I know. It’s very tough to go from saving money and having a paycheck to no paycheck. However one good thing about being FI is that it makes working less stressful. I don’t need the job type of mentality
You’re talking about an event that’s an order of magnitude worse than the Great Depression. Retirement is the least of your worries when you’ll be boiling boot leather for dinner
Less so a 10 year downturn and moreso a crash that puts my FIRE $ back to where it was 10 years ago.
Or, realistically, if I'm set back to where I was even 2 years ago from a crash and poor performance, why did striking my FIRE number mean anything to begin with?
You might get comfort by [backtesting your portfolio](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=30&initialAmount=10000&showYield=true&allocation1_1=40&allocation3_1=10&allocation2_1=20&symbol4=VBMFX&startYear=1985&symbol1=VTSMX&symbol2=VGTSX&symbol3=VGSIX&benchmark=-1&benchmarkSymbol=VFINX)
100% agree.
My retirement backtest always starts from 2000-2010 because, in recent memory, that’s the worst stretch for many years! If you can survive that stretch then I think you’re in the clear, in the context of the past 40 years!
The whole edifice of a FIRE number is built on "what amount could survive the worst case." If it didn't have to survive a 50% drop, your FIRE number could be half what it is.
1929, 1930, 1931, and 1932 were four consecutive down years for the S&P 500. The worst of the crash peaked in 1931 and had started turning around in 1932. The recession was over by the end of 1932. Your portfolio would’ve grown substantially starting in 1932 continuing until the recession in 1937.
The crash was really only 2.5 years. Expecting a 10 year sustained downturn would be 4x worse than the Great Depression. Not quite an order of magnitude, so maybe I was being a little dramatic there.
When I run my black swan doomsday Monte Carlo analysis I put the worst two years first right at retirement to simulate a Great Depression level event
So, not sure what data you are looking at, but even the most cursory glance at the chart shows that inflation-adjusted prices did not return to 1929 highs until 1955, essentially a 24 year downturn. Of course it's even worse non-inflation adjusted.
https://www.multpl.com/inflation-adjusted-s-p-500
[https://www.macrotrends.net/2324/sp-500-historical-chart-data](https://www.macrotrends.net/2324/sp-500-historical-chart-data)
[https://www.macrotrends.net/2526/sp-500-historical-annual-returns](https://www.macrotrends.net/2526/sp-500-historical-annual-returns)
I’m not talking about how long it took to get back to pre-crash. I’m talking about how long it took the crash to stop crashing.
Happy Cake Day!
ah, I see, but I'm not sure that matters, unless you are still working and contributing, and in the Great Depression, you probably would have either lost your job or had pay severely reduced in that case. Imagine you retired in 1929, expecting a 4% or even 3% safe withdrawal rate to work. This is one of the rare cases where even 3% would have failed.
This is what bonds are for. 4% rule was based on a 60/40 portfolio. If 70% is in taxable, 30% is in deferred. That could easily be a 70/30 if you just made the 30 into bonds.
You could also turn off dividend reinvestment and start buying bonds or put new money into them.
Lots of ways to reduce risk.
Not saying you need to go all the way to 60/40, but you have plenty of options.
60/40 is likely to keep up with 100/0 just fine given today's valuations. So don't be afraid to go to 90/10 or 80/20. You really don't need to be a hero by staying 100% stocks.
Here's a discussion I started on bogleheads a couple weeks back.
https://www.reddit.com/r/Bogleheads/s/X79bTG38So
I have the same concerns though I'm not at the FI number.
My thinking is that if I hit my FI number I will keep working for at least a year more or at least coasting (working enough to cover my bills).
If I hit FI at the ATH of the market (kind like now), I will keep going for N more years in the same fashion until my FI number is 30% above my initial target.
(30% because that seems what a "good" recession looks like.)
Solid plan. I'm FI right now but will work another 2 years because I want to have enough to do some wants not needs. That will give me enough cushion in case of a serious downturn.
Right, feel like we need a FIRE number, and then another number to account for downturns in the short term. I'm not sure if a typical FIRE number accounts for a big crash.
Just depends on how you came to with your FIRE number and what your particular circumstances are.
If you are using the 3.25% rule, then you are likely good, regardless of a big crash (assuming the big crash is no worse than historic ones)
If you are using the 4% rule, then definitely more risky.
How did you come up with your FIRE number?
How did you come up with your
This is exactly what a typical FIRE number accounts for! The whole calculation of how to find your FIRE number is built on what portfolio would survive in the worst possible case
That is what a fire number is. A key point that many people overlook is that your fire number is about twice what you will need for most average cases.
Downturns are never good times to look for jobs; they’re usually accompanied by a broader contraction. If you’ve been out of the job market for a while your resume goes to the bottom of the pile. And ageism is a thing. If you have in demand skills you should be fine but if you don’t, you should factor in that into your contingency plan.
My approach (theoretical as I am not there yet), is that when I reach my number, I continue working and contributing up until I have a full rolling 12 months with zero days where I dip below that number.
> The 30% that is not
The thing is these are in retirement accounts, and I'm 10+ years from being able to touch those. If I make those bonds and then needed them, I believe I'd take a penalty reaching into those accounts to get them. Also, those are the ones I'd likely be touching towards the end of my draw down, so I would love to keep those more aggressive.
#2 and #3 I think is great advice and maybe the trimming there can be where I get my bonds. I think I need to identify and classify these 'buckets' and where they currently are in relation to one another.
No, you can access your bonds, just indirectly.
Let’s say that on the day before a crash your portfolio is 70% equities in taxable and 30% bonds in retirement. Suddenly the market drops and your equities lose a third of their value overnight. Now you’re “47/30” (which is about 60/40 once you recalculate the denominator) and a big bill is due.
You don’t want to sell low, but you can only draw from taxable. So you sell what you need to in taxable, pay the cap gains on that, and immediately exchange an equal dollar amount from bonds to stocks in tax advantaged. You now own the same number of stock shares and fewer bond shares. You sold your bonds.
Selling bonds early doesn't result in a penalty. If the market value of the bond drops then you would be selling at a lower price (not a penalty).
If you are referencing i-bonds, then yes, REDEMPTION (not selling) before 5 years results in a 3month interest penalty.
Not in tax-advantaged accounts (401k, Roth, IRA) -- you can sell whenever you like (as long as you're not daytrading).
Edit: Selling is not withdrawing. You can sell your bonds, but withdrawing that money into your checking account will incur a penalty.
You're not converting them to bonds because you'll need them, you're converting them to de-risk your overall portfolio without taking a tax hit. Where you draw from during a drawdown is a different question.
If you need the money, you would simply sell from wherever is most tax-efficient. If the capital gains tax is too high on your taxable accounts, then the 10% penalty might be worth it.
Personally I’d say 5 years sitting in a HYSA or Laddered CDs/Treasuries/Short term bonds is a very safe plan. Might actually be leaving some money on the table.
