Posted on July 18, 2018 by fritz@theretirementmanifesto.com
Did you know a looming Bear Market Crisis is approaching?!
I just read it on the internet, so it’s got to be true!
To make matters worse, I just retired a month ago.
Uh Oh! (Am I screwed?)
Today, some reality about Bear Markets, along with 6 steps to consider as you structure your retirement portfolio.
Read these 6 Steps To Avoid The Looming Bear Market, especially if you're within 5 years of retirement. Click To Tweet
Ok, I’m having a bit of fun with the “read it on the internet” line, but the reality is that a Bear Market WILL happen. I’m not being prophetic, just stating the facts. Since before the days of the tulip maniain 1637, bear marketshave always been will us, and they always will. We’ve benefited from a very nice bull run. We’re being naive if we think that it will never end.
Trust me when I say a Bear Market is coming. It's just how markets work. Are you prepared? Click To Tweet
Since 1900, we’ve had 32 Bear Markets, defined as a correction of 20% or more. Do the math, and that averages out to a Bear Market every 3.7 years. The average bear market lasts 367 days (the longest was 34 months!). Here’s what they look like graphically:
I actually did read an article on the internet about the looming bear market crisis. In “The Next Bear Market In Stocks Will Drive A Retirement Crisis“, the author states:
“A recession could decimate even substantial retirement portfolios”.
Further, the author goes on to say that Social Security and Medicare, and the resulting increase in taxes, increase in eligibility age and reduction in benefits “would be a disaster” for those dependent on the safety net.
Add to that the Voices Of Worry over the global debt pile up and the underfunded status of many state & local pension funds and things could get really, really ugly.
Maybe I shouldn’t have retired early.
Too late now, I guess I’d better get to work onbuilding a Bear Market Crisis Prevention Plan.
A recession could decimate even substantial retirement portfolios. Throw some other problems, and things could get ugly. Time for a contingency plan. Click To Tweet
We all know a Bear Market is coming. It’s been an increasing theme in the blogosphere, with even the esteemed Financial Samuraitaking risk off the table. America’s wealthyare moving to cash. Ben Carlson of A Wealth of Common Sense has 36 Obvious Investment Truths to remind folks that you should protect yourself.
This isn't about scare tactics. The reality is that all of us should have a contingency plan to deal with the looming bear market. It will come. Click To Tweet
I’m not a panic-driven investor, screaming a scare tactic headline to drive traffic (tho, if you’re reading this, I guess it worked, right?). Rather, I’m reminding folks of the reality of how the markets work and encourage you to think about it as you develop your retirement portfolio strategy. Yes, stocks have historically outperformed over the long-term, and will likely continue to do the same. Just recognize that the road can be bumpy, and plan accordingly to avoid getting bitten by a bear when you can least afford it.
The reality is that bear markets have always been with us, and always will. Unfortunately, we never know when that snake is going to strike, so it’s best to wear snakeproof boots along the path of retirement. Following are some steps I’m taking, as an early retiree, to defend our portfolio against the risk of a bear attack. View them as suggestions, and pick and choose as appropriate for your situation.
Following are 6 Steps I’d suggest you take if you’re within 5 years of retirement, or already in retirement:
1. Assess Your Risk Tolerance (& Capacity)
Just because you’re comfortable with risk doesn’t mean you have the “Capacity” to absorb risk. While tolerance measures you’re the amount of risk an investor is comfortable taking, it shouldn’t be viewed in isolation. As you approach or enter retirement, you shouldn’t take on risk you can’t afford simply because you’re comfortable taking that risk.
Risk Capacity is more of a numbers gameand indicates how much risk your portfolio can withstand in the event of potential losses. As your income declines in retirement and your time horizon for recovery shortens, the reality is that you have less risk capacity than you had earlier in your career, when future earnings and a longer time horizon gave you an extra buffer against the impact of a bear market.
Factor in both Risk Tolerance and Risk Capacity as you work through the remaining 5 steps of protection.
