Planning for a 50% MARKET CRASH before or at retirement

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Charles Joseph
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Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Nowizard »

It all depends on your risk tolerance, need to take risk, etc. Planning for a potential 50% drop is commonly suggested, but it may not be possible for some or necessary for others. The choice may be to prepare for that possibility from an analytical standpoint, but others who have no analytical need may still choose to prepare in that fashion because it makes them sleep better. Basically, any answer you will get is an opinion based on whatever analytical and personal issues are important to the one stating the opinion, including this one. Others will post responses focusing on the analytical side, I suspect, but your post seems to suggest that you are in the category of those who can plan for a 50% downturn and may have the luxury of a choice.

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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by flyingaway »

If the market crashes down 50%, you still can retire, then you are in a really good shape.
You have a bond tent. That is just thr right thing to do if you are afraid of a market crash. Personally, I would not go below 50/50, but 50% crash is difficult to bear for many people.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dcabler »

Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
It depends on a lot of things, including whatever sort of withdrawal method you plan to use. Do you plan on it crashing 50% and never recovering? Crashing 50% and staying flat for N years? Crashing 50% for 1 year then fully recovering within a couple of years? Sky's the limit in terms of what's possible and what can and can't be done about it.

Cheers.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dbr »

To say the result of such a crash is that your entire retirement financial position is permanently reduced is extremely conservative because crashes in the US stock market almost always recover over some period of time. I don't think that in safe withdrawal rate studies one can clearly identify bad years to retire relative to the 4% estimate with market crashes just at the start of retirement though perhaps at 100% stock 1929 will appear in the list. At 40/60 I think your concern is extreme.

But I agree with the poster above that it depends on how worried you are and what your ability to cope might be. If your plan can painlessly accommodate such a pessimistic view of what you can spend or if the actual spending is not reduced that much because you have other sources of income, then by all means plan that way. If the cost is that you postpone retirement by five years I would say you are throwing the baby out with the bathwater. Keep in mind that before you actually retire you will have found out if there is a crash or not, so the question might be more hypothetical than real.

We have noted in other threads that the question of whether or not one has hit one's number when there is volatility in the market at the time of retirement might be handled by basing the statement of one's portfolio value on a trailing three year or five year average.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by nisiprius »

I have personally experienced two of them since I first began serious retirement saving, let's say about 1978.

Both of them took me by surprise. I think both of them took most people more or less by surprise. I remember on vacation in 2008, visiting a friend and not having checked news, she said "Are you worried about the stock market?" I said "Naaah, it's just bouncing around in the 13,000s-14,000. I won't start fussing until it's lower than 12,000." There's a pause. She looks at me. She said "It's below 12,000."

So, that is two in 44 years. So, no, it does not seem overly conservative to plan for a real possibility that a) a -50% crash will happen in our investing lifetime and that b) it will pretty much take us by surprise.

I may be personally biased by the fact that in 2008, I was in my early sixties, the market crashed, and I lost my job. It was a -50% market crash. Judge for yourself whether "early sixties" counts as "at or near retirement." I was old enough to claim Social Security, and when my unemployment benefits ran out, that's just what I did.

"Margins of safety" are always wasteful if they are not used, and there is a natural temptation to talk ourselves into reducing them--but I think it's important to allow for natural bias.

ADDED: I don't want to be overdramatic. It's true enough that I was in my early sixties when the market crashed and I lost my job. We personally experienced a good deal of anxiety and some disruption, but objectively when it was all over, it hadn't been all that bad. Although I didn't get as much as a single job interview for six months, just after starting to draw Social Security I landed a consulting gig that took care of things. So for us it was really "only" a six month gap, and I was drawing unemployment, and my wife was still working. But, no, I did not feel up to picking up "stocks on sale" during that income gap.
Last edited by nisiprius on Sun Aug 14, 2022 10:18 am, edited 2 times in total.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by RoadThunder »

nisiprius wrote: Sun Aug 14, 2022 9:04 am I have personally experienced two of them since I first began serious retirement saving, let's say about 1978.

Both of them took me by surprise. I think both of them took most people more or less by surprise. I remember on vacation in 2008, visiting a friend and not having checked news, she said "Are you worried about the stock market?" I said "Naaah, it's just bouncing around in the 13,000s-14,000. I won't start fussing until it's lower than 12,000." There's a pause. She looks at me. She said "It's below 12,000."

So, that is two in 44 years. So, no, it does not seem overly conservative to plan for a real possibility that a) a -50% crash will happen in our investing lifetime and that b) it will pretty much take us by surprise.

I may be personally biased by the fact that in 2008, I was in my early sixties, the market crashed, and I lost my job. It was a -50% market crash. Judge for yourself whether "early sixties" counts as "at or near retirement." I was old enough to claim Social Security, and when my unemployment benefits ran out, that's just what I did.
Thanks for sharing- it’s hard to hear for younger investors, but it’s real.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by nisiprius »

I think Morningstar's tabulation of stock market declines is useful, particularly Morningstar's "pain index." I worry that younger investors may not appreciate how relatively painless 2020 was.

