Scenario: Retired, what would you do?

[kork13]

Looking at today's dip below 10k on the Dow, I had a thought/question. I thought this might be an interesting scenario to run with everybody here to hear what you have to say. Doesn’t apply to me, I’m only 22, but it might help others who are in the same situation, or know someone who is. Assume I am the OP (my name is…. “Luke”), and this is my situation. (NOTE: I’m trying to be realistic here, if I say something totally ‘out there’, let me know, I’ll fix it)
~~~~~~~~~~~~~~~~
My wife and I are the picture of your average, middle-class, blue-collar, retired couple. 68yo, retired for the last 3 years, and are living off of our savings and the total $2000/mo SS checks (no pension). We made a total of $80k/yr before retiring, and have since lived on about $65k/yr. We were very responsible in saving, and as of Jan 08, had a holding of approx. $1M in 50% stocks and 40% bonds, 10% cash in a well-diversified portfolio. Unfortunately, all of our planning, preparation, responsibility and diversification can do nothing for us in today's market. Following right along with the Dow and S&P (down ~25% YTD), our portfolio has dropped a total of 15%, hedged only by the cash and bond holdings. So now, I look at the market in a shambles, and caught up in the collective angst, I’m on the verge of moving our assets to a 10% stock, 50% bond, and 40% cash allocation. What do you think? We’re both very afraid we’ll outlive our savings, and refuse to be a burden on our children. What is the best way for us to move forward?

The $1M was our balance on 15 Jan, right after we took out our annual withdrawal of $40,000. It’s since been sitting in our ING account getting a meager 3%, slowly draining out as we live off of it. We live fairly frugally, but are comfortable in our St. Louis, MO home ($200k value, PIF) and travel to Virginia during Christmas every year to see our 2 children’s families living there.

Current portfolio value: $850k
Current paper loss: $150k
Planning for the next 25 years (parents and grandparents all lived to 85-90yo)

HELP!!! WHAT DO WE DO???

If you need any more info, let me know and I can give it to you. (well, I’ll actually make it up, but I’ll try to get you a reasonable answer. ^_^)

-"Luke"

[tripods68]

The problem is that if you moved your money your losses is realized instead of paper loss. It's hard to recover from that.

Here's the strategy I would employ. I've employ this strategy myself many times. No strategy is perfect, only if you execute them well.

Sell performing stock funds that have less than 10% of losses. Use that proceeds to buy more stock funds that have greater losses of 20% or more. Your essentially buying more shares at a dip while lowering overall cost basis. When those stock funds recover based the fundamentals you would greatly benefit.

Keep the overall asset allocation percentage the same. Own more TIP bonds if you don't already own them. I'd buy more T-Bills instead of parking all 10% in cash/5% T-bills.

[jIM_Ohio]

15% relative to market's 25% drop (and I am down 30% ytd in my 401k alone), they should NOT be complaining.

$1 M portfolio, 65k income need, 24k SS.
Yearly withdraw is about 41k (which is just above 4% withdraw rate).

My questions would be
1) can the $850k kick out the 41k needed in interest and dividends? If yes, I would make no allocation changes and give porfolio TIME to recover.
2) is the portfolio diversified enough? If the 15% drop alarmed them, then I might suggest adding a real estate class (REITs) and also adding commodities (a fund like PRPFX) while decreasing equites by around 5%, bonds by 10% and cash by another 5%.

3) how long does family need the porfolio to last?
If more than 25 years, keeping 40% equity exposure is recomended or it's possible in 12 years inflation has taken away more than half their money (regardless of market performance).

4) I would educate them on a long term withdraw plan.

[maat55]

I heard an interesting statistic today. Since 1970, there have been 10 substantial drops in the market. Of these, all recovered within two years or less. These were based on the S&P 500. Provided by DR.

[LivingAlmostLarge]

What are your thoughts about downsizing your home and using the cash to bulk up your portfolio? Also less costs in maintaining a smaller condo or home?

[jIM_Ohio]

Originally Posted by maat55

I heard an interesting statistic today. Since 1970, there have been 10 substantial drops in the market. Of these, all recovered within two years or less. These were based on the S&P 500. Provided by DR.