2. Don’t Retire Before You’re Ready
I once had a wise Uncle who told me “Don’t Retire Before You’re Ready, you’ll never make the kind of money you’re making now, and once you walk away it’s all but impossible to replace”. Smart man, my uncle, and I listened.
I worked One More Year than “The Numbers” said I had to. Why? Because I listened to my Uncle, and because I’m conservative in my approach to finances. I weighed the pros and cons of working one more year, and decided it was the best approach for my wife and me. The additional year has created an additional financial buffer against a potential bear market, and the peace of mind in ourretirement of having that buffer was worth the additional year of work for me. Make up your own mind, but realize than an extra year of work provides a nice safety net if you’re able to endure the cubicle for a bit more time.
3. Asset Allocation & Retirement Income Strategy
As you approach retirement, your asset allocation should become more conservative due to your declining risk capacity. At the same time, you need to generate a dependable income which will last a lifetime (and a lifetime of inflation). This balance is, in my view, one of the most difficult elements in the retirement planning process.
Because of the importance of this step, I’d encourage you to read “How To Build A Retirement Paycheck From Your Investments”for the details of our strategy to balance the tradeoff of risk and income. There’s more to this step than I’m comfortable summarizing in this paragraph, but suffice it to say you need to ensure your portfolio has sufficient liquidity (e.g., cash) to ride out a bear market. Yes, you MUST have equities in a retirement portfolio to provide growth and mitigate inflation risk, but you can’t have too much of your asset allocation dedicated to stocks given your reduced risk capacity.Use atime segmentationapproach to avoid putting the money you need for the next 7-10 years into stocks.
At a minimum, make sure your portfolio has enough liquidity (cash) to avoid selling stocks during a bear market Click To Tweet
4. Don’t Take More Risk Than You Need
As you determine when you’re going to retire, it’s important to realize the advantage of having the largest possible portfolio in place before you pull the plug. The larger your portfolio in relation to your spending (income) requirements, the less return your portfolio will need to earn to last a lifetime. While working one more year is certainly not appealing to most, make sure you’ve thought through the benefits before you discount the approach.
With a larger portfolio, you can reduce the allocation you have to commit to stocks, and increase your allocation in more conservative asset classes (typically bonds, though they also contain an element of risk). To quote a line from Roger Whitney’s excellent book Rock Retirement:
“What’s the minimum effective dose of investment risk I need to take to be in a position to achieve my goals”. Roger Whitney
That sentence had an impact on me as I put together our retirement income strategy, and I’ve decided on a slightly more conservative asset allocation as a result. Our current asset allocation is 50% Equity / 30% Bonds / 10% Cash / 10% Alternatives, and I’m very comfortable with that balance as we start our retirement.
Working one more year has allowed us the luxury of building up our cash reserves to a 10% level, essentially eliminating Sequence Of Return Risk (or, having to sell stocks during a downturn). Sure, we may be giving up a bit of return, but the numbers say we can afford the lower returns associated with the lower investment risk, and we’ll still be in a position to achieve our goals. (Yes, Roger, I’m listening, and sleeping well at night.)
5. Use A Conservative Withdrawal Rate
The BEST study I’ve ever read of safe withdrawal rates is this 26 Part Series: The Ultimate Guide To Safe Withdrawal Rates, by Early Retirement Now. “Big ERN” retired in June 2018, same as me, and he’s been a friend who I’ve followed closely. He’s a real numbers guy, and his analysis is amazing.
Bottom Line: He argues convincingly that the old 4% “rule of thumb” is outdated, and a much safer approach given the state of today’s markets is ~3.25%. For example, if you have a $1M portfolio, a 4% rate says you can spend $40,000 in year 1 (increase annually for inflation), whereas the 3.25% guideline drops it to $32,500.
I could never have done the analysis that Big ERN did, but I respect his work and have incorporated his advice into my thinking.
We're using 3% for our initial withdrawal rate. It's just one of six steps we're taking to avoid the looming bear market. Click To Tweet
Our conservative 3% withdrawal approach is yet another step we’re taking to avoid the decimating impact of a bear market on our retirement portfolio. Yes, it means spending a bit less in retirement than you’d be able to do using a 4% withdrawal rate, but the peace of mind of knowing your portfolio will likely last a lifetime is a nice tradeoff.
