Author Topic: When did you start building your sequence of return risk stash?  (Read 4825 times)

Dusty Dog Ranch

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If you put together a CD ladder or similar to fund the first 3-5 years of FIRE, how far in advance did you start setting that up?


Background info: We are about 4 years out from FIRE and debating whether it makes sense to sell some of our taxable equities and put the money into a 3% 5 year CD. Possibly relevant: We wouldn't have to pay any cap gains. Our target AA is 70% equities and we are at 73% now. We have 1 year of expenses in CDs currently (our EF), so any CD we set up now would fund part of year 2 of FIRE.

Interested to hear how others approached this.


ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #1 on: April 30, 2019, 07:08:15 AM »
We are planning to do the bond tent/reverse equity glidepath strategy. We are about a year out now and have been upping our bonds for the past year. We have been increasing bonds in our tax-advantaged accounts by selling stocks to buy bonds as well as increasing on-going contributions in those accounts to be more bond heavy.

No plans for CDs but I wouldn’t be surprised if we decided to hoard some cash right before actually pulling the trigger. We haven’t thought that far ahead in that detail yet.

6-Saturdays

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Re: When did you start building your sequence of return risk stash?
« Reply #2 on: April 30, 2019, 12:17:19 PM »
I think we started approx. 30 months out from our target retirement date of December of this year, but will ramp up the cash stash starting this next month as we transition to buying more CDs and not putting as much into our taxable account for stocks. Our theory was to try to maximize time in market for money and then "back-fill" the cash stash at the end. Our goal is to have 3 years of lean-ish spending in CDs, and know we can go leaner if needed due to market returns. 

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cangelosibrown

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Re: When did you start building your sequence of return risk stash?
« Reply #3 on: April 30, 2019, 12:31:11 PM »
Here's how I'm thinking about this:
the CD ladder (or whatever similar thing) is to insure against a big market drop in the first few years retired, but starting one a few years early would actually be insuring against a big market drop now (before I retire). Realistically though, I already have insurance against a big market drop  -- in the form of working longer if it happens. Which I would almost certainly do out of caution regardless of how many years of bond ladders/cash I have.

ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #4 on: April 30, 2019, 12:36:49 PM »
Here's how I'm thinking about this:
the CD ladder (or whatever similar thing) is to insure against a big market drop in the first few years retired, but starting one a few years early would actually be insuring against a big market drop now (before I retire). Realistically though, I already have insurance against a big market drop  -- in the form of working longer if it happens. Which I would almost certainly do out of caution regardless of how many years of bond ladders/cash I have.
I’ve seen a few papers that suggest that hedging against a big market drop right before retirement is also valuable as the first years after retirement. I have yet to see anyone do any real simulations of what that glide path before retirement should look like. The focus seems to be after retirement. So we just took a stab and decided on our own slope.

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

It probably depends on your risk tolerance.
How miluch of a bummer would it be to work a couple of extra years when you have your heart set on quitting in 20xx? You might be okay with that or it might be a huge disappointment. If the latter, I’d recommend ramping up those bonds a few years before FIRE.

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Re: When did you start building your sequence of return risk stash?
« Reply #5 on: April 30, 2019, 12:43:12 PM »
Several good replies already.

In my view, if one reaches a 100% historically safe WR for one's time horizon, then there is no need to insure against SORR.  By definition, one can already survive the historical worst case set of bad starting years (usually viewed as the Great Depression or the 1970's stagflation) so there is no need to do anything additional.

What I actually do is slightly more nuanced, but essentially every six months I withdraw six months of spending from my portfolio and then rebalance the remaining portfolio to my AA.  I set my AA based on historical maximum portfolio survivability over my planning horizon.  I set my planning horizon based on my life expectancy given my current age.

cangelosibrown

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Re: When did you start building your sequence of return risk stash?
« Reply #6 on: April 30, 2019, 12:49:35 PM »
It probably depends on your risk tolerance.
How much of a bummer would it be to work a couple of extra years when you have your heart set on quitting in 20xx? You might be okay with that or it might be a huge disappointment. If the latter, I’d recommend ramping up those bonds a few years before FIRE.

I agree, but I think of it is more of a function of riskstrategy than risk tolerance. One way to hedge risk is by investment strategy, one is by being flexible with your retirement age, and/or being willing to return to work. The latter is something that isn't as available to traditional retirees (and thus there's not really any studies or literature out there on it), but is very much available to someone planning to retire at 30-something.