On the optimistic side, even if we include 1937-1945 as -50%, you can argue that there have only been five in about 150 years, or an average of only one every thirty years. On the pessimistic side, 1929-1936 was really quite a lot worse than -50%. In fact it was equivalent to losing -50%, then losing another -50%, then losing another -37%.

Source

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Charles Joseph
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

nisiprius wrote: Sun Aug 14, 2022 9:04 am I have personally experienced two of them since I first began serious retirement saving, let's say about 1978.

Both of them took me by surprise. I think both of them took most people more or less by surprise. I remember on vacation in 2008, visiting a friend and not having checked news, she said "Are you worried about the stock market?" I said "Naaah, it's just bouncing around in the 13,000s-14,000. I won't start fussing until it's lower than 12,000." There's a pause. She looks at me. She said "It's below 12,000."

So, that is two in 44 years. So, no, it does not seem overly conservative to plan for a real possibility that a) a -50% crash will happen in our investing lifetime and that b) it will pretty much take us by surprise.

I may be personally biased by the fact that in 2008, I was in my early sixties, the market crashed, and I lost my job. It was a -50% market crash. Judge for yourself whether "early sixties" counts as "at or near retirement." I was old enough to claim Social Security, and when my unemployment benefits ran out, that's just what I did.

"Margins of safety" are always wasteful if they are not used, and there is a natural temptation to talk ourselves into reducing them--but I think it's important to allow for natural bias.
This is really helpful -- a reality check and a bit of a shot in the gut. Good for me as an older investor and as a poster below intimated, this would be great for younger investors to read.

As for my situation, I will have a reasonable but relatively modest nest egg and planning with 80% of my balance has been a comfort for me.

Thank you nisiprius.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dbr »

The 2008 crash happened after we retired. Since then that crash has had no practical effect on our retirement as we have had massive bull markets in both stocks and bonds from 2010 to 2020. We also had higher withdrawal rates at the beginning as Social Security was delayed.

We were also heavily invested in 2000 and (less so) in 1987. 2020 and 2022 have been non-events so far and even the current inflation after years of low inflation just averages out. It helped that our 2000 portfolio was not in the NASDAQ.

The relative disaster for a retiree would be to retire into a repeat of 1966, but that does not involve market crashes per se though some bad things happened in the mid '70s and the 1982 bull market came too late. Note a 4% withdrawal rate works for a 1966 retiree. A 1982 retiree gets 8%.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by martincmartin »

What matters is not just the size of the down turn in stocks, but how long it takes to recover, and what bonds and inflation do at the same time. Rather than creating a simple model, why not use historical data? Are you familiar with cFIREsim?

The worst time to retire was not just before a big crash like 1929, but before a decade long stagflation, 1966 or 1969. Market crashes are like airplane crashes, they're big events that capture the news, but when you look at the statistics, they aren't a leading cause.
Last edited by martincmartin on Sun Aug 14, 2022 9:33 am, edited 1 time in total.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dbr »

I am going to add that the biggest risk to getting to retirement and doing well in retirement may not be that there are crashes but that the investor does not get bull markets in stocks. One way to assure that one does not get bull markets is to not own stocks, or to own too little.

I don't think risk in investing in this sort of context is intuitive at all. 40/60 is likely enough however.
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Re: Planning for a 50% MARKET CRASH before or at retirement

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Time the market. No.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by nisiprius »

"I don't want to be overdramatic..." (remark moved to end of story it is part of)
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by KlangFool »

OP,

A) In order to answer your question, we need to know the size of your portfolio in terms of annual expense? 25X? 30X?

B) What is your rebalancing policy? If the stock drops 50%, do you sell bond to buy the stock? If yes, do you set a limit on the minimum amount of the bond that you would held in your portfolio?

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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Mike Scott »

It is conservative but it may be more realistic than overly conservative. Given the history, it not only can happen but does happen relatively regularly. I am planning to stay 75/25 and would not plan to ever go below 50/50 but that is a minor difference. Are you counting your 50% drop from today or the last high end of December 2021? This could make a bigger difference in projected outcomes.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dbr »

martincmartin wrote: Sun Aug 14, 2022 9:29 am What matters is not just the size of the down turn in stocks, but how long it takes to recover, and what bonds and inflation do at the same time. Rather than creating a simple model, why not use historical data? Are you familiar with cFIREsim?
I agree completely that you have to consider the data and not try to wing it with "anecdotal analysis." Anecdotal analysis is looking at a problem by considering one single event or condition and deciding the whole problem according to that. An extreme example of anecdotal analysis is deciding to never step outside because one might be hit by a meteor (ignoring that a meteor could come through your roof anyway). Market crashes are a far, far less extreme form of the same analysis but anecdotal nevertheless.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by deltaneutral83 »

If you have 5-10x expenses in fixed income when you retire, the amount in equities and potential 50% decline will not matter, or I should say there's nothing you can do beforehand to make it matter, i.e. if we have another Great Depression (85% decline) your equities likely won't even be a top 5 priority, as things like guns, ammo, and batteries probably will be.

