"The Fragile Decade"

Retirement Researcher wrote about what it calls The Fragile Decade with the primary focus being sequence of return risk of poor market returns in the first few years of retirement. You know this already but retiring on December 31, 2007 could have created a serious headwind for a sustainable retirement versus retiring two years later. 

The blog post suggested four ways to mitigate sequence of return risk in a scenario like retiring on 12/31/2007.

• Spend less than 4% to start
• Have the flexibility for variable withdrawals
• Have a more conservative asset allocation when starting out and increase equity exposure later
• Set cash aside to cover X number of months of expected expenses

We've talked before about having a little more cash set aside and kind of related to the asset allocation bullet point, the help that a small percentage in negatively correlated assets can give. A 5% weighting to reliably negatively correlated holdings could grow to 8-9% in the face of a hideous decline. The need to protect against a large decline lessens after a large decline and could be a source of funds in addition to some holdings that are intended to look like horizontal lines that tilt upward no matter what is happening in the world. 

The point is to avoid meaningful sales of assets that have gone down a lot. As the Can I Retire Yet blog said, "all that matters is having enough—enough for me and my needs alone; enough to get me over the finish line" which is a crucial perspective to have in the withdrawal phase. 

I hadn't put this together before but one of my longest tenured clients was 57 and retired when they hired me in 2005. My philosophy was the same back then but there were far fewer tools available. During the summer of 2008, holdings included a gold miner, GLD, an inverse fund, RYMFX and cash to ride it out. This sort of protection is now much easier to add as the fund space has become more sophisticated.

When the financial crisis really kicked in, it was of course an emotional event for the client but I believe it was a great litmus test for the philosophy of cash and low/negatively correlated assets. 

I want to put a different meaning on The Fragile Decade. Fragile decade is a good description for the ten years before you retire too. By your mid-fifties, you probably have some idea of if/when you want to retire, how you'd pay for retirement and have something in mind for taking Social Security. Even if someone that age doesn't have it all dialed in they probably have some sort of framework. 

The fragility in this scenario comes from some event derailing that framework. If at 56, you know at 64 you will have enough to retire and then take Social Security at 67 (so eleven years) there are quite a few different areas of potential derailment. We've talked about several different ones including job loss having to do with something at the company, some sort of health or injury that prevents working, some sort of enormous, unexpected, ongoing expense like care for an aging parent and there must be others. 

In this scenario with our current 56 year old, what if he loses his job at 57, can't find meaningful income replacement so instead of taking SS at 67, he's now looking at 63. The drop in benefit paid for my numbers from 67 down to 63 would be $1049 less per month. Even if it's not precisely linear from person to person, the percentage drop is probably close and that could be a meaningful amount. 

What if layered on top of the job loss, when he's 58 the stock market embarks on 30 month bear market like the popping of the internet bubble and then takes quite a few years to get back to its highwater mark and so too does it take quite a few years for the portfolio to get back to its highwater mark? 

The idea is not to plan for some specific adverse outcome but to work on overall resiliency in case something comes out of left field. This would be a spot to misuse the term antifragile. An adverse outcome doesn't have to leave us better off, just that we stay close to "all that matters is having enough—enough for me and my needs alone; enough to get me over the finish line."

A weird adverse outcome maybe, for an acquaintance who has been making a ton of money for the last few years, 37% federal tax bracket money. He and his wife, they're my age, had a very rough go of it financially for quite a few years starting in the financial crisis, it took awhile but it worked out with this job. I don't really know what they have in savings or the extent to which they do or do not live below their means other than driving older cars but he is going to lose his job in a buyout. 

He is slated to walk away with $4 million, he said $2.5 million after taxes. I don't know whether there is any flexibility in how the payout is taken to reduce the tax burden like $400,000/yr for ten years maybe. Making up numbers and simplifying things, if they have $1 million put away and add another $2.5 million, the 4% rule says they can take $140,000/yr. Where he might be making $800,000-$900,000/yr, if they are living a $350,000 lifestyle, $140,000 doesn't sound so great. There's a lot I don't know which is fine, the thing to take away is something that seems like a great outcome may not be.

My thoughts have long focused on taking the long path to cultivating income streams. I write about this all the time because it seems like the easiest path. There needs to be a willingness in the cultivation process to do things for free and one piece of advice I got a while back is be willing in certain circumstances to do things that other people don't want to do. Another way to describe what I mean is paying your dues. 

The fire department is an example for me. For whatever reason, from the moment I walked in the door I was very motivated to be part of the solution, part of making it better. This was before I understood about it leading to being a lucrative side-gig if I ever needed it. 

Retirement is a word problem like a train leave Baltimore at 5:30.... and it is up to us to figure out how to solve it. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.