Sequence of Returns Risk - Mitigation/Management

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GiannaLuna
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Sequence of Returns Risk - Mitigation/Management

Post by GiannaLuna » Mon Dec 02, 2019 6:53 am

It's not hard to find discussions or articles related to this topic, but I am interested in learning which approach to manage this risk has been taken by Bogleheads and how they arrived at their chosen strategy?

So far, I have just adjusted my portfolio in favor of bond funds, but seeking to investigate/implement additional or other routes.

Thank you.

livesoft
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Re: Sequence of Returns Risk - Mitigation/Management

Post by livesoft » Mon Dec 02, 2019 7:25 am

You probably won't like it, but a couple of methods that are not discussed are:

1. Having a spouse that keeps working.

2. Having well-off relatives that will leave one their unused assets when they die.

And an easy one: Expenses low enough to live on one's social security benefits. I never hear from my western European friends about how much money they will need in their old age or rough spots. It is simply not a worry for them.
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stan1
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Re: Sequence of Returns Risk - Mitigation/Management

Post by stan1 » Mon Dec 02, 2019 7:56 am

Sequence of return risk is discussed directly or indirectly in many threads, including:
Annuities (SPIA)
Long Term Care Insurance
Total Market vs. Factor investing
Domestic vs. International
Can I retire now?

The mitigations include insurance, diversification, earning more, investing more, and close relationships with family. SPIA and LTCI are expensive and themselves are priced to reflect sequence of return risks. People who bought these insurance policies in the 1990s caught a favorable sequence of returns. Now they are priced differently with assumptions of low returns. People agree on diversification, but don't agree what it means. We have some who believe a 50/50 S&P 500/Total Bond Market Fund is diversified. Factor investing threads often mention that factors may underperform the total market for a long time, maybe decades. Some feel international is not needed because US companies do business internationally. Others feel international adds diversification. In reality it depends what sequence you are on. Working part time is viable for some people due to the nature of their career and expertise, but other people's health does not allow that. Many people on this board want 2-3% withdrawal rates made possible by high incomes and high saving rates. Families have taken care of their elders for thousands of years probably more. It's really only been within the last 70 years that the idea came up in the US that seniors should not be a burden to their kids. Still, today millions of Americans live in multi-generational households sharing living expenses and helping each other.

dknightd
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Re: Sequence of Returns Risk - Mitigation/Management

Post by dknightd » Mon Dec 02, 2019 8:03 am

This is discussed often here. Google "Sequence of Returns Risk site:bogleheads.org"

My plan:
Buy an SPIA that combined with SS at 70 will cover basic living expenses.
Keep enough in short term bonds, MM, and similar, to cover what SS will provide when I claim.
Be flexible about what I spend above and beyond what I need to stay comfortable.
Last edited by dknightd on Mon Dec 02, 2019 9:58 am, edited 2 times in total.

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Sandtrap
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Re: Sequence of Returns Risk - Mitigation/Management

Post by Sandtrap » Mon Dec 02, 2019 8:20 am

GiannaLuna wrote:
Mon Dec 02, 2019 6:53 am
It's not hard to find discussions or articles related to this topic, but I am interested in learning which approach to manage this risk has been taken by Bogleheads and how they arrived at their chosen strategy?

So far, I have just adjusted my portfolio in favor of bond funds, but seeking to investigate/implement additional or other routes.

Thank you.
Additional income streams.
Diversification of income streams. IE: Physical R/E with income generation, SPIA, etc.
Income streams outside of portfolio withdrawals that cover base expenses, or more.
Diversification of assets.
Finding the allocation that works for "you".
A "substantial" portfolio.
Substantial assets across the board.
Frugal lifestyle
Minimal expenses without compromising a reasonable (for you) lifestyle and providing for family needs.
Zero debt
Reducing points of financial failure
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EnjoyIt
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Re: Sequence of Returns Risk - Mitigation/Management

Post by EnjoyIt » Mon Dec 02, 2019 8:32 am

Be flexible in your spending.

Once you have all your needs covered, you are golden.
Have resources to cover the wants, but understand and accept that some of the wants may disappear for a few years.

Examples of needs: property tax, utilities, groceries, healthcare.

