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For those who planned to retire within the next 2-3 years or less how have your plans changed? are you still keeping your retirement date with the assumption that the market will turnaround rather quickly or are you considering working a few more years if there is a prolonged bear market?
The reason I am saying "prolonged" is that this time it's a paradigm shift, the interest rate regime has changed which logically can't resolve in a short period of time. The long term status quo on which the market was based itself has changed.
If one planned correctly through the proverbial red zone this should be a non event
even though you may have planned for the portfolio to "survive" a bear market having advance knowledge of sequence risk could cause a change of plans, perhaps delay retirement.
I have backtested my strategy for 1966-82 and it works but I would rather not be subject to something like that if I have a choice.
Given the current conditions, perhaps it's wise to see how this plays out... but since this is a "regime change" as opposed to a vanilla correction this may be on par with the big secular bear cycles of the past.
I interpret it as, ten years is enough to encompass a business cycle, so once the threat of recession has passed during your retirement, go all-in on equities. Because you will probably die before the next recession.
I'm less worried about the stock market correction (which has admittedly hurt) but more concerned about inflation. Not sure I'm setup for losing 8% purchasing power each year.
sooner than you think.
rising interest rate is not always bad for the stock market
It is not defined by rates or markets
interesting that kitces wrote this in 2016 and here we are
EXECUTIVE SUMMARY
The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.
And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year.
Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely.
Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal).
Ultimately, further research is necessary to determine the exact ideal shape of this “bond tent” (named for the shape of the bond allocation as it rises leading up to retirement and then falls thereafter). But the point remains that perhaps the best way to manage sequence of return risk in the years leading up to retirement and thereafter is simply to build up and then use a reserve of bonds to weather the storm.
Last edited by mathjak107; 05-12-2022 at 03:20 AM..
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