How are People Mitigating Sequence of Return Risks?

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willthrill81
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

Northern Flicker wrote: Sun Nov 28, 2021 4:35 pm A very important technique of dealing with SORR is income flooring-- establishing a base income that covers essentials without taking risk, and then takes some risk to cover unpredictable expenses and discretionary spending.

This typically involves using an income annuity in conjunction with social security and any pensions to cover essential expenses. Delaying social security is equivalent to purchasing a COLA'd income annuity and should be done before a SPIA purchase is considered.
While it's true that annuities are often used in an income flooring strategy, this might not be practically necessary if the withdrawal floor is sufficiently low.

Below is a graph from Portfolio Charts' retirement spending chart, and the portfolio being analyzed is a 60/40 AA with all U.S. assets since 1970. 4% of the portfolio's balance was withdrawn every year, but the minimum withdrawal was 2% of the inflation-adjusted starting balance. Note that while there were some periods where 3-12 years into the retirement, the floor was nearly reached, in no case did that actually occur. Therefore, many, including myself, would argue that for this AA, a retiree whose essential spending needs not otherwise covered by guaranteed income sources, such as SS benefits, do not exceed 2% of the starting portfolio balance and who is willing to adjust discretionary spending in direct proportion to portfolio performance does not likely have a justifiable need for an annuity or similar instrument.

Image

Of course, the liability matching portfolio + risk portfolio idea also achieves a similar aim, but it does so by foregoing virtually all upside potential with the assets used in the LMP itself, typically a ladder of TIPS and/or I bonds. That is not the case with the above approach, though it is theoretically possible that the portfolio could be prematurely depleted.

Several years ago, I started this thread to discuss this type of strategy, but it didn't get much traction.
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Re: How are People Mitigating Sequence of Return Risks?

Post by seajay »

Tyler9000 wrote: Sun Nov 28, 2021 11:19 am
MrCheapo wrote: Sat Nov 27, 2021 4:57 pm Is there alternative options?
My preferred option to mitigate sequence of return risk is to think about asset allocation in terms of noise cancellation. It's a different mindset than simply treating bonds like earplugs to dampen stock noise. Such noise-cancelling portfolios tend to have high returns relative to their low volatility, and the resulting withdrawal rates are quite desirable.
Combining the GoldenButterfly's long and short dated barbell into a central 10 year bullet, and combining the two stock indexes into one ... 40/40/20 stock/bond/gold. Broadly that and equal weightings thirds stock/bond/gold might be within the same ballpark. Equal diversification across stock, bonds and commodity. For non-US, holding US$ invested into US stocks, domestic bonds and as gold is also a global currency ... three way equal currency diversification. Broad neutral stance on currencies and assets.

Considered as a 33% in a 10 year Treasury ladder, generally around 3.3% of the portfolio value matures into cash each year - for spending, that leaves 50/50 stock/gold (along with some bonds) to replenish the ladder, add another 10 year Treasury. Some years that might not be possible (both stocks and gold down), other years might support two or more ladder rungs being added. Historically the odds were reasonable for relatively consistently being able to source bond purchases
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Re: How are People Mitigating Sequence of Return Risks?

Post by Northern Flicker »

willthrill81 wrote: While it's true that annuities are often used in an income flooring strategy, this might not be practically necessary if the withdrawal floor is sufficiently low.
We also can view income flooring as an asset allocation tool. By covering essential expenses with a reliable income floor, remaining assets can be invested more aggressively. The income floor then determines the minimum allocation to safe assets. A retiree naturally is risk averse, and may prefer to allocate a larger percentage to safe assets than needed to fund an income floor, but the flooring method establishes the minimum, avoiding asset allocations that err on the side of being too aggressive.
wollthrill81 wrote: Of course, the liability matching portfolio + risk portfolio idea also achieves a similar aim, but it does so by foregoing virtually all upside potential with the assets used in the LMP itself...
As would a SPIA. The main point of using a TIPS/I bond portfolio (which does not have to be a bond ladder) to delay annuitization is to reduce the number of years the SPIA is exposed to inflation risk.
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Re: How are People Mitigating Sequence of Return Risks?

Post by CurlyDave »

HomerJ wrote: Sat Nov 27, 2021 9:51 pm Just have a bunch in bonds\cash, and spend from that pool if the market crashes until the market comes back.

This is such an easy concept, I don't understand why people have trouble with it.

I mean we can argue about HOW MUCH to have in bonds\cash, but the idea is just to not sell stocks when they are down.
+1

Instead of keeping AA fixed we intend to withdraw living expenses from bonds in a market decline. We have 4 to 5 years expenses in bonds, and I really anticipate that if the market corrected, we would do some belt-tightening and that would last 6-7 years without any significant deprivation.

* * * * * * * * * * * * * * * * * * * * * * * * * * *

On a related, but different, topic, can anyone give a rational explanation for why I need an emergency fund in retirement? Other than producing unnecessary cash drag on the portfolio.

In the accumulation years I need to protect against income loss either through layoff or injury which would prevent working. In retirement I don't have a job any longer. All of my income comes from sources that are not subject to interruption, unless you want to count the loss of a pension for some reason. And, even then an emergency fund instead of an investment portfolio will hurt rather than help. It just seems obvious to me that once I reach the point where I can withdraw from a tax-advantaged portfolio, the need for an emergency fund evaporates and it can only hurt.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

CurlyDave wrote: Sun Nov 28, 2021 7:32 pm
HomerJ wrote: Sat Nov 27, 2021 9:51 pm Just have a bunch in bonds\cash, and spend from that pool if the market crashes until the market comes back.

This is such an easy concept, I don't understand why people have trouble with it.

I mean we can argue about HOW MUCH to have in bonds\cash, but the idea is just to not sell stocks when they are down.
+1

Instead of keeping AA fixed we intend to withdraw living expenses from bonds in a market decline. We have 4 to 5 years expenses in bonds, and I really anticipate that if the market corrected, we would do some belt-tightening and that would last 6-7 years without any significant deprivation.

* * * * * * * * * * * * * * * * * * * * * * * * * * *

On a related, but different, topic, can anyone give a rational explanation for why I need an emergency fund in retirement? Other than producing unnecessary cash drag on the portfolio.

