The Plight of the Y2K Retiree

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Norbert Schlenker
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The Plight of the Y2K Retiree

Post by Norbert Schlenker »

I received a query from a client who wanted to see how a well diversified portfolio would have done under withdrawal starting at the top in 2000. (Common question these days. :?) To answer the question, I updated some work I did about two years ago (see e.g. this post). I added a line for the simplest possible inflation adjusted portfolio, namely one invested entirely in RRBs. The result looks like this ...
Screenshot_2020-04-06_16-54-37.png
Screenshot_2020-04-06_16-54-37.png (243.79 KiB) Viewed 3452 times
The results are brutal for all the diversified portfolios, particularly the growth portfolio, but it's still not clear if we're destined for disaster per the parameters of the usual SWR studies. (The studies all demand 30 year portfolio survival, we're 8+ years in, and the worst case is the FPX growth portfolio which is right around 55% of initial real value.) Any such investor is arguably in similar circumstances to that which prevailed in the worst part of 2003 and not remarkably worse.

You might imagine that adding the RRB line promised an interesting discussion with my client, so I thought I'd better be prepared. ;) So I ran the simulation again from the bubble top in RRBs - December 2005 - and came up with ...
Screenshot_2020-04-06_16-56-42.png
Screenshot_2020-04-06_16-56-42.png (186.59 KiB) Viewed 3452 times
The above is three years in, i.e. about the same length of time as it took from the top in 2000 to the bottom in 2003. 100% RRBs are the worst portfolio, and worse than FPX Income looked in 2003.

Just thought I'd share...

Edited (2020-04-06) to replace expired tinypic images with attachments.
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Shakespeare
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Post by Shakespeare »

Just thought I'd share...
Since I'm nowhere near that worse off [the FPX Balanced is a reasonable benchmark for me], I guess I've added some value. :wink:
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Post by Jo Anne »

Well then, I guess I haven't done too badly by withdrawing capital and putting it into stuff like roofs, bathrooms, rototillers, etc.
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Post by ghariton »

... which proves that if you pick your end points carefully, you can prove almost anything :wink:

I went to a 50% RRB portfolio around 2001, using the jetsam and flotsam left over from my tech stocks. :wink: Now I'm about two thirds RRBs, having done no rebalancing whatsoever.

Having two-thirds of my savings wiped out once was enough. This way I know I'll never have to eat dog food.

RRBs turned out to be a lot more volatile than I had expected. I had not taken liquidity risk seriously enough, I guess.

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Post by BRIAN5000 »

Is there a good link to the composition of the Income FPX?

There is a calculator here http://www.croftgroup.com/indexes/calculator.asp
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Post by Norbert Schlenker »

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Post by Dividend Growth Investor »

Norbert,

How has an investment in the the canadian stock market index performed over the same period? ( assuming 4% withdrawal)
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Post by Norbert Schlenker »

Worse than the other choices if you can't stand volatility (but it looked pretty brilliant a few months ago). Assuming a 0.25% MER ...
Screenshot_2020-04-06_17-00-44.png
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Edited (2020-04-06) to replace expired tinypic images with attachments.
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Post by deaddog »

Norbert; without getting back into the market timing argument.


It seems that someone who has planned to withdraw a certain % of their investments in retirement might be in the situation where they will have to adjust their lifestyle.

Once a person has reached the distribution stage of their financial plan doesn’t it make sense to have a tighter rein on risk?

Rather than adjust your lifestyle to fit your income if your investments have a downturn wouldn’t it be reasonable to adjust your plan so that you are protected from the downturn.

Define you risk. Know how much you are prepared to lose on any investment. Take gains when they exceed targets, set limits on losses and preserve your capital.

Change your plan for rebalancing. Add to your winners and boot out the losers rather than selling an investment when it exceeds a certain percentage of your portfolio and buying what isn’t performing at this time.

Buy some insurance: Out of the money puts. In a bull market they are usually fairly cheap.
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Post by Norbert Schlenker »

deaddog wrote:doesn’t it make sense to have a tighter rein on risk?
Is there evidence that your approach puts a tighter rein on risk?
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Post by deaddog »

Norbert Schlenker wrote: Is there evidence that your approach puts a tighter rein on risk?
It doesn't have to be my approach.
Is it necessary to ride out wild swings to achieve the results you want?
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Post by BRIAN5000 »

deaddog wrote:
Norbert Schlenker wrote: Is there evidence that your approach puts a tighter rein on risk?
It doesn't have to be my approach.
Is it necessary to ride out wild swings to achieve the results you want?
Would you two hurry up and agree on something. I wish I would have had something in place before this dam storm hit. So far the only idea I have is lower the equity position from 50% to 30%.
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Post by deaddog »

BRIAN5000 wrote:
Would you two hurry up and agree on something.
Don't hold your breath. :D :D
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Post by adrian2 »

deaddog wrote:It doesn't have to be my approach.
Is it necessary to ride out wild swings to achieve the results you want?
Yes.

