How are People Mitigating Sequence of Return Risks?
How are People Mitigating Sequence of Return Risks?
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.
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.
Last edited by MrCheapo on Sat Nov 27, 2021 5:07 pm, edited 1 time in total.
Re: How are People Mitigating Sequence of Return Risks?
Bond funds is what I used. No longer concerned about it.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How are People Mitigating Sequence of Return Risks?
1 Working to 77 - I love my job
2 Sell business at 77 and invest proceeds to cover 5 years expense in bonds, rest in stocks
3 Use reverse mortgage or equity line to cover if 5 years bonds not enough
2 Sell business at 77 and invest proceeds to cover 5 years expense in bonds, rest in stocks
3 Use reverse mortgage or equity line to cover if 5 years bonds not enough
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Re: How are People Mitigating Sequence of Return Risks?
Cash reserve bucketing is one specific method for a more general technique of managing portfolio liquidity, which also can be done without large cash positions by diversifying fixed income so that there is a good source of liquidity in different market conditions.
Make a 4-cell grid by having inflation on one axis and interest rates on another. Each axis has 2 values, increasing or decreasing. Then identify a fixed income subclass that will be good to tap if thise conditions prevail. I think you will find that intermediate treasuries, I bonds, TIPS are sufficient to fill the 4 cells. Stable value funds and ladders of CDs or bonds also can be used.
Managing liquidity with a smaller cash position increases expected return.
Make a 4-cell grid by having inflation on one axis and interest rates on another. Each axis has 2 values, increasing or decreasing. Then identify a fixed income subclass that will be good to tap if thise conditions prevail. I think you will find that intermediate treasuries, I bonds, TIPS are sufficient to fill the 4 cells. Stable value funds and ladders of CDs or bonds also can be used.
Managing liquidity with a smaller cash position increases expected return.
Re: How are People Mitigating Sequence of Return Risks?
Most funds holding high quality bonds should be liquid. Mine can be liquidated in 24 hours. For that matter, so can most stock funds.Northern Flicker wrote: ↑Sat Nov 27, 2021 5:08 pm Cash reserve bucketing is one specific method for a more general technique of managing portfolio liquidity, which also can be done without large cash positions by diversifying fixed income so that there is a good source of liquidity in different market conditions.
Make a 4-cell grid by having inflation on one axis and interest rates on another. Each axis has 2 values, increasing or decreasing. Then identify a fixed income subclass that will be good to tap if thise conditions prevail. I think you will find that intermediate treasuries, I bonds, TIPS are sufficient to fill the 4 cells. Stable value funds and ladders of CDs or bonds also can be used.
Managing liquidity with a smaller cash position increases expected return.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How are People Mitigating Sequence of Return Risks?
Thank you but isn't stock market return missing? After all that's the whole basis of the danger.Northern Flicker wrote: ↑Sat Nov 27, 2021 5:08 pm Make a 4-cell grid by having inflation on one axis and interest rates on another. Each axis has 2 values, increasing or decreasing. Then identify a fixed income subclass that will be good to tap if thise conditions prevail. I think you will find that intermediate treasuries, I bonds, TIPS are sufficient to fill the 4 cells. Stable value funds and ladders of CDs or bonds also can be used.
Re: How are People Mitigating Sequence of Return Risks?
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.
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.
Re: How are People Mitigating Sequence of Return Risks?
Agree, part of SOR is psychological - managing anxiety and paralysis when the time comes to re-balance after a 60% drop in equity.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.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How are People Mitigating Sequence of Return Risks?
I also used 4) Cash Reserve Bucket to mitigate sequence risk. When I retired 10 years ago, I had about 7 years of expenses in cash. Now the cash is down to about 3 years of expenses. [The cash includes my emergency fund.]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)
I thought it worked great. Now I don't worry about sequence risk.
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Re: How are People Mitigating Sequence of Return Risks?
#1 - limit withdrawal rate for the first few years. Spouse will continue to work for (minimal) income for 4 to 5 more years. Hopefully we'll be past the worst sequence risk by then. That will keep it under 2%. If things get real bad in that 4 to 5 years, I guess I'm goin' back to work! But we're mid to late 40s, so we got a long way to go til social security.
