Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Of course you can't say the next 30 years will be like the last thirty years. But I think it is common thinking to feel like the social, economic and political problems we are facing today and into the future are going to be far worse than those in the last 20,30, 40 or 50 years. (This time it is different). I think this is naive because we faced some terrible economic and political headwinds in the last 30 years and look at what happened to the stock and bond market over time.
The last 15 years have been basically terrible for the market with the HUGE BEAR MARKETS of 2000-2003 and 2007-2009, which both had bigger drops than anytime since the Great Depression. The period from 2000-2010 was considered the LOST DECADE for investors with almost no increase in stock prices.
So if someone had retired with a million dollars at the peak of the Stock Market in January 2000 and died 15 years later on December 31, 2015 and took out an inflation adjusted 4% and had a 50% Total Stock Market and 50% Bond Market Portfolio, they would still have slightly over a million dollars in their investment accounts on December 31, 2015. ($1,003,631.00)
Another example showing that even in one of the worst 15 year periods for investors, a conservative 4% withdrawal is very harsh and limits your golden years lifestyle.
Of course you can't say the next 30 years will be like the last thirty years. But I think it is common thinking to feel like the social, economic and political problems we are facing today and into the future are going to be far worse than those in the last 20,30, 40 or 50 years. (This time it is different). I think this is naive because we faced some terrible economic and political headwinds in the last 30 years and look at what happened to the stock and bond market over time.
The last 15 years have been basically terrible for the market with the HUGE BEAR MARKETS of 2000-2003 and 2007-2009, which both had bigger drops than anytime since the Great Depression. The period from 2000-2010 was considered the LOST DECADE for investors with almost no increase in stock prices.
So if someone had retired with a million dollars at the peak of the Stock Market in January 2000 and died 15 years later on December 31, 2015 and took out an inflation adjusted 4% and had a 50% Total Stock Market and 50% Bond Market Portfolio, they would still have slightly over a million dollars in their investment accounts on December 31, 2015. ($1,003,631.00)
Another example showing that even in one of the worst 15 year periods for investors, a conservative 4% withdrawal is very harsh and limits your golden years spending.
As MathJak always says...sequence of return risk. Yeah you are right, those were some really bad bear markets. But if you invested the 1 million in the s&p 500 from January 1st, 1985 to December 31st, 2000 your annualized CAGR would have been 17.1% (13.48% if you account for inflation). What would the person's portfolio look like if instead of starting in 1985 they started in 2001-2015 where the annualized CAGR was 4.96% (2.83% if you account for inflation)? Model it like this. Where they get the sequence of returns from 2000-2015 and then the sequence of returns from 1985-2000. That 30 year result would almost certainly look very different.
That website also offers the option to run Monte Carlo scenarios which tend to be more conservative than standard historical data
Have you tried running the numbers through that platform?
As MathJak always says...sequence of return risk. Yeah you are right, those were some really bad bear markets. But if you invested the 1 million in the s&p 500 from January 1st, 1985 to December 31st, 2000 your annualized CAGR would have been 17.1%. What would the person's portfolio look like if instead of starting in 1985 they started in 2000? Model it like this. Where they get the sequence of returns from 2000-2015 and then the sequence of returns from 1985-2000. That 30 year result would almost certainly look very different.
See the results of your question in my posting above. The answer is you ended pretty much where you started, at a million dollars. But now you are 15 years older and closer to death so you can spend more money because unless you live to 120 it is less likely you will run out of money because you are now 80 years old and have only maybe 10-20 years- at most- to live. (Assuming you retired at age 65 in the year 2000.)
See the results of your question in my posting above. The answer is you ended pretty much where you started, at a million dollars. But now you are 15 years older and closer to death so you can spend more money because unless you live to 120 it is less likely you will run out of money because you are now 80 years old and have only maybe 10-20 years- at most- to live. (Assuming you retired at age 65 in the year 2000.)
I plan to be able to retire in my late 40s and plan to probably pull the trigger in my early 50s, so I likely do need to worry about at least 30 years.