For most people, relying on ultra-safe, guaranteed investments, is not going to cut it. Using deaddog's approach is not necessarily better -- it's quite easy to lose a lot of capital from being whipsawed.

As I've written before, it's a matter of probabilities and using them to your advantage - for example, I don't invest to be protected from TEOTWAWKI - if it happens, I won't enjoy it anyways.

As it's been said by some wise men (Warren Buffett?): be fearful when others are greedy and be greedy when others are fearful. I think today's the time for the latter proposition.
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Post by deaddog »

adrian2 wrote: As it's been said by some wise men (Warren Buffett?): be fearful when others are greedy and be greedy when others are fearful. I think today's the time for the latter proposition.
Hi Adrian;
So how do you be fearful if not by unloading some of your profits? Then you can take advantage of fearful times.

BTW If I mentioned Bernie Madoff as a successful market timer would you take him off the list please. :lol: :lol: :lol:
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Post by adrian2 »

deaddog wrote:So how do you be fearful if not by unloading some of your profits? Then you can take advantage of fearful times.
Sure, but my point was that nowadays it's time to be greedy.

Once again, my main objection to your strategy is being whipsawed, time and time again. The gains you may make minus the whipsaws, in the long run, will likely underperform buy and hold. The last year or two were the exception, not the norm.
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Post by deaddog »

adrian2 wrote:
deaddog wrote:So how do you be fearful if not by unloading some of your profits? Then you can take advantage of fearful times.
Sure, but my point was that nowadays it's time to be greedy.

Once again, my main objection to your strategy is being whipsawed, time and time again. The gains you may make minus the whipsaws, in the long run, will likely underperform buy and hold. The last year or two were the exception, not the norm.
I agree. Now may well be the time to be greedy. Also you may have a percent or 2 less performance. The model is set up to protect against the exception. Especially when you are in the distribution stage of your financial plan.
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Post by BRIAN5000 »

So which one of the portfolio's is better for someone starting retirement now, what are advisors recommending now, what were they recommending before?

Income - 8 years in, 4% (no inflation increase) x 1mil = withdrawn $320,000 about $775,000 left
Balanced $650,000 left
Growth $550,000

Income - 3 years in $910,000 left withdrawn about $120,000
Balanced $860,000
Growth $ $825,000

With only a non inflated $40,000 to live on and I would think a pretty nice starting value of 1 million the growth investor may have to adjust there withdraw rate going forward. Almost half there money gone in the first 8 years. Yes there could be a market recovery but is it wise to draw down another $40,000 plus for year 9?
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Re: The Plight of the Y2K Retiree

Post by Norbert Schlenker »

An update for the Y2K retiree under 4% withdrawals.
y2k retiree.png
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Re: The Plight of the Y2K Retiree

Post by Shakespeare »

Stop alarming people and start the y-axis at zero. :wink:
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Re: The Plight of the Y2K Retiree

Post by Norbert Schlenker »

Move along, nothing to see here. ;)
y2k retiree.png
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Re: The Plight of the Y2K Retiree

Post by pmj »

Shakespeare wrote:Stop alarming people and start the y-axis at zero. :wink:
But even worse is those side-by-side graphs in the financial pages with differently-scaled non-zeroed y-axes :shock:. Clarity be damned. Graphic artists rule :roll:.
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Re: The Plight of the Y2K Retiree

Post by investnoob »

These charts are interesting. One thing I wonder is whether or not a real Y2K retiree would have his portfolio resembling something like FPX Growth or FPX Balanced. Wouldn't the smart thing to do be to retire with a portfolio that looked something like FPX Income? If so, the hit wasn't so big.
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Re: The Plight of the Y2K Retiree

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investnoob wrote:These charts are interesting. One thing I wonder is whether or not a real Y2K retiree would have his portfolio resembling something like FPX Growth or FPX Balanced. Wouldn't the smart thing to do be to retire with a portfolio that looked something like FPX Income? If so, the hit wasn't so big.
I have no doubt there were many Y2K retirees who retired on a 4% SWR basis (and in the absence of other significant assets like DB pensions) with a biased equity portfolio assuming even 50% of the equity growth of the '90s would continue. The hell with formulae like '100 - age = FI component'. Perceived success over a sustained period of time breeds cockiness and dangerous assumptions. I know folks who had to go back to work because of the expectation 'reasonable' (in their minds) stock market growth would continue.
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Re: The Plight of the Y2K Retiree

Post by Shakespeare »

whether or not a real Y2K retiree would have his portfolio resembling something like FPX Growth or FPX Balanced
I retired in 1998. My overall allocation has always been similar to FPX Balanced overall, but I have significantly outperformed the benchmark by good luck in security selection.
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