Subject: Re: Have about 2.5 years of cash left for expenses
If a short period of low market prices is enough to push you over into the dreaded (but not real) "sequence of return risk" category
..
Do you mind elaborating on this Jim?

Nothing deeper than what was already in my post.
My point is that selling at a low valuation multiple isn't that big a deal, because you will be doing many, many sales over a very long period of time.
Some will be at good prices, some at low prices, but you'll average about whatever the long run average is, and you're not selling all that much in any given couple of years.

Sequence of return risk (SORR) is generally taken to mean the risk of a portfolio not sustaining one through retirement if and only if it sees big mark-to-market drawdowns in the first few years of retirement.
In very borderline cases, the same overall CAGR in (say) the first 25 years of retirement can be sufficient if the first few years are good but not sufficient if they aren't.
This specific risk comes not from the rate of return or the withdrawal rate, but from the order in which the returns happen to occur.

SORR is generally considered in conjunction with a "withdraw a constant dollar amount" program (with or without inflation adjustment).
Obviously the retiree will sell some of the portfolio at temporarily low prices from time to time.
If too much of this happens early in retirement, selling more shares than expected, it could leaving the retiree with too few remaining investments (too few shares) to sustain them through the rest of the retirement.

But, given what a small percentage of one's portfolio you're selling in a few year period in any sensible scheme to live off a portfolio, this can only happen in a retirement withdrawal program that is very badly designed.
For two reasons: (1) If you're that close to the edge, you're withdrawing too much, and (2) Even if you absolutely have to push things to the edge because your savings are borderline, then the amount sold should not be constant.


This is my suggestion to my spouse on how to handle investments after my death:
* Don't hold a big pile of cash, put it almost all in equities. I have made a specific suggestion for the portfolio holdings.
* Each quarter, sell 1.4% of whatever number of shares are currently owned in the portfolio (same percentage of each position).
Or less, if she doesn't need that much cash in a given quarter.

The income will be variable, but the number of shares 15 years later won't be any lower in the event of potentially poor stock prices in the first few years.
By construction the stream of cash will last forever as long as the investments don't all go bankrupt.
The real income will either rise quite gradually or fall quite gradually over the long haul depending on whether the long run real return on the portfolio is more or less than inflation + 5.8%/year.

If we could get actuarially fair prices on a deferred annuity or tontine then the plan would be different, but it seems nobody sells those.

Anybody want to join me in a mutual inheritance fund (tontine)?
You have to be a minimum age to play, say 63. Separate fund for men and fund for women.
Very round numbers: We each put in $X now. An accountant acts as trustee, charging by the hour.
Assuming you're still alive, you start getting at least about $X a year in real terms starting ~20 years from now, lasting till whenever you croak even if it's age 130.
The income starts very low and irregular, starts rising slowly and becoming more regular, then starts rising a LOT. Zero counterparty or default risk, zero actuarial or longevity risk.
For the rest of your retirement savings (everything minus the $X you put in), you can spend 100% of the capital and income linearly over the next 20 years, yet never worry about going broke.

Jim