Murphy's Law Of Retirement

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Random Walker
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Murphy's Law Of Retirement

Post by Random Walker » Fri Jun 02, 2017 3:12 pm

I've been reading Michael Zwecher's Retirment Portfolios. The book is highly recommended by William Bernstein. Anyways, the author describes "Murphy's Law Of Retirement". This was previously referenced in a thread titled " The Long Run Is Only Longer Than The Short Run, Not Safer", but I thought it worthwhile to discuss this Murphy's Law in a separate thread.
Murphy's Law Of Retirement is as follows. As a bull market proceeds, people's portfolios swell. These investors, seeing the size of their portfolios, then decide to retire at or near the top of a bull. After a long bull market future expected returns are lower and the potential for reversion to mean is high. People retire, then subject themselves to terrible sequence of returns risk at the worst time, early retirement. The sequence of returns early in retirement is crucial to a financially successful retirement. People who retire when valuations are high are most exposed to this risk.

Dave

livesoft
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Re: Murphy's Law Of Retirement

Post by livesoft » Fri Jun 02, 2017 3:13 pm

This is discussed also in a nice way in the ERN series on SWR that has been linked a few times in the bogleheads.org forum this year.

Also discussed in the videos by the DFA guy on managing expectations.

All are very worthwhile reviewing from time to time.
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Reb Tevye
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Re: Murphy's Law Of Retirement

Post by Reb Tevye » Fri Jun 02, 2017 3:36 pm

I am considering retiring ("early") in August.
Will a good ol' crash in July reduce my risk of running afoul of this Murphy's Law?

How about having 15 years expenses in bonds, as a bridge to Social Secuity?

Will I retire no matter what June-July bring?
I'm thinking (hoping?) that I could rationalize the decision no matter what 'the market' does.

And "adapt, adapt, adapt." Right?
I just hope that admonition isn't supposed to be about my IPS.
"So, what would have been so terrible if I had a small fortune?"

s0me0nesmind1
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Re: Murphy's Law Of Retirement

Post by s0me0nesmind1 » Fri Jun 02, 2017 4:05 pm

Seems like a simple solution to me:

Don't put all your eggs in one basket
Begin to taper off stocks and putting more into bonds slowly along the way (prior to retirement/crash as you grow older)
Have some cash on-hand and try to not take much from investment/retirement accounts by using other means (SS, Cash, liquid assets, etc..)

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Re: Murphy's Law Of Retirement

Post by Grt2bOutdoors » Fri Jun 02, 2017 4:08 pm

But Zwecher is also a fan of "maintaining enough in fixed income" to provide a stable floor. Therefore, while folks may fall victim to thought of retiring with a HUGE portfolio, reallocating to fixed income in a proportion necessary to provide the floor and take risk off the table may mitigate or eliminate the sequence risk. But to your point, folks get heady when ANY market rises, be it equities or real estate, gold, bitcoins, etc. It's only when markets enter a swift or sustained downturn that one comes to realization what goes up, can come down.
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bligh
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Re: Murphy's Law Of Retirement

Post by bligh » Fri Jun 02, 2017 4:18 pm

That makes complete sense. It is precisely due to this law that people hold a conservative portfolio early in their retirement. something like 30/70 or 40/60. Later on, when they have started pulling social security and older, they can dial the risk back up a bit. Some choose to setup an annuity or bond ladder to provide fixed income in the early years of their retirement.

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arcticpineapplecorp.
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Re: Murphy's Law Of Retirement

Post by arcticpineapplecorp. » Fri Jun 02, 2017 5:23 pm

stocks are for accumulating wealth, bonds are for preserving wealth and cash is for spending wealth. Make sure you have enought cash and bonds so you don't have to sell your stocks and allow them time to recover. When they do, you sell stocks that have recovered and increased in value to refill your cash/bond bucket from which you spend.

Also, if you stick to a SWR (safe withdrawal rate) or use a variable percentage withdrawal strategy, you should be fine over the long term. Both are discussed at length at bogleheads. Do a search and see.
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Levett
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Re: Murphy's Law Of Retirement

Post by Levett » Fri Jun 02, 2017 6:29 pm

"It's only when markets enter a swift or sustained downturn that one comes to realization what goes up, can come down."

Man. Ain't that the truth!

Lev

remomnyc
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Re: Murphy's Law Of Retirement

Post by remomnyc » Fri Jun 02, 2017 7:06 pm

Guilty. The bull market has hastened my retirement plans. As bligh suggested, to counter the sequence of returns risk, I have been allocating from 80/20 to 60/40. I have enough fixed income to comfortably survive a 10-year stock market crash and decline. I also have a lot of wants in my budget that could easily be delayed until the market recovers. If the market crashes before I give notice, I will hold onto my job a little longer and feed the bear.

