable that will mainly affect the result will be the withdrawal rates. I think by portfolio size you really mean to suggest that a large portfolio enables a low withdrawal rate. Sequence of return in the sense of increasing bonds early on should only be a big worry if for the initial years of retirement you have a very high withdrawal rate which is then reduced for the rest of retirement. I don't think Pfau's bond tent effect was very large in more evenly spread cases. Keep in mind that sequence of return effects are largest when portfolio volatility is largest. But reducing portfolio volatility also reduces expected return, so for the long run there is an offset there. Also keep in mind that for low enough withdrawal rates altogether everything is so safe it just doesn't matter what is done with asset allocation as far as worrying about running out of money is concerned.

The important question is what is your expected withdrawal rate over time (expressed as a percent of initial portfolio value increased by inflation annually)?
The current plan is 3.25% at age 55 with an AA of 65/35. It will take me 4 years to get to that AA or I could just sell off my bonds now to get there.

reln
Posts: 282
Joined: Fri Apr 19, 2019 4:01 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by reln » Sat May 16, 2020 8:54 am

hornet74 wrote:
Sat May 16, 2020 8:18 am
Emergency funds: 10000

Debt: 0

Tax Filing Status: Single

Tax Rate: 33% Federal, 5.75% State

State of Residence: VA

Age: 46

Target Retirement Age: 55

Current Asset allocation: 49.91% Stocks / 49.75% bonds / 0.34% Cash

Desired Asset allocation: 65% stocks / 35.00% bonds / 0.00% cash

Total portfolio: Mid 7 figures

Current retirement assets

Taxable
23.40% - FIDELITY TOTAL MARKET INDEX FUND - FSKAX - 0.015%
6.10% - VANGUARD TOTAL STOCK MKT IDX ADM - VTSAX - 0.04%
6.55% - iShares Core S&P Total U.S. Stock Market ETF - ITOT - 0.03%
0.58% - ISHARES US TECHNOLOGY ETF - IYW - 0.42%
0.44% - SPDR S&P500 ETF TRUST TRUST UNIT DEPOSITARY RECEIPT - SPY - 0.0945%
39.70% - VANGUARD INTERM-TERM TX-EX INV - VWITX - 0.17%
10.05% - T. ROWE PRICE VIRGINIA TAX FREE - PRVAX - 0.51%
0.23% - PROSHARES TR/PROSHARES ULTRAPRO - UPRO - 0.92%
0.14% - DIREXION SHS ET/DAILY 20+ YR T BULL - TMF - 1.09%
0.58% - Verizon - VZ


His 401k
8.93% - U.S. Large Company Index Fund - UPEC - 0.0171%


His Roth IRA at Fidelity
0.14% - VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF - TMF - 1.09%
0.19% - PROSHARES TR PROSHARES ULTRAPRO S&P 500 - UPRO - 0.92%


His Executive Deferral Plan at Fidelity
2.63% - U.S. Large Company Index Fund - UPEC - 0.0171%

Contributions

New annual Contributions

~57000/yr - Megabackdoor Roth + 401k (19500 pretax)


~60000/yr Bond Income (from VWITX/PRVAX) --> ITOT
~60000/yr Contributions from Paycheck --> ITOT
~106000/yr into EDP (Tax Deferred) --> U.S. Large Company Index Fund - UPEC - 0.0171%
~120000/yr into company stock (sell) --> ITOT
6000/yr into IRA --> Roth IRA --> TMF/UPRO 45%/55%
4000/yr into 529

Available funds

Funds available in his 401(k)
Target Funds - 2020 - 2060 - 0.5384%
REIT Income and Invest - 0.4073%
Small cap - 0.0248%
US Large - 0.0171%
US Large Co - 0.3878%
US Small Co - 0.6557%
Bond funds - N/A
Private Global RE - 0.6644%


Questions:
1) Does portfolio size matter when considering Sequence of return risk?
2) Is it better do keep the bond/stock ratio where it is to avoid Sequence of return risk or
just sell bonds to hit AA now? If I use my contributions to get to AA it will take until 2024.
3) Is using bond income to buy ITOT an efficient way to spend the income? (This relates to question 2, sell since I don't need the income now.)

More info: After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
SORR is best handled by delaying SS, maxing pensions and fixed annuities. For your financial assets, rebalance to a "minimum volatility portfolio" approximately 25/75 at retirement and then glide up your stocks from there by spending only from your bonds and fixed income (SS, pension, SPIA/DIA).

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Nicolas Perrault
Posts: 209
Joined: Thu Sep 27, 2018 12:33 pm
Location: Oxford, UK

Re: Does portfolio size matter when considering Sequence of return risk?

Post by Nicolas Perrault » Sat May 16, 2020 8:56 am

If you decide to adopt the three-fund portfolio, you could move toward it right away, without doing it over four years. Or you could do it over four years, as you like. Among the reasons to do it over several years are psychological ones (some investors would feel deep regret if they moved everything at once and it turns out that their timing was poor, even if they could not have known, so for them moving assets slowly is more likely to be tolerable) and behavioural ones (if you change strategies often, you are likely to have sub-par returns). You may also have taxable considerations for selling your bonds, etc. In my opinion, as long as you stick to the plan both options are good ones.

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canadianbacon
Posts: 127
Joined: Sun Nov 10, 2019 10:04 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by canadianbacon » Sat May 16, 2020 9:02 am

hornet74 wrote:
Sat May 16, 2020 8:18 am
More info: After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
In my opinion, SORR applies mainly if there is a risk you will run out of non-stock assets and have to sell stocks at a loss during a down market. If you have eight years worth of bonds it seems unlikely that this will be a problem for you.

If you are at a 50/50 AA and have 8 years worth of bonds, that suggests you have 16x your spending overall. Your risk isn't in having enough bond allocation, it's in spending too much for what you currently have saved. Of course you still have 9 years left (planned) so it may not be an issue by then.
Bulls make money, bears make money, pigs get slaughtered.

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WoodSpinner
Posts: 1472
Joined: Mon Feb 27, 2017 1:15 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by WoodSpinner » Sat May 16, 2020 9:21 am

OP,

Lot’s of opinions!

First, well done! You have a high savings rate and are paying attention to the high level planning. This will be very important as you move forward.