Not that I want to have to return to work, but being able to means I can take much greater risk with my investments and with my withdrawal rate, while keeping the same overall risk tolerance. This means that I can retire earlier than I otherwise would, so my total expected number of years working decreases, despite the chance of having to return to work increasing.

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #7 on: April 30, 2019, 05:15:58 PM »
I’ve seen a few papers that suggest that hedging against a big market drop right before retirement is also valuable as the first years after retirement. I have yet to see anyone do any real simulations of what that glide path before retirement should look like. The focus seems to be after retirement. So we just took a stab and decided on our own slope.

From what I've seen, the rising equity glide path should start at least several years before retiring, however, I didn't start reducing my equities until a little over a year and a half in advance of my projected FIRE date.  I had been at 80% equities and am down to about 55% equities now with about 11 months to go.  I plan to reduce further.  In my case, I only need to live on the stash alone for about 10 years before SS kicks in.

ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #8 on: April 30, 2019, 07:50:38 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

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Re: When did you start building your sequence of return risk stash?
« Reply #9 on: April 30, 2019, 08:18:05 PM »
We are using AA, rather than a CD ladder. This is in part because we plan to do a lot of slow travel, with weeks at a time with little to no internet, so we don't want to have CD maturity dates and best rate hunting to be hanging over us.

We just finally set a joint AA about a month ago, as DH got a bit antsy about the market and was finally willing to talk about AA and admit that 90/5/5 was rather on the aggressive side. At the same time, we decided that we would rebalance every six months, when RSUs vest.

We are 1 to 5 years from retirement, depending on when you ask and what happens between now and then.

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #10 on: April 30, 2019, 08:26:05 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

SwordGuy

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Re: When did you start building your sequence of return risk stash?
« Reply #11 on: April 30, 2019, 08:42:01 PM »
We sold our old, fully-paid for house the month we retired.   Solved that problem.

Had originally intended to pay off the mortgage on our new house with that money, but as we learned more, we decided against it.  Kept our 2.75% fixed rate mortgage instead.

ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #12 on: April 30, 2019, 09:28:49 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

markbike528CBX

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Re: When did you start building your sequence of return risk stash?
« Reply #13 on: May 01, 2019, 12:38:20 AM »
I'm FIREd. I've decided to take ~4% withdrawals, anything not spent is reserved in cash-like forms.
I had been so focused on stock funds (401k) and mortgage pay down, I just forgot about SORR.
I did buy gold rounds/1oz bars for an "emergency fund" when it was 1100/oz, but that is it. 

Since my spend is pretty close to 3.0% WR, I think that is also a SORR reducer.

Edit: more accurate WR.
« Last Edit: May 01, 2019, 12:42:35 AM by markbike528CBX »

Mr. Green

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Re: When did you start building your sequence of return risk stash?
« Reply #14 on: May 01, 2019, 03:26:48 PM »
Just make sure CD ladder reflects your asset allocation appropriately. If you want to be 80/20 and also keep a 5 year CD ladder then that means your portfolio is 100% stocks and your entire fixed income portion (20%) is in the CD ladder. If you keep an 80/20 portfolio AND a big CD ladder then you're skewed too conservative for an overall 80/20. Adjust that for whatever AA you keep.

A bond tent is a double edged sword. Being more conservative right after retirement could just as easily lessen the impact of a big run-up that would have padded the portfolio for poor performing years later in the retirement cycle. I'd rather be invested more aggressively early on and take that sequence of returns risk while young and recently out of the workforce and able to return if desired than miss the early run up in retirement and potentially face a shortage at the 20 or 30 year mark if that scenario would have been the one to develop.
« Last Edit: May 01, 2019, 03:29:46 PM by Mr. Green »

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #15 on: May 01, 2019, 03:58:56 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.

Mr. Green

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Re: When did you start building your sequence of return risk stash?
« Reply #16 on: May 01, 2019, 07:39:38 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.

markbike528CBX

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Re: When did you start building your sequence of return risk stash?
« Reply #17 on: May 01, 2019, 07:56:08 PM »
...... I'd rather be invested more aggressively early on and take that sequence of returns risk while young and recently out of the workforce and able to return and able to return if desired than miss the early run up in retirement and potentially face a shortage at the 20 or 30 year mark if that scenario would have been the one to develop.

But Mr. Green, didn't you try a job just out of FIRE, and found issues?   My memory may be faulty.

ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #18 on: May 01, 2019, 08:02:08 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.
I’m interested to hear more about what flip side risks you are referring to. It seems to me that the analysis done in the links above point to not quite a free lunch, but a pretty great hedge with minimal downside risk. Yes, I am giving up some growth in the short term, but for now my savings rate is still high which is powerful, and the loss of some growth in the first decade of FIRE seems a reasonable trade off for significant reducing my chance of catastrophic portfolio failure early on.

But I am all ears. I learn something new here every day.

I am especially interested in the intersection of a bond tent and holding a mortgage because that is one area I have not completely sorted out yet.

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #19 on: May 02, 2019, 05:06:27 AM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.

Stash is more likely to run out well after the SRR in early retirement, but the SRR is what can set you on that long term course, so it's actually that "down the road" that you are most protecting against by using the rising equity glide path.

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #20 on: May 02, 2019, 05:11:22 AM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.
I’m interested to hear more about what flip side risks you are referring to. It seems to me that the analysis done in the links above point to not quite a free lunch, but a pretty great hedge with minimal downside risk. Yes, I am giving up some growth in the short term, but for now my savings rate is still high which is powerful, and the loss of some growth in the first decade of FIRE seems a reasonable trade off for significant reducing my chance of catastrophic portfolio failure early on.

You "might" be, and most likely will be, giving up some growth in the short term, but the whole idea of the rising equity glide path is to protect against worst case scenarios so that you're more likely to come out of those early years of retirement with a bigger stash than you would have if you were to experience a poor sequence of returns, such as some big losses early in retirement that cut heavily into your stash and result in your stash running out down the road while you still need it.
« Last Edit: May 02, 2019, 05:13:37 AM by FIREstache »

Financial.Velociraptor

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Re: When did you start building your sequence of return risk stash?
« Reply #21 on: May 02, 2019, 08:11:27 AM »
I am 6.5 years into FIRE.  I never built a SORR sub-stache.  My philosophy is a little different than most and is sometimes taboo around these parts.  I have a substantial portion of the stache that is dedicated to using equities as a jumping off point to write (sell) options for income.  This strategy provides (usually) superior upfront income in exchange for giving up long term upside.  Option premiums are more plump when markets are declining and this provides something of a hedge.

Downsides are time requirement and tax inefficiency.

dude

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Re: When did you start building your sequence of return risk stash?
« Reply #22 on: May 02, 2019, 08:47:00 AM »
Regarding CD ladders -- right now, I don't think the returns are worth locking down your money and paying the penalty for breaking the terms if you have to. Vanguard's Prime Money Market Fund is returning 2.44 - 2.48%, which is the rate I've seen on CDs out to two years right now,  and is totally liquid. That's where I'm parking my cash reserves for the time being.

https://investor.vanguard.com/mutual-funds/money-markets-vs-savings-account-rates

Edited to add:  I'm retiring this month, FYI. I'm currently at 56/44 stocks/bonds allocation, with the intention of ratcheting up to 60/40, or possibly 65/45 after the first 3-5 years of retirement. But I also have a pension that will cover all non-discretionary spending.

Also, re: 60/40 -- I read how this classic allocation is "dead," and I've got to call bullshit on it. Not only did the Trinity Study confirm Bengen's analysis with a 60/40 allocation for a 30-year retirement period, but John Greaney's "real life retiree returns" have also convinced me of its utility. See his most recent update, including how it would have fared vis-ŕ-vis other allocations for a Y2K retiree (at the bottom of the page) here:

http://www.retireearlyhomepage.com/reallife19.html

« Last Edit: May 02, 2019, 08:57:44 AM by dude »

ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #23 on: May 02, 2019, 08:55:27 AM »
I am 6.5 years into FIRE.  I never built a SORR sub-stache.  My philosophy is a little different than most and is sometimes taboo around these parts.  I have a substantial portion of the stache that is dedicated to using equities as a jumping off point to write (sell) options for income.  This strategy provides (usually) superior upfront income in exchange for giving up long term upside.  Option premiums are more plump when markets are declining and this provides something of a hedge.