If you are 40/60 in your AA, I don't know what other insurances you could want/have as 60% in fixed income is a tremendous amount.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by UpperNwGuy »

It is interesting to me how few of those downturns happened in my lifetime (6 of 18). I don't know what that means.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by John Dulworth »

Based on past market performance your assumptions are to conservative. Having said that, if that assumption helps you sleep at night it might be the right move for you. I am very conservative and in no way see a 50% decline from the declines we have seen so far this year. Fed and politicians would more than likely come in and do whatever necessary to keep this from happening even if it meant 20% inflation. That seems to be the trend over the last 20+ years.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by rich126 »

I guess although maybe the numbers work out that way, I never look or worry about asset allocation. Instead I tend to follow something my uncle (80s, successful investor) told me a while ago. He made sure he had enough income streams to cover retirement or at least his necessary expenses.

So what I've been doing since retirement will occur shortly (end of this or next year) is making sure I have enough money to cover my expenses from retirement to 67 or 70 when I get social security. In my case I also have a small pension (cola) that will cover about 30% of my expenses. Then with a combination (depending on rates) of MYGAs, CDs, treasury bonds, ibonds or other fixed income investments, they will cover the first years.

I also get a small pension at 65 from another job but I almost just view it as an inflation boost since it would only cover about 10-15% of my expenses and my wife has an even smaller pension, neither of these are COLA. Once social security kicks in (assuming both of us are still alive), that along with the pensions probably will cover our expenses. Prior to social security I figure we might do a 2-3% SWR.

While not keeping more in the market could hurt our returns in the long run, it makes sleeping easier. The downturn for much of this year was a bit worrisome just because as your portfolio grows, a 15% or so drop, makes the numbers appear much larger. Fortunately I had a decent amount of cash due to an inheritance and I didn't want to rush into the market until I figured out things and now some of that money will be in bonds (individual) or other fixed income. I'm not a bond fund person.

Things get a lot more concerning when you get closer to retirement and aren't someone with 50X saved for retirement. I think we are in very good shape but life can whack you in the head pretty quickly. I thought I had everything planned out about a decade ago but with covid, inflation, and a family medical situation, it caused me to do an unplanned move, house sale, job change, etc. Fortunately things still look good.

And either with everything I said, and even if I wasn't planning to withdraw any money, a 50% drop would still concern me!
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Random Walker »

deltaneutral83 wrote: Sun Aug 14, 2022 9:41 am If you have 5-10x expenses in fixed income when you retire, the amount in equities and potential 50% decline will not matter, or I should say there's nothing you can do beforehand to make it matter, i.e. if we have another Great Depression (85% decline) your equities likely won't even be a top 5 priority, as things like guns, ammo, and batteries probably will be.

If you are 40/60 in your AA, I don't know what other insurances you could want/have as 60% in fixed income is a tremendous amount.
Sequence risk is a huge issue near retirement and early in retirement. 60% fixed income is certainly a major league cushion. But I would venture to say that at 40/60, 70-75% of the portfolio risk is still wrapped up in equities, and likely a single factor, market beta. I think a very rational goal is to narrow the standard deviation of potential outcomes by diversifying across unique and independent sources of return. Perhaps this is especially significant now with high equity valuations and low bond yields. We need to view potential outcomes as a mean with a very wide dispersion. Lower mean also implies the whole dispersion moves left: less positive good outcomes and worse bad outcomes. A 40/60 TSM/TBM portfolio is certainly rock bottom cheap. But it might be worthwhile to diversify across more expensive unique and independent sources of risk/return: geographies, factors, styles, alternatives.

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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by DSBH »

Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
It appears that you're in good financial shape for your planned retirement. We did not run the "overly conservative" scenarios that you described, but we assumed that market would come back after several (!) years and adopted a plan to get through (most of) those years when we retired 5 years ago:

1. Reduce our AA from 60/40 to 50/50,
2. Build a "cash management portfolio" with 2.5-3 years of budgeted living expenses (0.5-1 in cash, 2 in VG Intermediate Munis),
3. If after a big drop market has not sufficiently recovered after 3 years, start to withdraw T-IRA fixed income, perhaps stop delaying and claim SS,
4. And, expect to change the plan as future events start to unfold ...
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Random Walker »

rich126 wrote: Sun Aug 14, 2022 10:14 amThe downturn for much of this year was a bit worrisome just because as your portfolio grows, a 15% or so drop, makes the numbers appear much larger.
Very important point! An investor should think in terms of both % changes and absolute $ changes. Also need to think about the behavioral finance finding that the pain of a loss is twice as much as the happiness derived from an equal sized gain. And I think that 2:1 ratio dramatically increases with net worth.

