tag:blogger.com,1999:blog-5621914599310831423.post4490762873168433371..comments2018-12-10T20:34:12.364-08:00Comments on The Retirement Café: A Follow-Up on Confusing IssuesDirk Cottonnoreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5621914599310831423.post-34481735617365633832016-04-04T09:54:30.877-07:002016-04-04T09:54:30.877-07:00You're welcome, but I would like to tweak your...You're welcome, but I would like to tweak your conclusion just a bit more.<br /><br />SOR is actually quite dependent on the length of retirement, but it isn't linear. The increase in probability of ruin flattens out at around thirty years, so 40 or 50 years aren't much riskier than 30 years, but 30 years is a lot riskier than 5 years or 10.<br /><br />That's why I disagreed with your initial comment that adding a few years of retirement at age 65 to say, age 60 is the biggest risk of retiring early. You changed a possible 35-year retirement to a 40-year retirement. Not a big hit to P(ruin).<br /><br />Play with Milevsky's formula a little longer and you will see what I mean.<br /><br />Fun, huh? :-)Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-8948923610393124472016-04-04T08:05:04.347-07:002016-04-04T08:05:04.347-07:00Thanks for your followup comment. I couldn't g...Thanks for your followup comment. I couldn't get Milevsky's estimator to work - but I built my own (simpler but probably adequate to the task). Sure enough, I could not find what I expected - Milevsky is right - and I obviously was wrong. SOR is not really dependent on the length of the retirement - even when comparing 25 to 40 year retirement plans. <br />Thank you for straightening out that erroneous thought. <br /><br />cynicalanddisgustednoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-88861804693469467452016-03-27T11:12:17.142-07:002016-03-27T11:12:17.142-07:00Under reasonable assumptions of spending (say, not...Under reasonable assumptions of spending (say, not more than 4%) for early retirement on the order of 5 to 10 years, sequence risk doesn’t increase much and it’s completely manageable.<br /><br />Using Milevsky’s formula with an expected real return of 5% and sigma of 12%, a 19.7 year life expectancy for a 65-year old, and Wade Pfau’s current sustainable withdrawal rate estimate of 3%, the probability of successfully funding retirement is 96%. For a 60-year old with life expectancy of 23.6 more years, the probability of success decreases to only 95%, and for a 55-year old with life expectancy of 27.8 more years, the probability of success is still 93.9%. This is a relatively small range within the margin of error for a typical retirement plan and P(ruin) doesn’t increase significantly.<br /><br />(Here’s a <a href="http://1drv.ms/1BonWkI" rel="nofollow"> spreadsheet </a> that let’s you play with Milevsky’s estimator.)<br /><br />More importantly, exposure to sequence risk is both <i>manageable</i> and <i>a choice</i>. We can reduce sequence risk by lowering the withdrawal rate. We can also reduce the magnitude of the risk by investing less in equities, especially wise early in retirement as most research suggests.<br /><br />In fact, retirees who choose to fund retirement with Social Security benefits, annuities, TIPs ladders, pensions and the like instead of equities will have no sequence risk, at all. Hence, exposure to sequence risk is a choice.<br /><br />Sequence risk can be mitigated or completely avoided. The retiree whose biggest risk is the additional sequence risk created by retiring a few years early probably just needs a better plan. <br /><br />Analogously, if your biggest concern with swimming is shark bites, either stay in the shallow water next to the beach or swim in a pool!<br /><br />Thanks for writing! I love getting comments from regulars.<br />Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-76867233228483337672016-03-26T04:58:47.879-07:002016-03-26T04:58:47.879-07:00Retiring early has significantly greater risk than...Retiring early has significantly greater risk than normal retirement as (Obviously) You will be retired longer. But the risks is increased as the sequence of returns risk is not linear to the length of retirement. The longer time horizon for withdrawals means that you have increased your time horizon for poor early returns nearly by the number of extended years of retirement - not by the fractional extension of the retirement. <br /><br />SOR is (IMHO) the biggest risk associated with an early retirement. cynicalanddisgustednoreply@blogger.com