Downsides are time requirement and tax inefficiency.
In fairness though, you picked a pretty fabulous time to spend the first 6.5 years of your retirement, market-wise. Things could always go south next year or the following,  it you are well into the first critical decade without a massive downturn. Quite the opposite in fact. The bond tent is designed to protect against the scenario that you have been lucky enough not to experience.

ysette9

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Re: When did you start building your sequence of return risk stash?
« Reply #24 on: May 02, 2019, 08:56:23 AM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.
I’m interested to hear more about what flip side risks you are referring to. It seems to me that the analysis done in the links above point to not quite a free lunch, but a pretty great hedge with minimal downside risk. Yes, I am giving up some growth in the short term, but for now my savings rate is still high which is powerful, and the loss of some growth in the first decade of FIRE seems a reasonable trade off for significant reducing my chance of catastrophic portfolio failure early on.

You "might" be, and most likely will be, giving up some growth in the short term, but the whole idea of the rising equity glide path is to protect against worst case scenarios so that you're more likely to come out of those early years of retirement with a bigger stash than you would have if you were to experience a poor sequence of returns, such as some big losses early in retirement that cut heavily into your stash and result in your stash running out down the road while you still need it.
I feel like we are saying the same thing but in slightly different ways. As an old boss of mine used to say, we are “in violent agreement”.

Mr. Green

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Re: When did you start building your sequence of return risk stash?
« Reply #25 on: May 02, 2019, 07:09:07 PM »
...... I'd rather be invested more aggressively early on and take that sequence of returns risk while young and recently out of the workforce and able to return and able to return if desired than miss the early run up in retirement and potentially face a shortage at the 20 or 30 year mark if that scenario would have been the one to develop.

But Mr. Green, didn't you try a job just out of FIRE, and found issues?   My memory may be faulty.
I took a part-time grocery clerk job for two months to learn what the grocery industry was like but that chain's particular model relied more on full-time stock clerks so it wasn't a good fit. I had a lot of fun though and would have done the job for free to learn what I learned. A lot more makes sense to me know when I walk into a store as a customer.

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Re: When did you start building your sequence of return risk stash?
« Reply #26 on: May 02, 2019, 07:19:55 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.
I’m interested to hear more about what flip side risks you are referring to. It seems to me that the analysis done in the links above point to not quite a free lunch, but a pretty great hedge with minimal downside risk. Yes, I am giving up some growth in the short term, but for now my savings rate is still high which is powerful, and the loss of some growth in the first decade of FIRE seems a reasonable trade off for significant reducing my chance of catastrophic portfolio failure early on.

But I am all ears. I learn something new here every day.

I am especially interested in the intersection of a bond tent and holding a mortgage because that is one area I have not completely sorted out yet.
Think about a 30 year retirement period for someone like myself in their mid-30s. That's 30 years of retirement before any social security kicks in. In any given 30-year scenario a number of things can happen. When we talk about sequence of returns risk, almost everyone is talking about the first 10 years after retirement that are negative enough to cause a portfolio to fail long term. However, math says there is also a scenario out there where you've already been retired 10 or 20 years and then suddenly there's a bad period of performance. Maybe your stash is already drawn down a little bit because you've been drawing on it. Suddenly you're in the danger zone. If you used a rising equity glide path in the early years you could have muted gains that would have meant a higher starting balance and maybe staved off a bad situation. No one knows what sequence of returns we'll be dealt.

I'd rather be aggressive while young and flexible, knowing I can return to work early in the process, than ride the conservative train and add the risk of having missed gains causing a portfolio failure 20 years in, after I'm so used to being retired that I refuse to go back to work, or I'm sk used to my standard of living that cuts I once thought I could make now feel very painful. This scenario exists historically. It isn't a pie in the sky thought. Of course your individual performance will depend on whether you religiously pull out 4%, etc. but if you look at cfiresim or other chart you can find examples where someone using a rising equity glidepath will have a late portfolio failure and someone whom was 80/20 or 90/10 does not.

I don't think it's a likely scenario, but it is one that deserves consideration if you're considering a rising equity glidepath. That's just my opinion of course.
« Last Edit: May 02, 2019, 07:22:49 PM by Mr. Green »

Mr. Green

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Re: When did you start building your sequence of return risk stash?
« Reply #27 on: May 02, 2019, 07:26:34 PM »
To put it simply, giving up some risk (gains, to avoid losses) early in retirement to hedge against a big drop adds risk latter when those same gains you gave up, compounded over time, may have protected you against a big drop then. It's all the same equation.