As mentioned up-thread, your expenses are a key part of the equation. Do you have a handle in your mandatory vs. discretionary budget? I noticed a planned 3.125% withdrawal rate which looks excellent but I am wondering how it looks on a yearly curve? For instance in my Retirement plan, my projected withdrawal rate varies by year but there are some key trends. I plan to spend more from 60-70 than 4% as I focus on Roth Conversions and Travel. Less in my 70’s but trending upward in our 80’s. Overall my withdrawal rate is similar to yours, BUT the larger withdrawals early on in Retirement do increase our SOR risks.

My plan is to adjust my spending and reduce discretionary expense as needed. So one key aspect of planning for SOR risk is to reduce your mandatory expenses since this gives you more options to react to market conditions.

I have slowly become less enamored with the idea of a bond tent as outlined in the Kitces article. While it may mathematically work out better, psychologically I am finding it difficult to shift my AA upwards, especially during current times. Have a listed to the recent Wade Pfau interview on the Longview, https://www.morningstar.com/podcasts/the-long-view/54.

My current plan is to Hold at 55/45 through Retirement and not increase any further. Within this 55/45 portfolio, I have built a Liability Matching Portfolio (LMP) to cover 10 years of expenses in Treasuries and a Growth Portfolio for the remaining funds. This approach is working for us during these uncertain times.

Best of luck!

WoodSpinner

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Sandtrap
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Sandtrap » Sat May 16, 2020 9:22 am

hornet74 wrote:
Sat May 16, 2020 8:53 am
dbr wrote:
Sat May 16, 2020 8:49 am
You might Google for Wade Pfau's paper that talks about the bond tent, read it, and decide what you think the advice should be for your case.

The only way to estimate the prospects for your particular situation is to attempt to model the outcome. I am afraid I am not sure what model to use that allows both the asset allocation and the withdrawal rate to be significantly changed during retirement.

The variable that will mainly affect the result will be the withdrawal rates. I think by portfolio size you really mean to suggest that a large portfolio enables a low withdrawal rate. Sequence of return in the sense of increasing bonds early on should only be a big worry if for the initial years of retirement you have a very high withdrawal rate which is then reduced for the rest of retirement. I don't think Pfau's bond tent effect was very large in more evenly spread cases. Keep in mind that sequence of return effects are largest when portfolio volatility is largest. But reducing portfolio volatility also reduces expected return, so for the long run there is an offset there. Also keep in mind that for low enough withdrawal rates altogether everything is so safe it just doesn't matter what is done with asset allocation as far as worrying about running out of money is concerned.

The important question is what is your expected withdrawal rate over time (expressed as a percent of initial portfolio value increased by inflation annually)?
The current plan is 3.25% at age 55 with an AA of 65/35. It will take me 4 years to get to that AA or I could just sell off my bonds now to get there.
Great input from "dbr" as always.

Why have you settled on a 65/35 Allocation at age 55?

curious
j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

dbr
Posts: 32811
Joined: Sun Mar 04, 2007 9:50 am

Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Sat May 16, 2020 9:35 am

Keep in mind the biggest risk to a retirement is not the sequence of returns but the bad luck that the average return will be low. There is nothing that can be done about that except to be prepared and adjust.* You can't asset allocate your way out of that and trying to predict the average return for the next forty years or more is impossible. You can improve your chances by reducing your withdrawal rate at a high cost in saving more, spending less, and working longer. But starting out at 3.25% is already very conservative except from a most pessimistic point of view. It is also important to note how much income is going to be annuitized from pensions and Social Security.

*You might find it interesting to look up Variable Percentage Withdrawal in the Wiki. The point is that manipulating withdrawals is a bigger lever on retirement than playing with asset allocation. I would guess your proposed AA is probably a pretty conventional choice for a long retirement but the exact numbers don't matter very much. How many years expenses you have in bonds doesn't have much to do with the process. Anyone with 25 or 30 or 35 years withdrawals in a portfolio that is around 50/50 already has more than enough years in bonds for any purpose except perhaps taking the Liability Matching Portfolio approach using (nonexistent) inflation indexed annuities or a (nonexistent for 40-50 year retirements) TIPS ladders.

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 9:50 am

canadianbacon wrote:
Sat May 16, 2020 9:02 am
hornet74 wrote:
Sat May 16, 2020 8:18 am
More info: After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
In my opinion, SORR applies mainly if there is a risk you will run out of non-stock assets and have to sell stocks at a loss during a down market. If you have eight years worth of bonds it seems unlikely that this will be a problem for you.

If you are at a 50/50 AA and have 8 years worth of bonds, that suggests you have 16x your spending overall. Your risk isn't in having enough bond allocation, it's in spending too much for what you currently have saved. Of course you still have 9 years left (planned) so it may not be an issue by then.
I have 16x my expected SWR of 3.25% in 2029. So I need to almost double my portfolio. I can adjust downwards if needed.

Thanks for your input, as I didn't look at it that way.

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 9:52 am

dbr wrote:
Sat May 16, 2020 9:35 am
Keep in mind the biggest risk to a retirement is not the sequence of returns but the bad luck that the average return will be low. There is nothing that can be done about that except to be prepared and adjust.* You can't asset allocate your way out of that and trying to predict the average return for the next forty years or more is impossible. You can improve your chances by reducing your withdrawal rate at a high cost in saving more, spending less, and working longer. But starting out at 3.25% is already very conservative except from a most pessimistic point of view. It is also important to note how much income is going to be annuitized from pensions and Social Security.

*You might find it interesting to look up Variable Percentage Withdrawal in the Wiki. The point is that manipulating withdrawals is a bigger lever on retirement than playing with asset allocation. I would guess your proposed AA is probably a pretty conventional choice for a long retirement but the exact numbers don't matter very much. How many years expenses you have in bonds doesn't have much to do with the process. Anyone with 25 or 30 or 35 years withdrawals in a portfolio that is around 50/50 already has more than enough years in bonds for any purpose except perhaps taking the Liability Matching Portfolio approach using (nonexistent) inflation indexed annuities or a (nonexistent for 40-50 year retirements) TIPS ladders.
dbr, thanks for your valuable input. I am calculating an average return of 4.5%. I do have about 60k in SS and pension that I would take at age 70.

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 9:55 am

Sandtrap wrote:
Sat May 16, 2020 9:22 am
hornet74 wrote:
Sat May 16, 2020 8:53 am
dbr wrote:
Sat May 16, 2020 8:49 am
You might Google for Wade Pfau's paper that talks about the bond tent, read it, and decide what you think the advice should be for your case.