CAREFUL on that.

I believe the right reponse is "on average the 10 drops have recovered in 2 years or less". Meaning some of the drops might have taken 4 years, some of them 1, for an average recovery of 18 months.

What I am hearing is there is no reason to think that this is a simple recovery- we will recover, but no guarantee it will be less than 18 (or 24) months.

I am thinking recovery will spike once, then drop again, then that second drop will take around 24-36 months to recover.

The spike before that will be about 5-15% from the bottom, which will probably be hit in 2008 (if we have not hit it already).

Back in 2000 most of what I read is we are entering a bear market which might have small cyclical Bulls (meaning some increases, but will continue to drop or stay low in bear territory).

March 2000 S&P 500 was at ~1527, dec 2000 ~1306
2001 ~966 (in sept)
2002 ~800 (in oct)
2003 started year at 927 and ended at 1108 (was that 2 years or three?)

so somewhere in there is the "bear bottom"

2004 ~1194 (ended year)
2007 it hit ~1500 again ("recovered")
2008 we are down to ~1056
meaning it recovered it's losses 7 years later
only to give them back the 8th year.

when this happened 2001-2003 it kept going down
yet some funds showed positive returns (managed funds) so it was the bad companies pulling market down (enron).

I am expecting more of the same now- indexes might do bad, but managed funds which avoided financials might emerge soon as good funds.

Anyone investing trying to find the low should have a 7 year time horizon, at minimum, for the money being invested. Anyone which was buying in 2000-2003 can tell you they made significant money through 2007 (myself included), I have given back some of those gains this year...

But experience tells me to get in with even more money this time (I make 3X as much now as I did then). Get into this market because when it goes up, you will have significantly lower cost basis on a nice wave upward.

I am by no means a technical analysis guy, I pulled the values above from a yahoo chart to illustrate how long it took to recover from 2000-2002 dip, IMO we are in that same bear market now.

[jIM_Ohio]

Originally Posted by LivingAlmostLarge

What are your thoughts about downsizing your home and using the cash to bulk up your portfolio? Also less costs in maintaining a smaller condo or home?

Two very different issues/ Let's not confuse a house with an investment.

Let's assume everyone needs a place to live.

Is the place you are living meeting your needs? Can you sell it for a good value according to you? What is this value relative to 2-3 years ago?

Then go to another series of questions.

What is your retirement plan? % stocks-% bonds? How much is saved? How long to retirement? What are expected living expenses in retirement?


I would never recomend selling a house in this environment as blanket advice. I would consider downsizing as part of a life process (kids moving out) a possible reason to sell.

But even then, if you think you can get 100k more for house than you can right now (because of the market), then waiting is probably prudent.

If you sell and make a 50k profit and invest that 50k, you would need 7 years at a 10% return to get 100k and 10 years to get 150k at same return.

If you wait and sell at a 150k profit, I doubt you will have to wait 10 years to get the 150k. Maybe wait 3, get 75k-100k, then invest for 4 years and maybe be at 150k.... meaning there is something to be said for not selling at bottom.

But it depends on the numbers used and the actual performance reached.

[tripods68]

Originally Posted by LivingAlmostLarge

What are your thoughts about downsizing your home and using the cash to bulk up your portfolio? Also less costs in maintaining a smaller condo or home?

That's good strategy if you lots of equity in the house to begin with sizable price range. However, selling in today's housing market is really tough to expect full asking price. Most buyers are looking to negotiate below market value. Unless housing market stabilize, I'm afraid selling your home now now isn't a good idea without taking some losses.

I do agree owning a condo is far less to maintain compare to home.

[maat55]

[quote=jIM_Ohio;188545]CAREFUL on that.

I think what DR is pointing out is that after negative years the possitive years have recouped all losses within two years. In most of these cases, really bad years have really good years behind them.


