Retire at the top of the market

[Exflyboy]

OK I'm sure I am either going to get pointed at tons of previous discussion or told I am an idiot in some way.. But here goes..:)

Lets assume that today is the top of the market prior to a really bad recession, but we have had a wonderful run up so its time to retire.. Sound familiar?

So I made the assumption that that its September 1929 and time to pull the plug from within my Rosewood paneled tea room, right before the big meltdown.

How long was it before the S&P 500 showed a gain after accounting for inflation?.. Answer 7 years.. Yup with inflation, there was a slight gain in 1936 with dividend re-investment.

Now of course inflation turned negative (big time) in 1931, 32 and 33.. But of course in terms of spending power that really doesn't matter to us capitalist pigs driving past the soup lines.

In fact, minus 10% inflation actually makes our cash reserves look like a fantastic investment.

Bonds appeared to do something similar during the same timeframe.

So bottom line is make sure you have about 6 years or so of bonds plus cash (remember this will be worth 7 or 8 years in a deflationary environment) and you will ride out a repeat of the Great Depression. Of course the fear during the downturn will be awful, but the reality is it really shouldn't matter financially speaking.

Make sense?

[beltim]

Run the same analysis in, say, 1968 or 1969 and you might see why holding 6 years of cash is a bad idea.  Inflation is a much bigger threat to retirement savings than deflation.

[Exflyboy]

will do.. I assume bonds work during the 1968 period?

From March '68 till Dec '71 there was a gain of 1.3% counting inflation.

Without inflation it was 6.4%

So it was a shorter period to recover.. but it implies inflation was going a pretty alarming pace, which as you state is a bad place to be with cash.

[Eric]

There's a question that needs to be answered before you start taking action regarding your AA.  What makes you think the next Great Depression will look anything like the first one?

[Exflyboy]

Well every withdrawal strategy is based on historical data.. How would you define a worse case scenario?

[beltim]

will do.. I assume bonds work during the 1968 period?

From March '68 till Dec '71 there was a gain of 1.3% counting inflation.

Without inflation it was 6.4%

So it was a shorter period to recover.. but it implies inflation was going a pretty alarming pace, which as you state is a bad place to be with cash.

Bonds were fine.  But what killed portfolios starting in the 60s were the high inflation rates of ~1973-1981. 

[Spork]

Well every withdrawal strategy is based on historical data.. How would you define a worse case scenario?

Unfortunately, I believe it is defined as "the one you didn't plan for."

[forummm]

http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/

http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/

[Eric]

I don't think that there is one particular worse case scenario, so I wouldn't attempt to guard against something so specific.  High inflation, large market drops, or little to no (real) returns over an extended period, or some combination of the three could all be a SIGBTW^ scenario.

Regarding the Great Depression example, keeping a large percentage in bonds is good for a large market drop, but terrible for high inflation.  So while guarding against one bad scenario, you're over-exposed to others.


^ Shit, I'm Going Back To Work ( I just made that up)

[nereo]

Regarding the Great Depression example, keeping a large percentage in bonds is good for a large market drop, but terrible for high inflation.  So while guarding against one bad scenario, you're over-exposed to others.

+1.  You are making your plan based on how to survive the great depression of 1929 ~ 1936.  The one thing I would count on is that any future economic collapse will be different.  In the army they say Generals always plan for the previous war.  I think that applies here.

So - what to do?  stay flexible and accept that you can't predict what things will be like.  To end on a sunny note - odds are everything will be alright :-)

[steveo]

So bottom line is make sure you have about 6 years or so of bonds plus cash (remember this will be worth 7 or 8 years in a deflationary environment) and you will ride out a repeat of the Great Depression. Of course the fear during the downturn will be awful, but the reality is it really shouldn't matter financially speaking.

Make sense?

It does make sense to me. I would state though that you only need the amount of cash or bonds that can provide you with a really frugal lifestyle. Of course you have to be happy within that lifestyle however I think that is achievable.

[forummm]

It seems that, other than saving far too much money for normal historical returns, the best way to counteract terrible economic environments is the ability to get super frugal. And then maybe get a job later if you can once employment opportunities become available again.

[MDM]

Might be worth reading https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/:

The inspiration for today's blog post is some recent conversations I've had with other planners, who have questioned whether the safe withdrawal rate research is still relevant in today's low return environment. "In the 'new normal'", the planner usually states, "returns are likely to be lower than historical averages for both stocks and bonds. Doesn't that mean historical safe withdrawal rates are unrealistic?"

