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In a recent post, “lost decade” investment periods were mentioned. Looking at safe withdrawal rates, there is an assumption of portfolio continuity. Uniform returns over a long period of time coupled with consistent withdrawals. In such an environment, a portfolio which yields 6% annually can sustain a withdrawal rate that begins at 4% and the portfolio will increase in value. But over 30 years it may decrease in purchasing power. [1]
But what if a “Lost Decade” occurs? Financial writers have addressed this and I think those nearing or in retirement should consider such a scenario when making financial plans. I’ve experienced several such decades and witnessed what occurred for retirees.
The worst possible time for this to occur is when one is on the cusp of retirement. In such a situation a 30-year withdrawal period begins with a portfolio decrease and 10-years of stagnation.
It is aggravated by portfolio draw-down.
What might this look like? For some, we might be able to ride it out. Take IRS mandated RMDs, but not spend them. Instead, after paying taxes some or all is saved.
If the first 10 years of the 30 year withdrawal period is a “Lost Decade” there may be very little or no portfolio appreciation during that period. Furthermore, withdrawals may draw down the balance.
In a lost decade a portfolio decreases in value by the amount withdrawn each year. What occurs to a $100,000 portfolio with a 4% annual withdrawal? What is the portfolio value after 10 years? It is $66,483.20.
In the 10th year a 4% withdrawal would be $2,639.52. At the beginning of the 30 year period the withdrawal began at $4,000 but decreased each year thereafter.
With the end of the decade, the portfolio may again appreciate.
What if the remaining $66,483.20 portfolio is invested at 6% for 20 years and simultaneously 4% of the new balance is withdrawn each year? In the final year, 30 years after beginning withdrawals the account balance would be $94,100 and the withdrawal would be $3,764.00.
As can be seen, a lost decade can raise havoc for a retiree’s portfolio and actual withdrawals. These begin at $4,000 but decreased each year, falling to about $2,640 and then rising gradually to $3,764.00. Withdrawing more each year may deplete the portfolio.
Compare this to a desireable 30 year period without a lost decade. If a $100,000 portfolio is invested at 6% and 4% is withdrawn each year, the portfolio will grow over time. After 30 years it will be about $168,700. The initial 4% withdrawal would be $4,000 and it would be possible to increase the amount each year. [1]
Of course, over a 30 year period purchasing power will be severely eroded.
Can we avoid this? Well, the overall market will be beyond personal control. However, there are steps we can take, in advance, to plan and prepare for these types of disruptions.
[1] Morningstar’s 2026 outlook anticipates a 3.9% initial withdrawal rate for retirees and 2.46% inflation.
https://www.morningstar.com/retirement/whats-safe-retirement-withdrawal-rate-2026
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I also have heard ot called “sequence of risk”
People who claim keeping 3 years ( Morningstar ) in cash to a avoid selling at market bottoms are missing the fact that in y lifetime it took 13 years (2000 to 2013) for the SP500 to reach it’s previous peak and stay there
Some pundits take this into account and advise starting retirement with lower levels of stock exposure, unless your portfolio is big enough for the 40% FI to fund 13 years of expenses.
“People who claim keeping 3 years (Morningstar) in cash to a avoid selling at market bottoms are missing the fact that in y lifetime it took 13 years (2000 to 2013) for the SP500 to reach it’s previous peak and stay there.”
Christine Benz is the Morningstar writer that writes about the bucket portfolio method. She recommends 1-2 years of cash, and the balance of 8-9 years of short term treasuries/dividend appreciation stocks to cover 10 total years of protection from the vast majority of historic bear markets.
Good point David, and I too appreciate Ms. Benz’s writings.
My approach has evolved as I have aged in my lifecycle. I am a retiree taking RMDs and to lower my exposure to sequence of return risk, I hold ten future years’ worth of future withdrawals in assets that are safe with low price volatility. Two years’ worth in cash (treasury bills and money market) and 8 years’ worth in treasury notes, (a mix of both regular and TIPS) maturing within the next 1-5 years. No stocks in this bucket.
I mentally separate this 10 year bucket from my remaining investment portfolio, which includes stocks and short to medium term treasury notes, (also a mix of both regular and TIPS) maturing in 1-5 years.
My first decade of work in the financial biz was during the 70’s, which was considered a lost decade due to very low market returns 1970-80.
Market returns are but one factor. What about the rate of inflation and 10 year bond yields? During the 70’s, the rate of inflation was around 12%, and 10 year Treasuries ranged from 7%-11%. However, gold experienced a price runup for the entire decade. Housing prices also experienced a similar boom.
Maybe the answer is hard assets, but buying and selling can be hard and the timing to get this right is likely even harder.