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oldzey
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Re: Murphy's Law Of Retirement

Post by oldzey » Fri Jun 02, 2017 8:41 pm

Murphy was an optimist. :D
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ragabnh
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Re: Murphy's Law Of Retirement

Post by ragabnh » Sat Jun 03, 2017 1:16 am

Early retirees should consider liquidating their positions if they won the game, there is no point in being greedy and the markets are at all time high at this time.

SGM
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Re: Murphy's Law Of Retirement

Post by SGM » Sat Jun 03, 2017 1:58 am

Increase your fixed income and lower your stock market allocation. Delaying SS is helpful. The problem is an extended bear market early on in retirement. I would never completely liquidate my stock market allocation at any time in retirement. I have a friend who is not yet retired at 71 who sold all his stocks a few months ago. It seems a little crazy to me.

NiceUnparticularMan
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Re: Murphy's Law Of Retirement

Post by NiceUnparticularMan » Sat Jun 03, 2017 6:04 am

Unfortunately, "reversion to the mean" isn't really a thing, meaning we can't actually predict stock market returns like that.

However, there is a similar sort of reasoning that sort of works.

You can start by estimating your equity portfolio's future earnings. If you want, you can use past earnings to help you estimate future earnings, but it is future earnings which is your ultimate target. This sounds like a valuation exercise, except valuation exercises focus on the wrong number for your purposes--you've already bought your portfolio, so the current price is not what is important. What is important is what you think what you bought can do for you, and that is provide those future earnings.

You then can plan to spend a lot of those future earnings. How much depends on what sort of equity portfolio lifespan you want. If you want it to last indefinitely, you have to re-invest some of the earnings. If you are OK with reaching zero after some period of years, you can spend more than just the earnings.

OK, so now you have estimated what your equity portfolio can do for you. Except there is uncertainty around all this, and you might want to smooth your spending out, so you convert some equities to non-equities. But this lowers the expected future earnings. You achieve a balance you are comfortable with.

And there you go--you have a plan. Is it enough to retire on? That's up to you.

Why is this similar? Well, although it wasn't a valuation exercise per se, if you hold the size of the portfolio fixed, then higher valuations relative to future earnings means lower expected future earnings. So if a big run up in stock prices has led to higher valuations relative to future earnings, your method will effectively control for that by still looking at those future earnings, not those higher stock prices.

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Re: Murphy's Law Of Retirement

Post by carolinaman » Sat Jun 03, 2017 6:51 am

People should always have a cushion when planning their retirement. Your retirement is risky if you only have exactly what you project you will need based upon your retirement income, portfolio performance, inflation, etc. Expect Murphy's Law to apply to you and have more than you think you will need. Of course, if you have a large percentage of your retirement income from guaranteed sources: SS, pension and annuities; you have less to worry about.

Dandy
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Re: Murphy's Law Of Retirement

Post by Dandy » Sat Jun 03, 2017 7:22 am

I can see why Dr. Bernstein likes this "law". He wants those who have enough to consider funding 20-25 years of their retirement drawdown needs in very safe fixed income products. That is a hard pill to swallow for most investors that have had moderate or higher equity allocations during the accumulation years and that approach is what got them to "have enough" now. The longer the bull market the larger the pill.

People tend to underestimate the impact of equities on their retirement finances. When deciding if they have reached their "number" they should probably see how it looks with a 50% reduction in their equity holdings and then subtract 1 or 2? years estimated withdrawals needed to fund their retirement expenses. If they are still reasonably comfortable -- their number seems solid. If they are not comfortable after that math exercise then they need to take a hard look at what their allocation should be.

galectin
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Re: Murphy's Law Of Retirement

Post by galectin » Sat Jun 03, 2017 9:13 am

carolinaman wrote:People should always have a cushion when planning their retirement. Your retirement is risky if you only have exactly what you project you will need based upon your retirement income, portfolio performance, inflation, etc.
Exactly!

I just retired and ready to start withdrawals. Social Security and no pension. 50:50, stocks to bonds. Age 67 for both me and DW. I am calculating a 4% withdrawal rate, after I figure in a potential 20% drop in stocks (10% on my assets). I know that a bear market could go lower than 20% off, but not permanently, I figure.

Fortunately, this will still give us a cushion over our current spending rate.