"Not at all," I reply, "Because historical safe withdrawal rates aren't based on historical averages. They're based on historical worst case scenarios."

The full article goes into more details.

[Shane]

Jeremy over at gocurrycracker.com set up a similar scenario in his recent blog post, "The Worst Retirement Ever." He writes about what would've happened if you'd ER'd in 1965 with a million (2014) dollars and plans for a 4% SWR.

If you haven't read it already, you may find it interesting.

Here's a link to the post:

(http://www.gocurrycracker.com/the-worst-retirement-ever/)

[scottish]

ExFlyBoy, you didn't say explicitly, but I bet 6 years of living expenses in bonds is about 10% of your portfolio?   

[Exflyboy]

ExFlyBoy, you didn't say explicitly, but I bet 6 years of living expenses in bonds is about 10% of your portfolio?

I have a total stash of around $1.5M. 15% ($225k) in bonds and 3.4% ($50k) in cash.

Last years spending was $28k (call it 30k), plus when my Wife quits we expect our Healthcare costs to rise by $5k.. so $35k annual spend.

So if the meltdown happened today and we were living soley on the stash we have 7.8 years.

But we have more safety margin though, currently we get about $15k in rent and if I started drawing my pension next years that's a projected additional $16k.

Then in 8 years my Wife gets her pension of another $16k.

So its very hard to see how we could physically run out of money unless something REALLY bad happened.

[nereo]

ExFlyBoy, you didn't say explicitly, but I bet 6 years of living expenses in bonds is about 10% of your portfolio?

I have a total stash of around $1.5M. 15% ($225k) in bonds and 3.4% ($50k) in cash.

Last years spending was $28k (call it 30k), plus when my Wife quits we expect our Healthcare costs to rise by $5k.. so $35k annual spend.

So if the meltdown happened today and we were living soley on the stash we have 7.8 years.

But we have more safety margin though, currently we get about $15k in rent and if I started drawing my pension next years that's a projected additional $16k.

Then in 8 years my Wife gets her pension of another $16k.

So its very hard to see how we could physically run out of money unless something REALLY bad happened.

...$1.5MM stach, plus $15k/yr from rental, $16k/yr from your pension, plus an additional $16k/yr from wife's pension plus SS down the pipe....
estimated expenses under $35k...

Yup, that's layers upon layers of safety.  ignoring your rental & pension you have a WR of 2.33%.  You could most likely live off just your pension and rental - or supplement with cash for the next 8 years until your wife's pension kicked in, and then you'd have an annual surplus again.  When you get older you'll have even more surplus with SS. 
The market could loose 50% of it's value the day after you retired, your pension could go up in smoke, and your rental could generate only half the income you expect and you would still be ok (after the fall you'd still have a WR of 3.7%).
Congrats.  If you want more security stock up on ammo and read the 'end-of-the-world' bloggers out there.  And stay out of legal trouble; that can bankrupt anyone.

[Thegoblinchief]

Risk mitigation calls for the cajones to say, at some point, fuck it - enough!

Or, to borrow vikb's phrase about cyclists, avoid the siren call of "most saferer-est"

[MetalCap]

I don't think that holding 6 years if cash/bonds is too terrible if you're FIRE'ing at 4%.  4% requires 25x living expenses so 6yrs/ 25x =24% of Bonds or Cash.  Thats pretty close to the baseline that the 4% was derived off of.

I'm sure the finer details can go on but a broad brush look of this isn't wildly off base.

[nereo]

I don't think that holding 6 years if cash/bonds is too terrible if you're FIRE'ing at 4%.  4% requires 25x living expenses so 6yrs/ 25x =24% of Bonds or Cash.  Thats pretty close to the baseline that the 4% was derived off of.

But he's not FIRE'ing at 4%.  He's FIRE'ing at 2.3% IF you ignore both his pension and rental income.  If you include those he's retiring at ~0.3% WR.
Kind of changes the equations.  He could go to 100% cash stuffed in a mattress and even loosing 3% to inflation he could suppliment his rental and pension income with enough cash to meet his expected expenses and he's be fine until well past his 200th birthday.

On the conservative, principle protection side - "why keep playing when the game has been won" - just protect princple and f*ck future returns
On the wealth-accumulation side - "it's very unlikely he'll ever need that money, so why not just let it ride" and build a philanthropic legacy.

Seriously, either strategy should work - just different end-games.

[Exflyboy]

This post was not really about if I have enough money to make it.. Of course I do, it was more about the investment strategy for retirement years.

