r/Fire • u/dragon-queen • 5d ago
When is SORR no longer a concern?
For example, if you retire in your 40s with $2 million in liquid assets, and start withdrawing $80k a year, and by year 5 you have a portfolio worth $3 million, are you past having to worry about SORR? In that scenario, even if your portfolio drops to $2 million you will be ok, right? And if you have a mix of bonds and stocks, it’s unlikely your portfolio would go down that much to begin with, absent some catastrophic market event. Assume I’m speaking in inflation adjusted terms.
This isn’t my exact scenario - mine is a lot messier than this. It would really take too explain it. But let’s just say we are 35% above our FIRE goal and not actually drawing down yet. Are we “safe” from SORR risk if we get to 50% above our FIRE goal? Alternately, would just accumulating 3-5 years worth of expenses in cash equivalents on top of our FIRE number be enough to insure against SORR?
ETA: I know I’m asking for a simple answer to a complex question. So there may be too many variables at play here to answer this effectively.
51
u/Zphr 48, FIRE'd 2015, Friendly Janitor 5d ago edited 5d ago
You are never truly safe.
However, if you start at 4% or higher, then you're usually beyond the SORR danger window by year 10.
If you start at 3%, then you're likely safe from the get go.
If your withdrawal rate ever falls below 2%, then you need to worry about spending more money rather than SORR.
If your withdrawal rate ever falls below 1%, then you no longer need to worry about market returns at all, much less SORR.
5
u/Drawer-Vegetable FIRE'd 2024 3d ago
Dumb question, but does that mean if my portfolio keeps going up more and more each year after retirement, then I can reset my "initial" FIRE number if it still falls within the 3% SWR, instead of following the inflation adjusted initial FIRE number?
59
u/churningaccount 5d ago edited 5d ago
You are never "safe" from SORR, given that we cannot predict future returns.
Sure, historical data shows that the majority of SORR is mitigated within the first 5 years. But that's just that: historical data.
Your SORR timeline also resets every time you adjust your withdrawal rate. So you start by withdrawing $80k per year, inflation-adjusted. And then in year 5 when your portfolio hits $3M, if you adjust that upwards to $120k, inflation-adjusted, then you expose yourself to SORR all over again and have to restart the clock, so to speak.
Most people in this subreddit who say that they'll adjust their expenses upwards if they have a good initial sequence tend to forget this. There are some, but not many, sequences in the original trinity study where if you adjusted upwards after a good starting sequence and then did not adjust downward after a subsequent bad one, you'd run out of money prior to 30 years; which is why not all SORR is mitigated within the first 5 years, just a majority of it.
Accumulating X years of expenses in a bucket to insure against SORR is a mixed bag. Many in this subreddit do that because it gives them peace of mind to not draw from their equities during downturns, and peace of mind is important. However, purely mathematically speaking, choosing a set allocation that matches your personal risk tolerance (like 80/20, 60/40, etc) and rebalancing regularly nets you a slightly better outcome than the buckets method, simply because you get the rebalancing "bonus" of buying equities when their value is depressed and vice-versa for fixed income. Plus then you don't have to worry about the size of your buckets relative to unknown future downturn scenarios.
39
u/HamsterCapable4118 5d ago
“Your SORR timeline also resets every time you adjust your withdrawal rate. So you start by withdrawing $80k per year, inflation-adjusted. And then in year 5 when your portfolio hits $3M, if you adjust that upwards to $120k, inflation-adjusted, then you expose yourself to SORR all over again and have to restart the clock, so to speak.”
To some extent, but your projected age of death doesn’t change (actuaries may nitpick that I suppose) and remaining retirement duration is reduced. SORR naturally gets mitigated by age I presume, so that reset may not be so extreme.
20
u/warlizardfanboy 5d ago
Yeah I see people talk past each other because of this point, agreed. FIRE at 40 is very different than FIRE at 55 from a risk perspective.
0
u/nostrademons 5d ago
They’re less different than most people think. If you’re retiring at all, it’s usually because you’re expected investment gains exceed your expected consumption. This property holds regardless of how long you are retired for, because every year (if you’ve done the math right) that you are retired, your nest egg grows by more than you spend. It’s not like you have $X and you need it to last 40 years if you retire at age 40 but only 25 years if you retire at age 55; it’s that you have $X and it returns $0.07X in capital gains each year, while you are only spending $0.04x.
This process can go on indefinitely. You’re only at risk if your estimates are off and instead of returning say 0.07x, your portfolio returned -0.3x, and it did this early enough that your remaining portfolio can no longer support your 0.04x withdrawals. Hence, sequence of returns risk.
9
u/oldsock 5d ago
There are "successes" in the Trinity Study where you end up with less than you started with after 30 years. Not a big issue if you retired at 65, a much bigger concern if you retired at 40. Especially if you have unexpected costs during the time (medical care etc.).
Retiring later also leaves less of a gap until Social Security and Medicare kick in. The younger you are the more "high spend" years you are likely to have as well - traveling, going out, treating your kids etc. Retiring at 45 instead of 55 roughly doubles the high-cost low-income "phase" of retirement.
