Larry Swedroe: What If Your Plan Fails?

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Random Walker
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Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Wed Jun 06, 2018 11:09 am

http://www.etf.com/sections/index-inves ... nopaging=1

I think plan failure is an especially significant issue currently for those closing in on retirement or in early retirement. Murphy’s Law Of Retirement comes into play here. There have been outstanding stock market returns for the last nine years and portfolios have swelled. People start to think they are closer to retirement than they may have otherwise. With a good size portfolio they retire. But they can retire when equity valuations are high, expected future returns low, whole dispersion of future expected returns shifts left, and major risk of bad sequence of returns when it hurts most in early retirement. Larry reviews the importance of having a plan B and shows the tremendous potential value of using Monte Carlo Simulation.

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by IlliniDave » Wed Jun 06, 2018 12:09 pm

Random Walker wrote:
Wed Jun 06, 2018 11:09 am
http://www.etf.com/sections/index-inves ... nopaging=1

I think plan failure is an especially significant issue currently for those closing in on retirement or in early retirement. Murphy’s Law Of Retirement comes into play here. There have been outstanding stock market returns for the last nine years and portfolios have swelled. People start to think they are closer to retirement than they may have otherwise. With a good size portfolio they retire. But they can retire when equity valuations are high, expected future returns low, whole dispersion of future expected returns shifts left, and major risk of bad sequence of returns when it hurts most in early retirement. Larry reviews the importance of having a plan B and shows the tremendous potential value of using Monte Carlo Simulation.

Dave
It would really depend on how you define failure. I define failure as spending my last days camped under a bridge somewhere. I'm 1.5-2.5 years out and don't see the risk of plan failure being especially significant right now (else I'd not consider pulling the plug in that time frame).

I guess I could say that my plan is an aggregation of "plan B"s, so a disappointing stock market alone isn't going to sink me.
Don't do something. Just stand there!

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Re: Larry Swedroe: What If Your Plan Fails?

Post by galeno » Wed Jun 06, 2018 1:29 pm

I think a lot of people's PENSION plans will fail. Public and private. USA and non-USA. So many are underfunded and or use overly optimistic projections.

My wife and I are undecided whether we will take our public pension (Costa Rican govt) at age 65 or 70. Our pension's NPV is about 11% of port.

If we take it at 65 we will get X. At 70 it will be 1.3X or 30% more.

Our pensions SHOULD be the safest part or our retirement portfolio. They are not. Ours has two main problems.

First is currency. It's fragile junk. Our economy is smaller than the metropolitan area of Oaklahoma City (about # 100 in USA metropolitan cities).

Second is the CR pension system's holdings. It's almost exclusively in CR government bonds which are classified as junk bonds by the three global rating agencies.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by heyyou » Wed Jun 06, 2018 1:57 pm

When preaching to the choir, repeating a sermon is noticed, as is scare tactics for those who are already attending the services, whereas those tactics would be more suitable for non-believers.

The concept of choosing a steady spending plan then rigidly following it for the next 30 consecutive years is only attractive to the uninformed, but was easier to model when writing the first safe withdrawal testing program, twenty four years ago. There has been more research on the topic since then.

Even Bengen updated his plan in 2006. David Zolt's TPA shows when to skip the annual inflation adjustments of the 4% real plan, to boost portfolio longevity. On plan failures, leaving unspent multiples of the original corpus after three decades on the 4% real plan, would also be a failure to most retirees. Pay attention to the 30 year ending balances of the plan that you choose.

Is the concept of withdrawing a fixed percentage of each recent annual portfolio balance per Vanguard, too complex to use, or is having to live on slightly variable income not palatable to some? Steady income from Social Security will somewhat buffer the variable income. Retirees already have thirty years of experience at living within their means.

Other plans now use valuations (CAPE10) to adjust the initial withdrawal percentage. One plan suggests spending from bonds first to skip well past the crucial first decade, rebalancing only when the equities have grown to 120% of their retirement day value. That skipping avoids the sequence risk from early high inflation coupled with flat equity returns, which caused the failures of the 4% SWR plan.

Random Walker
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Re: Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Wed Jun 06, 2018 2:56 pm

I’m a big fan of MCS. Never really appreciated the usefulness of short- fall years. This article does a good job of explaining the significance of shortfall years and the potential trade offs between success rate and average time to shortfall in the cases that fail.

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by KlingKlang » Wed Jun 06, 2018 3:22 pm

Using the same data from his prior work, which you’ll recall covers 21 countries over the 115-year period 1900 through 2014
How many of these countries maintained their governments and currency systems without catastrophic dislocations over this time period? Monte Carlo Simulation is useless at predicting Black Swan events.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by cfs » Wed Jun 06, 2018 3:33 pm

Thank you Mister Dave for the link to yet another good article by Mister Larry. I do have my Plan B. Currently using a very low (percentage-wise) withdrawal rate. MCS results are looking good on my side of the house. I don't need that much from my portfolio. Good luck, y gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~

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Re: Larry Swedroe: What If Your Plan Fails?