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Re: When did you start building your sequence of return risk stash?
« Reply #28 on: May 03, 2019, 10:16:57 AM »
Lots of good replies here. I am in the camp of hedging with cash. I am nearly 100% in equities and have always kept an emergency fund. I really liked what Mr. Green said about AA. My cash amount is exactly why I don't carry much in bonds. I use Ally which keeps the cash liquid and provides a decent rate. I am slowly starting to ramp up the reserve now that I'm just over 2 years away from FIRE. I am still debating whether or not to shift some of my 401K or IRA $ over to bonds. I did enjoy reading about the strategies here.

Dusty Dog Ranch

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Re: When did you start building your sequence of return risk stash?
« Reply #29 on: May 03, 2019, 10:22:48 AM »
Thanks for all the responses to my post. The discussion is really interesting and I'm looking forward to digging into the links provided.

We are in our late 40's, so will be in our early 50's by the time we FIRE. We both have (small) gov't pensions that start at 65, which I count as bonds in our AA. How much should these factors influence our approach to SORR do you think?

@markbike528CBX, hello from the same side of the Cascade curtain. Although things are mostly green and yellow right now, not brown. ;-)

bacchi

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Re: When did you start building your sequence of return risk stash?
« Reply #30 on: May 03, 2019, 10:25:19 AM »
I started making a bond tent when I was FI and shifted to part-time work. If the market hit the fan while I was buying bonds, I would've kept working.

In other words, I worked OMY more-or-less to achieve a safer SWR.

markbike528CBX

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Re: When did you start building your sequence of return risk stash?
« Reply #31 on: May 03, 2019, 12:33:30 PM »
Thanks for all the responses to my post. The discussion is really interesting and I'm looking forward to digging into the links provided.

We are in our late 40's, so will be in our early 50's by the time we FIRE. We both have (small) gov't pensions that start at 65, which I count as bonds in our AA. How much should these factors influence our approach to SORR do you think?

@markbike528CBX, hello from the same side of the Cascade curtain. Although things are mostly green and yellow right now, not brown. ;-)
Dusty Dog Ranch, Just remember that green means more fire fuel (sorry, I've been reading zombie apocalypse memes today).

SORR is usually a big issue with first years of FIRE (for you 50-59.5), not really with 15 years in.   SS and pensions are intended as safety nets and probably can be discounted by 50%.   
I discount my SS by 25% a) that's what the SS.gov site says b) why not? 
I ignore my small pension (20K@65yars) , because it it not inflation adjusted, and I'm a long way from 65.

Meetup for the Everbrown side sometime?
Your phrase Cascade curtain reminded me of my intro to my job at the time. The security briefing had a map and "you are here and this---pointing to west of the Cascades ----is the left(ist) part of the state".
I had lived in Seattle for the previous 3 years, so I understood his meaning.



Dusty Dog Ranch

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Re: When did you start building your sequence of return risk stash?
« Reply #32 on: May 03, 2019, 01:37:27 PM »
@markbike528CBX, no worries, fire mitigation is my day job. My neck of the woods is actually in drought right now so it's a double-edged sword- less fine fuels but our big fuels are already dry.

Good point about the timeframe for SORR. Luckily we do have inflation adjusted pensions so I am reasonably confident in them.

We lived in Seattle nearly 20 years and have been here close to 10. I feel 'fluent' in both 'sides'. Sadly, both tend to talk past each other and have some pretty big misconceptions about the other.

The everbrown chunk is pretty large...wonder how many of us MMMers are here and in what sections? We're in north central.

markbike528CBX

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Re: When did you start building your sequence of return risk stash?
« Reply #33 on: May 03, 2019, 01:45:05 PM »
@markbike528CBX, no worries, fire mitigation is my day job. My neck of the woods is actually in drought right now so it's a double-edged sword- less fine fuels but our big fuels are already dry.

Good point about the timeframe for SORR. Luckily we do have inflation adjusted pensions so I am reasonably confident in them.

We lived in Seattle nearly 20 years and have been here close to 10. I feel 'fluent' in both 'sides'. Sadly, both tend to talk past each other and have some pretty big misconceptions about the other.

The everbrown chunk is pretty large...wonder how many of us MMMers are here and in what sections? We're in north central.

We're in Tri-Cities.   Maybe meetup in Moses Lake?

Dusty Dog Ranch

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Re: When did you start building your sequence of return risk stash?
« Reply #34 on: May 03, 2019, 02:04:15 PM »

We're in Tri-Cities.   Maybe meetup in Moses Lake?