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Re: Murphy's Law Of Retirement

Post by marcopolo » Sat Jun 03, 2017 9:53 am

ragabnh wrote:Early retirees should consider liquidating their positions if they won the game, there is no point in being greedy and the markets are at all time high at this time.
And do what with it?
The market is often at all time highs when looking backwards. Whether it is a peak can only be known after the fact.
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: Murphy's Law Of Retirement

Post by Vanguard Fan 1367 » Sat Jun 03, 2017 9:56 am

ragabnh wrote:Early retirees should consider liquidating their positions if they won the game, there is no point in being greedy and the markets are at all time high at this time.
Reminds me of saying, "there's room for the bulls and the bears, but there is no room for the pigs."

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Johnnie
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Re: Murphy's Law Of Retirement

Post by Johnnie » Sat Jun 03, 2017 9:57 am

Oh geeze, can't we just enjoy the big numbers for a few days before worrying about the next thing? :wink:

("You can have 30 minutes to enjoy it. Begin now...")

~~~~~~~~~

Seriously, I know this is commonplace, but in my early sixties it is still fascinating to experience the "squeeze play" between portfolio getting bigger, the time before social security getting smaller, and the number of years that portfolio must last also coming down.

IOW, hitting portfolio balance targets is satisfying, but of course it can reverse course in a hurry. Watching the number of years grow less until social security is also progress - and irreversible. Together they squeeze-down the years remaining until retiring on your own terms.


(Of course there's a dark side to those years passing too, but somehow that awareness doesn't diminish the anticipation of having income streams without having to work.)
Last edited by Johnnie on Sat Jun 03, 2017 9:59 am, edited 1 time in total.
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The Wizard
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Re: Murphy's Law Of Retirement

Post by The Wizard » Sat Jun 03, 2017 9:59 am

ragabnh wrote:Early retirees should consider liquidating their positions if they won the game, there is no point in being greedy and the markets are at all time high at this time.
Liquidating? Going to 100% cash??
Really bad potential move, that...
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AlohaJoe
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Re: Murphy's Law Of Retirement

Post by AlohaJoe » Sat Jun 03, 2017 10:01 am

Random Walker wrote:Murphy's Law Of Retirement is as follows. As a bull market proceeds, people's portfolios swell. These investors, seeing the size of their portfolios, then decide to retire at or near the top of a bull. After a long bull market future expected returns are lower and the potential for reversion to mean is high. People retire, then subject themselves to terrible sequence of returns risk at the worst time, early retirement. The sequence of returns early in retirement is crucial to a financially successful retirement. People who retire when valuations are high are most exposed to this risk.
I tried reading Zwecher's book and put it down in frustration. Maybe some day I'll give it another go.

His Murphy's Law says
This would be Murphy’s Law of retirement: People tend to retire just before a market downturn and are thus more likely to be unlucky.
His Murphy's Law -- like so much of his book -- is a plausible enough claim but he provides no evidence or analysis whatsoever for it. He consistently fails to provide a single study or reference or just a number from his own research for much of what he writes. He only has 3 pages of references (Ang's Asset Management, as a contrast I have at hand, provides 44 pages of references) and only 2 of the references came out less than 5 years before the book was published giving the impression that it relies on dated scholarship, even if you account for the lag time between writing and publication.

It's not like "number of retirees" every year is a hard thing to look up. How many more people retire at the peak as opposed to at a normal time?

According to the Bureau of Labor Statistic...

In 1995 the labor force participation rate of men 55-65 was 66%.
In 1999, right before the crash, the labor force participation rate of men was 67.9%

There were more people working right before the crash...not fewer. Where's the evidence that "Murphy's Law of Retirement" exists in reality outside of a handful of anecdotal cases? In fact, if you look in newspaper archives for stories about hard luck retirees after the Year 2000 crash...they are basically never about normal retirees who just timed in a little bit wrong. They're almost exclusively about people who retired with $120,000 expecting it to generate $10,000 a year or people who invested entirely in a handful of individual high-tech stocks. If there were so many normal people, as Zwecher claims, who retired at the height of the bubble and were unlucky, why did reporters at the time consistently fail to turn them up?

The main reason I'm dubious about Zwecher's Murphy's Law is that we see the early retirement questions play out over & over again right here on Bogleheads: covering medical insurance until Medicare is extremely expensive. It was expensive in 2000 and 2008 at pre-crash. Bridging to Social Security is extremely expensive.