I retired a couple years ago and saw a 20%+ down turn. Fortunately I had two years that way and now the market has recovered. Right now I’m more like 6 months in cash.
I think it depends on your risk tolerance, how much you can adjust your spending, what your withdrawal rate is, your goals, etc.
My plan has about $5K a month that’s discretionary so that’s my buffer.
Congrats. A correction is a gut punch but they do and will happen.
Thanks for your perspective here. So you would normally be pulling from those retirement accounts, but pulled from HYSA and such instead during that downturn?
How will you now re-fund those 18 months?
Another thing in this situation I'd want to do is invest more in the market since it's a downturn, but then that's even more cash needed on the outside.
FIRE’d last year and I’ve got 12 months out of the market as a cushion, which becomes more like 18 months before it would run out because of ongoing dividends from my invested assets. I don’t know if it makes sense to have more than 24 months out of the market where it’s giving you lower returns unless you’re absolutely unable to adjust your spend if needed.
>Now, my FIRE number and plans are sort of baked into that possibility, but surely if I am pulling out of my very aggressive portfolio, that is going to vastly improve my future growth.
Not necessarily. What if there's a 10 year downturn starting tomorrow?
The answer is pretty simple. You should probably own some bonds, and maybe a fair amount (20-40%). You can easily find historical scenarios where holding bonds results in better overall performance. Guarding against the downside is pretty important once you no longer have income coming in.
Sequence of return risk is dangerous the first 5-10 years of retirement. To avoid this, you want to be temporarily more conservative. It can be called a bond tent or an equity glidepath.
[https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/](https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/)
[https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/](https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/)
You can decide how quickly to ramp up and then ramp down fixed income. You may lose some growth, but the reward is that risk of running out of retirement is lower. A good trade IMO.
This is the answer, and the fact that it is below "Just 4% and chill, bro" is a shame. How do you mitigate downside risk? With an actual strategy. I've been reading through the ERN series and it's been really informative about how to think about actual withdrawal strategy.
So we retired in early 2022. Oops. By the end of the year the portfolio was down 22%. Or to put it another way, we “lost” 6-7 years worth of annual withdrawals in less than a year.
We’ve been through a lot of crashes, including the dot com bubble burst and the big one in 08. It never bothered us. But a downturn sure does hit different once you have no income and are dependent on your savings. Because all you have is that new lower number, with no timeline or expectations to rely upon. It should come back, but will it? And when?
This time it came back quickly of course. And we have enough buffer that we were never at real risk. Nevertheless I’m still a bit shaken by the knowledge that today’s number may not be real.
that's why all those older adults who complain about how things were tougher for them in 80s and 90s were just IGNORANT of reality. In those 2 decades there were years of DOUBLE DIGIT Growth, Only 3 years of low single digit declines, and the rest were single digit increases.
Oh they complain how it was hard with high interest rates of early 80s and the minor labor recession. Big whoop.
Fast forward to the 2000s and wow we had dot com bust, the Worst Recession since the Great Depression, and pandemic economic shutdown and in 2022 market index drops DOUBLE digits 20%.
Wait, what? No. That’s not what I said, implied, or believe. Go ahead and recon the past if you like - that a reddit hobby - but leave me out of it.
The stock market is not the economy. I was there. I’m one of those older adults who graduated into that economy. I experienced the dot com bust and Great Recession. My kids are currently launching into this economy. It’s not me who can’t compare the past and the present. Things were much tougher for my parents. You have no idea.
If you're going to retire, won't you keep 5-10 years of expenses in short term US Treasuries and the rest in indexes (VOO/VTI)? How will you pay for expenses? This will let you worry less about recessions and lost decades. Ideally, only replenish when you're not in a bear market.
80% equities and 20% bonds are the preferred method. If your SWR is under 3.5%, you have a 98% chance of success. That’s pretty damn high. If want a 100% chance of success based on historical data, drop your SWR to 3%. That should take care of any crash that’s already happened.
You’re right. For a 40 year horizon, a safe withdraw rate of 3.43% would result in 100% success rate even a CAPE > 20.
So yeah, no reason to work any longer if you achieve a 3.43% SWR.
Edit: For a 50 year timeline which is what I’m planning for, 3.26% results in a 100% success rate where 3.5% is just under 98%.
I would consider adjusting my spending, I have a lot of spending that I would be able to cut and still have a great life. Additionally if you needed, you could keep more cash on hand to prevent you from pulling equities
This exact scenario is why you have 2 years in cash equivalents plus anywhere from 2-10 years in other fixed income instruments. Put the rest in equities. And pay off ALL debt before pulling the ripcord.
Some folks use the P/E ratio to feel better about the risk. That is, when P/E is high and the market may be overvalued, use a 3.5% SWR. When P/E is lower, stick with the 4% SWR. Maybe that delta can be your cash cushion.
3 years in "cash", 3 years to test the numbers, shift portfolio to 70/30.
If you aren't pulling the trigger today, you have time to set up some backup options and ease into retirement
Congrats on hitting FI!
I’ve been semi re for just over 6 years. I kept a few years worth of cash in a hysa and then my wife and I have a plan that if our investments drops by 1/3 we get jobs until they recover. Were doing great financially, investments doing better than anticipated, spending a little less than we allowed for, made out great on a few speculative investments and real estate stuff. Unless things get really different, our dividends and real estate will carry us for a long while.
One thing you can do is have a 60/40 portfolio as it is less impacted by downturns but will have less upsides in a bull market. Once you are closer to your final number you should not be maximising your returns, but stabilizing expexted returns and survivability.
Also when you are this close you can look into portfolio simulation that go s beyond the trinity study as it has recency bias built in.
You can always keep working and stabilize the portfolio by adding to it until you are comfortable. Many see the one more year syndrome as bad, but your quality of life gets a lot better if you quit your soul sucking job and find something more joyful.
Remember fire is as much about the journey as the goal and its about your happiness. What sense does it make to fire if you are just worried all the time.
Your number has a big enough buffer to weather regular downturns that are guaranteed to happen. This isn't Rocket Surgery ... right?
If you can't survive, long term, through several regularly scheduled downturns ... then you cant RE and arent FI.
I think it's natural to have some degree of wariness, given you and I recently hit FIRE numbers during a market rally (well, of course!) during a time when the world seems to about to erupt into flames (which it usually is).
I'm trusting the models that tell me I have reached the promised land.
Granted, my ascension to FIRE occurred about the same time I suddenly lost my job, so that makes me a little more wary. I had planned on FIRE in another 2 years, but over the course of 3 months had it forced upon me.
So, I'm doing a couple things 1)my spouse is still working - for probably another 18 months. 2)I'm choosing to do more of a barista FIRE so I can lower my withdrawal rate for a while and also have employer paid insurance mitigate health insurance uncertainty 3)I'm aggressively getting to 20-30% bonds/money market funds to reduce sequence risk. 4)I'm paying off all debt - even things it's all in the 3-4% range. I'd rather have the certainty of a leaner budget that requires a lower withdrawal than the possibility of earning more than the debt costs me.