The only way to estimate the prospects for your particular situation is to attempt to model the outcome. I am afraid I am not sure what model to use that allows both the asset allocation and the withdrawal rate to be significantly changed during retirement.

The variable that will mainly affect the result will be the withdrawal rates. I think by portfolio size you really mean to suggest that a large portfolio enables a low withdrawal rate. Sequence of return in the sense of increasing bonds early on should only be a big worry if for the initial years of retirement you have a very high withdrawal rate which is then reduced for the rest of retirement. I don't think Pfau's bond tent effect was very large in more evenly spread cases. Keep in mind that sequence of return effects are largest when portfolio volatility is largest. But reducing portfolio volatility also reduces expected return, so for the long run there is an offset there. Also keep in mind that for low enough withdrawal rates altogether everything is so safe it just doesn't matter what is done with asset allocation as far as worrying about running out of money is concerned.

The important question is what is your expected withdrawal rate over time (expressed as a percent of initial portfolio value increased by inflation annually)?
The current plan is 3.25% at age 55 with an AA of 65/35. It will take me 4 years to get to that AA or I could just sell off my bonds now to get there.
Great input from "dbr" as always.

Why have you settled on a 65/35 Allocation at age 55?

curious
j :happy
I was thinking of going higher (75/25) based on this post [viewtopic.php?f=10&t=314622&newpost=5255144] and others like it. The graphic shows a 100% success rate of 75/25 for 3.25% for 40 years (I don't think I will last longer than that). 65/35 is between the two values on the graph and seems to ensure success @ 3.25%.

Topic Author
hornet74
Posts: 67
Joined: Sun Mar 31, 2019 5:19 pm

Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 9:59 am

WoodSpinner wrote:
Sat May 16, 2020 9:21 am
OP,

Lot’s of opinions!

First, well done! You have a high savings rate and are paying attention to the high level planning. This will be very important as you move forward.

As mentioned up-thread, your expenses are a key part of the equation. Do you have a handle in your mandatory vs. discretionary budget? I noticed a planned 3.125% withdrawal rate which looks excellent but I am wondering how it looks on a yearly curve? For instance in my Retirement plan, my projected withdrawal rate varies by year but there are some key trends. I plan to spend more from 60-70 than 4% as I focus on Roth Conversions and Travel. Less in my 70’s but trending upward in our 80’s. Overall my withdrawal rate is similar to yours, BUT the larger withdrawals early on in Retirement do increase our SOR risks.

My plan is to adjust my spending and reduce discretionary expense as needed. So one key aspect of planning for SOR risk is to reduce your mandatory expenses since this gives you more options to react to market conditions.

I have slowly become less enamored with the idea of a bond tent as outlined in the Kitces article. While it may mathematically work out better, psychologically I am finding it difficult to shift my AA upwards, especially during current times. Have a listed to the recent Wade Pfau interview on the Longview, https://www.morningstar.com/podcasts/the-long-view/54.

My current plan is to Hold at 55/45 through Retirement and not increase any further. Within this 55/45 portfolio, I have built a Liability Matching Portfolio (LMP) to cover 10 years of expenses in Treasuries and a Growth Portfolio for the remaining funds. This approach is working for us during these uncertain times.

Best of luck!

WoodSpinner
Thank you! I haven't mapped out my budget fully but have no debt and paid off my house already. I expect to spend more from 55-70, but in reality I think I will be well below my rate of 3.25% just based on my nature. That being said, I have been saving diligently and will continue to do so to ensure the portfolio is large enough. All my calculations are based on 4.5% growth over the next 9-10 years. I am looking at 65/35 based on the chart in this post [viewtopic.php?f=10&t=314622&newpost=5255144]

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hornet74
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 10:01 am

Nicolas Perrault wrote:
Sat May 16, 2020 8:56 am
If you decide to adopt the three-fund portfolio, you could move toward it right away, without doing it over four years. Or you could do it over four years, as you like. Among the reasons to do it over several years are psychological ones (some investors would feel deep regret if they moved everything at once and it turns out that their timing was poor, even if they could not have known, so for them moving assets slowly is more likely to be tolerable) and behavioural ones (if you change strategies often, you are likely to have sub-par returns). You may also have taxable considerations for selling your bonds, etc. In my opinion, as long as you stick to the plan both options are good ones.
Oddly, I have been heading towards the 2 fund portfolio (no international). The outlier stocks are being I had a financial advisor (no longer) that had me in all sorts of stocks and funds. I have been slowly TLHing and selling others to get more to ITOT and FSKAX/VTSAX along with my muni bond funds. The only reason I am not getting rid of FSKAX/VTSAX is cap gains.

dbr
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Sat May 16, 2020 10:05 am

hornet74 wrote:
Sat May 16, 2020 9:55 am


I was thinking of going higher (75/25) based on this post [viewtopic.php?f=10&t=314622&newpost=5255144] and others like it. The graphic shows a 100% success rate of 75/25 for 3.25% for 40 years (I don't think I will last longer than that). 65/35 is between the two values on the graph and seems to ensure success @ 3.25%.
A good exercise to do with that kind of data is to run the result for different withdrawal rates and see where you fall off a cliff. The same applies to running the results for different asset allocations. Keep in mind that kind of analysis should be looked at with a mind's eye placing large error bars over the result. I would not take a "success" withdrawal rate to be more than a band at +/-.5%. Also 100% success doesn't mean as much as noting how far away you are from where success is not 100%.

A different perspective, however, is that the SWR method by the very definition is a datum designed to avoid the worst cases. The dilemma in doing that is that most of the outcomes for a worst case plan will leave you fabulously wealthy when you die. In reality the whole thing is successive approximations toward retirement and then in retirement.

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hornet74
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 10:06 am

dbr wrote:
Sat May 16, 2020 8:49 am
You might Google for Wade Pfau's paper that talks about the bond tent, read it, and decide what you think the advice should be for your case.

The only way to estimate the prospects for your particular situation is to attempt to model the outcome. I am afraid I am not sure what model to use that allows both the asset allocation and the withdrawal rate to be significantly changed during retirement.

