What Am I Missing Here

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cresive
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What Am I Missing Here

Post by cresive » Tue May 14, 2019 9:53 am

Okay, time for another of my weird hypothetical situations. There is a reason I am posing this scenario and it isn't totally hypothetical, but I am trying to gain a consensus and ask if there is a major, or even minor, issue with my supposition. I am planning for a major sequence of return issue with my retirement date.


Scenario: It is 10 years from today and I am retiring in June (age about 67). Unfortunately for me, the market tanks in July of the same year. My savings are:
Tax-deferred Savings: $2M in a 60% equity/40% bond asset allocation, all mutual funds. About half bonds are T-bill based. All bonds are short-intermediate-term funds.
Cash Savings: for this exercise, I have limited cash on hand
SSA benefits: I plan to take SSA the day I retire. Yearly income from SSA is approximately $35,000
Pension: $15,000/ year
Royalty Income: (variable) but averages about $12,000/year

Game plan:
The day I retire, I will reduce my essential expenses to live within my guaranteed income which I estimate as: SSA ($35K) plus Pension ($15K) plus 1/2 royalties ($6K) or $56,000. This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.

If I require additional income, I will withdraw from my bond allocation so I don't eat losses from sustained by my equity allocation. I estimate my bond allocation to be approximately $800,000 total. I am assuming minimal loss from this allocation, even though it IS in a mutual fund and NOT a bond ladder. If I get 4% return on this, I should be able to add $32,000 to my needed income above.

This should yield a sustainable income of almost $88,000 that I can live on until the market recovers. Once the market recovers, I can tap my stocks and bond funds to fund my retirement.

For some reason, I think I am missing something major. I realize my bond funds may also lose money, but that will only reduce my income about 10% or so. I also plan to have a few dollars in cash reserves, so that will cover any bond losses or reduced income from the bonds. Do you think I can be confident on my math? Does anyone know about bonds tanking in a market? Have I missed something, or have I cracked the sequence of returns risk issue?

Thanks,
Ben

sjt
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Re: What Am I Missing Here

Post by sjt » Tue May 14, 2019 10:01 am

cresive wrote:
Tue May 14, 2019 9:53 am
The day I retire, I will reduce my essential expenses to live within my guaranteed income:... $56,000.

This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.
No mortgage, no car payments, what in the world are you going to spend $56k on? I think you should look at how to retire earlier.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

Living Free
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Re: What Am I Missing Here

Post by Living Free » Tue May 14, 2019 10:07 am

cresive wrote:
Tue May 14, 2019 9:53 am


If I require additional income, I will withdraw from my bond allocation so I don't eat losses from sustained by my equity allocation. I estimate my bond allocation to be approximately $800,000 total. I am assuming minimal loss from this allocation, even though it IS in a mutual fund and NOT a bond ladder. If I get 4% return on this, I should be able to add $32,000 to my needed income above.

$32,000/$2million = 1.6%. If you're so worried about the stock risk you could even reduce stock proportion of your portfolio a bit and should still be ok with such a low withdrawal rate.

KlangFool
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Re: What Am I Missing Here

Post by KlangFool » Tue May 14, 2019 10:14 am

OP,

There are multiple flaws in your thinking.

A) If you have 2 million portfolios and you only need 36K from the portfolio, you are withdrawing less than 2%. You do not have a sequence of return risk. So, why you care whether you withdraw from stock or bond? Why do you need to sell anything? The dividend/interest is big enough to cover the 2%.

B) Cash is a good thing. You need it to manage your tax. You may convert more or less your tax-deferred account depending on tax-efficiency.

C) It is very simple. Roth converts your tax-deferred portfolio to achieve minimal tax. Live on your dividend/interest. You do not have to sell anything.

D) In fact, you may keep your AA at 60/40 forever. Regardless of the bull or bear market.

KlangFool

cherijoh
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Re: What Am I Missing Here

Post by cherijoh » Tue May 14, 2019 10:35 am

cresive wrote:
Tue May 14, 2019 9:53 am
Okay, time for another of my weird hypothetical situations. There is a reason I am posing this scenario and it isn't totally hypothetical, but I am trying to gain a consensus and ask if there is a major, or even minor, issue with my supposition. I am planning for a major sequence of return issue with my retirement date.