Post by midareff » Wed Jun 06, 2018 3:40 pm

Of course it could fail.................. My income sources are threefold. Pension and SS. Portfolio pays for luxury items and upscale travel 4 to 6 times a year. Pension fails... portfolio pays in more than pension to so tragedy but a change in lifestyle. SS goes away.... much the same but extremely unlikely. Portfolio of highly diversified US and International stocks and bonds goes to zero... WTF... bags of salt and wampum? Probably a closet full of ammo would be worth a fortune.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by MrPotatoHead » Wed Jun 06, 2018 4:54 pm

galeno wrote:
Wed Jun 06, 2018 1:29 pm
I think a lot of people's PENSION plans will fail. Public and private. USA and non-USA. So many are underfunded and or use overly optimistic projections.

My wife and I are undecided whether we will take our public pension (Costa Rican govt) at age 65 or 70. Our pension's NPV is about 11% of port.

If we take it at 65 we will get X. At 70 it will be 1.3X or 30% more.

Our pensions SHOULD be the safest part or our retirement portfolio. They are not. Ours has two main problems.

First is currency. It's fragile junk. Our economy is smaller than the metropolitan area of Oaklahoma City (about # 100 in USA metropolitan cities).

Second is the CR pension system's holdings. It's almost exclusively in CR government bonds which are classified as junk bonds by the three global rating agencies.
Out of curiosity, isn't your healthcare rock solid?

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Re: Larry Swedroe: What If Your Plan Fails?

Post by MrPotatoHead » Wed Jun 06, 2018 5:06 pm

I have to say, to me, this is Larry at his best. No factor nonsense, no moss on the north side of a tree mumbo-jumbo, just a very simplistically presented but significant insight that is beneficial to most people. Well done!

Random Walker
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Re: Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Wed Jun 06, 2018 6:23 pm

MrPotatoHead wrote:
Wed Jun 06, 2018 5:06 pm
I have to say, to me, this is Larry at his best. No factor nonsense, no moss on the north side of a tree mumbo-jumbo, just a very simplistically presented but significant insight that is beneficial to most people. Well done!
Don’t want to bum you out too much, but factors can come into play here in a big way. As you’ve heard, any of the factors can have long periods of underperformance and timing factors islikely not even worth trying. Since any factor, including market beta, can underperform at any time, diversification across factors may be most important when the time period is short. The short period surrounding the start of retirement may well be just such a period, where sequence of returns is critical.

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by knpstr » Wed Jun 06, 2018 6:38 pm

MrPotatoHead wrote:
Wed Jun 06, 2018 5:06 pm
No factor nonsense, no moss on the north side of a tree mumbo-jumbo...
Haha, well put! :beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 10:22 am

I have never really understood this part. Is Larry saying it is easier to retire *after* the market has crashed and taken 50% hit? Or is he saying that if that is the case, then they would NOT have retired in the first place? Please explain to me how high stock market is a "bad" thing when it comes to retirement. And if that is the case, it of course means that low stock market is a "good" thing when it comes to retirement. When you try to explain this, please include not only the dry financial aspect but also real emotional aspect of the decision making process.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by bertilak » Thu Jun 07, 2018 10:41 am

wrongfunds wrote:
Thu Jun 07, 2018 10:22 am
I have never really understood this part. Is Larry saying it is easier to retire *after* the market has crashed and taken 50% hit? Or is he saying that if that is the case, then they would NOT have retired in the first place? Please explain to me how high stock market is a "bad" thing when it comes to retirement. And if that is the case, it of course means that low stock market is a "good" thing when it comes to retirement. When you try to explain this, please include not only the dry financial aspect but also real emotional aspect of the decision making process.
If your plans and projections are based on a stock market value that proves to have been ephemeral, that's bad news. If your plans are based on a stock market value that has already taken the hit then at least you have hope that the worst has already happened and your plans and projections are probably more realistic.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 10:48 am

bertilak wrote:
Thu Jun 07, 2018 10:41 am
wrongfunds wrote:
Thu Jun 07, 2018 10:22 am
I have never really understood this part. Is Larry saying it is easier to retire *after* the market has crashed and taken 50% hit? Or is he saying that if that is the case, then they would NOT have retired in the first place? Please explain to me how high stock market is a "bad" thing when it comes to retirement. And if that is the case, it of course means that low stock market is a "good" thing when it comes to retirement. When you try to explain this, please include not only the dry financial aspect but also real emotional aspect of the decision making process.
If your plans and projections are based on a stock market value that proves to have been ephemeral, that's bad news. If your plans are based on a stock market value that has already taken the hit then at least you have hope that the worst has already happened and your plans and projections are probably more realistic.
Yes, I get that part but please tell me honestly that if you had a choice of working one more year and the market had crashed, would you retire or continue to keep on working? Isn't market crash one of the legitimate reason for NOT retiring?