The variable that will mainly affect the result will be the withdrawal rates. I think by portfolio size you really mean to suggest that a large portfolio enables a low withdrawal rate. Sequence of return in the sense of increasing bonds early on should only be a big worry if for the initial years of retirement you have a very high withdrawal rate which is then reduced for the rest of retirement. I don't think Pfau's bond tent effect was very large in more evenly spread cases. Keep in mind that sequence of return effects are largest when portfolio volatility is largest. But reducing portfolio volatility also reduces expected return, so for the long run there is an offset there. Also keep in mind that for low enough withdrawal rates altogether everything is so safe it just doesn't matter what is done with asset allocation as far as worrying about running out of money is concerned.

The important question is what is your expected withdrawal rate over time (expressed as a percent of initial portfolio value increased by inflation annually)?
dbr, the current inputs are 4.5% growth over the next 9-10 years, a 3.25% SWR (adjusted if needed), tax rate of 28% and an end AA of 65/35 with my contributions getting me there over the next 4 years.

dbr
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Sat May 16, 2020 10:19 am

hornet74 wrote:
Sat May 16, 2020 10:06 am
[
dbr, the current inputs are 4.5% growth over the next 9-10 years, a 3.25% SWR* (adjusted if needed), tax rate of 28% and an end AA of 65/35 with my contributions getting me there over the next 4 years.
[/quote]

It doesn't matter what growth you get as long as you live with the 3% plan. You will find out in ten years where you actually are. SWR models include the taxes as part of your spending, so don't forget that.

It might be worth your while to run some of the retirement models out there that consider the statistical variation of returns in preference to guessing at growth rate. The whole idea of an SWR is incorporated in and is an output of that kind of model.

*You mean, by the way, not SWR but WR, withdrawal rate. Your plan is to forecast average withdrawals at 3.25%. The estimate of whether or not that withdrawal rate is safe has to come from modeling. It could be that 3.25% is a reasonable estimate of a safe rate for your plan and that means your plan is to set your withdrawal rate equal to your estimate of the SWR based on some model criterion for the SWR. A person can plan to withdraw less than the SWR to be ultra conservative and have a cushion or one can withdraw more on a willingness to take more risk and adjust as things go along. Variable Percentage Withdrawal changes the rate of withdrawals with portfolio results so does not set withdrawals exactly at any particular ex ante SWR. I think in reality life itself is variable enough that all these things are just rough estimates that need flexibility at time goes by, but it is alright for a plan.

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hornet74
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 10:24 am

dbr wrote:
Sat May 16, 2020 10:05 am
hornet74 wrote:
Sat May 16, 2020 9:55 am


I was thinking of going higher (75/25) based on this post [viewtopic.php?f=10&t=314622&newpost=5255144] and others like it. The graphic shows a 100% success rate of 75/25 for 3.25% for 40 years (I don't think I will last longer than that). 65/35 is between the two values on the graph and seems to ensure success @ 3.25%.
A good exercise to do with that kind of data is to run the result for different withdrawal rates and see where you fall off a cliff. The same applies to running the results for different asset allocations. Keep in mind that kind of analysis should be looked at with a mind's eye placing large error bars over the result. I would not take a "success" withdrawal rate to be more than a band at +/-.5%. Also 100% success doesn't mean as much as noting how far away you are from where success is not 100%.

A different perspective, however, is that the SWR method by the very definition is a datum designed to avoid the worst cases. The dilemma in doing that is that most of the outcomes for a worst case plan will leave you fabulously wealthy when you die. In reality the whole thing is successive approximations toward retirement and then in retirement.
Using Fidelity's retirement calculator with "below market" returns, my current portfolio and my contributions I am set for 3.25 with a larger portfolio at death. The reason I am waffling on switching to my desired AA now is future growth vs SOR risk.

dbr
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Sat May 16, 2020 10:31 am

hornet74 wrote:
Sat May 16, 2020 10:24 am
dbr wrote:
Sat May 16, 2020 10:05 am
hornet74 wrote:
Sat May 16, 2020 9:55 am


I was thinking of going higher (75/25) based on this post [viewtopic.php?f=10&t=314622&newpost=5255144] and others like it. The graphic shows a 100% success rate of 75/25 for 3.25% for 40 years (I don't think I will last longer than that). 65/35 is between the two values on the graph and seems to ensure success @ 3.25%.
A good exercise to do with that kind of data is to run the result for different withdrawal rates and see where you fall off a cliff. The same applies to running the results for different asset allocations. Keep in mind that kind of analysis should be looked at with a mind's eye placing large error bars over the result. I would not take a "success" withdrawal rate to be more than a band at +/-.5%. Also 100% success doesn't mean as much as noting how far away you are from where success is not 100%.

A different perspective, however, is that the SWR method by the very definition is a datum designed to avoid the worst cases. The dilemma in doing that is that most of the outcomes for a worst case plan will leave you fabulously wealthy when you die. In reality the whole thing is successive approximations toward retirement and then in retirement.
Using Fidelity's retirement calculator with "below market" returns, my current portfolio and my contributions I am set for 3.25 with a larger portfolio at death. The reason I am waffling on switching to my desired AA now is future growth vs SOR risk.
SOR risk is already in the model along with all the other risks and variations. You only need to worry about a bad sequence of returns if you plan to spend a large fraction of the portfolio early in retirement and at just that time really bad returns materialize. That can happen to people who plan to liquidate a significant fraction of the portfolio to get to Social Security which then becomes a large fraction of the income. I am not hearing that you plan a large withdrawal rate early on and a low withdrawal rate after some later date. I think you should stop thinking about sequence of returns risk.

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hornet74
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 11:07 am

dbr wrote:
Sat May 16, 2020 10:31 am
hornet74 wrote:
Sat May 16, 2020 10:24 am
dbr wrote:
Sat May 16, 2020 10:05 am
hornet74 wrote:
Sat May 16, 2020 9:55 am


I was thinking of going higher (75/25) based on this post [viewtopic.php?f=10&t=314622&newpost=5255144] and others like it. The graphic shows a 100% success rate of 75/25 for 3.25% for 40 years (I don't think I will last longer than that). 65/35 is between the two values on the graph and seems to ensure success @ 3.25%.
A good exercise to do with that kind of data is to run the result for different withdrawal rates and see where you fall off a cliff. The same applies to running the results for different asset allocations. Keep in mind that kind of analysis should be looked at with a mind's eye placing large error bars over the result. I would not take a "success" withdrawal rate to be more than a band at +/-.5%. Also 100% success doesn't mean as much as noting how far away you are from where success is not 100%.