We're also still carrying our mortgage but hold far more in bonds @ 70/30, so I suppose there's that too (mortgage value is 4 to 6 years of expenses.) That's kind of like being able to #2 "tap equity" without actually doing anything other than spending it.
We're also still carrying our mortgage but hold far more in bonds @ 70/30, so I suppose there's that too (mortgage value is 4 to 6 years of expenses.) That's kind of like being able to #2 "tap equity" without actually doing anything other than spending it.
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Re: How are People Mitigating Sequence of Return Risks?
All of them are a form of #1, and that's basically the only answer.
You can do whatever you want to effectively achieve #1.
You can do whatever you want to effectively achieve #1.
Re: How are People Mitigating Sequence of Return Risks?
Our retirement plan:
DW and I retired a few years apart.
We reduced our AA to 65/35.
We have a conservative withdrawal rate.
DW and I retired a few years apart.
We reduced our AA to 65/35.
We have a conservative withdrawal rate.
"I started with nothing and I still have most of it left."
Re: How are People Mitigating Sequence of Return Risks?
Interesting, I'm glad it worked out for you but holding that much in expenses for the last 10 years meant you missed out on some great returns.doobiedoo wrote: ↑Sat Nov 27, 2021 5:34 pmI also used 4) Cash Reserve Bucket to mitigate sequence risk. When I retired 10 years ago, I had about 7 years of expenses in cash. Now the cash is down to about 3 years of expenses. [The cash includes my emergency fund.]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)
I thought it worked great. Now I don't worry about sequence risk.
Re: How are People Mitigating Sequence of Return Risks?
1. Delay social security until 70
2. Have enough in bonds to cover basic expenses until age 70
3. Prefer duration matched TIPS and iBonds to nominal bonds
4. Use a variable withdrawal strategy such as VPW instead of the 4% rule
2. Have enough in bonds to cover basic expenses until age 70
3. Prefer duration matched TIPS and iBonds to nominal bonds
4. Use a variable withdrawal strategy such as VPW instead of the 4% rule
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
Re: How are People Mitigating Sequence of Return Risks?
If the market drops significantly and stays down before I turn 65, I plan to tap my monthly pension which will have the effect of lowering my withdraw rate to 2-3% (i.e., #1). If not, I will take either the lump sum or the monthly pension payment at 65 depending on how things are looking at the time.
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Re: How are People Mitigating Sequence of Return Risks?
I'm surprised that they didn't list the best strategy, that is to work until you die.
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Re: How are People Mitigating Sequence of Return Risks?
Ahh. Monday morning quarterbacking.MrCheapo wrote: ↑Sat Nov 27, 2021 5:45 pmInteresting, I'm glad it worked out for you but holding that much in expenses for the last 10 years meant you missed out on some great returns.doobiedoo wrote: ↑Sat Nov 27, 2021 5:34 pmI also used 4) Cash Reserve Bucket to mitigate sequence risk. When I retired 10 years ago, I had about 7 years of expenses in cash. Now the cash is down to about 3 years of expenses. [The cash includes my emergency fund.]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)
I thought it worked great. Now I don't worry about sequence risk.
Being wrong compounds forever.
- willthrill81
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Re: How are People Mitigating Sequence of Return Risks?
Indeed. Siamond has already shown in the post below that even if we were to know what the average returns of the next 30 years would be, we would still be unable to predict the corresponding 30 year SWR due to sequence of returns risk. There hasn't been a strong relationship between returns and safe withdrawal rates (i.e. sequence of returns risk). Note how many periods had average annualized returns of 4% or lower yet had a SWR of 5-8% due to a favorable sequence of returns.
siamond wrote: ↑Wed Feb 06, 2019 2:35 pmNote that the relation between CAGR and SWR is surprisingly loose, as Will already hinted at. Let me try to make the point more clear because it is certainly a tad counter-intuitive. I assembled the following graphs by tweaking a tad the Simba backtesting spreadsheet. Every vertical is a retirement cycle of 30 years, starting on the year indicated on the X axis. And you'll find the max WR (aka SWR) for each individual cycle as well as the (real) CAGR. Check those graphs carefully. If you perceive that the blue points (CAGR) give you any solid indication about the lowest pink points (SWR), I don't know, look again...
