First post-FIRE market tantrum

[bigchrisb]

Hi all,

This is a question for those who have been FIRE for a while, and have been through a market slump (thinking 20% plus) while in the draw down phase.

I'm quite OK with sticking the course of asset allocation through slumps in the accumulation phase (proven to myself through the GFC and the 2011-12 euro-tantrums).  I kept fully invested and kept adding money.  In fact, I got excited by these as an opportunity to buy more on the cheap.

However, I'm wondering how the psyche has played out for those who were in draw-down while experiencing these events.  Did you find it a bigger mental hurdle than sticking the course during accumulation?

I realise that many on here have FIRED recently, so probably haven't experienced this first hand yet.  Anyone out there who has?  Any tips on how you coped, or things you could have done to reduce the risk of panic?

[SwordGuy]

Well, I've been putting money in my 401K since about 1990.  I don't like to spend money that I've saved. 

Even if it makes more sense to pay for something out of saved capital than it does to finance it and pay it off of income, I would rather pay more from an income stream than eat into savings.

So, I've ignored all the ups and downs this whole time because those savings were "not to be touched" unless at extreme need.

I still feel that way.  So, pulling money out of savings to fund my retirement isn't something I want to do.  If I do it, it will be because I have to.  I'm as sure as anyone can be before they actually face that situation head on.

Then again, I'm not planning on living solely off my savings.  Instead, I set up some rental properties to provide an income stream and plan to live off that, supplemented by stock as needed.

That way, I should only rarely have to sell stocks just to get by, which means I can ignore most downturns (from a panic point of view).   If rental income is going along nicely with a surplus, I'll buy some stock on sale! :)

[Financial.Velociraptor]

I found it challenging the first 6 to 18 months.  Almost 5 years in, I hardly notice events like today's minus 1.5% movement.  Basically, you grow accustomed to it.

[itchyfeet]

Knowing with certainty that drawing money from a diminished stash is going to cause a certain level of angst, I suppose the best approach is to reduce the risk of that happening as much as is practical i.e.:

1. Hold a few months of expenses in cash; and
2. Hold some of your stash in fixed income and/ or property

Then

3. Take a deep breath and have faith that this correction is highly unlikely to be the beginning of a sequence of events that will destroy your stash quicker than any time in history
4. Take confidence that if the worst happens, you might have to spend a little less in old age than you thought, but at least your bare bones costs are covered with a paid off house and social security, so what ever remains of your stash will still provide a few luxuries
5. If a couple of dire years early on convince you that you need to top up the stash a little, hustle for a little supplementary income.

But as 3-5 probably won't help my anxiety too much despite how many times I repeat the words, I will definitely be primarily relying on 1&2.

[Tyson]

Isn't this why we have bonds?  During a downturn just live off the bonds for a while.  Once things bounce back, replenish the bonds that you sold off.

[msheldon]

The "live off your bond allocation" or "live off an N-year cash buffer" ideas are alternate ways of basically saying: "increase your stock allocation percentage as the market P/E drops" optionally combined with "start with a more conservative asset allocation".

• These are both strategies that increase your risk profile while the market is tanking. This may be scary to implement. Or you may believe that low P/E times are great investment opportunities and you like the idea of increasing your risk. Either way you look at the scenario, make sure you are comfortable with what you're doing to your asset allocation.

To OP's 20% market drop concern, historically 43% of retirement start dates have seen your portfolio value drop 20% below it's starting line. Those are good enough (bad enough?) odds that we shouldn't be at all surprised when this happens. See Dr Doom's "Oh Shit Percentage" (OSP) idea under the "3. Living Below The Line Is Normal" section here: https://livingafi.com/2014/06/03/drawdown-part-5-validation/, in particular look at the "Dip Analysis" table.

Personally I found the OSP idea very calming: we've identified items in our family budget that will go should we hit our OSP, so there's a back up plan in place should we need it.

Good luck figuring out your draw down strategy!

--Michael Sheldon

* Why do I say "increase your stock allocation percentage as the market P/E drops"? Because that is in effect what you are doing. Let's look at a couple examples. The math here assumes the 4% WR exactly equals one year of expenses, so this is basically "I just started RE and the market tanks" -- if you've seen market growth so currently use a smaller WR then the increase in stock allocation isn't as much, but it still happens:

3-year cash buffer idea. The cash doesn't contribute to your 4% WR, so you need to save this extra 3-year cash buffer. Which results in a just over 10% allocation to cash and the rest to stocks/bonds. Assuming 70:30 ratio there, you have: cash 10.7%, stocks 62.5%, bonds 26.8%. In a long extended down-turn, you spend your cash buffer and wind up at a 70% stock allocation. You increased your stock allocation.

just-spend-bonds idea. You are in "just sell bonds" mode. After the 20% crash your 70:30 ratio is now 65:35 (simplifying assumption: bonds didn't change value, stocks are flat going forward for a few years). Sell bonds to get your next year's living expenses and you are at 68.3:31.7. After 3 years of this you are at 75.7:24.3. You increased your stock allocation.