A different perspective, however, is that the SWR method by the very definition is a datum designed to avoid the worst cases. The dilemma in doing that is that most of the outcomes for a worst case plan will leave you fabulously wealthy when you die. In reality the whole thing is successive approximations toward retirement and then in retirement.
Using Fidelity's retirement calculator with "below market" returns, my current portfolio and my contributions I am set for 3.25 with a larger portfolio at death. The reason I am waffling on switching to my desired AA now is future growth vs SOR risk.
SOR risk is already in the model along with all the other risks and variations. You only need to worry about a bad sequence of returns if you plan to spend a large fraction of the portfolio early in retirement and at just that time really bad returns materialize. That can happen to people who plan to liquidate a significant fraction of the portfolio to get to Social Security which then becomes a large fraction of the income. I am not hearing that you plan a large withdrawal rate early on and a low withdrawal rate after some later date. I think you should stop thinking about sequence of returns risk.
Thank you so much. That helps a lot. I also assume using a variable withdrawal rate would help.

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by aristotelian » Sat May 16, 2020 3:27 pm

I don't see how size matters in the sense that 40k withdrawal with say 1M invested should have the same success rate as 400k withdrawal with 10M invested. Or for that matter 4k spending on 100k portfolio. However size matters to the extent that a larger starting budget gives you a lot more room to cut spending if needed.

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hornet74
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Sat May 16, 2020 5:02 pm

aristotelian wrote:
Sat May 16, 2020 3:27 pm
I don't see how size matters in the sense that 40k withdrawal with say 1M invested should have the same success rate as 400k withdrawal with 10M invested. Or for that matter 4k spending on 100k portfolio. However size matters to the extent that a larger starting budget gives you a lot more room to cut spending if needed.
You brought up a good point, if I use the bond side, I could do a lower WR rate to avoid cashing out if the market is down. That brings up another question. I assume you factor in bond yield as part of income? So if I need 100k and my bonds kick out 50k I only need to sell 50k of bonds per year?

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by goodenyou » Sat May 16, 2020 5:49 pm

hornet74 wrote:
Sat May 16, 2020 5:02 pm
aristotelian wrote:
Sat May 16, 2020 3:27 pm
I don't see how size matters in the sense that 40k withdrawal with say 1M invested should have the same success rate as 400k withdrawal with 10M invested. Or for that matter 4k spending on 100k portfolio. However size matters to the extent that a larger starting budget gives you a lot more room to cut spending if needed.
You brought up a good point, if I use the bond side, I could do a lower WR rate to avoid cashing out if the market is down. That brings up another question. I assume you factor in bond yield as part of income? So if I need 100k and my bonds kick out 50k I only need to sell 50k of bonds per year?
Are you assuming the yield on the stock portion of your portfolio to be 0%?
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by aristotelian » Sat May 16, 2020 6:02 pm

hornet74 wrote:
Sat May 16, 2020 5:02 pm
aristotelian wrote:
Sat May 16, 2020 3:27 pm
I don't see how size matters in the sense that 40k withdrawal with say 1M invested should have the same success rate as 400k withdrawal with 10M invested. Or for that matter 4k spending on 100k portfolio. However size matters to the extent that a larger starting budget gives you a lot more room to cut spending if needed.
You brought up a good point, if I use the bond side, I could do a lower WR rate to avoid cashing out if the market is down. That brings up another question. I assume you factor in bond yield as part of income? So if I need 100k and my bonds kick out 50k I only need to sell 50k of bonds per year?
Most of us look at total return, which is dividends plus capital gains. Once you are retired the concept of income doesn't make much sense unless counting Social Security.

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Watty » Sat May 16, 2020 6:10 pm

WoodSpinner wrote:
Sat May 16, 2020 9:21 am

My current plan is to Hold at 55/45 through Retirement and not increase any further. Within this 55/45 portfolio, I have built a Liability Matching Portfolio (LMP) to cover 10 years of expenses in Treasuries and a Growth Portfolio for the remaining funds. This approach is working for us during these uncertain times.
+1

Be sure to understand this point about using a LMP that covers 10 years. With this the rest of your portfolio will not be needed four ten years. The chances of a balanced portfolio doing badly over a ten year period is a lot less than for a one year period.
hornet74 wrote:
Sat May 16, 2020 8:18 am
Total portfolio: Mid 7 figures
When building a LMP you can also consider your dividends and interest to be somewhat reliable so you can just set your mutual funds to not automatically reinvest those. You might expect around 2% in dividends and interest so with a $5 million dollar portfolio that would be $100K a year so if you wanted to set up a LMP portfolio you would only need to fund what your expected expenses, including taxes, are above that.

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by heyyou » Sat May 16, 2020 10:40 pm

Sequence risk can be mitigated by selling assets from bond funds to avoid needing to sell shares from any stock fund holdings. Keep at least decade of spending in bond funds, prepared for stocks to have depressed prices for that long. Also, consider always spending a somewhat fixed percentage of each recent portfolio value to buffer any period of bad years during retirement. Yes, larger portfolio size is a buffer if the retiree can reduce spending during periods of depressed stock prices. That is just living within our means in retirement, same as before retiring.

Expecting to need to adapt, is far better than following what appears to be certain. The 4% Safe Withdrawal Method (SWR) did not address the above, since its focus was on steady, inflation buffered income, expecting the retiree to need all of every portfolio withdrawal.

What percentage to spend? Sun and Webb at Boston College's Center for Retirement Research found that spending the RMD percentage for your age plus annual interest and dividends (shown on your brokerage statements) was superior to other methods. There is a Required Minimum Distribution (RMD) percentage for all ages, not just retirees, for those who inherit an IRA. For age 70, the RMD number is 3.65% of the asset value. The RMD number grows due to your longevity being less with each passing year.

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Dandy » Sun May 17, 2020 8:10 am

Size does matter -- in relationship with with your projected withdrawals to support your retirement income needed. In other words if your retirement pension and Social Security will cover your basic expenses you have no Sequence risk. On the other hand if you have to withdraw 4%+ to meet basic retirement needs then you do.

I had the actual experience when forced to retire in 2008 at age 60. I had enough to supplement a modest pension but the market dropped to the point that I probably didn't have enough. i.e. facing up to 30 or more years of retirement I had a decent chance of my portfolio would not support our basic expense needs and run out before say age 90. If the portfolio had taken that hit when I was 70 I probably would have been ok only facing 20 years worth of drawdown instead of 30.