What's more, when you look at the actual equity returns around the bubbles I think it is useful to keep in mind just what kinds of portfolio growth we're actually talking about. For someone to "hit their number" and retire in 2000 right at the height of the bubble...it means they quadrupled their portfolio in 5 years. In 1995 they were thinking, "Well, if stocks grow at their historical rate I should hit my number around 2010". And then your portfolio quadruples and you're planning on retiring a decade sooner than originally planned. It is hard for me not to think that even people less conservative than Bogleheads are going to hesitate a bit on that one and not rush out to hand in their resignation.

MathWizard
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Re: Murphy's Law Of Retirement

Post by MathWizard » Sat Jun 03, 2017 10:02 am

My thought is that when the PE ratio is above 16, to discount the value of the equities in my
portfolio by a factor of long-term-average-PE/current-PE.

This would seem to lessen the effect of a long bull market encouraging an early than prudent retirement.

This eliminates some of the problems retirees had when getting out in Jan 2000, when they saw stocks
underperform through the 2000's.

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Re: Murphy's Law Of Retirement

Post by marcopolo » Sat Jun 03, 2017 10:20 am

AlohaJoe wrote:
His Murphy's Law says
This would be Murphy’s Law of retirement: People tend to retire just before a market downturn and are thus more likely to be unlucky.
....

It's not like "number of retirees" every year is a hard thing to look up. How many more people retire at the peak as opposed to at a normal time?

According to the Bureau of Labor Statistic...

In 1995 the labor force participation rate of men 55-65 was 66%.
In 1999, right before the crash, the labor force participation rate of men was 67.9%
I agree with most of your points. But, I am not sure looking at broad retirement statistics is the right measure here. I would venture to guess (sorry, no references!) that most retirees captured in those statistics retire based on age, forced retirement, becoming eligible for pensions, etc.

That may be a different situation compared to many on this forum who are looking at early retirement/financial independence on voluntary terms. In that case it is often driven by "making their number". For that subset of people, this observation, that they tend to retire after strong market run-ups seems logical. Whether that means it is just before a down turn is another matter.
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: Murphy's Law Of Retirement

Post by AlohaJoe » Sat Jun 03, 2017 10:32 am

marcopolo wrote:I agree with most of your points. But, I am not sure looking at broad retirement statistics is the right measure here. I would venture to guess (sorry, no references!) that most retirees captured in those statistics retire based on age, forced retirement, becoming eligible for pensions, etc.
I agree with you but I was trying to make the easy point that his broad claim is non-sensical on the surface. He obviously means some narrower claim...that's the only thing that makes any sense. But who knows what that actual narrower claim might be?

To further weaken his claim...

In Kim & Hanna's 2016 paper "The Impact of the 2008-2009 Stock Market Crash on the Wealth of U.S. Households" they found that among households aged 54-70 "only 5 percent had a potential loss of 8 percent or more of wealth". They sum it up as, "the research shows that although households faced financial stress because of the stock market crash of 2008-2009, the impact of market declines on total wealth was limited in scope".

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tennisplyr
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Re: Murphy's Law Of Retirement

Post by tennisplyr » Sat Jun 03, 2017 4:00 pm

I've been lucky enough to have retired in early 2011. It's made my financial life pretty stress free and I'm thankful for that.
Those who move forward with a happy spirit will find that things always work out.

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Re: Murphy's Law Of Retirement

Post by IlliniDave » Sat Jun 03, 2017 4:40 pm

What does he think people should do, wait around for a crash and then retire? Don't see many people doing that.

The first books I read on investing were by Bernstein. If I shared his hyper-conservative outlook I'd work until my late 60s or longer and even then I'd spend all my time cringing and waiting for the other shoe to fall. Not familiar with this author, but maybe he's similarly gloomy.

It's hard for some of us, but the thing to do is to take some equity exposure off the table as you near retirement if you have reason to be concerned about SRR, especially if there's been a recent healthy run up (the latter consideration nudges close to market timing). I don't buy into the approach implied by the expression, "if you've won the game why keep playing?" for myself, but it seems prudent to play a little more conservatively at sensitive junctures like the transition into retirement.
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HomerJ
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Re: Murphy's Law Of Retirement

Post by HomerJ » Sat Jun 03, 2017 4:50 pm

ALWAYS plan for the stock market dropping 50% tomorrow and taking 5-10 years to recover.

If your plan can survive that, then you are good to go.

At 30, one can plan for the above and still be 100% stocks.

Near retirement, one should probably not be 100% stocks if you are planning for the above.

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Re: Murphy's Law Of Retirement

Post by heyyou » Sat Jun 03, 2017 9:57 pm