In the accumulation years I need to protect against income loss either through layoff or injury which would prevent working. In retirement I don't have a job any longer. All of my income comes from sources that are not subject to interruption, unless you want to count the loss of a pension for some reason. And, even then an emergency fund instead of an investment portfolio will hurt rather than help. It just seems obvious to me that once I reach the point where I can withdraw from a tax-advantaged portfolio, the need for an emergency fund evaporates and it can only hurt.
You don't need a separate EF, but you do need some fixed income allocation that may include cash among other things.
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

Northern Flicker wrote: Sun Nov 28, 2021 7:14 pm
willthrill81 wrote: Of course, the liability matching portfolio + risk portfolio idea also achieves a similar aim, but it does so by foregoing virtually all upside potential with the assets used in the LMP itself...
As would a SPIA. The main point of using a TIPS/I bond portfolio (which does not have to be a bond ladder) to delay annuitization is to reduce the number of years the SPIA is exposed to inflation risk.
True. The other advantage of the TIP/I bond ladder is that the retiree retains full control of the assets as do the heirs, unlike the SPIA.
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Re: How are People Mitigating Sequence of Return Risks?

Post by heyyou »

Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.

Someone (Bengen?) has likely published SWR % numbers for starting retirement ages of 70 and up, which would also be a good reference for comparing remaining portfolio size to current spending amounts for earlier 4% SWR retirees.

Those who delayed SS are good candidates for a variable spending method, because they have already experienced living on reduced spending earlier in retirement, while they were waiting to start SS. Most, or all variable spending methods, would be far less susceptible to SORR. Note that small annual changes to spending are better than blindly spending until a major reduction is absolutely necessary.
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Re: How are People Mitigating Sequence of Return Risks?

Post by seajay »

heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.
3.33% SWR and consider re-retiring every year if 3.33% of the recent portfolio value is greater than not having re-retired. Historically you'd have generally seen income ratchet up at a broad 3% - 5% type real rate.
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Re: How are People Mitigating Sequence of Return Risks?

Post by randomguy »

heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.

So the worst of voth worlds? The 2000 retire qould have been living on 28k instead of the 40k they could have from 2010-2015....!
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Re: How are People Mitigating Sequence of Return Risks?

Post by Zardoz »

Northern Flicker wrote: Sun Nov 28, 2021 4:35 pm A very important technique of dealing with SORR is income flooring-- establishing a base income that covers essentials without taking risk, and then takes some risk to cover unpredictable expenses and discretionary spending.

This typically involves using an income annuity in conjunction with social security and any pensions to cover essential expenses. Delaying social security is equivalent to purchasing a COLA'd income annuity and should be done before a SPIA purchase is considered.
Right. Exposing our portfolios to SORR is a side effect of the choice we make when we allocate some percentage of the portfolio to highly volatile asset classes (equities). We can reduce our exposure to SORR by reducing our exposure to equities. A portfolio of 100% TIPS and iBonds, plus an inflation adjusted pension (Social Security) has zero exposure to SORR.

If you'd rather structure your portfolio so that it has a chance to return more than inflation after you've retired, you're going to be taking on some SORR. Building a floor of inflation adjusted income that is large enough to cover essential spending and exposing only the remaining portion of the portfolio to the upside and volatility of equities is a viable way to mitigate SORR.
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Re: How are People Mitigating Sequence of Return Risks?

Post by dbr »

Zardoz wrote: Mon Nov 29, 2021 7:57 am
Northern Flicker wrote: Sun Nov 28, 2021 4:35 pm A very important technique of dealing with SORR is income flooring-- establishing a base income that covers essentials without taking risk, and then takes some risk to cover unpredictable expenses and discretionary spending.

This typically involves using an income annuity in conjunction with social security and any pensions to cover essential expenses. Delaying social security is equivalent to purchasing a COLA'd income annuity and should be done before a SPIA purchase is considered.
Right. Exposing our portfolios to SORR is a side effect of the choice we make when we allocate some percentage of the portfolio to highly volatile asset classes (equities). We can reduce our exposure to SORR by reducing our exposure to equities. A portfolio of 100% TIPS and iBonds, plus an inflation adjusted pension (Social Security) has zero exposure to SORR.

If you'd rather structure your portfolio so that it has a chance to return more than inflation after you've retired, you're going to be taking on some SORR. Building a floor of inflation adjusted income that is large enough to cover essential spending and exposing only the remaining portion of the portfolio to the upside and volatility of equities is a viable way to mitigate SORR.
I think this is well said.

I have trouble even identifying SOR as a risk. It is really just part of the natural mechanics of trying to supply income from volatile assets and as such the idea of managing or mitigating this process is kind of non-sensical once one chooses to rely on volatile assets for income.

But, the other side of the problem is, as others have pointed out, that avoiding volatile assets in a sense constitutes surrender to holding only the lowest returning assets.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.
Isn't it simply constant-%? It effectively mitigates SORR but your withdrawals would be volatile. Which is fine for me, but lots of people dislike that - hence they have to do something a bit more complicated to smooth out the withdrawals.
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

Marseille07 wrote: Mon Nov 29, 2021 9:34 am
heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.
Isn't it simply constant-%?
No, because if you strictly followed that method (i.e., 're-retire every 5 years using 4% SWR'), your inflation-adjusted withdrawals would never go down; they could only go up. I doubt very much that anyone on this forum would do that in a poor sequence of returns.
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Re: How are People Mitigating Sequence of Return Risks?

Post by sailaway »

willthrill81 wrote: Mon Nov 29, 2021 9:53 am
Marseille07 wrote: Mon Nov 29, 2021 9:34 am
heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.
Isn't it simply constant-%?
No, because if you strictly followed that method (i.e., 're-retire every 5 years using 4% SWR'), your inflation-adjusted withdrawals would never go down; they could only go up.


How do you figure that?
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

willthrill81 wrote: Mon Nov 29, 2021 9:53 am
Marseille07 wrote: Mon Nov 29, 2021 9:34 am
heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.
Isn't it simply constant-%?
No, because if you strictly followed that method (i.e., 're-retire every 5 years using 4% SWR'), your inflation-adjusted withdrawals would never go down; they could only go up. I doubt very much that anyone on this forum would do that in a poor sequence of returns.
I don't follow. If the 4% is on the recent portfolio balance as of Jan 1, 2009 for example (near the bottom of GFC), how would the withdrawals be higher than Jan 1, 2008?

Besides, it's very unusual to calculate 4% of remaining balance then add CPI on top of that because that means it's no longer 4% of remaining balance. Assuming CPI is positive, you end up withdrawing more than deemed safe.
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Re: How are People Mitigating Sequence of Return Risks?

Post by dknightd »

dbr wrote: Sat Nov 27, 2021 5:29 pm Keep in mind the infamous 4% SWR is already a defense against SORR. Otherwise the SWR might be closer to 6%-8%. When SORR does not materialize the SWR is on the order of 6%-8%.