The Sensible Steward
- willthrill81
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Re: How are People Mitigating Sequence of Return Risks?
Choosing a portfolio with a long track record of historically low start date sensitivity may be one of the best ways to mitigate sequence of returns risk, as described here.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.
The Sensible Steward
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Re: How are People Mitigating Sequence of Return Risks?
Portfolio liquidity is a different concept from whether a withdrawal will be processed. If that were all it was, cash buckets would not even be on the table for discussion. Portfolio liquidity refers having a good source of liquidity when it is needed. If a bond has just dropped 4% from rising rates, it is not a good source of portfolio liquidity because a withdrawal will lock in the short-term loss.jebmke wrote: ↑Sat Nov 27, 2021 5:16 pmMost funds holding high quality bonds should be liquid. Mine can be liquidated in 24 hours. For that matter, so can most stock funds.Northern Flicker wrote: ↑Sat Nov 27, 2021 5:08 pm Cash reserve bucketing is one specific method for a more general technique of managing portfolio liquidity, which also can be done without large cash positions by diversifying fixed income so that there is a good source of liquidity in different market conditions.
Make a 4-cell grid by having inflation on one axis and interest rates on another. Each axis has 2 values, increasing or decreasing. Then identify a fixed income subclass that will be good to tap if thise conditions prevail. I think you will find that intermediate treasuries, I bonds, TIPS are sufficient to fill the 4 cells. Stable value funds and ladders of CDs or bonds also can be used.
Managing liquidity with a smaller cash position increases expected return.
- Ben Mathew
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Re: How are People Mitigating Sequence of Return Risks?
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.
SORR arises from poor time diversification. When risk is better spread over time, SORR is less of a problem.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: How are People Mitigating Sequence of Return Risks?
1. Worked till 66.
2. Retired with 5 years of cash not counted in portfolio.
3. Portfolio is 50/25/25, mutual funds/bonds/annuity.
4. Will start Social Security and annuity at 70. Combined these equal 150% of annual expenses.
5. With 50% extra built into cash flow, so I am flexible.
6. x,xxx,xxx in portfolio to cover inflation.
7. No debt and no mortgage on home and 40 acres.
8. If all else fails I noticed Walmart is paying $14.50/hr for restocking shelves at night.
2. Retired with 5 years of cash not counted in portfolio.
3. Portfolio is 50/25/25, mutual funds/bonds/annuity.
4. Will start Social Security and annuity at 70. Combined these equal 150% of annual expenses.
5. With 50% extra built into cash flow, so I am flexible.
6. x,xxx,xxx in portfolio to cover inflation.
7. No debt and no mortgage on home and 40 acres.
8. If all else fails I noticed Walmart is paying $14.50/hr for restocking shelves at night.
The realist sees the glass as completely full, 50% water and 50% air.
Re: How are People Mitigating Sequence of Return Risks?
Dude, I don't know about you, but when I turned 50 I started to go to bed before 9pm so I'd be asleep in the bedding section.InNameOnly wrote: ↑Sat Nov 27, 2021 7:08 pm 1. Worked till 66.
2. Retired with 5 years of cash not counted in portfolio.
3. Portfolio is 50/25/25, mutual funds/bonds/annuity.
4. Will start Social Security and annuity at 70. Combined these equal 150% of annual expenses.
5. With 50% extra built into cash flow, so I am flexible.
6. x,xxx,xxx in portfolio to cover inflation.
7. No debt and no mortgage on home and 40 acres.
8. If all else fails I noticed Walmart is paying $14.50/hr for restocking shelves at night.
- Sandtrap
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Re: How are People Mitigating Sequence of Return Risks?