Notice how doom and gloom get your attention, including boosting the sale of books or number of website hits. It has been five decades since the 1966 retiree quit working. The 1968 retiree had similar troubles, but the 1967 retiree didn't. Try to plan in advance for that! In a way, many people did, but they died with a few unspent multiples of their retirement day assets which is also a bad risk.

Sequence of Return Risk is just a subset of living beyond your means. It is unique to those spending 4% real of their retirement day assets without any monitoring of current portfolio balance. How many retirees would do that? How can someone harvest annual inflation info for boosting their WDs without ever checking their asset balance divided by their expected longevity (same as your RMD divisor)? Wouldn't those blindly spending be the ones WDing a fixed 4% of their recent balance, as that would be the limit of their financial acumen?

Yes, plenty of retirees overspend but the specialization of 4% real until portfolio exhaustion is a very small sample.

Seems like a straw man, beware of SEQUENCE RISK!, buy my book to learn how to avoid it. If the advice is wrong, either you won't know it for two and a half decades, or your heirs and your AUM advisor will be delighted.
End of this rant about Sequence Risk, expect another one soon in the next thread on the same recurring topic.

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Random Walker
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Re: Murphy's Law Of Retirement

Post by Random Walker » Sat Jun 03, 2017 10:41 pm

Heyyou,
For a rant that was pretty wise, concise, and informative :-) keep them coming!

Dave

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Re: Murphy's Law Of Retirement

Post by Sandman62 » Sun Jun 04, 2017 10:19 am

From a post of mine last fall, here's our plan:

With me planning to retire at 55 at the end of next year, and wife thereabouts too, we changed our 65/25/10 AA about a week ago from what had crept up a bit in stocks to 35/50/15, converting about $300k of stock funds to bonds/cash funds. We'll have two pensions that we believe will more than cover our expenses for the first few years, then we'll start supplementing with some withdrawals from our retirement accounts. But we just weren't sleeping well thinking about how our plans could be derailed if the stock market drops 30-50% in the next five or so years. Some of that 15% in cash could be put back into a slightly higher stock allocation in 5-7 years, once we seem past the crucial window where a bad sequence of returns could really wreak havoc.

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siamond
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Re: Murphy's Law Of Retirement

Post by siamond » Sun Jun 04, 2017 11:27 am

heyyou wrote:Notice how doom and gloom get your attention, including boosting the sale of books or number of website hits. It has been five decades since the 1966 retiree quit working. The 1968 retiree had similar troubles, but the 1967 retiree didn't. Try to plan in advance for that! In a way, many people did, but they died with a few unspent multiples of their retirement day assets which is also a bad risk.

Sequence of Return Risk is just a subset of living beyond your means. It is unique to those spending 4% real of their retirement day assets without any monitoring of current portfolio balance. How many retirees would do that? How can someone harvest annual inflation info for boosting their WDs without ever checking their asset balance divided by their expected longevity (same as your RMD divisor)? Wouldn't those blindly spending be the ones WDing a fixed 4% of their recent balance, as that would be the limit of their financial acumen?

Yes, plenty of retirees overspend but the specialization of 4% real until portfolio exhaustion is a very small sample.

Seems like a straw man, beware of SEQUENCE RISK!, buy my book to learn how to avoid it. If the advice is wrong, either you won't know it for two and a half decades, or your heirs and your AUM advisor will be delighted.
End of this rant about Sequence Risk, expect another one soon in the next thread on the same recurring topic.
Totally agreed. The Sequence of Returns risk is quite exaggerated, and can be largely mitigated by common-sense withdrawal techniques.

Also, if one ponders to retire when CAPE is 30 or close for the US stocks (like... now!), then common sense dictates to do some quick math: multiply US stocks balance by 20/30, recompute entire portfolio balance and see if this still matches your 'number' (i.e. run a scenario where CAPE drops to a more reasonable 20)... This is obviously coarse math, but still a solid sanity check.

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Re: Murphy's Law Of Retirement

Post by garlandwhizzer » Sun Jun 04, 2017 4:38 pm

arcticpineapplecorp. wrote:
stocks are for accumulating wealth, bonds are for preserving wealth and cash is for spending wealth. Make sure you have enought cash and bonds so you don't have to sell your stocks and allow them time to recover. When they do, you sell stocks that have recovered and increased in value to refill your cash/bond bucket from which you spend.
!+