Dropping your withdrawal rate to 2.5% is an over-reaction. Messing around with asset allocation and timing asset allocation is not likely to help a lot. In general the problem is that increased return requires increased risk and vice-versa and those offset, so there is not much leverage there. Note that devices such as TIPS ladders and SPIAs remove uncertainty but effectively capitulate on a better chance to withdraw more money or accumulate wealth for heirs or for giving. Those things are still subject to the risk of what history offers in that at low interest rates TIPS and annuities are expensive.

That said a good all purpose approach is to hold a balanced asset allocation around 40/60 to 60/40, maximize Social Security, consider an SPIA or two not purchased too soon, and be prepared to be flexible. It probably makes some sense to hold inflation indexed fixed income as well, at least on part.
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Re: How are People Mitigating Sequence of Return Risks?

Post by ncbill »

MrCheapo wrote: Sat Nov 27, 2021 4:57 pm This article https://www.forbes.com/sites/jamiehopki ... e41ab727eb states four main strategies:

1) Limit Withdrawal Rate (i.e. drop down to 2.5%)
2) Home Equity (i.e. borrow against capital if market turns down)
3) Income Laddering (i.e. bond laddering)
4) Cash Reserve Bucketing Strategy (i.e. set aside two years of expenses a priori and if market drops use it)

Thoughts on which of these is better? Is there alternative options?

I didn't know the term but I'm effectively going with 4) by moving some of my 2050 targeted funds by moving 2 years of living expenses into a 2025 targeted fund. But going forward if interest rates stay low then borrowing against the equity in our home seems a better idea.
#4 for me...specifically the "never refilled once depleted" cash bucket discussed here:
https://earlyretirementnow.com/2018/05/ ... ity-myths/

#2 could also include portfolio equity (given current low margin rates offered by IB) if most of the portfolio is in taxable (e.g. sold a business)
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Re: How are People Mitigating Sequence of Return Risks?

Post by AlohaBill »

We have absolutely no problem with SORR, the fear factor pushed by the financial planning industry. We have the following:
1. Pension
2. Social Security
3. X, XXX, XXX
4. Home
5. We can spend between $33,000 and $150,000 per year
6. Last year we spent $75,000 ($30000 to buy a car)
7. #3 is plan B
8. #4 is plan C
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

Marseille07 wrote: Mon Nov 29, 2021 10:01 am
willthrill81 wrote: Mon Nov 29, 2021 9:53 am
Marseille07 wrote: Mon Nov 29, 2021 9:34 am
heyyou wrote: Mon Nov 29, 2021 12:47 am Belaboring the obvious: Periodically re-retire (every 5 years?) using 4% SWR on the recent portfolio balance.
Isn't it simply constant-%?
No, because if you strictly followed that method (i.e., 're-retire every 5 years using 4% SWR'), your inflation-adjusted withdrawals would never go down; they could only go up. I doubt very much that anyone on this forum would do that in a poor sequence of returns.
I don't follow. If the 4% is on the recent portfolio balance as of Jan 1, 2009 for example (near the bottom of GFC), how would the withdrawals be higher than Jan 1, 2008?

Besides, it's very unusual to calculate 4% of remaining balance then add CPI on top of that because that means it's no longer 4% of remaining balance. Assuming CPI is positive, you end up withdrawing more than deemed safe.
We're envisioning two different strategies. I was thinking that heyyou was referring to withdrawing the greater of the 4% of the inflation-adjusted starting withdrawal or 4% of the current portfolio balance. But you and perhaps heyyou as well are referring to withdrawing 4% of the current starting balance on a periodic basis, such as every 5 years. If that is the case, then you're correct that this becomes functionally similar to a fixed percentage-of-portfolio withdrawal method, which results in the withdrawals becoming as volatile as the portfolio.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Northern Flicker »

willthrill81 wrote: Sun Nov 28, 2021 10:57 pm
Northern Flicker wrote: Sun Nov 28, 2021 7:14 pm
willthrill81 wrote: Of course, the liability matching portfolio + risk portfolio idea also achieves a similar aim, but it does so by foregoing virtually all upside potential with the assets used in the LMP itself...
As would a SPIA. The main point of using a TIPS/I bond portfolio (which does not have to be a bond ladder) to delay annuitization is to reduce the number of years the SPIA is exposed to inflation risk.
True. The other advantage of the TIP/I bond ladder is that the retiree retains full control of the assets as do the heirs, unlike the SPIA.
A TIPS/I bond portfolio is a method of income flooring. Annuitization is not required. But annuitization is cheaper because you do not have to cover as many years. This means that the bond ladder or bond portfolio will result in a larger minimum allocation to safe assets, and the asset allocation process will exclude more choices on the aggressive end of the acceptable range.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

willthrill81 wrote: Mon Nov 29, 2021 10:43 am We're envisioning two different strategies. I was thinking that heyyou was referring to withdrawing the greater of the 4% of the inflation-adjusted starting withdrawal or 4% of the current portfolio balance. But you and perhaps heyyou as well are referring to withdrawing 4% of the current starting balance on a periodic basis, such as every 5 years. If that is the case, then you're correct that this becomes functionally similar to a fixed percentage-of-portfolio withdrawal method, which results in the withdrawals becoming as volatile as the portfolio.
In the context of dealing with SORR, I'm guessing heyyou meant constant-%. Picking the higher of constant-dollar or constant-% does not deal with SORR at all.
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Re: How are People Mitigating Sequence of Return Risks?

Post by randomguy »

Marseille07 wrote: Mon Nov 29, 2021 11:53 am
willthrill81 wrote: Mon Nov 29, 2021 10:43 am We're envisioning two different strategies. I was thinking that heyyou was referring to withdrawing the greater of the 4% of the inflation-adjusted starting withdrawal or 4% of the current portfolio balance. But you and perhaps heyyou as well are referring to withdrawing 4% of the current starting balance on a periodic basis, such as every 5 years. If that is the case, then you're correct that this becomes functionally similar to a fixed percentage-of-portfolio withdrawal method, which results in the withdrawals becoming as volatile as the portfolio.
In the context of dealing with SORR, I'm guessing heyyou meant constant-%. Picking the higher of constant-dollar or constant-% does not deal with SORR at all.
There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns. Gold is pretty much the only thing that "Works" historically and that is a pretty big bet to make on something that basically worked once (gold before 1975 had a lot of issues). All the AA shifting schemes like bond ladders, rising glide paths, buckets, just don't generate enough returns to matter. Diversifying (international, value, small caps, gold) might bring up your SWR a bit but it is hard to put a number on it. It is also likely the next horrible times will be a result of something new (i.e. the 1929 stock bubble/deflation wasn't the same as the 60s stagflation or the 2000-09 combo dot.com & real estate bubbles) and you scheme may or may not protect against it. You make your bet and hope things work out.