What I mostly remember about the 70’s was being glad when it was over, but then came even higher inflation in the 80’s combined with painful fed rates to bring rates back down.
Diversification may be about the best answer to this dilemma, including more foreign representation and a higher cash balance.
Try 6.5 to 7% as your inflation rate and see how the portfolio performs. Why? Since we went off the gold standard in 1971, the money supply has grown about 6.6% annually. The Fed announced last month they will begin a program of “Reserve Management Purchases”, a euphemism for injecting money into the banks, also known as money printing. M2 began to rise again in Nov 2022, and it’s only going to get worse. Over a long retirement, if you assume inflation is whatever the government says, now about 2.7%, you will fall behind. You will end the months with less and less money as your car insurance, home insurance, health insurance, food, etc., all increase more than the government’s official rate of inflation. I think the hurdle rate going forward that each investor must earn, just to keep head above water, is about 7%–a return hard to get without a great deal of risk. And with more and more Fed rate cuts looming, retirees, savers, investors will be forced further out on the risk curve, again, just to break even. Retiree and savers, and those just trying to get ahead in life, are going to find the treadmill getting faster and steeper.
This is unnecessarily alarmist. As indicated in some of the comments below, the author appears not to have read the research behind the 4% SWR. First, purchasing power is maintained by increasing the withdrawal rate by the previous year’s inflation rate. Second, the portfolio used for the analysis is 60-40. If someone’s portfolio is, instead, 80-20, they need to use a different percentage. Third, the analysis did not assume a constant rate of return, it used historical results. My portfolio is 50-50, plus I have a five year CD ladder. I am not overly concerned.
I think using the bucket approach Christine Benz at Morningstar likes combined with withdrawal flexibility minimizes the possibility of running out of money prematurely. No matter how you plan, unless you are really wealthy, there will always be the possibility of being short. Predicting the future is pretty tricky.
As Yogi Berra is famously known for saying, “It’s tough to make predictions, especially about the future.”
Norm, you are spot on in your statement that those nearing or in retirement should consider such a scenario. I retired last fall at age 62 and have benefited greatly from 25 years of being fully invested in the market and maximizing my deferred compensation contributions. This included a recommendation from my financial advisor to roll a portion of one of my 401 K accounts into a deferred annuity. If such a “lost decade” event were to occur we would need to cut back on luxury expenses and turn on the annuity earlier than planned, but we would be in a good position once the market corrected. As Mark mentioned below, a lost decade would not unduly concern or affect me either. As much as I like the 4 % rule I feel more comfortable knowing I have enough in a money market fund to at least cover me for the next several years.
I may be missing your point here, but I believe the “4% Rule” indicates that you should be able to withdraw 4% ($4K in this case) in the first year and INCREASE withdrawals for inflation so as not to lose purchasing power. Based on historical periods, including the periods beginning in the late 60s, and a reasonable stock allocation (50% to 75%), the original study showed that that all portfolios survived 30 years. Of course, the future may be different …
The 4% rule assumes an average return each and every year. Perhaps 9.9% for the S&P plus a modest bond return also.
However, market downturns disrupt this. “Lost Decades” flatline the market returns, meaning that a portfolio may return only 1% per year (Bonds 3%, stocks 0%). When this occurs, the annual drawdown reduces the size of the portfolio. Less is then available for each succeeding year and the value of 4% decreases. If I were to maintain the original amount I drew in year 1 and increased it by inflation each year per 4% guidelines, it is possible to deplete the portfolio. I posted about this today.
Some people say that lost decades are rare. But I’ve experienced three as an adult. That was about 40% of the time available to me to build a retirement fund.
When the 2000 and 2008 crisis occurred the S&P 500 decreased in value up to 50% and required years to recover. I knew retirees who struggled and in the worst case, a home was sold into a down real estate market at a decline. That couple’s retirement was substantially altered.
You are wrong. I suggest you read the following article by Bengen in which he both describes the problem with assuming constant average returns and his findings using actual historical data.
https://kyestates.com/wp-content/uploads/2015/02/Bengen1.pdf
You are correct; I mis-stated. When I do these analysis, which I began in 2004, I use a Monte Carlo simulator which uses real data going back to 1871 if desired. However, I prefer data going back to 1927. The spreadsheets I use indicate long term large cap returns and treasuries. The premise I stated is accurate. I’ve noticed there is a tendency to assume that following the 4% rule assures that one will never run out of funds. Other planners have seen the problem. Christine Benz at Morningstar advocates a dynamic “guardrail approach” to withdrawals. This was developed by planners including Jonathan Guyton. It adapts to market realities to deliver better results in the long run. That’s the point here.