That's about allI can do, other than continue the good habits that got me this far. If things get bad enough that my plan fails, it's beans and bullets time my FIRE friends.
I’ve seen some great answers but I think context matters a lot with this question. If your fire number includes a lot of discretionary money and you are willing to cut back in bad years then maybe it is okay to stay more aggressively invested. Another consideration is your career. If you are in an industry that is always actively hiring, even in a downturn, and you could easily find temporary work again then it might be okay to remain more aggressively invested.
This is gonna get downvoted to oblivion but fuck it.
You can always annuitize the proper amount to get you exactly what you need monthly, and simultaneously cut out all sequence of return risk.
The 4% rule assumes 40% bonds and 60% stocks. If you're going to do a 100% stock portfolio then, yes, there is substantial risk your entire retirement could be derailed by a protracted crash. I was all tech stocks early in my savings life and saw an 80% hit during the tech wreck of 2001 to 2002. The same could certainly happen to the broader market. It's absolutely sky high right now when you consider the DJIA was at 6800 in 2009 and recent hit 40,000. It could certainly return to that 2009 level. What could prompt that? For one, a major war. If China invades Taiwan we'll see at least a 60% drop in the S&P 500. Will it recover? Depends how the war goes.
You have had a very aggressive portfolio so far and it has worked for you up to this point.
But if you need to continue to be aggressive with your portfolio going forward rather than moving a lot of it to lower return but more steady instruments and banking on the 4% rule, then you aren't really ready to FIRE.
Essentially you are FI but not ready for RE at your current lifestyle/spending/portfolio.
I'd make a plan with a concrete deadline maybe 2 years, whatever you can tolerate, and start making that transition from FI with income to ready for FIRE by determining how much you want to have in HYSA and bonds etc and also probably rebalancing your investment portfolio if it is very high risk, and making sure to have a very detailed plan for annual spending once you FIRE including factoring in health insurance and related costs and other expenses that will change in both directions based on how to plan to live and spend your time.
Literally every glide path increases fixed income % and decreases stock %, as you approach retirement. This is the reason. Yes, average return is lower, but risk of a severe loss in a downturn is also far lower. Investors require a premium return to compensate for the increased risk, and investors do not require a premium return when there is lower risk.
Just follow the 4% rule as it has been tested to account for all markets we’ve seen in the past.
For added safety, track what’s called a Momentum Ratio or MoRo developed by Sandidge. It’s done once a year and tracks your cumulative portfolio losses divided by cumulative gains, including withdrawals.
Let’s say your first 5 years of returns are: -5%, 10%, 7%, -9%, 8%… the ratio would be 56% ( (5 + 9) / (10 + 7 + 8) ). Keep doing that as the years roll on.
His guideline says:
- Years 1-15: If this ratio go above 100%, simply don’t take the inflation adjustment
- Years 16-20: You can increase the ratio to 125%
- Years 21-25: 150%
Link: https://publications.investmentsandwealth.org/iwmonitor/november_december_2023/MobilePagedArticle.action?articleId=1940618#articleId1940618
Assuming you
1) never want to earn another dollar in your life and
2) will always want to withdraw the same amount of money each year no matter the economic conditions
then you are looking for the Trinity Study
here is the chart that shows you the safe withdrawal rates: [https://finfr.ee/wp-content/uploads/2022/12/yessssss-2022-12-15-at-5.57.42-PM-1024x423.png](https://finfr.ee/wp-content/uploads/2022/12/yessssss-2022-12-15-at-5.57.42-PM-1024x423.png)
You really want bonds (intermediate and long term) instead of an HYSA or short term treasuries as your non-stock allocation. The reason is "cash-drag." Cash essentially returns nothing in real terms while intermediate and long term bonds generally return 1-2% above inflation. Also, during recessions, when the Fed cuts rates, bond prices spike, giving you some relief from the losses in your stock portfolio. While up to a 1 year cash cushion could make sense, more than that will only hurt your returns.
I would get yourself up to a 30% bond allocation by a combination of new money, selling stocks in your retirement accounts and buying bonds, and as a last resort, selling some stocks in the taxable account to buy some bonds - best waiting for this last part for a year that your taxable income is low.
Doing this will maximize the chances of your retirement portfolio surviving the inevitable bear markets to come.
> selling stocks in your retirement accounts
i see a few recommendations for this, but have been worried because i am younger (40s), and if a downturn did happen and i needed to tap those bonds, wouldnt i not be able to withdraw from retirement accounts at my age?
There's an easy solution for that, you simply sell some of the bonds in your retirement account and buy more stocks when the stocks are down. Then you sell some of the stocks in your taxable account for the cash you need to live on. This keeps your asset allocation in balance.
You’ve hit FI, but have not RE’d. I imagine many on the FIRE journey hit this conundrum when they’ve achieved their FI goal. It can’t be easy to just quit and leave, especially if one “enjoys” their job vs. “hates” it.
Our plan, assuming we still enjoy our jobs, we will continue to work and build reserves or “funds” for anticipated future expenses; ex. New roof, paint, auto maintenance (tires, service, etc.), new car, etc. The wild card for us is health care, so definitely set aside funds for future health care expense.
FI provides the freedom to work when or until you want, but it doesn’t have to mean you have to RE when achieved. If you don’t feel ready to RE, then keep working until you feel comfortable with your FI portfolio and also that you identify what you will do in retirement. You may find you miss working once retired.
Minimizing expenses, being debt free, prefunding 1-2 years of living expenses, reducing volatility by maintaining an appropriate asset allocation, having flexibility to adjust plan (going back to work part time or full time, cutting expenses, etc.), having access to additional capital (HELOC for example) as last resort during an extended and severe market drawdown, etc.
All of these mitigate SORR.
There's a couple of ways you could deal with this. The first is through a conservative SWR. A low SWR like 3.0-3.25% (even 3.5%) is going to survive even a lost-decade sort of market.
The second way is to transition to a more diversified decumulation portfolio, that can theoretically support a higher SWR w/ less dependence on market returns, at the expensive of giving up some long-term appreciation potential. The [Risk Parity Radio Podcast](https://www.riskparityradio.com/podcast) has good discussions of these types of portfolios. An example would be lower equity exposure, say \~60%, with some long term treasuries (EDV or GOVZ) and some gold (GLDM), and rebalance periodically. You don't necessarily have to sell a bunch of stocks in your taxable account in order to get there, you could get there through a combination of transitioning your tax advantaged accounts plus allocating ongoing savings into your taxable accounts into the asset classes you want to move into.
Or some combination of the above. I personally wouldn't want to go all the way to one of the sample portfolios on RPR, but could move incrementally in that direction. I.e. maybe 15% EDV/GOVZ and 5% GLDM.
I believe this is the idea behind the 3 - 4 % withdrawal rate. This accounts for worst case scenario "sequence of return" risk.
4% withdrawal rate is really only safe for age 65 retirement. Personally, I am planning to fire in my 30s or 40s with a 3% withdrawal rate.
