I survived the 'sequence of returns risk'

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tennisplyr
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I survived the 'sequence of returns risk'

Post by tennisplyr »

I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
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Re: I survived the 'sequence of returns risk'

Post by sailaway »

What have you been using to determine withdrawals up until now?
B. Wellington
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Re: I survived the 'sequence of returns risk'

Post by B. Wellington »

tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
balbrec2
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Re: I survived the 'sequence of returns risk'

Post by balbrec2 »

B. Wellington wrote: Thu Aug 27, 2020 7:12 am tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
+1
McDougal
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Re: I survived the 'sequence of returns risk'

Post by McDougal »

Watching with interest. Planning on retiring in 2021 and SOR is probably my biggest fear.
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midareff
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Re: I survived the 'sequence of returns risk'

Post by midareff »

tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Very similar, retired April 2012, quite the ride upwards since then. FWIW, I use the VPW as a guide adjusting the end point for my wife (younger) at 103.
Fortunately I have a pension and SS which can pay all our bills, we live modestly, and the portfolio is used for international travel which isn't happening this year and maybe next so just building cash. Portfolio runs in the 50/50 AA area and WR has averaged 4% as measured against each year's closing balance, while annual returns have averaged 9.1%. It has been an exceptional time for Mr. Market.
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tennisplyr
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Re: I survived the 'sequence of returns risk'

Post by tennisplyr »

B. Wellington wrote: Thu Aug 27, 2020 7:12 am tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
My withdrawals have been based on what I need....typically 4-6%. My AA is ~50/50, been taking SS since I turned 62, no pension and have always reinvested all dividends/gains.
Those who move forward with a happy spirit will find that things always work out.
wanderer
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Re: I survived the 'sequence of returns risk'

Post by wanderer »

We retired in 2013, set course with a 50/50 AA and budget plan. We have also been blessed by a generally positive tailwind to date. I too feel the winds might be shifting, but feel uncertain of an appropriate "tack" (using the sailing definition). We have a comfortable AA/budget for us and our sails still seem full, so continue to hold course.
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Re: I survived the 'sequence of returns risk'

Post by Dude2 »

More importantly, are you still playing Tennis? If so, good for you, especially with Covid messing us up. I used to work in a thrift store with individuals in their 70's and 80's that were still playing. Hope to be one of them one day.

My take on SOR risk is that it is scariest at the beginning, like you are saying. That's just math related to the probability that you will outlive your portfolio. If the bad stuff happens early, then there's a higher likelihood the money runs out. As the runway gets shorter and you still have your nest egg, the probability is lower. If the bad stuff happens in the middle or toward the end, you may still not run out. It's kind of common sense when stated that way. The bad stuff didn't happen early, hooray.

Not much you can do about it now. The answer would have been to have had a larger nest egg in the beginning. I think now all you can do is be as frugal as is practical if you're worried about running out.

Appreciate the data that you took SS at 62.5.
Then ’tis like the breath of an unfee’d lawyer.
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Watty
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Re: I survived the 'sequence of returns risk'

Post by Watty »

tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
I am in a similar situation.

I retired in 2015 just before I turned 59 so I knew that I would have six years to pay for healthcare before I could get on Medicare. My investment income needs will also go down a lot when I eventually start Social Security and I may start that when I reach my full retirement age of 66 years 4 months(lots of details on that decision).

Combined I knew that my first six or seven years of retirement would be my most most expensive. I am pretty well though that now and I have only spent my portfolio down a modest amount. My home value has also increased so my total net worth is about the same as when I retired.

So far this has not really impacted my spending much because we had already budgeted for what we wanted to spend. I didn't really see any reason to spend much more just because our numbers were looking good.

A few examples of where doing well might make a difference are;

Before the pandemic limited travel we might have spent just a bit more on travel by doing things like staying at a bit nicer hotels because the finances were doing well but that was not a huge amount.