Withdrawal rate in retirement 2-3% variable
Diversification to R:E debt free income properties
Deferred SS
LBYM ie:frugal
50+X at 4% margin comfort zone
Allocation 50/50
3 fund index
No debt
Follow the forum wiki to the T
Huge sleep factor pillow
j
Diversification to R:E debt free income properties
Deferred SS
LBYM ie:frugal
50+X at 4% margin comfort zone
Allocation 50/50
3 fund index
No debt
Follow the forum wiki to the T
Huge sleep factor pillow
j
Re: How are People Mitigating Sequence of Return Risks?
liquidity generally refers to the ability to convert to cash readily without affecting the market price. What you are concerned about is NAV risk which may or may not involve liquidity.Northern Flicker wrote: ↑Sat Nov 27, 2021 6:46 pm Portfolio liquidity is a different concept from whether a withdrawal will be processed. If that were all it was, cash buckets would not even be on the table for discussion. Portfolio liquidity refers having a good source of liquidity when it is needed. If a bond has just dropped 4% from rising rates, it is not a good source of portfolio liquidity because a withdrawal will lock in the short-term loss.
https://www.investopedia.com/terms/l/liquidity.asp
For example, long term treasury bonds are highly liquid but subject to significant NAV fluctuation due to duration.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How are People Mitigating Sequence of Return Risks?
2.5%swr is low for someone in their 50s. I would not start trying to borrow against my house if the stock mkt went down big. I'd go the SPIA, QLAC route, 70 SS, 50/50 AA would hopefully lessen the hurt.
Re: How are People Mitigating Sequence of Return Risks?
But if you need funds a few years into retirement and encounter an equity setback, which is better to pull from: a bond that had earned 10% since retirement followed by a recent 4% drop, or cash that had earned 4% since retirement and not dropped at all?Northern Flicker wrote: ↑Sat Nov 27, 2021 6:46 pmPortfolio liquidity is a different concept from whether a withdrawal will be processed. If that were all it was, cash buckets would not even be on the table for discussion. Portfolio liquidity refers having a good source of liquidity when it is needed. If a bond has just dropped 4% from rising rates, it is not a good source of portfolio liquidity because a withdrawal will lock in the short-term loss.jebmke wrote: ↑Sat Nov 27, 2021 5:16 pmMost funds holding high quality bonds should be liquid. Mine can be liquidated in 24 hours. For that matter, so can most stock funds.Northern Flicker wrote: ↑Sat Nov 27, 2021 5:08 pm Cash reserve bucketing is one specific method for a more general technique of managing portfolio liquidity, which also can be done without large cash positions by diversifying fixed income so that there is a good source of liquidity in different market conditions.
Make a 4-cell grid by having inflation on one axis and interest rates on another. Each axis has 2 values, increasing or decreasing. Then identify a fixed income subclass that will be good to tap if thise conditions prevail. I think you will find that intermediate treasuries, I bonds, TIPS are sufficient to fill the 4 cells. Stable value funds and ladders of CDs or bonds also can be used.
Managing liquidity with a smaller cash position increases expected return.
Re: How are People Mitigating Sequence of Return Risks?
Indeed, that is an issue. But liquidity is not the issue, duration risk is. All my assets are highly liquid, some have much higher risk than others. None of them have liquidity risk. I don't hold any cash and haven't for decades. I liquidate whichever asset is out of balance (unless there is a tax hit, then I waffle a bit).
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How are People Mitigating Sequence of Return Risks?
Having a diversified portfolio is the most important thing. Diversification means holding lots of overperforming and underperforming assets without expecting them to repeat specific past sequences. Since we are managing for worst sequences we know we do not need anything like historical stock returns, and it is really as simple as not trying to pick winners through timing, not trying to avoid what we think will be losing assets, and not trying to find something that did well in the past and expect it to repeat just because of it's past performance.
Diversify through the characteristics the investments provide, not through what sequence of them best manages the couple of worst drops of the past, and definitely not based on how you think they will perform individually. You should be ambivalent to how any one asset performs in your investing decisions, as anything that has potential rewards has potential risks.