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Re: Larry Swedroe: What If Your Plan Fails?

Post by bertilak » Thu Jun 07, 2018 10:59 am

wrongfunds wrote:
Thu Jun 07, 2018 10:48 am
bertilak wrote:
Thu Jun 07, 2018 10:41 am
wrongfunds wrote:
Thu Jun 07, 2018 10:22 am
I have never really understood this part. Is Larry saying it is easier to retire *after* the market has crashed and taken 50% hit? Or is he saying that if that is the case, then they would NOT have retired in the first place? Please explain to me how high stock market is a "bad" thing when it comes to retirement. And if that is the case, it of course means that low stock market is a "good" thing when it comes to retirement. When you try to explain this, please include not only the dry financial aspect but also real emotional aspect of the decision making process.
If your plans and projections are based on a stock market value that proves to have been ephemeral, that's bad news. If your plans are based on a stock market value that has already taken the hit then at least you have hope that the worst has already happened and your plans and projections are probably more realistic.
Yes, I get that part but please tell me honestly that if you had a choice of working one more year and the market had crashed, would you retire or continue to keep on working? Isn't market crash one of the legitimate reason for NOT retiring?
Exactly. That's why it is a worse problem if the crash happens after you have just committed yourself to an overly-optimistic plan. You probably don't get a do-over.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Thu Jun 07, 2018 11:08 am

wrongfunds wrote:
Thu Jun 07, 2018 10:22 am
I have never really understood this part. Is Larry saying it is easier to retire *after* the market has crashed and taken 50% hit? Or is he saying that if that is the case, then they would NOT have retired in the first place? Please explain to me how high stock market is a "bad" thing when it comes to retirement. And if that is the case, it of course means that low stock market is a "good" thing when it comes to retirement. When you try to explain this, please include not only the dry financial aspect but also real emotional aspect of the decision making process.
Hi wrongfunds,
Don’t remember if Larry discussed this in his article, but i believe it’s a very important issue. I started a Boglehead thread on the issue “Murphy’s Law Of Retirement” linked below that you might look up. Also might want to check out the end of William Bernstein’s short e-book on Life Cycle Investing.
Imagine two cases of starting retirement. In both cases the new retiree has the same size equity heavy portfolio. In the first case, there has been a recent huge run up in the market, returns have been great, valuations are generous, and expected future returns are lower. Not only are future expected returns lower, the whole potential distribution of returns has shifted left, with less good good outcomes and worse bad outcomes. In the second case, although the investor has a same size portfolio as first case, it is the result of dramatic shrinkage after market decline. Although the portfolio is smaller than it once was, equity valuations are modest and future expected returns greater.
In both of the above cases, the investor retires and starts withdrawing money for personal use. The withdrawn money can never participate in future market gains and help the portfolio grow. So the big risk after a market run up is sequence of returns risk. There is a substantial possibility that the investor is withdrawing money while the market is falling into an extended bear.
So one of the points Larry has made in the past is that the shorter the time period, the more risky it is to put all one's bets on a single factor, like market beta. That relatively modest period of time, say the first 5-10 years of retirement is just such a period. To go a step further, in preparation for retirement, I think it makes sense to look at one’s portfolio size, current valuations, future expected returns. I believe that under circumstances such as now, someone in that position should make a strong move to cool off the asset allocation. This is why I believ more in opportunistically customizing one’s glide path to retirement rather than blindly following an age based formula.

viewtopic.php?t=220275

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by celia » Thu Jun 07, 2018 11:27 am

Here's our worst case: The stock markets crash and thus our pensions will evaporate too. The government will be busy bailing out industries/creating job programs, etc and thus need to reduce SS for those collecting the most (or print more money). Meanwhile our house is paid off but we could take in "renters". Since we are seniors, in California, we could defer the property taxes until the house is sold (after we die). The renters probably won't be able to pay much but they can work in our yard growing the food we all need and/or be our caregivers, since health care may become our largest expense. Our income taxes will drop since some of our income streams will have dried up.

I see lots of opportunities here in encouraging us to walk more (save gas), be out in the sun (I mean shade), meet new people (renters), and save on taxes!

(Just thinking out load here since I never seriously considered failure scenarios.)

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 11:34 am

And exactly how different is this than say market timing? Isn't this the same reason (hypothetical) I am keeping cash on the sideline for last 5 years? How is that working out for me?

Either we believe in market timing or we don't. I agree that one has to be prepared for the market to crash but I do not know if the crash is coming tomorrow or after 5 years and after another 50% growth. AND nobody else knows it either.

Did Larry say the same thing 5 years ago?

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Re: Larry Swedroe: What If Your Plan Fails?