One big splurge is that I have a kitchen faucet and a leaky cutoff valve that needs to be replaced. I could do that myself but working under and behind the sink is a pain so I am going to pay a plumber to do that which makes me feel a bit decadent. :D

We are still talking about moving to a different retirement home that does not have any steps and is easier to maintain and if we do that then we might spend a bit more but that would be a one time expense.
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Re: I survived the 'sequence of returns risk'

Post by Bill2020 »

At what point can one safely assume that they survived SRR? I assume there is both a time element (ie. years left in life expectancy) and a portfolio growth element (ie. current portfolio versus starting value in real dollars).

1) Retired with $2M and have $1M (real) at age 100.

2) Retire with $2M and have $xM (real) y years into retirement.
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Re: I survived the 'sequence of returns risk'

Post by smitcat »

Bill2020 wrote: Thu Aug 27, 2020 2:53 pm At what point can one safely assume that they survived SRR? I assume there is both a time element (ie. years left in life expectancy) and a portfolio growth element (ie. current portfolio versus starting value in real dollars).

1) Retired with $2M and have $1M (real) at age 100.

2) Retire with $2M and have $xM (real) y years into retirement.
The two key parameters would be the rate of withdrawal and the remaining duration of the draw.
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
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: I survived the 'sequence of returns risk'

Post by tennisplyr »

Technically maybe never. I've heard it usually referred to as an 'early in retirement' issue. I'm almost 10 years in, I think that's a good gauge.
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Re: I survived the 'sequence of returns risk'

Post by willthrill81 »

Bill2020 wrote: Thu Aug 27, 2020 2:53 pm At what point can one safely assume that they survived SRR?
Historically, the first 15 years of real returns have been very strongly correlated with the 30 year safe withdrawal rate. Basically, those returns have determined what the safe withdrawal rate would be. So by around year 15, you're pretty much over the worst of the SRR hurdle, assuming that those real returns have been good (at least 1% real).

That said, no one is actually rigidly following a SWR approach and for very good reason. At least some amount of flexibility with regard to withdrawals is a must.

To the extent that one's withdrawals are flexible, the impact of SRR 'transfers' from one's portfolio to one's withdrawals. With a fixed percentage-of-portfolio withdrawal approach, the ending portfolio value is the same no matter what the sequence of returns is, though the total amount withdrawn will vary. Therefore, SRR impacts your withdrawals, not your portfolio.
tennisplyr wrote: Thu Aug 27, 2020 3:13 pm Technically maybe never. I've heard it usually referred to as an 'early in retirement' issue. I'm almost 10 years in, I think that's a good gauge.
If you're using a SWR approach and planning for a 30 year retirement, 15 years have historically been the approximate line of demarcation. But you're using a more flexible approach, which reduces the risk of portfolio ruin by transferring SRR to your withdrawals. As such, the amount of your withdrawals will vary as long as you keep making them, presumably until you die.
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Re: I survived the 'sequence of returns risk'

Post by willthrill81 »

marcopolo wrote: Thu Aug 27, 2020 3:02 pm As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
To the extent that your withdrawals are flexible, which they certainly should be to at least some extent, SRR never goes away. The amount of your withdrawals will vary depending upon the sequence of returns that you experience, the very definition of the risk. That said, if your portfolio grows at a faster pace than do your withdrawals, the likelihood of that SRR really hurting you goes down.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: I survived the 'sequence of returns risk'

Post by MathIsMyWayr »

Doesn't the SRR clock reset everyday with a new portfolio balance and an updated life expectancy? It shouldn't be like the last hill to climb.
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Re: I survived the 'sequence of returns risk'

Post by willthrill81 »

MathIsMyWayr wrote: Thu Aug 27, 2020 3:30 pm Doesn't the SRR clock reset everyday with a new portfolio balance and an updated life expectancy? It shouldn't be like the last hill to climb.
As I noted above, it depends on the withdrawal method being used. If you were using a safe withdrawal rate approach (i.e. starting off withdrawing something like 4% of the initial portfolio balance and subsequently withdrawing that same dollar amount, adjusted for inflation, in subsequent years), then the historic odds were very high that after 15 years, your portfolio at a point where funding the remaining 15 years of withdrawals was very easy, even with poor returns. But if your withdrawals are flexible, they bear the brunt of SRR rather than your portfolio, and, consequently, those withdrawals will forever be subject to SRR.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: I survived the 'sequence of returns risk'

