on impact of previous downturns

[Deleted]

compoundadvisors.com/2022/how-to-face-the-single-biggest-fear-in-retirement

What if this downturn happens in 10th year of your retirement and one has only 10 years left instead of 20 or 30 as this article discusses?

[steelpony10]

@waffle ,

      If you income invest and receive income increases each year above your personal inflation rate you may be set for years depending how much you dedicate to income only and personal unknowns before you need to spend down. So a variety of holdings combined raising payouts 3-5% yearly as a group might do it. Add a healthy stash of cash to this and that’s about all you can hope for to cover most markets. Buffet recommends 90% equities so this could be 90% income producers instead giving up hoped for enough capital gains with variable income vs. hopefully more dependable dividends or distributions.

      Having lived using that method with our parents for 15 years at the start I came to realize this may be cutting things too close under some situations. So I switched things up during 9/11 for them. We chose to get way way ahead of every possible scenario by investing in CEF’s (8-10% distributors starting about 5-10 years before retirement for us) stashing way more excess income to needs and made equities secondary added extra income during up markets with plans for reducing them slowly over time eventually converting them to income. This has worked great for us for 15 years so far and helped make one parents’ portfolio last up to 35 years.

       You can also just live in fear and skinflint your way through retirement stressing yourself over a total unknown with no holy grail of solutions. *

        *So it comes down to this: Do you want to depend on the train that shows up at the station each month, quarter and year on schedule with some cash in excess of needs or the train that just shows up 7 out of ten years, has an unknown arrival and departure schedule, another unknown variable, when you’re dealing with unsolvable unknowns already? How about what you leave a surviving spouse or partner?

[johnsmith]

@waffle,

Use the Bucket System

2 years expenses in Cash / CDs.

year 3 - 8 expenses in Bonds (preferably higher quality).

year 9 - X expenses in Stocks.

This way one always has around 8 years of expenses. After that we need to worry and since 2 years of cash/CDs is a lot, it's easier to get through downturns. Can even manage to extend that amount by reducing expenses if one needs to.

Can modify to 3 - 10 years in Bonds, year 11 onwards in Stock.

Depending on risk taking ability, amount of investment, income from other sources, expense levels etc.

Also say your stocks are up massively and bonds are flat - at the end of the year move one year's worth of expenses from stocks into Cash.

If Bonds are up and stocks are down massively - at the end of the year move one year's worth of expenses from bonds into Cash.

Mix & Match for your own needs.

[Deleted]

Aug 20, 2022 18:31:15 GMT @waffle said:

compoundadvisors.com/2022/how-to-face-the-single-biggest-fear-in-retirement

What if this downturn happens in 10th year of your retirement and one has only 10 years left instead of 20 or 30 as this article discusses?

Based on SWR (MC) studies, FAs wrote that a stock market/economic downturn at the beginning of retirement is the most dangerous possibility. But that depends on individual circumstances and the nature of the downturn. Personally, I don't believe the traditional 60/40 with 4% withdrawal is enough for a $1 mil portfolio to survive for the next 20-30 years without additional income.

[ECE Prof]

As steepony says, I am not worried about downturn. I welcome it because I can buy equties cheap - like TQQQ, SSO, etc. I am not going to short the market but wait for the market to come back.

[FD1000]

The usual, income investing = fuzzy math.

If you started with 1 million, 3 years ago investing in PDI, and you only needed 5% annually. Today you have about 87.5-88% which equal to $880K. PDI paid about 30% in 3 years, while you needed just 15%. Sounds great on paper, but you have now $120K less than you started.
In you invested in SPY, it paid about 5%(maybe 1.5% annually) for 3 years, this means you had to sell some shares, BUT you ended up, after taking all this money with ...drumroll, 35+% more.

So, to be sure, I asked my 4-year-old grandson who loves small cars, do you want to have 135 cars or 88 cars. He had no hesitation, of course 135 cars.