Examples of wants: cable tv, daily coffee runs, car less than 7 years old, overseas vacations, etc. I find many people have a hard time decoupling their wants from their needs.

dcabler
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Re: Sequence of Returns Risk - Mitigation/Management

Post by dcabler » Mon Dec 02, 2019 8:29 pm

GiannaLuna wrote:
Mon Dec 02, 2019 6:53 am
It's not hard to find discussions or articles related to this topic, but I am interested in learning which approach to manage this risk has been taken by Bogleheads and how they arrived at their chosen strategy?

So far, I have just adjusted my portfolio in favor of bond funds, but seeking to investigate/implement additional or other routes.

Thank you.
By turning it into "Sequence of Income Risk". I'd rather guarantee that my money lasts as long as I need it to and accept withdrawals that are variable instead. For many, it could be "maintain flexibility in your spending" or it could be to follow a withdrawal method such as VPW or a PMT based method both of which are searchable in this forum.

flyingaway
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Re: Sequence of Returns Risk - Mitigation/Management

Post by flyingaway » Mon Dec 02, 2019 8:50 pm

The best strategy, do not retire.

carolinaman
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Re: Sequence of Returns Risk - Mitigation/Management

Post by carolinaman » Tue Dec 03, 2019 7:58 am

Retire without any debt. Have your cars and house paid for and both in good condition.

Develop and maintain healthy habits (diet, exercise, etc.) that result in better quality of life. Serious health issues happen even to people who maintain healthy habits but overall these people will have better health, better quality of life and lower medical bills.

ScubaHogg
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Re: Sequence of Returns Risk - Mitigation/Management

Post by ScubaHogg » Tue Dec 03, 2019 8:13 am

livesoft wrote:
Mon Dec 02, 2019 7:25 am

And an easy one: Expenses low enough to live on one's social security benefits. I never hear from my western European friends about how much money they will need in their old age or rough spots. It is simply not a worry for them.
Do your American friends talk about running out of money in their old age? In general my experience is that isn’t something friends talk about a lot. Might just be my age (40 ish).

livesoft
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Re: Sequence of Returns Risk - Mitigation/Management

Post by livesoft » Tue Dec 03, 2019 8:17 am

ScubaHogg wrote:
Tue Dec 03, 2019 8:13 am
Do your American friends talk about running out of money in their old age? In general my experience is that isn’t something friends talk about a lot. Might just be my age (40 ish).
I'm an affable guy, so for reasons only known to them people tell me things that they don't tell others. A few widows have told me about their worries of running out of money. And of course, there are all the folks at bogleheads.org who are worried.
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ScubaHogg
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Re: Sequence of Returns Risk - Mitigation/Management

Post by ScubaHogg » Tue Dec 03, 2019 8:27 am

livesoft wrote:
Tue Dec 03, 2019 8:17 am
ScubaHogg wrote:
Tue Dec 03, 2019 8:13 am
Do your American friends talk about running out of money in their old age? In general my experience is that isn’t something friends talk about a lot. Might just be my age (40 ish).
I'm an affable guy, so for reasons only known to them people tell me things that they don't tell others. A few widows have told me about their worries of running out of money. And of course, there are all the folks at bogleheads.org who are worried.
You must be like my wife then. Total strangers confess terrible and dark secrets to her in passing. I’ve witnessed it and it’s inexplainable. Luckily they don’t have the same desire to share with me!

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Re: Sequence of Returns Risk - Mitigation/Management

Post by Call_Me_Op » Tue Dec 03, 2019 8:48 am

GiannaLuna wrote:
Mon Dec 02, 2019 6:53 am
It's not hard to find discussions or articles related to this topic, but I am interested in learning which approach to manage this risk has been taken by Bogleheads and how they arrived at their chosen strategy?
Ensure you have an adequate amount of fixed income. This is an easy and effective way to mitigate SOR risk.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Sequence of Returns Risk - Mitigation/Management

Post by tennisplyr » Tue Dec 03, 2019 11:48 am

IMHO, keep your eye on expenses, your portfolio and adjust accordingly. In reality, this can occur during any stage of your retirement, not just your early years. Don't panic.
Those who move forward with a happy spirit will find that things always work out.

rich126
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Re: Sequence of Returns Risk - Mitigation/Management

Post by rich126 » Tue Dec 03, 2019 12:10 pm

EnjoyIt wrote:
Mon Dec 02, 2019 8:32 am
Be flexible in your spending.

Once you have all your needs covered, you are golden.
Have resources to cover the wants, but understand and accept that some of the wants may disappear for a few years.