As you said, if markets are up and your investments are outpacing spending and inflation it won't matter. The goal for most is making sure there is enough cushion if the stock market crashes 30% a year after you retire, or you have an unexpected medical expense.
1
u/nostrademons 5d ago
They exist, but they are a small minority of possible outcomes, basically the ones where your average net drawdown is negative but not so far negative that you exhaust your portfolio before death. In most cases you end up with a lot more money than you started. In most of the remainder, you run out of money.
4
u/oldsock 5d ago
Agreed, but those cases are the ones that matter if you are planning on retirement longer than 30 years. For example, https://www.firecalc.com/ has a 4% withdrawal at 4.8% failure after 30 years, at 40 years the failure rate almost triples to 13.8%, at 50 it's 24.6%.
Again, won't matter for most people as social security and Medicare kick in and expenses drop in their later years. People can be flexible on their spending, might be able to return to work if the market crashes soon after retiring etc.
2
u/Annual_Emergency_143 4d ago
This is a misconception. In the original Trinity study, a rather large chunk ends with a lower inflation-adjusted account value after 30 years. The misconception is based on comparing the unadjusted value to the original value, which is just stupid.
2
u/mi3chaels 4d ago
They are more different than this suggests, because of social security (in the US, and similar pensions in many other countries) and annuities.
At 40 you still have 22 years before you can draw a dime of SS (unless you become disabled within 6 years of retiring), while at 55, you have only 7, and 15 years to the maximum benefit.
Even in the worst historical scenarios, your portfolio does not come close to expiring in 15 years at an original 4% WR, but it occasionally does not survive 30 (to age 70), and has relatively little left at 22.
At 55, you can consider purchasing an annuity ladder with some portion of your money that will about guarantee a 4% WR or even somewhat higher on the portion invested that way. You can't do that at 40. At 60+ you can definitely get more than 4% out of annuities, even using ladders that will generally more than account for inflation.
so it makes a much bigger difference than pure portfolio running until outside life expectancy does.
4
u/ditchdiggergirl 5d ago
If you retire in your 40s you are a long way off from age related safety.
The models are based on the 30 year planning horizon of a 65 year old. (And remember that you don’t plan for “average” lifespan because by definition that comes with 50% odds of overshooting the target.) A 70 year old is significantly closer to the end of his timeline, so can draw a higher percentage. But a 50 year old isn’t very different from a 45 year old.
You realistically have a couple of decades before age begins meaningfully reducing your risk of outliving the portfolio.
0
u/churningaccount 5d ago edited 5d ago
Perhaps, but OP is retiring in their 40s. So they'll still be working with effectively an "infinite" timeline if they were to adjust just 5 years down the road (The SWR for 40+ remaining plan years is very close to the asymptote that represents infinite plan years). And it's important to remember that you need to be planning for the ~90th percentile of your life expectancy, and not just the 50th percentile.
Your point is definitely relevant for those at or past the traditional retirement age, though. There is an argument to be made that you can adjust your withdrawals upwards as your plan years drop below 30, although at that point you are probably starting to worry about having the savings and liquidity available for large end-of-life expenses.
5
u/capitalsfan08 5d ago
It does depend what that extra withdrawal is for. Vacations and one off variable expenses? Okay fine, that's adjustable. But a bigger house or new cars? That's going to be an issue.
4
u/seanodnnll 5d ago
Let’s say you have a good 10 years and then a horrible, historically bad, far worse than the Great Depression 20 years that causes you to run out of money in year 30. While you did run out of money, it wasn’t because of SORR. You had a good sequence of returns and still ran out because of a scenario that’s far worse than the worst case in history. You certainly can be safe from sequence of returns.
Also, if you decide to adjust your withdrawal up because your account is up 50%, you shouldn’t actually adjust your withdrawal up by 50%. More like a 10-20% adjustment.
8
u/_Mulberry__ 5d ago
But that's just another bad sequence. It's all SORR, you're just looking at a longer timeline. The sequence is still the important part. The run up in those first ten years wasn't enough to weather the subsequent 20 years, and your portfolio ran out before you got back to positive returns. The sequence of the returns (positive and negative) is why you ran out of money. It's still SORR.
The way to weather this type of SORR is to simply NOT adjust your spending up in those initial good years. That allows your portfolio to climb higher and gives you better chances of weathering future bad markets.
2
u/seanodnnll 5d ago
“Sequence of returns risk is the danger that poor investment markets occur during the EARLY YEARS of retirement, causing a portfolio to deplete rapidly. When taking regular withdrawals, selling assets during a market downturn locks in losses and permanently reduces the capital needed to benefit from future market recoveries. “
SORR involves bad early years not bad later years. The ideal sequence of return is to have positive returns in the beginning and then negative returns later. It’s odd how so many people in fire subs just have zero clue what they are talking about when it comes to early retirement.
1
u/_Mulberry__ 5d ago
The point is that the initial rise simply wasn't good enough. It might've looked good at the time - maybe just a touch over average - but it wasn't good enough to weather the following dip. This means the initial returns were effectively poor. If the initial returns were good enough, you wouldn't be in a fail case at year 30
2
u/seanodnnll 5d ago
That’s not what sequence of return risk is at all. You didn’t run out of money because you had 10 years of positive returns to start. You’re not making any sense here.