-9.72% -1.61%
1971 5.46% 3.10% 102.09 5.57 3.16 1.15% -0.74%
1972 5.23% 2.70% 118.05 6.17 3.19 10.76% 0.71%
1973 8.16% 3.70% 97.55 7.96 3.61 28.93% 13.24%
1974 13.64% 5.43% 68.56 9.35 3.72 17.48% 3.14%
1975 8.55% 4.14% 90.19 7.71 3.73 -17.54% 0.30%
1976 9.07% 3.93% 107.46 9.75 4.22 26.39% 13.10%
1977 11.43% 5.11% 95.1 10.87 4.86 11.53% 15.07%
1978 12.11% 5.39% 96.11 11.64 5.18 7.07% 6.60%
1979 13.48% 5.53% 107.94 14.55 5.97 25.01% 15.23%
1980 11.04% 4.74% 135.76 14.99 6.44 3.01% 7.81%
1981 12.39% 5.57% 122.55 15.18 6.83 1.31% 6.08%
1982 9.83% 4.93% 140.64 13.82 6.93 -8.95% 1.58%
1983 8.06% 4.32% 164.93 13.29 7.12 -3.84% 2.76%
1984 10.07% 4.68% 167.24 16.84 7.83 26.69% 9.85%
1985 7.42% 3.88% 211.28 15.68 8.20 -6.91% 4.74%
1986 5.96% 3.38% 242.17 14.43 8.19 -7.93% -0.15%
1987 6.49% 3.71% 247.08 16.04 9.17 11.10% 11.99%
1988 8.20% 3.68% 277.72 22.77 10.22 42.02% 11.49%
1989 6.80% 3.32% 353.4 24.03 11.73 5.52% 14.80%
1990 6.58% 3.74% 330.22 21.73 12.35 -9.58% 5.26%
1991 4.58% 3.11% 417.09 19.10 12.97 -12.08% 5.03%
1992 4.16% 2.90% 435.71 18.13 12.64 -5.12% -2.59%
1993 4.25% 2.72% 466.45 19.82 12.69 9.37% 0.41%
1994 5.89% 2.91% 459.27 27.05 13.36 36.45% 5.34%
1995 5.74% 2.30% 615.93 35.35 14.17 30.70% 6.00%
1996 4.83% 2.01% 740.74 35.78 14.89 1.20% 5.10%
1997 4.08% 1.60% 970.43 39.56 15.52 10.57% 4.25%
1998 3.11% 1.32% 1229.23 38.23 16.20 -3.35% 4.37%
1999 3.07% 1.14% 1469.25 45.17 16.71 18.13% 3.16%
2000 3.94% 1.23% 1320.28 52.00 16.27 15.13% -2.65%
2001 3.85% 1.37% 1148.09 44.23 15.74 -14.94% -3.24%
2002 5.37% 1.83% 879.82 47.24 16.08 6.81% 2.15%
2003 4.87% 1.61% 1111.91 54.15 17.88 14.63% 11.19%
2004 5.53% 1.60% 1211.92 67.01 19.407 23.75% 8.54%
2005 5.47% 1.79% 1248.29 68.32 22.38 1.95% 15.32%
2006 5.78% 1.77% 1418.3 81.96 25.05 19.96% 11.93%
2007 5.96% 1.89% 1468.36 87.51 27.73 6.77% 10.70%

[MYOM]

The 40% allocation to cash is too high. The 50% in corporate bonds is perfect. Buy individual corporate bonds maturing in one year or less. Keeping maturities short will minimize corporate bond interest rate risk that moves pricing. I screen for bonds coming due in 90-days, 6-months, and one year. The 40% can be invested in CDs and Treasuries if you need a government guarantee. CDs can be purchased in the secondary market that pay higher yields than local banks and again your maturity should be kept to one year or less. The reason for the one year or less is because interest rates will go higher once the economy gets back on its feet.

To do well in the stock market, you need an exit strategy. I have one but can't mention it here on the forum until I have made 15 posts.

Dan Clemons, author and retired Certified Financial Planner

[LivingAlmostLarge]

I think home selling depends on the how large a home and how easy it is for you to maintain.

But definitely I would stay invested. Did you already move everything or are you considering it?

[jIM_Ohio]

[quote=maat55;188555]

Originally Posted by jIM_Ohio

CAREFUL on that.

