How Have You Planned for Sequence of Return Risk (SOR)?

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willthrill81
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by willthrill81 » Fri Sep 13, 2019 2:25 pm

TravelforFun wrote:
Fri Sep 13, 2019 1:26 pm
EnjoyIt wrote:
Fri Sep 13, 2019 12:07 pm
TravelforFun wrote:
Fri Sep 13, 2019 11:43 am
I retired last month and have no worry about SOR risk because I have 10 years worth of expenses in bonds, money market, and CDs. My AA works out to be 70/30 but AA is not my focus, the 10x annual expenses is.

TravelforFun
So, do you spend from your equities then leaving the bonds and bond equivalents at 10x?

What would you do if the market drops 10%?
20%?
50%?
How or when do you decide to start spending from bonds?
My plan is to spend from the bonds when the market is down and spend from equities and replenish the bonds when the market is up. Some people call this rebalancing.

TravelforFun
So in other words, yours is just a traditional fixed AA approach.
“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

randomguy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by randomguy » Fri Sep 13, 2019 2:32 pm

willthrill81 wrote:
Fri Sep 13, 2019 2:25 pm
TravelforFun wrote:
Fri Sep 13, 2019 1:26 pm
EnjoyIt wrote:
Fri Sep 13, 2019 12:07 pm
TravelforFun wrote:
Fri Sep 13, 2019 11:43 am
I retired last month and have no worry about SOR risk because I have 10 years worth of expenses in bonds, money market, and CDs. My AA works out to be 70/30 but AA is not my focus, the 10x annual expenses is.

TravelforFun
So, do you spend from your equities then leaving the bonds and bond equivalents at 10x?

What would you do if the market drops 10%?
20%?
50%?
How or when do you decide to start spending from bonds?
My plan is to spend from the bonds when the market is down and spend from equities and replenish the bonds when the market is up. Some people call this rebalancing.

TravelforFun
So in other words, yours is just a traditional fixed AA approach.
It doesn't sound like he is rebalancing as much as letting the AA float.

It sounds so simple on paper. How about reality. You retire in 2000 and stocks are down from march 00 to roughly march 2013 in real dollars. 10 years of bonds and 13 years of expenses. I sense a problem:)

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willthrill81
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by willthrill81 » Fri Sep 13, 2019 2:35 pm

randomguy wrote:
Fri Sep 13, 2019 2:32 pm
willthrill81 wrote:
Fri Sep 13, 2019 2:25 pm
TravelforFun wrote:
Fri Sep 13, 2019 1:26 pm
EnjoyIt wrote:
Fri Sep 13, 2019 12:07 pm
TravelforFun wrote:
Fri Sep 13, 2019 11:43 am
I retired last month and have no worry about SOR risk because I have 10 years worth of expenses in bonds, money market, and CDs. My AA works out to be 70/30 but AA is not my focus, the 10x annual expenses is.

TravelforFun
So, do you spend from your equities then leaving the bonds and bond equivalents at 10x?

What would you do if the market drops 10%?
20%?
50%?
How or when do you decide to start spending from bonds?
My plan is to spend from the bonds when the market is down and spend from equities and replenish the bonds when the market is up. Some people call this rebalancing.

TravelforFun
So in other words, yours is just a traditional fixed AA approach.
It doesn't sound like he is rebalancing as much as letting the AA float.

It sounds so simple on paper. How about reality. You retire in 2000 and stocks are down from march 00 to roughly march 2013 in real dollars. 10 years of bonds and 13 years of expenses. I sense a problem:)
I originally thought that he was using a dynamic AA (i.e. bucket) approach, but now I'm not so sure.

I agree that the devil is in the details, something that I've often pointed out with these bucket strategies. How does one determine that stocks are down? It's actually not obvious. What if stocks drop by 50% and then rise by 25%? Are they still down? Are you withdrawing only from bonds during this time frame? Are you comfortable with moving to a 100% stock allocation if stocks don't recover for a decade?

