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While dollar cost averaging and index investing are solid strategies, this article overlooks an important consideration: the Realistic Rate of Return (RoR) need

While dollar cost averaging and index investing are solid strategies, this article overlooks an important consideration: the Realistic Rate of Return (RoR) needed for retirement planning. Yes, US markets historically recover (lately that notion seems to be challenged more often than not), but timing matters significantly. What happens if someone's retirement coincides with a market crash? Younger investors have time on their side for recovery, but as retirement approaches, blindly following market-based strategies without carefully considering your required rate of return could be problematic. Age-appropriate risk management becomes increasingly important as your investment horizon shortens.

exe34 2y ago
surely as retirement approaches, you should be taking money out of your investments so that you can either live off those (and traditional savings interest) or investing in safer things like real estate?
317070 2y ago
Meet Bob. Bob is the world’s worst market timer. https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...
- UncleMeat 2y ago
  The bob scenario is educational, but isn't relevant here. The reason why bob is still fine is that the crashes all happen during the accumulation phase. What you don't want is a crash right as you retire, causing you to rapidly liquidate a much larger portion of your savings than expected.
  - ManuelKiessling 2y ago
    But do you really liquidate „rapidly“ once you retire? You basically dollar-cost-average out of your portfolio when retirement begins. That’s not to say that timing isn’t an issue — it absolutely is. It’s just not a make-or-brake issue imho.
    - UncleMeat 2y ago
      You liquidate rapidly if the market is way down. If you are planning on withdrawing ~4% of your stating portfolio annually to pay your expenses, the market tanking by 50% means you are now consuming 8% annually. In the accumulation phase the value of your equities is likely to return. You never end up selling anything. But in the retirement phase you liquidate in order to pay your expenses. If you end up liquidating down too far there won't be enough future growth to cover your retirement needs. Market crashes right after retirement are very dangerous for retirees.
- bryanlarsen 2y ago
  Bob also picked the best stock market to invest in. He would have done a lot worse investing in any other stock market. It's not surprising he did well, he picked the winner. What are the chances the US is going to have the best stock market over the next 50 years? It's possible, but doesn't seem likely.
  - 317070 2y ago
    Sure, but the lesson is that the big story is what matters, way more than detailed RoR calculations. Bob made huge mistakes, but even then compounding was the stronger force and he ended up ahead.
    - bryanlarsen 2y ago
      The story makes it sounds like he's guaranteed to end up ahead. That's not true. For instance if he was investing in Germany starting before WW1 and invested at the peaks Bob would be massively underwater.
nine_zeros 2y ago
> Age-appropriate risk management becomes increasingly important as your investment horizon shortens. As you appear closer to retirement, make sure you invest in Bonds or other fixed income. It won't beat inflation but it will prevent you from draw-downs exactly when the market is down.
- velcrovan 2y ago
  Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds. I just don't have confidence that the people needed to keep TreasuryDirect running will still have their jobs if/when I need to redeem them in the future.
  - timtom123 2y ago
    What did you have nothing but TBills, TIPS? Not quite sure what you have where you could just sell them. But, ya, bit silly as your money is still in USD. Nothing is happening to US bonds or there are bigger problems and all your investments are at risk.
  - Bluecobra 2y ago
    Good point, the website looks like it's 25+ years old so who knows what is running under the hood to keep it going.
    - velcrovan 2y ago
      It's actually improved a lot since I started using it in 2016, but yes. Your session breaks if you use your browser's "Back" button. It used to require you to enter your password by clicking around on an on-page keyboard, I would always open dev tools, "edit as HTML" the read-only password input and paste the password right in from my password manager.
  - sieabahlpark 2y ago
    [flagged]
darth_avocado 2y ago
You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). You shouldn’t be really relying on selling assets to pay your monthly bills.
- deleted 2y ago
  [deleted]
- throw0101c 2y ago
  > You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). Just before and just after retirement it's considered a good idea to go bond heavy to help mitigate sequence of returns risk: * https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/ https://www.kitces.com/blog/managing-portfolio-size-effect-w... * https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk https://www.schwab.com/learn/story/timing-matters-understand... * https://www.td.com/content/dam/tdgis/document/ca/en/pdf/insights/thought-leadership/Managing-Sequence-of-Return-Risk-EN.pdf https://www.td.com/content/dam/tdgis/document/ca/en/pdf/insi...
xnx 2y ago
> While dollar cost averaging and index investing are solid strategies Dollar cost averaging is a psychological strategy, not a financial one. "The costly myth of dollar-cost averaging": https://web.archive.org/web/20050910142530/http://moneycentral.msn.com/content/P104966.asp https://web.archive.org/web/20050910142530/http://moneycentr... "Debunking the Myth of Dollar Cost Averaging": https://news.ycombinator.com/item?id=36271061 https://news.ycombinator.com/item?id=36271061
- stvltvs 2y ago
  Doesn't that assume that you're sitting on a pile of cash already and deciding how to invest it? That's not the situation for working class investors who didn't inherit a lump sum or win the lottery. The optimal strategy for most retirement savers is "invest it as you get it" which is basically dollar cost averaging except in the rare cases when a pile of cash falls in your lap.
  - UncleMeat 2y ago
    Yes. That's usually how the term is defined. You have a lump amount to invest and you invest it over a period of time. Meaning shifts, and now the term is also being used in web forums to describe the investment strategy of "in each paycheck, invest a bit of money." This creates confusion.

exe34 2y ago

surely as retirement approaches, you should be taking money out of your investments so that you can either live off those (and traditional savings interest) or investing in safer things like real estate?