A side note: I’m not a fan of the “increase your annual spending with inflation”, which is a tenant of the traditional 4% Withdrawal Rate. Rather, we’re using a “Floor & Ceiling” approach, where we’ll adjust our spending annually based on ourNet Worthyear-end update. If our portfolio has taken a significant hit in a bear market, this annual adjustment will result in a slight reduction of spending the following year, offsetting the bear’s bite.
6. Build Some Defense Into Your Portfolio
While the majority of our holdings are in low cost diversified mutual funds (think, Vanguard), I’m a huge fan of diversification and believe it can play a significant role in defense against a bear market. In the 10% of our asset allocation which is in “Alternatives”, we own a variety of asset classes which could provide some protection.
I’m not a “gold bug”, but we’ve got gold (VGPMX, DGL and some physical coins). Gold only comprises ~2% of our portfolio, but if things really go nuts this could provide a year’s worth of living expenses to give more traditional assets a time to recover. We also hold REITS (VGSIX), Inflation-protected bonds (I-Bonds), and Peer-To-Peer lending (Prosper & Peer Street). Combined with a widely diversified equity and bond portfolio (Domestic & International), it’s highly unlikely that everything we own would be down at the same time.
In the worst case, if we consumed the entire cash liquidity inBucket 1and we were still in a bear market, we’d likely have something we could sell from to cover our spending without being forced to sell at a significant loss. Consider diversifying your portfolio to build a portfolio of asset classes which have a chance of moving to different beats. When one is down, you may be fortunate to have something that’s up that will put food on the table.
Finally, I should also mention that we chose to enter retirement 100% Debt Free. While not specifically cited as a defense against a bear market, the fact that we have eliminated debt certainly reduces our cost of living in retirement. If necessary, we can hunker down for a very long time at a reduced spending level to ride out the storm.
Put another way, I’ve no worries about eating cat food in our later years. I hope you can say the same.
Further Reading
If you’re interested in reading other articles I’ve written about market volatility, feel free to browse:
- I’m Scared Of A Crash…Where Should I Put My Money
- 5 Moves I’ve Made In Today’s Market Volatility
- Are We In A 15 Year Bull Market?
- What If You Live To 100?
A Bear Market is coming.
I wish I could tell you when, but I can’t. Rather than try to time the market, think through your personal Bear Market Contingency Plan. These 6 Steps can give you some ideas which may be applicable to your situation. The important thing is to think about it before it arrives, and have a plan of action so you don’t do something stupid if when the market tanks. It’s a lot easier to put plywood over the windows before the hurricane arrives. The same principle applies to your investments. Are you ready for a storm?
What About You?
Are there other things you’re doing as a defense against the looming bear market? Do you agree that, at some point, a bear market is inevitable, or is it all just “scare tactics” that we can choose to ignore? Let’s chat in the comments…
You’re more prepared than anyone I know for the bear! Most impactful line of your post for me: Just because you’re comfortable with risk doesn’t mean you have the “Capacity” to absorb risk.
I’m not as confident but we really should be Ok. We should have enough in cash reserves to cover us for even a 7-year span… doesn’t make me any less antsy though! 🙂
— Jim
A 7-year cash reserve will cover you through any historical Bear, Jim. I think you’re as prepared as I am, so don’t let the ants get to you…
Uh-oh. Better go back to work immediately! 🧛♀️
We’re in line with you and Big ERN about the 4% rule being overrated. We’re more comfortable with 3%.
Dunno, Mrs. G, this retirement thing is suiting my pretty well, and I think the same is true for you. We’ll run with the 3% and avoid the workplace, deal?
10% cash seems high to many people but not to me. if you have enough then everything will be fine. i’m sure you analyzed your basic needs/ common comforts/ wants by cost. if selling in a down market meant not taking that trip to tahiti this year then the world wouldn’t end. we also have a contingency of maybe going down to one car or renting rooms in our house as a nuclear option. we’ll try to get to zero equities as we get older. i think bond funds are riskier than bonds as you can just ride a bond to maturity so they make more sense to me. a little off topic but do you think you’ll be buying long term care insurance?