With a portfolio in the mid 7 digits it sounds like you are in good shape. I would estimate what your drawdown percentage would be at retirement. If it is 2% or less you probably don't have much Sequence risk. The closer it is to 4% the more likely you have some risk to deal with. That assumes you will retire in your mid 60"s. If a lot earlier the greater the potential risk.

The other idea to consider if you seem to have enough or more than enough retirement assets is what is the new NEED to take a lot of equity risk? Some investors are so used to going for growth and being rewarded for it that they tend to lose sight of the need to continue a higher level of risk. They often underestimate the difference in risk tolerance when you are working --salary, bonus, contributions, company matches vs only withdrawals. It was a lot easier to tolerate the market drop in 2000 when I was employed than when I was forced to retire in 2008 and realized that the "pot" was basically all I've got. (and I had a modest pension). Without a modest pension I know I would have be in a high state of panic.

Good luck.

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KEotSK66
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hornet74

Post by KEotSK66 » Sun May 17, 2020 9:04 am

hi

portfolio size matters because if you have to abandon your plan a you can shift to a plan b which may be as simple as putting n years of inflation-adjusted expenses into low yielding safe investments

i think you're overcomplicating things, if you want to go 65/35 or 35/65 just do it

the mention of sor risk triggers something (fear?) in people causing them to overreact, such reactions do more damage than sor risk will ever do to reasonably balanced portfolios
"i just got fluctuated out of $1,500", jerry

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Re: Does portfolio size matter when considering Sequence of return risk?

Post by nigel_ht » Sun May 17, 2020 11:30 am

hornet74 wrote:
Sat May 16, 2020 8:18 am
Emergency funds: 10000

Debt: 0

Tax Filing Status: Single

Tax Rate: 33% Federal, 5.75% State

State of Residence: VA

Age: 46

Target Retirement Age: 55

Current Asset allocation: 49.91% Stocks / 49.75% bonds / 0.34% Cash

Desired Asset allocation: 65% stocks / 35.00% bonds / 0.00% cash

Total portfolio: Mid 7 figures

Current retirement assets

Taxable
23.40% - FIDELITY TOTAL MARKET INDEX FUND - FSKAX - 0.015%
6.10% - VANGUARD TOTAL STOCK MKT IDX ADM - VTSAX - 0.04%
6.55% - iShares Core S&P Total U.S. Stock Market ETF - ITOT - 0.03%
0.58% - ISHARES US TECHNOLOGY ETF - IYW - 0.42%
0.44% - SPDR S&P500 ETF TRUST TRUST UNIT DEPOSITARY RECEIPT - SPY - 0.0945%
39.70% - VANGUARD INTERM-TERM TX-EX INV - VWITX - 0.17%
10.05% - T. ROWE PRICE VIRGINIA TAX FREE - PRVAX - 0.51%
0.23% - PROSHARES TR/PROSHARES ULTRAPRO - UPRO - 0.92%
0.14% - DIREXION SHS ET/DAILY 20+ YR T BULL - TMF - 1.09%
0.58% - Verizon - VZ


His 401k
8.93% - U.S. Large Company Index Fund - UPEC - 0.0171%


His Roth IRA at Fidelity
0.14% - VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF - TMF - 1.09%
0.19% - PROSHARES TR PROSHARES ULTRAPRO S&P 500 - UPRO - 0.92%


His Executive Deferral Plan at Fidelity
2.63% - U.S. Large Company Index Fund - UPEC - 0.0171%

Contributions

New annual Contributions

~57000/yr - Megabackdoor Roth + 401k (19500 pretax)


~60000/yr Bond Income (from VWITX/PRVAX) --> ITOT
~60000/yr Contributions from Paycheck --> ITOT
~106000/yr into EDP (Tax Deferred) --> U.S. Large Company Index Fund - UPEC - 0.0171%
~120000/yr into company stock (sell) --> ITOT
6000/yr into IRA --> Roth IRA --> TMF/UPRO 45%/55%
4000/yr into 529

Available funds

Funds available in his 401(k)
Target Funds - 2020 - 2060 - 0.5384%
REIT Income and Invest - 0.4073%
Small cap - 0.0248%
US Large - 0.0171%
US Large Co - 0.3878%
US Small Co - 0.6557%
Bond funds - N/A
Private Global RE - 0.6644%


Questions:
1) Does portfolio size matter when considering Sequence of return risk?
2) Is it better do keep the bond/stock ratio where it is to avoid Sequence of return risk or
just sell bonds to hit AA now? If I use my contributions to get to AA it will take until 2024.
3) Is using bond income to buy ITOT an efficient way to spend the income? (This relates to question 2, sell since I don't need the income now.)

More info: After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
You are 9 years from retirement with a mid 7 figure portfolio. Let's call it $5M.

1) Yes, portfolio size matters when considering SORR but mostly from the perspective of sustainable withdrawal rate. WR is key to SORR. A retiree with a very large portfolio tends to have a lower WR. A 2% WR gives you $100K from a $5M portfolio. Larger portfolios tend to provide a lot more room to downsize your spending with less lifestyle impact.

You have far less SORR risk than someone FIREing on $1M at 55.

2) It turns out that AA has less impact on SORR than folks think during the accumulation phase.

"You might ask about the impact of asset allocation. When fractal events happen, asset mix doesn’t greatly affect the recovery time. If the portfolio is heavy in equities, it loses more but recovers faster. The difference in asset mix impacts the dollar dimension much more than the time dimension. The important factor here is the client’s ability to stay-the-course during adverse market events."

Luck has far more impact than AA on portfolio recovery time.

"We observe that it took about 2.8 years for the median line to reach the original portfolio value of $100,000 (the horizontal dashed line). If this were a “V” shaped recovery, then Keith’s portfolio would reach this in 1.2 years, or about in 14 months. If this were a multi-year bear market, then it would take 5.8 years to see the $100,000 mark again, thanks to his periodic contributions."

https://retirementincomejournal.com/art ... s-it-take/

You care about time to recover during the accumulation phase because you tend to have some kind of target portfolio size before you pull the trigger and retire early.

In decumulation WR is more important than AA for SORR. You can control saving before retirement and WR after retirement. You can't control luck. Bonds are there to mitigate SORR to a degree but having a low WR does more for you.

