Author Topic: Stock market: how will retiring mustachians weather depressions?  (Read 3728 times)

TOSkier

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Hi all,

I've been voraciously reading MMM's blog for the past couple of weeks. Investing and expecting a 7% rate of return sounds good. However, when I look at the inflation-adjusted S&P500 at http://www.multpl.com/inflation-adjusted-s-p-500 I notice some disturbing trends:

People who started their 10 year savings in 1910, 1970 or 2000 would have had significantly reduced staches by their retirement age. Even people who'd started a few years earlier in any of these cases would have no interest growth, and would either have to live off the stache or return to work.

I'm confident that another crash is inevitable at some point.

I get that market crashes are great times to buy more funds. However, once you've lost those hundreds of thousands of dollars, it'll take a decade for the market to recover. And your early retirement is now delayed for perhaps a decade or more.

What do mustachians think? How do you intend to weather a depression if it occurs the day you intend to retire?

Bearded Man

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #1 on: October 25, 2015, 10:47:59 PM »
For me, a blend of real estate, index funds and dividend funds. I want to have enough money that any of the above investments can support me alone. I'm also investing in a backup plan: an MBA with a CIS concentration. Your greatest asset is your earning power.

Frankies Girl

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #2 on: October 26, 2015, 12:10:05 AM »
Quote
I'm confident that another crash is inevitable at some point.

Yeah it will. They're a part of life. They will happen dozens more times in our lifetimes. It's healthy and to be expected.

I suggest you read Jim Collins' stock series to get a better understanding. ;)
http://jlcollinsnh.com/stock-series/

I have run many, many FIRE calculators to see the possible outcomes, and suggest anyone thinking of FIRE do the same. CFIREsim, FIREsim, Fidelity's RIP (although I think they have just updated it and changed how it works)... all give you a better handle on historic investment outcomes on your specific allocations might turn out.


I retired in the spring of this year.

I was the breadwinner and we lived off of my salary (less maxed 401k/IRAs for the both of us) and some surplus to go towards savings. Husband's salary was completely funneled into savings and investments. We have approximately 2 years worth of living expenses in a high yield savings account and the rest in investments (indexed mutual funds).

I am currently in "training wheels phase" in that the husband is still working, so his salary is providing the living expenses.

So what happens when husband retires in the new year? We live off of investments (selling off some of the well-performing ones every quarter as necessary to fund expenses) as long as the market is moving upwards. If it starts a downward trend (correction/crash) then we live off the cash savings until such time as the market recovers. At that point, we revert to living off of the (recovered) investments and replenish the cash reserves.

Dr. Doom posted a nice explanation of how this works (http://livingafi.com/ and check out Drawdown scenarios in the post collections tab).

Our back up plans are similar to Dr. Doom's - cut back on expenses if needed, cut to bare bones expenses if still needed, and then consider going back to work at something - either part time or full if necessary for a year or two. I would much rather quit my job now and get a no-brainer part time job 5 years down the road if absolutely needed (and it is doubtful actually based off of all of the calculators - 95% success rate means that we should never have to work again).

After a certain point, a portfolio gets to be too big to fail. As long as you don't inflate your living expenses, (and usually they go down as you age anyway) even suffering a loss of 50% won't cause you to lose everything. For example, we live off of about 30K a year, so we need 750K minimum to supply the 4% safe withdrawal rate. Well, once my portfolio grows up past 1.5 mill or so, I can afford to lose half my portfolio and not adjust my living standards at all.

Quote
I get that market crashes are great times to buy more funds. However, once you've lost those hundreds of thousands of dollars, it'll take a decade for the market to recover. And your early retirement is now delayed for perhaps a decade or more.

A decade to recover? Nope. Even the Great Depression recovery average was around 7 years and that was catastrophic and unlikely to ever happen again with all the safeguards in place. We just had a pretty awful crash in 2007/8 and most folks were fine even a year later and this last bull run was hitting amazing highs. Unless you're doing something really dumb with your money, like panicking and pulling out into cash? Well, yeah, that would mess up FIRE plans pretty quick.

http://money.cnn.com/2015/02/26/investing/stock-market-crash-bubble-investing/

Most all of the historic crashes recover within a year or two; so just leave it be, and keep investing. If you're already FIREd, then just keep an eye on expenses and be prepared to dip into cash or rely on your alternative streams (like real estate or getting a part time job). You'll still have the shares and they will recover their value and more so. (seriously, read Jim Collins series - especially the first 6 or so posts and you should get a better grip on this stuff).