We can’t go to Tahiti? Man, I’m bummed.
Yep, I agree with you that bond funds have more risk since you can’t ride them to maturity. At the same time, they should have new maturities rolling in as other expire, so the risk of a fund should be lessened with time.
As for Long Term Care, we chose to self-insure (read Why We Are NOT Buying LTC Insurance). Ironically, next week’s post is from a guy who challenges our position, keep an eye here for more on the topic next week!
Great post Fritz. There’s always a Bear lurking in the woods. I had one cross my driveway yesterday (Black). The inverted yield curve is getting a lot of press from the media, but super low short-term rates have distorted things from a historical perspective quite a bit. As an article I read yesterday stated the spread between long and short rates could only narrow; due to those super low short term rates. What else were folks expecting. We’ll see where the long term rates start heading as capital tightens. All good stuff on having a well diversified portfolio. It’s all about riding the Bear until the Bull comes back to the market.
For every Cindi, there’s a Paul. Thanks for your kind words. Cool about the bear on your driveway (we actually hit one near our cabin a few years ago, bear was fine, car not so much). As you’ve obviously read, an inverted yield curve is one of the indicators folks look for as a sign that a Bear is pending…
I popped in to read the comments again and I saw these.
BEARS?!?
Real people-eating bears???
And people think Australian animals are dangerous…
Thanks, Fritz.
Been following you for a while, I love reading your posts. You’re insight and thoughts are very helpful.
I am on a 68 month countdown/journey to retirement, so 5 plus years to go! Loving the one question series.
Keep writing please!Welcome, Amy! Thanks for leaving your first comment!! With 5 years to go, you may benefit from The Ultimate Pre-Retirement Checklist, if you haven’t seen it yet. Thanks for the kind words on the One Question Series, I’m having fun with that one!
Like Cindi, we are out of the market entirely. With neither the time nor the paychecks to replenish our savings/investments should a giant bear come down from the mountain, we cannot risk our retirement savings. (We are highly risk averse in any event.)
We draw a conservative annual 2.5% from our retirement accounts. Agreed that 4% is probably too high. 2.5% is probably too low, but we edge on the conservative side in case our emergency fund suddenly need replenishing. Houses occasionally need major repairs (which we are less able to manage ourselves), cars need replacing, health crises occur, and so forth.
J, nothing wrong with a conservative approach if it helps you sleep at night! BTW, I agree a 2.5% SWR is probably smart if you have no exposure to equities, it’s simply too difficult for a fixed income portfolio to grow enough to allow a higher withdrawal rate (at least until interest rates rise further). Thanks for stopping by!
Ah!!! The Bear Market…..
Alas it is coming, but I hope it holds out for another year and lets me build and sell my house. All sound advice my friend, particularly the safe withdrawal rate and risk tolerance. As a wise man once said (William Bernstein I think), “If you have won the game, stop playing”! So if you have enough money to retire, then figure out how to invest them safely (I should say more safely) to decrease risk of loss.“If you have won the game, stop playing”. GREAT addition to the post, Dad. Fingers crossed that you get your house built and sold before the bear comes out from the woods. You deserve that, given all that you’ve been through!
Fritz,
We’re 55 and 53 and my husband just retired this year. Like you we decided to work a bit longer than needed and built up a nice cash cushion with those extra funds. I’d always rather put money into equities rather than cash, but at some time one has to admit that one is getting older, and that ready cash is comforting to think of when the bear arrives.Congrats on the retirement, RD. No doubt that cash has an important role for those of us who are in retirement. Difficult balance, hope this article helped folks figure out what balance works for them.
We follow a similar plan. We are keeping 5 years of cash (one in the bank, and the other 4 in increasing length defined maturity bond funds), about 20% of our assets in alternative investments (like PeerStreet) and a moderately aggressive equity mix for the rest. With the idea that everything is at least a little bit of a crap shoot, we are optimistic that we’ll be able to weather the inevitable downturn, and perhaps even take the opportunity to add to our equities.