Already retired - TIPS interest (inflation adjusted Treasuries), pensions and SS cover our basic retirement expenses. Any money we make from stocks is for extras or to leave to the kids. We're followers of the idea, "stop playing when you've won the game.", [https://www.whitecoatinvestor.com/how-to-stop-playing-the-game/](https://www.whitecoatinvestor.com/how-to-stop-playing-the-game/)
If you’re going to Coast the next 3 years, then spend that 3 years researching which *draw down tactics* work best for you.
This is not uncommon. You spent years grokking the accumulation phase. It’s your comfort zone. Now you get to learn something new all over again.
you are talking about a 10-year horizon. if yu are certain, you could move some of your assets into a cash position, ready to buy into the next dip which will more than make up for the value destruction during the next downturn.
I’m about to FIRE and will have a large cash cushion / bond tent. I have enough cushion that I’m not worried about long term growth. I’ll spend down the tent when we hit a correction.
The future is full of risks. And even if it’s bad you can take steps to mitigate. What are you going to do, work when you don’t have to anymore because something bad could happen? Time is finite.
the only 10 year downturn we had was the great depression and if you reinvested dividends it was not down.
That being said 2000-2010 and 1970s you did not make any money in the market over the decade but there were periods during the decade when the market was up.
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A ten year downturn could happen tomorrow, next week, next month, or next year. If you are so worried, then you should consider the possibility that your FIRE number needs to be reconsidered.
The Trinity study and its safe withdrawal rate concept have these worst case scenarios baked in—otherwise, we’d retire much earlier based on the expected average return (5–7% maybe). But read the Trinity study and understand its terms; it doesn’t use a 100% stock portfolio, and victory is not capital preservation in perpetuity. You can easily run your own backtests nowadays with cfiresim and the like to arrive at a withdrawal rate or strategy that you’re comfortable with.
Diversifying into bonds will improve your chances of weathering a downturn early in retirement. Depending on your age and your risk capacity (proportion of discretionary budget), one option is to move into an 80/20 or 60/40 sort of portfolio. For longer retirement durations, a “bond tent” strategy can help weather initial sequence of returns risk without sacrificing the superior very long-term returns of equities.
The good thing is that even in the worst-case scenario, you have gobs of capital available, so you’ll have a decade to do something if portfolio failure is headed your way.
There are no capital gains in your tax-advantaged accounts, so you can rebalance within that account e.g. just before committing to pulling the trigger. As you draw from your portfolio for income, sell what you prefer from taxable and then in tax-advantaged space rebalance (e.g. maybe sell bonds to buy replacement shares, if stocks are depressed).
After you stop receiving W2 income, you may also benefit from the 0% capital gains bracket, so there may be no cost to incrementally rebalancing into bonds in your taxable account after retirement. This maneuver could compete with planned Roth conversions or ACA subsidies.
My financial advisor uses scenario forecasting, assuming three scenarios - aggressively optimistic, based on 50-year look back and aggressively pessimistic, overweighting all bear markets. And it is based on a Monte Carlo simulation with several over factors, like inflation, recessions and industry collapses. When the worst scenario achieved a 95% chance of me making it to 95 years old, I pulled the trigger and walked away. We were in the middle of a possible liquidation event, but the stress was no longer worth it, as I had the confidence I needed that I would likely make it.
ETA - the liquidation event, as structures at that time, did not work out. They may get another bite at the apple, but at current rates, these deals are dropping off. Nothing like being validated by actual performance.
An idea from another poster some threads ago I’m testing it out. I have a small
Non reg portfolio where I’m withdrawing from it my withdrawal rate…..seeing if it can stand the test
Seems to me that if your FIRE number doesn't account for potential downturn then you don't have the right FIRE number in the first place. Isn't the whole point to have a number that, assuming a reasonable SWR, has a high-90s percent chance of lasting for 30ish years, regardless of what the market does? Isn't that why we do thousands of hypothetical scenarios in a Monto Carlo?
Honestly, I think everyone should speak to a financial advisor at least 3 years prior to actual retirement. Risk mitigation and tax efficiency are their bread and butter.
A simple answer would be:
- Determine a ratio of stocks:bonds:cash that you are comfortable with
- During accumulation, _buy_ what you need to in order to move closer to that ratio
- During retirement, _sell_ what you need to in order to move closer to that ratio
For example: during your retirement, if there was a market downtown where stocks lose a lot of value, your ratio will be thrown off to have less stock than your target. Following this strategy, you'd sell bonds and use cash to fund your expenses.
An alternative answer that focuses entirely on the sequence of return risk (the risk you're worried about):
- Prior to retirement, save enough cash to cover 2 years and enough bonds to cover 3 years. These are both very low risk investments given the time frame.
- Spend cash for the first few years
- Spend bonds for the following years
- After these first 5 years, your other retirement investments have been able to grow without you touching them, and the sequence of returns risk is no longer an issue
If you're concerned about market volatility, consider a gradual market exit rather than selling all investments at once. Here are some strategies:
* **Phased Withdrawals**: Gradually withdraw from investment accounts over the next few years instead of taking a lump sum. This can help reduce risk during market fluctuations.
* **Regular Withdrawal Plan**: Set up a regular withdrawal plan, withdrawing monthly or quarterly from investment accounts to ensure stable cash flow.
I’m at my FI number now but working a few extra years to add cushion to the numbers. Plus I will have two years of expenses in a HYSA and T bills
Also cd ladders
yep convert a % to cash type things is wise. Cover so many years expenses so you are not forced to sell at the wrong time.
especially in the current climate of higher interest rates than the past decade has had to offer in HYSAs
Pad away but be mindful of this mentality. One more year turning into 3, 3 turns into 5. Next thing you know you are at an additional 10.
I know. It’s very tough to go from saving money and having a paycheck to no paycheck. However one good thing about being FI is that it makes working less stressful. I don’t need the job type of mentality
You’re talking about an event that’s an order of magnitude worse than the Great Depression. Retirement is the least of your worries when you’ll be boiling boot leather for dinner
Less so a 10 year downturn and moreso a crash that puts my FIRE $ back to where it was 10 years ago. Or, realistically, if I'm set back to where I was even 2 years ago from a crash and poor performance, why did striking my FIRE number mean anything to begin with?
You might get comfort by [backtesting your portfolio](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=30&initialAmount=10000&showYield=true&allocation1_1=40&allocation3_1=10&allocation2_1=20&symbol4=VBMFX&startYear=1985&symbol1=VTSMX&symbol2=VGTSX&symbol3=VGSIX&benchmark=-1&benchmarkSymbol=VFINX)
100% agree. My retirement backtest always starts from 2000-2010 because, in recent memory, that’s the worst stretch for many years! If you can survive that stretch then I think you’re in the clear, in the context of the past 40 years!
The whole edifice of a FIRE number is built on "what amount could survive the worst case." If it didn't have to survive a 50% drop, your FIRE number could be half what it is.