Post by redmaw »

This is one of the most analyticalmsites I've found, and he recently asked the same question :

https://earlyretirementnow.com/2020/07/ ... s-part-38/

He ends the article with:

". Think of your retirement as in the movie “Groundhog Day”: every day is your first day in retirement again. And since this is your new imaginary first day in retirement again, you face a renewed Sequence of Return Risk again over the next roughly 10 years! Sorry: Sequence. Risk. Will. Not. Go. Away!"
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Re: I survived the 'sequence of returns risk'

Post by palanzo »

Bill2020 wrote: Thu Aug 27, 2020 2:53 pm At what point can one safely assume that they survived SRR? I assume there is both a time element (ie. years left in life expectancy) and a portfolio growth element (ie. current portfolio versus starting value in real dollars).

1) Retired with $2M and have $1M (real) at age 100.

2) Retire with $2M and have $xM (real) y years into retirement.
I think you will have survived SRR with Option 1 :mrgreen:
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Re: I survived the 'sequence of returns risk'

Post by wawoodjr »

tennisplyr wrote: Thu Aug 27, 2020 7:31 am
B. Wellington wrote: Thu Aug 27, 2020 7:12 am tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
My withdrawals have been based on what I need....typically 4-6%. My AA is ~50/50, been taking SS since I turned 62, no pension and have always reinvested all dividends/gains.
I retired 5 years ago. I am cautiously aware of SORR, but less susceptible to it because of a conservative withdrawal rate of 2.0-2.5%. Every year that goes by I feel a little better about SORR and can see extra splurging in my future with an increasing withdrawal rate.

I am curious why you are reinvesting dividends in retirement. That's my first source of income monthly or quarterly.
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Re: I survived the 'sequence of returns risk'

Post by hoops777 »

Maybe you survived it when you realize the amount of money you need to withdraw yearly is very low and you have no concerns about the stock market.
K.I.S.S........so easy to say so difficult to do.
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Re: I survived the 'sequence of returns risk'

Post by tennisplyr »

wawoodjr wrote: Thu Aug 27, 2020 4:56 pm
tennisplyr wrote: Thu Aug 27, 2020 7:31 am
B. Wellington wrote: Thu Aug 27, 2020 7:12 am tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
My withdrawals have been based on what I need....typically 4-6%. My AA is ~50/50, been taking SS since I turned 62, no pension and have always reinvested all dividends/gains.
I retired 5 years ago. I am cautiously aware of SORR, but less susceptible to it because of a conservative withdrawal rate of 2.0-2.5%. Every year that goes by I feel a little better about SORR and can see extra splurging in my future with an increasing withdrawal rate.

I am curious why you are reinvesting dividends in retirement. That's my first source of income monthly or quarterly.

Old school, like the power of compounding....I sell shares for money I need.
Those who move forward with a happy spirit will find that things always work out.
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Re: I survived the 'sequence of returns risk'

Post by Monster99 »

hoops777 wrote: Thu Aug 27, 2020 4:58 pm Maybe you survived it when you realize the amount of money you need to withdraw yearly is very low and you have no concerns about the stock market.
+1
I realized it when I had money left in the sweep account after dividends were deposited - My withdrawal rate was less than 2%.... :sharebeer
marcopolo
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

tennisplyr wrote: Thu Aug 27, 2020 5:56 pm
wawoodjr wrote: Thu Aug 27, 2020 4:56 pm
tennisplyr wrote: Thu Aug 27, 2020 7:31 am
B. Wellington wrote: Thu Aug 27, 2020 7:12 am tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
My withdrawals have been based on what I need....typically 4-6%. My AA is ~50/50, been taking SS since I turned 62, no pension and have always reinvested all dividends/gains.
I retired 5 years ago. I am cautiously aware of SORR, but less susceptible to it because of a conservative withdrawal rate of 2.0-2.5%. Every year that goes by I feel a little better about SORR and can see extra splurging in my future with an increasing withdrawal rate.

