Sorry, I should have read the entire thread before posting. 
I will say though that when the market hits a bottom, that’s a perfect time to convert to Roth IRA.
I’ll have to look more into grantor’s trusts.
Lucky Dog
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Later this year I am forced to take social security (70) and I am already dreading the prospect of RMD extractions beginning two years from now. I’ve spent a lifetime learning and am geared for increasing, not decreasing our portfolio. I can understand that aspect in older investors like Warren, Charlie and many others of their ilk.
Anyone else not retiring and holding off to the last possible dates for social security and RMDs?
I’ve been planning our retirement since I was 19, though I could barely afford to eat at the time, and happily got DH to finally agree to retire at 58, though that was 3 years later than I wanted. Retirement is awesome.
We have held off on taking SS until 70 for DH, FRA for me, taking a lump sum for our pensions so we didn’t have to draw a pension payment at 65 and could defer it to RMD age. We have a balance of funds in taxable accounts as well as IRAs. Given our age eligibility for Roths was minimal, we are going to be hit hard on RMDs. Because of this we have been doing aggressive Roth conversions, using taxable funds to pay the taxes, which IMO is tantamount to making a deposit of those tax dollars into the Roth. The external factors to our personal accounts was the temporary tax breaks implemented by Trump. There is no better future time than now to do those conversions when you look at the tax brackets today and what they will revert back to in 2025 by the Fed Gov’t doing what they do best…nothing. Then if you are married, consider the potential tax impact of losing your spouse.
We have had long threads on the Retirement Investing board on this subject, and when I have more time I will go search for that link to post here, but I strongly encourage everyone to run their own numbers. I was shocked to see how high a tax bracket we would be in with RMDs.
Yes, it’s a good problem to have.
IP
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Jim: If you’re owning the S&P 500 at current prices, you’re sensibly expecting no real total return for the next 5 years so I would hope you’re not withdrawing more than (say) 2%/year of today’s value.
I cross-posted this to the Retirement board where I think they’ll be interested:
https://discussion.fool.com/sorr-35130631.aspx?result=NewPostSub…
https://discussion.fool.com/our-accountant-suggested-we-do-a-rot…
As promised this will take you to how I ran the numbers to determine if we should do Roth Conversions. It’s pretty dated, so instead of figuring out how many years before you turn 70.5, substitute 72. Where I reference adding up all your TIRAs, include all your tax deferred accounts.
Don’t forget about all the taxes, like the 3.8% NIIT for AGI over $250K, higher taxes on SS and higher costs for Medicare that comes with higher income.
This is only one of the many Roth Conversion threads on that board, but they are hard to find with the search tool.
I run these numbers every year. DH turned 63 this year so Medicare look back comes into play, plus we sold a rental property and I am loathe to negate all those beautiful capital gains that are taxed at 0-15%, so we are skipping conversions this year. Or so I think anyway. We do our conversions at the end of December when I have a handle on how much income we have realized, and I will still re-run our numbers. I also feel we have enough in Roth’s for the kids to inherit without taxes, and if RMDs are taxed at a higher amount than I care to give to our spendaholic gov’t, we will determine as a family how to give some of those RMDs away via qualified charitable distributions. Honestly looking forward to that annual family discussion. Finding out about QCDs was a game changer for me, in that it allows me to push the decisions down the road and not feel as though ACTION NOW is the only choice. Good thing too, given though our Roth’s have increased considerably via conversions, our TIRAs are also bigger than ever. First world problem, and one which I greatly prefer over the 19 year old me who started planning retirement even though she couldn’t afford to eat.
I hope the info at the link helps you decide what is right for you.
IP
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If you’re owning the S&P 500 at current prices, you’re sensibly expecting no real total return for the next 5 years so I would hope you’re not withdrawing more than (say) 2%/year of today’s value.
If selling 8-10% of your portfolio at below average prices pushes your balance below what
can meet your future needs you simply don’t have enough money for your expense profile.