317070 2y ago

Meet Bob. Bob is the world’s worst market timer. https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...

UncleMeat 2y ago
The bob scenario is educational, but isn't relevant here. The reason why bob is still fine is that the crashes all happen during the accumulation phase. What you don't want is a crash right as you retire, causing you to rapidly liquidate a much larger portion of your savings than expected.
- ManuelKiessling 2y ago
  But do you really liquidate „rapidly“ once you retire? You basically dollar-cost-average out of your portfolio when retirement begins. That’s not to say that timing isn’t an issue — it absolutely is. It’s just not a make-or-brake issue imho.
  - UncleMeat 2y ago
    You liquidate rapidly if the market is way down. If you are planning on withdrawing ~4% of your stating portfolio annually to pay your expenses, the market tanking by 50% means you are now consuming 8% annually. In the accumulation phase the value of your equities is likely to return. You never end up selling anything. But in the retirement phase you liquidate in order to pay your expenses. If you end up liquidating down too far there won't be enough future growth to cover your retirement needs. Market crashes right after retirement are very dangerous for retirees.
bryanlarsen 2y ago
Bob also picked the best stock market to invest in. He would have done a lot worse investing in any other stock market. It's not surprising he did well, he picked the winner. What are the chances the US is going to have the best stock market over the next 50 years? It's possible, but doesn't seem likely.
- 317070 2y ago
  Sure, but the lesson is that the big story is what matters, way more than detailed RoR calculations. Bob made huge mistakes, but even then compounding was the stronger force and he ended up ahead.
  - bryanlarsen 2y ago
    The story makes it sounds like he's guaranteed to end up ahead. That's not true. For instance if he was investing in Germany starting before WW1 and invested at the peaks Bob would be massively underwater.

nine_zeros 2y ago

> Age-appropriate risk management becomes increasingly important as your investment horizon shortens. As you appear closer to retirement, make sure you invest in Bonds or other fixed income. It won't beat inflation but it will prevent you from draw-downs exactly when the market is down.

velcrovan 2y ago
Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds. I just don't have confidence that the people needed to keep TreasuryDirect running will still have their jobs if/when I need to redeem them in the future.
- timtom123 2y ago
  What did you have nothing but TBills, TIPS? Not quite sure what you have where you could just sell them. But, ya, bit silly as your money is still in USD. Nothing is happening to US bonds or there are bigger problems and all your investments are at risk.
- Bluecobra 2y ago
  Good point, the website looks like it's 25+ years old so who knows what is running under the hood to keep it going.
  - velcrovan 2y ago
    It's actually improved a lot since I started using it in 2016, but yes. Your session breaks if you use your browser's "Back" button. It used to require you to enter your password by clicking around on an on-page keyboard, I would always open dev tools, "edit as HTML" the read-only password input and paste the password right in from my password manager.
- sieabahlpark 2y ago
  [flagged]

darth_avocado 2y ago

You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). You shouldn’t be really relying on selling assets to pay your monthly bills.

deleted 2y ago
[deleted]
throw0101c 2y ago
> You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). Just before and just after retirement it's considered a good idea to go bond heavy to help mitigate sequence of returns risk: * https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/ https://www.kitces.com/blog/managing-portfolio-size-effect-w... * https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk https://www.schwab.com/learn/story/timing-matters-understand... * https://www.td.com/content/dam/tdgis/document/ca/en/pdf/insights/thought-leadership/Managing-Sequence-of-Return-Risk-EN.pdf https://www.td.com/content/dam/tdgis/document/ca/en/pdf/insi...

xnx 2y ago

> While dollar cost averaging and index investing are solid strategies Dollar cost averaging is a psychological strategy, not a financial one. "The costly myth of dollar-cost averaging": https://web.archive.org/web/20050910142530/http://moneycentral.msn.com/content/P104966.asp https://web.archive.org/web/20050910142530/http://moneycentr... "Debunking the Myth of Dollar Cost Averaging": https://news.ycombinator.com/item?id=36271061 https://news.ycombinator.com/item?id=36271061

stvltvs 2y ago
Doesn't that assume that you're sitting on a pile of cash already and deciding how to invest it? That's not the situation for working class investors who didn't inherit a lump sum or win the lottery. The optimal strategy for most retirement savers is "invest it as you get it" which is basically dollar cost averaging except in the rare cases when a pile of cash falls in your lap.
- UncleMeat 2y ago
  Yes. That's usually how the term is defined. You have a lump amount to invest and you invest it over a period of time. Meaning shifts, and now the term is also being used in web forums to describe the investment strategy of "in each paycheck, invest a bit of money." This creates confusion.