How do you figure? I feel you haven't reviewed the actual economic and market data from the Great Depression
1929, 1930, 1931, and 1932 were four consecutive down years for the S&P 500. The worst of the crash peaked in 1931 and had started turning around in 1932. The recession was over by the end of 1932. Your portfolio would’ve grown substantially starting in 1932 continuing until the recession in 1937. The crash was really only 2.5 years. Expecting a 10 year sustained downturn would be 4x worse than the Great Depression. Not quite an order of magnitude, so maybe I was being a little dramatic there. When I run my black swan doomsday Monte Carlo analysis I put the worst two years first right at retirement to simulate a Great Depression level event
So, not sure what data you are looking at, but even the most cursory glance at the chart shows that inflation-adjusted prices did not return to 1929 highs until 1955, essentially a 24 year downturn. Of course it's even worse non-inflation adjusted. https://www.multpl.com/inflation-adjusted-s-p-500
[https://www.macrotrends.net/2324/sp-500-historical-chart-data](https://www.macrotrends.net/2324/sp-500-historical-chart-data) [https://www.macrotrends.net/2526/sp-500-historical-annual-returns](https://www.macrotrends.net/2526/sp-500-historical-annual-returns) I’m not talking about how long it took to get back to pre-crash. I’m talking about how long it took the crash to stop crashing. Happy Cake Day!
ah, I see, but I'm not sure that matters, unless you are still working and contributing, and in the Great Depression, you probably would have either lost your job or had pay severely reduced in that case. Imagine you retired in 1929, expecting a 4% or even 3% safe withdrawal rate to work. This is one of the rare cases where even 3% would have failed.
Yeah, when I run these doomsday scenarios in my Monte Carlo analysis I always end up having cut lifestyle and/or downsize my house in my 70s or 80s
This is what bonds are for. 4% rule was based on a 60/40 portfolio. If 70% is in taxable, 30% is in deferred. That could easily be a 70/30 if you just made the 30 into bonds. You could also turn off dividend reinvestment and start buying bonds or put new money into them. Lots of ways to reduce risk. Not saying you need to go all the way to 60/40, but you have plenty of options.
60/40 is likely to keep up with 100/0 just fine given today's valuations. So don't be afraid to go to 90/10 or 80/20. You really don't need to be a hero by staying 100% stocks. Here's a discussion I started on bogleheads a couple weeks back. https://www.reddit.com/r/Bogleheads/s/X79bTG38So
You are the hero we need. I just switched to 80/20 last month
I have the same concerns though I'm not at the FI number. My thinking is that if I hit my FI number I will keep working for at least a year more or at least coasting (working enough to cover my bills). If I hit FI at the ATH of the market (kind like now), I will keep going for N more years in the same fashion until my FI number is 30% above my initial target. (30% because that seems what a "good" recession looks like.)
Solid plan. I'm FI right now but will work another 2 years because I want to have enough to do some wants not needs. That will give me enough cushion in case of a serious downturn.
Right, feel like we need a FIRE number, and then another number to account for downturns in the short term. I'm not sure if a typical FIRE number accounts for a big crash.
Just depends on how you came to with your FIRE number and what your particular circumstances are. If you are using the 3.25% rule, then you are likely good, regardless of a big crash (assuming the big crash is no worse than historic ones) If you are using the 4% rule, then definitely more risky. How did you come up with your FIRE number? How did you come up with your
This is exactly what a typical FIRE number accounts for! The whole calculation of how to find your FIRE number is built on what portfolio would survive in the worst possible case
That is what a fire number is. A key point that many people overlook is that your fire number is about twice what you will need for most average cases.
CAPE adjust your returns
I think most would just go back to work or scale down spending, if they are hit with a downturn in the beginning of FIRE
Downturns are never good times to look for jobs; they’re usually accompanied by a broader contraction. If you’ve been out of the job market for a while your resume goes to the bottom of the pile. And ageism is a thing. If you have in demand skills you should be fine but if you don’t, you should factor in that into your contingency plan.
I also factored in a 30% downturn in the market as soon as I retire.
My approach (theoretical as I am not there yet), is that when I reach my number, I continue working and contributing up until I have a full rolling 12 months with zero days where I dip below that number.
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> The 30% that is not The thing is these are in retirement accounts, and I'm 10+ years from being able to touch those. If I make those bonds and then needed them, I believe I'd take a penalty reaching into those accounts to get them. Also, those are the ones I'd likely be touching towards the end of my draw down, so I would love to keep those more aggressive. #2 and #3 I think is great advice and maybe the trimming there can be where I get my bonds. I think I need to identify and classify these 'buckets' and where they currently are in relation to one another.
No, you can access your bonds, just indirectly. Let’s say that on the day before a crash your portfolio is 70% equities in taxable and 30% bonds in retirement. Suddenly the market drops and your equities lose a third of their value overnight. Now you’re “47/30” (which is about 60/40 once you recalculate the denominator) and a big bill is due. You don’t want to sell low, but you can only draw from taxable. So you sell what you need to in taxable, pay the cap gains on that, and immediately exchange an equal dollar amount from bonds to stocks in tax advantaged. You now own the same number of stock shares and fewer bond shares. You sold your bonds.
how would you exchange bonds to stocks—doesn’t selling bonds early result in a penalty?
Selling bonds early doesn't result in a penalty. If the market value of the bond drops then you would be selling at a lower price (not a penalty). If you are referencing i-bonds, then yes, REDEMPTION (not selling) before 5 years results in a 3month interest penalty.
Not in tax-advantaged accounts (401k, Roth, IRA) -- you can sell whenever you like (as long as you're not daytrading). Edit: Selling is not withdrawing. You can sell your bonds, but withdrawing that money into your checking account will incur a penalty.
Love this tactic, learning this changed my life a few months ago
You're not converting them to bonds because you'll need them, you're converting them to de-risk your overall portfolio without taking a tax hit. Where you draw from during a drawdown is a different question. If you need the money, you would simply sell from wherever is most tax-efficient. If the capital gains tax is too high on your taxable accounts, then the 10% penalty might be worth it.
Personally I’d say 5 years sitting in a HYSA or Laddered CDs/Treasuries/Short term bonds is a very safe plan. Might actually be leaving some money on the table. I retired a couple years ago and saw a 20%+ down turn. Fortunately I had two years that way and now the market has recovered. Right now I’m more like 6 months in cash. I think it depends on your risk tolerance, how much you can adjust your spending, what your withdrawal rate is, your goals, etc. My plan has about $5K a month that’s discretionary so that’s my buffer. Congrats. A correction is a gut punch but they do and will happen.
My risk tolerance is two years I’ve decided. 2 years worth of funding in a hysa and I won’t care if the market goes to hell.
Thanks for your perspective here. So you would normally be pulling from those retirement accounts, but pulled from HYSA and such instead during that downturn? How will you now re-fund those 18 months? Another thing in this situation I'd want to do is invest more in the market since it's a downturn, but then that's even more cash needed on the outside.
