tag:blogger.com,1999:blog-5621914599310831423.post8893771775196028868..comments2022-05-18T15:23:51.882-07:00Comments on The Retirement CafĂ©: Clarifying Sequence of Returns Risk (Part 1)Dirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5621914599310831423.post-17282605302279593172018-04-22T10:35:03.901-07:002018-04-22T10:35:03.901-07:00Thanks, Patrice. I've written about both sever...Thanks, Patrice. I've written about both several times. I would expand "any non-fixed percentage withdrawal" to any variable-spending strategy that reduces spending when the portfolio declines in value. <br /><br />However, variable spending doesn't <i>eliminate</i> sequence of return risk. It simply moves SOR's effect from the probability of portfolio depletion to reduced spending, clearly the lesser of two evils.<br /><br />Whether one periodically spends a fixed amount from a portfolio or a variable amount, a more favorable sequence of returns will always permit more spending.<br /><br />An easy way to see this is to calculate spending for a two-year retirement with returns of +20% followed by -10% compared to returns of -10% followed by +20%. You will, in fact, end up with the same portfolio balance but you can spend more with the better sequence of returns (the first).<br /><br />We're interested in spending here, not terminal portfolio value. The only way to eliminate sequence risk is to avoid periodic spending from a volatile portfolio, period. Any amount or percentage you spend will be subject to unpredictable future stock prices.<br /><br />Thanks for your comment!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-50918108940536027052018-04-22T07:07:28.935-07:002018-04-22T07:07:28.935-07:00I totally Agree with you that using percentage wit...I totally Agree with you that using percentage withdrawal instead of constant dollar withdrawal (adjusted for inflation) is the way to go. <br /><br />As a side note, SOR is also eliminated using any non-fixed percentage withdrawal. To have the fund at t=0 to be the same at fund t=10, you only need that the geometric average rate of return = 1/(1- geometric average rate of withdrawal). <br /><br />If you go down the percentage withdrawal path, may I suggest Accumulation-Dynamic Decumulation as a strategy of withdrawal? While you get the benefit of removing SOR, you also mitigate substantially the variable withdrawal risk that you face using a percentage withdrawal. It can be used in combination with "Variable Percentage Withdrawal" or the Constant Percentage Withdrawal. Patricehttps://www.blogger.com/profile/17081257987162445208noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-56934966433256896612017-05-11T11:09:54.142-07:002017-05-11T11:09:54.142-07:00You can withdraw money any day. You can withdraw m...You can withdraw money any day. You can withdraw monthly. You can withdraw weekly. I have been retired for 11 years and have never once withdrawn a year's expenses at the beginning of the year. Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-45645649175139255692017-05-11T10:56:35.135-07:002017-05-11T10:56:35.135-07:00I agree with your statement that SOR risk is remov...I agree with your statement that SOR risk is removed if you withdraw a fixed % each year. However your formula will not work because it is combining the investment return % and the withdraw % and then basing it on the portfolio value at a certain point in time. I reason that the withdrawal is on day 1 of each year, because if it is at the end of the year (day365) then the retiree would have no money for that entire year until the last day of the year. In your example, year 1 draw which is taken on the 1st day of the year is 4% based on the current value (day1) 100,000 which is fine. That would leave 96,000 (not 100,000 as in your formula) invested in year 1 to earn 20% and ending value of 115,200. On the 2nd year draw (taken out on day 1 at the beginning of Year 2, the 4% is based on what? The only current value known at that point in time is 115,200. You won't know you will earn -7% in that 2nd year until the year is over, so you can't include that in your formula. The withdrawal would be 4% of 115,200 and the ending value of year 2 will be 102,581. Finally the remaining value TPV end of year 3 would be 101,699. Truth Be Toldhttps://www.blogger.com/profile/16599989737836812135noreply@blogger.com