[Eric]

The "live off your bond allocation" or "live off an N-year cash buffer" ideas are alternate ways of basically saying: "increase your stock allocation percentage as the market P/E drops" optionally combined with "start with a more conservative asset allocation".

• These are both strategies that increase your risk profile while the market is tanking. This may be scary to implement. Or you may believe that low P/E times are great investment opportunities and you like the idea of increasing your risk. Either way you look at the scenario, make sure you are comfortable with what you're doing to your asset allocation.

To OP's 20% market drop concern, historically 43% of retirement start dates have seen your portfolio value drop 20% below it's starting line. Those are good enough (bad enough?) odds that we shouldn't be at all surprised when this happens. See Dr Doom's "Oh Shit Percentage" (OSP) idea under the "3. Living Below The Line Is Normal" section here: https://livingafi.com/2014/06/03/drawdown-part-5-validation/, in particular look at the "Dip Analysis" table.

Personally I found the OSP idea very calming: we've identified items in our family budget that will go should we hit our OSP, so there's a back up plan in place should we need it.

Good luck figuring out your draw down strategy!

--Michael Sheldon

Damn, I should've patented the Oh Shit Percentage when I had a chance.  Or at least started a blog as good as Doom's.  Oh well, I guess I'll just go back to work.  :(

[secondcor521]

I've only been retired a year or so, but I've thought a lot about this question.  Here's what I've noticed others who are longer-retired than me have done and/or things I will do:

1.  Cut back on spending.  I think everyone does this naturally.  It is also an extremely effective factor in FIRE portfolio survivability.
2.  Make sure the asset allocation you have going into a correction is really truly what you want and can stick to through thick and thin.  Many long-term FIREees over on ER.org are at 50:50-ish allocations.
3.  Understand the risks and probabilities and how they are arrived at, via tools like cfiresim or FIREcalc or I-ORP or whatever.  This helps people establish a good AA (see #2) for their situation.
4.  Get nervous and possibly go back to work for a bit.  This is usually the last-ditch item, because being FIREd turns out to be very appealing to most people and once you're not working for a while the BS that people who work have to put up with and the taxes one has to pay seem ridiculous.
5.  Many people (more so on ER.org than here) are even more conservative than the 4% rule when they start.  A common technique is to not include things like Social Security or a pension or a pile of money, and then decide that they could tap these things if things really get bad.
6.  Personally, I have a pre-researched and pre-thought out list of five contingency plans that I could implement that would reduce expenses (#1), 20 contingency plans for additional income (#4), and 8 contingency plans that are super duper backups that I'd rather not do but are options if I'm broke and starving (#5).
7.  I also have triggers that I monitor, so if things are going south, my tripwires will be tripped and I should start implementing contingency plans ASAP.  Just like I've noticed that people who get into trouble with a job loss that lasts a while by ignoring the situation for a while and not tightening their belts immediately, I think that people could risk their FIRE status by not responding promptly.

I think that I have a pretty good plan, but I admit I am still nervous.  One day blips like last Wednesday don't bother me, and I think a 10%-20% decline over a few months would be OK too.  If/when we get something like the tech bubble or Great Recession, I'm not sure what I will do.  That being said, sometimes I think I could just go back to work and at least be thankful that I had a few years' of vacation and was able to spend some additional time with my teenage kids.

[Tyler]

2.  Make sure the asset allocation you have going into a correction is really truly what you want and can stick to through thick and thin.  Many long-term FIREees over on ER.org are at 50:50-ish allocations.
3.  Understand the risks and probabilities and how they are arrived at, via tools like cfiresim or FIREcalc or I-ORP or whatever.  This helps people establish a good AA (see #2) for their situation.

+1.  The effects of intelligent asset allocation on retirement portfolio performance and personal peace of mind is greatly underappreciated. 

Not every portfolio is equally susceptible to market tantrums.  Looking at year-end data, my personal asset allocation has never experienced a year-over-year drawdown deeper than 13% in the last 47 years.  That consistency not only helps me never worry about the markets but also greatly improves the withdrawal rate. 

There's lots of good retirement portfolio information here: https://portfoliocharts.com/portfolio/retirement-income/

And for Drawdown info, try this: https://portfoliocharts.com/portfolio/drawdowns/

Also, I've personally found that after being FIRE a few years you simply stop worrying about money so much.  At a certain point, you accept that your plan is sound and turn your attention to more fun and interesting endeavors than watching markets every day.  :)