Ellensburg has better brewpubs. :-)  I'll keep it in mind for after fire season; until then I will have less free time than usual. But I will do another post to see who else is on our side of the hills.

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #35 on: May 03, 2019, 04:40:10 PM »
SS and pensions are intended as safety nets and probably can be discounted by 50%.

Sounds a little extreme to me.  For SS, I assume I'll get 100% of the promised benefit that I paid for over my working career.  If I was under 50, I might be more concerned, but I might be collecting in about 10 years.

markbike528CBX

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Re: When did you start building your sequence of return risk stash?
« Reply #36 on: May 03, 2019, 07:58:57 PM »
FIREstache, Dusty Dog Ranch  IS under 50.

I actually ignore all SS/pensions for 4% rule type calculations. 

Makes it simpler and it has not delayed FIRE for me :-)

I have done a FV future value calculation in a spreadsheet, just for the fun of it.  Increases margin of safety for me.

Adam Zapple

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Re: When did you start building your sequence of return risk stash?
« Reply #37 on: May 04, 2019, 12:27:18 PM »
I am 6.5 years into FIRE.  I never built a SORR sub-stache.  My philosophy is a little different than most and is sometimes taboo around these parts.  I have a substantial portion of the stache that is dedicated to using equities as a jumping off point to write (sell) options for income.  This strategy provides (usually) superior upfront income in exchange for giving up long term upside.  Option premiums are more plump when markets are declining and this provides something of a hedge.

Downsides are time requirement and tax inefficiency.

Can you point to some reading on this topic?

FIREstache

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Re: When did you start building your sequence of return risk stash?
« Reply #38 on: May 04, 2019, 02:49:22 PM »
I’m curious what specifically you have seen on the subject of how many years before FIRE to start increasing bonds because I have never seen anything concrete. I think it was Kitces who had made some comment in one of his articles about how future work for him was to investigate how early to start that.

We started ours about a year or so ago, when I first read about this concept. We will probably hit our number in another year so we are now rethinking how fast to increase the bonds. Initially our plan was going to take another two years to get to our target of 40% bonds.

I'll link to a couple sites for articles from Wade Pfau and Michael Kitces.  They show the big decrease in equities starting 10 to 20 years out.  Kitces states, "getting more conservative in the decade leading up to retirement..."

https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Thank you for the reminder. I did read that and had forgotten. I had dismissed it because “getting more conservative in the 10-20 years before retirement” doesn’t make a lot of sense to someone who is planning for a 15 or so year-long career. :)

That's true.  As long as you move to a more conservative asset allocation before a big market drop you should be ok.  I've already moved from 80% equities to 55% equities within the last year and would like to get that down to 40%, which is low as I can go without triggering capital gains taxes, and I have one year to go to FIRE.   Then I'll use the rising equity glide path after retirement to reduce the sequence of returns risk and provide a higher overall success rate with my SWR, per the info in the webpages that I linked to earlier.
Just understand that you mitigate sequence of returns risk now but you're potentially creating additional risk down the road. Probably not too important if you're not in your 30s or 40s. I point this out to people to make sure they've considered the flip side of mitigating risk now.
I’m interested to hear more about what flip side risks you are referring to. It seems to me that the analysis done in the links above point to not quite a free lunch, but a pretty great hedge with minimal downside risk. Yes, I am giving up some growth in the short term, but for now my savings rate is still high which is powerful, and the loss of some growth in the first decade of FIRE seems a reasonable trade off for significant reducing my chance of catastrophic portfolio failure early on.

You "might" be, and most likely will be, giving up some growth in the short term, but the whole idea of the rising equity glide path is to protect against worst case scenarios so that you're more likely to come out of those early years of retirement with a bigger stash than you would have if you were to experience a poor sequence of returns, such as some big losses early in retirement that cut heavily into your stash and result in your stash running out down the road while you still need it.
I feel like we are saying the same thing but in slightly different ways. As an old boss of mine used to say, we are “in violent agreement”.

I'm about a year out if all goes well.  I just reduced my equities further to about 43% of my stash.  I can't tighten much more without realizing capital gains.

evanc

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Re: When did you start building your sequence of return risk stash?
« Reply #39 on: September 09, 2020, 05:30:39 PM »
Thanks for all the responses to my post. The discussion is really interesting and I'm looking forward to digging into the links provided.