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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Random Walker »

Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
If the market really tanks, there will probably be a flight to quality or flight to liquidity. So probably fair to expect bonds to increase in value a bit under those circumstances. Overall stocks and bonds tend to be uncorrelated, but when equities really take it on the chin, the correlation tends to turn sharply negative, just when you would want it to. Larry Swedroe has charts in a couple of books that boil down to assuming bonds go up about 5% if equities tank 50%. So for example in a 50% equity decline a 40/60 portfolio might lose 15% as opposed to your assumed 20%.

**** :-) I do realize both stocks and bonds took a hit together recently.

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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by nisiprius »

It just transforms one unanswerable question into another, but here's a way to frame the question. Look at a 2x2 contingency table and try to answer the question "what happens, and how good or bad would I feel, in each of the four contingencies?"

Obviously it's good when the events match the plan, and bad when they don't. But can you say anything about how good and how bad they would be for you?

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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by mall0c »

The thing is, if the market crashes 50%, your SWR probably goes way up:

Image

This is from Early Retirement Now (BigERN) - 40/50/10 S/B/C, 30 year horizon, 0% final value target.

$1M * 3.61% at market top = 36k
$800k * 5.15% after 50% market drop = 41k

Historically, your SWR actually would increase after a 50% market drop.
FIRE'd. Mid-40s.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by whodidntante »

Your portfolio is extremely conservative, maybe a couple of risk clicks above those who buy only bank CDs. If you're going to keep so much in bonds, consider making a sizeable chunk of that TIPS.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by MathWizard »

You may be too conservative.
I am conservative,but not that conservative.

Valuations in 2008/9 were crazy. I took a paper loss of about 50% since I was almost 100% equities.

Valuations are high now, but not as bad as 2008/9.
I am planning for a drop of 3/8ths on the equities side, but I am currently 55/45, since I will soon be retiring .

Having a lot on the bonds/fixed income side opens you up to more interest rate and inflation risk.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

whodidntante wrote: Sun Aug 14, 2022 11:14 am Your portfolio is extremely conservative, maybe a couple of risk clicks above those who buy only bank CDs. If you're going to keep so much in bonds, consider making a sizeable chunk of that TIPS.
Do you mean that a 40/60 portfolio is "a couple of risk clicks above those who buy only bank CDs"?
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by coffeeblack »

dbr wrote: Sun Aug 14, 2022 9:25 am The 2008 crash happened after we retired. Since then that crash has had no practical effect on our retirement as we have had massive bull markets in both stocks and bonds from 2010 to 2020. We also had higher withdrawal rates at the beginning as Social Security was delayed.

We were also heavily invested in 2000 and (less so) in 1987. 2020 and 2022 have been non-events so far and even the current inflation after years of low inflation just averages out. It helped that our 2000 portfolio was not in the NASDAQ.

The relative disaster for a retiree would be to retire into a repeat of 1966, but that does not involve market crashes per se though some bad things happened in the mid '70s and the 1982 bull market came too late. Note a 4% withdrawal rate works for a 1966 retiree. A 1982 retiree gets 8%.
Did you reduce spending in 2008?

There was no way to know if 2008 would be 1966. That is my biggest concern in retirement.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by whodidntante »

Charles Joseph wrote: Sun Aug 14, 2022 11:43 am
whodidntante wrote: Sun Aug 14, 2022 11:14 am Your portfolio is extremely conservative, maybe a couple of risk clicks above those who buy only bank CDs. If you're going to keep so much in bonds, consider making a sizeable chunk of that TIPS.
Do you mean that a 40/60 portfolio is "a couple of risk clicks above those who buy only bank CDs"?
I'm saying your portfolio construction is extremely conservative while also recognizing that you have something in stocks. Some people won't buy stocks.

A conservative portfolio has multiple downsides. It exposes you to longevity risk, and you likely had to work longer to arrive at your target. If you have heirs, they stand to get a lot less money. And bonds have had long periods of negative real returns so they might not be as safe as you think. If you know all that and want a conservative portfolio anyway, don't let me tell you how much risk to take.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dbr »

coffeeblack wrote: Sun Aug 14, 2022 11:49 am
dbr wrote: Sun Aug 14, 2022 9:25 am The 2008 crash happened after we retired. Since then that crash has had no practical effect on our retirement as we have had massive bull markets in both stocks and bonds from 2010 to 2020. We also had higher withdrawal rates at the beginning as Social Security was delayed.

We were also heavily invested in 2000 and (less so) in 1987. 2020 and 2022 have been non-events so far and even the current inflation after years of low inflation just averages out. It helped that our 2000 portfolio was not in the NASDAQ.

