Author Topic: Question on managing SORR  (Read 1073 times)

mistymoney

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Question on managing SORR
« on: December 06, 2020, 08:13:59 AM »
Wondering how you all approach this.

So - my reading around indicates that the dangers of SORR is really concentrated to the earliest years of retirement.

So - Hypothetically speaking let's talk about the classic 1m/40k year retirement plan.

You retire with 20x40 (800k) in stocks, and 5x40 (200k) in bonds/cash.

What do you do the first five years? Use up the bonds/cash no matter what the market? I think this is what is meant by the glidepath?

Or keep the bonds/cash to use as a hedge whenever the market may fail, but taking from the stock pile as long as there are positive returns? or returns of at least average? or what criteria might you use?

If you use up the cash and bonds first and stocks return 7% average real returns you enter 100% stocks with 1.122 and a 3.6% withdrawal rate. That doesn't seem a whole lot more secure over going with 100% in the first place.

On the other side, if you take from stocks during 5 average years in the beginning, your stocks would stay relatively stable and increase just a bit each year during the first five.

Which way did/would you go?

vand

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Re: Question on managing SORR
« Reply #1 on: December 06, 2020, 08:23:17 AM »
Add gold. It diversifies against both stocks AND bonds.
https://youtu.be/6eUOSh5mxko

Simples.

mistymoney

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Re: Question on managing SORR
« Reply #2 on: December 06, 2020, 08:50:13 AM »
I feel like cheap gold is going to be manufactured soon.

Early attempts were radioactive, but if someone did a couple of tons and buried it in the 40's waiting until it was non radioactive....could flood the market soon ;)

Malcat

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Re: Question on managing SORR
« Reply #3 on: December 06, 2020, 08:58:56 AM »
This is a big question and my best recommendation is to read A LOT about it until the answer for your particular case feels obvious.

The reason I say that is that it's your individual circumstances that will really determine the risk. How flexible will your spending be in the early years? How tight is your budget? Are you actually planning on a 4% WR?

I personally have exactly zero concern about SORR, because my personal risk factors make it virtually irrelevant. Between pension and over saving, the markets could drop by 80% for the first decade of our retirement and we would easily still be fine. I mean...other than the enormous civil conflict that would break out, but let's not poison my hypothetical with logic, lol.

So yes, if you have 1M saved and plan on faithfully spending 40K (+inflation) year over year regardless of what the markets do, then you absolutely should look at a bond tent.

As for your glide path, it very much depends on what the market does, because it still involves establishing an AA each year and rebalancing.

As I said, read more about it until the magnitude of impact of each approach is clear, and then you will intuitively know which approach is right for your circumstances.

vand

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Re: Question on managing SORR
« Reply #4 on: December 06, 2020, 09:14:48 AM »
I feel like cheap gold is going to be manufactured soon.

Early attempts were radioactive, but if someone did a couple of tons and buried it in the 40's waiting until it was non radioactive....could flood the market soon ;)

They've been trying to turn lead into gold since about 17,000 BC.

Apparently though Elon Musk is gonna make mining gold on Asteroids at $100 an ounce a real thing by this time next Tuesday.

mistymoney

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Re: Question on managing SORR
« Reply #5 on: December 06, 2020, 11:19:21 AM »
I feel like cheap gold is going to be manufactured soon.

Early attempts were radioactive, but if someone did a couple of tons and buried it in the 40's waiting until it was non radioactive....could flood the market soon ;)

They've been trying to turn lead into gold since about 17,000 BC.

Apparently though Elon Musk is gonna make mining gold on Asteroids at $100 an ounce a real thing by this time next Tuesday.

Yes - they've been trying since gold was discovered to be shiny.


today - they can actual do it. it is currently easy and cheaper to get the regular gold. but who know?

Paul der Krake

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Re: Question on managing SORR
« Reply #6 on: December 06, 2020, 11:41:50 AM »
It's more art than science.

Don't lock yourself into obligations. Keep some cash around. Leave the door open to earning some beer money. In short: be flexible.

mistymoney

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Re: Question on managing SORR
« Reply #7 on: December 06, 2020, 11:46:19 AM »
sounds good Paul!

Maybe split the difference...

lhamo

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Re: Question on managing SORR
« Reply #8 on: December 06, 2020, 11:52:22 AM »
So far we have just kept a big portion of our stash in cash.  Big enough that there is no immediate need to replenish.  The rest of the stash is large enough that it will provide plenty of income when we do need to tap it in 8-10 years, especially since the SO will be taking SS by then.

As we get closer to 70 I will likely reverse glide path some of the cash back into the market.

It is not optimizing for growth, but we already have more than enough.  Even modest returns over time will far surpass our spending needs.  I like the peace of mind having a large cash stash gives me -- plus it is there to deploy if/when the market does tank again.  Kind of kicking myself for not investing more of it in March, but oh well.   

Paul der Krake

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Re: Question on managing SORR
« Reply #9 on: December 06, 2020, 12:08:27 PM »
Further illustration that flexibility is key: in March we were a whopping 3 months out of our jobs, when the stock market decided to drop 35%. Okay, that's some shitty timing but hey I knew that was a possibility.