« Last Edit: October 26, 2015, 12:12:14 AM by Frankies Girl »

Ryo

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #3 on: October 26, 2015, 01:03:47 AM »

I get that market crashes are great times to buy more funds.



This point has always got me wondering ... as someone who is slowly but surely trying to follow MMM's investment guidelines (invest all available funds in equity indexes and don't touch it), I am already all-in, so to speak, resulting in little to no liquidity.  How are we supposed to take advantage of crashes as buying opportunities?  I imagine that you'd need to keep a large pile of cash lying around. 

Goldielocks

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #4 on: October 26, 2015, 01:31:48 AM »
People who hit a recession a few years before retiring generally just work longer or run new spending numbers.  They are actually in OK shape as they have choices about when to retire.

The problem is a recession in your first few years or decade of retirement.  The best way around this that I can see, is to have a few years of minimum spend saved as cash, so you don't draw down your principle.  Hopefully you can wait it out. 

A decade of this decline, or more tragically likely, just not realizing that inflation is outstripping market gains, could be dangerous. 

dungoofed

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #5 on: October 26, 2015, 02:05:08 AM »
Ok, so a depression doesn't sneak up on you and suddenly attack. While we have no idea what form the next "depression" will take, they usually follow a protracted recession. So Rule 1 is "Don't retire in the middle of a protracted recession."

A lot of companies will continue to profit and pay dividends. It may be harder for these companies to get financing (eg for expansion) but that applies to everyone across the board, and if they have cashflow positive businesses then these will continue to spew out money until the storm has passed.

Real estate, too - people might not be able to buy a place because of tightened credit (leading to a drop in prices) but renters will still be paying rent at more or less the same level.

Exactly as you mentioned, cash is important during times of tightened credit because you don't want to be forced to sell your other assets, and if possible you want to be able to purchase some more stocks/etc at bargain-basement prices as people and businesses struggle with cashflow/etc.

I think you'll find the way it tends to play out is that people pile into stocks as they're approaching retirement when they should be taking a bit of money off the table. They retire the moment their stocks reach their "magic number" and then the bottom falls out of the market. So Rule 2 is "Make sure you have a chunk of your stache as cash when you retire." Dividend/rental/bond income is also important here.

The other important difference between you and other people is that your frugality muscle should be well-trained by the time you retire. A lot of people really struggle to tighten the purse strings, and ehen the going gets tough they are still proud and worried about what other people think. You won't have that problem.

k9

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #6 on: October 26, 2015, 04:22:23 AM »
That is basically it : one (two) year(s) of cash for your first year(s) of retirement if it happens on a bear market, a dividend/rental flow, and you are basically ok.

Also remember that long bear markets at the worse possible time are already included in the 4% SWR.  It is "only" 4% because, on some rare occasions, a bad bear market forced retirees to sell a lot of their assets because of a long bear market.

TomTX

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #7 on: October 26, 2015, 05:06:34 AM »

I get that market crashes are great times to buy more funds.



This point has always got me wondering ... as someone who is slowly but surely trying to follow MMM's investment guidelines (invest all available funds in equity indexes and don't touch it), I am already all-in, so to speak, resulting in little to no liquidity.  How are we supposed to take advantage of crashes as buying opportunities?  I imagine that you'd need to keep a large pile of cash lying around.

Rebalance your asset allocation.

Retire-Canada

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #8 on: October 26, 2015, 11:07:31 AM »

This point has always got me wondering ... as someone who is slowly but surely trying to follow MMM's investment guidelines (invest all available funds in equity indexes and don't touch it), I am already all-in, so to speak, resulting in little to no liquidity.  How are we supposed to take advantage of crashes as buying opportunities?  I imagine that you'd need to keep a large pile of cash lying around.

