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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In a lost decade a portfolio decreases in value by the amount withdrawn each year.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What if the remaining $66,483.20 portfolio is invested at 6% for 20 years and simultaneously 4% of the new balance is withdrawn each year?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 If a $100,000 portfolio is invested at 6% and 4% is withdrawn each year, the portfolio will grow over time.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 remembe