I am curious why you are reinvesting dividends in retirement. That's my first source of income monthly or quarterly.

Old school, like the power of compounding....I sell shares for money I need.
If you are doing this in a taxable account, you may be paying more taxes than you would need to otherwise.
Once in a while you get shown the light, in the strangest of places if you look at it right.
hoops777
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Re: I survived the 'sequence of returns risk'

Post by hoops777 »

Monster99 wrote: Thu Aug 27, 2020 6:03 pm
hoops777 wrote: Thu Aug 27, 2020 4:58 pm Maybe you survived it when you realize the amount of money you need to withdraw yearly is very low and you have no concerns about the stock market.
+1
I realized it when I had money left in the sweep account after dividends were deposited - My withdrawal rate was less than 2%.... :sharebeer
Yep. That is the way you ease your worries if you are inclined to worry.
K.I.S.S........so easy to say so difficult to do.
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Re: I survived the 'sequence of returns risk'

Post by willthrill81 »

marcopolo wrote: Thu Aug 27, 2020 6:06 pm
tennisplyr wrote: Thu Aug 27, 2020 5:56 pm
wawoodjr wrote: Thu Aug 27, 2020 4:56 pm
tennisplyr wrote: Thu Aug 27, 2020 7:31 am
B. Wellington wrote: Thu Aug 27, 2020 7:12 am tennisplyr, other members (new and old) might find it helpful if you could share your "income strategy" if any, during those years. Average WR, AA, any pensions, and/or SS. Harvesting dividends and/or capital gains. :beer
My withdrawals have been based on what I need....typically 4-6%. My AA is ~50/50, been taking SS since I turned 62, no pension and have always reinvested all dividends/gains.
I retired 5 years ago. I am cautiously aware of SORR, but less susceptible to it because of a conservative withdrawal rate of 2.0-2.5%. Every year that goes by I feel a little better about SORR and can see extra splurging in my future with an increasing withdrawal rate.

I am curious why you are reinvesting dividends in retirement. That's my first source of income monthly or quarterly.

Old school, like the power of compounding....I sell shares for money I need.
If you are doing this in a taxable account, you may be paying more taxes than you would need to otherwise.
How so?

If he's in the 12% federal tax bracket, then LTCG are not taxed at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
marcopolo
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

willthrill81 wrote: Thu Aug 27, 2020 6:37 pm
marcopolo wrote: Thu Aug 27, 2020 6:06 pm
tennisplyr wrote: Thu Aug 27, 2020 5:56 pm
wawoodjr wrote: Thu Aug 27, 2020 4:56 pm
tennisplyr wrote: Thu Aug 27, 2020 7:31 am

My withdrawals have been based on what I need....typically 4-6%. My AA is ~50/50, been taking SS since I turned 62, no pension and have always reinvested all dividends/gains.
I retired 5 years ago. I am cautiously aware of SORR, but less susceptible to it because of a conservative withdrawal rate of 2.0-2.5%. Every year that goes by I feel a little better about SORR and can see extra splurging in my future with an increasing withdrawal rate.

I am curious why you are reinvesting dividends in retirement. That's my first source of income monthly or quarterly.

Old school, like the power of compounding....I sell shares for money I need.
If you are doing this in a taxable account, you may be paying more taxes than you would need to otherwise.
How so?

If he's in the 12% federal tax bracket, then LTCG are not taxed at all.
Do we know that OP is in 12% tax bracket?

Do we know that all his holding are LT?
Certainly the reinvested shares are not.
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: I survived the 'sequence of returns risk'

Post by willthrill81 »

marcopolo wrote: Thu Aug 27, 2020 6:54 pm
willthrill81 wrote: Thu Aug 27, 2020 6:37 pm
marcopolo wrote: Thu Aug 27, 2020 6:06 pm
tennisplyr wrote: Thu Aug 27, 2020 5:56 pm
wawoodjr wrote: Thu Aug 27, 2020 4:56 pm
I retired 5 years ago. I am cautiously aware of SORR, but less susceptible to it because of a conservative withdrawal rate of 2.0-2.5%. Every year that goes by I feel a little better about SORR and can see extra splurging in my future with an increasing withdrawal rate.