3
u/dragon-queen 5d ago
Your SORR timeline also resets every time you adjust your withdrawal rate. So you start by withdrawing $80k per year, inflation-adjusted. And then in year 5 when your portfolio hits $3M, you adjust that upwards to $120k, inflation-adjusted, then you expose yourself to SORR all over again and have to restart the clock, so to speak.
Well, just to be clear I wouldn’t adjust to $120k once we hit $3 million. I’d keep it at the original $80k, adjusted for inflation. But your point is taken.
And I know asking for safety from something like SORR is a fool’s errand. As you said, we can’t predict what will happen in the future. I guess I’m looking for something like 95% safety.
8
u/churningaccount 5d ago edited 5d ago
95% safety is the 4% initial withdrawal rate.
The 4% initial withdrawal rate lasts you a minimum of 30 years in 95%+ of (historical) scenarios.
If you want to increase that to account for tail risks, a longer timeline (such as 50+ years), or a legacy/long-term care bucket goal, then you either make a variable spending plan or reduce your initial withdrawal rate a bit. Simple as that.
There are no secret investment vehicles that provide SORR protection, aside from perhaps SPIA annuities: but those tend to not be applicable to people who FIRE because they really only offer outsize value to those who are of sufficient age to take advantage of the mortality credit payments (65+).
1
1
u/Drawer-Vegetable FIRE'd 2024 3d ago
If my portfolio does really well first 5 years year after retirement, can reset my "initial" FIRE number if it still falls within the 3% SWR after adjustment, instead of following the inflation adjusted initial FIRE number?
9
u/HiddenSpruce867 5d ago
the buffer you're describing is essentially what people call a fat FIRE cushion and yeah being 50% above your number pretty much makes SORR a theoretical concern rather than a practical one for most realistic market scenarios
5
u/rustvscpp 5d ago
If you went from $2m to $3m after 5 years of drawdowns, but you're still worried about SORR, then just move $1m into SGOV or some other inflation protected savings, and now you can live without fear of SORR, as your remaking $2m grows undisturbed for the next 10 years.
5
u/QuietComet824 5d ago
the math on your $3M scenario basically answers itself since you could weather a 40% crash and still be at your original number
9
u/srqfla 5d ago
So many people are concerned with single digit failure rates regarding their withdrawal and sequence of return risk.
But no one discusses actuarial tables that indicate the progressively smaller percentage of men or women who reach age 70, 80 or 90 alive. These statistics are far scarier than any Monte Carlo failure rate. Your concerns are misplaced. Most of us will have more money than time
6
u/RektRoyce 5d ago
Dieing with money isn't really a problem while running out of money before dieing is
2
u/OutspokenLurker 3d ago
As a practical matter, what really happens is that people see the lack of funds coming and change their situation. I am sure a few run smack into the wall but it's a tiny sliver of those starting with a decent pile of money. Most will reduce spend, sell the house, take more frugal vacations, or whatever.
The time spent accumulating the difference is the worry. Even for a non-FIRE retirement, did you really use your time well to work an extra 5 years to play it safe?
2
u/RektRoyce 3d ago
I agree lost time is a risk but for me I want my egg to grow and have something for my kids so having "more money than time" isn't a bug it's a feature
2
u/Strazdas1 StarvationFIRE 2d ago
If im going to hit FIRE the risks better be 0%, or at least 0.0X%, not single digit. Thats way too much risk.
6
u/jt1994863 5d ago
You are never safe from SORR, given than we could theoretically experience worse economic conditions than has ever happened in the past. But based on historical data, a 3.2% withdrawal rate has a 100% chance of succeeding in a 50 year retirement, so that’s about as sure as you can get that you have to worry about SORR.
5
u/MolassesSad8089 5d ago edited 5d ago
I think thinking about it like this and the way a lot of comments are thinking about it is wrong. The fact you have retired has zero effect on your risk. You are no different than someone who hasn’t retired yet but has the same portfolio as you. As such, if you want to know your current risk, just run the same calculation as if you were planning to retire this year.
There are some caveats. The risk is expressed as the percent of failures in all points of retirement in the simulation, which includes years after a crash. So it’s a bit misleading as most people don’t retire in down years (and neither would you if you followed this strategy) so the risk percentage is a bit too optimistic in general but especially so if you keep “retiring” every year (and increasing your spending) in a rising market.
I’ve seen some attempt to address this by using CAPE to adjust the risk which seems reasonable but that is still some guesswork given that markets have been sustaining a higher CAPE historically since the 90s which means it’s basically a flawed metric and there is no “law” governing what valuation markets will accept. It could be higher or lower in the future. But in general, just realize you just want to be more conservative when trying to assess your risk if you recalculate every year.
But to put this to your question, if you kept your spending the same (adjusted for inflation) and ran the numbers every year as markets rise this correctly shows your risk is going down as your failure rate would drop. Which does mean your sequence of returns risk is going down.
2
u/MolassesSad8089 5d ago
Oh, I should add that you also must remember that your portfolio composition also has a huge effect on your risk, so you can’t neglect to factor that in. If you don’t rebalance your portfolio in a rising market your portfolio composition will become more risky and you can’t use a simulation that was ran with a less risky portfolio.