As the bull market goes on and on (this one now in its 8th year), I believe you should rebalance periodically from risky assets like stocks which have appreciated greatly to less risky but safer bonds according your asset allocation plan. In this way you slowly and gradually take money out of the rapidly appreciating risky assets and place it an asset that will preserve wealth in a market downturn. Having a cushion in bonds and cash comes in handy when the bull dies and the bear appears and, given sufficient time, that always happens. It's emotionally hard for many of us to sell assets while they're consistently going up in price, but it lowers long term risk by avoiding such stock sales during a bear market. Over time you'll find the right asset allocation stock/bond balance for your own particular risk tolerance/financial goals, and rebalancing back into those fixed percentages when they get knocked out of whack by market action is a good way to smooth out the long ride.

Garland Whizzer

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TD2626
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Re: Murphy's Law Of Retirement

Post by TD2626 » Sun Jun 04, 2017 4:46 pm

Anything that can go wrong will, eventually - there are a range of investment outcomes that are possible (this is characterized by the standard deviation). If you hold stocks long enough, you are very, very likely to hit a large stock downturn. Problem is, you never know when this will happen.

Always being emotionally prepared for a downturn, and always being committed to staying the course, is vital.

One must have enough of a margin of safety / cushion in safer assets (bonds/cash) as well.

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Re: Murphy's Law Of Retirement

Post by gkaplan » Sun Jun 04, 2017 10:26 pm

arcticpineapplecorp. wrote:stocks are for accumulating wealth, bonds are for preserving wealth and cash is for spending wealth. Make sure you have enought cash and bonds so you don't have to sell your stocks and allow them time to recover. When they do, you sell stocks that have recovered and increased in value to refill your cash/bond bucket from which you spend. . . .

This should be a "sticky."
Gordon

ragabnh
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Re: Murphy's Law Of Retirement

Post by ragabnh » Mon Jul 24, 2017 4:45 pm

marcopolo wrote:
ragabnh wrote:Early retirees should consider liquidating their positions if they won the game, there is no point in being greedy and the markets are at all time high at this time.
And do what with it?
The market is often at all time highs when looking backwards. Whether it is a peak can only be known after the fact.
Invest conservatively in income yielding funds that beat inflation, typically low yield. Consider Annuities (SPA), treasuries and other conservative investments (CD's).

What is the purpose of riding the highs and lows in the market if you won the game. Only greed.

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FIREchief
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Re: Murphy's Law Of Retirement

Post by FIREchief » Tue Jul 25, 2017 1:33 am

ragabnh wrote: Invest conservatively in income yielding funds that beat inflation, typically low yield.
What is this?
ragabnh wrote: What is the purpose of riding the highs and lows in the market if you won the game. Only greed.
It could also be charity or a desire to help one's heirs or others....
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Murphy's Law Of Retirement

Post by Iliketoridemybike » Tue Jul 25, 2017 6:39 am

I have what I need and have more aggressively moving toward a 50/50 allocation. As many say on this board, if you've won the game, stop playing.

ragabnh
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Re: Murphy's Law Of Retirement

Post by ragabnh » Tue Jul 25, 2017 7:14 am

FIREchief wrote:
ragabnh wrote: Invest conservatively in income yielding funds that beat inflation, typically low yield.
What is this?
"Annuities (SPA), treasuries and other conservative investments (CD's)." Did you get it now?

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Re: Murphy's Law Of Retirement

Post by Mr.BB » Tue Jul 25, 2017 7:21 am

Any retirement budget should also include a $2,000 - $4,000 (depending on your income) yearly buffer for those "what if's" in life.
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Re: Murphy's Law Of Retirement

Post by RadAudit » Tue Jul 25, 2017 7:56 am

arcticpineapplecorp. wrote:stocks are for accumulating wealth, bonds are for preserving wealth and cash is for spending wealth. Make sure you have enought cash and bonds so you don't have to sell your stocks and allow them time to recover. When they do, you sell stocks that have recovered and increased in value to refill your cash/bond bucket from which you spend.Also, if you stick to a SWR (safe withdrawal rate) or use a variable percentage withdrawal strategy, you should be fine over the long term.
I just slogged through a long book that had a numerous charts and graphs, cost a lot, and said the same thing. I prefer your summary.
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Re: Murphy's Law Of Retirement

Post by aristotelian » Tue Jul 25, 2017 8:15 am

As long as the retiree shifts to a conservative allocation that reduces exposure to the next bear market, the worst case scenario can happen and the should be OK.

I do see a correlation between the interest in early retirement and the long bull market. I was just listening to a podcast with a professional couple having a baby in their 30s talking about ER with a 100% stock portfolio. I don't think they would be talking about ER if the market had just dropped 50%.

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Re: Murphy's Law Of Retirement

Post by stemikger » Tue Jul 25, 2017 8:23 am

If you have enough in bonds during the downturns, you take from the bonds.

Also, I plan to be flexible with my withdrawal rate.
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Re: Murphy's Law Of Retirement

Post by Random Walker » Tue Jul 25, 2017 8:48 am

Iliketoriemybike,