I think what DR is pointing out is that after negative years the possitive years have recouped all losses within two years. In most of these cases, really bad years have really good years behind them.


-9.72% -1.61%
1971 5.46% 3.10% 102.09 5.57 3.16 1.15% -0.74%
1972 5.23% 2.70% 118.05 6.17 3.19 10.76% 0.71%
1973 8.16% 3.70% 97.55 7.96 3.61 28.93% 13.24%
1974 13.64% 5.43% 68.56 9.35 3.72 17.48% 3.14%
1975 8.55% 4.14% 90.19 7.71 3.73 -17.54% 0.30%
1976 9.07% 3.93% 107.46 9.75 4.22 26.39% 13.10%
1977 11.43% 5.11% 95.1 10.87 4.86 11.53% 15.07%
1978 12.11% 5.39% 96.11 11.64 5.18 7.07% 6.60%
1979 13.48% 5.53% 107.94 14.55 5.97 25.01% 15.23%
1980 11.04% 4.74% 135.76 14.99 6.44 3.01% 7.81%
1981 12.39% 5.57% 122.55 15.18 6.83 1.31% 6.08%
1982 9.83% 4.93% 140.64 13.82 6.93 -8.95% 1.58%
1983 8.06% 4.32% 164.93 13.29 7.12 -3.84% 2.76%
1984 10.07% 4.68% 167.24 16.84 7.83 26.69% 9.85%
1985 7.42% 3.88% 211.28 15.68 8.20 -6.91% 4.74%
1986 5.96% 3.38% 242.17 14.43 8.19 -7.93% -0.15%
1987 6.49% 3.71% 247.08 16.04 9.17 11.10% 11.99%
1988 8.20% 3.68% 277.72 22.77 10.22 42.02% 11.49%
1989 6.80% 3.32% 353.4 24.03 11.73 5.52% 14.80%
1990 6.58% 3.74% 330.22 21.73 12.35 -9.58% 5.26%
1991 4.58% 3.11% 417.09 19.10 12.97 -12.08% 5.03%
1992 4.16% 2.90% 435.71 18.13 12.64 -5.12% -2.59%
1993 4.25% 2.72% 466.45 19.82 12.69 9.37% 0.41%
1994 5.89% 2.91% 459.27 27.05 13.36 36.45% 5.34%
1995 5.74% 2.30% 615.93 35.35 14.17 30.70% 6.00%
1996 4.83% 2.01% 740.74 35.78 14.89 1.20% 5.10%
1997 4.08% 1.60% 970.43 39.56 15.52 10.57% 4.25%
1998 3.11% 1.32% 1229.23 38.23 16.20 -3.35% 4.37%
1999 3.07% 1.14% 1469.25 45.17 16.71 18.13% 3.16%
2000 3.94% 1.23% 1320.28 52.00 16.27 15.13% -2.65%
2001 3.85% 1.37% 1148.09 44.23 15.74 -14.94% -3.24%
2002 5.37% 1.83% 879.82 47.24 16.08 6.81% 2.15%
2003 4.87% 1.61% 1111.91 54.15 17.88 14.63% 11.19%
2004 5.53% 1.60% 1211.92 67.01 19.407 23.75% 8.54%
2005 5.47% 1.79% 1248.29 68.32 22.38 1.95% 15.32%
2006 5.78% 1.77% 1418.3 81.96 25.05 19.96% 11.93%
2007 5.96% 1.89% 1468.36 87.51 27.73 6.77% 10.70%

I don't think your data supported your statement.

If I read the statement you are suggesting within 3 years if market was at 1500 it should be back at 1500 within 3 years (recovered losses).

What I think you meant to say was within 3 years the market started going UP again. But recovering losses within 3 years did not happen.

If I have $100 and lose 20% I have $80. If that loses 20% I have $64. If that loses 20% I have $52. I am down close to 50%.

For me to recover that loss I need a 100% gain that 4th year. If the $52 goes up 20% I only have 62, that goes up 20% I have $74... so if you plug numbers into the returns above, you will see the 2000 bear did not recover until around 2006 or 2007.

Getting into positive returns is one thing
most investors will look to when they recover their losses as when things really turned around.