It’s funny, when we run the FireCalc Monte Carlo simulations the results are that we’ll have somewhere between $1million and $50 million when the retirement period ends. Either way, we shouldn’t starve 😉
Amazing minds, Oldster! I’m sure our children hope we end up with that $50M scenario!
I enjoyed this post very much, Fritz, and hope you’re having an awesome retirement!
The graphic on the bull vs. bear markets was especially good, because it shows how many more bulls there have been than bears. Seeing it in color makes a great visual to help keep things in perspective.
Not knowing how long I’ll be smelling the roses, I’ve decided to leave in the market what money is already invested there (all in index funds), but to taper back on my automatic purchase amounts. My reason is that some pretty reliable financial advisors are predicting only around a 3% return on equities over the next few years. Given my age and shorter “recovery” time available, that’s not enough of a return for me to throw too much additional money into stocks right now.
The fact that short-term interest rates are rising (and that some CDs have already hit a 3% rate of return) also convinced me to tilt a little more towards cash right now. Plus the Fed may do another rate hike or two this year, so it could be a nice time to have cash readily available.
And as unsophisticated as it sounds, years ago I bought a bunch of inflation-protected Savings Bonds (back when they had a 3% floor). Most of them are earning in the 4-6% range, which has been very nice in the low interest rate environment of the last few years. Those are my only “bond” investments.
To balance the cash and equity investments, I’m putting additional money into my deferred annuity (also bought years ago, with a guaranteed return of 3%). The associated costs are tiny, since I don’t invest in equities through the annuity. It’s becoming my “bond substitute” you might say. I like the idea of having a certain amount of guaranteed income every month, independent of equities or interest rates.
Other bear market preps include no mortgage and no credit card (or any other) debt. Also sold the RV (a.k.a. “driveway ornament”) ahead of any market downturn, figuring the funds could better serve hubby and me elsewhere. What the heck, they’ll always make more RVs!
I’m always impressed with your comments, Ann. You’re a smart one, for sure. Ironically, we did the same “taper new investments into cash” strategy over the past year to build up our 10% cash prior to retirement. We’re also considering a deferred annuity (I’ll be talking about that on an upcoming podcast on New Retirement).
The major difference: We just bought our RV, and we’re heading out tomorrow for a 2 week run through the Midwest to visit family! Dang, we should have bought yours, we could have saved some money!
Nice Post! I think your last point – retire 100% Debt Free – should be first. That gives you so much more flexibility when the Bear Market comes. Being 100% debt free doesn’t mean you have complete control of your spending (hello medical insurance!) but it gives you a lot of room for adjustments. For me, I am comfortable with using the 4% withdrawal rule as a guideline, but if I need to shrink it to 2% or less for a few years, it would not be an issue. Retiring with a lot of debt just leaves you no room for maneuvering.
P.S. thanks for sharing your asset allocation here – 30% bonds is too high for me – I don’t see that big a place for them in my portfolio, but to each his own!
Wow, here’s wishing you both a WONDERFUL trip! We don’t regret doing the RV thing one bit. Collected a lot of great memories and met some super nice folks at every turn. But after living on the road as full-timers for 8 years, we were more than ready to hang up the sewer hose! If you ever have any RV-related stuff we can help you with, shoot me an email.
Very timely post – thanks as always for sharing your perspective with us. I’m having one final meeting with our fee-only financial advisor tomorrow, before I pull the plug next month. We’re ready to go, I’m just asking for a little help simplifying our portfolio (so I can rebalance easier), and we’re also implementing your bucket strategy.
I’m enjoying your retirement ride, and look forward to hopping on my own here shortly!