Examples of needs: property tax, utilities, groceries, healthcare.

Examples of wants: cable tv, daily coffee runs, car less than 7 years old, overseas vacations, etc. I find many people have a hard time decoupling their wants from their needs.
So true. People often say "I deserve x because I work so hard". Unfortunately life doesn't work that way.

Topic Author
GiannaLuna
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Re: Sequence of Returns Risk - Mitigation/Management

Post by GiannaLuna » Tue Dec 03, 2019 2:54 pm

Interesting responses. All over the board - I was expecting asset allocation, bond tent or similar strategy responses.... some of the responses follow the same strategy I used to accumulate...

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Wiggums
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Re: Sequence of Returns Risk - Mitigation/Management

Post by Wiggums » Tue Dec 03, 2019 3:08 pm

GiannaLuna wrote:
Tue Dec 03, 2019 2:54 pm
Interesting responses. All over the board - I was expecting asset allocation, bond tent or similar strategy responses.... some of the responses follow the same strategy I used to accumulate...
I see a lot of suggestions regarding your sources of income. We don’t know what your portfolio look like, your age or projected expenses. Sometimes, working longer is the answer. Deferring non essential spending is another posdibily.

Additional income streams.
—Diversification of income streams. IE: Physical R/E with income generation, SPIA, etc.
—Income streams outside of portfolio withdrawals that cover base expenses, or more.
—Diversification of assets.
—Finding the allocation that works for "you".
— having A "substantial" portfolio.
— Frugal lifestyle
— Minimal expenses as needed
— retire with Zero debt
— Reducing points of financial failure

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Re: Sequence of Returns Risk - Mitigation/Management

Post by midareff » Tue Dec 03, 2019 3:49 pm

FWIW, my opinion is the sequence of return risks are self mitigating as you go further into retirement. ... as a starter. I retired at 64 in 2012 so I am a ways in now @ 72. Sequence of returns risk deals with the impact to a portfolio, and primarily the impact on equity pricing. While nothing will protect you in case of world wide nuclear war other than a large cache of ammunition (slightly sarcastic) ... I think the first decision is how long you think the catastrophic drop will last and what you can do to protect from having to sell equities at fire sale prices (in decumulation). IMHO, the first decision is how many years of withdrawals do you want to protect? At the onset of my retirement I decided my decumulation would be from bonds which have a stable NAV, such as Intermediate Term or Limited Term Municipals in taxable s and ST Corporates in my IRA, or as breakable CDs in Ally. That was then, this is now and it's down to 3 years of ST in IRA but still many years in taxable. I understand I just retired at a really good time to do that and others may have real different results. I'd be more cautious than not.

Schlabba
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Re: Sequence of Returns Risk - Mitigation/Management

Post by Schlabba » Tue Dec 03, 2019 4:11 pm

livesoft wrote:
Mon Dec 02, 2019 7:25 am
And an easy one: Expenses low enough to live on one's social security benefits. I never hear from my western European friends about how much money they will need in their old age or rough spots. It is simply not a worry for them.
I, as a Western European, do complain all day about the high taxes here. Maybe the grass is always greener on the other side of the pond :happy

To the OP, sequence of return risk only exists if your nest egg is of a size where a financial crisis would put you at risk of running out of money. My strategy for dealing with it is simply working until I reach the perpetual withdrawal rate instead of a risky withdrawal rate.
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Re: Sequence of Returns Risk - Mitigation/Management

Post by ruralavalon » Tue Dec 03, 2019 5:24 pm

GiannaLuna wrote:
Mon Dec 02, 2019 6:53 am
It's not hard to find discussions or articles related to this topic, but I am interested in learning which approach to manage this risk has been taken by Bogleheads and how they arrived at their chosen strategy?

So far, I have just adjusted my portfolio in favor of bond funds, but seeking to investigate/implement additional or other routes.

Thank you.
Age 74, retired nine years.

Retire without debt.
A higher bond allocation in early retirement.
Flexibility in spending.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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willthrill81
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Re: Sequence of Returns Risk - Mitigation/Management

Post by willthrill81 » Tue Dec 03, 2019 5:44 pm

EnjoyIt wrote:
Mon Dec 02, 2019 8:32 am
Be flexible in your spending.
Yes. The ability to reduce one's spending by the same extent as potential drops in one's portfolio completely removes sequence of returns risk from one's portfolio (i.e. the portfolio balance will be the same no matter how the returns are arranged). For this reason, eliminating debt before beginning withdrawals reduces sequence of returns risk in virtually all instances.