Post by bertilak » Thu Jun 07, 2018 11:41 am

wrongfunds wrote:
Thu Jun 07, 2018 11:34 am
And exactly how different is this than say market timing?
The Market times Itself. If it does so in a way that turns your plans to dust, that's bad, and especially bad if you have already become reliant on those plans. If it does so while you still have a chance to make new plans it is not quite as bad.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 11:49 am

So what exactly is the actionable part? Plan for 50% market crash just after you have started your retirement and you have no chance of getting your old job (or anything similar) back? Change the 4% to 2%? How about 90% market crash? I mean if I were to look at last 115 years of data and 25 countries, surely there *must* be a situation like that. Should I then be planning for worst case WR of 0.75%? Isn't there a line in the sand where you tell yourself to stop worrying about all the what ifs?

I understand the need for financial and retirement porn that we all crave for and people like Larry S. have no choice but to supply it us.

But really, at least realize that is what it is.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wootwoot » Thu Jun 07, 2018 11:52 am

If my plan fails my backup plan is to work at home Depot helping customers in my older years. Not glamorous but it beats being a greeter at Walmart.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 11:58 am

celia wrote:
Thu Jun 07, 2018 11:27 am
Here's our worst case: The stock markets crash and thus our pensions will evaporate too. The government will be busy bailing out industries/creating job programs, etc and thus need to reduce SS for those collecting the most (or print more money). Meanwhile our house is paid off but we could take in "renters". Since we are seniors, in California, we could defer the property taxes until the house is sold (after we die). The renters probably won't be able to pay much but they can work in our yard growing the food we all need and/or be our caregivers, since health care may become our largest expense. Our income taxes will drop since some of our income streams will have dried up.

I see lots of opportunities here in encouraging us to walk more (save gas), be out in the sun (I mean shade), meet new people (renters), and save on taxes!

(Just thinking out load here since I never seriously considered failure scenarios.)
What makes you so confident that the patently unfair tax treatment being afforded to seniors will continue under the dire circumstances that you had listed out? What if the other California voters decide that you as senior need to pay your fair share of taxes, especially when the state is severely short of the tax revenue and federal government has no money either?

What if???

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 12:02 pm

wootwoot wrote:
Thu Jun 07, 2018 11:52 am
If my plan fails my backup plan is to work at home Depot helping customers in my older years. Not glamorous but it beats being a greeter at Walmart.
I don't think you get it. Because of the fallen economy and market crash, both Home Depot and Lowes have already gone bankrupt. The big box stores has been now vacant for years. The employment is over 50%. You are competing with 25 year old for the scraps of jobs.

Have you planned for such a scenario?

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Re: Larry Swedroe: What If Your Plan Fails?

Post by bertilak » Thu Jun 07, 2018 12:05 pm

wrongfunds wrote:
Thu Jun 07, 2018 11:49 am
So what exactly is the actionable part? Plan for 50% market crash just after you have started your retirement and you have no chance of getting your old job (or anything similar) back? Change the 4% to 2%? How about 90% market crash? I mean if I were to look at last 115 years of data and 25 countries, surely there *must* be a situation like that. Should I then be planning for worst case WR of 0.75%? Isn't there a line in the sand where you tell yourself to stop worrying about all the what ifs?

I understand the need for financial and retirement porn that we all crave for and people like Larry S. have no choice but to supply it us.

But really, at least realize that is what it is.
You need to nail down some minimal amount of income, independent of the stock market. Customary ways are bond ladders and annuities. SS and pensions are types of annuities. The less income your investments need to provide, the easier and safer that becomes, to the point where a market downturn becomes only a small problem. This is the concept of liability matching.

A more sophisticated way of looking at this is called the "funded ratio" as describe hereabouts by user bobcat2. See viewtopic.php?t=219878#p3385451 for a starting place. Personally, I don't dig that deeply into it because I am lucky to have a very good pension and a reasonable nest egg. But still, if you want to get to the nitty gritty where we don't talk circles around each other that's a good place to get more formal. (No market porn involved!)
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Thu Jun 07, 2018 12:16 pm

Wrongfunds,
I believe there is a difference between market timing and periodically looking at one’s financial circumstance, current valuations, future expected returns, dispersion of potential future returns, and adjusting accordingly. As I said above, it’s more like opportunistically adjusting the glide path than overt market timing.

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by celia » Thu Jun 07, 2018 12:33 pm

wrongfunds wrote:
Thu Jun 07, 2018 11:58 am
celia wrote:
Thu Jun 07, 2018 11:27 am
Here's our worst case: The stock markets crash and thus our pensions will evaporate too. The government will be busy bailing out industries/creating job programs, etc and thus need to reduce SS for those collecting the most (or print more money). Meanwhile our house is paid off but we could take in "renters". Since we are seniors, in California, we could defer the property taxes until the house is sold (after we die)...
What makes you so confident that the patently unfair tax treatment being afforded to seniors will continue under the dire circumstances that you had listed out? What if the other California voters decide that you as senior need to pay your fair share of taxes, especially when the state is severely short of the tax revenue and federal government has no money either?