The relative disaster for a retiree would be to retire into a repeat of 1966, but that does not involve market crashes per se though some bad things happened in the mid '70s and the 1982 bull market came too late. Note a 4% withdrawal rate works for a 1966 retiree. A 1982 retiree gets 8%.
Did you reduce spending in 2008?

There was no way to know if 2008 would be 1966. That is my biggest concern in retirement.
No, did not. Keep in mind the withdrawal rates we had while being a relative disaster in 1966 still survive if it were 1966. The real disaster, if it is, would be to endure too large a cost in working longer, spending less, and saving more if it turns out it is not 1966. Historically to avoid 1965-1969 or so you need to drop the withdrawal rate to 3.8% while to see much failure in any other years you might try more like 4.4%, an increase in withdrawals of 15%. 1980-1989 doesn't drop out until 7.5% withdrawal rate. Also 1966 is not a worst possible year due to a large market crash but due to a long bear market combined in one period with extreme inflation and not saved until 15 years later when inflation has subsided and a bull market starts.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by invest4 »

I think what you are doing is fine if it helps you feel more confident about weathering volatility during retirement. While we naturally look to the past to inform us, we may lack the imagination to see the potential calamities of the future.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

whodidntante wrote: Sun Aug 14, 2022 11:51 am
Charles Joseph wrote: Sun Aug 14, 2022 11:43 am
whodidntante wrote: Sun Aug 14, 2022 11:14 am Your portfolio is extremely conservative, maybe a couple of risk clicks above those who buy only bank CDs. If you're going to keep so much in bonds, consider making a sizeable chunk of that TIPS.
Do you mean that a 40/60 portfolio is "a couple of risk clicks above those who buy only bank CDs"?
I'm saying your portfolio construction is extremely conservative while also recognizing that you have something in stocks. Some people won't buy stocks.

A conservative portfolio has multiple downsides. It exposes you to longevity risk, and you likely had to work longer to arrive at your target. If you have heirs, they stand to get a lot less money. And bonds have had long periods of negative real returns so they might not be as safe as you think. If you know all that and want a conservative portfolio anyway, don't let me tell you how much risk to take.
You must be "very ahhh-gree-ayy-sive." :D

Seriously, after much trial and error as I approach retirement, 40/60 is my sleep-at-night portfolio.

Given that a bank CD's principal is guaranteed, it seems that a portfolio that can lose 20 percent or more of its value is more than just a couple of risk clicks above that. But we're getting into semantics there.

In any event. Thanks for the input. Rounders was such a great movie and I take much more risk at the poker table. :sharebeer
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by JDave »

One of the best ways to prepare for an investing catastrophe at time of retirement is to remain employable. Keep your skills and contacts up, so if necessary you can work a few more years, or work part-time until the dust settles.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by dogagility »

Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
Have you put your numbers into a retirement withdrawal calculator like VPW? That would give you an estimate of how much flexibility you need to have in your spending should a 50% crash happen.

Personally, I would not use a bond tent to mitigate sequence of returns risk. I'd have enough flexibility in my spending to reduce spending if a market crash shows up.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Taylor Larimore »

Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
Charles Joseph:

My own simple rule for asset allocation is this: "Never have more in stocks than I can afford to lose."

Vanguard also has this asset allocation tool:

https://retirementplans.vanguard.com/VG ... -OX77-OGQQ

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:
"Asset allocation is critically important; but cost is critically important, too -- All other factors pale into insignificance."
"Simplicity is the master key to financial success." -- Jack Bogle
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Charles Joseph
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

JDave wrote: Sun Aug 14, 2022 12:25 pm One of the best ways to prepare for an investing catastrophe at time of retirement is to remain employable. Keep your skills and contacts up, so if necessary you can work a few more years, or work part-time until the dust settles.
This is a great point and is definitely an option for me.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
yohac
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by yohac »

Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
I don't think it's so bad. You might consider it insurance against having to postpone your retirement due to an ill-timed crash.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

dogagility wrote: Sun Aug 14, 2022 12:46 pm
Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
Have you put your numbers into a retirement withdrawal calculator like VPW? That would give you an estimate of how much flexibility you need to have in your spending should a 50% crash happen.

Personally, I would not use a bond tent to mitigate sequence of returns risk. I'd have enough flexibility in my spending to reduce spending if a market crash shows up.
I've used Vanguard's Retirement Nest Egg Calculator and a simple NerdWallet calculator that I like, which takes taxes into account. And I've used those to text different account balances against monthly withdrawal amounts. I've found that insightful. It's good me a good sense of how much wiggle room I'd have with different swings in my portfolio. I'm not sure if that's the same as testing out variable percentage withdrawals.