A is trivial to handle if you are willing to slash spending for long periods of time. But then you end up with inefficient use of money as you hoard for the future which is unlikely to be as bad as you plan for. Go look at any of these schemes and look at how many cut spending unnecessarily between 2000-2010f for example...
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Re: How are People Mitigating Sequence of Return Risks?

Post by HomerJ »

MnD wrote: Sun Nov 28, 2021 8:57 am All needs and some wants are covered by pension.
That, of course, changes everything.
of our SS claims (one above average and one maxed out) are still in the future
And you haven't even claimed SS yet.

Yeah, you can pull 5% or really whatever you want from the portfolio.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

randomguy wrote: Mon Nov 29, 2021 12:16 pm There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns. Gold is pretty much the only thing that "Works" historically and that is a pretty big bet to make on something that basically worked once (gold before 1975 had a lot of issues). All the AA shifting schemes like bond ladders, rising glide paths, buckets, just don't generate enough returns to matter. Diversifying (international, value, small caps, gold) might bring up your SWR a bit but it is hard to put a number on it. It is also likely the next horrible times will be a result of something new (i.e. the 1929 stock bubble/deflation wasn't the same as the 60s stagflation or the 2000-09 combo dot.com & real estate bubbles) and you scheme may or may not protect against it. You make your bet and hope things work out.

A is trivial to handle if you are willing to slash spending for long periods of time. But then you end up with inefficient use of money as you hoard for the future which is unlikely to be as bad as you plan for. Go look at any of these schemes and look at how many cut spending unnecessarily between 2000-2010f for example...
b) can also be mitigated by some %-based methods, since you'd be spending a lot more should there be no SORR.

VPW & ABW would be perfect for dealing with SORR and depleting your portfolio in the end. Assuming that's your goal, that is (not everyone aims for this).
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Re: How are People Mitigating Sequence of Return Risks?

Post by randomguy »

Marseille07 wrote: Mon Nov 29, 2021 12:37 pm
randomguy wrote: Mon Nov 29, 2021 12:16 pm There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns. Gold is pretty much the only thing that "Works" historically and that is a pretty big bet to make on something that basically worked once (gold before 1975 had a lot of issues). All the AA shifting schemes like bond ladders, rising glide paths, buckets, just don't generate enough returns to matter. Diversifying (international, value, small caps, gold) might bring up your SWR a bit but it is hard to put a number on it. It is also likely the next horrible times will be a result of something new (i.e. the 1929 stock bubble/deflation wasn't the same as the 60s stagflation or the 2000-09 combo dot.com & real estate bubbles) and you scheme may or may not protect against it. You make your bet and hope things work out.

A is trivial to handle if you are willing to slash spending for long periods of time. But then you end up with inefficient use of money as you hoard for the future which is unlikely to be as bad as you plan for. Go look at any of these schemes and look at how many cut spending unnecessarily between 2000-2010f for example...
b) can also be mitigated by some %-based methods, since you'd be spending a lot more should there be no SORR.

VPW & ABW would be perfect for dealing with SORR and depleting your portfolio in the end. Assuming that's your goal, that is (not everyone aims for this).
Only if you don't care about when you spend your money. Spending 30k for 15 years followed by 70k for 15 yers is more money than just spending 40k/year for 30 years. But most people would rather have the money early in retirement than in the latter years when they are less active. Yes you can 100% avoid SORR by spending all your money on the day you die. You will spend the same amount of money with any sequence of returns. That is absurd though. Cutting spending by 33%+ like VPW does isn't quite as absurd but it is getting there.... You might have somethings you can move around (i.e. you donate 100k to charity in year 20 instead of year 5) without messing up your retirement a ton but in general it is hard because you want to be spending your money when they outcome isn't known. It is likely I could have retired a decade a go and been fine. But it hasn't been really clear til recently that was true. It is the unavoidable part of not knowing the future and not having a good way to hedge against the uncertainty.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Northern Flicker »

randomguy wrote: There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns.
Implementing a real income floor with safe assets eliminates both risks short of extreme tail risk scenarios (which are not SOR risks in any case).
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Re: How are People Mitigating Sequence of Return Risks?

Post by SnowBog »

I didn't see EE Bonds called out - so I'll add them to the mix...

EE Bonds are essentially a DIY alternative to a SPIA (annuity) - which I attempted outline in the EE Bond Manifesto: viewtopic.php?t=358793.

We plan to use EE Bonds & I Bonds (since I didn't start 20 years before retirement and to add some inflation adjustment) to create an "income floor" between the year we retire and when our delayed social security/pensions kick in (roughly equal to my delayed social security). If markets are doing well, we'll optionally not redeem these and let them continue to grow until markets decline and/or maturity is reached. I fully acknowledge that - similar to the comments prior on LMP - this is trading some level of upside for some level of certainty. I'm OK with that for our situation.

To round things out, we also:
  • Plan to have saved "enough" (aka will likely have saved more than needed)
  • Have a 60/40 portfolio at age 45 (positioning to be able to retire in 5 - 7 years)
  • Plan to delay pensions/social security - effectively "longevity insurance" - which should cover the bulk of our expected expenses in later years
  • Will have a good mix of taxable, tax-free (Roth, HSA, and muni bonds), and tax-deferred investments
  • Plan to use VPW for simplification and "self-healing" (adjusting to markets going up or down). Note - we view the "recommended" amount as the "upper limit" on expenses.
  • Plan to increase our "cash" from roughly 1 year to potentially 2-3 years (still TBD on this - I know there is an opportunity cost, but trying to defer to "simplification" - and thinking of the VPW "forward test" with the withdrawal buffer)
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Re: How are People Mitigating Sequence of Return Risks?

Post by randomguy »

Northern Flicker wrote: Mon Nov 29, 2021 1:56 pm
randomguy wrote: There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns.
Implementing a real income floor with safe assets eliminates both risks short of extreme tail risk scenarios (which are not SOR risks in any case).
Problem is safe income floors are absurdly expensive when looking at 30-40 year retirements. If you have that much money, you don't need them since 3% SWR are absurdly safe already. You are paying for insurance you don't need...
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Re: How are People Mitigating Sequence of Return Risks?

Post by SnowBog »

randomguy wrote: Mon Nov 29, 2021 3:09 pm
Northern Flicker wrote: Mon Nov 29, 2021 1:56 pm
randomguy wrote: There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns.
Implementing a real income floor with safe assets eliminates both risks short of extreme tail risk scenarios (which are not SOR risks in any case).
Problem is safe income floors are absurdly expensive when looking at 30-40 year retirements. If you have that much money, you don't need them since 3% SWR are absurdly safe already. You are paying for insurance you don't need...
I think it's all in perspective...

