I went full FIRE 3 1/2 years ago at the age of 43.
Just checked up on my investments and by a combination of good luck and maybe a little bit of skill, I actually have more money now than when I retired 3 and 1/2 years ago, even though I've been living off that money for 3 1/2 years.
Does this mean that I'm out of the woods in terms of "Sequence of Return Risk?"
At what point in a retirement journey is sequence of return risk no longer something to be concerned about?
Sequence of Return and FIRE
byu/sick_economics infinancialindependence
Posted by sick_economics
13 Comments
Out of the woods? No
You can stop worrying about it when your 90.
It’s not hard to be up today higher than 3 1/2yrs ago… markets at all time highs. Sp500 52wk high was a few days ago.
You didn’t monitor your investments for 3.5 years?
In my unprofessional opinion you’re out of the woods when the market crashes and you still have enough to live on despite it. So, if you’d prefer, simulate what it’d be like to lose a significant portion of your assets and how you’d respond.
Ok, if you started with a 4% withdrawal rate, you are likely (if you only give yourself inflation raises) to see your portfolio grow over the years. By the time your withdrawal rate is 3.5% then you are very likely out of the woods. By the time you get to 3% you are very much out of the woods.
I struggled a bit with this when I started studying it all. I was like “wait, but it’s always the first few years of the rest of my life, there’s always this risk” – and that’s true but irrelevant. The point is that if you stick to the plan, your portfolio growth means that your withdrawal percentage over time will likely fall.
Because you are still very young at 46.5, you aren’t getting much benefit (ha) of having a shorter lifespan to worry about every year. But since the rough rule of thumb is that 4% lasts for 30 years 95% of the time, 80 year olds can also relax about their withdrawal rate and go higher if they need to.
As a side note, those who are brave enough to go 5% withdrawal rate in early years, they are in real danger if the market goes down. But if it doesn’t, then in a few years time they are likely to be at the 4% rate and can stop panicking as they are now in a “normal” range, and then a few years later they will likely to be at the 3.5% rate and out of the woods.
I see potential woods in your future for another 15 years or so.
What SWR did you start with and what is spending as a % of investible assets now?
I’d say you’re out of the woods when your current spending as a % of investible assets drops below about 3%. So if you started at a 3.75% SWR, grew spending by whatever your personal inflation rate is (likely less than CPI esp if you own your home), and assets appreciated to bring current year spending to <=3%. This assumes you have a reasonable asset allocation.
It would be a five alarm emergency if you didn’t have more money today than you did 3 1/2 years ago, the inflation rate during those years and your relatively young age. Do you have more today after adjusting for inflation? Again, the answer should be a resounding, yes. If not, You need to double check your projections.
Your reference to “skill “makes me wonder if you are investing in some other than broad market index funds. If you have substantial assets in individual stocks, crypto, or the like, then you’ll never be out of SORR, because the whole concept of a safe withdrawal rate presupposes, broad market investing. If you’re in a handful of individual stocks, then there will always be risk. , broad market investing. If you’re in a handful of individual stocks, then there will always be the risk.
SORR is generally a 5-10 year window for most folks. I’d personally say you can relax about SORR when your withdrawal rate falls below 3% and forget about it entirely when you fall below 2.5%. I’m rather conservative in my financial planning though and many folks might adjust those up a half percent or so.
From a pure mathematics point of view, you will be out of the woods when your portfolio goes up enough that your effective SWR is now so low that it doesn’t matter anymore. The exact number is of course subjective but for most folks if your effective SWR is <3% of current portfolio then you should be good. If your portfolio remained the same then mathematically your risk is going to be the same.
In practice this is probably moot as the market conditions have changed: QE has “ended” and interest rates are up, CAPE is now cresting new 20-year highs, not to mention the geopolitical risks and the end of Pax Americana — so who knows what is going to happen next?
My understanding is that SORR matters most in the years immediately after retirement, and if you avoid retiring right into a crash you’re quite unlikely to ever run out of money.
I couldn’t say for sure how many years, so it’s probably worth still being adaptable, but you sure didn’t pick down years to retire into 🙂
My understanding is that SORR is really a “First 10 years” concern, so you’re not out of the woods yet.
However, I only recently read this brilliant analysis on “Ratcheting” – [https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/](https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/)
Where Michael Kitces demonstrated a simple, but more dominant strategy than the 4% Rule. He showed that applying the following:
* Start with the normal 4% Rule, with the option to tweak for inflation each year (as you have done)
* If your portfolio grows by 50%
* Then ratchet up your spending limit by 10%
Worst case scenario, your portfolio doesn’t grow by 50% and you end up in the same situation as the normal rule. But historically that 50% growth (eg, $1M to $1.5M) has allowed a 10% spending increase (eg, from $40,000 to $44,000 withdrawals, increased for inflation) with no cohort failures.
This would indicate that a 50% increase means you have escaped the SORR. He does flag that additional research may be warranted into whether those numbers (50% and 10%) might be improved, such as a smaller growth trigger or a larger spending increase, but I’m late to the party so haven’t investigated further.