Unless you annuitize your entire portfolio with an annuity or via an LMP approach, it's almost impossible to completely avoid sequence of returns risk and its twin, sequence of income risk.
“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

EnjoyIt
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by EnjoyIt » Fri Sep 13, 2019 3:32 pm

TravelforFun wrote:
Fri Sep 13, 2019 1:26 pm
EnjoyIt wrote:
Fri Sep 13, 2019 12:07 pm
TravelforFun wrote:
Fri Sep 13, 2019 11:43 am
I retired last month and have no worry about SOR risk because I have 10 years worth of expenses in bonds, money market, and CDs. My AA works out to be 70/30 but AA is not my focus, the 10x annual expenses is.

TravelforFun
So, do you spend from your equities then leaving the bonds and bond equivalents at 10x?

What would you do if the market drops 10%?
20%?
50%?
How or when do you decide to start spending from bonds?
My plan is to spend from the bonds when the market is down and spend from equities and replenish the bonds when the market is up. Some people call this rebalancing.

TravelforFun
Your statement is obvious, I’m honestly curious how you will decide which to use though? Market being up or down by how much?

If your goal is 10x in bonds as soon as you spend some bonds you will no longer be 10x.

How much does the market need to be down before you start using bonds?

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HomerJ
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by HomerJ » Fri Sep 13, 2019 3:35 pm

randomguy wrote:
Fri Sep 13, 2019 2:32 pm
It sounds so simple on paper. How about reality. You retire in 2000 and stocks are down from march 00 to roughly march 2013 in real dollars. 10 years of bonds and 13 years of expenses. I sense a problem:)
Stocks were not "down" that entire time. He would have replenished bonds and lived off stocks in 2005-2007
The J stands for Jay

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HomerJ
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by HomerJ » Fri Sep 13, 2019 3:42 pm

Here's how I plan to do it...

5 year CD ladder. Rest in 50/50 stocks/bonds. (at 25x expenses, this would be equal to 40/60 stocks/bonds).

Each year, cash out the CD that is expiring, and buy a new 5-year CD using dividends and money from whichever side is higher.

If stocks are up, sell stocks.
If stocks are down, sell bonds.

Rebalance to 50/50 if stocks are up.
Don't rebalance if stocks are down. (Yes, this is not optimal - but I'm very conservative - I'm not rebalancing into a stock crash in retirement, but I won't be selling stocks either, just waiting for them to bounce back).

Very easy. Three-fund plus CDs portfolio... The 40% in stocks will be 75/25 U.S./International
The J stands for Jay

randomguy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by randomguy » Fri Sep 13, 2019 4:50 pm

HomerJ wrote:
Fri Sep 13, 2019 3:35 pm
randomguy wrote:
Fri Sep 13, 2019 2:32 pm
It sounds so simple on paper. How about reality. You retire in 2000 and stocks are down from march 00 to roughly march 2013 in real dollars. 10 years of bonds and 13 years of expenses. I sense a problem:)
Stocks were not "down" that entire time. He would have replenished bonds and lived off stocks in 2005-2007
They were off their peaks for that whole periods. But lets say he replenished after an up year. How does that work. Lets assume 10 years in bonds, 15 in stocks and the standard 4% rule.

2000-3. You spend 4 years of bonds. Stocks are off 20% but we just finished an up year so time to replenish.

6 years in bonds
12 years in stocks

You replensish the bonds by selling stocks
10 years bonds
8 years stocks.

Now you live off stocks from 2005-7. Your stock portfolio goes from 8x to 6x since returns aren't high enough to cover your expenses but since they the market is up you supposed to live off them.
Then in 2008-9 you sell bonds 2 years of bonds and stocks again are off about 20%.
8 years bonds
4.8 stocks.

Now you sell your stocks to replenish the bonds
10 years bonds
2.8 years of stocks

Does it matter what stocks do at this point? You have so little of your portfolio in them that you are going broke.

With slower replenishment rules you will do better but you will still have the same general problem of not buying stocks when they are cheap and your selling your stocks at low prices.

TravelforFun
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by TravelforFun » Fri Sep 13, 2019 11:37 pm

EnjoyIt wrote:
Fri Sep 13, 2019 3:32 pm
TravelforFun wrote:
Fri Sep 13, 2019 1:26 pm
EnjoyIt wrote:
Fri Sep 13, 2019 12:07 pm
My plan is to spend from the bonds when the market is down and spend from equities and replenish the bonds when the market is up. Some people call this rebalancing.