I too have moved quite aggressively from 80/20 to 50/50 over about five years I think. Never thought I'd take the equity that low. Now suddenly 50/50 is feeling pretty aggressive. :-)

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Re: Murphy's Law Of Retirement

Post by Northern Flicker » Tue Jul 25, 2017 2:29 pm

When working, regular contributions to a portfolio buffer the risk of a bear market to a significant extent because contributions during the best bear market buy into the market at lower valuations, and there is a high likelihood of being able to continue working until the market recovers or beyond.

In retirement, the opposite happens-- withdrawals heighten the risk of a bear market. In other words, the act of retiring creates a single point in time where risk tolerance drops significantly.

A revisit to asset allocation is warranted at retirement. Retiring near the peak of a bull run is fine as long as one dials back risk at retirement to a level within one's new capacity to bear risk. Establishing an income floor is one very effective way to do that.
Last edited by Northern Flicker on Tue Jul 25, 2017 7:32 pm, edited 1 time in total.
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Re: Murphy's Law Of Retirement

Post by willthrill81 » Tue Jul 25, 2017 2:59 pm

arcticpineapplecorp. wrote:Also, if you stick to a SWR (safe withdrawal rate) or use a variable percentage withdrawal strategy, you should be fine over the long term. Both are discussed at length at bogleheads. Do a search and see.
The entire concept of safe withdrawal rates is build around historical sequence of returns risk. If it's not necessary for you to leave behind a lot of assets (even though you probably will), just use a 4% withdrawal rate for a 30 year planned retirement. Even using this method, few retirees are going to keep their spending levels the same when stocks tank, which provides even more security. If you want even more security, use a 3.5% WR or a variable withdrawal rate. Unless you're retiring with barely enough funds, taking a 20% income reduction for a few years shouldn't be a death knell.

A recent study found that retirees were more concerned with running out of money than dying. :oops: After reading a lot of these kinds of threads, I think that study is probably accurate.
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Re: Murphy's Law Of Retirement

Post by J295 » Tue Jul 25, 2017 3:11 pm

relative equity valuations were not part of our retirement decision five years ago and aren't applicable now to our financial decisions. i suppose the relative valuations could be a piece of someone's decision tree.

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Re: Murphy's Law Of Retirement

Post by bligh » Tue Jul 25, 2017 3:41 pm

willthrill81 wrote:
arcticpineapplecorp. wrote:Also, if you stick to a SWR (safe withdrawal rate) or use a variable percentage withdrawal strategy, you should be fine over the long term. Both are discussed at length at bogleheads. Do a search and see.
The entire concept of safe withdrawal rates is build around historical sequence of returns risk. If it's not necessary for you to leave behind a lot of assets (even though you probably will), just use a 4% withdrawal rate for a 30 year planned retirement. Even using this method, few retirees are going to keep their spending levels the same when stocks tank, which provides even more security. If you want even more security, use a 3.5% WR or a variable withdrawal rate. Unless you're retiring with barely enough funds, taking a 20% income reduction for a few years shouldn't be a death knell.

A recent study found that retirees were more concerned with running out of money than dying. :oops: After reading a lot of these kinds of threads, I think that study is probably accurate.
If I remember correctly, a 4% withdrawal rate had a 96% success rate for a 30 year period. A 60 year old male only a 20% probability of living to see his 90th birthday. To put it another way, there is an 80% probability you wont have a 30 year retirement. So if my math is correct, your actual probability of a 60 year old male running out of money with a 4% withdrawal rate on his portfolio is 0.04 * 0.2 = 0.8%!

Similarly a 50 year old male has only a 56.5% probability of reaching 80. So an early retiree 50 year old male with a 4% withdrawal rate has a 0.04 * 0.565 = ~2% probability of running out of money.

Both of those probabilities are assuming people don't adjust their spending when the market takes a dive. Also that doesn't take into account a surving spouse.

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Re: Murphy's Law Of Retirement

Post by alfaspider » Tue Jul 25, 2017 3:56 pm

bligh wrote:
willthrill81 wrote:
arcticpineapplecorp. wrote:Also, if you stick to a SWR (safe withdrawal rate) or use a variable percentage withdrawal strategy, you should be fine over the long term. Both are discussed at length at bogleheads. Do a search and see.
The entire concept of safe withdrawal rates is build around historical sequence of returns risk. If it's not necessary for you to leave behind a lot of assets (even though you probably will), just use a 4% withdrawal rate for a 30 year planned retirement. Even using this method, few retirees are going to keep their spending levels the same when stocks tank, which provides even more security. If you want even more security, use a 3.5% WR or a variable withdrawal rate. Unless you're retiring with barely enough funds, taking a 20% income reduction for a few years shouldn't be a death knell.

A recent study found that retirees were more concerned with running out of money than dying. :oops: After reading a lot of these kinds of threads, I think that study is probably accurate.