What I had not anticipated was how out of whack the bond market would also be.



Had we stuck to a pre-determined formula, there is a very good chance we could have sold both stocks and bonds at the worst possible time. Instead, we dipped slightly into our cash reserves, earned a couple thousand bucks, and rebalanced.

Rob_bob

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Re: Question on managing SORR
« Reply #10 on: December 06, 2020, 01:03:42 PM »
If you have a target portfolio AA of say 60/40 then just sell whatever you need to keep it in balance.

Wintergreen78

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Re: Question on managing SORR
« Reply #11 on: December 06, 2020, 10:28:32 PM »
Personally, I have an 80% equities/ 20% low volatility mix for my investments. My strategy was to also have one yearís expenses in cash when I quit. I rebalance every 3 months and top my cash up to 6 monthsí expenses once it drops below that level. So, over the first year of my retirement I let my cash on hand drop by 6 monthsí expenses. Someone could call that a very short glide path if they felt like being silly.

Some people argue that you donít need to keep so much cash, and they are probably right if your goal is to maximize your total returns. For me, keeping a fairly large amount of cash on hand helps me ignore volatility.

Iím not planning to change my asset allocation over time unless my circumstances change dramatically.

Paul der Krake

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Re: Question on managing SORR
« Reply #12 on: December 06, 2020, 10:38:29 PM »
Personally, I have an 80% equities/ 20% low volatility mix for my investments. My strategy was to also have one yearís expenses in cash when I quit. I rebalance every 3 months and top my cash up to 6 monthsí expenses once it drops below that level. So, over the first year of my retirement I let my cash on hand drop by 6 monthsí expenses. Someone could call that a very short glide path if they felt like being silly.

Some people argue that you donít need to keep so much cash, and they are probably right if your goal is to maximize your total returns. For me, keeping a fairly large amount of cash on hand helps me ignore volatility.

Iím not planning to change my asset allocation over time unless my circumstances change dramatically.
Rebalance every three months? That seems super aggressive. I was under the impression that it was best to give the winners room to do their thing.

bacchi

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Re: Question on managing SORR
« Reply #13 on: December 07, 2020, 08:47:08 AM »
Personally, I have an 80% equities/ 20% low volatility mix for my investments. My strategy was to also have one yearís expenses in cash when I quit. I rebalance every 3 months and top my cash up to 6 monthsí expenses once it drops below that level. So, over the first year of my retirement I let my cash on hand drop by 6 monthsí expenses. Someone could call that a very short glide path if they felt like being silly.

Some people argue that you donít need to keep so much cash, and they are probably right if your goal is to maximize your total returns. For me, keeping a fairly large amount of cash on hand helps me ignore volatility.

Iím not planning to change my asset allocation over time unless my circumstances change dramatically.
Rebalance every three months? That seems super aggressive. I was under the impression that it was best to give the winners room to do their thing.

As was I. There are a couple of papers out there about this and every 3 months, as I recall, is way too often.

vand

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Re: Question on managing SORR
« Reply #14 on: December 07, 2020, 09:12:28 AM »
There are many rebalancing strategies, but no evidence that any rebalancing periodicity is superior to any other (if there was, then everybody would be in agreement on it).

You have funds like the Vanguard LifeStrategy that essentially rebalance daily, yet nobody seems to bat an eyelid that this is "too frequent".

ixtap

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Re: Question on managing SORR
« Reply #15 on: December 07, 2020, 10:14:38 AM »
It's more art than science.

Don't lock yourself into obligations. Keep some cash around. Leave the door open to earning some beer money. In short: be flexible.

Remember that unless you have retired with a barebones budget, reducing costs, at least temporarily, is an option...

We set our minimum FI budget based on what we were spending when living the lifestyle we want. By the time we actually reached that, we had changed our lifestyle somewhat to make work more tolerable and we realized that we might want some of those comforts as we age, even if they aren't compatible with the nomadic lifestyle we are looking forward to for a few years. So, we have saved up 25x our current lifestyle, but we plan to spend about half that much for the first couple of years. Obviously, that level of spending cut is dependent on your ideal lifestyle, which is not nomadic for everyone!

Another tool is to do everything you can to avoid surprise expenses during the first few years. If you own, have your house inspected and do pending repairs/ upgrades the last couple of years that you are still working. Replace your cars within a couple of years of retirement. Get a thorough physical check up while you still have time to address anything that comes up. Use a pending retirement as an extra incentive to make any healthy lifestyle changes that you have been struggling with.

ChpBstrd

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Re: Question on managing SORR
« Reply #16 on: December 07, 2020, 10:23:28 AM »
The key word is risk. Either the risk ends up happening or it doesn't. I.e. either the stock market tanks during your first several years of retirement or it doesn't. You don't need to cash in your hedge if the risk doesn't happen.