What if???
Oh, the state will get their money with interest eventually. Some of us die every year and settle up with the state. But the number of seniors grows each year as the baby boomers get older. Seniors are a big voting block. (What else do we have to do in retirement?) And our "kids" would rather we defer our property taxes than have to put up with us moving in with them. :D

Beside, property taxes are the least of the problems I mentioned originally. We have comparatively low property taxes since we've lived in the same house since before prop 13 passed.
Last edited by celia on Thu Jun 07, 2018 12:37 pm, edited 1 time in total.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by galeno » Thu Jun 07, 2018 12:36 pm

Bill Bernstein is one of my favorite investment guys. My only problem with him is that he loves to COMPLICATE portfolios and withdrawal methods.

I prefer a the simplest and cheapest portfolio that gets things done. We presently use 4 ETFs. I'd like to get it down to 2 or 3 at the most.

I also prefer a simple withdrawal strategy. The 4% rule is simple. It's also very conservative.

Using firecalc tests your portfolio's survival against the worst historical period since 1871. It's simple. It's conservative. It works.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wootwoot » Thu Jun 07, 2018 2:53 pm

wrongfunds wrote:
Thu Jun 07, 2018 12:02 pm
wootwoot wrote:
Thu Jun 07, 2018 11:52 am
If my plan fails my backup plan is to work at home Depot helping customers in my older years. Not glamorous but it beats being a greeter at Walmart.
I don't think you get it. Because of the fallen economy and market crash, both Home Depot and Lowes have already gone bankrupt. The big box stores has been now vacant for years. The employment is over 50%. You are competing with 25 year old for the scraps of jobs.

Have you planned for such a scenario?
You don't get it. What type of answer are you expecting for your doomsday scenario? Should I starr buying farmland and build a fallout shelter in my backyard?

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 3:13 pm

My point was that a doomsday scenario by definition has no lower limit. Unfortunately when we talk about what if your plan fails, we fail to account for failing worse than what your had allowed for failure scenario (yah, try to parse that one!). Your "get a job at Home Depot" option is NOT guaranteed.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by HomerJ » Thu Jun 07, 2018 3:16 pm

Random Walker wrote:
Wed Jun 06, 2018 2:56 pm
I’m a big fan of MCS.
I'm not a fan at all, but then maybe I don't understand it... Isn't Monte Carlo purely random? Yet markets in the real world very rarely appear purely random. Last year's returns do seem to have some effect on the following years...

But of course there is no good understanding of the variables and HOW previous years affect following years. So there's no way to make a good model.

So people just use historical data, which is also lacking, since there are not enough sample points.
The J stands for Jay

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Re: Larry Swedroe: What If Your Plan Fails?

Post by HomerJ » Thu Jun 07, 2018 3:18 pm

bertilak wrote:
Thu Jun 07, 2018 10:41 am
wrongfunds wrote:
Thu Jun 07, 2018 10:22 am
I have never really understood this part. Is Larry saying it is easier to retire *after* the market has crashed and taken 50% hit? Or is he saying that if that is the case, then they would NOT have retired in the first place? Please explain to me how high stock market is a "bad" thing when it comes to retirement. And if that is the case, it of course means that low stock market is a "good" thing when it comes to retirement. When you try to explain this, please include not only the dry financial aspect but also real emotional aspect of the decision making process.
If your plans and projections are based on a stock market value that proves to have been ephemeral, that's bad news. If your plans are based on a stock market value that has already taken the hit then at least you have hope that the worst has already happened and your plans and projections are probably more realistic.
The trick is to have a conservative allocation when you retire so you don't care what the stock market does at all.

Enjoy the gains of the rising stock market, slowly move those gains into more conservative investments as you approach retirement.
The J stands for Jay

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HomerJ
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Re: Larry Swedroe: What If Your Plan Fails?

Post by HomerJ » Thu Jun 07, 2018 3:20 pm

Duplicate
Last edited by HomerJ on Thu Jun 07, 2018 3:32 pm, edited 1 time in total.
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Re: Larry Swedroe: What If Your Plan Fails?

Post by wootwoot » Thu Jun 07, 2018 3:23 pm

wrongfunds wrote:
Thu Jun 07, 2018 3:13 pm
My point was that a doomsday scenario by definition has no lower limit. Unfortunately when we talk about what if your plan fails, we fail to account for failing worse than what your had allowed for failure scenario (yah, try to parse that one!). Your "get a job at Home Depot" option is NOT guaranteed.
Nothing in life is guaranteed, this is a frivoulous exercise with your parameters.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by HomerJ » Thu Jun 07, 2018 3:31 pm

wootwoot wrote:
Thu Jun 07, 2018 3:23 pm
wrongfunds wrote:
Thu Jun 07, 2018 3:13 pm
My point was that a doomsday scenario by definition has no lower limit. Unfortunately when we talk about what if your plan fails, we fail to account for failing worse than what your had allowed for failure scenario (yah, try to parse that one!). Your "get a job at Home Depot" option is NOT guaranteed.
Nothing in life is guaranteed, this is a frivoulous exercise with your parameters.
Well, I have to agree with wrongfunds that a "worst case scenario" shouldn't have "getting a job" in there. Because that's certainly not guaranteed.