Scenario: It is 10 years from today and I am retiring in June (age about 67). Unfortunately for me, the market tanks in July of the same year. My savings are:
Tax-deferred Savings: $2M in a 60% equity/40% bond asset allocation, all mutual funds. About half bonds are T-bill based. All bonds are short-intermediate-term funds.
Cash Savings: for this exercise, I have limited cash on hand
SSA benefits: I plan to take SSA the day I retire. Yearly income from SSA is approximately $35,000
Pension: $15,000/ year
Royalty Income: (variable) but averages about $12,000/year

Game plan:
The day I retire, I will reduce my essential expenses to live within my guaranteed income which I estimate as: SSA ($35K) plus Pension ($15K) plus 1/2 royalties ($6K) or $56,000. This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.

If I require additional income, I will withdraw from my bond allocation so I don't eat losses from sustained by my equity allocation. I estimate my bond allocation to be approximately $800,000 total. I am assuming minimal loss from this allocation, even though it IS in a mutual fund and NOT a bond ladder. If I get 4% return on this, I should be able to add $32,000 to my needed income above.

This should yield a sustainable income of almost $88,000 that I can live on until the market recovers. Once the market recovers, I can tap my stocks and bond funds to fund my retirement.

For some reason, I think I am missing something major. I realize my bond funds may also lose money, but that will only reduce my income about 10% or so. I also plan to have a few dollars in cash reserves, so that will cover any bond losses or reduced income from the bonds. Do you think I can be confident on my math? Does anyone know about bonds tanking in a market? Have I missed something, or have I cracked the sequence of returns risk issue?

Thanks,
Ben
How did you come up with a 4% return on a mix of short- and intermediate-term bond funds? This seems very unrealistic to me for a very low risk bond portfolio unless inflation is rampant - in which case you have other problems.

Also it isn't clear to me why you wouildn't actually be selling bond funds to cover expenses. The best solution for sequence of return risk is to be able to adjust spending so that your withdrawl rate from your portfolio is quite low. If you only need $32K from a $2M portfolio then you shouldn't worrry. But just don't expect to get that amount strictly from dividends on your bond funds.

Bond prices tank (assuming Treasury or high grade corporate) primarily in response to changes in interest rate. If a newly issued bond is paying more than an exisiting issue, the price of the existing issue will fall. Conversely, if your exisiting issue bond is paying a higher rate, its price will increease.

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jeffyscott
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Re: What Am I Missing Here

Post by jeffyscott » Tue May 14, 2019 10:54 am

sjt wrote:
Tue May 14, 2019 10:01 am
cresive wrote:
Tue May 14, 2019 9:53 am
The day I retire, I will reduce my essential expenses to live within my guaranteed income:... $56,000.

This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.
No mortgage, no car payments, what in the world are you going to spend $56k on? I think you should look at how to retire earlier.
Yeah, that's what I'd do (did 8-) ), with initially somewhat less guaranteed income. Plus the $56K is excluding anything from the $2 million and only half the royalties. Even 2% from the $2 mil, puts potential spending at $96,000. But some people like to continue working, even with no need for the money and others "need" or want to spend $100K per year or more.
Time is your friend; impulse is your enemy. - John C. Bogle

delamer
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Re: What Am I Missing Here

Post by delamer » Tue May 14, 2019 11:17 am

sjt wrote:
Tue May 14, 2019 10:01 am
cresive wrote:
Tue May 14, 2019 9:53 am
The day I retire, I will reduce my essential expenses to live within my guaranteed income:... $56,000.

This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.
No mortgage, no car payments, what in the world are you going to spend $56k on? I think you should look at how to retire earlier.
Depends on the type of retirement that you want.

We probably will spend $25,000 per year on travel/vacations. That wouldn’t leave much to live on if we had to cover everything else on $30,000.

Topic Author
cresive
Posts: 251
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Re: What Am I Missing Here

Post by cresive » Tue May 14, 2019 1:23 pm

sjt wrote:
Tue May 14, 2019 10:01 am
cresive wrote:
Tue May 14, 2019 9:53 am
The day I retire, I will reduce my essential expenses to live within my guaranteed income:... $56,000.

This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.
No mortgage, no car payments, what in the world are you going to spend $56k on? I think you should look at how to retire earlier.
I wish!!