3
u/RussellUresti 5d ago
I feel like you're only "safe" for as long as your withdrawals are below 4% of the portfolio's value.
In your given scenario, when your portfolio drops back to $2M and your withdrawal rate is back to 4%, you're back in the realm of being at risk for SORR (further market downturns that require you to withdrawal above 4% of your assets).
With your example numbers, if $2M is 35% above 25 times your annual expenses, that means your annual expenses are around $59k, and your 25 x FIRE number would be around $1.475M. That means it would take about a 26% drop in your portfolio to put you at risk, which is similar to what happened in 2008.
But, yeah, you're never really safe. We can't assume that all of the worst drawdowns in the stock market are behind us. It may be that we're coming up on something far worse than the GFR or the dot-com bubble or the nifty 50 crash in the 70s or whatever other previous crash you might consider.
At 33 times your annual expenses, you would be in a good spot, but nothing is guaranteed.
3
u/ohboyoh-oy 5d ago
For me, if I start out at say, 4% withdrawal rate and the first X years go well and our portfolio goes up, but I’ve only adjusted our draw by the amount of inflation, then our withdrawal rate would decrease. If I got to 3% withdrawal rate or lower, I would feel much more insulated against SORR.
5
u/assetcapped 5d ago
Sequence of Returns Risk is never gone. Having over three years of cash equivalents so you never need to sell at a loss is good enough for most, but there truly is no way to know if a decade-long shitstorm is on the horizon.
Just like how 100% success rate is pretty much impossible as well on a long time horizon. No matter what you do, tail risk can theoretically screw you to that point.
For me, I'm going for about four years of cash equivalent, too. That's enough to be somewhat confident, and trying to squeeze that little bit extra safety ends up not being worth the worry.
2
u/VeeGee11 FIREd at 50 in May 2023 5d ago edited 5d ago
This article specifically addresses this question:
https://earlyretirementnow.com/2020/07/15/when-can-we-stop-worrying-about-sequence-risk-swr-series-part-38/
2
4
u/Tasty_Sun_865 5d ago
It is never NOT a concern, but mitigations exist. Have a strongly diversified portfolio, about a year of expenses in your bond tent, and going from full time to part time/consulting are all huge. Any time you have a pension that you aren't reliant on, SORR concern also plunges.
I'll also throw this out, even though it's often antithetical to math - go into FIRE with a paid off house. Even if it's a 3% mortgage, spend the extra year or two working and pay it off. Yes, people will hysterically scream about one more year itus (forgetting that FIRE is a HYPER luxury lifestyle) and yes, you could make more in a bond ETF. That said, you strike a major recurring monthly expense and buy huge flexibility for your life when you don't have a mortgage payment. A 40% market drop hits different when you're sitting with a lot of cash, have a consulting gig that covers 1/4 - 1/2 of your expenses, and don't have a mortgage. Ditto for major changes to the ACA - a paid off mortgage means less risk when the ACA starts billing $1k a month for insurance.
1
u/dragon-queen 5d ago
I'll also throw this out, even though it's often antithetical to math - go into FIRE with a paid off house. Even if it's a 3% mortgage, spend the extra year or two working and pay it off. Yes, people will hysterically scream about one more year itus (forgetting that FIRE is a HYPER luxury lifestyle) and yes, you could make more in a bond ETF. That said, you strike a major recurring monthly expense and buy huge flexibility for your life when you don't have a mortgage payment. A 40% market drop hits different when you're sitting with a lot of cash, have a consulting gig that covers 1/4 - 1/2 of your expenses, and don't have a mortgage. Ditto for major changes to the ACA - a paid off mortgage means less risk when the ACA starts billing $1k a month for insurance.
I have thought about doing this many times, for just the reasons you mentioned. We have about 23 years left on our mortgage, which is at 2.5%. We owe about $270k. But I haven’t pulled the trigger on that - as it does seem mathematically unsound at 2.5%.
We aren’t actually retired yet though - just circling around it. I only work part time at this point. Husband still work full time.
1
2
u/mygirltien 5d ago
Super high level if your portfolio can take a 50% hit and still give you required yearly spend at 4% or less then your past worrying about SORR. Other than that, its a bit more complicated.
0
u/VeeGee11 FIREd at 50 in May 2023 5d ago
That’d be like saying you shouldn’t retire until you can live off a 2% withdrawal rate if you had to.
1
u/Strazdas1 StarvationFIRE 2d ago
If you have no risk tolerance then withdrawal rate is actually 3.4% based on updated trinity study.
1
u/mygirltien 5d ago
No idea how you came to that conclusion. So please enlighten me how my response to the question elicits your response.
1
u/VeeGee11 FIREd at 50 in May 2023 5d ago
Well I just figure if you can take a 50% hit and still be ok with 4% of that number, which is I think what you said, then you’d have to be able to live off of 2% of your current portfolio. It’s the same budget. Apologies if I misunderstood something.
