VTSAX fund for retirement: what happens when it loses 50%+ value?

[fizzgig]

I will hopefully be getting a 30K pension when I'm 55 in 7 years. My VTSAX up to this point was a plan to be a supplementary fund to the pension. It's worth 600K right now. I was going to either just use the dividends or 3% of it per year, depending on what I need. Right now my living expenses are no more than 35K. Should I just leave 600K in VTSAX and use 3% when it's up or down or is there a smarter plan? This is the only account/asset that I have except for 7K in savings.

[bacchi]

Does your pension have a COLA? Is the $600k in a tax advantaged account or in a brokerage account?

Withdrawing 3% for 30 years is close to foolproof, historically. The real question is if you're going to lose sleep when you're pulling 3% (+ inflation) from $300,000 for several years. Will you tell yourself, "No worries, this worked during the Great Depression!" or will you ask yourself, "Eeek, it could be different this time!"

If you're still working, you could shift some of your new investment money into bonds like BND or VTIP.

[fizzgig]

No COLA sadly. VTSAX Fund is in a brokerage account, too. I can hold when there's a crash, I'm just worried it might crash too much and then there won't be enough to live.

[secondcor521]

Do you plan to work for another 7 years?

If so, that $600K in VTSAX will probably approximately double to $1.2M.  The dividend yield is about 1.5%, so if you only took dividends, that would be $18K a year in dividends.  Plus your $30K pension would give you $48K, although as you note no COLA on the pension.  You'd also have to assess inflation of your $35K living expenses over the next 7 years, plus any change in expenses when you stop working.

Are you eligible for Social Security?  That would provide another bump anywhere between 62 and 70.

[Laura33]

First, as noted above, if you are taking out only 3% a year, you are in all likelihood going to be just fine, even when the market crashes for some period of time. 

If you start with $600K and will need only about $5K of that per year, you could put it all under your mattress and still have enough to cover 100 years; even if you draw 3% of that per year (18 years), that will cover you until you're almost 90 -- even if you never earn another cent on that money.  Put it all in CDs and you can probably live off the interest and never even touch the capital. 

But financial success is emotional as much as it is math.  The last thing you want is to be too aggressive in your investments and then panic and sell when the shit hits the fan.  And really, where's the fun in retiring only to fret over your finances all the time? 

IOW, you don't actually need to have so much money in the stock market to cover your needs and then some.  So if having so much in VTSAX is making you fret, move some of that over to something like CDs.

One strategy people use to manage down markets (without using your mattress) is to keep anywhere from 2-7 years' expenses in a CD ladder.  If you're 7 years out, you can start that now.  This year, pull that 3% that you want out of VTSAX and buy CDs with it that will mature in 7 years.  Next year, pull another 3% out and buy more CDs that will mature in 7 years.  Do that every year.  By the time you retire, you will have the next 7 years' expenses (plus interest) becoming available right when you need them.  Then keep doing that.  Except if the market crashes, take a break for a year or two.  You have enough "safe" money to ride out even a long crash.  Then, when the market recovers, you can replenish the ladder to fill in those missing years.

The value in the CD ladder isn't so much about maximizing earnings -- it's about giving you the confidence to ride out any market crashes without having to worry about them.  So if the math alone isn't enough to make you feel safe, strategies like this can help calm those fears and allow you to just enjoy yourself without unnecessarily worrying so much about your money.

[BECABECA]

For this type of question, I love using the Rich/broke/dead graph from Engaging Data. You can input all your parameters and play around with scenarios to see how it would do:
https://engaging-data.com/will-money-last-retire-early/

[Heckler]

https://www.bogleheads.org/wiki/Risk_and_return:_an_introduction

[GilesMM]

You only need $5k/yr which is less than 1% of $600,000.  If it drops by half to $300,000 you will have to go wild and take out 1.7%.  I think you'll survive.

[dividendman]

For this type of question, I love using the Rich/broke/dead graph from Engaging Data. You can input all your parameters and play around with scenarios to see how it would do:
https://engaging-data.com/will-money-last-retire-early/

Great calculator... my probability of being dead always exceeds my probability of being broke... by a lot... yet I don't seem to worry about death as much. Humans are not logical creatures.

[simonsez]

For this type of question, I love using the Rich/broke/dead graph from Engaging Data. You can input all your parameters and play around with scenarios to see how it would do:
https://engaging-data.com/will-money-last-retire-early/

Great calculator... my probability of being dead always exceeds my probability of being broke... by a lot... yet I don't seem to worry about death as much. Humans are not logical creatures.

One outcome is largely within your agency, one is largely outside of your agency.

I think it's logical to worry more about the one I have more control over and not worry about the one largely outside of my control.  Also, when you're dead your expenses really go down!

[dividendman]

For this type of question, I love using the Rich/broke/dead graph from Engaging Data. You can input all your parameters and play around with scenarios to see how it would do:
https://engaging-data.com/will-money-last-retire-early/

Great calculator... my probability of being dead always exceeds my probability of being broke... by a lot... yet I don't seem to worry about death as much. Humans are not logical creatures.

One outcome is largely within your agency, one is largely outside of your agency.

I think it's logical to worry more about the one I have more control over and not worry about the one largely outside of my control.  Also, when you're dead your expenses really go down!

I bet a lot of people who are fat (me), or otherwise engage in unhealthy habits that lead to increased risk of death, still worry about dying less than money running out. People have a fair amount of agency over both.

[secondcor521]

For this type of question, I love using the Rich/broke/dead graph from Engaging Data. You can input all your parameters and play around with scenarios to see how it would do:
https://engaging-data.com/will-money-last-retire-early/

Great calculator... my probability of being dead always exceeds my probability of being broke... by a lot... yet I don't seem to worry about death as much. Humans are not logical creatures.

One outcome is largely within your agency, one is largely outside of your agency.

I think it's logical to worry more about the one I have more control over and not worry about the one largely outside of my control.  Also, when you're dead your expenses really go down!

I bet a lot of people who are fat (me), or otherwise engage in unhealthy habits that lead to increased risk of death, still worry about dying less than money running out. People have a fair amount of agency over both.

Now that my red sliver is basically gone and my grey skateboard ramp is noticeable, I have shifted my focus more towards doing the things to stay healthy.  Still could get run over by a bus, but I can affect my odds on a number of other diseases.