Diversify through the characteristics the investments provide, not through what sequence of them best manages the couple of worst drops of the past, and definitely not based on how you think they will perform individually. You should be ambivalent to how any one asset performs in your investing decisions, as anything that has potential rewards has potential risks.
Last edited by abc132 on Sat Nov 27, 2021 7:48 pm, edited 1 time in total.
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Re: How are People Mitigating Sequence of Return Risks?
Portfolio liquidity is the property that makes it likely there will be an overweight asset to liquidate from in most or all conditions.jebmke wrote: But liquidity is not the issue, duration risk is. All my assets are highly liquid, some have much higher risk than others. None of them have liquidity risk. I don't hold any cash and haven't for decades. I liquidate whichever asset is out of balance (unless there is a tax hit, then I waffle a bit).
Longer duration risk assets are mot a good dource of portfolio liquidity shortly after a rise in interest rates. Again, portfolio liquidity does not refer specifically to whether it is easy to find a buyer for the asset, although assets with poor marketable liquidity are often not a good source of portfolio liquidity.
Portfolio liquidity is a property of the portfolio, not specifically a property of the individual assets.
Last edited by Northern Flicker on Sat Nov 27, 2021 7:49 pm, edited 1 time in total.
Re: How are People Mitigating Sequence of Return Risks?
I suspect the term liquidity is often used incorrectly.Northern Flicker wrote: ↑Sat Nov 27, 2021 7:46 pmPortfolio liquidity is the property that there likely will be an overweight asset to liquidate from.jebmke wrote: But liquidity is not the issue, duration risk is. All my assets are highly liquid, some have much higher risk than others. None of them have liquidity risk. I don't hold any cash and haven't for decades. I liquidate whichever asset is out of balance (unless there is a tax hit, then I waffle a bit).
Longer duration risk assets are mot a good dource of portfolio liquidity shortly after a rise in interest rates. Again, portfolio liquidity does not refer specifically to whether it is easy to find a buyer for the asset, although assets with poor marketable liquidity are often not a good source of portfolio liquidity.
Portfolio liquidity is a property of the portfolio, not specifically a property of the individual assets.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: How are People Mitigating Sequence of Return Risks?
There are different notions of liquidity. The use of the word for "portfolio liquidity" may or may not be ideal, but it is an established usage.
Re: How are People Mitigating Sequence of Return Risks?
That could be. My wife was a portfolio manager. They generally looked at liquidity as the ability to move the asset with low bid-ask spreads -- ie., could you convert to cash without affecting the asset value.
edit, the portfolios were generally not liquid, however since you had to request a valuation to pull out money and that took time. You couldn't convert to cash quickly if you were invested in her fund. So the fund was not liquid but the assets were.
edit, the portfolios were generally not liquid, however since you had to request a valuation to pull out money and that took time. You couldn't convert to cash quickly if you were invested in her fund. So the fund was not liquid but the assets were.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How are People Mitigating Sequence of Return Risks?
That is one way to look at it. I saw it as a SWAN choice. Even with current hindsight, I would have done the same thing. [And I did have plenty of dollars invested in the market.]MrCheapo wrote: ↑Sat Nov 27, 2021 5:45 pmInteresting, I'm glad it worked out for you but holding that much in expenses for the last 10 years meant you missed out on some great returns.doobiedoo wrote: ↑Sat Nov 27, 2021 5:34 pmI also used 4) Cash Reserve Bucket to mitigate sequence risk. When I retired 10 years ago, I had about 7 years of expenses in cash. Now the cash is down to about 3 years of expenses. [The cash includes my emergency fund.]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)
I thought it worked great. Now I don't worry about sequence risk.
Essentially the cash bucket is self-insuring for a risky but not-too-likely event. You could say the same thing about an emergency fund. I don't think I have used my emergency fund in the last 40 years. Does that mean I should have invested it? NO!
Almost every investment decision boils down to risk vs reward. I don't view an 80% equity allocation as risky, because I have a cash bucket that allows me to ride out the volatility.
Re: How are People Mitigating Sequence of Return Risks?
How are Retirees Mitigating Sequence of Return Risks?
