Author Topic: Post Fire 4% SWR Strategies in down markets  (Read 2806 times)

Dawg Fan

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Post Fire 4% SWR Strategies in down markets
« on: June 11, 2015, 05:40:00 AM »
Been reading MMM and Forum for some time and now just joining the conversation. Been searching for the answer to this question, but have not quite found the whole answer. I'm about 4 yrs from FIRE (goal is 55) provided I have the balls to do it. My math says I can, but I am hopeful I won't suffer from the OMY syndrome. A quick background... I am a self-employed guy with no debt (other than primary residence with no plans to pay off early even though I could because my $$ are working harder elsewhere). I presently have 5 - 6 yrs of projected FIRE expenses in taxable accounts, large 401K/IRA/SEP retirement account balances (no Roth), and real estate investments producing annual income (some will be sold before I FIRE). My investment profile is probably in line with a 75/25 mix, but I could be convinced to be more aggressive with some good arguments. As far as I can evaluate, the 4% SWR is the best strategy although I would love to hear from others who employ other strategies (i.e. Bucket approach). So here is my question... assuming the 4% SWR takes into account all your income producing assets (i.e. stocks, bonds, cash, RE investments), how are/have you managed the 4% SWR during market down cycles? If you use a 75/25 split on your investments assuming you have 25 x living expenses than by my math you have 6.25 yrs worth of bonds/cash. I am sure part of the AA growth model assumes you are getting a return on these bonds, maybe not the cash. If you liquidate these during a down cycle like we had in 2008 for a period of 2 - 3 yrs then you are depleting your principle and betting on your stocks to recover in time to not only make up the difference, but provide the growth you projected over time. Does anyone use the bucket approach and keep say 2 yrs of cash outside the 25 X or is it actual part of the total AA? I get that we all probably make adjustments to our expenses in down yrs, but curious to what strategies have been used to weather the storms without depleting your principle. I would particularly like to hear from you guys who have been in FIRE prior to 2008 and understand how you battled thru it.

matchewed

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Re: Post Fire 4% SWR Strategies in down markets
« Reply #1 on: June 11, 2015, 05:48:01 AM »
A) Your assumption is wrong. The SWR is based off of a mix of stocks and bonds not RE.

B) Yes some people who've already "won the game" keep large cash reserves (in my mind 1+ years) as there is no need for more risk if you're all set.

Search through the forums for posts by Nords. He's been the most transparent when it comes to how he dealt with 2008. If my memory serves they rode through it with some cash withdrew as necessary to refill that and came out way ahead of where they thought they'd be.

Don't worry about depleting principal too much as that's baked into the assumptions behind the SWR. Other methods of mitigating the risks you've outlined beyond cash reserves is just what you've already mentioned; RE cashflow can mitigate, lowering your SWR, not your amount withdrawn due to inflation, Wade Pfau outlined an AA adjustment that is "funnel" shaped where you increase your bond allocation in the first few years and then switch to increasing your equity allocation after that (it would depend on what sort of financial environment you're in at that time but that's true for all of these).

Dawg Fan

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Re: Post Fire 4% SWR Strategies in down markets
« Reply #2 on: June 11, 2015, 06:00:14 AM »
Thanks for the reply

Yes, my intent was not to include RE in my SWR. I have heard some people trying to intertwine the Bucket approach by keeping as you said 1 (some up to 2) yrs in cash and then in down yrs depleting the cash, in good yrs leaving the cash bucket and selling some stocks. Obviously all the tax implications need to be evaluated first to determine what the best final strategy is. I also subscribe to the theory that short of possible medical related needs, most people in FIRE will spend more $$ while they are younger/healthier (i.e. travel, fulfilling bucket list) than they will at say 75 + (obviously, there are exceptions). It would seem to me this would play into over SWR and possible AA. I know there is no perfect science and no one size fits all, but love to hear the different approaches/philosophies. I will check out Nords posts.

Thanks.

foobar

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Re: Post Fire 4% SWR Strategies in down markets
« Reply #3 on: June 11, 2015, 12:10:09 PM »
It doesn't matter if the markets are down. The 4% SWR still works. (well has worked. Who knows what the next 30 years). Yes your principle goes down. Who cares. You are making a statiscial bet that you will not hit the point of no return. A bucket approach doesn't change the numbers other than by shifting your AA.  You can debate if 72/25 is the right AA (as you say that is 6 years in bonds) or if something like 60/40 (10 years in bonds) is more approiate.

If you are really worried about this, just plan on cutting spending (say to the equivalent of a 3% SWR) if the market goes below a certain point. The 4% rule was ment as planning tool not some ridge approach to take.