To the extent that one's spending is not that flexible, buying a SPIA likely reduces sequence of returns risk.

For the above reasons, a purely fixed withdrawal strategy like the '4% rule' is maximally exposed to sequence of returns risk. A purely flexible withdrawal strategy like VPW and the TVM approach are not at all exposed to sequence of returns risk. Other approaches are somewhere between.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Sequence of Returns Risk - Mitigation/Management

Post by TN_Boy » Tue Dec 03, 2019 5:50 pm

flyingaway wrote:
Mon Dec 02, 2019 8:50 pm
The best strategy, do not retire.
A cure much worse than the disease!

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Re: Sequence of Returns Risk - Mitigation/Management

Post by sixtyforty » Wed Dec 04, 2019 5:31 am

Aside from what has already been mentioned, the tool below opened my eyes on how asset allocation can affect your portfolio by forcing a sequence of returns at the beginning of retirement. In these Monte-Carlo simulations, higher stock allocations didn't do real well.

https://www.portfoliovisualizer.com/financial-goals
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Re: Sequence of Returns Risk - Mitigation/Management

Post by Watty » Wed Dec 04, 2019 9:06 am

GiannaLuna wrote:
Mon Dec 02, 2019 6:53 am
It's not hard to find discussions or articles related to this topic, but I am interested in learning which approach to manage this risk has been taken by Bogleheads and how they arrived at their chosen strategy?
A few;

1) I have a paid off house. That reduces my spending on rent or a mortage and my portfolio is smaller so if there is a bear market my portfolio decline will be less and I will also be spending less while the market is down.

2) I will be delaying starting Social Security to get a larger benefit check later. The money that is earmarked for paying by living expenses before I start Social Security is invested more conservatively so it should not decline much in a bear market. Once I start Social Security I will have lower withdrawals from my portfolio each year.

These both have the side benefit of reducing my taxes.

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Re: Sequence of Returns Risk - Mitigation/Management

Post by bertilak » Wed Dec 04, 2019 9:14 am

So far I think I have seen above:
  1. Conservative AA.
  2. Annuities. Perhaps this is an overlap of #1.
  3. Large nest egg.
  4. Willingness and ability to cut back on spending.
  5. Low non-negotiable expenses. This primarily means low debt (e.g. mortgage).
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dbr
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Re: Sequence of Returns Risk - Mitigation/Management

Post by dbr » Wed Dec 04, 2019 9:34 am

Since risk in investing is symmetric, I am surprised so few people ask how to cope with favorable sequence of returns risk. I think there was one other post somewhere asking what people do with all the money they have in the 95% of cases that the outcome was not the worst case outcome.

The classic financial response is that the wealth should be annuitized. Probably the classic real world result is that heirs and maybe charities get a lot of money. I don't know how helpful a spending model like VPW is for getting rid of too much money.

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Re: Sequence of Returns Risk - Mitigation/Management

Post by Dinosaur Dad » Wed Dec 04, 2019 12:07 pm

Another view on this:

I'm 63 and about to retire. I plan to delay social security to age 70 and do a sequence of conversions of my pretax IRA's to Roth. I think both could help me mitigate the longer-term sequence risk as well as saving on higher taxes once RMD's start. I'm using "Pralana" retirement planning software to figure out how much to convert, purchased a subscription for $99 a year and have found it very helpful.

As I look at this, the trick is generating the cash between now and age 70 to pay for base expenses AND the additional conversion taxes. When you overlay the potential for a market downturn during this time, and given the amount of money I'll need to spend short-term to get the twin benefits, my conclusion is that I'm going to have to expand the percent of my asssets in short-term bonds or other low-risk equivalents...I don't want to have to sell in a down market when I know these expenses are coming. Takes some money off the table for potential gains but I think the longer term gain will be worth it.
"Take calculated risks - that is quite different from being rash." | General George S. Patton

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Re: Sequence of Returns Risk - Mitigation/Management

Post by willthrill81 » Wed Dec 04, 2019 12:20 pm

dbr wrote:
Wed Dec 04, 2019 9:34 am
Since risk in investing is symmetric, I am surprised so few people ask how to cope with favorable sequence of returns risk. I think there was one other post somewhere asking what people do with all the money they have in the 95% of cases that the outcome was not the worst case outcome.