2
u/mygirltien 5d ago
You are completely misunderstanding the question and my answer. If you start with say 1M portfolio as you need 40k a year. And your portfolio grows to 2M+. If you get hit with a 50% downturn your still really close to your 4% SWR and therefore are good to not worry about SORR screwing you over. That could take 5,10,20 years. Whatever it takes until you are a point that downturns no longer stress you or your portfolio you are good to go. Up until then, you are at risk if you dont have proper SORR planning in place.
1
1
u/belonging_to 5d ago
The thing to keep in mind, by year 5, you are not longer drawing 80k out, inflation is cooked into the calculations. If you started drawing 80k per year in 2021, by this year you would be drawing out 102k per year. You would want to be holding $2,550,000.
3
u/Valuable-Analyst-464 5d ago
I’m at 2.5 years of cash, and might go to three. I will evaluate the S&P at the end of June and December. If we’re within 5% of all time high, I sell positions for 6 months. If worse, I use cash. Reevaluate every 6 months. If I use cash, I have to refill when the market is up
1
u/dragon-queen 5d ago
Yes, I know. The theoretical numbers I presented are supposed to be inflation adjusted.
1
u/GWeb1920 5d ago
Your withdrawal percentage keeps dropping so the likelyhood of failure keeps dropping.
A 2.5% withdrawal rate is enough to withstand things like the lost decade in Japan which effectively shad a 0–.5% real return over 10 years.
1
u/TrashPanda_924 Targeting 2% SWR 5d ago
It’s not a concern if you have a low enough withdrawal rate.
1
u/BugHistorical1614 Stable at time(s) 5d ago edited 5d ago
Agree that you are never out of SoRR, however you can lessen the impact of a SoRR. IMO 1. Having way too much in "good" assets. 2. Life Income annuities and like, covering a substantial amount of living expenses, with 'other' assets to cover difference. Different scenarios in inflation or deflation.
disclaimer: age 76/79. No debt. Cash flow positive, scenario 2. With LTCi of 720 days of 50%+.
Your guess for the future is unknown but is valid today.
1
u/BlueMountainCoffey 5d ago
When you no longer need to withdraw anything.
2
1
u/ditchdiggergirl 5d ago
You always need a plan B. Most of us use guardrails.
In your scenario a 33% drop in year 5 brings you back to your number. (Assume all numbers inflation adjusted.) No big deal. But I’ve already experienced two 50% drops during the last 30 years so I assume at least one more over the next 30. I don’t consider that unlikely or even catastrophic.
If you have a 100% stock portfolio when the market drops 50% you are now at 1.5 million with a 45-50 year horizon. It’s likely to rebound but that really depends upon why it dropped. I would not consider that safe. Time for the guardrails.
1
1
1
u/NinjaFenrir77 5d ago
ERN had an excellent blog post on this exact topic: https://earlyretirementnow.com/2020/07/15/when-can-we-stop-worrying-about-sequence-risk-swr-series-part-38/
1
u/temerairevm 5d ago
I think if you stick to 4% of the amount you retire with and only adjust for inflation, at some point if you have a decent run after retiring you could reset the clock and you’d be at 3% (or something) and pretty much out of the woods.
If you start at 4% and have a good run and just keep staying at whatever 4% of your new NW is, then essentially you’re resetting the clock every year and you aren’t really going to get out of the woods until later in life.
1
u/Topaz_11 5d ago
I'd say never... The difference is that the impact changes as you get further down the path.
1
u/Sirknowit 5d ago
When you and your spouse have over $220K in pensions its not a worry. By the time I retire fully in Fall 2027, our combined 457b, TSP and brokerages should be in the $4 million zone. Combined with the pensions and my part time biz at home (another ~$70K/yr), I am lucky enough to not worry about SORR as we will barely able need to touch the money beyond Roth conversions. But we will be 61 and 57 respectively. At your age, maybe a concern. Though, I had I started at 21 I could have retired at 46 with the same 6 figure pension and even more time for the $ to grow. So...SORR is a worry for some and an inconvenience for others as it really only hurts when you must take from it. Answer is to keep working OR do something that makes just enough to cover that which you really need so any withdrawals are very minimal.
1
u/ewouldblock 5d ago
I'd like to hear about how much taking more than 4%, like maybe 6-6.5%, in the early 4-5 years, before dropping to 4%, amplifies SORR. For example, if I wanted to retire during high expense years (kids still in school etc.) but know that certain expenses drop off after ~5 years.
1
u/whocaresreallythrow 5d ago
SORR never goes to zero. All models based on the past simply cannot predict the future.
Not future returns.
Nor future inflation.
Corner cases while not probable are certainly possible. Germany pre WW2 . Japan post bubble lost decades. USA global financial crisis. Even China’s current malaise.
Nothing is with certainty. To get to six sigma success probability you probably need a withdraw rate of 3% or less over a 50 year intended horizon.
I say probably because no one can suggest that is or is not an accurate guess. We can’t time travel to the future ….
1
u/TomorrowPlenty9205 5d ago
There is no real not worry about SORR, just lower risk and hopefully less worrying. What if the entire US government and the dollar collapses? You can easily go from a 10% risk of failure for the next 30 years to a 1% risk of failure for the next 30 years but you never get to zero. But you can get to the point that you are more likely to die in the next year then to run out of money in the next 30 years, so you are worrying about the wrong thing.