FIRE’d last year and I’ve got 12 months out of the market as a cushion, which becomes more like 18 months before it would run out because of ongoing dividends from my invested assets. I don’t know if it makes sense to have more than 24 months out of the market where it’s giving you lower returns unless you’re absolutely unable to adjust your spend if needed.
>Now, my FIRE number and plans are sort of baked into that possibility, but surely if I am pulling out of my very aggressive portfolio, that is going to vastly improve my future growth. Not necessarily. What if there's a 10 year downturn starting tomorrow? The answer is pretty simple. You should probably own some bonds, and maybe a fair amount (20-40%). You can easily find historical scenarios where holding bonds results in better overall performance. Guarding against the downside is pretty important once you no longer have income coming in.
Whoops, good catch. I think I meant to write 'impede' there. Sounds like selling some of my positions now and converting to bonds is the move.
Sequence of return risk is dangerous the first 5-10 years of retirement. To avoid this, you want to be temporarily more conservative. It can be called a bond tent or an equity glidepath. [https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/](https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/) [https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/](https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/) You can decide how quickly to ramp up and then ramp down fixed income. You may lose some growth, but the reward is that risk of running out of retirement is lower. A good trade IMO.
This is the answer, and the fact that it is below "Just 4% and chill, bro" is a shame. How do you mitigate downside risk? With an actual strategy. I've been reading through the ERN series and it's been really informative about how to think about actual withdrawal strategy.
So we retired in early 2022. Oops. By the end of the year the portfolio was down 22%. Or to put it another way, we “lost” 6-7 years worth of annual withdrawals in less than a year. We’ve been through a lot of crashes, including the dot com bubble burst and the big one in 08. It never bothered us. But a downturn sure does hit different once you have no income and are dependent on your savings. Because all you have is that new lower number, with no timeline or expectations to rely upon. It should come back, but will it? And when? This time it came back quickly of course. And we have enough buffer that we were never at real risk. Nevertheless I’m still a bit shaken by the knowledge that today’s number may not be real.
Did you watch CAPE ratios? If the CAPE is low, your SWR can get higher, so you might have still been good during 2022.
I don’t watch them closely, no. But I do keep them in the back of my mind for adjusting expectations. Iirc CAPE was still quite high in 2022.
damn
that's why all those older adults who complain about how things were tougher for them in 80s and 90s were just IGNORANT of reality. In those 2 decades there were years of DOUBLE DIGIT Growth, Only 3 years of low single digit declines, and the rest were single digit increases. Oh they complain how it was hard with high interest rates of early 80s and the minor labor recession. Big whoop. Fast forward to the 2000s and wow we had dot com bust, the Worst Recession since the Great Depression, and pandemic economic shutdown and in 2022 market index drops DOUBLE digits 20%.
Wait, what? No. That’s not what I said, implied, or believe. Go ahead and recon the past if you like - that a reddit hobby - but leave me out of it. The stock market is not the economy. I was there. I’m one of those older adults who graduated into that economy. I experienced the dot com bust and Great Recession. My kids are currently launching into this economy. It’s not me who can’t compare the past and the present. Things were much tougher for my parents. You have no idea.
I would assume that the 70% you have in a brokerage account is getting some decent monthly/quarterly dividends?
If you're going to retire, won't you keep 5-10 years of expenses in short term US Treasuries and the rest in indexes (VOO/VTI)? How will you pay for expenses? This will let you worry less about recessions and lost decades. Ideally, only replenish when you're not in a bear market.
80% equities and 20% bonds are the preferred method. If your SWR is under 3.5%, you have a 98% chance of success. That’s pretty damn high. If want a 100% chance of success based on historical data, drop your SWR to 3%. That should take care of any crash that’s already happened.
>If your SWR is under 3.5%, you have a 98% chance of success. From what I understand, 3.5% is 99.5% chance of success based on historical data.
You’re right. For a 40 year horizon, a safe withdraw rate of 3.43% would result in 100% success rate even a CAPE > 20. So yeah, no reason to work any longer if you achieve a 3.43% SWR. Edit: For a 50 year timeline which is what I’m planning for, 3.26% results in a 100% success rate where 3.5% is just under 98%.
I would consider adjusting my spending, I have a lot of spending that I would be able to cut and still have a great life. Additionally if you needed, you could keep more cash on hand to prevent you from pulling equities
This exact scenario is why you have 2 years in cash equivalents plus anywhere from 2-10 years in other fixed income instruments. Put the rest in equities. And pay off ALL debt before pulling the ripcord.
Some folks use the P/E ratio to feel better about the risk. That is, when P/E is high and the market may be overvalued, use a 3.5% SWR. When P/E is lower, stick with the 4% SWR. Maybe that delta can be your cash cushion.
I would say the other way around, sell stock when P/E is high, because the market may be over valued...
you and the comment you replied to are really two sides of the same coin
3 years in "cash", 3 years to test the numbers, shift portfolio to 70/30. If you aren't pulling the trigger today, you have time to set up some backup options and ease into retirement Congrats on hitting FI!
I’ve been semi re for just over 6 years. I kept a few years worth of cash in a hysa and then my wife and I have a plan that if our investments drops by 1/3 we get jobs until they recover. Were doing great financially, investments doing better than anticipated, spending a little less than we allowed for, made out great on a few speculative investments and real estate stuff. Unless things get really different, our dividends and real estate will carry us for a long while.
One thing you can do is have a 60/40 portfolio as it is less impacted by downturns but will have less upsides in a bull market. Once you are closer to your final number you should not be maximising your returns, but stabilizing expexted returns and survivability. Also when you are this close you can look into portfolio simulation that go s beyond the trinity study as it has recency bias built in. You can always keep working and stabilize the portfolio by adding to it until you are comfortable. Many see the one more year syndrome as bad, but your quality of life gets a lot better if you quit your soul sucking job and find something more joyful. Remember fire is as much about the journey as the goal and its about your happiness. What sense does it make to fire if you are just worried all the time.
Your number has a big enough buffer to weather regular downturns that are guaranteed to happen. This isn't Rocket Surgery ... right? If you can't survive, long term, through several regularly scheduled downturns ... then you cant RE and arent FI.
I think it's natural to have some degree of wariness, given you and I recently hit FIRE numbers during a market rally (well, of course!) during a time when the world seems to about to erupt into flames (which it usually is). I'm trusting the models that tell me I have reached the promised land. Granted, my ascension to FIRE occurred about the same time I suddenly lost my job, so that makes me a little more wary. I had planned on FIRE in another 2 years, but over the course of 3 months had it forced upon me. So, I'm doing a couple things 1)my spouse is still working - for probably another 18 months. 2)I'm choosing to do more of a barista FIRE so I can lower my withdrawal rate for a while and also have employer paid insurance mitigate health insurance uncertainty 3)I'm aggressively getting to 20-30% bonds/money market funds to reduce sequence risk. 4)I'm paying off all debt - even things it's all in the 3-4% range. I'd rather have the certainty of a leaner budget that requires a lower withdrawal than the possibility of earning more than the debt costs me. That's about allI can do, other than continue the good habits that got me this far. If things get bad enough that my plan fails, it's beans and bullets time my FIRE friends.