I am curious why you are reinvesting dividends in retirement. That's my first source of income monthly or quarterly.

Old school, like the power of compounding....I sell shares for money I need.
If you are doing this in a taxable account, you may be paying more taxes than you would need to otherwise.
How so?

If he's in the 12% federal tax bracket, then LTCG are not taxed at all.
Do we know that OP is in 12% tax bracket?

Do we know that all his holding are LT?
Certainly the reinvested shares are not.
No, we don't know either of those things, but as a result, we don't know that the OP is paying more in taxes that needed.

Certainly it wouldn't make sense to reinvest shares and then sell them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
marcopolo
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

willthrill81 wrote: Thu Aug 27, 2020 6:56 pm
marcopolo wrote: Thu Aug 27, 2020 6:54 pm
willthrill81 wrote: Thu Aug 27, 2020 6:37 pm
marcopolo wrote: Thu Aug 27, 2020 6:06 pm
tennisplyr wrote: Thu Aug 27, 2020 5:56 pm


Old school, like the power of compounding....I sell shares for money I need.
If you are doing this in a taxable account, you may be paying more taxes than you would need to otherwise.
How so?

If he's in the 12% federal tax bracket, then LTCG are not taxed at all.
Do we know that OP is in 12% tax bracket?

Do we know that all his holding are LT?
Certainly the reinvested shares are not.
No, we don't know either of those things, but as a result, we don't know that the OP is paying more in taxes that needed.

Certainly it wouldn't make sense to reinvest shares and then sell them.
So, perhaps you missed the word "may" in my response.

There is no advantage that I can think of to reinvesting dividends in taxable account to then turn around and sell shares to fund expenses. It only has possible negative consequences, which may or may not be significant.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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HomerJ
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Re: I survived the 'sequence of returns risk'

Post by HomerJ »

marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
Well, if one has GOOD years for the first 5-10 years after retiring, I would assume your portfolio would be a good amount larger.

If I retired with $1 million, pulling $40,000 and 10 years later, after withdrawals, I was up to $2 million and only pulling $60k (from inflation), I'd feel like I had beaten SORR.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: I survived the 'sequence of returns risk'

Post by willthrill81 »

marcopolo wrote: Thu Aug 27, 2020 7:00 pm
willthrill81 wrote: Thu Aug 27, 2020 6:56 pm
marcopolo wrote: Thu Aug 27, 2020 6:54 pm
willthrill81 wrote: Thu Aug 27, 2020 6:37 pm
marcopolo wrote: Thu Aug 27, 2020 6:06 pm

If you are doing this in a taxable account, you may be paying more taxes than you would need to otherwise.
How so?

If he's in the 12% federal tax bracket, then LTCG are not taxed at all.
Do we know that OP is in 12% tax bracket?

Do we know that all his holding are LT?
Certainly the reinvested shares are not.
No, we don't know either of those things, but as a result, we don't know that the OP is paying more in taxes that needed.

Certainly it wouldn't make sense to reinvest shares and then sell them.
So, perhaps you missed the word "may" in my response.

There is no advantage that I can think of to reinvesting dividends in taxable account to then turn around and sell shares to fund expenses. It only has possible negative consequences, which may or may not be significant.
Yes, I missed the 'may'.

I agree.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
marcopolo
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

HomerJ wrote: Thu Aug 27, 2020 7:03 pm
marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
Well, if one has GOOD years for the first 5-10 years after retiring, I would assume your portfolio would be a good amount larger.