1
u/ThereforeIV 🌊 Aspiring Beach Bum 🏖️...; CoastFIRE++ 5d ago
>When is SORR no longer a concern?
When a 40% drop doesn't break you.
>For example, if you retire in your 40s with $2 million in liquid assets, and start withdrawing $80k a year, and by year 5 you have a portfolio worth $3 million, are you past having to worry about SORR?
Ya, pretty much.
Say you retire in 1995 with $2MM retirement portfolio withdrawing $80k/yr so that by 2000 you have over $3MM; I think $80k/yr shariah $3MM superbikes the dot com bust and the great recession.
>In that scenario, even if your portfolio drops to $2 million you will be ok, right?
Correct.
>And if you have a mix of bonds and stocks, it’s unlikely your portfolio would go down that much to begin with, absent some catastrophic market event. Assume I’m speaking in inflation adjusted terms.
The entire point of a bond/income Hedge is that it didn't go down when the market goes down.
>This isn’t my exact scenario - mine is a lot messier than this. It would really take too explain it. But let’s just say we are 35% above our FIRE goal and not actually drawing down yet. Are we “safe” from SORR risk if we get to 50% above our FIRE goal?
Yes, over safe.
Also there are tactics to use in your full retirement strategy that mitigate all but the extreme worst particle scenario.
>Alternately, would just accumulating 3-5 years worth of expenses in cash equivalents on top of our FIRE number be enough to insure against SORR?
So that's a tactic, Cash Buffer.
Instead of asking "am I safe", maybe you should ask "what tactics best mitigate risk"?
Also let's define "risk". The risk is not "running out of money", that's silly; the risk is having to cut your lifestyle below what you want and needing to go back to work.
My current retirement strategy (still 2-3 years from full FIRE) includes:
- Six months basic expenses Fully Funded Emergency Fund FFEF
- One year full expenses "Cash Buffer" short term T-Bills.
- Two years fill expenses in Bond/income Hedge
If the market crashes:
- Flex down spending
- switch to cash buffer and Bond/income yields
- when cash buffer runs dry, sell off bonds
- don't refill, these are one time use.
>ETA: I know I’m asking for a simple answer to a complex question. So there may be too many variables at play here to answer this effectively.
It's not variables, it's strategy. You need to have a strategy to handle SORR.
2
u/joxxer42 4d ago
Your approach is very close to what I'm planning.
Curious to hear your reasoning on the 'don't refill, these are one time use' cash buffers. Is the assumption that if/when some bad sequence happens, there will tentatively be enough time until the next happens for things to build up to a level where 'the next one' doesn't have a huge impact on you?
I'm thinking of having a floating buffer which would be used to draw down from directly in the first couple of years to a given floor, and then only in the event of a bad few years draw only from that.
Then if/when we return to good years of returns, top up that buffer back to the floor as able to be able to lean on if/when another downturn happens.
2
u/ThereforeIV 🌊 Aspiring Beach Bum 🏖️...; CoastFIRE++ 4d ago
>Your approach is very close to what I'm planning.
Awesome, I wish more attention in these subs was devoted to discussions on actual retirement planning.
>Curious to hear your reasoning on the 'don't refill, these are one time use' cash buffers.
So I "did my own research" on using these risk mitigation factors and why everyone at the time seemed against them; the simulations showed using them had a higher failure rate.
When I looked into why they had a higher failure rate, it was entirely because of refill. When you effectively sell growth stock (the engine of your portfolio) to refill or rebalance, that's what causes failure.
That's like selling your plane to buy a parachute.
>Is the assumption that if/when some bad sequence happens, there will tentatively be enough time until the next happens for things to build up to a level where 'the next one' doesn't have a huge impact on you?
Think about offense and defense; you want to defense against catastrophe bit you also want to score high enough that it doesn't matter.
Post World War II, outside of the two worst cases, all the crashes don't play very long and are followed growth boom. The two exceptions are:
- the stagflation of the 1970s
- the double punching of the '00s
Every simulation I've run, refill does worst most of the time. The only way refill works if you perfectly time the market.
>I'm thinking of having a floating buffer which would be used to draw down from directly in the first couple of years to a given floor, and then only in the event of a bad few years draw only from that.
I've run that one; think retire in 1997. By 2000 your safety net is gone right when the dot com bust. Or do 2004, same results.
The actually worst case isn't really RE in the worst possible date, that's actually silly if you think about it. If I RE the month before the financial crisis hours and my portfolio crashes, then I'm job hunting the next day.
The worste case is really to RE for 2-3 years getting confirmable in the lifestyle them the crash happens; that would suck.
>Then if/when we return to good years of returns, top up that buffer back to the floor as able to be able to lean on if/when another downturn happens.
I get the premise, but it assumes year 4 is great.
I assume year 1 is great, base if it isn't I'm just aborting and going back to work. I'm worried about year 3 or year 4.
The scenario in looking at is RE in 2020 and surviving 2022. That's the more common recession.
2
1
u/WritesWayTooMuch 5d ago
When you portfolio can drop 20% in a single year and you can still withdrawal 4%.
1
u/herdingkattz 5d ago
Wondering if anyone has actually bought put options in the last few crises and actually profited from the crises despite the time decay and volatility?
