The Ultimate Guide to Safe Withdrawal Rates – Part 15: More Thoughts on Sequence of Return Risk

Welcome back to our Safe Withdrawal Rate Series! Last week’s post on Sequence of Return Risk (SRR) got too long and I had to defer some more fun facts to this week’s post. Again, to set the stage, I can’t stress enough how important Sequence of Return Risk is for retirement savers. In fact, after doing all this research on safe withdrawal rates (start series here, and also check out our SSRN research paper) if someone asked me for the top three reasons a retirement withdrawal strategy fails I’d go with:

  1. Sequence of Return Risk,
  2. Sequence of Return Risk,
  3. and let’s not forget that pesky Sequence of Return Risk!

Huh? Isn’t that lame? Surely, low average returns throughout retirement ought to be included in that list, right? Or even top that list, right? That’s what I thought, too. Until I looked at the data! Let’s get rolling and look at some more SRR fun facts.Read More »

The Ultimate Guide to Safe Withdrawal Rates – Part 14: Sequence of Return Risk

This is a long overdue post considering how much we’ve written about safe withdrawal rates already. Sequence of Return Risk, sometimes also called Sequence Risk, is the scourge of early retirement. Or any retirement for that matter. So, here we go, finally, we have a designated post on this topic for our Safe Withdrawal Rate series (check here to go to the first post and also make sure you download Big Ern’s SSRN working paper on the topic).

Besides, in case you haven’t heard it, yours truly, Big Ern, was asked by Jonathan and Brad at ChooseFI to be an occasional contributor to their awesome Financial Independence podcast. Specifically, I’ll be the in-house expert on everything related to safe withdrawal rates. And that’s alongside an A-plus-rated team of experts: real estate guru Coach Carson, tax expert The Wealthy Accountant, and business guru Alan Donegan from PopUp Business School! How awesome is that? Because Sequence of Return Risk is something we’ll cover in the podcast soon as part of a crowdsourced case study, I thought it would be a good time to have a go-to reference post on the topic here on our blog. So, once again, make sure you head over to the ChooseFI podcast:

-> ChooseFI Podcast <-

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How to invest a windfall: Lump Sum or Dollar Cost Averaging?

This issue is as old as personal finance itself: What should an investor do with a large windfall, say, a bonus, gift, inheritance, etc.? Invest it all at once as one big lump sum or should we “ease into the market” and invest the cash in multiple installments? The latter is called Dollar Cost Averaging (DCA). This is a popular topic in the personal finance world and many of you might have read about it. JL Collins had a blog post on why he doesn’t like DCA and Vanguard has a nice study with extensive simulations showing that, on average, the lump sum investment pretty handily beats DCA. The intuition for that result is pretty straightforward: equities go up on average, so if you sit on your hands and voluntarily delay your investments you will have lower returns on average.

End of story! End of story? Not so fast! Even if you’re familiar with the subject already, please keep reading because we’ll have a new spin on this old topic. Spoiler alert: we propose a way dollar cost averaging will reduce risk and have the same average return as the lump-sum investment!Read More »

The scariest week for the stock market is also scary profitable!

Every six to seven weeks, we go through a tense week in the stock market. A bunch of very smart central bankers meet in Washington D.C. to decide on the path of U.S. monetary policy. Just like this week! U.S. monetary policy is determined by an elite group of Federal Reserve officials; the Federal Open Market Committee (FOMC). It has 8 scheduled meetings per year and the schedule is pre-announced for everyone to see. And the meetings are scary for the stock market. If by scary you mean scary profitable!Read More »

Have bonds lost their diversification potential?

If you are a regular reader of this blog you’ll notice that we don’t like bonds very much:

Add to that our series on safe withdrawal rates where we found that over a long retirement horizon bonds become much less attractive. In the Trinity Study with retirement horizons of 15-30 years, you can get away with a bond share as high as 50%. But over long horizons of 40-60 years in the FIRE community, the low expected returns of bonds can jeopardize the sustainability of the portfolio as we showed in part 2 of our series.

Has anything changed since last year? Are we now a bit more optimistic about bonds? After all, yields have risen. The 10-Year Treasury yield reached 2.6% earlier this year but has since fallen again to about 2.2-2.3% just last week.