The scenarios can include large- small-cap, micro-caps, various bonds and treasuries, etc.
I think you’ve got a bit confused. The 4% SWR was tested using real-world historic returns, not an average return each year, but actual real-world data. Even with that error, it doesn’t invalidate the premise that future returns, including a lost decade, could be worse than the data set used and cause a current portfolio to fail. The 4% SWR is a best-guess tool using historical numbers, not a future guarantee with a money-back promise.
That’s just not correct.
For example see
What Returns Are Safe Withdrawal Rates REALLY Based Upon?
Well, what is a lost decade? There have been decades where the stock market has ended up at the same place it started, but the years in-between were not exactly calm. First there was a giant boom, then there was a giant bust, then there was a slow recovery.
Moreover, not all stocks were impacted, and many dividend stocks continued to pay. If you entered 2000 with a portfolio of preferreds, oils, and utilities, you continued to collect maybe 4-5% in dividends throughout the decade….just as long as you didn’t rely too much on financial stocks.
Index investors won’t easily get 5%. Vanguard’s S&P 500 ETF VOO has a yield of 1.1%. To get more, one can buy Vanguard Dividend Appreciation Index Fund ETF Shares VIG with 1.58%. ProShares S&P 500 Dividend Aristocrats ETF NOBL yields 2.14%.
After that there are even more specialized ETFs, or for higher yields on can take on the risk of individual stocks.
Those are pretty low dividends. You can still get 6% on the preferreds of banks with excellent credit ratings, which can goose your returns. I’m still getting nearly 4% on a very conservative portfolio that is almost 1/3 short-term Treasuries.
True, but HD suggests Index Investing and that’s what you may get. My personal portfolio includes individual stocks, sector funds, and so on. It spins off significant dividends and interest, up to 50% of my annual RMD. I could easily increase that but my portfolio meets my risk profile, has provided the returns I want and has about 29% growth, as well as core and value stocks.
I’m pretty well covered for the next ten years. Between a ten-year term annuity for essential spending and a ten-year collapsing bond ladder for ‘wants’ spending—plus two years of cash sitting in a money market fund—a lost decade wouldn’t unduly concern or affect me.
The reason for this structure is for the reasons you mentioned: I’m recently retired, and SORR risk is highest during the first ten years.
Mark here is an article that I have referenced in the past on sequence of return risk (SORR):
Last year I emailed Jeff Ptak at Morningstar asking to address a question that I had been looking for an answer in my investment readings. That question was at what point does an investor know they are past the scary sequence of return risk.
The following was an article he wrote in response (Note in a follow-up email apologized for not crediting me for the idea for the article).
https://www.morningstar.com/retirement/how-avoid-outliving-your-retirement-savings-its-all-sequence
“..how likely was it for early retirement gains to give way to later losses, which, coupled with ongoing spending, ran the retirement savings dry? The good news is it’s pretty unlikely: If you made it through the first five years of retirement with investment gains, there was only about a 1 in 25 chance you’d subsequently deplete your savings before reaching the end of retirement, assuming you stuck with the system of fixed real withdrawals (read the article to understand the system he is referencing here). Even after one year of retirement, a gain cut your risk of failure in half.
Did there come a point in retirement when sequence risk was fully in the rearview mirror? It depends on how we define sequence risk. If we define it as failures stemming from losses in the first five years of retirement and focus on trials that avoided losses at any point in those first five years, the risk of failure shrank to about 1% by year 15 of retirement.”
Thanks for the link and kudos to you for being the genesis of the article. I remember reading it at the time of publication and it definitely informed my investment thinking and choices. I found its results very reassuring.
Thanks for the kudos Mark. Yeah, for years I read beware of SORR, beware of SORR which was great to know that risk is out there, but I was really frustrated that I could not find a single article that would tell historically when that risk had essentially passed so I took a shot at emailing Jeff.
Hi David. I just read that Morningstar article.
So essentially this means if you aren’t forced to sell equities when they’re down during the first 5 years we are good right?
And being that most of us are something like 60/40 stock/bond with the 40 representing coverage for at least 5 years, we should all have no significant concerns. Is my understanding of that article correct?
It wasn’t clear in the article how a lost decade might impact us. Did I miss something I wonder?
thanks..
Still hoping someone answers johny’s question(s) :).
Also, posing this question…at a SWR of ~4%, does 60/40 imply that you have ~10 years covered?
Technically no, because the 4% rule says to toss that 4% figure out after the first year and adjust your withdrawals by the inflation rate.
This article I posted a while ago might be helpful. https://humbledollar.com/forum/dont-let-mr-market-bully-you-a-gentle-reminder-of-your-built-in-protection/