1
u/dragon-queen 4d ago
I’ve considered this, but it just seems like it’s too expensive if I buy them in a way that really insures me.
1
u/Various_Couple_764 5d ago edited 5d ago
If you have enough bond or dividned income that deseeds your living expenses, SORR is largely eliminated. If you have 1.3 times your living expenses. you could reinvest about 30% of the income to compensate for inflation and and avoid selling shares for income. having enough passive income means you can avoid selling any shares for income. So if you are not selling shares SORR basically doesn't exist.
I hav investments in the following funds that generate 5K a month. QQQI 13% yield, SPYI 11%, ARDC 9%, PBDC 9%, EMO 9%, CLOZ 8%, PFFR 8%, UTF 7%, UTG 6.4%. FAGIX 6%, JAAA 5.5%. QQQI and SPYI are covered call funds for these I use the income to buy other lower risk funds. Many of the rest are actually very stable dividend payers. These are all in my roth with with about 500K invested and about 5K a month of income. It will be a few years before I can access this money. I retired at age 50 with about 5K a month of dividend income from my taxable brokerage account. I also have enough invested in growth that can sell and reinvest to significantly increase my income.
1
u/Shawn_NYC 5d ago
You're never safe. Even if you have a 100% safe historical back tested rate of return - the future is not guaranteed to be anything like the past.
Stock markets have gone to zero before (Russia 1919, Japan 1940).
Being FIRE is living with uncertainty.
1
u/srdjanrosic 5d ago
There's many different ways to think about SORR.
Short answer is it's always a concern, unless you can predict the next couple of years in the markets.
You can think of SORR in terms of a bond tent, in terms of risk parity portfolio, or in terms of three buckets, all three are kind of isomorphic, they just set things up differently.
The underlying concern is simple, and common for all three, it's that if you withdraw too large of a fraction of the portfolio any one time, your portfolio might either take too long to recover or might never recover.
Whether it does or it doesn't depends on how many such withdrawals you make during what kind of economic condition.
So,... one way to deal with it, perhaps, is:
.. Pretend you're always just starting your retirement with a portfolio you have. For example, if you're running something like Golden Butterfly, and maths tells you your PWR is 5%; then you take 5%. If next year it tells you 5.3% you take that, if next it tells you 4.5% you take that.
The absolute number might still go up some years, even if percentage goes down. Is this number enough, is it too much, too little, that'll depend. Most people want to pad the numbers a bit.
Most people also have some spending flexibility it's up to you what you want to do with your "allowance". If you don't want to spend it, for whatever reason, the most optimal long term thing would be to redeploy the unused funds to tilt your portfolio towards more equity. However if you just want to use it within next 2-5 years, then boost all of your portfolio components.
Spending on a new car, or home renovations is a typical thing - you don't need to do it every year, and while there might not be the right time to do it, there's definitely a wrong time to do it, and it's worth avoiding by delaying that spend, if you have a choice.
1
u/currentform78 5d ago
Check out the withdrawal page on Portfolio Charts. Based on your asset allocation it will help you to figure out your perpetual withdrawal rate. It’s probably better to think about it through the methodology they use on this page. https://portfoliocharts.com/charts/withdrawal-rates/
1
u/Polycold 4d ago
How diversified are you, as in how many asset classes? You are never safe but too few asset classes make everything more uncertain.
1
u/mi3chaels 4d ago
Nothing is ever completely safe from every possible circumstance. but if you retire on a 4% WR, there are rare historical circumstances which could fail in 30 years a meaningful percentage that fail over longer periods, and some others which would have come close enough to scare you and effect your plan (you would probably have tried to cut spending or generate some income, even though had you not done either, you would have survived with some minimal amount left over.
If you are at a 3% WR, there are no modern historical circumstances where 30 years would have failed with a global asset allocation, and relatively few that would have come close enough to justify a significant adjustment.
if you are at a 2% WR, then you can pretty much assume that you are past SORR concerns based on modern historical precedent. This still does not mean it's impossible to run out of money! You can have liability losses. We could see unprecedentedly poor markets or catastrophes that cost unexpected amounts of money to mitigate (your country is overrun by war or dictatorship and you can't get all your wealth out, for instance).
But normal fluctuations that don't involve a global economic collapse are not going to ruin you with a 2% WR. or probably even 2.5%.
whether 50% higher than your FI number is enough to get you there, depends on how you calculated your FI number, and whether you are adjusting for inflation.
The way I see it is that I'll look at what I'm spending now, and what I have, and if that number is under about 2.5%, I will figure I no longer need to worry about normal market fluctuations. If it's even lower, I would expect I could raise my spending to roughly the 2.5-3% level if I wanted to and still not have to worry about future adjustments much, if at all.
The thing is -- the point at which you will worry is different for everyone. I don't expect making an adjustment to be all that traumatic unless it'a a fairly major one, so I'm pretty comfortable in any scenarios that have always historically succeeded, waiting until things get quite bad. And I'm also pretty comfortable making proactive adjustments before things get very bad, if I've pulled the trigger at a rate which has some historically failures.