If I retired with $1 million, pulling $40,000 and 10 years later, after withdrawals, I was up to $2 million and only pulling $60k (from inflation), I'd feel like I had beaten SORR.
Definitely puts one in a better place. If one is 10 years into a 30 year retirement, that seems good enough to declare victory. But, if one is 10 years into a 45 or 50 year retirement, it may be less clear cut.
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HomerJ
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Re: I survived the 'sequence of returns risk'

Post by HomerJ »

marcopolo wrote: Thu Aug 27, 2020 7:08 pm
HomerJ wrote: Thu Aug 27, 2020 7:03 pm
marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
Well, if one has GOOD years for the first 5-10 years after retiring, I would assume your portfolio would be a good amount larger.

If I retired with $1 million, pulling $40,000 and 10 years later, after withdrawals, I was up to $2 million and only pulling $60k (from inflation), I'd feel like I had beaten SORR.
Definitely puts one in a better place. If one is 10 years into a 30 year retirement, that seems good enough to declare victory. But, if one is 10 years into a 45 or 50 year retirement, it may be less clear cut.
You make a good point. Still got to feel somewhat better to be breaking even or hopefully even up after first 10 years.
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Re: I survived the 'sequence of returns risk'

Post by Peter Foley »

redmaw quoted:
Think of your retirement as in the movie “Groundhog Day”: every day is your first day in retirement again. And since this is your new imaginary first day in retirement again, you face a renewed Sequence of Return Risk again over the next roughly 10 years! Sorry: Sequence. Risk. Will. Not. Go. Away!"
I disagree. We retired in 2012 with no debt and my pension that covered about half of our essential expenses. We were invested at 45/55 when we retired and followed a rising equity glide path to about 55/45. We live fairly frugally although we don't deny ourselves life experiences. Our net worth has increased substantially (good sequence of returns as all our investments are in large index funds and stable value funds). This year I will take SS benefits that I deferred until age 70. Pension plus SS benefits for my wife and me will more than cover our annual expenses. I do not see that we have any real sequence of return risk.
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Re: I survived the 'sequence of returns risk'

Post by Bill2020 »

willthrill81 wrote: Thu Aug 27, 2020 3:39 pm
MathIsMyWayr wrote: Thu Aug 27, 2020 3:30 pm Doesn't the SRR clock reset everyday with a new portfolio balance and an updated life expectancy? It shouldn't be like the last hill to climb.
As I noted above, it depends on the withdrawal method being used. If you were using a safe withdrawal rate approach (i.e. starting off withdrawing something like 4% of the initial portfolio balance and subsequently withdrawing that same dollar amount, adjusted for inflation, in subsequent years), then the historic odds were very high that after 15 years, your portfolio at a point where funding the remaining 15 years of withdrawals was very easy, even with poor returns. But if your withdrawals are flexible, they bear the brunt of SRR rather than your portfolio, and, consequently, those withdrawals will forever be subject to SRR.
According to the Early Retirement Now SWR series the actual safe withdraw rate is less than 4% and depends on time horizon, AA, desired portfolio balance when you kick the bucket, and several other factors.

I started out with about a 3.5% withdraw rate and adjust for inflation every January. With investment returns I'm now under 3% withdraw. If I have similar returns (insert praying hands emoji) and only adjust withdraws for inflation (ignoring hyper inflation for this discussion) then at some point my portfolio balance would reach a point where even a dot com or GFC drawdown would have no impact.

I agree using variable withdraw you are always going to be subject to return risk, but in the amount of your withdraw, not portfolio longevity.
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Re: I survived the 'sequence of returns risk'

Post by Bill2020 »

