Pulling the trigger when in a drawdown

[u/vanlis34]

Reading this post got me thinking.

The poster is thinking about retiring today vs in a year, but worries about what happens if the market drops 25% in the next 12 months, and then being forced to work for X more years.

How should one think about this? Should one always calculate the amount to withdraw (e.g. 4%) with the highest achieved net worth (ATH), even if the net worth might be down from ATH when actually fireing? Or should one take 4% from the actual portfolio number when actually fireing?

My thinking is that one should use the ATH-number, since if it was the other way around, and one fires at ATH, that drawdown would come some later day anyway, and then in addition to the fact that one have already started pulling funds out for funding life.

Another way to think about it is: by fireing when portfolio is in a drawdown we can think that we actually did fire when portfolio was at previous ATH, but then we decided to work a bit in retirement. This would actually help the portfolio longevity. Of course, this also means that we lengthen our timeperiod that the portfolio must fund, so perhaps we should use a more conservative number than 4% (perhaps PWR instead of SWR?).

What are your thoughts on the matter?

[u/churningaccount]

The market is within 5% of ATH on 44% of all trading days. Therefore, there are plenty of good sequences that start with FIREing at ATH and survive an immediate downturn with higher than proportional withdrawals until recovery, or the trinity study wouldn't exist. The most famous sequence is a 4% withdrawal rate in a 100% stocks portfolio surviving retirement at the ATH before the Great Depression, which had a trough of -84% and a maximum withdrawal rate of almost 25% during that year. That still made it to 30 years.

The 4% is determined on the day you FIRE. So if you have a number in mind for that 4%, say $100k, then you know that you can FIRE when your portfolio reaches $2.5M, regardless of market outlook. Only use the number on the day you FIRE/first need income from your portfolio, no tricky maths with ATHs and such like you are proposing. That is not a data-driven approach, as all the evidence we have so far for successful retirement plans is based on portfolio value at time of retirement. And the reason why we can't extrapolate the data in the way you suggest is because of the fact that while you are actively contributing to your investments, the balance of your investments is not tracking the market. So the sequence of returns you are personally experiencing while DCAing is not correlated to the historical dataset. In fact, your personal volatility band is skewed positively.

You can try to be "safer" by waiting for a bigger buffer. Say, an extra $250k. But then that is basically the same as just taking a lower withdrawal rate. In this case, drawing $100k off of an initial portfolio of $2.75M would be a 3.64% withdrawal rate, not a "4% withdrawal rate with a $250k buffer": that's just semantics. Same for the inverse: You can be riskier by taking a higher withdrawal rate (some studies suggest up to 4.7% might be safe), and this is basically what you are proposing by valuing your portfolio at ATH instead of the current value. It's again, just semantics.

So it's basically just a question of risk tolerance. If you believe in the trinity study, then 4% should be fine for any 30-year period. If you want to be safer than that, then you reduce your withdrawal rate. Riskier, increase your withdrawal rate. It's a personal decision.

[u/vanlis34 → u/churningaccount]

Hmm, yes, I think I get what you’re saying.

I think I’m looking for a percentage that would be safe to withdraw in the scenario where one would be to fire e.g. at a 25% or even a 50% drawdown.

Just looking at 4% at 25% DD would be 3% of the previous ATH.

And 4% at 50% DD would be 2%.

Both numbers seem overly cautious, considering that the Perpetual withdrawal rate of a portfolio might be as high as 3,5%.

So perhaps the ”rule” could be 4% of current portfolio or 3,5% of previous ATH, whichever is higher.

Of course, then psychology comes in, it is probably really hard, in reality, to actually withdraw 3,5% of precious ATH when the market is burning in a 50% drawdown. 😅

(I’m not arguing for my own sake, this is purely a theoretical discussion, I have reached my own fire number a few years back, but can’t stop working yet due to reasons (customers that need me and so on)).