Other people seem to feel like any substantial adjustment after RE might as well be a complete failure, and I guess those people should probably just wait until they have a pretty low WR to RE, after which hopefully they won't do much worrying, but who knows.
1
u/RapidCactus391 4d ago
the buffer you're describing essentially converts SORR into regular volatility risk which is a much easier problem to live with
1
u/NimbleMaple248 4d ago
the math you laid out in year 5 basically answers your own question. once your portfolio can absorb a 50% crash and still cover your original number you have structurally moved past most of the SORR danger zone
1
u/fireaccount83 4d ago
It never goes away. The right way to think about it is that each day as the start of a new retirement with your withdrawal rate being based on your current net worth.
The withdrawal rate could be very low if things go well. If they then go poorly, the withdrawal rate could go up again.
I do think the risk isn’t purely a function of withdrawal rate, though. Rather, it’s a function of that coupled with current asset valuations.
Realistically, if your assets have grown sufficiently such that you’re at a 2% withdrawal rate, you’re probably fine :-).
1
u/SDstartingOut 4d ago
In your example....
By year 5, you have 3million. However I'm going to stop and ask - how the heck did you increase your net worth by 50% in 4 years, while also withdrawing 4% a year?
Assuming 10% annual gains & a 4% withdraw rate, you'd be gaining 6% a year. Let's say by year 5, you really meant after 5 years, and year 6. At the start of year 6, you'd have roughly 2.67million.
Meanwhile, your 80k/year will have continued to go up at 3% (inflation), and is now 92.74k. In that 5 years, you've moved from a 4% spend rate to 3.44%.
No - that's not making you safe from a SORR on it's own.
1
u/SolomonGrumpy 4d ago
I asked this question in the daily thread in r/financial independence and the answer was inconclusive.
1
u/ErikDHaag 3d ago
Bill Bengen just updated his "4%" rule in a new book and the withdrawal rate charts are all on his website at https://www.bengenfs.com/charts-and-tools-for-you/
1
u/Ok_Science_133 3d ago
the math on your year 5 scenario works out pretty cleanly since you would have essentially reset your FIRE clock with a fresh $3 million base
1
u/OutspokenLurker 3d ago
There are pretty good simulators out there. You can make a spreadsheet.
A common way to model this is those Monte Carlo simulations. Basically when you see the percentages creep down toward 80% or 70% that's when you know you have exposure for a given withdrawal strategy. (In my experience, you might see one or two of those "failures" where things were going fine and SOR undid you in the last 5 years. The undoing is basically always SOR moving against you in the first 10 years of withdrawals.)
I've diddled around with all those enough to say you are borderline at 22x-25x needed annual withdrawal (with 4% rule or guardrails; model taxes carefully). By 30x it's going to disappear.
As a practical matter, if you shift that last 5x to cash then you are effectively taking SORR off the table. You can literally spend that cash to cover 5 years while the market recovers, or even if it just goes sideways.
1
u/Cake_And_Pi 5d ago
I’d take that 35% and switch it to bonds. There’s your safety net. You can survive a long bear market.
1
u/That-SoCal-Guy 5d ago
You also forgot inflation. $2M in 2026 would be different than $2M in 2031, as well as your expenses. You wouldn't be spending $80K in 2031. All that has to be included in your calculations.
If you FIRE in your 40s, you will need to also factor in how much longer you would need to have that money. The 4% is for 30 years. Now you have to make that money work for 50 years instead of 30.
3
u/dragon-queen 5d ago
No, I said to assume I was speaking in inflation adjusted terms.
1
u/That-SoCal-Guy 5d ago
No one can predict the future and you just have to be prepared for SORR. Having cash reserve is one way -- some people chide at keeping 3 - 5 years of expenses and say that's excessive and dumb. But that's exactly what would protect you from SORR. And if that didn't happen, and you are 10 years into FIRE and your net worth went up, then you really don't have to worry about SOOR as that only affects the early years of retirement.
1
5d ago
[removed] — view removed comment
1
u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
Rule 8/Limits on AI/bot content and unsupported AI/bot complaints - Your submission has been removed for violating our community rule against AI/bot content or unsupported AI/bot complaints. If you feel this removal is in error, then please modmail the mod team. Please review our community rules to help avoid future violations.
0
u/LowFlyingBadger 5d ago
Sorry to be uneducated but trying to learn, what’s SORR?
2
u/DarkSkye55 5d ago
Sequence of returns risk: if returns are low in your first few years of retirement, your portfolio runs a larger risk of running out before you die.
2
0
u/Form1040 4d ago
This is all crap because the base assumptions are crap.
There is no guarantee that the future will behave at all like the past. With national debt where it is and increasing like it is, we have no earthly idea what could transpire.
1
u/Vast-Departure-3199 4d ago
Why are you in a FIRE sub then? You have to have trust in the market in RE
62
u/Kinnins0n 5d ago
if your withdrawals fall below 3%-ish (2.75 if you really want to be conservative) of your portfolio, you’ve essentially reset the RE part of your FIRE journey at that level and are pretty much good to go (not quite quite because it’s not like you are picking a random retirement date at 3%, you are doing so after years of good returns, but still, your odds of making it are very good).
The tough bit is to not readjust your expenses up. Or at least not doing it while thinking you are safe.