For example, my delayed social security at 70 will be roughly $40k - which I'd consider more than a safe income floor (that's more than enough to meet all our non-medical essentials, and if things were that bad we'd be getting ACA/etc. assistance).

Let's say we want to retire at 50, and have the same $40k/year income floor from 50 - 70 (and then SS for 70+). Had we started doing so at 30 (we didn't), we could have purchased $10k of EE Bonds for each spouse for 20 years (total investment roughly $400k over 20 years, for a guaranteed $40k/year nominal "income"). For us, that may end up being around 10% of our portfolio. Someone who needs a smaller income floor and/or for a smaller period of time would be even less.

In our case, we didn't start until a few years ago, so we will end up spending more buying a mix of EE and I Bonds to get the same approximate return with less than 20 years to get it, but we'll have more inflation protection. In our case, this will cost more since we stated late...

Now, to your final point...
You are paying for insurance you don't need...
Maybe, and I'm OK with that. More specifically, I've decided that "our timeline" is more important than "how much money we pass on to heirs". The nature of my work is such that another 5-7 years is likely the most I should reasonably expect (very few people in my role at 50+), and I don't want to feel obligated to get a different job and/or keep working if the markets are doing poorly when we'd otherwise planned to retire. So I'm willing to "buy insurance" - as you put it - for a small % of our portfolio to achieve that end. But we expect to have "enough" either way, so I'm not risking our ability to save enough to do so.
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Re: How are People Mitigating Sequence of Return Risks?

Post by randomguy »

SnowBog wrote: Mon Nov 29, 2021 3:25 pm
randomguy wrote: Mon Nov 29, 2021 3:09 pm
Northern Flicker wrote: Mon Nov 29, 2021 1:56 pm
randomguy wrote: There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns.
Implementing a real income floor with safe assets eliminates both risks short of extreme tail risk scenarios (which are not SOR risks in any case).
Problem is safe income floors are absurdly expensive when looking at 30-40 year retirements. If you have that much money, you don't need them since 3% SWR are absurdly safe already. You are paying for insurance you don't need...
I think it's all in perspective...

For example, my delayed social security at 70 will be roughly $40k - which I'd consider more than a safe income floor (that's more than enough to meet all our non-medical essentials, and if things were that bad we'd be getting ACA/etc. assistance).

Let's say we want to retire at 50, and have the same $40k/year income floor. Had we started doing so at 30 (we didn't), we could have purchased $10k of EE Bonds for each spouse for 20 years (total investment roughly $400k over 40 years). For us, that may end up being around 10% of our portfolio. Someone who needs a smaller income floor and/or for a smaller period of time would be even less.

In our case, we didn't start until a few years ago, so we will end up spending more buying a mix of EE and I Bonds to get the same approximate return with less than 20 years to get it. In our case, this will cost more...

Now, to your final point...
You are paying for insurance you don't need...
Maybe, and I'm OK with that. More specifically, I've decided that "our timeline" is more important than "how much money we pass on to heirs". The nature of my work is such that another 5-7 years is likely the most I should reasonably expect, and I don't want to feel obligated to get a different job and/or keep working if the markets are doing poorly when we'd otherwise planned to retire. So I'm willing to "buy insurance" - as you put it - for a small % or our portfolio to achieve that end. But we expect to have "enough" either way, so I'm not risking our ability to save enough to do so.
Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
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Re: How are People Mitigating Sequence of Return Risks?

Post by patrick013 »

MrCheapo wrote: Sat Nov 27, 2021 4:57 pm
1) Limit Withdrawal Rate (i.e. drop down to 2.5%)
2) Home Equity (i.e. borrow against capital if market turns down)
3) Income Laddering (i.e. bond laddering)
4) Cash Reserve Bucketing Strategy (i.e. set aside two years of expenses a priori and if market drops use it)

Thoughts on which of these is better? Is there alternative options?


Use age-in-bonds to your advantage whatever you think would
lead to adequacy there.

I don't think the next recession will last ten years or
even five years but rather one or two years while interest
rates, lower taxes, and the usual bailouts keep the supply
chain moving.

Other than that a 3 to 5 year TRSY or CD ladder would solve
that era financially with no losses. My Corp Coupon bond
fund usually just sets for a long term investment.

You shouldn't have to decrease your withdrawals if set frugally.
age in bonds, buy-and-hold, 10 year business cycle
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

randomguy wrote: Mon Nov 29, 2021 3:45 pm
SnowBog wrote: Mon Nov 29, 2021 3:25 pm
randomguy wrote: Mon Nov 29, 2021 3:09 pm
Northern Flicker wrote: Mon Nov 29, 2021 1:56 pm
randomguy wrote: There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns.
Implementing a real income floor with safe assets eliminates both risks short of extreme tail risk scenarios (which are not SOR risks in any case).
Problem is safe income floors are absurdly expensive when looking at 30-40 year retirements. If you have that much money, you don't need them since 3% SWR are absurdly safe already. You are paying for insurance you don't need...
I think it's all in perspective...

For example, my delayed social security at 70 will be roughly $40k - which I'd consider more than a safe income floor (that's more than enough to meet all our non-medical essentials, and if things were that bad we'd be getting ACA/etc. assistance).

Let's say we want to retire at 50, and have the same $40k/year income floor. Had we started doing so at 30 (we didn't), we could have purchased $10k of EE Bonds for each spouse for 20 years (total investment roughly $400k over 40 years). For us, that may end up being around 10% of our portfolio. Someone who needs a smaller income floor and/or for a smaller period of time would be even less.

In our case, we didn't start until a few years ago, so we will end up spending more buying a mix of EE and I Bonds to get the same approximate return with less than 20 years to get it. In our case, this will cost more...

Now, to your final point...
You are paying for insurance you don't need...
Maybe, and I'm OK with that. More specifically, I've decided that "our timeline" is more important than "how much money we pass on to heirs". The nature of my work is such that another 5-7 years is likely the most I should reasonably expect, and I don't want to feel obligated to get a different job and/or keep working if the markets are doing poorly when we'd otherwise planned to retire. So I'm willing to "buy insurance" - as you put it - for a small % or our portfolio to achieve that end. But we expect to have "enough" either way, so I'm not risking our ability to save enough to do so.
Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
I agree that, in most instances, strategies that result in a withdrawal rate under 3% are 'recklessly conservative'.
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Re: How are People Mitigating Sequence of Return Risks?