Peter Foley wrote: Thu Aug 27, 2020 7:58 pm redmaw quoted:
Think of your retirement as in the movie “Groundhog Day”: every day is your first day in retirement again. And since this is your new imaginary first day in retirement again, you face a renewed Sequence of Return Risk again over the next roughly 10 years! Sorry: Sequence. Risk. Will. Not. Go. Away!"
I disagree. We retired in 2012 with no debt and my pension that covered about half of our essential expenses. We were invested at 45/55 when we retired and followed a rising equity glide path to about 55/45. We live fairly frugally although we don't deny ourselves life experiences. Our net worth has increased substantially (good sequence of returns as all our investments are in large index funds and stable value funds). This year I will take SS benefits that I deferred until age 70. Pension plus SS benefits for my wife and me will more than cover our annual expenses. I do not see that we have any real sequence of return risk.
I agree 100%, although we have a slightly more aggressive AA at about 70/30. My hope is that by the time I start collecting my pension and both of us are on Medicare and get rid of $20,000/year medical insurance (less any medicare supplemental) we will have survived SORR. Collecting my SS @ 70 will just be gravy. But I'm in no hurry to get to those milestones. :mrgreen:
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

HomerJ wrote: Thu Aug 27, 2020 7:42 pm
marcopolo wrote: Thu Aug 27, 2020 7:08 pm
HomerJ wrote: Thu Aug 27, 2020 7:03 pm
marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
Well, if one has GOOD years for the first 5-10 years after retiring, I would assume your portfolio would be a good amount larger.

If I retired with $1 million, pulling $40,000 and 10 years later, after withdrawals, I was up to $2 million and only pulling $60k (from inflation), I'd feel like I had beaten SORR.
Definitely puts one in a better place. If one is 10 years into a 30 year retirement, that seems good enough to declare victory. But, if one is 10 years into a 45 or 50 year retirement, it may be less clear cut.
You make a good point. Still got to feel somewhat better to be breaking even or hopefully even up after first 10 years.
Agreed. Sure hope we are in that situation in 7-8 years from now (2.5 years into retirement now).
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Re: I survived the 'sequence of returns risk'

Post by AlohaJoe »

marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
As mentioned by others, it is a function of time left and the current withdrawal amount. We can look at how the "safe withdrawal rate" varies by time remaining (this is assuming a 60/40 portfolio):

Image

Of course, this comes with all the usual SWR caveats. Nobody withdraws exactly inflation-adjusted amounts, people die instead of living exactly as long as the simulation says, etc, etc, etc.

That said, the OP mentioned withdrawing 6% of their portfolio which is getting into riskier amounts. Another way to look at it is, when you have 20 years left of retirement (i.e. you've been retired 10 years), what's the risk of failure for various current withdrawal amounts?

Image

If you're withdrawing 6% of your portfolio after 10 years of retirement then there's a 20% chance it'll be exhausted before the 20 years are up.

A pretty decent rule of thumb is that if your current withdrawal rate is much more than 4% of your portfolio in the first 10-15 years of retirement you should consider reducing expenses. You don't need to make a knee-jerk reaction after 1 year but if it continues for 2-3 years you should probably be making adjustments.

If you're further into retirement then if you're withdrawing more than 6% of the current value of your portfolio for more than a year or two, you should probably consider adjustments to your spending.

A slightly more rigorous way to see if you're "at risk" of SORR is to compare your current withdrawal rate to the amount that VPW or another PMT-based solution would let you withdraw at a given point in retirement. If you're withdrawing more than that says then you are "at risk" and implicitly counting on some kind of mean reversion in the stock market to bounce back and save you.

You can just look at the table here: https://www.bogleheads.org/wiki/Variabl ... #VPW_Table
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Re: I survived the 'sequence of returns risk'

Post by tennisplyr »

HomerJ wrote: Thu Aug 27, 2020 7:03 pm
marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
Well, if one has GOOD years for the first 5-10 years after retiring, I would assume your portfolio would be a good amount larger.

If I retired with $1 million, pulling $40,000 and 10 years later, after withdrawals, I was up to $2 million and only pulling $60k (from inflation), I'd feel like I had beaten SORR.