[Deleted]

Going forward it would be hard decision to have what % of bonds in portfolio. I guess bonds % equal to ones age or 60% stocks - 40% bonds does not make sense right now. (not sure where I heard that rule though I never followed it.)

"2 years expenses in Cash / CDs.
year 3 - 8 expenses in Bonds (preferably higher quality).
year 9 - X expenses in Stocks." - johnsmith

I am still 5-10 years away from retirement.

In retirement I expect 15k per month expenses. (8K per month is my current mortgage and property tax here in amazing California)

 2 year expense in cash would be 360K, So probably I will do 1 year in cash.

6 years in bond and 18 years in stocks means 25% bonds and 75% stocks. That sounds very reasonable. (Assuming 25 years retirement period.) And yearly moving to cash from whichever of stock and bond is doing better sounds like a great idea.

I will start studying and looking to add CEFs too.

[steelpony10]

@waffle ,

        That being the case, get the h**l out of there and live like a king somewhere else. If you miss California have your pilot fly you back in your plane whenever you get the itch. Lol.

         I could solve any financial situation on a napkin over lunch. Allocations, diversification, studies, schemes, my way, someone’s else’s way, buckets, books, talking heads, past performance, rules, simulations, projections, nothing secures your future 100% for sure never ever. Don’t angst over it we’re all wrong or lucky. Whatever you can live with is fine. I’m just following what I saw worked for 35 years and I never found anything better that allows me to spend freely in all markets and believe me I looked, took classes, picked brains, tested etc.

          So 2.5 mil * 8% gives you 200k a year. Too risky then back track into the most sure investment you can live with, which costs you more, which leaves you less to spend freely. I framed my napkin from 1978. It says a sure 75k + SS and as much excess income as I could generate at a risk I could live with.

[bobfl]

Aug 20, 2022 18:31:15 GMT @waffle said:

compoundadvisors.com/2022/how-to-face-the-single-biggest-fear-in-retirement

What if this downturn happens in 10th year of your retirement and one has only 10 years left instead of 20 or 30 as this article discusses?

If you invest for yield (like preferreds and stick with investment grade), then your actual portfolio can drop 75% and your income stays the same. If you count on capital gains from stocks for your income, that could be a problem.

When asked by the head huge investment company (Franklin), what advice would she give to investors. She basically said "Don't sell at the bottom;  Don't buy at the top."

(It always come back. Pure individual debt instruments come back fastest because the Fed drops rates making debt instruments more desirable.)

How do you know it is a top? Look at the darn chart. Does it look like the incline is too steep?

[retiredat48]

bobfl,...who posted: "How do you know it is a top? Look at the darn chart. Does it look like the incline is too steep?"

I love it.  I too tend to sell at least a little, when the market goes parabolic up.  Another way is to say, the price goes way above the 200 day Moving Average.  Last time was in Jan/Feb 2020,...I sold two years worth of RMD distributions, just before Covid.

R48

[steadyeddy]

Aug 20, 2022 18:59:24 GMT steelpony10 said:

@waffle ,

      If you income invest and receive income increases each year above your personal inflation rate you may be set for years depending how much you dedicate to income only and personal unknowns before you need to spend down. So a variety of holdings combined raising payouts 3-5% yearly as a group might do it. Add a healthy stash of cash to this and that’s about all you can hope for to cover most markets. Buffet recommends 90% equities so this could be 90% income producers instead giving up hoped for enough capital gains with variable income vs. hopefully more dependable dividends or distributions.

      Having lived using that method with our parents for 15 years at the start I came to realize this may be cutting things too close under some situations. So I switched things up during 9/11 for them. We chose to get way way ahead of every possible scenario by investing in CEF’s (8-10% distributors starting about 5-10 years before retirement for us) stashing way more excess income to needs and made equities secondary added extra income during up markets with plans for reducing them slowly over time eventually converting them to income. This has worked great for us for 15 years so far and helped make one parents’ portfolio last up to 35 years.

