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Order of Returns Risk and Portfolio simulations

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kennyw
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Order of Returns Risk and Portfolio simulations  Reply with quote  

I've been reading a couple of books on retirement planning, "How Much Can I Spend In Retirement," Pfau; and "The Simple Path To Wealth," Collins. I'm fascinated with the idea of Order of Returns Risk and simulations based on historical returns in the market.

I've done some simulations on my portfolio. Its a small sample size, only 90 years of data , mirroring the S&P 500 beginning in 1928 and sequentially running over a 40 year life expectancy (that would make me 99 at death -ha!). So, the number of simulations are not statistically significant, and it is still subject to gambler's fallacy.

However, the thing I've found interesting is that (in my specific situation) in all but 3 of the simulations (beginning years 1929, 1930,1931), all of the simulations show that as long as spending is constrained to a reasonable budget and drawdowns from the portfolio only match differences in budget requirements and social security and defined benefit pension income, the value of the portfolio actually grows (a lot) instead of declining. This is a drawdown rate of 7-8% in the early years, and then 3-4% once SSI kicks in.

Has anyone else done this? Its seems that unless we have another 1929 style crash, "Order of returns" risk might not be as huge a problem as I thought it was. -Your thoughts?
Post Thu Jan 11, 2018 7:24 pm
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oldguy
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quote:
and social security and defined benefit pension income, the value of the portfolio actually grows (a lot) instead of declining. This is a drawdown rate of 7-8% in the early years, and then 3-4% once SSI kicks in.


I calculate to have my funds grow in perpetuity - planners seem to try to guess your lifespan and then aim at being broke at death. Two things wrong - (1) if you are used to being wealthy, you are not going to enjoy being near-broke at age 95, and (2) it would be nice to leave money to the kids. Given that, I set my draw down at 4% and my growth rate at 4%. (The growth rate offsets the fact that your drawdown amount will need to increase as your fund decreases).

As for avoiding taking SS early - there is something to be said for taking it early to avoid pulling 8% out of your portfolio- it might be better to leave that money invested for the next 40 years, and use the SS pay-out?

Pfau: He gets dangerously close to recommending Reverse Mortgages, not good, they loan you a very small amount and at a high rate. And he even seems to like annuities. Yike. lol
Post Thu Jan 11, 2018 10:45 pm
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kennyw
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Originally posted by oldguy


I calculate to have my funds grow in perpetuity - planners seem to try to guess your lifespan and then aim at being broke at death. Two things wrong - (1) if you are used to being wealthy, you are not going to enjoy being near-broke at age 95, and (2) it would be nice to leave money to the kids. Given that, I set my draw down at 4% and my growth rate at 4%. (The growth rate offsets the fact that your drawdown amount will need to increase as your fund decreases).

As for avoiding taking SS early - there is something to be said for taking it early to avoid pulling 8% out of your portfolio- it might be better to leave that money invested for the next 40 years, and use the SS pay-out?

Pfau: He gets dangerously close to recommending Reverse Mortgages, not good, they loan you a very small amount and at a high rate. And he even seems to like annuities. Yike. lol


I'm not an expert. Heck, I'm not even retired, - yet!

But it seems to me that by setting a constant rate of return and a constant withdrawal rate, you're not even allowing for "order of returns" risk.

What would you do if your nest egg suddenly faced a double digit negative return? Would you still withdraw that 4%? Would you go back to work, or reduce your standard of living? Or, do you have a cushion of cash to ride out the market?
Post Fri Jan 12, 2018 2:47 am
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oldguy
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if your nest egg suddenly faced a double digit negative return?


That's not an 'if', it is a "when". The >10% pull-backs are fairly common, they have happened to me since retirement, 2003, 2007, 2015. I don't do anything, it's kinda like a blown-out tire - ie, don't brake, don't steer, just 'be gentle' and coast to a stop. If your planning was right, the 'order of returns' is already in place.
Post Fri Jan 12, 2018 1:19 pm
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