TravelforFun
Your statement is obvious, I’m honestly curious how you will decide which to use though? Market being up or down by how much?

If your goal is 10x in bonds as soon as you spend some bonds you will no longer be 10x.

How much does the market need to be down before you start using bonds?
10x in bonds at the start of my retirement which began in August 2019. This month (September 2019) I sold $21K worth of equities for three months of expenses so I still have 10x in bonds. I will feel my way from quarter to quarter and see what happens. I'll keep spending my equities if the market continues to rise or starts plateauing and will start spending the bonds when the market has dropped by more than 10%. I don't have hard and fast rules on this.

TravelforFun

EnjoyIt
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by EnjoyIt » Sat Sep 14, 2019 8:27 am

randomguy wrote:
Fri Sep 13, 2019 4:50 pm
HomerJ wrote:
Fri Sep 13, 2019 3:35 pm
randomguy wrote:
Fri Sep 13, 2019 2:32 pm
It sounds so simple on paper. How about reality. You retire in 2000 and stocks are down from march 00 to roughly march 2013 in real dollars. 10 years of bonds and 13 years of expenses. I sense a problem:)
Stocks were not "down" that entire time. He would have replenished bonds and lived off stocks in 2005-2007
They were off their peaks for that whole periods. But lets say he replenished after an up year. How does that work. Lets assume 10 years in bonds, 15 in stocks and the standard 4% rule.

2000-3. You spend 4 years of bonds. Stocks are off 20% but we just finished an up year so time to replenish.

6 years in bonds
12 years in stocks

You replensish the bonds by selling stocks
10 years bonds
8 years stocks.

Now you live off stocks from 2005-7. Your stock portfolio goes from 8x to 6x since returns aren't high enough to cover your expenses but since they the market is up you supposed to live off them.
Then in 2008-9 you sell bonds 2 years of bonds and stocks again are off about 20%.
8 years bonds
4.8 stocks.

Now you sell your stocks to replenish the bonds
10 years bonds
2.8 years of stocks

Does it matter what stocks do at this point? You have so little of your portfolio in them that you are going broke.

With slower replenishment rules you will do better but you will still have the same general problem of not buying stocks when they are cheap and your selling your stocks at low prices.
Randomguy,
Thanks for the analysis. I think rebalancing is key for managing sequence of returns in either direction. During good times such as years greater than 4% returns, one should sell equities to buy bonds. During bad times, one should sell stocks to buy equities which psychologically has to be hard to do for many. I have not lived in this scenario yet and patiently awaiting the next downturn to see how it goes.

randomguy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by randomguy » Sat Sep 14, 2019 8:50 am

EnjoyIt wrote:
Sat Sep 14, 2019 8:27 am


Randomguy,
Thanks for the analysis. I think rebalancing is key for managing sequence of returns in either direction. During good times such as years greater than 4% returns, one should sell equities to buy bonds. During bad times, one should sell stocks to buy equities which psychologically has to be hard to do for many. I have not lived in this scenario yet and patiently awaiting the next downturn to see how it goes.
Yeah to some extent it isn't realistic to buy stocks during market crashes for retirees. The key though is that they cant sell stocks when they are really down and your AA is out of whack. Missing out on the rebalancing bonus (or loss) is something you can live without out. You can't live without those market gains. Yyou need to keep your stock exposure at a reasonable level. Rules like sell what ever AA is out of whack (i.e. you want to be 50/50 but after a crash you are at 33/67. You sell bonds till you get back to 50/50) work but then you are basically back to holding a fixed AA that has a bit of latency in how long it takes to rebalance.

No matter what you do, if you get poor returns early, you will end up with gut check moments. It is easy to look back and say the 1966 or 2000 retiree just had to sit tight and things would be all right. But being 10 years in and your portfolio being down 50% is going to test anyones nerves.