You got it. :beer
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Re: I survived the 'sequence of returns risk'

Post by hoops777 »

I think the answer is so simple that it just stares you in the face. You have a scale of SWR say going from 6 pct down to zero.
The lower your rate the less you have to worry about SORR.
K.I.S.S........so easy to say so difficult to do.
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Re: I survived the 'sequence of returns risk'

Post by marcopolo »

AlohaJoe wrote: Thu Aug 27, 2020 10:08 pm
marcopolo wrote: Thu Aug 27, 2020 3:02 pm
tennisplyr wrote: Thu Aug 27, 2020 7:00 am I retired in 2011, and luckily, have been on a pretty good ride in the market since then. So, since I was not negatively affected by the sequence risk, what can I expect/how might this impact my withdrawals going forward?
Curious how one determines when they have survived SORR. What criteria did you use to declare victory on that risk?

As an early retiree I get the feeling my SORR danger zone is longer than the 10 years people normally use for SORR. But, I don't know how to quantify it.
As mentioned by others, it is a function of time left and the current withdrawal amount. We can look at how the "safe withdrawal rate" varies by time remaining (this is assuming a 60/40 portfolio):

Image

Of course, this comes with all the usual SWR caveats. Nobody withdraws exactly inflation-adjusted amounts, people die instead of living exactly as long as the simulation says, etc, etc, etc.

That said, the OP mentioned withdrawing 6% of their portfolio which is getting into riskier amounts. Another way to look at it is, when you have 20 years left of retirement (i.e. you've been retired 10 years), what's the risk of failure for various current withdrawal amounts?

Image

If you're withdrawing 6% of your portfolio after 10 years of retirement then there's a 20% chance it'll be exhausted before the 20 years are up.

A pretty decent rule of thumb is that if your current withdrawal rate is much more than 4% of your portfolio in the first 10-15 years of retirement you should consider reducing expenses. You don't need to make a knee-jerk reaction after 1 year but if it continues for 2-3 years you should probably be making adjustments.

If you're further into retirement then if you're withdrawing more than 6% of the current value of your portfolio for more than a year or two, you should probably consider adjustments to your spending.

A slightly more rigorous way to see if you're "at risk" of SORR is to compare your current withdrawal rate to the amount that VPW or another PMT-based solution would let you withdraw at a given point in retirement. If you're withdrawing more than that says then you are "at risk" and implicitly counting on some kind of mean reversion in the stock market to bounce back and save you.

You can just look at the table here: https://www.bogleheads.org/wiki/Variabl ... #VPW_Table
Thanks for the analysis, that is a good way to think about it.

We are planning to do a PMT based approach once we have to start drawing from our portfolio in earnest. We are only a couple years into retirement and have relied mostly deferred comp so far for our living expenses.

Analysis like this helps us get comfortable as we prepare to start drawing more substantial amounts out of our portfolio. Thanks.
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redmaw
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Re: I survived the 'sequence of returns risk'

Post by redmaw »

Peter Foley wrote: Thu Aug 27, 2020 7:58 pm redmaw quoted:
Think of your retirement as in the movie “Groundhog Day”: every day is your first day in retirement again. And since this is your new imaginary first day in retirement again, you face a renewed Sequence of Return Risk again over the next roughly 10 years! Sorry: Sequence. Risk. Will. Not. Go. Away!"
I disagree. We retired in 2012 with no debt and my pension that covered about half of our essential expenses. We were invested at 45/55 when we retired and followed a rising equity glide path to about 55/45. We live fairly frugally although we don't deny ourselves life experiences. Our net worth has increased substantially (good sequence of returns as all our investments are in large index funds and stable value funds). This year I will take SS benefits that I deferred until age 70. Pension plus SS benefits for my wife and me will more than cover our annual expenses. I do not see that we have any real sequence of return risk.
2 points

if you read the whole article, the basic conclusion is that you can't pick a time period after which SORR no longer effects you. This was to refute some of the earlier findings that sorr goes away after 10years. It just doesn't really work that way.

I think you are looking at risk wrong. Sorr reflects the fact that over a period of time when you are withdrawing if poor returns proceed good returns you will have a lower balance at the end of the term than expected based on the average return over that period. You may grow your portfolio large enough that this effect no longer worries you, but it's still a riskin the same way stocks are still risky, even if have an enormous amount of money.

That doesn't mean you can't grow your portfolio enough that you will survive any concievable sequence of returns.
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