Let’s look at the numbers in more detail

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The Ultimate Guide to Safe Withdrawal Rates – Part 13: Dynamic Stock-Bond Allocation through Prime Harvesting

Welcome back to the Safe Withdrawal Rate series. 13 installments already! As requested by many readers, both in the comments section and via email, I wanted to look into one intriguing method, called “Prime Harvesting” (PH) to dynamically shift the stock vs. bond allocation during retirement. Where does this post fit into the big picture? Recall that parts 1-8 of our series dealt with fixed withdrawals and fixed asset allocation (same % stocks and bonds throughout retirement). Make sure you check out our SSRN working paper, now downloaded over 1,000 times!

Parts 9-11 dealt with how to adjust the withdrawal amounts while keeping the asset allocation fixed (Guyton-Klinger, VPW, CAPE-based rules, etc.). Prime Harvesting does something completely different: Keep the withdrawal amount constant, but use a dynamic stock/bond asset allocation to (hopefully) squeeze out some extra withdrawal wiggle room; the Northwest corner in the diagram below. Almost uncharted territory in our series!

SWR-Part13-Chart3
13 parts of Safe Withdrawal Rate research and where they all fit in.

Eventually, of course, we like to move to that Northeast corner: Dynamic withdrawals and Dynamic Asset Allocation. But let’s take it one step at a time! Let’s see what this Prime Harvesting is all about.

Let’s get cranking!Read More »

Our Net Worth (as of 3/31/2017)

We were surprised by how many personal finance bloggers publish their net worth numbers. J. Money over at RockstarFinance maintains the world’s first and only (to our knowledge) blogger directory and out of almost 1,000 bloggers, over 250 publish their net worth. So, should we publish ours? What good is all that stealth wealth business (see the excellent posts from Physician on FIRE and The Retirement Manifesto) if I post our net worth on the blog? Well, if someone were to find out who we actually are then with or without the precise number it would be pretty obvious that we’re well off. Whether our net worth is $500,000 or $5 million, what’s the difference, then? People get mugged on the street every day for much less. So we might as well show our numbers, right?

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You want to know our savings rate? Which one?

Last week, I read a nice post on Chief Mom Officer on the challenges of calculating savings rates. Right around that time I was also revisiting our 2017 budget and the projections of how much we are going to save this year. This is the last full calendar year before our planned retirement in early 2018 and it’s imperative that we stay on track and keep a high savings rate on the home stretch. But how high is our savings rate? Is there even a generally accepted way of calculating a savings rate? What are some of the pitfalls? We were surprised about how easy it is to mess up a calculation as seemingly trivial as the savings rate.

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The Ultimate Guide to Safe Withdrawal Rates – Part 12: Six reasons to be suspicious about the “Cash Cushion”

When we read about withdrawal strategies in early retirement, the cash cushion is often one crucial ingredient. Simply keep a little bit of cash sitting around on the sidelines, dig into that cash during an equity market drawdown and avoid selling equities until the next recovery. How much cash? Well, the Global Financial Crisis raged for “only” 18 months and the average garden-variety recession should last a year or even less. Thus, even if we assume that the equity market takes a little bit longer to recover it will take only very little cash and very little opportunity cost to achieve this. The whole issue of Sequence of Return Risk is solved! Who knew this was so easy? This is almost too good to be true! Well, unfortunately, it might be just that; too good to be true.

Here are our top six concerns about the cash cushion:Read More »

The end of CAPE Fear? What happens to the Shiller CAPE ratio when we roll out the weak 2008/09 earnings?

In last week’s post on dynamic withdrawal rates, one of the withdrawal rules we actually liked quite a bit was based on the Shiller CAPE ratio. One disadvantage of any such rule: The CAPE is at a high level by historical standards, 29.30 to be precise as of this morning (March 22, 2017). Today’s CAPE-based withdrawal rates will be very stingy, only around 3% per annum.

So, what to do about our CAPE Fear? One reader recently made an interesting observation: The CAPE uses ten-year rolling S&P500 earnings. So, once we roll out the low earnings from the Global Financial Crisis (GFC) in 2008/9, average earnings should move up again and the CAPE should come down. But by how much? Probably not below 20. Still, how much of a decline in the CAPE can we realistically expect: 10%? 20%? We have to start a new Excel Spreadsheet for that. Let’s get cranking!

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