My focus has been "do I have enough money in "safe" places to act as a life raft to get me to the island of pension income?.. The rest of the portfolio is a giant game of monopoly.. OK that sounds a bit crass, but it is a game.

I like games and yes I would prefer to see if I can generate a huge pot to leave for a worthy cause.. Heck even create my own foundation perhaps?

The other part is that we do want to do some travel and may well drop $10 to $20k a year on going places till we get bored with that.

We will probably get out of the rental business in the next 5 years or so too.. lets face it its a PITA.. or at least its not free money. One of the properties is a 1996 single wide trailer that does require more and more upkeep.. sooner or later that is going to get real old and we'll haul it off.

So yes I realize we are in a very fortunate position, we got lots of options..:)

[nereo]

This post was not really about if I have enough money to make it.. Of course I do, it was more about the investment strategy for retirement years.

My focus has been "do I have enough money in "safe" places to act as a life raft to get me to the island of pension income?

Yes, you have enough in cash & bonds alone.  As you calculated earlier, you can go 7.8 years to get to full 'pension land' but that doesn't include your $16k from pension starting next year or the $15k that you currently make renting (which may be going away sometime "soon" - but hopefully will generate some cash when you sell).
Factoring in $16k from your pension and $14k (vacancies?) from rental your cash-stach alone will give you another 10 years without touching your bonds.  Consider the bonds a travel fund if you like, letting you spend $10k/year just on travel until your wife's pension kicks in.  At that point you will still have >$100k in bonds, plus all of your equities, and essentially all of your living expenses from your two pensions (let's assume you've sold the rental at this point and gotten $0 for it).  From there on out your 'stach is entirely a travel + philanthropy fund... use it when the market is up, hold back when the market is down.  Since you'd like to 'leave a legacy' and you won't need it for daily living expenses, i'd just leave it at the ~85/15 it will be after drawing down the cash & bonds over the next 8 years. 
...that's what I'd do.  Congrats on getting to this point.
Congrats.

[forummm]

Sounds like you have the resources to spend enough time in Bondville to weather any harsh times in Stockistan to get you on your voyage to Pension Island. But with your long residence in Stasheton, you should have no trouble getting from Pension Island to Richland.

[Exflyboy]

Sounds like you have the resources to spend enough time in Bondville to weather any harsh times in Stockistan to get you on your voyage to Pension Island. But with your long residence in Stasheton, you should have no trouble getting from Pension Island to Richland.

hahahah..:)

Actually, I had a further thought.. I don't need to actually take the pensions early, in fact a big part of the UK pension is guaranteed to rise at 6.25%, the rest at the CPI. Thus is life in stocktistan continues to look good it probably makes sense to NOT take it until WW3 breaks out.

[MetalCap]

I don't think that holding 6 years if cash/bonds is too terrible if you're FIRE'ing at 4%.  4% requires 25x living expenses so 6yrs/ 25x =24% of Bonds or Cash.  Thats pretty close to the baseline that the 4% was derived off of.

But he's not FIRE'ing at 4%.  He's FIRE'ing at 2.3% IF you ignore both his pension and rental income.  If you include those he's retiring at ~0.3% WR.
Kind of changes the equations.  He could go to 100% cash stuffed in a mattress and even loosing 3% to inflation he could suppliment his rental and pension income with enough cash to meet his expected expenses and he's be fine until well past his 200th birthday.

On the conservative, principle protection side - "why keep playing when the game has been won" - just protect princple and f*ck future returns
On the wealth-accumulation side - "it's very unlikely he'll ever need that money, so why not just let it ride" and build a philanthropic legacy.

Seriously, either strategy should work - just different end-games.

Agreed, I was talking in generalities for everyone else (myself) but didn't articulate that.  I usually take any case, start at 4% and apply the sniff test to it.

[Exflyboy]

Jeremy over at gocurrycracker.com set up a similar scenario in his recent blog post, "The Worst Retirement Ever." He writes about what would've happened if you'd ER'd in 1965 with a million (2014) dollars and plans for a 4% SWR.

If you haven't read it already, you may find it interesting.

Here's a link to the post:

(http://www.gocurrycracker.com/the-worst-retirement-ever/)

This was a really good article!!!!.. Shows that high rates of inflation are far more dangerous (historically) than large stock market drops. It also shows that during the worse periods that 4% is a little too aggressive.. but the difference between portfolio success and failure is a very small pullback in annual spending.

Well worth a read.

[Bob W]

Inflation now vs 1929 isn't comparable.   

Our big meltdown will be inflation driven this time with the many trillions pumped into the banking system year after year.

The past is not the future. 

