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Jin
Hey guys, would love your thoughts on a few sequence of return questions. I know many will have a large savings balance to draw from when the market is down – these are asking about alternatives.
1. How do you determine the market is down so you know to trigger your mitigation plan? Is it based on the market having a negative return for the previous month?
The previous year? How frequently do you snap the chalkline and what constitutes a “bad” market?
2. What do you do when you have to trigger your sequence-of-return-risk mitigation plan?
Do you just draw from cash/bonds or do you keep drawing from stocks from decrease the amount so you live on less (tighten your budget)?
3. Is anyone planning to slow travel overseas if the market does poorly?
For example, if the market drops significantly in a month, then go to somewhere like Vietnam and stay there for a few months (living well on a much smaller income) until the market recovers?
Scott1) You don’t know absent owning a fully functioning crystal ball. The market can keep falling farther and longer than anticipated.
2) Dynamic withdrawal mechanisms are really the mitigation for a severe SORR scenario ie 1968 or 1999.
You just have to accept if that happens some spending on discretionary items needs to be curtailed.
That said I’d rather start with 3 trips to Europe, then realize in 5 years I need to cut to 2, than to have started with 2 and realize in 5 years I could have done 3 or 4 when I was younger.
3) Not that specific, but in general you can’t control the Fed or what Mr Market will do so it is not a bad idea to have a plan B if you need to.
Examples (not exhaustive and not possible in all cases) might be you downsize from a 4BR to a 3BR, go to one car instead of 2, cut the Europe trip to one week from two, shop more at Aldi, etc.
RickAnother variant for consideration is timing Roth conversions during down markets.
Many here will have “too much” in pretax to Roth convert at very tax efficient rates so the use of down markets becomes a great extra leverage to pull.It does not take tons of pretax money to have too much.
Someone with say $40k of room for Roth conversions will see this challenge when they have “just” a $500k pre tax balance and an 8% return as the Roth conversions won’t reduce the pre tax amount over time (using very basic projections).
The challenge to this are twofold. First, timing is out of your control and the market may blow past your trigger points leading you to wish you had waited a little longer or the market may stop failing a hair shy of your trigger point leading to a missed opportunity.
Second, additional Roth conversions at unknown future times may cause more of a cash crunch for taxes on the conversion at a time your cash may be coveted for covering living expenses for longer before you sell any investments to replenish the cash bucket.
A general version of this is:
Roth convert to fill 12% tax bucketIf no market drop trigger reached, do Roth conversion for the year at a time convenient for you.
If portfolio or a specific part of portfolio falls 10%, do Roth conversion for the year.
If portfolio or specific part of of portfolio falls 20%, Roth convert more to fill up the 22% tax bucket.
This should help reduce that pre tax balance in a way that is far more RMD avoidance friendly.
LisahFollowing. And I just went to Vietnam for 3 weeks. So so inexpensive and I thought when I retire I’d spend more time there.
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