Dandy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by Dandy » Sat Sep 14, 2019 10:42 am

Here is what I did

1. had a moderate allocation e.g. 55/45 at the time I was retired --2008
2. had house paid for and no debt including education debt for children's education
3. had a modest pension from another company at retirement - and retiree health insurance
4. had about 4 years or more of drawdown dollars in liquid assets
5. had an HELOC
6. had a basically frugal life style and watched expenses even more closely for a year or 2.

EnjoyIt
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by EnjoyIt » Sat Sep 14, 2019 11:13 am

randomguy wrote:
Sat Sep 14, 2019 8:50 am
EnjoyIt wrote:
Sat Sep 14, 2019 8:27 am


Randomguy,
Thanks for the analysis. I think rebalancing is key for managing sequence of returns in either direction. During good times such as years greater than 4% returns, one should sell equities to buy bonds. During bad times, one should sell stocks to buy equities which psychologically has to be hard to do for many. I have not lived in this scenario yet and patiently awaiting the next downturn to see how it goes.
......

No matter what you do, if you get poor returns early, you will end up with gut check moments. It is easy to look back and say the 1966 or 2000 retiree just had to sit tight and things would be all right. But being 10 years in and your portfolio being down 50% is going to test anyones nerves.
I am starting to realize that this rare but very very possible scenario would put anyone at unease. I know I would already be spending less, but I very well may start freaking out and maybe even considering looking for a source of income. This is obviously a worst case scenario. If one was to retire in 1965 they are slightly better off and I doubt anyone would retire in 1967 voluntarily. An early retiree who does retire in 1966 may consider going back to work if possible. All this goes back to my point:

1) Early financial security is ideal if possible.
2) Keeping fixed expenses low allows for flexibility.

Both of those offer increased options which would be invaluable in a time of crisis.

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willthrill81
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by willthrill81 » Sat Sep 14, 2019 11:19 am

EnjoyIt wrote:
Sat Sep 14, 2019 11:13 am
randomguy wrote:
Sat Sep 14, 2019 8:50 am
EnjoyIt wrote:
Sat Sep 14, 2019 8:27 am


Randomguy,
Thanks for the analysis. I think rebalancing is key for managing sequence of returns in either direction. During good times such as years greater than 4% returns, one should sell equities to buy bonds. During bad times, one should sell stocks to buy equities which psychologically has to be hard to do for many. I have not lived in this scenario yet and patiently awaiting the next downturn to see how it goes.
......

No matter what you do, if you get poor returns early, you will end up with gut check moments. It is easy to look back and say the 1966 or 2000 retiree just had to sit tight and things would be all right. But being 10 years in and your portfolio being down 50% is going to test anyones nerves.
I am starting to realize that this rare but very very possible scenario would put anyone at unease. I know I would already be spending less, but I very well may start freaking out and maybe even considering looking for a source of income. This is obviously a worst case scenario. If one was to retire in 1965 they are slightly better off and I doubt anyone would retire in 1967 voluntarily. An early retiree who does retire in 1966 may consider going back to work if possible. All this goes back to my point:

1) Early financial security is ideal if possible.
2) Keeping fixed expenses low allows for flexibility.

Both of those offer increased options which would be invaluable in a time of crisis.
This is where I think that Kitces' 'bond tent' approach may have an edge. The math says that it doesn't work better than a fixed AA approach, but I wonder whether it would be easier to stick with, especially if you experience a really poor first decade of returns in retirement (e.g. 2000-2009). But the problem with this is that many 80 year olds may not want a high stock allocation.
“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

mtmingus
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by mtmingus » Sat Sep 14, 2019 11:59 am

I expect to retire within 5 years. But prep for loss of job anytime.
Our current AA are:
Stocks/Bonds/Cash=28/18/54
Cash alone would last us till 67 SS very comfortably including travels.
SS would cover our basic needs and hopefully the stocks and bonds would help to contribute to our discretionary.