The easy answer is to avoid SWR's problems, ..................by not using the 4% SWR method.
SWR was the first one based on long historical research, but since then, better methods have been developed. SWR has the significant problems of (1) under spending if the worst case is not experienced by the retiree, and (2) early depletion if high inflation occurs for too long, early in retirement. The second problem was initially missed by Bengen because the 1966 and later retirees had not yet been retired for 30 years when Bengen was doing his initial research.
In general, many variable WD rate methods boost portfolio longevity. I am using the RMD spending method of: my age based, annual RMD % applied to each recent annual portfolio value, plus spending annual dividends and interest. That one adjusts my annual spending to my remaining portfolio value, which just makes sense to me. That is living within my means, DURING retirement.
I am overly sensitive to SWR's early inflation problem because my father retired in 1968, one of those adjacent worst years to retire, if he had used the SWR method. The method was not developed until 24 years after his retirement started.
The easy answer is to avoid SWR's problems, ..................by not using the 4% SWR method.
SWR was the first one based on long historical research, but since then, better methods have been developed. SWR has the significant problems of (1) under spending if the worst case is not experienced by the retiree, and (2) early depletion if high inflation occurs for too long, early in retirement. The second problem was initially missed by Bengen because the 1966 and later retirees had not yet been retired for 30 years when Bengen was doing his initial research.
In general, many variable WD rate methods boost portfolio longevity. I am using the RMD spending method of: my age based, annual RMD % applied to each recent annual portfolio value, plus spending annual dividends and interest. That one adjusts my annual spending to my remaining portfolio value, which just makes sense to me. That is living within my means, DURING retirement.
I am overly sensitive to SWR's early inflation problem because my father retired in 1968, one of those adjacent worst years to retire, if he had used the SWR method. The method was not developed until 24 years after his retirement started.
Re: How are People Mitigating Sequence of Return Risks?
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.
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.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Re: How are People Mitigating Sequence of Return Risks?
I don't think this is the most efficient way, ie:cash. But some amount of cash will alleviate potential sleeplessness!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.
Re: How are People Mitigating Sequence of Return Risks?
One thing to consider is a rising equity glide path during retirement. For example start at 30/70 and gradually increase to 60/40 or 70/30.
See: viewtopic.php?p=4066058#p4066058
See: viewtopic.php?p=4066058#p4066058
Last edited by OnTrack on Sat Nov 27, 2021 10:09 pm, edited 1 time in total.
Re: How are People Mitigating Sequence of Return Risks?
26% stocks/74% bonds (weighted to short term TIPs.)
Taking RMDs, pension and SS.
Easy peasy.
Taking RMDs, pension and SS.
Easy peasy.
Re: How are People Mitigating Sequence of Return Risks?
This is not true. Bond tents, rising equity glide paths, cash buckets, etc. are not about reducing withdrawal rate. (They reduce withdrawal from equities when those are down, but that's not what "withdrawal rate" means.) They are about buying some stability at the price of lower expected returns.Marseille07 wrote: ↑Sat Nov 27, 2021 5:36 pm All of them are a form of #1, and that's basically the only answer.
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Re: How are People Mitigating Sequence of Return Risks?
If I walk into a downturn and stop slashing equities and draw from my fixed income allocation, my withdrawal rate on equities is 0%.Charon wrote: ↑Sat Nov 27, 2021 11:18 pm This is not true. Bond tents, rising equity glide paths, cash buckets, etc. are not about reducing withdrawal rate. (They reduce withdrawal from equities when those are down, but that's not what "withdrawal rate" means.) They are about buying some stability at the price of lower expected returns.
Maybe I wasn't clear, but that's what I meant by "withdrawal rate" in this context. I don't mean 0%, but we have to reduce the damage on equities when we're facing SORR. Cash reserves, HELOC etc etc are different ways to achieve this goal.
Last edited by Marseille07 on Sat Nov 27, 2021 11:30 pm, edited 1 time in total.
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Re: How are People Mitigating Sequence of Return Risks?
I agree with dbr's advice. Diversification of strategies is just as valuable as diversification of investments.dbr wrote: ↑Sat Nov 27, 2021 5:29 pm
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.