I'm not going all the way to plan for Mad Max times, but I do plan for a Great Depression II... I've made sure that my base needs are pretty low, my house is paid off, and that I don't have too much at risk in the stock market.

SPIAs are an option if I find myself 15 years into my retirement with a declining portfolio.
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Re: Larry Swedroe: What If Your Plan Fails?

Post by Engineer250 » Thu Jun 07, 2018 3:37 pm

Random Walker wrote:
Thu Jun 07, 2018 11:08 am

This is why I believ more in opportunistically customizing one’s glide path to retirement rather than blindly following an age based formula.

viewtopic.php?t=220275

Dave
I agree with this. Before 2008 (but after 2000) I read an article concerned that too many on the verge of retirement were too heavily invested in stocks and too many young people were too heavily invested in bonds. The VG Target Retirement starts off at 10% bonds at the riskiest (2065, 47 years from now!) Then goes to 15% to 20% with 20 years to go. Something like 30-40% with less than 10 years to go. The article proposed a person might realistically stay 100% stocks up to the point you are 15 or 20 years to retirement. And at that point begin a steeper climb into bonds as you get closer to retirement.

I'm not saying that works for everyone, you are the captain of your own ship, but I do think people should be informed and flexible if they can be.
Where the tides of fortune take us, no man can know.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Thu Jun 07, 2018 3:47 pm

HomerJ wrote:
Thu Jun 07, 2018 3:16 pm
Random Walker wrote:
Wed Jun 06, 2018 2:56 pm
I’m a big fan of MCS.
I'm not a fan at all, but then maybe I don't understand it... Isn't Monte Carlo purely random? Yet markets in the real world very rarely appear purely random. Last year's returns do seem to have some effect on the following years...

But of course there is no good understanding of the variables and HOW previous years affect following years. So there's no way to make a good model.

So people just use historical data, which is also lacking, since there are not enough sample points.
Yes I think MCS usually uses random returns as inputs. Not sure, but possibly some MCS may be able to account for some short term auto-correlation. More importantly, good MCS, despite using random portfolio returns, generates those returns based on current valuations of asset classes, current interest rates, historical factor premia, historical volatilities and correlations. Appreciating the weaknesses inherent in using those numbers, still powerful tool nonetheless. I would think having good estimate of expected return and volatility for portfolio would dominate over any relatively short term auto-correlation issues.

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Thu Jun 07, 2018 3:51 pm

The point being one has to draw a line in the sand and say enough is enough whether looking at the withdrawal ratio or doomsday scenarios. It is NOT possible to plan for *all* of the things that could go wrong. Otherwise, the only real solution is to never retire.

The most amusing thing about these theoretical onanian analysis (I hope that is a word; if not, it should be!) is when a paper claims that their MC simulation shows that 3.872% withdrawal works but 3.873 *FAILS* and you need to take precautions to not to cross 3.872%. I might be joking, but those authors surely are extremely serious.

This is *after* putting a disclaimer that one can NOT predict future based upon past. I do understand that past is the only thing on which you can do research upon.

Sue me if I do get a chuckle or two when I read math heavy serious paper about 3 significant digits after decimal points in their recommendation of withdrawal ratio! And this forum just goes gaga over it.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by Random Walker » Thu Jun 07, 2018 3:56 pm

Engineer250 wrote:
Thu Jun 07, 2018 3:37 pm

I'm not saying that works for everyone, you are the captain of your own ship, but I do think people should be informed and flexible if they can be.
My point exactly. We can’t control the markets and we can’t control our age. But we can control how we react to what the market has done in relation to our age. If we find that because the market gods have been generous that we are ahead of schedule on our way to retirement, then makes sense to take some risk off the table. Perhaps more than a measly 1% like a target date fund. Target date funds may reduce equity exposure 1-2% per year. Equities have a standard deviation of maybe 20%. So the market can make dramatic swings and at times it’s prudent for the investor to do something a bit more definitive with the portfolio as he approaches the retirement portfolio. That being said, staying the course is always the default position.

Dave

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Re: Larry Swedroe: What If Your Plan Fails?

Post by marcopolo » Thu Jun 07, 2018 4:10 pm

You do realize the SWR studies included a LOT of bad things that have happened (great depression, WWII, Stagflation, looks like dot-com bust will work out as well).

Of course, things could be worse in the future. But, it is not clear to me that some of the solutions, like uncorrelated assets are likely to save you.