Thanks for the post Fritz. Good read. I was kind of forced into early retirement a little over a year ago when my position at work was eliminated. I was already working diligently to determine when I could retire, and once I had determined that I was already in a good position to call it quits from full time employment, it made losing the job much easier. Before I lost my job, I was heavily invested in equities with a mix of about 70% equities, 15% in annuities, 2% cash, and the remaining in REITs. I have recently changed that mix to about 62% equities and upped the cash (including short term bonds) to about 8% to protect against sequence of returns. My portfolio is about 65% in non-retirement investments and 35% in retirement (tax deferred) investments. I am 54 years old now and my wife is 52. She is still working which is helping us to avoid much draw down from our investments at this point, but her income will not offset all our spending needs. We are totally debt free and do not carry a mortgage or any credit card balances (pay off every month). I agree that a bear market is coming as historical trends show there is one every several years, and we appear overdue for one. I too have performed multiple stress tests on our investment portfolio and have determined that if we maintain a withdrawal rate of 3%, that the chance of our investments being wiped out prior to our deaths is at or near 0% adjusting for inflation. I feel we can safely pull down 4-5% and still be safe, but 3% will provide more than enough for us to be financially comfortable and enable us to enjoy travel and the hobbies/activities we enjoy. I also just ran the firecalc tool and it listed that I had 0% of failure and that my ending balance was projected to be between $2,279,875 and $42,904,272. I know my kids are hoping for the higher end numbers as I do want to leave them an inheritance once we are gone. I look forward to reading more of your posts as we continue down our journey. Best of luck to you!
Great post Fritz – yes a bear will Cole and yes there are steps people can take to be prepared.
It sounds like you and your readers / commenters are prepared and being very prudent on the drawdown and reserve side.
I just shared with our team since we are working on adding richer withdrawal modeling to PlannerPlus now. http://www.newretirement.com/
I’m reminded of the fact that we don’t eat percentages – which is why the bucket strategy works better for most people. Setting aside enough cash and very short maturity funds is essential.
And don’t knock cat food. From the ingredients list, it may be healthier than most food packaged for humans. Of course, it really does mess up your breath.
Good post Fritz!
After having looked long and hard at the evidence all around, I decided a while back to give up buy-and-hold investing for trend following. I don’t expect to have higher returns with this strategy, but I do expect to have a smoother ride than otherwise. There is a growing body of academic research demonstrating that this method can be effective, particularly in the withdrawal phase when those big bear markets can really make sequence of returns risk a serious problem. It’s not quite as much of an issue in the accumulation phase, but even so, that last decade of accumulation is usually the most important for total portfolio growth, and if it happens to be a repeat of 2000-2009, would-be retirees may have to delay retirement if they are able, but they may not have a choice in the matter.
Each investor needs to understand themselves foremost and what type of strategy is best for them.
Fritz
I enjoy your blog and look forward to hearing how your early retirement unfolds since I may not be too far behind you. Could you clarify something for me? When you talk about a 3% withdrawal rate, how are you factoring in social security? Do you assume some present worth of future social security benefits in your portfolio?
ThanksHey Dave – you’ll enjoy next weeks post, my perspective after 60 days of retirement!
As for the 3%, I assumed I’d be receiving 75% of my projected Social Security at Age 70. The 3% is above and beyond that estimate. Hope that helps. The only place I include SS in my retirement planning is in my Retirement Cash Flow plan, I don’t account for a NPV in my net worth.
This is a very timely article Fritz for many reasons. My wife and I had a conversation about this the other day. We know something is coming, most likely sooner than later. We are still accumulating heavily right now. Any suggestions for those still in the accumulation phase? Should we ride out a bear market with equities knowing that our portfolio will take a hit but we have PLENTY of time to keep buying cheap equities and ride the market back up?
Absolutely, IF you have plenty of time. For you, the best thing that could happen would be a bear. Just don’t look at your statements very often!
I am very grateful I was able to keep buying in the 2008 crunch. It makes retirement much closer today. I didn’t buy 100% stocks, but should have. But I did keep maxing out my 401k and buying mostly stock funds. Ric Edelman in his “Truth about IRAs” book suggests most everyone should be buying 100% stocks in their 401k while working. Of course, I read that after the 2008 crash – but losing 40% was still very scary.
Cooper, I agree with Kevin’s comments below. I was ~80% equities during the ’08 crash (and other bear markets earlier in my career). I never withdrew any money from stocks, and I continued to dollar cost average through the down markets.