Post by SnowBog »

randomguy wrote: Mon Nov 29, 2021 3:45 pm Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
So a few thoughts...
  • A "safe" floor of $40k/year would be "safe" regardless of what's happening in the market. Our total expenses are expected to be > $100k (without ACA subsidies). We can make up the difference from other sources like the rest of our fixed income assets (or optionally scale back if things are really bleak).
  • As noted, that $400k turned into $800k guaranteed vs. maybe the potential for more (your $1.5M estimate presumably in a total stock market fund) or potentially much less (the whole point of SORR). But yes, as I said before, I acknowledge its a tradeoff, and I'm giving up upside for a level of certainty...
  • The $400k is part of our 60/40 AA, which was chosen due to our need/ability/willingness to take risk. We are at the point we have more to lose than we need to gain. Regardless, a more accurate comparison would be a different fixed income fund - I think most people would be happy if their fixed income fund returned a guaranteed 3.5% return...
  • This isn't "all or nothing", as mentioned its likely we'll invest roughly 10% of our portfolio into this income floor. That leaves the other 90% for our needs, and likely a good chunk of that is going to our heirs.
  • Our primary goal is to be able to retire on our timeline. We expect we'll leave something to heirs, but that's not our goal. However, if we die young we'll leave a lot to heirs and if we die late (after many years of expenses largely covered by social security + pensions) we'll leave a lot to heirs. So I think our heirs will probably be just fine...
So to me the trade off comes down to "have even more money we aren't likely to need" (except for a SORR situation) or "settle for 'enough' and structure things to help meet our timeline."

I don't claim one is universally superior to the other. But for our needs, we'll take that tradeoff and be fine with "enough".
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

SnowBog wrote: Mon Nov 29, 2021 4:56 pm
randomguy wrote: Mon Nov 29, 2021 3:45 pm Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
So a few thoughts...
  • A "safe" floor of $40k/year would be "safe" regardless of what's happening in the market.
The problem is that the $40k is in nominal dollars. A 3.53% guaranteed nominal return (via the doubling after 20 years) sounds great until you see inflation running at 6.2%. Even 3% inflation halves the buying power of a dollar every 24 years.
Last edited by willthrill81 on Mon Nov 29, 2021 5:09 pm, edited 1 time in total.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

willthrill81 wrote: Mon Nov 29, 2021 4:53 pm I agree that, in most instances, strategies that result in a withdrawal rate under 3% are 'recklessly conservative'.
If your goal is to deplete your portfolio in the end, sure. Not everyone's going for the same goal.
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

Marseille07 wrote: Mon Nov 29, 2021 5:09 pm
willthrill81 wrote: Mon Nov 29, 2021 4:53 pm I agree that, in most instances, strategies that result in a withdrawal rate under 3% are 'recklessly conservative'.
If your goal is to deplete your portfolio in the end, sure. Not everyone's going for the same goal.
There have been exceptionally few historic instances where those in first-world nations would have depleted their diversified portfolio had a 3% SWR-type method been used. Add in the fact that even those who did this would still likely reduce their withdrawals in the event of poor portfolio performance, and the number remaining will be very close to zero.

Yes, the future could look worse, but the odds that your (not meaning you specifically) future will look worse than that seem tiny.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

willthrill81 wrote: Mon Nov 29, 2021 5:12 pm There have been exceptionally few historic instances where those in first-world nations would have depleted their diversified portfolio had a 3% SWR-type method been used. Add in the fact that even those who did this would still likely reduce their withdrawals in the event of poor portfolio performance, and the number remaining will be very close to zero.

Yes, the future could look worse, but the odds that your (not meaning you specifically) future will look worse than that seem tiny.
Well, what I meant to say is that for some people, depleting or not isn't the question - maybe they want to leave a legacy to their heirs, for example.

3% being 'recklessly conservative' or not depends on your goal / perspective.
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

Marseille07 wrote: Mon Nov 29, 2021 5:17 pm
willthrill81 wrote: Mon Nov 29, 2021 5:12 pm There have been exceptionally few historic instances where those in first-world nations would have depleted their diversified portfolio had a 3% SWR-type method been used. Add in the fact that even those who did this would still likely reduce their withdrawals in the event of poor portfolio performance, and the number remaining will be very close to zero.

Yes, the future could look worse, but the odds that your (not meaning you specifically) future will look worse than that seem tiny.
Well, what I meant to say is that for some people, depleting or not isn't the question - maybe they want to leave a legacy to their heirs, for example.

3% being 'recklessly conservative' or not depends on your goal / perspective.
That's true, but in the vast majority of historic instances, even a 3% SWR would result in substantial portfolio growth over one's retirement.

Those who are primarily concerned about leaving their assets behind for others shouldn't likely be much concerned about SWRs, VPW, ABW, income flooring, or any such methods or strategies.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Marseille07 »

willthrill81 wrote: Mon Nov 29, 2021 5:19 pm That's true, but in the vast majority of historic instances, even a 3% SWR would result in substantial portfolio growth over one's retirement.

Those who are primarily concerned about leaving their assets behind for others shouldn't likely be much concerned about SWRs, VPW, ABW, income flooring, or any such methods or strategies.
I have nothing against 3% SWR, I think that's actually very reasonable.

That said, they still have to use some methodology themselves unless they are doing the "wing it" approach. I know already my WR will be very conservative when I walk.
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Re: How are People Mitigating Sequence of Return Risks?

Post by cflannagan »

NTSX? :twisted:
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Re: How are People Mitigating Sequence of Return Risks?

Post by SnowBog »

willthrill81 wrote: Mon Nov 29, 2021 5:09 pm
SnowBog wrote: Mon Nov 29, 2021 4:56 pm
randomguy wrote: Mon Nov 29, 2021 3:45 pm Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
So a few thoughts...
  • A "safe" floor of $40k/year would be "safe" regardless of what's happening in the market.
The problem is that the $40k is in nominal dollars. A 3.53% guaranteed nominal return (via the doubling after 20 years) sounds great until you see inflation running at 6.2%. Even 3% inflation halves the buying power of a dollar every 24 years.
True - this is a noted risk of using EE Bonds (or any nominal bond for that matter). One that can be partially offset by adding something like I Bonds (or TIPS) to help offset this risk, although doing so "adds to the cost" as it were... And in our case, we'll only have a few years covered by EE Bonds, and the rest covered by I Bonds as we didn't start 20 years in advance... So less of a risk in our particular circumstances - but again at "more cost" for us since I'm expecting I Bonds to average far less than 3.53%...