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willthrill81
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by willthrill81 » Sat Sep 14, 2019 12:04 pm

mtmingus wrote:
Sat Sep 14, 2019 11:59 am
I expect to retire within 5 years. But prep for loss of job anytime.
Our current AA are:
Stocks/Bonds/Cash=28/18/54
Cash alone would last us till 67 SS very comfortably including travels.
SS would cover our basic needs and hopefully the stocks and bonds would help to contribute to our discretionary.
Why is over half your portfolio in cash?
“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

mtmingus
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by mtmingus » Sat Sep 14, 2019 12:24 pm

willthrill81 wrote:
Sat Sep 14, 2019 12:04 pm
mtmingus wrote:
Sat Sep 14, 2019 11:59 am
I expect to retire within 5 years. But prep for loss of job anytime.
Our current AA are:
Stocks/Bonds/Cash=28/18/54
Cash alone would last us till 67 SS very comfortably including travels.
SS would cover our basic needs and hopefully the stocks and bonds would help to contribute to our discretionary.
Why is over half your portfolio in cash?
My goal was 50% cash so even 0% (actually now around 2%) returns from MM would be OK for us to live comfortably from now (56, 55) to ages 68, 67 - if both bonds and stocks would decline substantially in the following weeks, months, years, and we shouldn't depend on anything from them in the next a few years (till SS ages). You may call this cash pile bucket one.

Our remaining stocks/bonds are close to 60/40 - call it bundled bucket two and bucket three.

randomguy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by randomguy » Sat Sep 14, 2019 7:30 pm

willthrill81 wrote:
Sat Sep 14, 2019 11:19 am

This is where I think that Kitces' 'bond tent' approach may have an edge. The math says that it doesn't work better than a fixed AA approach, but I wonder whether it would be easier to stick with, especially if you experience a really poor first decade of returns in retirement (e.g. 2000-2009). But the problem with this is that many 80 year olds may not want a high stock allocation.
Lets compare 2 cases
a) Bond tent. 10 years in bonds, 70/30 for the 15 years in a portfolio.
2010 -> 581k real dollars (bottomed out at 423k)

b) Portfolio
40/60 -> 730k (bottomed out at 628)
60/40 -> 609k (bottomed out at 490)

Note that the bond tent person will have a bit of interest from those 10 year in bonds.

From 2000-2 the bond tent might have made you sleep better. On the other hand your higher stock exposure in 2007-9 and 2011,might have been keeping you up at night. Your minimum net worths during that case is going to be roughly the same. Note the 2009 case is sort of a worse case for your nerves as you have that huge drop right as your bond tent is ending.

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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by AerialWombat » Sun Sep 15, 2019 11:24 am

dknightd wrote:
Sun Aug 25, 2019 6:03 pm
Even with a paid off house, can you really live a "middle class lifestyle" on just SS? I think we'd survive on SS. But would have to give up some things we are used to, like cell phones and internet, and a car sitting in the driveway. And money for hobbies . . .
Many Americans already do live just fine on the equivalent of what their SS will be. My current living expenses are about equal to my projected SS benefits (I’m 25-30 years from collecting it, though).
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by NearlyRetired » Fri Nov 08, 2019 2:10 am

Dandy wrote:
Sat Sep 14, 2019 10:42 am
Here is what I did

1. had a moderate allocation e.g. 55/45 at the time I was retired --2008
2. had house paid for and no debt including education debt for children's education
3. had a modest pension from another company at retirement - and retiree health insurance
4. had about 4 years or more of drawdown dollars in liquid assets
5. had an HELOC
6. had a basically frugal life style and watched expenses even more closely for a year or 2.
That is pretty much what I will be doing (retiring in 12 weeks time :D ). My AA is 45/55 though and not sure about a HELOC. Encouraging to know others are making this set-up work
To err is to be human, to really mess up, use a computer

Dandy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by Dandy » Fri Nov 08, 2019 7:12 am

My AA is 45/55 though and not sure about a HELOC. Encouraging to know others are making this set-up work
Soon after retirement in 2008 my 55/45 allocation went lower due to the great recession. At one point I rolled over my 401k to a Vanguard Money Market Fund and only gradually moved back into "investments" as the market recovered.

While the HELOC isn't a necessity if there is no charge to set it up and only pay if you use it it does give you another choice to handle unexpected expenses. In past posts people have noted that during the great recession many banks restricted the HELOC use.

mtmingus
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by mtmingus » Fri Nov 08, 2019 9:11 am

Dandy wrote:
Fri Nov 08, 2019 7:12 am
My AA is 45/55 though and not sure about a HELOC. Encouraging to know others are making this set-up work
Soon after retirement in 2008 my 55/45 allocation went lower due to the great recession. At one point I rolled over my 401k to a Vanguard Money Market Fund and only gradually moved back into "investments" as the market recovered.