Sequence of return risk is real, but it’s a problem only for those unfortunate enough or imprudent enough to be skating too close to the line already.
Sure, but most retirees hold recommended 60/40 TSM/TBM portfolios and withdraw a recommended 4%/year. They’ve no idea they’re skating too close to the line.
Say you get a 4-5 year bear market with valuations low at all times. Not the worst possible, but pretty bad.
What fraction of your aggregate positions are you selling in that interval if you had (say) only a year of cash?
Probably not that much.
For most retirees? Double digits.
And if it is that much, as I mentioned, your problem isn’t really the sequence of returns risk, it’s that you have too high a withdrawal rate for the size of your pile.
Most retirees don’t have the luxury of withdrawing below 4%.
Don’t forget the flip side of the equation.
What is the impact on your supportable income 20-25 years from now by having 5 years in cash at all time?
It’s possible to be too close to that line, as well.
Most retirees don’t have the luxury of foregoing that insurance.
(Myself, I’ve 4-5 years cash to be spent only if the portfolio down 20% or more at time of withdrawal and I won’t replenish the cash bucket once spent. And withdrawing only ~3%.)
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And if it is that much, as I mentioned, your problem isn’t really the sequence of returns risk, it’s that you have too high a withdrawal rate for the size of your pile.
Most retirees don’t have the luxury of withdrawing below 4%.
I do not know about most retirees, but I sure don’t.
Don’t forget the flip side of the equation.
What is the impact on your supportable income 20-25 years from now by having 5 years in cash at all time?
It’s possible to be too close to that line, as well.
Most retirees don’t have the luxury of foregoing that insurance.
I have nowhere near 5 years living expenses in “cash.” Perhaps only a month or two, unless I count the cash in my stock market accounts. Then about two years.
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Don’t forget the flip side of the equation.
What is the impact on your supportable income 20-25 years from now by having 5 years in cash at all time?
It’s possible to be too close to that line, as well.
…
Most retirees don’t have the luxury of foregoing that insurance.
I realize that, really.
But there is also a very real question to be asked about whether they can afford the premium that the insurance will cost.
Take five years of current living expenses in cash, invested in [pick your equities], and wait 25 years.
Is that a meaningful amount more in terms of real purchasing power? Sure.
What would that buy? Could the person near the edge live without that extra?
Imagine, 25 years from now, being hit with a surprise expense that large. That’s the difference that the “5 years of cash forever” makes.
Not to mention that almost nobody talks about the difficulty of how to decide when to use the cash, versus when to do periodic sales.
If you never use the cash, it was entirely pointless all along.
Like paying a huge insurance premium to a company that never pays out.
Say you get a 4-5 year bear market with valuations low at all times. Not the worst possible, but pretty bad.
What fraction of your aggregate positions are you selling in that interval if you had (say) only a year of cash?
Probably not that much.
…
For most retirees? Double digits.
Very low double digits sounds plausible, though it should be less at the moment.
Let’s say somebody is forced to sell (say) 15% of their stock at a valuation level an average of (say) 20% less than they would have hoped for.
(twice as much as would be reasonable to sell, if they own the S&P these days)
Their portfolio is 3% lower forever after, as a result. Bummer.
But the number of people who would otherwise have been OK, but are not OK because of this fact, is pretty tiny.
They were already within 3% of the ragged edge, but not over it.
The key thing that most people miss about sequence of return risk is that you’re not selling your entire portfolio at low prices during a bear market.
It’s a real risk, but not the one most people think it is.
The loss is a fraction (the undervaluation) times a very small fraction (the amount sold that year).
If that marginal amount that you sell at low prices pushes you over the edge, the problem is not the sales,
it’s the problem that you were, very unfortunately, too close to the edge. You almost certainly would have gone broke anyway.
I really do feel for the people who won’t be OK. I can tell you the price of Kraft Dinner* in any year 1968-1978 in Canada.