Take for example, a recent favorite: LENDX based on direct lending. Sure, that has been uncorrelated to equities in the (recent?) past. But, if you are imaging a scenario worse than say the great depression where your chosen WR is going to fail, how confident are you that the default rates on these loans will not go through the roof and make LENDX much more correlated to a collapsing stock market?

How about annuities, in a world where things have gone that bad, how confident are you that your chosen Insurance company will be able to meet its obligations?

Living is risky. At some point you have to draw the line somewhere, there is no 100% certainty.

I am at a 3% withdrawal rate. With a 50/50 asset allocation, if the market drops 50%, My portfolio is not worth 75% of what it was. assuming bonds stay about flat (flight to safety is likely to increase bonds). The same dollar withdrawal now equates to a 4% withdrawal rate, even if I don't adjust my spending. In reality, I would probably cut back a little.

I am OK with a plan that would essentially survive a 50% drop in equities FOLLOWED by the Great Depression.

I am sure many here think that is still too risky. We just draw the line of risk tolerance in different places. That is OK, each person has to find their own comfort level.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by gmaynardkrebs » Thu Jun 07, 2018 4:13 pm

Random Walker wrote:
Thu Jun 07, 2018 3:47 pm
HomerJ wrote:
Thu Jun 07, 2018 3:16 pm
Random Walker wrote:
Wed Jun 06, 2018 2:56 pm
I’m a big fan of MCS.
I'm not a fan at all, but then maybe I don't understand it... Isn't Monte Carlo purely random? Yet markets in the real world very rarely appear purely random. Last year's returns do seem to have some effect on the following years...

But of course there is no good understanding of the variables and HOW previous years affect following years. So there's no way to make a good model.

So people just use historical data, which is also lacking, since there are not enough sample points.
Yes I think MCS usually uses random returns as inputs. Not sure, but possibly some MCS may be able to account for some short term auto-correlation. More importantly, good MCS, despite using random portfolio returns, generates those returns based on current valuations of asset classes, current interest rates, historical factor premia, historical volatilities and correlations. Appreciating the weaknesses inherent in using those numbers, still powerful tool nonetheless. I would think having good estimate of expected return and volatility for portfolio would dominate over any relatively short term auto-correlation issues.

Dave
There's a lot of great math behind MCS, but not much science, as far as I can tell. There simply have not been enough independent periods in the past to see how well MCS predicts the future. Moreover, even if you use today's expected returns, those expectations are based on the same limited past periods. I think MCS is the best tool we have, but my personal view is that that doesn't make it a good tool. I think Larry's "have a plan B" is outstanding advice, even if you disagree with my skeptical view of MCS.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by stlutz » Thu Jun 07, 2018 9:44 pm

SPIAs are an option if I find myself 15 years into my retirement with a declining portfolio.
The problem here is that it's kind too late to buy a SPIA after the market has done very poorly and your pot of money has shrunk dramatically. In that situation doesn't it make more sense to sticks with stocks in anticipation of mean reversion?

To me, the point of an annuity (either immediate or deferred) is to buy it before there is a market crash so I don't care so much if the market crashes.

Buying an annuity at age 65 that starts paying at age 80 is much cheaper than buying an annuity at age 80 that starts paying immediately.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by stlutz » Thu Jun 07, 2018 9:52 pm

I kind of disagree with where the article goes in terms of saying that the solution to uncertainly is to waterboard the same set of data over and over again.

In real life, most people do one of three things:

1) If they have smaller nest eggs, they don't spend anything unless there is an emergency, which can be personal or it can grandchildren related.

2) Some people decide to just spend the income and leave the principal intact. We [rightly] critique that way of thinking all of the time, but it does provide an illusion of fairly stable income while not having to care about the year-to-year moves in the market.

3) Some people turn their assets into steady income by annuitizing.

All 3 approaches will generally work, if "work" means that you'll likely have some money when you need it. What is most likely to cause failure are things that happen to you personally or to your family that require a large financial investment. Grandparents will generally do anything for their grandchildren, even if means their retirement plan "fails".

Obviously the more money you have the more flexibility you have.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by smectym » Fri Jun 08, 2018 12:08 am

Suggest allocating a sum sufficient to fund basic retirement needs to assets such as Series I Savings Bonds (full faith and credit, tax-deferred 30 years, rate inflation adjusted, exempt from state tax). We followed that approach (largely due to boglehead agitation) since around 2000 and now the savings bond portfolio by itself is “enough.” That gives us more confidence wnen investing in volatile assets.

Cash is increasingly attractive today. Bank CD rates are also trending higher.

The best Plan B is one by definition immune to failure: Plan B assets don’t suffer downside principal fluctuation. The only path is upside, though compounding. Check the portfolio daily—you’ll never see a down day.

Smectym

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Re: Larry Swedroe: What If Your Plan Fails?