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cresive
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Re: What Am I Missing Here

Post by cresive » Tue May 14, 2019 1:25 pm

KlangFool wrote:
Tue May 14, 2019 10:14 am
OP,

There are multiple flaws in your thinking.

A) If you have 2 million portfolios and you only need 36K from the portfolio, you are withdrawing less than 2%. You do not have a sequence of return risk. So, why you care whether you withdraw from stock or bond? Why do you need to sell anything? The dividend/interest is big enough to cover the 2%.

Can you depend on dividends in a bad market?


B) Cash is a good thing. You need it to manage your tax. You may convert more or less your tax-deferred account depending on tax-efficiency.

C) It is very simple. Roth converts your tax-deferred portfolio to achieve minimal tax. Live on your dividend/interest. You do not have to sell anything.

I am working on this, but that is another post

D) In fact, you may keep your AA at 60/40 forever. Regardless of the bull or bear market.

KlangFool

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cresive
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Re: What Am I Missing Here

Post by cresive » Tue May 14, 2019 1:28 pm

delamer wrote:
Tue May 14, 2019 11:17 am
sjt wrote:
Tue May 14, 2019 10:01 am
cresive wrote:
Tue May 14, 2019 9:53 am
The day I retire, I will reduce my essential expenses to live within my guaranteed income:... $56,000.

This will cover housing, food, taxes, clothing and transportation. I don't plan to have a mortgage in retirement, or if I do, it will be small. I don't plan a new car purchase or even car payments in my first few years.
No mortgage, no car payments, what in the world are you going to spend $56k on? I think you should look at how to retire earlier.
Depends on the type of retirement that you want.

We probably will spend $25,000 per year on travel/vacations. That wouldn’t leave much to live on if we had to cover everything else on $30,000.
This is my game plan in a decent to good market. However, I am planning for the worst case scenario. Once I feel safe, I can plan my trips abroad

thanks

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gilgamesh
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Re: What Am I Missing Here

Post by gilgamesh » Tue May 14, 2019 2:08 pm

Like others have said, only thing majorly missing is you are unnecessarily working longer than needed. Your withdrawal method is unnecessarily ultra-conservative.

Will your pension adjust to inflation and how about royalty - I think factoring inflation on those is important too...

If you have to work that long for pension or something and there’s no other alternative, have you considered something ultra safe like a TIPS ladder followed by an SPIA ladder. Even with 0% yield from 67-80 you will need $416k to give you inflation adjusted $32k until age 80. You also buy TIPS for $200k that matures at age 80 to purchase an SPIA and then another SPIA for $84k from maturing TIPS a few years later as an SPIA ladder hedge inflation. This should give you about $32k adjusted to inflation for life for a total cost of $800k.

You still have $1.2M for extra income. A conservative 3% gives you $36k. On good years you take your trips abroad - don’t wait too long and you couldn’t do it any more.

Also, consider potential need for Long Term Care (like could a House be sold? Or rely on your $1.2M side portfolio @ 3% SWR etc)

Just throwing it out there.

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patrick013
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Re: What Am I Missing Here

Post by patrick013 » Tue May 14, 2019 2:29 pm

The annuity would help securing a core income. An SPIA needs about 15-20 years life expectancy to really pay out a good discounted return. A Fixed Term annuity usually pays out more than a comparable CD return-wise but with a monthly payment to you. So it is another option to increase monthly income. An A+ company would reduce risk, higher interest rates generally increase monthly payment, and increased age increases monthly payments generally.
age in bonds, buy-and-hold, 10 year business cycle

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cresive
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Re: What Am I Missing Here

Post by cresive » Tue May 14, 2019 2:53 pm

gilgamesh wrote:
Tue May 14, 2019 2:08 pm
Like others have said, only thing majorly missing is you are unnecessarily working longer than needed. Your withdrawal method is unnecessarily ultra-conservative.

Will your pension adjust to inflation and how about royalty - I think factoring inflation on those is important too...


Great Point! Yes, the pension has an inflation rider. The royalties have a market adjustment, but I can't predict which way that will go. As you mentioned, I am being conservative in my estimates. Hopefully, the pension will be higher as well.