And I know what a 3-digit total family income after government subsidies feels like. Hint: there is nothing in the couch cushions, we already checked.
But sequence-of-return risk is almost never the central problem, it’s just having too few assets.
Geeky side note: It is of course true that there are some people in that liminal situation, even if there are very few of them:
Good sequence of returns and they’re OK, bad sequence of return and it’s dog food time.
Surprisingly, they are better off buying some index put options during the first five years of retirement than sitting on cash.
This isn’t an idle speculation, there is some serious academic research on the subject.
The premium cost is high…but lower than sitting on the cash allocation.
An often-forgotten corollary that comes out of that study: there is no point in a large cash allocation, OR insurance, past the first several years of retirement.
Sequence of return risk is by definition the problem of very low asset prices early in the retirement, rather than later.
Later on in the retirement, it’s not really an issue for anybody.
Except, as mentioned, those who simply didn’t have enough assets to begin with.
Jim
- in Canada it’s called that, or KD to its close friends, not Kraft Macaroni and Cheese.
I guess “dinner” gives them the option of including no actual cheese. Or no actual macaroni, if it comes to that.
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“I can tell you the price of Kraft Dinner* in any year 1968-1978 in Canada.”
3 for $1 if I recall correctly…
But sequence-of-return risk is almost never the central problem, it’s just having too few assets.
One method I have looked at is to base the % withdrawal rate on the value of assets 5 years ago and keep adjusting the withdrawal amount if next year the value of assets 5 years ago is greater than 6 years ago. This eliminates the concern about sequence risk when first withdrawing.
e.g.
Year 2020 withdraw x% of maximum value of assets before 2015.
Year 2021 withdraw x% of maximum value of assets before 2016
Craig
Very low double digits sounds plausible, though it should be less at the moment.
Let’s say somebody is forced to sell (say) 15% of their stock at a valuation level an average of (say) 20% less than they would have hoped for.
(twice as much as would be reasonable to sell, if they own the S&P these days)
Their portfolio is 3% lower forever after, as a result. Bummer.
But the number of people who would otherwise have been OK, but are not OK because of this fact, is pretty tiny.
They were already within 3% of the ragged edge, but not over it.
The key thing that most people miss about sequence of return risk is that you’re not selling your entire portfolio at low prices during a bear market.
It’s a real risk, but not the one most people think it is.
The loss is a fraction (the undervaluation) times a very small fraction (the amount sold that year).
If that marginal amount that you sell at low prices pushes you over the edge, the problem is not the sales,
it’s the problem that you were, very unfortunately, too close to the edge. You almost certainly would have gone broke anyway.
Jim,
I think you’ve explained this to me before, about how I would not be selling a very large percentage of the portfolio even in a long bear market, but I guess it didn’t stick because I’m still carrying so much low-earning cash. I actually don’t normally have 5 years of cash, but I think Covid broke my brain a little bit and made me even more conservative.
If I had only 1 year of cash and was forced to sell Berkshire for 4 years during a 5 year bear market at prices I would never normally sell at (like at today’s levels) it would not be the end of the world. My cash seems to be more of a security blanket for me, but with higher inflation it appears I should possibly reduce the size of my blanket.
However, I’m in a pretty strange position of having about 90% of my net worth in Berkshire and the rest in cash, so maybe the larger cash position makes sense in my situation?
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Just ran across this older post from Jim, who was patiently trying to convince me that my excess cash hoard was pretty dumb. I finally understood what he was saying, and the recent higher inflation has helped me deploy some of that excess cash into more risk assets at decent entry prices (I think).
I ran across this article today that explains how sequence of return can actually lead toward a LARGER than expected terminal portfolio value, as long as your SWR is low enough that you don’t blow yourself up. Or if you are able to ratchet your spending down in bad times, which is pretty much what I do. I also don’t ratchet up my SWR in times of high inflation like today, but just spend a little bit less.
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