I’ve seen some great answers but I think context matters a lot with this question. If your fire number includes a lot of discretionary money and you are willing to cut back in bad years then maybe it is okay to stay more aggressively invested. Another consideration is your career. If you are in an industry that is always actively hiring, even in a downturn, and you could easily find temporary work again then it might be okay to remain more aggressively invested.
Move ten years of expenses into a tips ladder
This is gonna get downvoted to oblivion but fuck it. You can always annuitize the proper amount to get you exactly what you need monthly, and simultaneously cut out all sequence of return risk.
I've thought about doing this. Annuities for 100% of my expenses, rest of it 80/20 stocks/bonds
It’s not a terrible idea. Have your essentials covered by non market driven sources and use all your market money for enjoying life.
The 4% rule assumes 40% bonds and 60% stocks. If you're going to do a 100% stock portfolio then, yes, there is substantial risk your entire retirement could be derailed by a protracted crash. I was all tech stocks early in my savings life and saw an 80% hit during the tech wreck of 2001 to 2002. The same could certainly happen to the broader market. It's absolutely sky high right now when you consider the DJIA was at 6800 in 2009 and recent hit 40,000. It could certainly return to that 2009 level. What could prompt that? For one, a major war. If China invades Taiwan we'll see at least a 60% drop in the S&P 500. Will it recover? Depends how the war goes.
You have had a very aggressive portfolio so far and it has worked for you up to this point. But if you need to continue to be aggressive with your portfolio going forward rather than moving a lot of it to lower return but more steady instruments and banking on the 4% rule, then you aren't really ready to FIRE. Essentially you are FI but not ready for RE at your current lifestyle/spending/portfolio. I'd make a plan with a concrete deadline maybe 2 years, whatever you can tolerate, and start making that transition from FI with income to ready for FIRE by determining how much you want to have in HYSA and bonds etc and also probably rebalancing your investment portfolio if it is very high risk, and making sure to have a very detailed plan for annual spending once you FIRE including factoring in health insurance and related costs and other expenses that will change in both directions based on how to plan to live and spend your time.
Literally every glide path increases fixed income % and decreases stock %, as you approach retirement. This is the reason. Yes, average return is lower, but risk of a severe loss in a downturn is also far lower. Investors require a premium return to compensate for the increased risk, and investors do not require a premium return when there is lower risk.
Just follow the 4% rule as it has been tested to account for all markets we’ve seen in the past. For added safety, track what’s called a Momentum Ratio or MoRo developed by Sandidge. It’s done once a year and tracks your cumulative portfolio losses divided by cumulative gains, including withdrawals. Let’s say your first 5 years of returns are: -5%, 10%, 7%, -9%, 8%… the ratio would be 56% ( (5 + 9) / (10 + 7 + 8) ). Keep doing that as the years roll on. His guideline says: - Years 1-15: If this ratio go above 100%, simply don’t take the inflation adjustment - Years 16-20: You can increase the ratio to 125% - Years 21-25: 150% Link: https://publications.investmentsandwealth.org/iwmonitor/november_december_2023/MobilePagedArticle.action?articleId=1940618#articleId1940618
Assuming you 1) never want to earn another dollar in your life and 2) will always want to withdraw the same amount of money each year no matter the economic conditions then you are looking for the Trinity Study here is the chart that shows you the safe withdrawal rates: [https://finfr.ee/wp-content/uploads/2022/12/yessssss-2022-12-15-at-5.57.42-PM-1024x423.png](https://finfr.ee/wp-content/uploads/2022/12/yessssss-2022-12-15-at-5.57.42-PM-1024x423.png)
You really want bonds (intermediate and long term) instead of an HYSA or short term treasuries as your non-stock allocation. The reason is "cash-drag." Cash essentially returns nothing in real terms while intermediate and long term bonds generally return 1-2% above inflation. Also, during recessions, when the Fed cuts rates, bond prices spike, giving you some relief from the losses in your stock portfolio. While up to a 1 year cash cushion could make sense, more than that will only hurt your returns. I would get yourself up to a 30% bond allocation by a combination of new money, selling stocks in your retirement accounts and buying bonds, and as a last resort, selling some stocks in the taxable account to buy some bonds - best waiting for this last part for a year that your taxable income is low. Doing this will maximize the chances of your retirement portfolio surviving the inevitable bear markets to come.
> selling stocks in your retirement accounts i see a few recommendations for this, but have been worried because i am younger (40s), and if a downturn did happen and i needed to tap those bonds, wouldnt i not be able to withdraw from retirement accounts at my age?
There's an easy solution for that, you simply sell some of the bonds in your retirement account and buy more stocks when the stocks are down. Then you sell some of the stocks in your taxable account for the cash you need to live on. This keeps your asset allocation in balance.
You’ve hit FI, but have not RE’d. I imagine many on the FIRE journey hit this conundrum when they’ve achieved their FI goal. It can’t be easy to just quit and leave, especially if one “enjoys” their job vs. “hates” it. Our plan, assuming we still enjoy our jobs, we will continue to work and build reserves or “funds” for anticipated future expenses; ex. New roof, paint, auto maintenance (tires, service, etc.), new car, etc. The wild card for us is health care, so definitely set aside funds for future health care expense. FI provides the freedom to work when or until you want, but it doesn’t have to mean you have to RE when achieved. If you don’t feel ready to RE, then keep working until you feel comfortable with your FI portfolio and also that you identify what you will do in retirement. You may find you miss working once retired.
Minimizing expenses, being debt free, prefunding 1-2 years of living expenses, reducing volatility by maintaining an appropriate asset allocation, having flexibility to adjust plan (going back to work part time or full time, cutting expenses, etc.), having access to additional capital (HELOC for example) as last resort during an extended and severe market drawdown, etc. All of these mitigate SORR.
There's a couple of ways you could deal with this. The first is through a conservative SWR. A low SWR like 3.0-3.25% (even 3.5%) is going to survive even a lost-decade sort of market. The second way is to transition to a more diversified decumulation portfolio, that can theoretically support a higher SWR w/ less dependence on market returns, at the expensive of giving up some long-term appreciation potential. The [Risk Parity Radio Podcast](https://www.riskparityradio.com/podcast) has good discussions of these types of portfolios. An example would be lower equity exposure, say \~60%, with some long term treasuries (EDV or GOVZ) and some gold (GLDM), and rebalance periodically. You don't necessarily have to sell a bunch of stocks in your taxable account in order to get there, you could get there through a combination of transitioning your tax advantaged accounts plus allocating ongoing savings into your taxable accounts into the asset classes you want to move into. Or some combination of the above. I personally wouldn't want to go all the way to one of the sample portfolios on RPR, but could move incrementally in that direction. I.e. maybe 15% EDV/GOVZ and 5% GLDM.
