Last fall DD had a school fundraiser that involved selling magazine subscriptions. I chose to buy a subscription to "Money". I have found it interesting to thumb through. This morning I picked up the most current issue to finish looking at.
The feature article/theme was about retirement. While most of the article was moderately interesting the section that made me go "Hmmm.." was titled Protecting Your Critical First Decade.
It describes a newer theory called "sequence risk". Basically the idea is that if you make your allocations too conservative in retirement it could negatively impact your nest egg in the long run.
The idea is that maybe you should own more % stock as you age, but timing is everything.
Obviously we all know timing is everything! And I think we understand that it is difficult to overcome losses.
This graph in the article (I didn't see it online) shows how a loss of value in the early years of retirement are much more damaging than if the same percent of loss happened later.
"The idea is that if you can get through the early years with your portfolio intact, you can still handle owning stocks later."
"In tests of thousands of simulated markets, Kitces and Pfau found that portfolios starting with as little as 20% in stocks and increasing to 60% had a better chance of lasting 30 years than portfolios that began high in stocks and gradually decreased. The portfolios also had less severe shortfalls when they failed."
Unfortunately the online version of this section is a bit condensed vs. the printed version, but I think the main points are still explained.
What I came away with is that shifting allocation should maybe look more like a curved graph where you start with higher risk, gradually moving to lower risk, and then gradually moving back up to higher risk (thus possible reward). Verses the traditional straight line graph of steadily reducing risk. And to be even more protective of our capital than traditionally recommended as we close in and enter the early years of retirement. Additionally it might be very worthwhile to increase investing in stocks into retirement - as long as you are capable of paying attention to what is going on with the market. Lastly, not rely on retirement funds in "auto-pilot", low yield investments to provide for you.
Sure, I feel the ideal position is have enough principle that you only withdraw the interest and/or dividends that the lump sum provides. But I imagine that most folks won't have that luxury and are going to have to slowly dip into the principle.
Makes this newest plan food for thought...
March 10th, 2014 at 06:01 am 1394431265
If retirees can bring down their costs sufficiently to use 4% of retirement funding, to meet needs the numbers work. It means paid off mortgage, paid vehicle, some travel on public transportation which is usually subsidized, making meals or using low cost services like Meals on Wheels. It presumes individuals will be mindful of health avoiding those poor choice lifestyles that lead to type II diabetes and obesity related problems. It's already incredibly expensive to live in a mid quality supported living or nursing home. I'm told those cost $ 5K per month for those who can primarily care for themselves but need cleaning services and meals.