Given your current allocations I would sit pat on your portfolio and put new money into the same ratio as your desired AA (65/35). Then just patiently chug along as your current AA is about where it should be 10 years from retirement anyway.

If the market should crash then I would commit the heinous sin of market timing and switch to your desired 65/35 AA...but I would call it "rebalancing". Then when we enter the next secular cycle and things are more stable lock in any gains into a 40/60 AA and keep my WR rate to below to 3% or less.

You can't control luck, but you can put yourself in a position to respond when opportunity knocks. I would be very hesitant to go 100/0 even if the market tanked in a big way. Move from 50/50 to 65/45 or 70/30? Yah...I can do that.

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KEotSK66
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nigel

Post by KEotSK66 » Sun May 17, 2020 10:18 pm

hi

In decumulation WR is more important than AA for SORR. You can control saving before retirement and WR after retirement. You can't control luck. Bonds are there to mitigate SORR to a degree but having a low WR does more for you.

i agree, a low draw % is a good thing, the lower the better, more control

but the way i view investing in retirement the draw % alone doesn't tell the whole story

first, a low draw % coupled with a high inflation % puts a big burden on the AA, if the AA can't deal with the high inflation the end result is the same as if the draw % was too high

second, maybe the draw % isn't so flexible, a 4% draw in 3% inflation requires a 7.29% return to maintain the purchasing power of both the draw and the portfolio, so picking an AA which can turn that trick without excessive exposure to sor/draw risk might be a tougher decision than going from a 4.0% draw down to a 3.9% draw

third, moderate AAs with distributions close to the draw do a good job of dealing with sor risk


the draw % and the inflation % determine needed return, the AA/portfolio is how one goes about getting that needed return
"i just got fluctuated out of $1,500", jerry

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Re: nigel

Post by nigel_ht » Mon May 18, 2020 9:28 am

KEotSK66 wrote:
Sun May 17, 2020 10:18 pm
hi

In decumulation WR is more important than AA for SORR. You can control saving before retirement and WR after retirement. You can't control luck. Bonds are there to mitigate SORR to a degree but having a low WR does more for you.

i agree, a low draw % is a good thing, the lower the better, more control

but the way i view investing in retirement the draw % alone doesn't tell the whole story

first, a low draw % coupled with a high inflation % puts a big burden on the AA, if the AA can't deal with the high inflation the end result is the same as if the draw % was too high

second, maybe the draw % isn't so flexible, a 4% draw in 3% inflation requires a 7.29% return to maintain the purchasing power of both the draw and the portfolio, so picking an AA which can turn that trick without excessive exposure to sor/draw risk might be a tougher decision than going from a 4.0% draw down to a 3.9% draw

third, moderate AAs with distributions close to the draw do a good job of dealing with sor risk


the draw % and the inflation % determine needed return, the AA/portfolio is how one goes about getting that needed return
Yes, that's true...you do need enough performance to offset inflation and WR to not have portfolio depletion. If we enter a period with poorer than historical market performance coupled with high inflation then many of our assumptions in retirement planning will be wrong...I think we had a couple of decent bulls mixed into our periods of high inflation where we haven't encountered both at the same time.

rbaldini
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by rbaldini » Mon May 18, 2020 10:07 am

Let's make the question more concrete: Does your risk of running out of money due to a bad sequence of returns depend on your portfolio size?

Yes, of course. The more money you have, the less likely it is to run out. This is true for all sources of risk.

dbr
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Mon May 18, 2020 10:12 am

rbaldini wrote:
Mon May 18, 2020 10:07 am
Let's make the question more concrete: Does your risk of running out of money due to a bad sequence of returns depend on your portfolio size?

Yes, of course. The more money you have, the less likely it is to run out. This is true for all sources of risk.
I think the OP has been imprecise between the two issues of portfolio size and withdrawal rate. The first is an absolute and the second is normalized and removes the dependence on portfolio size. To do the problem with only portfolio size we need to know the size of the withdrawals. This is why a couple of posters have mentioned that one difference between a large portfolio and large withdrawals and small values of each is that a person spending a lot from a large portfolio may have more options to reduce spending. It is also possible a person with a large portfolio is comfortable with a very low withdrawal rate to start with. In the latter case sequence of returns risk does not apply.

Wanderingwheelz
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Wanderingwheelz » Mon May 18, 2020 10:15 am

Nicolas Perrault wrote:
Sat May 16, 2020 8:44 am
hornet74 wrote:
Sat May 16, 2020 8:27 am
Nicolas Perrault wrote:
Sat May 16, 2020 8:23 am
1) Sequence of return risk happens when you input money in the system. If you don’t, there is no sequence of return risk regardless of the size of the portfolio
Thanks for the response, but what does that mean? After reading various posts, etc on retirement, glide-paths and bond tents, the advice seems to be increase bond holdings getting close to retirement and then sell those off after retirement to avoid SORR. I asked about size of portfolio because I can live off my bond income, currently, for 8+ years and that would over time shift my AA to higher equities for the last 30 years of retirement. I am trying to determine if I should just increase equities over the next 4 years to get to 65/35 since I can live off of selling bonds for 8+ years. Hope that helps clarify the ask.
I’ve never heard of the strategy to increase equity allocation after retirement to avoid sequence of return risk. Do you have links to such posts? On first consideration, it does not sound wise to me because the older you are, the less time you have to recoup your gains if equities go down.

One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age. The allocation you suggest (65/35) is very close to this, so you could consider the three fund portfolio. You would then be able to forget about glide paths. Over the next 30 years, most allocations will probably not be able to beat it on a risk-adjusted basis. Read more about it here: https://www.bogleheads.org/wiki/Three-fund_portfolio

As for sequence of return risk, the only way I know of to mitigate it is to use leverage (borrowed money) early in your career and them deleverage as you get older in a strategy known as “life cycle investing”. I myself would not consider this without having down months of research (and I haven’t).
There’s some sound research that indicated increasing your stock allocation post-retirement can be a wise strategy. You would have to decide if it’s relevant for you. I surely would help reduce sequence of return risk since you’ll front load bonds and slowly, I’ve time, increase exposure to risky assets to take car of yourself late in life.

https://www.google.com/amp/s/www.wsj.co ... 1417408070

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Taylor Larimore
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Taylor Larimore » Mon May 18, 2020 11:07 am

One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age.
Bogleheads:

Sorry, the above quote is incorrect.