While the HELOC isn't a necessity if there is no charge to set it up and only pay if you use it it does give you another choice to handle unexpected expenses. In past posts people have noted that during the great recession many banks restricted the HELOC use.
Your lenders always watch your collateral. In the case of Great Recession, most of them declined substantially, so your HELOCs would be adjusted down as well. Or even cancelled if you lost your job just when you need it the most.

Most HELOCs have yearly fees ($50 in our case).

Dandy
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by Dandy » Fri Nov 08, 2019 9:26 am

Most HELOCs have yearly fees ($50 in our case).
I understand that most do charge fees either to set up or yearly or both.

I have opened a BofA HELOC about 2 years ago and didn't have any initial or ongoing fees. Neither had they charged me for the prior HELOC which had expired. I have been with that bank for a long time but have only a checking account with a small balance and no other relationship with them. During the great recession and don't recall that they made any adjustment to my HELOC terms.

So maybe if you want an HELOC you need to shop around -- I wouldn't mind a small set up fee but would not want to pay a yearly fee unless I knew I was going to be a somewhat frequent user.

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siamond
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by siamond » Fri Nov 08, 2019 10:29 am

willthrill81 wrote:
Sat Sep 14, 2019 11:19 am
This is where I think that Kitces' 'bond tent' approach may have an edge. The math says that it doesn't work better than a fixed AA approach, but I wonder whether it would be easier to stick with, especially if you experience a really poor first decade of returns in retirement (e.g. 2000-2009). But the problem with this is that many 80 year olds may not want a high stock allocation.
I don't see that the bond tent approach has much value, this is just a clunky bandage trying to mitigate the consequences of a deeper root cause (the use of a non-sensical constant withdrawal method). Once one deals with the root cause (e.g. using a more sensible withdrawal method), then the weird bandage becomes spurious if not downright counter-productive. But I know you and I agree on this.

What made me react is your last sentence. I have to question the 'conventional wisdom' on this. I have an inkling that this is one of those 'Bogleheads echo chamber' things, statements which are repeated in circles, but may not have a lot of real life foundation. Heck, my own grandfather (who was a very successful entrepreneur and had a long and full life until he passed away at 99) couldn't stand bonds (he lived through the post-WW-II bond crisis, and through the next one during the 70s/80s) and had zero issue staying 100% stocks till the end of his life. My mother did the same (if only out of lessons learned from her dad). One might say this is just anecdotal, but a) this might be reflective of a certain generation b) when one spent a lifetime observing the ups & downs of the stock market, one should really get much more 'Zen' about it than somebody in their mid-30s or 40s. Come on, we're human beings, we learn and adapt (well, most of us, at least).

I would be curious to see an extensive poll on the matter, not only with Bogleheads, but actually with a broader set of retirees. Such factual results might surprise us. Anyhoo, I'm just ranting on a Friday morning... :wink:

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willthrill81
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by willthrill81 » Fri Nov 08, 2019 6:00 pm

siamond wrote:
Fri Nov 08, 2019 10:29 am
willthrill81 wrote:
Sat Sep 14, 2019 11:19 am
This is where I think that Kitces' 'bond tent' approach may have an edge. The math says that it doesn't work better than a fixed AA approach, but I wonder whether it would be easier to stick with, especially if you experience a really poor first decade of returns in retirement (e.g. 2000-2009). But the problem with this is that many 80 year olds may not want a high stock allocation.
I don't see that the bond tent approach has much value, this is just a clunky bandage trying to mitigate the consequences of a deeper root cause (the use of a non-sensical constant withdrawal method). Once one deals with the root cause (e.g. using a more sensible withdrawal method), then the weird bandage becomes spurious if not downright counter-productive. But I know you and I agree on this.