I'm not sure what a bond tent is (heard the term many times). I've always just focused on my asset allocation. You've given me homework: research VPW and bond tents! :happy
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

Taylor Larimore wrote: Sun Aug 14, 2022 1:00 pm
Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
Charles Joseph:

My own simple rule for asset allocation is this: "Never have more in stocks than I can afford to lose."

Vanguard also has this asset allocation tool:

https://retirementplans.vanguard.com/VG ... -OX77-OGQQ

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:
"Asset allocation is critically important; but cost is critically important, too -- All other factors pale into insignificance."
Thank you Taylor. And thanks for Jack's words of wisdom.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

martincmartin wrote: Sun Aug 14, 2022 9:29 am What matters is not just the size of the down turn in stocks, but how long it takes to recover, and what bonds and inflation do at the same time. Rather than creating a simple model, why not use historical data? Are you familiar with cFIREsim?

The worst time to retire was not just before a big crash like 1929, but before a decade long stagflation, 1966 or 1969. Market crashes are like airplane crashes, they're big events that capture the news, but when you look at the statistics, they aren't a leading cause.
cFIREsim is wild!! According to this I am way, way, way too conservative. I fail 2 out of 120 total cycles over 30 years, inflation adjusted (not sure what cycles are...possible outcomes?).

I'm going to go back and make sure my inputs are correct. But this just lowered my blood pressure by about 20 points. Thanks for this.

Is this a Monte Carlo Simulation, with other data inputs?

Thanks again!
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by coffeeblack »

dbr wrote: Sun Aug 14, 2022 12:05 pm
coffeeblack wrote: Sun Aug 14, 2022 11:49 am
dbr wrote: Sun Aug 14, 2022 9:25 am The 2008 crash happened after we retired. Since then that crash has had no practical effect on our retirement as we have had massive bull markets in both stocks and bonds from 2010 to 2020. We also had higher withdrawal rates at the beginning as Social Security was delayed.

We were also heavily invested in 2000 and (less so) in 1987. 2020 and 2022 have been non-events so far and even the current inflation after years of low inflation just averages out. It helped that our 2000 portfolio was not in the NASDAQ.

The relative disaster for a retiree would be to retire into a repeat of 1966, but that does not involve market crashes per se though some bad things happened in the mid '70s and the 1982 bull market came too late. Note a 4% withdrawal rate works for a 1966 retiree. A 1982 retiree gets 8%.
Did you reduce spending in 2008?

There was no way to know if 2008 would be 1966. That is my biggest concern in retirement.
No, did not. Keep in mind the withdrawal rates we had while being a relative disaster in 1966 still survive if it were 1966. The real disaster, if it is, would be to endure too large a cost in working longer, spending less, and saving more if it turns out it is not 1966. Historically to avoid 1965-1969 or so you need to drop the withdrawal rate to 3.8% while to see much failure in any other years you might try more like 4.4%, an increase in withdrawals of 15%. 1980-1989 doesn't drop out until 7.5% withdrawal rate. Also 1966 is not a worst possible year due to a large market crash but due to a long bear market combined in one period with extreme inflation and not saved until 15 years later when inflation has subsided and a bull market starts.
I agree. It's those long years with poor return or inflation or both that could be the big problem. The 3.8% WR was/is for a 30 year retirement. I'm more a 40 to 45 if we make it to that age. So perhaps 3.5% or 3.6%, although it may this low after SS kicks in in 10 years.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by JackoC »

Charles Joseph wrote: Sun Aug 14, 2022 2:39 pm
martincmartin wrote: Sun Aug 14, 2022 9:29 am What matters is not just the size of the down turn in stocks, but how long it takes to recover, and what bonds and inflation do at the same time. Rather than creating a simple model, why not use historical data? Are you familiar with cFIREsim?

The worst time to retire was not just before a big crash like 1929, but before a decade long stagflation, 1966 or 1969. Market crashes are like airplane crashes, they're big events that capture the news, but when you look at the statistics, they aren't a leading cause.
cFIREsim is wild!! According to this I am way, way, way too conservative. I fail 2 out of 120 total cycles over 30 years, inflation adjusted (not sure what cycles are...possible outcomes?).

I'm going to go back and make sure my inputs are correct. But this just lowered my blood pressure by about 20 points. Thanks for this.

Is this a Monte Carlo Simulation, with other data inputs?
How that works is to sample (let's say your retirement period is 30 yrs) different actual 30 yr paths of stock and bond returns from a roughly 150 yr history, One path is 1891 to 1922, the next one is 1968 to 1998, etc till there's a large sample of them. Other simulations using historical data, like Vang's 'Nest Egg' thing, work a little differently. That one puts together 30 yr paths as random selection of *one* year return results from a database of returns that doesn't go back as far (you can chase it down on Vanguard's site). Some would say neither is technically a 'Monte Carlo Simulation' but they work basically as I described.