Nords

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Re: Post Fire 4% SWR Strategies in down markets
« Reply #4 on: June 13, 2015, 02:51:05 PM »
My investment profile is probably in line with a 75/25 mix, but I could be convinced to be more aggressive with some good arguments. As far as I can evaluate, the 4% SWR is the best strategy although I would love to hear from others who employ other strategies (i.e. Bucket approach). So here is my question... assuming the 4% SWR takes into account all your income producing assets (i.e. stocks, bonds, cash, RE investments), how are/have you managed the 4% SWR during market down cycles? If you use a 75/25 split on your investments assuming you have 25 x living expenses than by my math you have 6.25 yrs worth of bonds/cash. I am sure part of the AA growth model assumes you are getting a return on these bonds, maybe not the cash. If you liquidate these during a down cycle like we had in 2008 for a period of 2 - 3 yrs then you are depleting your principle and betting on your stocks to recover in time to not only make up the difference, but provide the growth you projected over time. Does anyone use the bucket approach and keep say 2 yrs of cash outside the 25 X or is it actual part of the total AA? I get that we all probably make adjustments to our expenses in down yrs, but curious to what strategies have been used to weather the storms without depleting your principle. I would particularly like to hear from you guys who have been in FIRE prior to 2008 and understand how you battled thru it.
75/25 is probably right on the efficient frontier of maximum return (for maximum volatility).  60/40 will produce less of both, while more than 75/25 will probably boost volatility without significantly raising returns. 

The studies that produced the 4% SWR did not consider real estate.  You could decide to call it a very volatile corporate bond, or you could assume that it'll offset some minimum amount of your expenses and then address the remaining spending gap with the stocks & bonds in your investment accounts. 

If you're keeping two years of expenses in cash then that'd be about 8% of your portfolio.  Whether you call it a bucket or an asset allocation is probably not relevant, so do whichever you find simpler.  We keep about 10% of our portfolio in cash because the rest of our investments are in equities (no bonds).  You could do the same if you consider your real estate to be similar to bonds. 

Your questions about the mechanics and intricacies of the 4% SWR may indicate that you're over-thinking it.  The initial assumptions of the study were made to simplify the computer simulations, and your system doesn't have to rigidly follow the studies.  You know that real estate is not bonds, but you also know that real estate has advantages over the bond portfolio of the SWR studies.

During the Great Recession, we started 2008 with 10% of our investment portfolio in cash and then spent that down through 2008 and 2009.  When 2010 rolled around we felt comfortable selling shares to raise our 2010 cash, and in 2011 we replenished the 10% allocation.  So hypothetically by the end of 2009 and 2010 we were nearly 100% equities.

Thanks for the reply

Yes, my intent was not to include RE in my SWR. I have heard some people trying to intertwine the Bucket approach by keeping as you said 1 (some up to 2) yrs in cash and then in down yrs depleting the cash, in good yrs leaving the cash bucket and selling some stocks. Obviously all the tax implications need to be evaluated first to determine what the best final strategy is. I also subscribe to the theory that short of possible medical related needs, most people in FIRE will spend more $$ while they are younger/healthier (i.e. travel, fulfilling bucket list) than they will at say 75 + (obviously, there are exceptions). It would seem to me this would play into over SWR and possible AA. I know there is no perfect science and no one size fits all, but love to hear the different approaches/philosophies. I will check out Nords posts.
Ray Lucia's bucket strategy was generally discredited when he admitted that he was just makin' stuff up.  It also tends to lead to a ridiculously conservative asset allocation to bonds, although recent research indicates that it might be wiser to start ER with a higher allocation to bonds and then allowing the equities AA to rise during ER. 

But that "rising equity glide slope" research is too new to be declared credible.  If you simply call your plan "asset allocation" instead of buckets then you can replenish the cash every year (when the market is up) and be ready for the mythical two-year bear market.  You could keep your real estate portfolio, too, if you're comfortable with that.  A large diversified portfolio of real estate is probably just about as good as a single-premium immediate annuity from an insurance company. 

It doesn't matter if the markets are down. The 4% SWR still works. (well has worked. Who knows what the next 30 years). Yes your principle goes down. Who cares. You are making a statiscial bet that you will not hit the point of no return. A bucket approach doesn't change the numbers other than by shifting your AA.  You can debate if 72/25 is the right AA (as you say that is 6 years in bonds) or if something like 60/40 (10 years in bonds) is more approiate.

If you are really worried about this, just plan on cutting spending (say to the equivalent of a 3% SWR) if the market goes below a certain point. The 4% rule was ment as planning tool not some ridge approach to take.
What foobar says.  In your other thread, I went into more details about spending a higher SWR when you're starting ER and about varying your spending during ER.