Post by HomerJ » Fri Jun 08, 2018 5:19 pm

stlutz wrote:
Thu Jun 07, 2018 9:44 pm
SPIAs are an option if I find myself 15 years into my retirement with a declining portfolio.
The problem here is that it's kind too late to buy a SPIA after the market has done very poorly and your pot of money has shrunk dramatically.
Depends on when you retire... If you retire at 45-50, SPIA at 60-65 may not be a great solution.... But if your retire at 55-60, an SPIA at 70 or 75 pays pretty well... like 8% or so.. so as long as you have half your money left, you can always generate the same income you started with at 4% withdrawals.

A 50/50 portfolio has never dropped more than 50% in the first 15 years I think.

If I started with $2 million, and 15 years in, I only had $1.2 million left, I'd definitely be looking at a SPIA. Sorry, kids!

(I also don't count my house equity at all, so there's yet another buffer for Plan C) :)
Buying an annuity at age 65 that starts paying at age 80 is much cheaper than buying an annuity at age 80 that starts paying immediately.
I will have to look into this. You may have a very good point here.
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stlutz
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Re: Larry Swedroe: What If Your Plan Fails?

Post by stlutz » Fri Jun 08, 2018 6:50 pm

If I started with $2 million, and 15 years in, I only had $1.2 million left, I'd definitely be looking at a SPIA.
I would say that if you start with $2M at age 65 and your plans fails--you probably had an issue that was not related to market performance (which could be due to life circumstances, over-consumption, or day trading).

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Re: Larry Swedroe: What If Your Plan Fails?

Post by delamer » Fri Jun 08, 2018 6:59 pm

wrongfunds wrote:
Thu Jun 07, 2018 12:02 pm
wootwoot wrote:
Thu Jun 07, 2018 11:52 am
If my plan fails my backup plan is to work at home Depot helping customers in my older years. Not glamorous but it beats being a greeter at Walmart.
I don't think you get it. Because of the fallen economy and market crash, both Home Depot and Lowes have already gone bankrupt. The big box stores has been now vacant for years. The employment is over 50%. You are competing with 25 year old for the scraps of jobs.

Have you planned for such a scenario?
If it gets to that point, I am competing with 25 year olds for food, electricity, and health care.

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Re: Larry Swedroe: What If Your Plan Fails?

Post by AtlasShrugged? » Tue Jun 19, 2018 6:16 am

Bogleheads....reviving this thread. I reread the article from Larry, and then I took a look at Estrada's paper. And I thought about RAS and D-RAS. Pretty nifty metric, particularly D-RAS. I really would like to see a more in-depth examination of D-RAS.

In the paper (pretty dense on math), Estrada analyzes a US-based portfolio with various stock/bond allocations, and then a World portfolio with various stock and bond mixes. The issue? Never the twain shall meet. Meaning, I did not see what happens to RAS or D-RAS when you are a US based investor and you have an allocation to international.

If Mr. Swedroe or Mr. Estrada sees this post, I am wondering if there is data that looked at adding in an int'l equity allocation and then calculating RAS and D-RAS. Does having a portion of your portfolio in int'l equities drive D-RAS higher? I would assume an index fund like FTIPX for international equities.
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Re: Larry Swedroe: What If Your Plan Fails?

Post by wrongfunds » Tue Jun 19, 2018 9:35 am

AtlasShrugged? wrote:
Tue Jun 19, 2018 6:16 am
Bogleheads....reviving this thread. I reread the article from Larry, and then I took a look at Estrada's paper. And I thought about RAS and D-RAS. Pretty nifty metric, particularly D-RAS. I really would like to see a more in-depth examination of D-RAS.

In the paper (pretty dense on math), Estrada analyzes a US-based portfolio with various stock/bond allocations, and then a World portfolio with various stock and bond mixes. The issue? Never the twain shall meet. Meaning, I did not see what happens to RAS or D-RAS when you are a US based investor and you have an allocation to international.

If Mr. Swedroe or Mr. Estrada sees this post, I am wondering if there is data that looked at adding in an int'l equity allocation and then calculating RAS and D-RAS. Does having a portion of your portfolio in int'l equities drive D-RAS higher? I would assume an index fund like FTIPX for international equities.
Suppose you get all the mathematical answers that you are looking for.

Then what? How would you be able to make use of that information? To ask this differently, how does knowing the answer to nth precision about the past events allow you to solve the future issues?

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Re: Larry Swedroe: What If Your Plan Fails?

Post by SeeMoe » Tue Jun 19, 2018 3:10 pm

Even though our pensions more than pay for our expenses and medical insurance, we still have a 45/55 retiree folio and 100% bonds in the TIRA accounts for the end of year RMD’s. The RMD’s and excess pension monies are reinvested in the taxable folio. But this year more is going into the Prime MM fund. Am considering short term bonds like our Limited tax exempt fund getting more bucks for safety...also.

SeeMoe.. :mrgreen:
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