The Three Fund Portfolio does not suggest "33.3% to International stocks." I recommend 20% of equity to International stocks.

I recommend a portfolio allocation depending on one's goals, time-frame, risk-tolerance and personal financial situation, all of which change as we grow older.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Nicolas Perrault
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Nicolas Perrault » Tue May 19, 2020 11:43 pm

Taylor Larimore wrote:
Mon May 18, 2020 11:07 am
One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age.
Bogleheads:

Sorry, the above quote is incorrect.

The Three Fund Portfolio does not suggest "33.3% to International stocks." I recommend 20% of equity to International stocks.

I recommend a portfolio allocation depending on one's goals, time-frame, risk-tolerance and personal financial situation, all of which change as we grow older.

Best wishes.
Taylor
Dear Taylor, thank you for the correction.

I believe the 33.3/33.3/33.3 portfolio is suggested by Bill Bernstein in If You Can.

Best

dbr
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by dbr » Wed May 20, 2020 7:17 am

Nicolas Perrault wrote:
Tue May 19, 2020 11:43 pm
Taylor Larimore wrote:
Mon May 18, 2020 11:07 am
One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age.
Bogleheads:

Sorry, the above quote is incorrect.

The Three Fund Portfolio does not suggest "33.3% to International stocks." I recommend 20% of equity to International stocks.

I recommend a portfolio allocation depending on one's goals, time-frame, risk-tolerance and personal financial situation, all of which change as we grow older.

Best wishes.
Taylor
Dear Taylor, thank you for the correction.

I believe the 33.3/33.3/33.3 portfolio is suggested by Bill Bernstein in If You Can.

Best
I would have to look at Bernstein again, but always be wary of the difference between an example and an actual recommendation for anyone in particular. Many authors of books present portfolios that are intended as illustrations rather than advice. And, of course, 1/n is always a peculiar piece of advice. 1/n means if you have several choices you divide the assets equally across them. But what would be an argument for doing that except that you have no actual means of distinguishing between and among any of them. Of course there is then the counter argument that advice for precise allocations to one thing rather than another are not likely to be any better founded. 37/21/42 is no more likely to be right in the abstract.

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nicolas

Post by KEotSK66 » Wed May 20, 2020 7:52 am

you don't need to be changing your stock allocation periodically to avoid sequence of return risk

you're better off holding a portfolio which you think will achieve your retirement objectives, then go with it, you can't realize the benefits of a particular AA if you keep changing the AA

if you moderate your volatility with bonds and distributions you'll be fine

KISS, the fewer moving parts the better
"i just got fluctuated out of $1,500", jerry

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Nicolas Perrault
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by Nicolas Perrault » Wed May 20, 2020 8:03 am

dbr wrote:
Wed May 20, 2020 7:17 am
Nicolas Perrault wrote:
Tue May 19, 2020 11:43 pm
Taylor Larimore wrote:
Mon May 18, 2020 11:07 am
One standard and wise recommendation here on the Bogleheads is the so-called “three-fund portfolio”, whose most vocal advocate is Taylor Larimore, a 96-year old WW2 veteran who fought in the Battle of the Bulge. The three-fund portfolio suggests you allocate 33.3% to bonds, 33.3% to US stocks, and 33.3% to International stocks, regardless of age.
Bogleheads:

Sorry, the above quote is incorrect.

The Three Fund Portfolio does not suggest "33.3% to International stocks." I recommend 20% of equity to International stocks.

I recommend a portfolio allocation depending on one's goals, time-frame, risk-tolerance and personal financial situation, all of which change as we grow older.

Best wishes.
Taylor
Dear Taylor, thank you for the correction.

I believe the 33.3/33.3/33.3 portfolio is suggested by Bill Bernstein in If You Can.

Best
I would have to look at Bernstein again, but always be wary of the difference between an example and an actual recommendation for anyone in particular. Many authors of books present portfolios that are intended as illustrations rather than advice. And, of course, 1/n is always a peculiar piece of advice. 1/n means if you have several choices you divide the assets equally across them. But what would be an argument for doing that except that you have no actual means of distinguishing between and among any of them. Of course there is then the counter argument that advice for precise allocations to one thing rather than another are not likely to be any better founded. 37/21/42 is no more likely to be right in the abstract.
If You Can is intended as an ultra-simple “good enough” suggestion for those that don’t want to spend much time thinking about investing. Bernstein would not argue with you that 33/33/33 is better than 37/21/42. But it is simpler. Here is the first section of the pamphlet:

Would you believe me if I told you that there’s an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of finance professionals in the long run, and make you a millionaire over time?
Well, it is true, and here it is: Start by saving 15 percent of your salary at age 25 into a 401(k) plan, an IRA, or a taxable account (or all three). Put equal amounts of that 15 percent into just three different mutual funds:
  • A U.S. total stock market index fund
  • An international total stock market index fund
  • A U.S. total bond market index fund.
Over time, the three funds will grow at different rates, so once per year you’ll adjust their amounts so that they’re again equal. (That’s the fifteen minutes per year, assuming you’ve enrolled in an automatic savings plan.)
That’s it; if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors. More importantly, you’ll likely accumulate enough savings to retire comfortably.
Bernstein has made it free to download:

http://flip4u.org/docs/If%20You%20Can%2 ... nstein.pdf

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hornet74
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Re: Does portfolio size matter when considering Sequence of return risk?

Post by hornet74 » Wed May 20, 2020 6:12 pm

goodenyou wrote:
Sat May 16, 2020 5:49 pm
hornet74 wrote:
Sat May 16, 2020 5:02 pm
aristotelian wrote:
Sat May 16, 2020 3:27 pm
I don't see how size matters in the sense that 40k withdrawal with say 1M invested should have the same success rate as 400k withdrawal with 10M invested. Or for that matter 4k spending on 100k portfolio. However size matters to the extent that a larger starting budget gives you a lot more room to cut spending if needed.
You brought up a good point, if I use the bond side, I could do a lower WR rate to avoid cashing out if the market is down. That brings up another question. I assume you factor in bond yield as part of income? So if I need 100k and my bonds kick out 50k I only need to sell 50k of bonds per year?
Are you assuming the yield on the stock portion of your portfolio to be 0%?
No, just draw down bonds and let the equity side grow over time. I would have to determine a new AA and withdraw from equities but at a slower rate.

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