One thing I found a little odd about the calculator (you can view the math if you download the worksheet) is that he withdrew the money needed for spending at the end of the calculation for the year (i.e. (starting amount -/+ total return) - withdrawal)). IMO if you need $40k to live off of you need it at the beginning of the year (or at least throughout the year) not at the end of the year. Not sure how big of an impact that would have, but it would likely have an impact.
Most people FAR prefer that risk over the alternative one of not playing it safe enough and subsisting on Alpo during their twilight years because their savings ran out before they died.
I'm hoping I'll be leaving money to posterity! I think it would be a great thing to leave the world a better place when my will is read.
I would much prefer something that is REALISTIC. Then I can decide how much to (continue) pinch(ing) pennies once I am retired. I don't understand the mindset of pinching pennies your whole working life and then continuing that into retirement! To be realistic the calculator needs to have some type of Monte Carlo mechanism built into the algorithm - I don't want to put any particular weight on a particular sequence of years.
Of course I mean if you have a reasonable chance of maintaining the lifestyle you desire. If you have no choice, then fine - but I don't want to unnecessarily continue scrimping so give me numbers that are as realistic as possible and I'll decide the degree of risk I'm willing to take.
I plan to be able to retire in my late 40s and plan to probably pull the trigger in my early 50s, so I likely do need to worry about at least 30 years.
One thing I found a little odd about the calculator (you can view the math if you download the worksheet) is that he withdrew the money needed for spending at the end of the calculation for the year (i.e. (starting amount -/+ total return) - withdrawal)). IMO if you need $40k to live off of you need it at the beginning of the year (or at least throughout the year) not at the end of the year. Not sure how big of an impact that would have, but it would likely have an impact.
The backtesting calc allows you to change the frequency of withdraw from annually to monthly. If you do though he sure to change the % because 4% monthly kills any portfolio
The 4% rule was never about being the "max" someone could take out, it was the floor. IE if you took out 4% you were good to go. If you wanted to take out more, you could but know that you might have to come off it at a later time.
There is no such thing as the 4% rule . It was never meant to be a rule it was only a bunch of study's .
It is what it is because bill bengen found for retirees to make it through the worst combo of returns, rates and inflation was those who retired in 1965/1966.
The most they could draw and make it through 30 years with a 50/50 mix was 4.16%..
Bill used equity's and 5 year bonds .
A later study by others used a few different allocations and longer term corporate bonds and there were a few more failures than bill had. That was the trinity study.
It actually took 3.60% roughly to get through those absolute worst scenario's.
It only stands to reason that anything better than worst case will leave you pretty well off. That is unless you were the y2k retiree. They are on par with those who retired in 1929 16 years later.
They are still passing but not by much . They may run out of money if they go longer than 30 years .
Also is the fact that large unexpected expenses can wipe out a good part of your years income long term care costs can eat you alive . So you can not only look at passing the income stress test.
Don't forget if you were that y2k retiree the 4% draw assumes principal can go to zero if need be trying to keep that income going .
No one lives by the 4% rule . We all spend dynamically . If after a run up you have 50% more than what you started with take a increase of 10% plus the inflation adjusting . Repeat every 3 years if you are still up by more than 50%
It only stands to reason that anything better than worst case will leave you pretty well off. That is unless you were the y2k retiree. They are on par with those who retired in 1929 16 years later.
They are still passing but not by much . They may run out of money if they go longer than 30 years .
Also is the fact that large unexpected expenses can wipe out a good part of your years income long term care costs can eat you alive . So you can not only look at passing the income stress test.
Don't forget if you were that y2k retiree the 4% draw assumes principal can go to zero if need be trying to keep that income going .
No one lives by the 4% rule . We all spend dynamically . If after a run up you have 50% more than what you started with take a increase of 10% plus the inflation adjusting . Repeat every 3 years if you are still up by more than 50%
According to OPs link a 50/50 portfolio where you started drawing down in 2001 would be about even (i.e. if you started with 1 million you would still have 1 million today). However, they would need to be able to get away with 5.5%+ (as at that point in their life cycle they are drawing $56k+/yr) drawdowns over the next 15 years.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