The damage occurs when you sell stocks at relatively depressed prices during a multi-year bear market like the 1930s, 1970s, 2000-2003, or 2008-2009. When stocks come back, you are left holding fewer shares because you sold them for living expenses. Thus, due to the math of gains and losses, you recover much less than if you had held. E.g. You start retirement with 10,000 shares of an index ETF priced at $100 each and as luck would have it the market drops 40%. Now to obtain your $40,000/year you need to sell 667 shares instead of 400. When the market fully recovers the next year, you have 267 fewer shares than you would have had if that dip never occurred. The market recovered completely but you are still down $26,700 compared to a hypothetical world where markets had been flat! Multiply that by a few years and you have a big SORR.

Your cash/bond allocation is there to reduce the number of shares you have to sell at cheap prices during a major correction as described above. E.g. had you funded that year out of cash and bonds, you would have used up $40k worth of cash and bonds that would have been worth about $40k after the correction, instead of 667 shares that would have been worth $66,700 after the correction.

But you'd only need to tap the cash/bond allocation if a big correction / bear market actually occurrs. Otherwise, you should stick to an AA. Recommended steps:

1) Set target asset allocations for each of the next 10 years. Withdraws should be proportional.

2) Write an IPS describing under what circumstances you will withdraw more from cash/bonds instead of proportionally from each part of your target AA as you'd normally do. This could be as simple as "withdraws shall be 100% from cash/bonds any time the S&P500 is 30% lower than its all-time high" or it could be some kind of step ladder or mathematical function that slowly increases the percentage of the draw that comes from bonds/cash. E.g. "When the stock market is more than 15% below its all-time-high, increase the percentage of monthly withdraws that come from cash/bonds by 3.5X the percentage the stock market is below its all-time high, up to 100%." Bear in mind, this rule could be in use for years. Pencil out the scenarios.

3) Stick to it no matter what. NO. MATTER. WHAT. Asteroid? Stick to it. Another pandemic? Stick to it. Nuclear war? Stick to it. Trump re-elected in 2024? Stick to it. Zombie apocalypse. Stick to it, could be the original George Romero scenario where it gets under control quickly and we just mistreat the remaining zombies for fun. 

Mr. Green

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Re: Question on managing SORR
« Reply #17 on: December 07, 2020, 12:00:14 PM »
It's a little easier to digest if you just think about SORR as compound interest in reverse. That compounding is the magic that makes your portfolio grow faster than your spending. Fundamentally, that's just a sequence of returns that is greater than your draw on your assets. The same thing can happen with a prolonged period of bad returns. That, coupled with your spending, creates an accelerated reduction of your assets.

SORR risk can become a problem at any time in your retirement, though the most likely time is just after you've retired. This is because compounding has not yet had the chance to grow your portfolio into a larger number that is more capable of withstanding your withdrawals and a period of bad returns. However, this can happen at any time. You could be 20 years into retirement and if you've drawn on your portfolio such that the balance is still close to the number that led you to retire in the first place (adjusting for inflation) then you could just as easily encounter a SORR scenario in which your assets become depleted then as you would after having just retired. The 4% rule, or any spending approximating that, makes it less likely because in most cases the portfolio has grown so large it can withstand a bad run of returns but it's an important distinction to make.

As far as withdrawals go, straying from your chosen AA may introduce psychological risk if you chose that AA to keep you from making bad decisions, like selling stocks during a market crash. Though as long as your AA has some bonds in it the decision basically makes itself if you are periodically rebalancing. Take an 80/20 stocks/bonds ratio for example. A big market crash is going to push bonds higher as a percentage of your portfolio. When you need to make a withdrawal for expenses, it makes sense to pull those funds from bonds. It helps bring your AA back into alignment a little, and it's the asset that has performed better recently. Likewise, a big market run-up will push stocks to be a larger percentage of your portfolio. Take your expenses withdrawals from stocks for the same reasons.

During big market moves, those withdrawals will not be a substitution for periodic rebalancing because the percentage swings will be bigger than your withdrawals will correct.
« Last Edit: December 07, 2020, 12:02:09 PM by Mr. Green »

Wintergreen78

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Re: Question on managing SORR
« Reply #18 on: December 07, 2020, 08:05:22 PM »
Personally, I have an 80% equities/ 20% low volatility mix for my investments. My strategy was to also have one yearís expenses in cash when I quit. I rebalance every 3 months and top my cash up to 6 monthsí expenses once it drops below that level. So, over the first year of my retirement I let my cash on hand drop by 6 monthsí expenses. Someone could call that a very short glide path if they felt like being silly.

Some people argue that you donít need to keep so much cash, and they are probably right if your goal is to maximize your total returns. For me, keeping a fairly large amount of cash on hand helps me ignore volatility.

Iím not planning to change my asset allocation over time unless my circumstances change dramatically.
Rebalance every three months? That seems super aggressive. I was under the impression that it was best to give the winners room to do their thing.

As was I. There are a couple of papers out there about this and every 3 months, as I recall, is way too often.

Actually, to clarify: when I pull cash out I pull out from investments that are above my target allocation. I only actually sell an asset to buy a different asset if there has been a significant swing. Iíve never set a hard number range for rebalancing, but I generally ignore swings that stay within several percentage points of my target.