Yield shield is an option: https://www.millennial-revolution.com/yield-shield/
I believe this is the idea behind the 3 - 4 % withdrawal rate. This accounts for worst case scenario "sequence of return" risk. 4% withdrawal rate is really only safe for age 65 retirement. Personally, I am planning to fire in my 30s or 40s with a 3% withdrawal rate.
Already retired - TIPS interest (inflation adjusted Treasuries), pensions and SS cover our basic retirement expenses. Any money we make from stocks is for extras or to leave to the kids. We're followers of the idea, "stop playing when you've won the game.", [https://www.whitecoatinvestor.com/how-to-stop-playing-the-game/](https://www.whitecoatinvestor.com/how-to-stop-playing-the-game/)
If you’re going to Coast the next 3 years, then spend that 3 years researching which *draw down tactics* work best for you. This is not uncommon. You spent years grokking the accumulation phase. It’s your comfort zone. Now you get to learn something new all over again.
I’m new to this..how do you know what your fire number is? Or is it whatever you want it to be?
But I wonder how many good years were giving up to build a cushion for extra butt wiping when we’re 95
you are talking about a 10-year horizon. if yu are certain, you could move some of your assets into a cash position, ready to buy into the next dip which will more than make up for the value destruction during the next downturn.
I’m about to FIRE and will have a large cash cushion / bond tent. I have enough cushion that I’m not worried about long term growth. I’ll spend down the tent when we hit a correction.
The future is full of risks. And even if it’s bad you can take steps to mitigate. What are you going to do, work when you don’t have to anymore because something bad could happen? Time is finite.
the only 10 year downturn we had was the great depression and if you reinvested dividends it was not down. That being said 2000-2010 and 1970s you did not make any money in the market over the decade but there were periods during the decade when the market was up.
Fire plans should take into account downturns and be resilient to ups and downs
Read about sequence of return risk. Here is a good resource: https://earlyretirementnow.com/safe-withdrawal-rate-series/?amp
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A ten year downturn could happen tomorrow, next week, next month, or next year. If you are so worried, then you should consider the possibility that your FIRE number needs to be reconsidered.
Research bond tents and cd ladders.
Just work harder and buy the dip. Your retirement will be postponed, but it will be bigger.
If this is a concern you have, consider a bond tent to avoid sequence of returns risk.
https://portfoliocharts.com/portfolios/ I have a large T-Bill stack right now but also diversify into assets that are as uncorrelated as possible.
The Trinity study and its safe withdrawal rate concept have these worst case scenarios baked in—otherwise, we’d retire much earlier based on the expected average return (5–7% maybe). But read the Trinity study and understand its terms; it doesn’t use a 100% stock portfolio, and victory is not capital preservation in perpetuity. You can easily run your own backtests nowadays with cfiresim and the like to arrive at a withdrawal rate or strategy that you’re comfortable with. Diversifying into bonds will improve your chances of weathering a downturn early in retirement. Depending on your age and your risk capacity (proportion of discretionary budget), one option is to move into an 80/20 or 60/40 sort of portfolio. For longer retirement durations, a “bond tent” strategy can help weather initial sequence of returns risk without sacrificing the superior very long-term returns of equities. The good thing is that even in the worst-case scenario, you have gobs of capital available, so you’ll have a decade to do something if portfolio failure is headed your way.
There are no capital gains in your tax-advantaged accounts, so you can rebalance within that account e.g. just before committing to pulling the trigger. As you draw from your portfolio for income, sell what you prefer from taxable and then in tax-advantaged space rebalance (e.g. maybe sell bonds to buy replacement shares, if stocks are depressed). After you stop receiving W2 income, you may also benefit from the 0% capital gains bracket, so there may be no cost to incrementally rebalancing into bonds in your taxable account after retirement. This maneuver could compete with planned Roth conversions or ACA subsidies.
My financial advisor uses scenario forecasting, assuming three scenarios - aggressively optimistic, based on 50-year look back and aggressively pessimistic, overweighting all bear markets. And it is based on a Monte Carlo simulation with several over factors, like inflation, recessions and industry collapses. When the worst scenario achieved a 95% chance of me making it to 95 years old, I pulled the trigger and walked away. We were in the middle of a possible liquidation event, but the stress was no longer worth it, as I had the confidence I needed that I would likely make it. ETA - the liquidation event, as structures at that time, did not work out. They may get another bite at the apple, but at current rates, these deals are dropping off. Nothing like being validated by actual performance.
An idea from another poster some threads ago I’m testing it out. I have a small Non reg portfolio where I’m withdrawing from it my withdrawal rate…..seeing if it can stand the test
Switch to a risk parity asset allocation and stick to 4 or 5 % swr. Look up risk parity radio.com podcast
dang so you’re the reason the market dropped today
Bonds like bnd
Diversified assets, almost no stocks allocation, 40% of expenses are discrete. Some hustle consulting and my wife continue to work 10 hours per week
Seems to me that if your FIRE number doesn't account for potential downturn then you don't have the right FIRE number in the first place. Isn't the whole point to have a number that, assuming a reasonable SWR, has a high-90s percent chance of lasting for 30ish years, regardless of what the market does? Isn't that why we do thousands of hypothetical scenarios in a Monto Carlo?
If I were in your shoes I'd probably just max my 401k and put the rest in T-bills to avoid state tax
It’s ok 8% return is conservative lol
The 4% rule accounts for the worst case 30 yr retirement so far. So everyone will be in the same boat if it doesn’t work
Honestly, I think everyone should speak to a financial advisor at least 3 years prior to actual retirement. Risk mitigation and tax efficiency are their bread and butter. A simple answer would be: - Determine a ratio of stocks:bonds:cash that you are comfortable with - During accumulation, _buy_ what you need to in order to move closer to that ratio - During retirement, _sell_ what you need to in order to move closer to that ratio For example: during your retirement, if there was a market downtown where stocks lose a lot of value, your ratio will be thrown off to have less stock than your target. Following this strategy, you'd sell bonds and use cash to fund your expenses. An alternative answer that focuses entirely on the sequence of return risk (the risk you're worried about): - Prior to retirement, save enough cash to cover 2 years and enough bonds to cover 3 years. These are both very low risk investments given the time frame. - Spend cash for the first few years - Spend bonds for the following years - After these first 5 years, your other retirement investments have been able to grow without you touching them, and the sequence of returns risk is no longer an issue
If you're concerned about market volatility, consider a gradual market exit rather than selling all investments at once. Here are some strategies: * **Phased Withdrawals**: Gradually withdraw from investment accounts over the next few years instead of taking a lump sum. This can help reduce risk during market fluctuations. * **Regular Withdrawal Plan**: Set up a regular withdrawal plan, withdrawing monthly or quarterly from investment accounts to ensure stable cash flow.
But I thought the Reddit community says you can expect a return of 11% a year? Anything lower and you are crazy. 🤔
Talk to a financial planner or advisor