1. Defer necessary, but not immediately critical expenses. [ie. a roof replacement could wait months or even a year]
2. Get motivated to skip discretionary spending and invest [ie. you might have saved for a vacation to Europe and go camping locally instead]
3. Sell stuff and invest [ie. clear out the garage]
4. You can use a LOC to invest today and repay with diverted savings if you want to advance your investment purchases between pay periods
5. Rebalance with other assets as was mentioned above
« Last Edit: October 26, 2015, 11:09:11 AM by Vikb »

Interest Compound

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #9 on: October 26, 2015, 11:55:45 AM »
Hi all,

I've been voraciously reading MMM's blog for the past couple of weeks. Investing and expecting a 7% rate of return sounds good. However, when I look at the inflation-adjusted S&P500 at http://www.multpl.com/inflation-adjusted-s-p-500 I notice some disturbing trends:

People who started their 10 year savings in 1910, 1970 or 2000 would have had significantly reduced staches by their retirement age. Even people who'd started a few years earlier in any of these cases would have no interest growth, and would either have to live off the stache or return to work.

I'm confident that another crash is inevitable at some point.

I get that market crashes are great times to buy more funds. However, once you've lost those hundreds of thousands of dollars, it'll take a decade for the market to recover. And your early retirement is now delayed for perhaps a decade or more.

What do mustachians think? How do you intend to weather a depression if it occurs the day you intend to retire?

This is a confusing topic for many new investors, so don't be discouraged :)

To calculate this, you can't simply look at the overall returns between the two points. If you started your 10 year savings plan in the year 2000, how much would you have in the year 2010? A 10 year savings plan means you're saving about 65% of your salary:



If your expenses are $40,000 a year, that means you're saving $61,538 a year, and need $1,000,000 to retire (4% rule).



With a standard 80/20 portfolio:




You end up with this after inflation:



So you're short of your goal. You have a few options:
  • Reduce expenses in retirement by $666 a month.
  • Keep working (would've had to keep working until 2013).
  • Get a side-gig that makes $666 a month to make up the difference.

When I look at this, and consider it's one of the worst-case historical scenarios...it just doesn't seem like something to worry about :)

Jack

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #10 on: October 26, 2015, 12:09:47 PM »

This point has always got me wondering ... as someone who is slowly but surely trying to follow MMM's investment guidelines (invest all available funds in equity indexes and don't touch it), I am already all-in, so to speak, resulting in little to no liquidity.  How are we supposed to take advantage of crashes as buying opportunities?  I imagine that you'd need to keep a large pile of cash lying around.

1. Defer necessary, but not immediately critical expenses. [ie. a roof replacement could wait months or even a year]
2. Get motivated to skip discretionary spending and invest [ie. you might have saved for a vacation to Europe and go camping locally instead]
3. Sell stuff and invest [ie. clear out the garage]
4. You can use a LOC to invest today and repay with diverted savings if you want to advance your investment purchases between pay periods
5. Rebalance with other assets as was mentioned above

6. Get lucky enough to receive a windfall at the right time.

Otherwise, you just keep shoving your money in as you get it, as usual.

k9

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #11 on: October 26, 2015, 01:10:13 PM »
4. You can use a LOC to invest today and repay with diverted savings if you want to advance your investment purchases between pay periods
You mean... going into debt to buy stock on a bear market ? :o

Retire-Canada

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Re: Stock market: how will retiring mustachians weather depressions?
« Reply #12 on: November 02, 2015, 06:59:56 AM »
4. You can use a LOC to invest today and repay with diverted savings if you want to advance your investment purchases between pay periods
You mean... going into debt to buy stock on a bear market ? :o

Typical pay periods are 2 to 4 weeks. So worst case you are carry debt at some super low interest rate for 1 - 2 weeks. If you want to jump on some market movement you see that's an option if you ask the question RYO did.

I did that during the Greek debt crisis earlier this year as well as putting off expenses that didn't have to happen right away to add extra money to my investments. Yup it's marketing timing.

I'm in that purgatory of not yet FIRE and high enough net worth that additions don't make much difference each month so I find little games to play or mini-targets to hit to keep me motivated and aggressively contributing.