I think this approach is fundamentally flawed. You can read many threads here where I and some others argue this and others disagree and ultimately judge for yourself. The basic flaw as I see it is that even though many people will justify this approach based on 'it looks at the worst case', in fact it gives you a probability which is relative to the whole distribution of return, the *past* distribution of returns. The validity of that probability therefore depends on the future distribution of returns (not the single realized future return, nobody can know that, but the distribution of possible future returns) looking like the past distribution of returns. Is this a roughly reasonable assumption? IMO clearly not at a time like now where stock earnings yields and bond yield as so much lower than the past CAGR of the historical data set. The return distribution from 1871-now is centered somewhere near 7% real pre tax CAGR for stocks and 2.5% real pre tax for long term nominal government bonds. The expected returns of bonds now is 100% obviously significantly lower than that, and the expected return for stocks by any reasonable estimate just about as obviously lower also. Whereas there's no information on which to base an assumption that the variance of future return is less than the variance of past return (or that higher moments like skew are any more favorable either). So the 'probabilities' spit out by those 'cFireSim' are significantly biased in a positive direction. I would not use a tool like that as a major input into a real plan. There isn't any harm in seeing 'what would have happened rerunning past history' per se, but that is not what we're going to do.

My own approach is more like yours. I understand 'sequence of return' and other such bells and whistles, but again in my view those historically based models gain more insight on second order effects like that at the cost of a basically wrong assumption about a first order thing: they implicirly assume future return will be selected from a stationary distribution represented by past returns, regardless of where valuations and yields are now compared to where they were over the past data set. I've looked at results from those models but it's pretty much in one ear out the other. I assume a big drop in risk assets at time 0, followed by a rate of return only around equal to now's expected return (I figure at ~1.7% after expenses, inflation *and taxes*, I'm counting those on the portfolio side, for my portfolio which isn't simple stock/bond but equates roughly to 60/40 stock/bond in risk). I assume more than 50% drop, but I agree with other posts how conservative you are tends to depend on how conservative you can afford to be. As long as we're aware that's what we are doing, not arguing that a black box model is 'more scientific' when that's really in part because an over optimistic output flatters our plans.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by bridge2benefits »

dbr wrote: Sun Aug 14, 2022 12:05 pm
coffeeblack wrote: Sun Aug 14, 2022 11:49 am Did you reduce spending in 2008?

There was no way to know if 2008 would be 1966. That is my biggest concern in retirement.
No, did not. Keep in mind the withdrawal rates we had while being a relative disaster in 1966 still survive if it were 1966. The real disaster, if it is, would be to endure too large a cost in working longer, spending less, and saving more if it turns out it is not 1966. Historically to avoid 1965-1969 or so you need to drop the withdrawal rate to 3.8% while to see much failure in any other years you might try more like 4.4%, an increase in withdrawals of 15%. 1980-1989 doesn't drop out until 7.5% withdrawal rate. Also 1966 is not a worst possible year due to a large market crash but due to a long bear market combined in one period with extreme inflation and not saved until 15 years later when inflation has subsided and a bull market starts.
It's also good to remember that in the future there could be even worse years to retire than 1966. When we backtest like this, we are looking at a relatively small number of unique 30 year periods. Another way to say it - if you were studying backtested data in December 1965, wondering if you should retire, it wouldn't have been safe to presume that the worst previously recorded period would define the lower bound for poor performance in the future.
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charon »

mall0c wrote: Sun Aug 14, 2022 11:12 am The thing is, if the market crashes 50%, your SWR probably goes way up:
+1

What hasn't been addressed enough in this thread is how else the OP is planning. Assuming a 50% drop and using a very conservative SWR is double counting disasters. Simplistically, it's like assuming a very bad drop and then implicitly assuming another very bad drop.

So, OP, details on how else you're planning?
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

JackoC wrote: Sun Aug 14, 2022 3:29 pm
Charles Joseph wrote: Sun Aug 14, 2022 2:39 pm
martincmartin wrote: Sun Aug 14, 2022 9:29 am What matters is not just the size of the down turn in stocks, but how long it takes to recover, and what bonds and inflation do at the same time. Rather than creating a simple model, why not use historical data? Are you familiar with cFIREsim?

The worst time to retire was not just before a big crash like 1929, but before a decade long stagflation, 1966 or 1969. Market crashes are like airplane crashes, they're big events that capture the news, but when you look at the statistics, they aren't a leading cause.
cFIREsim is wild!! According to this I am way, way, way too conservative. I fail 2 out of 120 total cycles over 30 years, inflation adjusted (not sure what cycles are...possible outcomes?).

I'm going to go back and make sure my inputs are correct. But this just lowered my blood pressure by about 20 points. Thanks for this.