That said,  I don't see the market tanking anytime soon because ---  the trillions pumped into the system are ending up in the market  --- there is a lot of worry and not over exuberance in the market  --- markets climb a wall of worry  --- the US economy is clawing along.

In the long run we are all screwed of course and it all really is a debt manufactured house of cards.

Of course,  I'm probably wrong. 

[nereo]

Inflation now vs 1929 isn't comparable.   

Our big meltdown will be inflation driven this time with the many trillions pumped into the banking system year after year.
...
In the long run we are all screwed of course and it all really is a debt manufactured house of cards.

I just love reading your sunny disposition on hump-day.  Makes me feel all warm and fuzzy about the future :-)

[Mr. Green]

Generally speaking, I feel like if you FIRE'd with a less than 4% SWR and in the lean years you had the ability to spend less and make a little cash on the side if you had to, and it still wasn't enough you don't really need to worry about it because the world as we know it has ceased to exist. Entire financial markets have collapsed, perhaps countries have collapsed. You'd probably be more concerned with how much food, water, and guns you own at that point than how much money you have.

[forummm]

Generally speaking, I feel like if you FIRE'd with a less than 4% SWR and in the lean years you had the ability to spend less and make a little cash on the side if you had to, and it still wasn't enough you don't really need to worry about it because the world as we know it has ceased to exist. Entire financial markets have collapsed, perhaps countries have collapsed. You'd probably be more concerned with how much food, water, and guns you own at that point than how much money you have.

Inflation now vs 1929 isn't comparable.   

Our big meltdown will be inflation driven this time with the many trillions pumped into the banking system year after year.

The past is not the future. 

That said,  I don't see the market tanking anytime soon because ---  the trillions pumped into the system are ending up in the market  --- there is a lot of worry and not over exuberance in the market  --- markets climb a wall of worry  --- the US economy is clawing along.

In the long run we are all screwed of course and it all really is a debt manufactured house of cards.

Of course,  I'm probably wrong. 

Hey look! Both the Bruce Willises are huge pessimists!

BTW Sir Hikes-A-Lot, there was another thread on here that said you should change your avatar because Bob W is the poster people associate with that Bruce Willis avatar.

[Mr. Green]

Actually I'm an optimist. If you have the kind of money that you FIRE'd and then things went to hell, you'd likely be better off than 99% of all the other people out there. You A) had more money so it would take longer for the same dire straits to apply to you, and B) understand Mustachian principles that will make it far more likely that you could adapt and survive in whatever came about.

I'm simply don't believe that if I had a million bucks and lost it all due to an equities collapse, that our financial system would still be intact. The domino effect of such an occurrence certainly makes a total collapse a possibility.

To me the idea of losing it all post-FIRE is a waste of brain power  because if you're better off than everyone else, and you know the system will do everything it can to pull out of a financial collapse, it stands to reason that you'd be one of the last people to actually lose it all. And if you still lost it all, it stands to reason there was absolutely nothing you could have done about it that would have changed anything. Hence my position that it's not worth thinking about.

Unfortunately, Bruce Willis was the only male actor in the list I liked enough to use as an avatar. Fixed!

[NearlyThere]

Wouldn't it be nice to work a little bit in a market downturn and pick up some nice cheap stocks?

[Shane]

Wouldn't it be nice to work a little bit in a market downturn and pick up some nice cheap stocks?

That's our plan.

[Exflyboy]

Yeah then I will get a little p.t. job and.. wait a minute....:)

[Livewell]

Our big meltdown will be inflation driven this time with the many trillions pumped into the banking system year after year.

I wouldn't worry too much about inflation.  Why?  Because we know how to stamp it out, see Paul Volker.   The issue with our current situation remains low or negative (in EU) interest rates and the Fed being constrained by the lower bound.  Doesn't mean we won't have a period of inflation down the road, but IMO it will be some time before we see it and the Fed has the tools to stamp it out quickly.

[Bateaux]

Just one of the many factors keeping me in OMY mode.  Planning 3% withdrawl rate.   Right now that is 40k.  Want a little more comfort than 40k provides so we'll keep going OMY recurring till it hits 60k @ 3% or March 2018.  March 2018 is a hard FIRE date.
Now, also waiting on 2016 election.  Since I want to use ACA and subsidy, I'm waiting out changes while I enjoy a Cadillac plan at work.
Possible Market pullback.  We're due for a 20% or more correction by 2017 in my opinion.   Fed will raise rates like once or twice this year, they won't be in 2016.  So we may end 2015 down, gain it all back 2016 and then capitulate in 2017.  That means recovery maybe for 2018-2019.  With the buying power my wife and I have now we could see big gains by OMY till 2018.  All speculation on my part, but, just don't see now as the time to quit and start drawing down.

