retiring *right now* and factoring in SORR

[Tannhauser]

Hi all:

I have a partially hypothetical/partially genuine question on which I'd love some input.

Let's say I wanted to retire right now, and my stash could support a conservative 3% SWR for my needs (though of course I'd love to spend 3.5% or 4%). In the last few years I've built up a bond tent, and with the recent market falls, I'm right where I was aiming for my SORR-minimizing AA of 60/40 stocks/bonds. Prior to the market collapse, the plan was to follow the equity glidepath strategy to gradually ramp up to 80/20 over the next ten years.

So here's the question: Given current market valuations and CAPE ratio, would you now adjust your AA to move much more quickly to 80/20?

One the one hand, I can imagine a logic whereby this was the SORR event I was worried about and had planned for, and since it's now happened, it would make sense to move more aggressively toward 80/20. A weird upside of the market collapse is greater clarity about SORR.

On the other hand, I can imagine a logic whereby ongoing volatility and economic weakness might justify a continued conservative approach, sticking with the glidepath strategy over the next decade.

What do you all think? What would you do, and why?

Thanks for thinking about this, and sincere best wishes to everyone and their families in this trying time.

[reeshau]

Of course, the answer depends on your risk tolerance.  But you are right in that we've at least partly passed through what everyone was worried about in 2019:  were we in a bubble / market high / at risk?

If by "more aggressively" you mean this week, that's probably still too soon.  While the market is down 30%, it is just now approaching average for the Shiller P/E--it's not depressed, it's just not crazy.  Marking in terms of time, we're not at 2008, just back to 2016.

If you mean some time in 2020, or perhaps averaged over 2020 because nobody knows if or how much worse the market will get before it gets better:  then yes.

I have found myself in a similar situation:  without a job, but with a big pile of "disappointment money."  I had a 50% cushion in January, and now am at my numbers.  I have enough cash to ride out whatever is going on, even for 2 years.  Or, I could be investing in a downturn and end up expecting to have an even bigger 'stache when things come back online.  Of course, why would I want that?  I've won, so stop racing.  But opportunity is knocking.  Decisions, decisions.

[vand]

I would be more interested in understanding how you are ready to RE today after a recent 20-25% portfolio decline!

This is the ultimate irony for 4% rule adherents. Statistically many more people will be in a position to RE at a point when their portfolios are unlikely to support very high SWRs (ie near market tops) than will be to retire at a point where the portfolio is likely to support higher SRW (near market bottoms).

[bigblock440]

This is the ultimate irony for 4% rule adherents. Statistically many more people will be in a position to RE at a point when their portfolios are unlikely to support very high SWRs (ie near market tops) than will be to retire at a point where the portfolio is likely to support higher SRW (near market bottoms).

Why is that irony?  That's why it's 4% and not 8%.  The SWR could very well be 6,7,8,10% for a retiree today, you just won't know until a few decades from now.  That's what the 4% is for, it's the lowest historical SWR.  If you're not invested in the US market, this does not apply to you.

[Tannhauser]

I have found myself in a similar situation:  without a job, but with a big pile of "disappointment money."  I had a 50% cushion in January, and now am at my numbers.  I have enough cash to ride out whatever is going on, even for 2 years.  Or, I could be investing in a downturn and end up expecting to have an even bigger 'stache when things come back online.

Thanks for the thoughts, reeshau. And you're right about "disappointment money." I should be thankful -- and I am -- that I'm still in a relatively secure position given all that's happened in the last few weeks. But now it's precisely about managing my risk tolerance with a sound, long-term perspective that poses a quandary.

And vand, the reason I can even think about RE at this point is because my stash had grown (and for now remains) greater than what I really need for a 3% SWR. Benefits of frugality and minimalism!

Thanks for the responses, all.

[bacchi]

If you can retire now, at 3% with a bond tent, you're in great shape. Pull from bonds, let the 60% equities glide, and relax.

[BicycleB]

I'd put another 5% in stocks now. Do it again if S&P drops under 2150, again if under 1900.

I support the idea that this market is a big chunk of the SORR you were worried about, and that you should therefore respond to it in some way, given that you target a higher stock % eventually.

I'm no expert though!  :)

[frugalnacho]

If you can retire now after this crazy market drop and are still only pulling 3% then you've already hedged your bets significantly and probably should have retired years ago.

[Steeze]

I'd put another 5% in stocks now. Do it again if S&P drops under 2150, again if under 1900.

I support the idea that this market is a big chunk of the SORR you were worried about, and that you should therefore respond to it in some way, given that you target a higher stock % eventually.

I'm no expert though!  :)

+1

seems logical to accelerate the glide path after a significant drop.

[Tannhauser]

Thanks again for the responses, all.

For anybody who's thinking about this situation, Big ERN conveniently has a post as of yesterday where he does some analysis of SWR and equity allocation after a big market drop event such as we've just experienced: https://earlyretirementnow.com/2020/03/25/dealing-with-a-bear-market-in-retirement-swr-series-part-37/

Stay safe and positive, everybody!

[reeshau]

Thanks for the link @Tannhauser .  Leave it to Big ERN to address the question head on, and with all the data you can eat!

[LightStache]

One the one hand, I can imagine a logic whereby this was the SORR event I was worried about and had planned for, and since it's now happened, it would make sense to move more aggressively toward 80/20. A weird upside of the market collapse is greater clarity about SORR.

But this isn't logical because there could just as easily be another SORR event in a year or two years. It's a version of gamblers fallacy -- just because we have a big event in March 2020 doesn't impact the probability of a similar event at any point in the future.

We could see a big rebound in the second half of the year and then DPRK lobs a nuke at Los Angeles in Mar 2022. Your SORR "clarity" wouldn't look so good in retrospect.

If you're going to withdraw at 3% I don't see any compelling reason to move from your SORR-minimizing AA and stick with your planned glidepath.

[Tannhauser]

True, @FatFI2025, a major market drop in early 2020 doesn't preclude another major market drop in 2022. But from my understanding of the history, such an event would be pretty unusual.

As to the North Korea nuke hitting LA, I'd relate that back to what @reeshau said about risk tolerance. A nuke hitting LA isn't something I can control, so I'm not going to worry too much about it. By the same logic, you might as well just remain at 50/50 (or whatever your preferred AA would be) forever, because you never know, a meteor could strike the Earth next month. Or aliens land. Or X country launches a biological weapons strike. Choose your doomsday scenario...

Personally, my risk tolerance allows me to take this market event in the context of past, similar market events, and try to build a plan based on that. As always, YMMV.

[ChpBstrd]

Past results are not indicative of future returns. Just because the market dropped ~30% does not mean it is more likely to revert to past levels, or that it will keep dropping. The price change next month will be almost independent of the price change this month.

When we speak of "a" sequence of returns "event", we are typically talking from peak to bottom, as seen in hindsight. To make a move today would essentially be calling a bottom. The SORR event might have just begun, recall that many lasted several years. Imagine yourself in 1929 or 1930, contemplating risking your portfolio with 40-50% down still to go.

Yet a third way of looking at this is simple risk to retirement. Which option has a chance of extending your career in a terrible job market? Staying the course does not. Going all in opens up a small possibility. Is that small possibility worth the chance to buy more stuff?

There is a way to capture much of the gains in a V-shaped recovery scenario, and to not lose your retirement if that doesn't pan out. Buy call options. FWIW, my investments are currently bearish, but I have other positions that are essentially bets on myself being wrong!