However, I try to look at things over the long term. It wasn't that many months ago people were talking about how interest rates were going to continue to fall - and citing international negative interest rates as where we were going. The recent spike in inflation I think has reminded people that its nearly as impossible to predict future inflation as it is to time the market. While I have no idea what inflation will be in any given year, I do think that over 20+ years it's more likely that the government will return to keeping the average near their 2% goal. So, I think it's likely that EE Bonds at 3.53% average over 20 years will end up beating inflation (although their "purchase power" will still be reduced) - but most definitely not guaranteed. But I have other bonds - both nominal and inflation adjusted - not to mention the balance of equities (including international) that are intended to help keep up/beat inflation as well.

And one of the benefits of I & EE Bonds is the ability to "exchange" them for a better option should one become available. Since I & EE Bonds are not "marketable" - they won't be negatively impacted by interest rates rising (whereas something like a total bond market will see its "value" fall as rates rise). So, if inflation gets to the point that a 10-year TIPS and/or Treasury is better than the current/projected return on I/EE Bonds - simply redeem them (after 1 year) and purchase a "better" safe investment if available. But at the moment, nothing in the "fixed income" category - especially "government backed" options - is offering better rates...
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Re: How are People Mitigating Sequence of Return Risks?

Post by patrick013 »

Marseille07 wrote: Mon Nov 29, 2021 5:23 pm I have nothing against 3% SWR, I think that's actually very reasonable.

The next time I figure out my annual withdrawal I'm

going to increase it by 1% per year and then run the

Monte Carlo. Or not.



.
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Re: How are People Mitigating Sequence of Return Risks?

Post by willthrill81 »

SnowBog wrote: Mon Nov 29, 2021 5:32 pm
willthrill81 wrote: Mon Nov 29, 2021 5:09 pm
SnowBog wrote: Mon Nov 29, 2021 4:56 pm
randomguy wrote: Mon Nov 29, 2021 3:45 pm Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
So a few thoughts...
  • A "safe" floor of $40k/year would be "safe" regardless of what's happening in the market.
The problem is that the $40k is in nominal dollars. A 3.53% guaranteed nominal return (via the doubling after 20 years) sounds great until you see inflation running at 6.2%. Even 3% inflation halves the buying power of a dollar every 24 years.
True - this is a noted risk of using EE Bonds (or any nominal bond for that matter). One that can be partially offset by adding something like I Bonds (or TIPS) to help offset this risk, although doing so "adds to the cost" as it were... And in our case, we'll only have a few years covered by EE Bonds, and the rest covered by I Bonds as we didn't start 20 years in advance... So less of a risk in our particular circumstances - but again at "more cost" for us since I'm expecting I Bonds to average far less than 3.53%...

However, I try to look at things over the long term. It wasn't that many months ago people were talking about how interest rates were going to continue to fall - and citing international negative interest rates as where we were going. The recent spike in inflation I think has reminded people that its nearly as impossible to predict future inflation as it is to time the market. While I have no idea what inflation will be in any given year, I do think that over 20+ years it's more likely that the government will return to keeping the average near their 2% goal. So, I think it's likely that EE Bonds at 3.53% average over 20 years will end up beating inflation (although their "purchase power" will still be reduced) - but most definitely not guaranteed. But I have other bonds - both nominal and inflation adjusted - not to mention the balance of equities (including international) that are intended to help keep up/beat inflation as well.

And one of the benefits of I & EE Bonds is the ability to "exchange" them for a better option should one become available. Since I & EE Bonds are not "marketable" - they won't be negatively impacted by interest rates rising (whereas something like a total bond market will see its "value" fall as rates rise). So, if inflation gets to the point that a 10-year TIPS and/or Treasury is better than the current/projected return on I/EE Bonds - simply redeem them (after 1 year) and purchase a "better" safe investment if available. But at the moment, nothing in the "fixed income" category - especially "government backed" options - is offering better rates...
I agree that EE bonds are offering the highest long-term rates of any bond issues by the U.S. Treasury.

My only word of caution is that over the long-term, I'm not convinced that bonds are 'safer' than stocks, for instance, unless we only view risk as volatility.
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Re: How are People Mitigating Sequence of Return Risks?

Post by dogagility »

Ben Mathew wrote: Sat Nov 27, 2021 7:00 pm Fixed asset allocation on the total portfolio combined with amortization based withdrawals manages sequence of return risk very well, as described in this post.

SORR arises from poor time diversification. When risk is better spread over time, SORR is less of a problem.
+1

Flexibility in portfolio withdrawals is key to mitigating the SORR potential. Variable (i.e. flexible) withdrawals are baked into the excellent VPW and ABW calculators developed and championed by knowledgeable Bogleheads.

But... a person needs to have the ability to withdraw less money from their portfolio should the market take a dive. Get a job and/or spend less on those "wants", if necessary.
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Re: How are People Mitigating Sequence of Return Risks?

Post by SnowBog »

willthrill81 wrote: Mon Nov 29, 2021 5:44 pm ...
I agree that EE bonds are offering the highest long-term rates of any bond issues by the U.S. Treasury.

My only word of caution is that over the long-term, I'm not convinced that bonds are 'safer' than stocks, for instance, unless we only view risk as volatility.
In my view of "income floor" - at least as we are using it to bridge until social security kicks in - it's more "mid-term" (not long-term). As currently planned, we have a 17 year range to cover starting in 7 years (the last redeemed in 24 years). I have far more confidence in where bonds will be in 7-10 years than I am where stocks will be. By 15 years (8 years into planned retirement), I should have a good grasp on how things are tracking.

If things are looking bad, we'll be spending down this "income floor" - which will naturally shift us to a more stock heavy AA.

If things are looking good, we'll start to shift our AA to more stock heavy as we get closer to pensions and social security kicks in.

So in a "long-term" sense, I guess I agree with you. Again, it's all a matter of perspective.
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Re: How are People Mitigating Sequence of Return Risks?

Post by TN_Boy »

Marseille07 wrote: Mon Nov 29, 2021 5:17 pm
willthrill81 wrote: Mon Nov 29, 2021 5:12 pm There have been exceptionally few historic instances where those in first-world nations would have depleted their diversified portfolio had a 3% SWR-type method been used. Add in the fact that even those who did this would still likely reduce their withdrawals in the event of poor portfolio performance, and the number remaining will be very close to zero.

Yes, the future could look worse, but the odds that your (not meaning you specifically) future will look worse than that seem tiny.
Well, what I meant to say is that for some people, depleting or not isn't the question - maybe they want to leave a legacy to their heirs, for example.

3% being 'recklessly conservative' or not depends on your goal / perspective.
The SWR studies showing 4% "worked" had no legacy requirement.

If you put more requirements on the portfolio -- fund a retirement AND leave money for heirs, sure that changes things, which is not surprising.