       You can also just live in fear and skinflint your way through retirement stressing yourself over a total unknown with no holy grail of solutions. *

        *So it comes down to this: Do you want to depend on the train that shows up at the station each month, quarter and year on schedule with some cash in excess of needs or the train that just shows up 7 out of ten years, has an unknown arrival and departure schedule, another unknown variable, when you’re dealing with unsolvable unknowns already? How about what you leave a surviving spouse or partner?

steelpony10, Curious if you think the current bear market offers better opportunities in the CEF-land?

[steelpony10]

steadyeddy ,

         Heck yes. Everything’s on sale probably about 5-20% down still. I already dumped all our excess cash into our holdings about 3 weeks before that summer rally. September and October are usually the most volatile months of the year. So maybe a better opportunity. I’d be awful tempted to invest more in our CEF’s again in about 3 years which as of now I may have a chance, one can hope anyway. Lol.

          In reality I’m still simplifying our portfolio, consolidating holdings and spreading cap gains taxes out. Probably another 2,3 years for that process. I’m really leaning hard towards accumulating a large cash hoard, a fourth section, from now on. When another 10 year run up occurs as an income investor in the past I usually shifted gears to cap gains for even more income and left income positions alone auto investing excess income into 2 bond OEF’s.

[Mustang]

Aug 20, 2022 18:31:15 GMT @waffle said:

compoundadvisors.com/2022/how-to-face-the-single-biggest-fear-in-retirement

What if this downturn happens in 10th year of your retirement and one has only 10 years left instead of 20 or 30 as this article discusses?

I hate articles like this.  He either intentionally misuses the 4% Rule or else he doesn't understand it.

First, the 4% Rule is a spend down strategy.  It's purpose is to provide a stable, inflation adjusted income stream.  It intentionally spends down principal during bad economic periods.  The only failure is if the retiree's portfolio goes to zero before the end of the payout period.  None of his examples did that.  None of them came close.

Second, all withdrawals are inflation adjusted.  The scare tactic chart at the end of the article showing the decline of purchasing power is irrelevant because with inflation adjusted withdrawals there is no loss of purchasing power.

The 4% Rule (not called that in Bengen's original 1994 study) is specifically for a 30 year payout period.  Why 30 years? It takes someone from age 65 to 95 which encompasses most people's lifetimes.  It was calculated using the worst 30-year retirement period in history which didn't occur with start dates in 1929, 1962 or 1999.  A 1929 start might have been the worst except after the crash the country experienced deflation not inflation.  1962 isn't the worst because there was there was no sequence of return problem. Even after 10 years of inflation adjusted withdrawals the retiree's portfolio increased almost $4,000.  There was no decline at all. 

The worst 30-year payout period in history started in 1968.  It had serious sequence of return problems.  The S&P500 was down 11.4% in 1969, down 17.4% in 1973 and down 29.7% in 1974.  On top of that inflation was 8.7% in 1973, 12.3% in 1974,  9% in 1978, 13.3% in 1979 and 12.5% in 1980. Even with huge sequence of return problems and double digit inflation the withdrawal method was a success.  The portfolio did not run out of money during the 30 year payout period.

In fact, according to Pfau's 2018 update of the Trinity study (1998) a 50/50 portfolio had a 100% success rate for all 30-year payout periods from 1926 to 2017.  That is not a probability of success.  That is an actual success rate.  Why?  Because the 4% initial withdrawal rate was determined using the worst economic 30-year period on record.  All other 30-year periods allowed higher initial withdrawals.

Keeping with the article's 50/50 asset allocation, Pfau's update not only showed 4% successful for 30 years 100% of the time but also 5% successful for 20 years 99% of the time and 6% successful for 15 years 100% of the time.  No one knows the future but that is a pretty good track record.

Actually, that data can be used to check an inflation adjusted withdrawal strategy's performance.  If looking for a 30 year payout start with 4%.  After 10 years verify that the withdrawal is no more than 5% of the portfolio's value, after 15 years verify that it is no more than 6% the portfolio's value.  If the withdrawal is a lot less then you can give yourself a bonus.