Best thing that can happen to you. Just DON’T sell in a dip.
I’m already slightly early retired and we are allocated 50% stocks, 25% bonds, 5% alternatives and 20% cash. Not counting a two year cash emergency fund. I also fund 100% of our expenses with my one day a week side gigs so our withdrawal rate is zero. Bring on the bear so I can put that 20% cash to work!
I wouldn’t count P2P lending in the defense bucket. The loans will go tit* up when there is a big recession. Also, REIT didn’t perform too well during the last recession. Gold is probably a good idea. I don’t have gold and just stick with bonds for now. Even if bond funds drop, it wouldn’t be as volatile as stocks. Anyway, good stuff. 🙂
Actually, consumer credit, which is what P2P lending is, is far more stable than many think. Credit cards, for instance, were still in the black throughout the last recession. And Lending Club’s returns were still positive during the recession; many don’t realize that they were around back then.
I admire you for posting this right now. Your retirement is such a huge success and is very influential in the FI world. We enjoy following your excellent story and photos, but it is important for everyone to realize that they need to be cautious too.
For us, we built our nest egg with 100% equities and 2 rental properties. But now that the market has had such a big upside, for so long, we now have a big cash position. It feels very weird and it is new ground to look into bonds and CDs. Really? Yeah. That part where you mention “capacity” is very important. Thanks for another great article.
Agree with the 6 steps but all seemingly underpinned by the SWR approach favored by the FIRE crowd. There is another way, which is not probabilistic like SWR but guaranteed-Floor and Upside. And it provides a retirement paycheck and takes market/downside and sequence risk off the table, which is the primary subject of this post. I spend zero time worrying about the market and all my time enjoying retirement-the floor of laddered TIPs, CDs and bond funds takes care of the income and although I don’t need it (or at least wont for 20+ years..), the Upside (in index funds) is doing fine. It is a conservative approach and buying the income in advance is relatively expensive to the overall portfolio (65%) so clearly not for everyone, particularly those in the FIRE crowd apparently, but it is great Bear Repellant!
Rob, solid plan, for sure. Not entirely dissimilar to the Bucket Strategy we’re employing, tho I suspect you’ve got the floor covered for a longer timeframe than Bucket 1 would cover. Good plan, thanks for adding some repellent ideas to the discussion!
Fritz, I enjoyed reading your post about your 7,000 mile train journey and decided to review some of your prior posts. In re-reading this post about preparing for the looming bear market I was interested in your asset allocation and if/how you factored in your pension? Like you, I will receive a pension when I retire (looking at one more year) and when I use the Financial Engine asset allocation models in my company’s 401K website, the asset model doesn’t take into account whether I have a pension or not. It seems to me that I should be able to take on more risk given that I will have a known stream of income. (And that’s not even considering Social Security when I do start taking that.) So how do you value a pension benefit relative to asset allocation? I thought a reverse calculation to determine what it would cost to purchase an equivalent annuity and then consider that value as equal to owning bond assets when I look at my asset allocation. When I run that exercise, obviously it suggests being more aggressive in owning a higher percentage of stocks. I also thought about doing a reverse calculation of the 4% guideline to my pension (example: $60,000/year would need $1.5 million in assets) but that generates a much larger number and I’m concerned that isn’t realistic. Anyway, if you have some thoughts on this I would appreciate your perspective — something to consider on the last 1000 miles of your train adventure!
David, thanks for “digging back” into my prior posts, much appreciated. Regarding the pension, as I wrote in “When Can I Retire“, I subtract my pension income from our spending requirements, and only look at the remaining balance as my target for investment income. Given that, the pension income doesn’t really come into play when determining our asset allocation. Technically, you’re correct that you could take on more risk, assuming the pension is sufficient to cover your basic living requirements.
I’ve thought about doing a NPV on the pension and including it as a bond equivalent in our asset allocation, but I think that over-complicates what is, in reality, a fairly simple question. How much $ do I need my investments to produce, and what’s the best allocation to achieve that income at the lowest required risk.
Hope that helps. Good question.
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