If you have to work that long for pension or something and there’s no other alternative, have you considered something ultra safe like a TIPS ladder followed by an SPIA ladder. Even with 0% yield from 67-80 you will need $416k to give you inflation adjusted $32k until age 80. You also buy TIPS for $200k that matures at age 80 to purchase an SPIA and then another SPIA for $84k from maturing TIPS a few years later as an SPIA ladder hedge inflation. This should give you about $32k adjusted to inflation for life for a total cost of $800k.

These are good points. I don't know if I want to go the SPIA route, especially since I have SSA and a Pension that will continue through my life. I hope to have enough money to avoid annuities. It is a area to investigate, though.

You still have $1.2M for extra income. A conservative 3% gives you $36k. On good years you take your trips abroad - don’t wait too long and you couldn’t do it any more.

POINT TAKEN!!

Also, consider potential need for Long Term Care (like could a House be sold? Or rely on your $1.2M side portfolio @ 3% SWR etc)

Good point. Fortunately, I have LTC insurance and will have hopefully paid off my home.


Just throwing it out there.


Thank You! That is just what I was hoping to get from the group.

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gilgamesh
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Re: What Am I Missing Here

Post by gilgamesh » Tue May 14, 2019 3:08 pm

Even if you don’t take the SPIA route a TIPS ladder can guarantee inflation adjusted $32k for $416k (most likely less if it’s higher than 0% yield) until 80 (when many slow down on vacations abroad)...

An added point I had to consider, and if you are married, you may have to as well...SS will go down and taxes up, if one spouse dies and expenses may not have the same decline. Also, if one spouse needs LTC and the other not, then may not be able to sell the house. So, being conservative with withdrawal given all these contingencies is ok!
Last edited by gilgamesh on Tue May 14, 2019 4:29 pm, edited 1 time in total.

fyre4ce
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Re: What Am I Missing Here

Post by fyre4ce » Tue May 14, 2019 3:31 pm

I think your strategy is conservative, although I wouldn't call it ultra-conservative. If you have $62k/year in fixed income and a $2M portfolio, that's $142k per year with a 4% withdrawal rate. In the worst case, if you could drop down to 2% withdrawal (basically, just interest and dividends) from a portfolio with a depressed value of $1.2M, and you would be fine living off of $86k/year to preserve your equity, I think that's a reasonable plan in that circumstance. It sounds travel is your thing and you will be fine traveling more in boom years and less when the market's down. Far better than to have lots of fixed expenses.

A SPIA would be worth thinking about. I don't like SPIAs for those with way more than they need, or just barely enough, but you're kinda in the middle of the SPIA sweet spot (according to Fyre4ce). If you annuitize $500k-$1M and go more aggressive on the rest, it might let you enjoy your money more.

Don't forget RMDs. In the scenario it's 3.5 years to RMDs so you'll have to withdraw 3.6%+. If you're trying to preserve your equity you could buy a stock mutual fund in taxable.

KlangFool
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Re: What Am I Missing Here

Post by KlangFool » Tue May 14, 2019 4:14 pm

cresive wrote:
Tue May 14, 2019 1:25 pm
KlangFool wrote:
Tue May 14, 2019 10:14 am
OP,

There are multiple flaws in your thinking.

A) If you have 2 million portfolios and you only need 36K from the portfolio, you are withdrawing less than 2%. You do not have a sequence of return risk. So, why you care whether you withdraw from stock or bond? Why do you need to sell anything? The dividend/interest is big enough to cover the 2%.

Can you depend on dividends in a bad market?


B) Cash is a good thing. You need it to manage your tax. You may convert more or less your tax-deferred account depending on tax-efficiency.

C) It is very simple. Roth converts your tax-deferred portfolio to achieve minimal tax. Live on your dividend/interest. You do not have to sell anything.

I am working on this, but that is another post

D) In fact, you may keep your AA at 60/40 forever. Regardless of the bull or bear market.

KlangFool
cresive,

<<
Can you depend on dividends in a bad market?
>>

At 1.6% withdrawal rate, even if you have to sell some stock and bond, it is not a big deal.

You can start a simple spreadsheet and assume the stock drop 50% and you withdraw 1.6% from 60/40 equally. Even assuming the market stays down for 10 years, it is not a problem.

KlangFool

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