We are in our late 40's, so will be in our early 50's by the time we FIRE. We both have (small) gov't pensions that start at 65, which I count as bonds in our AA. How much should these factors influence our approach to SORR do you think?

@markbike528CBX, hello from the same side of the Cascade curtain. Although things are mostly green and yellow right now, not brown. ;-)

Sorry to resurrect an older thread, but I don’t think there was much in the way of an answer to @Dusty Dog Ranch ’s concern, and his situation seems to be fairly common for ERs, at least those who have future pension (or equivalent) income.

All due respect to Mr.Green, the above scenario may be one where there’s a strong argument for the equity glide path. It depends on your priorities. You might be fine returning to work. I abhor the very thought :)

Quote
I'd rather be aggressive while young and flexible, knowing I can return to work early in the process, than ride the conservative train and add the risk of having missed gains causing a portfolio failure 20 years in

For many ERs, they have some back end protection (pension, SS, etc.), so they are most concerned about SORR in the short term (vis-ŕ-vis the long term), because they are effectively insured by the future income sources outside of their portfolio, assuming those funds were not already calculated in their SWR. As a result, it may be perfectly rational for such an investor to decrease equity exposure leading up to/during the beginning of drawdown.

It should also be pointed out that historically (per Pfau et al), retirees tend to spend LESS once they are 20+ years down the road, thereby effectively mitigating some of the long term SORR.
« Last Edit: September 09, 2020, 05:32:13 PM by evanc »

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Re: When did you start building your sequence of return risk stash?
« Reply #40 on: September 10, 2020, 12:14:55 PM »
Truth be told, when reading about SORR, I really think Early Retirement Extreme's 38 part series really does look at quite a few angles. Trinity Study, references to Kitces, Bogglehead theories, etc. The proof is in the pudding; he's pulling data from 1871 to 2016-7 for most of his work, best or worst case. I don't see many other sites, or people here quoting much beyond "well, I see this one person it worked out for, I'll do what they did" sort of stuff.

I'm a big fan of workable data. If he says 60/40 bonds at the time of pulling the plug, so be it, I can get behind that. Also the why, the pitfalls, mortgage vs bond planning, the rest of it. Better yet, I completely agree with 3.5, or even better 3.25%, because the numbers look a lot more secure. Not that 4% can't be done, or that it won't take me that much longer, but a lot of the data shown, shows greater success.

It took me quite a bit of time to read the whole series, and I refer to it often. Yes there's other work out there, but how often do they overtly challenge each other's thoughts like this? Not saying it's perfect, but I really do respect the style in which it was presented, in the fact it gives you critical thoughts on things like the almighty Trinity Study, among others. If it doesn't answer some, if not start the investigation for the entirety of the question, and frankly whole discussion above, I don't know what does.

Dicey

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Re: When did you start building your sequence of return risk stash?
« Reply #41 on: September 14, 2020, 02:01:48 PM »
PTF. I really need to think about this more. DH is finally making retirement noises. Thank goodness!

Trudie

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Re: When did you start building your sequence of return risk stash?
« Reply #42 on: September 15, 2020, 06:22:38 PM »
We live on 3-3.5 WR and have a paid off house and 5 years of expenses in cash.  The rest is heavily in equities.  I view our home equity and cash as the bonds in our portfolio.  They have also provided peace of mind to be able to sleep at night during the pandemic economic collapse and potential global unrest during the Trump era.  Since all of the above are happening early in our retirement I felt a need for more of a buffer.

The cash used to be in CDs and is now just in the money market.  It’s drawing the same in the money market that it would in a one year CD.

Drawing down cash for living expenses has also allowed me to do Roth conversions and eased our minds regarding shelling out for health care.

When the market tanks and we’re further along on our five year glide path, I will likely invest more in the market.  But this is working.

Retire-Canada

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Re: When did you start building your sequence of return risk stash?
« Reply #43 on: September 16, 2020, 02:46:38 PM »
Interested to hear how others approached this.

I went from 100% stocks to 100% stocks + ~5 year's of spending in bonds about 6 months out from my FIRE date. Basically until I was committed to a FIRE date I had no need for bonds. As soon as I was committed to a FIRE date I wanted that security in place. Mentally bonds made no sense to me during accumulation and then as I got close to FIRE buying a big chunk of bonds made perfect sense. I won't buy more bonds and I won't set them as a fixed % of my portfolio. I'll just keep that ~5 year's of spending in place regardless if my portfolio goes up or down over time.