What made me react is your last sentence. I have to question the 'conventional wisdom' on this. I have an inkling that this is one of those 'Bogleheads echo chamber' things, statements which are repeated in circles, but may not have a lot of real life foundation. Heck, my own grandfather (who was a very successful entrepreneur and had a long and full life until he passed away at 99) couldn't stand bonds (he lived through the post-WW-II bond crisis, and through the next one during the 70s/80s) and had zero issue staying 100% stocks till the end of his life. My mother did the same (if only out of lessons learned from her dad). One might say this is just anecdotal, but a) this might be reflective of a certain generation b) when one spent a lifetime observing the ups & downs of the stock market, one should really get much more 'Zen' about it than somebody in their mid-30s or 40s. Come on, we're human beings, we learn and adapt (well, most of us, at least).

I would be curious to see an extensive poll on the matter, not only with Bogleheads, but actually with a broader set of retirees. Such factual results might surprise us. Anyhoo, I'm just ranting on a Friday morning... :wink:
You may be right. My 70 year old father is 100% stock and can't stand bonds either.
“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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Leif
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by Leif » Sat Nov 09, 2019 5:29 pm

HomerJ wrote:
Fri Sep 13, 2019 3:42 pm
Here's how I plan to do it...

5 year CD ladder. Rest in 50/50 stocks/bonds. (at 25x expenses, this would be equal to 40/60 stocks/bonds).

Each year, cash out the CD that is expiring, and buy a new 5-year CD using dividends and money from whichever side is higher.

If stocks are up, sell stocks.
If stocks are down, sell bonds.

Rebalance to 50/50 if stocks are up.
Don't rebalance if stocks are down. (Yes, this is not optimal - but I'm very conservative - I'm not rebalancing into a stock crash in retirement, but I won't be selling stocks either, just waiting for them to bounce back).

Very easy. Three-fund plus CDs portfolio... The 40% in stocks will be 75/25 U.S./International
How do you define "Up" and "Down"?

Is up an all time high on the rebalance day? Is it for 1 year? Calendar year, or rebalance year? If down 50% one year then up 25% the next year considered up? Is up were equities are above 50%? What if both stocks and bonds are down, but stocks are above 50%. Is that considered up? Is up nominal or inflation adjusted?

What I did was I recorded my $ equities at time of retirement. My equity sell point is a 10% increase from that base. Each year the base increases by the CPI for the previous year. I never buy equities just sell (then buy fixed income) down to the inflation adjusted base. I sell from fixed income for living expenses. I also consider this conservative (I'm using 50/50).

Yes, it is possible to end up with 100% stocks in this scenario. However, unlikely given my low withdrawal rate. If at 100% stocks then they must be incredibly cheap. My portfolio is also a LMP out to 25 years, so doubly unlikely.

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Johnnie
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by Johnnie » Sat Nov 09, 2019 10:26 pm

HomerJ wrote:
Fri Sep 13, 2019 3:42 pm
Here's how I plan to do it...

5 year CD ladder. Rest in 50/50 stocks/bonds. (at 25x expenses, this would be equal to 40/60 stocks/bonds).

Each year, cash out the CD that is expiring, and buy a new 5-year CD using dividends and money from whichever side is higher.

If stocks are up, sell stocks.
If stocks are down, sell bonds.

Rebalance to 50/50 if stocks are up.
Don't rebalance if stocks are down. (Yes, this is not optimal - but I'm very conservative - I'm not rebalancing into a stock crash in retirement, but I won't be selling stocks either, just waiting for them to bounce back).

Very easy. Three-fund plus CDs portfolio... The 40% in stocks will be 75/25 U.S./International
I like that. I hadn't planned on the CD ladder for that purpose (I do plan one at retirement for a bridge to SS at 70, but aren't that sensitive to portfolio swings thereafter), and had wondered if I would be willing to rebalance into a big bad stock bear. Maybe a little.

My SOR-mitigating distribution method: Percentage of annual balance (lower at first), plus Taylor's take a little more when the market is up and little less when down.
"I know nothing."