[maat55]

[quote=jIM_Ohio;188651]

Originally Posted by maat55

I don't think your data supported your statement.

If I read the statement you are suggesting within 3 years if market was at 1500 it should be back at 1500 within 3 years (recovered losses).

What I think you meant to say was within 3 years the market started going UP again. But recovering losses within 3 years did not happen.

If I have $100 and lose 20% I have $80. If that loses 20% I have $64. If that loses 20% I have $52. I am down close to 50%.

For me to recover that loss I need a 100% gain that 4th year. If the $52 goes up 20% I only have 62, that goes up 20% I have $74... so if you plug numbers into the returns above, you will see the 2000 bear did not recover until around 2006 or 2007.

Getting into positive returns is one thing
most investors will look to when they recover their losses as when things really turned around.

Jim, with using your example of 100.00 here is how the recoveries worked.

100.00 -9.72 =90.28 down
90.28 +1.15 =91.31 1st rec
91.31 +10.76 =101.13 2nd rec +1.13

100.00 -17.54 =82.46 down
82.46 +26.39 =104.22 1st +4.22

100.00 -8.95 =91.05 down
91.05 -3.84 =87.55 down
87.55 +26.69 =110.91 1st +10.92

100.00 -6.91 =93.09 down
93.09 -7.93 =85.70 down
87.70 +11.10 =95.22 1st up
95.22 +42.02 =135.23 2nd up +35.23

100.00 -9.58 =90.42 down
90.42 -12.08 =79.49 down
79.49 -5.12 =75.42 down
75.42 +9.37 =82.49 1st up
82.49 +36.45 =112.56 2nd up +12.56

100.00 -3.35 =96.65 down
96.65 +18.13 =114.17 1st up +14.17

100.00 -14.94 =85.06 down
85.06 +6.81 =90.85 1st up
90.85 +14.63 =104.14 2nd up +4.14

Jim, unless I did this wrong, based on your 100.00 example, the down years were recovered by the up years within two years. I'm not sure where the 10 drops come from other than there are 11 down years, but I only see 6 recoveries after down years. But judging by these numbers, if next year is an up year, we may get back to level by the year after.

Disclaimer: Past results are not indicative of future results.

[jIM_Ohio]

1995 5.74% 2.30% 615.93 35.35 14.17 30.70% 6.00%
1996 4.83% 2.01% 740.74 35.78 14.89 1.20% 5.10%
1997 4.08% 1.60% 970.43 39.56 15.52 10.57% 4.25%
1998 3.11% 1.32% 1229.23 38.23 16.20 -3.35% 4.37%
1999 3.07% 1.14% 1469.25 45.17 16.71 18.13% 3.16%
2000 3.94% 1.23% 1320.28 52.00 16.27 15.13% -2.65%
2001 3.85% 1.37% 1148.09 44.23 15.74 -14.94% -3.24%
2002 5.37% 1.83% 879.82 47.24 16.08 6.81% 2.15%
2003 4.87% 1.61% 1111.91 54.15 17.88 14.63% 11.19%
2004 5.53% 1.60% 1211.92 67.01 19.407 23.75% 8.54%
2005 5.47% 1.79% 1248.29 68.32 22.38 1.95% 15.32%
2006 5.78% 1.77% 1418.3 81.96 25.05 19.96% 11.93%
2007 5.96% 1.89% 1468.36 87.51 27.73 6.77% 10.70%

You only looked at the most recent down year. Look at whole series:

For example what happens when 2000-2001-2002 reduces most of portfolio, then look at all 3 year rolling periods (meaning any 10 year period has 7 3 year periods (1-2-3, 2-3-4, 3-4-5, 4-5-6, 6-7-8, 8-9-0... then [for next decade] 9-0-1, 0-1-2 and so on)

Here is data for 1998-2007

1998 $10,000 28.62% $2,862 $12,862
1999 $12,862 21.07% $2,710 $15,572
2000 $15,572 -9.06% -$1,411 $14,161
2001 $14,161 -12.02% -$1,702 $12,459
2002 $12,459 -22.15% -$2,760 $9,699
2003 $9,699 28.50% $2,764 $12,464
2004 $12,464 10.74% $1,339 $13,802
2005 $13,802 4.77% $658 $14,461
2006 $14,461 15.64% $2,262 $16,722
2007 $16,722 5.39% $901 $17,624
2008 $17,624 $0 $17,624

Note portfolio value at end of year 1999 and that portfolio did not recover that value until 2006. That is 7 years last I checked.