Is this a Monte Carlo Simulation, with other data inputs?
How that works is to sample (let's say your retirement period is 30 yrs) different actual 30 yr paths of stock and bond returns from a roughly 150 yr history, One path is 1891 to 1922, the next one is 1968 to 1998, etc till there's a large sample of them. Other simulations using historical data, like Vang's 'Nest Egg' thing, work a little differently. That one puts together 30 yr paths as random selection of *one* year return results from a database of returns that doesn't go back as far (you can chase it down on Vanguard's site). Some would say neither is technically a 'Monte Carlo Simulation' but they work basically as I described.

I think this approach is fundamentally flawed. You can read many threads here where I and some others argue this and others disagree and ultimately judge for yourself. The basic flaw as I see it is that even though many people will justify this approach based on 'it looks at the worst case', in fact it gives you a probability which is relative to the whole distribution of return, the *past* distribution of returns. The validity of that probability therefore depends on the future distribution of returns (not the single realized future return, nobody can know that, but the distribution of possible future returns) looking like the past distribution of returns. Is this a roughly reasonable assumption? IMO clearly not at a time like now where stock earnings yields and bond yield as so much lower than the past CAGR of the historical data set. The return distribution from 1871-now is centered somewhere near 7% real pre tax CAGR for stocks and 2.5% real pre tax for long term nominal government bonds. The expected returns of bonds now is 100% obviously significantly lower than that, and the expected return for stocks by any reasonable estimate just about as obviously lower also. Whereas there's no information on which to base an assumption that the variance of future return is less than the variance of past return (or that higher moments like skew are any more favorable either). So the 'probabilities' spit out by those 'cFireSim' are significantly biased in a positive direction. I would not use a tool like that as a major input into a real plan. There isn't any harm in seeing 'what would have happened rerunning past history' per se, but that is not what we're going to do.

My own approach is more like yours. I understand 'sequence of return' and other such bells and whistles, but again in my view those historically based models gain more insight on second order effects like that at the cost of a basically wrong assumption about a first order thing: they implicirly assume future return will be selected from a stationary distribution represented by past returns, regardless of where valuations and yields are now compared to where they were over the past data set. I've looked at results from those models but it's pretty much in one ear out the other. I assume a big drop in risk assets at time 0, followed by a rate of return only around equal to now's expected return (I figure at ~1.7% after expenses, inflation *and taxes*, I'm counting those on the portfolio side, for my portfolio which isn't simple stock/bond but equates roughly to 60/40 stock/bond in risk). I assume more than 50% drop, but I agree with other posts how conservative you are tends to depend on how conservative you can afford to be. As long as we're aware that's what we are doing, not arguing that a black box model is 'more scientific' when that's really in part because an over optimistic output flatters our plans.
Thanks for the above. Calculators are fun. But like you, I've kept it simple in my planning. 1. Save as much as I can. 2. Invest at an asset allocation I can live with. 3. Plan with a worst case scenario in mind. I'm not sure it has to be any more complicated than that.

As I think about it, Vanguard's Nest Egg Calculator has been a bit tougher on me than the cFIREsim is being.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by coffeeblack »

Charles Joseph wrote: Sun Aug 14, 2022 2:21 pm
Taylor Larimore wrote: Sun Aug 14, 2022 1:00 pm
Charles Joseph wrote: Sun Aug 14, 2022 8:34 am I'm three years from retirement, and in all my calculations I assume a 50% market crash between now and the year I retire. In other words, I'm at a 40/60 asset allocation, and all my estimates are based on 80% of my current and future projected balances (a rough estimate, I know; things could be worse).

Is this overly conservative?
Charles Joseph:

My own simple rule for asset allocation is this: "Never have more in stocks than I can afford to lose."

Vanguard also has this asset allocation tool:

https://retirementplans.vanguard.com/VG ... -OX77-OGQQ

Best wishes.
Taylor
Jack Bogle's Words of Wisdom:
"Asset allocation is critically important; but cost is critically important, too -- All other factors pale into insignificance."
Thank you Taylor. And thanks for Jack's words of wisdom.
Perhaps I understood your quote incorrectly, but never have more in stock than I can afford to lose???

So how many people in here with a basic 2 fund 60/40 portfolio can afford to lose 60% of their portfolio?
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Re: Planning for a 50% MARKET CRASH before or at retirement

Post by Charles Joseph »

Charon wrote: Sun Aug 14, 2022 3:38 pm
mall0c wrote: Sun Aug 14, 2022 11:12 am The thing is, if the market crashes 50%, your SWR probably goes way up:
+1

What hasn't been addressed enough in this thread is how else the OP is planning. Assuming a 50% drop and using a very conservative SWR is double counting disasters. Simplistically, it's like assuming a very bad drop and then implicitly assuming another very bad drop.

So, OP, details on how else you're planning?
Absolutely. Can you ask me some specific questions I could answer? I don't say this to be flippant, but I'm really a saver first and an investor second and I don't have a lot of complicated plans.

Thanks for contributing to the thread.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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