The classic financial response is that the wealth should be annuitized. Probably the classic real world result is that heirs and maybe charities get a lot of money. I don't know how helpful a spending model like VPW is for getting rid of too much money.
It may be nitpicking, but I'm not sure that there is "favorable sequence of returns risk." Risk is typically associated with negative events, not positive ones. I think that it may be better to refer to it as the 'upside potential of a favorable sequence of returns'.

I think that the reasons so few ask about this issue are (1) most are more worried about downside risk than upside potential and (2) having an excess of funds is rarely a problem. I believe you're right that heirs and charity will likely much of it. However, this seems to fit with the 'annuitization model'. For instance, I may plan to annuitize my assets under the assumption that I'll live to age 95, but I'm likely to kick the bucket well before then, leaving behind a bequest. Obviously, this is not typically the case with funds used to buy a life annuity.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Sequence of Returns Risk - Mitigation/Management

Post by patrick013 » Wed Dec 04, 2019 7:23 pm

I've always liked a 5 year CD ladder with each year a year of expenses.

Of course if the sequence is a full 5 years you'd have to figure out how
to refund your 5 year CD ladder when equity returns normalize.

TRSY's usually go up dramatically when stocks go down dramatically but you
have to sell the TRSY's then before they go back down. LT TRSY's have
about a 25% gain the last year and extended duration zeros have about a 35%
gain the last year. Very helpful this time when the yield curve inverted
for awhile and possibly forecast sequence of returns risk coming in the short
term. In 2008 similar TRSY gains occurred and would be realized if sold.

Of course rates could have gone up if the market could've handled them and
equities would be somewhat slower then, and bonds would be somewhat depressed
per their market adjustment. Nice to have a CD ladder in reserve then also if needed.
age in bonds, buy-and-hold, 10 year business cycle

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DG99999
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Re: Sequence of Returns Risk - Mitigation/Management

Post by DG99999 » Wed Dec 04, 2019 11:04 pm

Spend more (sorry to be facetious, but assuming you choose a theoretical Safe Withdrawal Rate, and we assume it is correct, then you have based your spending on the worst case historical sequence and it is likely that the risk is highly ASSYMETRIC toward spending too little and dying with a large residual - i.e. cheating yourself out of the experiences and things you could have had).

See Kitces below:

https://www.kitces.com/blog/url-upside- ... al-wealth/
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

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Re: Sequence of Returns Risk - Mitigation/Management

Post by jmk » Sun Dec 08, 2019 1:16 pm

dbr wrote:
Wed Dec 04, 2019 9:34 am
Since risk in investing is symmetric, I am surprised so few people ask how to cope with favorable sequence of returns risk. I think there was one other post somewhere asking what people do with all the money they have in the 95% of cases that the outcome was not the worst case outcome.

The classic financial response is that the wealth should be annuitized. Probably the classic real world result is that heirs and maybe charities get a lot of money. I don't know how helpful a spending model like VPW is for getting rid of too much money.
A main reason I've chosen to use a PMT formula for withdrawal (ie similar to VPW) is as a means to behaviorally overcome my irrational fear of withdrawing monies in retirement. My mind irrationally says "but what if.... better safe than sorry, keep it just in case and give away after dead". So having the pmt formula determine higher withdrawals when returns have been good and vice versa is a big advantage. Don't know how typical I am though.

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Re: Sequence of Returns Risk - Mitigation/Management

Post by jmk » Sun Dec 08, 2019 1:35 pm

DG99999 wrote:
Wed Dec 04, 2019 11:04 pm
Spend more (sorry to be facetious, but assuming you choose a theoretical Safe Withdrawal Rate, and we assume it is correct, then you have based your spending on the worst case historical sequence and it is likely that the risk is highly ASSYMETRIC toward spending too little and dying with a large residual - i.e. cheating yourself out of the experiences and things you could have had).
That's not inherent in the calculation of a SWR, and rather depends on what percentile cut-off you subsequently use. The SWR formula is simply a formula for the highest constant withdrawal that in retrospect, given a series of returns, would reduce wealth to zero. How one utilizes the total of those calculations if up to the user. In fact the Simba spreadsheet allows the user to enter any percentile from 0% to 100% of cases.

Put simply, if user uses 50% as her percentile (rather than 95%), then assuming future mimics the past and in the mean, you won't have money left over by withdrawing the SWR.

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