This was returns for VFINX off yahoo
VFINX: Performance for VANGUARD INDEX TRUST 500 INDEX - Yahoo! Finance

IMO the reason this is important is that it takes 7 years to recover from bad markets, that is why any time horizon less than 5 years should be in cash, and anything less than 10 years needs a bond component or cash component.

In reality the cost basis was probably recovered somewhere between 3 yr and 7 yr times we are debating.

[maat55]

Originally Posted by jIM_Ohio

You only looked at the most recent down year. Look at whole series:

For example what happens when 2000-2001-2002 reduces most of portfolio, then look at all 3 year rolling periods (meaning any 10 year period has 7 3 year periods (1-2-3, 2-3-4, 3-4-5, 4-5-6, 6-7-8, 8-9-0... then [for next decade] 9-0-1, 0-1-2 and so on)

Here is data for 1998-2007

1998 $10,000 28.62% $2,862$ 12,862
1999 $12,862 21.07% $2,710 $15,572
2000$15,572-9.06%-$1,411$14,161
2001$14,161-12.02%-$1,702$12,459
2002$12,459-22.15%-$2,760$9,699
2003$9,69928.50%$2,764$12,464
2004$12,46410.74%$1,339$13,802
2005$13,8024.77%$658$14,461
2006$14,46115.64%$2,262$16,722
2007$16,7225.39%$901$17,624
2008$17,624$0$17,624

Note portfolio value at end of year 1999 and that portfolio did not recover that value until 2006. That is 7 years last I checked.

This was returns for VFINX off yahoo
VFINX: Performance for VANGUARD INDEX TRUST 500 INDEX - Yahoo! Finance

I'm going to have to take your word for it because all I see is computer language.

[jIM_Ohio]

Originally Posted by maat55

I'm going to have to take your word for it because all I see is computer language.

My excel sheet did not paste, I needed to edit the post. How does it look now?

BTW- the numbers you posted- what are those returns for?

[maat55]

Originally Posted by jIM_Ohio

My excel sheet did not paste, I needed to edit the post. How does it look now?

BTW- the numbers you posted- what are those returns for?

I went to get an history report for the S&P 500 and was given the numbers I have listed. I copied the numbers for 1970 and on, but they are jiving with your numbers. I'm not sure what stats DR used in his example of two year recovery. Based on your numbers, his would be wrong.

Where do you get the official history for every year of the S&P 500?

[maat55]

Here is the chart I used.

Calculated based upon earnings yield and S&P 500 levels each year. The raw data for this table was obtained from Bloomberg (and from S&P).

6.66% 6.49%
1970 5.98% 3.46% 92.15 5.51 3.19 -9.72% -1.61%
1971 5.46% 3.10% 102.09 5.57 3.16 1.15% -0.74%
1972 5.23% 2.70% 118.05 6.17 3.19 10.76% 0.71%
1973 8.16% 3.70% 97.55 7.96 3.61 28.93% 13.24%
1974 13.64% 5.43% 68.56 9.35 3.72 17.48% 3.14%
1975 8.55% 4.14% 90.19 7.71 3.73 -17.54% 0.30%
1976 9.07% 3.93% 107.46 9.75 4.22 26.39% 13.10%
1977 11.43% 5.11% 95.1 10.87 4.86 11.53% 15.07%
1978 12.11% 5.39% 96.11 11.64 5.18 7.07% 6.60%
1979 13.48% 5.53% 107.94 14.55 5.97 25.01% 15.23%
1980 11.04% 4.74% 135.76 14.99 6.44 3.01% 7.81%
1981 12.39% 5.57% 122.55 15.18 6.83 1.31% 6.08%
1982 9.83% 4.93% 140.64 13.82 6.93 -8.95% 1.58%
1983 8.06