[Mr. Green]

Just one of the many factors keeping me in OMY mode.  Planning 3% withdrawl rate.   Right now that is 40k.  Want a little more comfort than 40k provides so we'll keep going OMY recurring till it hits 60k @ 3% or March 2018.  March 2018 is a hard FIRE date.
Now, also waiting on 2016 election.  Since I want to use ACA and subsidy, I'm waiting out changes while I enjoy a Cadillac plan at work.
Possible Market pullback.  We're due for a 20% or more correction by 2017 in my opinion.   Fed will raise rates like once or twice this year, they won't be in 2016.  So we may end 2015 down, gain it all back 2016 and then capitulate in 2017.  That means recovery maybe for 2018-2019.  With the buying power my wife and I have now we could see big gains by OMY till 2018.  All speculation on my part, but, just don't see now as the time to quit and start drawing down.

Kinda in the same boat. FIRE in March 2017 and I really want to see a correction before then. Would make me feel better knowing I wasn't likely FIRE'ing only to experience the correction just after. Of course it wouldn't matter if it popped right back but it would be nice to buy some more equities at a better price.

[Exflyboy]

As we have already shown in this thread, even retiring at the very worse point just before the Great Depression meant you had to have enough cash/bonds to survive 7 years before the market popped back up to pre-depression levels and that's accounting for inflation.

Assuming inflation is not going to go non-linear, a 3% WR would be plenty safe enough even if there was a big pull back the day after you quit.

[NorCal]

There's actually a very simple solution to this problem.  One of my business school professors wrote a book on the topic called "Asset Dedication".  I recommend it.

If you know that you're going to spend $20K/yr in retirement, buy $20K of bonds directly that mature the first year of your retirement, and $20K that mature the year after.  Use this as your bond allocation instead of bond funds.  This will remove the market risk from your withdrawal plan and your bond allocation.

You can keep 3-5 years expenses covered this way, and add to your funded bond years based on desired asset allocation and market valuation (not timing).  This way you can avoid drawing down your equities during a serious downturn.

[brooklynguy]

If you know that you're going to spend $20K/yr in retirement, buy $20K of bonds directly that mature the first year of your retirement, and $20K that mature the year after.  Use this as your bond allocation instead of bond funds.  This will remove the market risk from your withdrawal plan and your bond allocation.

You can keep 3-5 years expenses covered this way, and add to your funded bond years based on desired asset allocation and market valuation (not timing).  This way you can avoid drawing down your equities during a serious downturn.

This protects you against the risk of a sharp downturn in the years immediately after commencing retirement, but not against the historically-more-detrimental risk of a prolonged period of subpar market performance and/or high inflation (assuming you buy fixed rate bonds) in the years after commencing FIRE.

[NorCal]

If you know that you're going to spend $20K/yr in retirement, buy $20K of bonds directly that mature the first year of your retirement, and $20K that mature the year after.  Use this as your bond allocation instead of bond funds.  This will remove the market risk from your withdrawal plan and your bond allocation.

You can keep 3-5 years expenses covered this way, and add to your funded bond years based on desired asset allocation and market valuation (not timing).  This way you can avoid drawing down your equities during a serious downturn.

This protects you against the risk of a sharp downturn in the years immediately after commencing retirement, but not against the historically-more-detrimental risk of a prolonged period of subpar market performance and/or high inflation (assuming you buy fixed rate bonds) in the years after commencing FIRE.

True.  But the sharp downturns are worth protecting against, and are much more common.

Inflation risk can be hedged (but not totally eliminated) with a real estate portion of your portfolio.  You can also manage some inflation risk with creative thinking on the expense side like solar panels and owning your own home.  The real risk here is inflation in categories where you can't necessarily control spend, like health care.

If you're truly worried about long periods of market under-performance, annuities might be the way to go.  And I hate saying this because I really really dislike how annuities are priced and sold.

[brooklynguy]

True.  But the sharp downturns are worth protecting against, and are much more common.

The point is that taking an approach that is too custom-tailored against one specific risk could leave you exposed to other (perhaps equally likely and equally detrimental) risks.

Personally, I plan to maintain a constant near-100% equity allocation and carry a long-dated mortgage to maturity, which (when combined with a dose of flexibility in spending requirements and income-generating capability) should provide good protection against most of the foreseeable risks.