There are reasons to be worried about a portfolio lasting but that article is nothing but garbage.  The data appears to be correct but without the proper context it is misleading.  I personally think the data shown in that article shows that the retiree shouldn't be afraid, especially now.  Sequence of return failures apply only to fixed withdrawal methods.  Low returns and high inflation during the first 10 years make the dollar withdrawals grow too large for declining portfolio balances to support.  But, they tend to be a much larger risk for retirement start dates that start at or near a market peak.  We are currently past the peak.

P.S. To answer your question look at the chart for the 1962 retirement period.  The market crash did not occur until after the 10th year and at the end of 20 years the ending balance was higher than the beginning balance.  It was more than triple the beginning balance at the end of 30 years.  A sequence of return failure happens if the crash is during the first 10 years.

[mozart522]

Mustang,

HUH? seemed reasonable to me. First, he states a clear fact; Many retirees are afraid of running out of money. Then he suggests a 50/50 index portfolio only, allowing that most people will have SS and home equity. Then he shows how taking 4%+ inflation during the worst 20 year periods all worked out and didn't come close to running out of money. The average life expectancy for a 65 year old is 83 for men and 86 for women, but in reality, only 40% of men are alive at 80 and less at 83. But if one is in that lower percentage, they were still ok according to your figures.

He was trying to help retirees be less afraid of running out of money. Most would be more afraid of running out with a 30 year retirement than a 20 year, which is likely why he chose it. He used the 4% withdrawal strategy exactly as intended as far as I can tell.

He ended with:
"You can’t change what the markets will do in the future, but you can change the way you think about it. Knowing that retirees with a diversified portfolio would have made it through the worst periods in history should give you comfort that you’ll get through whatever challenges lie ahead.

Face your fears, have a plan, and enjoy your retirement. You’ve earned it.

[Mustang]

Yes, his intentions were good but he did not use the 4% Rule as it was intended. (Actually, there is no such rule it a guideline but that is splitting hairs.) It is not 4% for all payout periods and a 50/50 asset allocation is the minimum stock allocation. The studies showed that a 75/25 allocation had higher ending balances and was better for the longer payout periods. People who retire in their 50s may be looking for a 40 year payout.

According to modern portfolio theory the minimum risk portfolio for best returns is currently 33/67.  More stocks increase returns but also increase risk.  More bonds decrease returns and increase risk. But a 33/67 asset allocation doesn't have enough stock to support a 4% initial withdrawal. That allocation wasn't specifically mentioned in the analysis but a 25/75 allocation only had an 87% success rate of lasting 30 years.  It did have a 100% success rate of lasting 25 years.

If a retiree plans only for a 20 year payout then he should hope that he isn't part of the 40% of the population that lives longer.  And, if the retiree is truly so afraid that no risk is acceptable then he should buy a single premium immediate annuity. Guaranteed payments for life even if he is in the lucky 40%.

[mozart522]

Sept 18, 2022 1:37:22 GMT Mustang said:

Yes, his intentions were good but he did not use the 4% Rule as it was intended. (Actually, there is no such rule it a guideline but that is splitting hairs.) It is not 4% for all payout periods and a 50/50 asset allocation is the minimum stock allocation. The studies showed that a 75/25 allocation had higher ending balances and was better for the longer payout periods. People who retire in their 50s may be looking for a 40 year payout.

According to modern portfolio theory the minimum risk portfolio for best returns is currently 33/67.  More stocks increase returns but also increase risk.  More bonds decrease returns and increase risk. But a 33/67 asset allocation doesn't have enough stock to support a 4% initial withdrawal. That allocation wasn't specifically mentioned in the analysis but a 25/75 allocation only had an 87% success rate of lasting 30 years.  It did have a 100% success rate of lasting 25 years.