If I remember correctly, a 4% withdrawal rate had a 96% success rate for a 30 year period. A 60 year old male only a 20% probability of living to see his 90th birthday. To put it another way, there is an 80% probability you wont have a 30 year retirement. So if my math is correct, your actual probability of a 60 year old male running out of money with a 4% withdrawal rate on his portfolio is 0.04 * 0.2 = 0.8%!

Similarly a 50 year old male has only a 56.5% probability of reaching 80. So an early retiree 50 year old male with a 4% withdrawal rate has a 0.04 * 0.565 = ~2% probability of running out of money.

Both of those probabilities are assuming people don't adjust their spending when the market takes a dive. Also that doesn't take into account a surving spouse.
It also doesn't take into account that you are not the hypothetical "average 50 year old male" used for general longevity statistics. You know if you are a smoker, have chronic conditions, etc. Better to use life insurance tables for your risk profile- i.e. if you are healthy as a horse with no bad habits or dangerous activities, you might want to assume "super-preferred" longevity tables.

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Re: Murphy's Law Of Retirement

Post by bligh » Tue Jul 25, 2017 4:15 pm

alfaspider wrote:
It also doesn't take into account that you are not the hypothetical "average 50 year old male" used for general longevity statistics. You know if you are a smoker, have chronic conditions, etc. Better to use life insurance tables for your risk profile- i.e. if you are healthy as a horse with no bad habits or dangerous activities, you might want to assume "super-preferred" longevity tables.
Yeah that is a very good point. Also family history should be taken into account as well. Even then, you are shifting it around by small fractions of a percent. Even if you assume you are twice as likely as a 60 year old male to make it to 90 (which is extremely optimistic) you still end up with a really tiny 0.04 * 0.40 = 1.6% chance of failure at a 4% withdrawal rate.


Google brought this up for super preferred longevity tables : http://www.lifeinsreviews.com/uploads/L ... report.pdf

Note how a 55 year old super preferred male has only a 50% chance of making it to 85 (30 year retirement) .. and it isn't all that much better than a preferred (50% die by 84) or a standard (50% die by 82). If you look at the graph with the black line it doesn't stand out way above the other levels, the variation is small. In general we all tend to over estimate how long we will live. This is wishful thinking on our part. Even if you are a super healthy 55 year old male, it is still a coin toss as to whether you will make it to 85.

Of course the other side of the coin, is that 50% will live past 85 and need to plan for it too. However, notice how the curve steepens rapidly past 85. Even among the healthiest 55 year old early retirees, only about 5-6% will be lucky enough to live the 10 more years to see a 40 year retirement!

In short, if you stick with a 4% withdrawal rate, the odds are very good that you will leave behind a decent sized estate. :)

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Re: Murphy's Law Of Retirement

Post by willthrill81 » Tue Jul 25, 2017 4:37 pm

bligh wrote:
willthrill81 wrote:
arcticpineapplecorp. wrote:Also, if you stick to a SWR (safe withdrawal rate) or use a variable percentage withdrawal strategy, you should be fine over the long term. Both are discussed at length at bogleheads. Do a search and see.
The entire concept of safe withdrawal rates is build around historical sequence of returns risk. If it's not necessary for you to leave behind a lot of assets (even though you probably will), just use a 4% withdrawal rate for a 30 year planned retirement. Even using this method, few retirees are going to keep their spending levels the same when stocks tank, which provides even more security. If you want even more security, use a 3.5% WR or a variable withdrawal rate. Unless you're retiring with barely enough funds, taking a 20% income reduction for a few years shouldn't be a death knell.

A recent study found that retirees were more concerned with running out of money than dying. :oops: After reading a lot of these kinds of threads, I think that study is probably accurate.
If I remember correctly, a 4% withdrawal rate had a 96% success rate for a 30 year period. A 60 year old male only a 20% probability of living to see his 90th birthday. To put it another way, there is an 80% probability you wont have a 30 year retirement. So if my math is correct, your actual probability of a 60 year old male running out of money with a 4% withdrawal rate on his portfolio is 0.04 * 0.2 = 0.8%!

Similarly a 50 year old male has only a 56.5% probability of reaching 80. So an early retiree 50 year old male with a 4% withdrawal rate has a 0.04 * 0.565 = ~2% probability of running out of money.

Both of those probabilities are assuming people don't adjust their spending when the market takes a dive. Also that doesn't take into account a surving spouse.
Precisely. Mortality doesn't enter into people's calculations nearly as often as it should. For a 65 year old opposite sex couple, there's only an 18% chance that at least one of them will survive to age 95. So a 5% chance of 'failure' (I really hate that term because virtually no one really runs out of money, they just reduce their spending somewhere along the way) for a 30 year strategy is really only a 0.9% chance of failure.
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