I do think that many people have a legacy goal, though it may not be crisply stated in terms of the minimum they want to leave.
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Ben Mathew
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Re: How are People Mitigating Sequence of Return Risks?

Post by Ben Mathew »

dogagility wrote: Mon Nov 29, 2021 7:15 pm
Ben Mathew wrote: Sat Nov 27, 2021 7:00 pm Fixed asset allocation on the total portfolio combined with amortization based withdrawals manages sequence of return risk very well, as described in this post.

SORR arises from poor time diversification. When risk is better spread over time, SORR is less of a problem.
+1

Flexibility in portfolio withdrawals is key to mitigating the SORR potential. Variable (i.e. flexible) withdrawals are baked into the excellent VPW and ABW calculators developed and championed by knowledgeable Bogleheads.

But... a person needs to have the ability to withdraw less money from their portfolio should the market take a dive. Get a job and/or spend less on those "wants", if necessary.
Indeed. The market can do badly. If that happens, the retiree has to be prepared to adjust. They can postpone adjustments for a while and hope that the market will bounce back soon enough. That may work out. But if it doesn't, the delayed response means that even larger adjustments will be needed.

The advantage of adjusting sooner rather than later is that the adjustments required will be smaller. ABW is on the "adjust quickly" end of the spectrum. SWR fixed withdrawals is on the opposite end of the spectrum, with no adjustments made unless the money actually runs out. That runs the risk of having to make the biggest adjustment of all -- from full starting income to zero income.
Total Portfolio Allocation and Withdrawal (TPAW)
randomguy
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Re: How are People Mitigating Sequence of Return Risks?

Post by randomguy »

SnowBog wrote: Mon Nov 29, 2021 4:56 pm
randomguy wrote: Mon Nov 29, 2021 3:45 pm Lets say you had invested that 20k/year. You would now have 1.5 million and a 2.5% SWR. What did EE bonds gain me and how expensive were they? You are talking about the difference between your heirs getting 0 dollars and like 3 million when you die in 30 years. To me that is absurdly expensive...

If safe floors helped "our time" at the expense of heirs, it would be a good trade off. Unfortunately most of the cases I have seen add nothing to the "our time" and just expense out the heirs. Maybe your case is different where the math works out better but you need your safe flooring to support 3.5%+ SWR for it to make sense and I haven't seen that over any 30+ year retirement time frame from any of the options I am aware off....
So a few thoughts...
  • A "safe" floor of $40k/year would be "safe" regardless of what's happening in the market. Our total expenses are expected to be > $100k (without ACA subsidies). We can make up the difference from other sources like the rest of our fixed income assets (or optionally scale back if things are really bleak).
  • As noted, that $400k turned into $800k guaranteed vs. maybe the potential for more (your $1.5M estimate presumably in a total stock market fund) or potentially much less (the whole point of SORR). But yes, as I said before, I acknowledge its a tradeoff, and I'm giving up upside for a level of certainty...
  • The $400k is part of our 60/40 AA, which was chosen due to our need/ability/willingness to take risk. We are at the point we have more to lose than we need to gain. Regardless, a more accurate comparison would be a different fixed income fund - I think most people would be happy if their fixed income fund returned a guaranteed 3.5% return...
  • This isn't "all or nothing", as mentioned its likely we'll invest roughly 10% of our portfolio into this income floor. That leaves the other 90% for our needs, and likely a good chunk of that is going to our heirs.
  • Our primary goal is to be able to retire on our timeline. We expect we'll leave something to heirs, but that's not our goal. However, if we die young we'll leave a lot to heirs and if we die late (after many years of expenses largely covered by social security + pensions) we'll leave a lot to heirs. So I think our heirs will probably be just fine...
So to me the trade off comes down to "have even more money we aren't likely to need" (except for a SORR situation) or "settle for 'enough' and structure things to help meet our timeline."

I don't claim one is universally superior to the other. But for our needs, we'll take that tradeoff and be fine with "enough".
Yes investing isn't guaranteed. But there are also basically 0 times in US history where over 20 years you weren't better off doing DCA into the market instead of bonds. You are paying a lot for that last 1% of risk reduction.. Personally I am not happy with locking up money and making 3.5%. Odds are that will barely keep up with inflation.

Why do you think the safe floor lets you retire sooner? If you sink 1.0m into tips and invest the other 9 million 60/40 do you think that changes your retirement picture from just investing all 10m 60/40? Even on bogleheads a .4% SWR is still considered pretty safe...... You are going to pay like 2 million dollars for safety you don't need. Maybe you think that is a meaningless amount of money. I think it is pretty noticeable....

The safe flooring concept works a lot better when you are like 80 and looking at 10-15 year time lines instead of 30. The opportunity cost over 30 years is just too high.
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Re: How are People Mitigating Sequence of Return Risks?

Post by Northern Flicker »

randomguy wrote: Mon Nov 29, 2021 3:09 pm
Northern Flicker wrote: Mon Nov 29, 2021 1:56 pm
randomguy wrote: There are basically two SOR risks that people are talking about
a) Going broke.
b) Only spending 40k instead of the 50k they could have if SORR didn't show up(i.e. The 1966 person could have spend a bit over 5% given their average returns. They could only spend 3.9% because of SORR).

b is pretty much impossible to mitigate against as you need to generate returns.
Implementing a real income floor with safe assets eliminates both risks short of extreme tail risk scenarios (which are not SOR risks in any case).
Problem is safe income floors are absurdly expensive when looking at 30-40 year retirements. If you have that much money, you don't need them since 3% SWR are absurdly safe already. You are paying for insurance you don't need...
If the fixed income allocation in your portfolio does not cover your income floor, you are taking sequence of return risk. That risk may be low enough to take it, but the thread is about eliminating or reducing it. Delaying SS and funding a nominal SPIA from an IRA (to provide a little bit of inflation protection for the SPIA because tax brackets are indexed to inflation) are cheaper than 3.3% SWR, and may get moderately close to a real income floor, likely with less SOR risk than 3.3% SWR as well.
Last edited by Northern Flicker on Tue Nov 30, 2021 2:33 am, edited 1 time in total.
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Re: How are People Mitigating Sequence of Return Risks?

Post by iamlucky13 »

There's some interesting posts in here that are based on more detail analysis and a better understanding of the factors involved than I have.

My own strategy is pretty straightforward: over save (probably).

If I retire with enough savings my current expenses are 4% of savings, I'll probably die with a bunch left over.

If I decide to err a little more conservative (like 3.5%), which I'm leaning toward, I'll die with even more left over.

I'm more ok with regretting that I left money unspent than I am with regretting that I spent too much.
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