If a retiree plans only for a 20 year payout then he should hope that he isn't part of the 40% of the population that lives longer.  And, if the retiree is truly so afraid that no risk is acceptable then he should buy a single premium immediate annuity. Guaranteed payments for life even if he is in the lucky 40%.

It was just an example.  You have said that you are 50/50.  The whole point was to take 4% + inflation and you shouldn't worry about running out of money.

[retiredat48]

Mustang,...Nice post re historical review of 4% rule, etc.

I copied and added your post to my library. Of course, my library is worthless!

R48

[archer]

retiredat48 , IIRC you retired in '68 or close to it. If you don't mind sharing, what was your WR?

WR can get complicated if people continue to earn and save after retirement, own rentals etc.


edit: I thought I remembered the 1968 from the old M* forums, but, 48 + 54 (2022-1968) would put you at 102, so I assume I am mistaken!

[retiredat48]

Sept 18, 2022 18:39:42 GMT archer said:

retiredat48 , IIRC you retired in '68 or close to it. If you don't mind sharing, what was your WR?

WR can get complicated if people continue to earn and save after retirement, own rentals etc.


edit: I thought I remembered the 1968 from the old M* forums, but, 48 + 54 (2022-1968) would put you at 102, so I assume I am mistaken!

archer,...1968, I was just out of college.  And BTW there were no computers in 1968, so could not have been on a  Morningstar Forum!

Retired in 1993, approx 29 years ago.

What is "WR"??

R48

[chang]

Sept 19, 2022 2:33:27 GMT retiredat48 said:

Sept 18, 2022 18:39:42 GMT archer said:

retiredat48 , IIRC you retired in '68 or close to it. If you don't mind sharing, what was your WR?

WR can get complicated if people continue to earn and save after retirement, own rentals etc.


edit: I thought I remembered the 1968 from the old M* forums, but, 48 + 54 (2022-1968) would put you at 102, so I assume I am mistaken!

archer,...1968, I was just out of college.  And BTW there were no computers in 1968, so could not have been on a  Morningstar Forum!

Retired in 1993, approx 29 years ago.

What is "WR"??

R48

I’m guessing "withdrawal rate".

[archer]

Yes WR = withdraw rate. I meant to clarify yesterday but must not have made the final click to enter the my post.

retiredat48 , I didn't mean we were on the forums in 68! I was in 6th grade then, LOL. For some reason I was thinking a few years ago you mentioned retiring in 68, but obviously I am misplacing numbers. I probably would have done better to delete my post when I realised the impossibility. 

[retiredat48]

at archer ,...fair enough. No harm/no foul.

To your question of what was my WR...withdrawal rate...a good question also.

MY WR was in three parts. First, I had to get from age 48 to age 60, whereby a pension from GE would be available; then to age 62 where Soc. Security was available.

The first phase WR was 7.8%...for 12 years. This was in the form of an annuitized withdrawal from my IRAs. This was done because of a (then) little know tax feature that if you WR in an annuity form, to age 59.5, you do not pay any IRA early withdrawal tax. IRS has OK'd about five formulas...still in place today.  I chose an aggressive WR because it was still at the zero fed income tax rate for me.

Then at age 60, in lieu of pension, I took a lump sum. This money was invested, with the income further lowering my WR needs. So WR was reduced.

Then at age 62, Soc Security was taken, the annual income further reducing the WR again.

All this time,my portfolio was actually GROWING. Then at age 70 had to take Reqd Min Distributions from IRAs. Did major conversions of Trad IRA to ROTH during age 60's; now have a large ROTH IRA.

I don't currently need the full RMDs to live on, so invest some.

My starting fed income tax goal remains at zero, each year.

R48

[bb2]

Charlie Biello's articled is for busy people with jobs and kids.
People who have blinders on as far as events go. Market valuation. Never read a paper or watch the news. Are fraid of buying or selling a stock or bond themselves.
Not people on this forum.

I do like his multi-chart emails on the weekends. compoundadvisors.com/blog