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If your friend is worried about sequence risk, he can adjust the idea you described somewhat. Id suggest if he wants to go this conservative, he only sell enough to buy sufficient CD's for his cash needs for the first years of his requirement. Leave the rest of his stock in markets.
The sequence risk in my view if made up of two parts. There is a risk the market has a sharp downturn or a no growth period that generates much less than the 4% safe withdrawal amount. He protects against this risk by having his funds in essentially a low return low risk and low volatility ladder of CD's. So he is not drawing funds to live on out of market invested funds which in these early critical years can fail only if during the first 15 years the return is low single digits.(See mathjack's great analysis and data in an earlier post that establishes this). So he protects some of his funds from being hit twice, once by the market having low or negative turns but also by not withdrawing funds from those in the market. In my view it is the combined hit of the market action early in the retirement withdrawal sequence AND withdrawing his needed funds against that already stressed balance.
I would consider other options to address this risk. But if he feels safe this way, have at it, I think the risk of having all funds out of the market is as great as his sequence rate is but it is just my gut feel no analysis to back it up.
The perceived Pain & Fear of loss often outstrips the Exuberance of gains. It is easy to talk about the volatility of the market when the last 9 years have provided such great gains. I have more than quadrupled my savings over the last 9 years, with about 20% of it being influx of principal.
The OPs friend is trying to time the market. Good luck. As mentioned by many, studies have shown that consist cost averaging accumulation has always beat timing. BUT this time, its different, right?
Like many, in both 2001 & 2008 I saw the “ loss “ of about 35% each time. I had not been any kind of saver or investor besides my 401k. I had been using my house purchase as a fixer upper to be the RE portion of my start.
At the time it seemed like a huge amount. In 2001, I had less than $150k invested. And like many, I sold some during the “bloodbath”, like Qualcomm, purchased at around $100, rode it gloriously to about $200 and sold it on the way down at about $30. Other techs that I bought were not as dramatic losses, Cisco, Intel, AMD, Apple & Microsoft. It seemed like all was lost. Until I realized that I was only looking at the losses as viewed from the highs. When I viewed the overall loss from what I had invested, well, I actually had still gained! It was hard to quantify, but when all was said and done, what I had left over was more than I had ever put in. The PAPER loss was what depressed me.
One of the reasons for a late start in the accumulation phase was the previous REAL loss in the ’90s of what turned out to be retention of much debt from not LBYM and costs of fixing and selling that first house after a divorce, but where my 401k got split in half, and the ex saw most all of the little appreciation of the house. After that my NW was about zero. So what seemed like a solid plan, really didn’t pan out. So when I still had postive NW after the 2001 bear, I realized, I wasn’t a real smart individual stock picker, but at keast Instill HAD more NW and decided if I stuck with funds, I’d let the experts make the decisions.
So when 2008 happened, I kept my cool. Well, mostly. Once again, same thing. From the high, the loss was tremendous. But compared to principal, not so bad. In fact, still better than if I had just put it in CDs or Ts. Plus Because I still had some in MM in the 401k, I was able to buyin after the down turn and keep doing the time averaged buying. In early 2009, I decided to track in Excel both my principal influx and gross values. For everything.
If I had just used CDs for the last 9 years, my total egg would be 2/3s less than what it is. The issue with this is the previously mentioned “once you’ve “won”, why continue to play?” DW feels that way. She knows nothing about investing but thinks I am crazy to keep anything in equities because we “might lose it all”, even after acknowledging that we are where we are because of the same equities.
During the “decumulation” phase that fear is even greater for those that can’t grasp the concepts behind the need for real growth. Enough is enough, so why go through it? THIS TIME it is different. Well, in a way, it is, because this time you ARE living off it, not just keeping score.
What it boils down to is do you trust that the “system” will sustain its gyrations as it has historically for the last 100 years. For many, the answer is no. For many a resounding yes. For a whole bunch, somewhere in between.
And that’s the reason for all the variations of answers here. No one knows what the future brings and everything they do is based on their belief of what may happen. I don’t have any better answer than I do knowing when I will die. But to borrow an often used platitude from the early retirement forum, I guess “I should stick with the date that brung me to the prom”
Last edited by Perryinva; 09-20-2018 at 12:12 AM..
A portfolio with stocks in it has given a higher withdrawal rate on average. But in the worst cases it honestly isn't a hell of a lot better than super safe instruments.
Just for grins I took a look at using a ladder of TIPS for twenty years, age 65 through 85, and then having enough TIPS left to buy an SPIA (joint&survivor at today's rate) that will pay the age 85 spending amount plus a one-time income bump of 20%. Payments will be flat after that. The TIPS yield today is pretty much 0.9% real out to 20 years, so that's what I used for this analysis.
The withdrawal rate that comes out of this is 3.6%. No stock market risk. No worries about zeroing out one's account. And if you are happy with CPI, it's inflation protected out to age 85 plus probably a few more years (the 20% bump at the end).
The detractors are... no upside if the markets are good, and no inheritance to pass along if one lives long enough to need the SPIA.
I think the CAPE ratio on the share market is way over the top and I would expect a major correction in the next year or so. Having a very low exposure at present seems wise. The real question is when do I re-enter the market.