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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by goodenyou » Sat Nov 09, 2019 10:58 pm

Combination of several strategies. The most important one is to save to a 2% withdrawal rate with a 50/50 portfolio. The second is to work part time to meet my expenses until age 70. The third is a large buffered asset allocation. Mostly cash for buffered assets. I am reading Pfau’s new book on Safety-First retirement planning. Annuities are an interesting vehicle to mitigate SOR risks as well. I haven’t gotten there yet.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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HomerJ
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by HomerJ » Sat Nov 09, 2019 11:20 pm

Leif wrote:
Sat Nov 09, 2019 5:29 pm
HomerJ wrote:
Fri Sep 13, 2019 3:42 pm
Here's how I plan to do it...

5 year CD ladder. Rest in 50/50 stocks/bonds. (at 25x expenses, this would be equal to 40/60 stocks/bonds).

Each year, cash out the CD that is expiring, and buy a new 5-year CD using dividends and money from whichever side is higher.

If stocks are up, sell stocks.
If stocks are down, sell bonds.

Rebalance to 50/50 if stocks are up.
Don't rebalance if stocks are down. (Yes, this is not optimal - but I'm very conservative - I'm not rebalancing into a stock crash in retirement, but I won't be selling stocks either, just waiting for them to bounce back).

Very easy. Three-fund plus CDs portfolio... The 40% in stocks will be 75/25 U.S./International
How do you define "Up" and "Down"?

Is up an all time high on the rebalance day? Is it for 1 year? Calendar year, or rebalance year? If down 50% one year then up 25% the next year considered up? Is up were equities are above 50%? What if both stocks and bonds are down, but stocks are above 50%. Is that considered up? Is up nominal or inflation adjusted?

What I did was I recorded my $ equities at time of retirement. My equity sell point is a 10% increase from that base. Each year the base increases by the CPI for the previous year. I never buy equities just sell (then buy fixed income) down to the inflation adjusted base. I sell from fixed income for living expenses. I also consider this conservative (I'm using 50/50).

Yes, it is possible to end up with 100% stocks in this scenario. However, unlikely given my low withdrawal rate. If at 100% stocks then they must be incredibly cheap. My portfolio is also a LMP out to 25 years, so doubly unlikely.
I'll do it once a year...

Say I have $2 million 50/50 stocks/bonds.

2% dividends have put $40,000 in my account over the last year. So I need to pull another $40,000 from the stocks/bonds.

If stocks are up, maybe my accounts look like this... $1,060,000 in stocks and $1,010,000 in bonds

I pull the extra $40,000 from stocks, and rebalance back to 50/50... So I start the next year with $1,015,000 in both stocks and bonds.

If stocks were down, maybe my accounts look like this... $920,000 in stocks and $1,010,000 in bonds...

So I pull the extra $40,000 from bonds, but I don't rebalance... So I start the next year with $920,000 in stocks, and $970,000 in bonds.

I'm just pulling the money from whichever side is higher... That's how I define "up and down".
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Leif
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Re: How Have You Planned for Sequence of Return Risk (SOR)?

Post by Leif » Sun Nov 10, 2019 12:35 pm

HomerJ wrote:
Sat Nov 09, 2019 11:20 pm
...
If stocks were down, maybe my accounts look like this... $920,000 in stocks and $1,010,000 in bonds...

So I pull the extra $40,000 from bonds, but I don't rebalance... So I start the next year with $920,000 in stocks, and $970,000 in bonds.

I'm just pulling the money from whichever side is higher... That's how I define "up and down".
So it sounds like up and down don't really matter. And history doesn't really matter. What matters is to make the withdrawal to bring the portfolio closer to 50/50. So if the above scenario was modified to $970,000 in stocks and $920,000 in fixed income (both down) you would pull the $40,000 from stocks. That is certainly easier than my playing around with CPI. Plus less likely of having an AA much different than when you started. Your approach is certainly reasonable. It does have the beauty of simplicity.

If I had $970,000 in stocks and $920,000 in fixed income, I would feel a bit uncomfortable selling $40,000 from the stocks that were down. For me, history matters. If it was me I would sell the $40,000 from fixed income (making my AA more aggressive) and give (and hope) stocks a chance to recover. So if I had a decade of bad stock returns my AA might get more aggressive (depending on my withdrawal rate from fixed income). I can live with that since the expected longer term returns on stocks should be higher.

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