Have a plan, stay the course and simplify. Then ignore the noise!
Re: How are People Mitigating Sequence of Return Risks?
Frugal by nature (and a pension) enabled saving a nice cushion (80+X predicted uncovered expenses, not counting SS) @ about 65:33:2
Planning on retiring with 25X in FI
3 Fund simplicity
Deferred compensation until almost 70, then start SS.
Planning on retiring with 25X in FI
3 Fund simplicity
Deferred compensation until almost 70, then start SS.
Re: How are People Mitigating Sequence of Return Risks?
+1Ben 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.
For me, it's
- Saving more than I need
- Living below my means
- Investing wisely and sticking with an allocation that suits me and not necessarily a one-size-fits-all allocation.
- Not using anything that remotely resembles SWR as a withdrawal method. ABW, as Ben notes above, fits the bill although I use my own version of it.
- Planning beyond the end of my nose to include contingencies: DW predeceasing, long term care needs, Roth conversions, SPIA, etc...
"Simplicity" in and of itself is not one of our goals - besides, that's in the eye of the beholder...
Cheers.
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Re: How are People Mitigating Sequence of Return Risks?
I retired at age 66, working a little longer to have a larger nest egg.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.
We had a bond ladder, using Treasury STRIPS, in early retirement.
Flexibility in spending during early retirement.
I don't believe that asset allocation or cash reserves can solve a Sequence of Returns problem.
The so-called 4% rule is not a withdrawal strategy spending plan, it is just a planning tool used to estimate the size of nest egg needed at the start of retirement.
Last edited by ruralavalon on Sun Nov 28, 2021 8:28 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
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Re: How are People Mitigating Sequence of Return Risks?
I bought ten-year treasury bond ladder that covers normal yearly discretionary and non-discretionary spending in retirement; bond amounts drop after planned start of social security (at 70). So mostly I don't sweat market drops. Still exposed though when fund portfolio withdrawals are needed for large lumpy expenses like major house repairs or car replacement. It's a compromise that gives me confidence.
Re: How are People Mitigating Sequence of Return Risks?
Exactly. Just start with a lot more money and forget about it.Marseille07 wrote: ↑Sat Nov 27, 2021 5:36 pm All of them are a form of #1, and that's basically the only answer.
You can do whatever you want to effectively achieve #1.
Re: How are People Mitigating Sequence of Return Risks?
Another comment is that managing SORR by reducing withdrawal rate is not managing SORR but rather making oneself a victim of it.
The trick is to be able to spend one's resources without cutting back. Obviously answers to that are welcome.
The trick is to be able to spend one's resources without cutting back. Obviously answers to that are welcome.
Re: How are People Mitigating Sequence of Return Risks?
5% of annual portfolio balance with threshold rebalancing and proportional to AA withdrawals.
All needs and some wants are covered by pension.
Both of our SS claims (one above average and one maxed out) are still in the future and will backfill nicely if a poor sequence of returns actually emerges and crimps income from portfolio under a % of portfolio balance approach.
FYI - Bolted on buckets of cash strategy is a suboptimal approach and increases the risk of portfolio failure.
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
https://www.marketwatch.com/story/do-bu ... 2019-02-12
All needs and some wants are covered by pension.
Both of our SS claims (one above average and one maxed out) are still in the future and will backfill nicely if a poor sequence of returns actually emerges and crimps income from portfolio under a % of portfolio balance approach.
FYI - Bolted on buckets of cash strategy is a suboptimal approach and increases the risk of portfolio failure.
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
https://www.marketwatch.com/story/do-bu ... 2019-02-12
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Re: How are People Mitigating Sequence of Return Risks?
This, along with maximizing our social security benefits is the approach we have taken.ruralavalon wrote: ↑Sun Nov 28, 2021 8:18 am Flexibility in spending during early retirement.
I don't believe that asset allocation or cash reserves can solve a Sequence of Returns problem.
We have money in several different vehicles (cash, equities, bonds, taxable, non-taxable) to give us flexibility.
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