I think the CAPE ratio on the share market is way over the top and I would expect a major correction in the next year or so. Having a very low exposure at present seems wise. The real question is when do I re-enter the market.
Even Shiller agrees that the short term predictive power of the CAPE is virtually zero. Those who do not know any better have been making the same prediction for the past several years.
Others look at the CAPE and decide that the current high values will mean that years from now there will be a reversion to the mean. BS! That may or may not happen within a great many years or ever.
As with other considerations, a little knowledge can be dangerous. What you "think" probably has very little to do with reality.
Here is how I look at it. CDs are a stable principal instrument. They preserve value in nominal dollars and add a little bit to the pile each year via accrued interest. So one can decide how long they want the pile of money to last and then make withdrawals accordingly.
Let's say we want the money to last 30 years. In year one we pull 1/30th of the pile for spending. Then in year two we pull 1/29th of the pile, etc. That pile of money will last 30 years with pretty much zero uncertainty, but of course at the end of 30 years the account will be zero. Along the way we'll get little pay raises as the accrued interest accumulates. There is no guarantee that they will offset one's actual expense increases, but that's true of any raise while working as well.
The wrong way to look at it, IMO, is to think one is going to live off the CD interest and never touch the initial deposit. That's nonsensical and will not work in many cases.
the problem with cd's is 50% of the time they have negative real returns after inflation and taxes . they too are subject to sequence risk . in fact as i type , one year cd's are behind the curve and have negative real returns .you can go out in years with the cd's but odds are pretty good as you run through those years farther out today's rate will be negative as well half of those years .
negative real return years can mean you are spending down in those years at a greater rate then planned and that lower balance effects the subsequent years income , so sequence risk is still a problem . you have little cushion with fixed income for negative real return years like you do with diversified portfolio's . that is why fixed income in retirement has a very low success rate unless much lower draws are taken . that to me is very inefficient use of a lifetime of saving and accumulating money . .
the problem with cd's is 50% of the time they have negative real returns after inflation and taxes . they too are subject to sequence risk . in fact as i type , one year cd's are behind the curve and have negative real returns .you can go out in years with the cd's but odds are pretty good as you run through those years farther out today's rate will be negative as well half of those years .
negative real return years can mean you are spending down in those years at a greater rate then planned and that lower balance effects the subsequent years income , so sequence risk is still a problem . you have little cushion with fixed income for negative real return years like you do with diversified portfolio's . that is why fixed income in retirement has a very low success rate unless much lower draws are taken . that to me is very inefficient use of a lifetime of saving and accumulating money . .
Personally, I don't care for CDs, but some people aren't comfortable with anything else.
IMO, a better non-equity approach is the TIPS ladder plus SPIA chaser that I posted yesterday. The draw is not that much lower than with stocks/bonds, only 10% less than the usual 4% safe draw. One doesn't need to fret about negative real returns for the life of the ladder since the inflation-adjusted return is "baked in" at the beginning.
Whats funny, since that article is from 2008, is that a 5 yr 4.25% CD today would be considered fantastic! I’d be all over that! In 10 short years we’ve already fogotton when 4% inflation was normal and have tons of people making plans that assume it stays under 3% forever. The article is missing an important point. The lower the inflation, typically the greater the discrepancy between investment returns and fixed rates. The last 9 years have seen very low fixed rates and well above average investment returns. In our rising rates economy, most are predicting lower equity returns for a while. So a gradual shift to higher rate fixed vehicles may not be AS bad an idea at all as it was 10 years ago.
Personally, I don't care for CDs, but some people aren't comfortable with anything else.
IMO, a better non-equity approach is the TIPS ladder plus SPIA chaser that I posted yesterday. The draw is not that much lower than with stocks/bonds, only 10% less than the usual 4% safe draw. One doesn't need to fret about negative real returns for the life of the ladder since the inflation-adjusted return is "baked in" at the beginning.
remember , though that our personal cost of living has almost nothing in common with a cpi index . so the fact you get an inflation adjustment with tips can still produce negative real returns when matched to ones personal cost of living .
that is something that we are always effected with even with inflation adjusted incomes .
to really be protected you need a nice buffer between cpi inflation adjusted income and your actual personal cost of living income and that generally means investments ..
Whats funny, since that article is from 2008, is that a 5 yr 4.25% CD today would be considered fantastic! I’d be all over that! In 10 short years we’ve already fogotton when 4% inflation was normal and have tons of people making plans that assume it stays under 3% forever. The article is missing an important point. The lower the inflation, typically the greater the discrepancy between investment returns and fixed rates. The last 9 years have seen very low fixed rates and well above average investment returns. In our rising rates economy, most are predicting lower equity returns for a while. So a gradual shift to higher rate fixed vehicles may not be AS bad an idea at all as it was 10 years ago.
the 40 plus years of falling rates and falling inflation can have us looking in the rear view mirror while driving forward .
it can be pretty risky betting on any past results . especially some that if you back test the past , failed already many times unless you take much smaller draws .
to consider fixed income only , you really have to look at your needs from savings to see if it can reliably support what you need .
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