What a “lost decade” might look like

Unusual events happen from time to time.  Since 2022 the S&P 500 has had some remarkable years.  Recently foreign stocks have also done very well.  This is a boon to retirement portfolios, and particularly welcome for those entering retirement.

The opposite situation is the “lost decade” which I recently posted about.  Some say these are rare and if we are lucky the timing will be such as to have slight impact on retirees.  But fingers crossed is not a strategy.  I’ve experienced several “lost decades” and these influenced my retirement planning.

There are several ways to approach this.  One is “What annual withdrawal rate can a retirement portfolio support? “  However, what really matters is “How can I generate the annual withdrawal rate I will need?”  I used the second when deciding how much to save for retirement.

In my modelling I concluded that if a retiree encounters a “lost decade” there is a real possibility they will deplete their portfolio.  I created several spreadsheets to model this.  If a lost decade occurred at the onset of retirement and the portfolio followed the S&P 500 trajectory, then using the “4% rule” the amount withdrawn would be significantly reduced. I showed this in my January 13 post.

https://humbledollar.com/forum/considering-a-lost-decade-when-retirement-planning/  =

This post considers the question “If a $100,000 portfolio isn’t sufficient to generate a $4,000 withdrawal throughout retirement, then what portfolio is necessary?”

In the example, at a normal 4% rate, $40,000 would be withdrawn in the first 10 years of retirement, plus a small additional amount to maintain purchasing power.  If we increase the annual withdrawal by 2.45%, an amount for inflation, then in the 10^th year we would withdraw 4.97% and the amount withdrawn that year would be  $5,628.74.

Over a 10 year period we would withdraw a total of $47,881.  This is significantly more than the $33,516.80 that would be available were we to adhere to the 4% rule in a lost decade.  (see previous post). But that higher withdrawal amount is what we said was necessary to sustain a given life style.

This indicates that a larger amount must be saved to accommodate the desired $4,000 initial annual withdrawal if we include a modest annual inflation adjustment. =

Looking at the final 20 year portfolio withdrawal period, the withdrawal rate in the 30^th year would be 8.072% and the amount withdrawn would be $10,810.05.  The total amount withdrawn over a 30 year period would be $210,705.79.

It is apparent that, a $100,000 portfolio if invested at 6% and with an initial “lost decade”  cannot sustain a $4,000 annual withdrawal, adjusted for inflation.

So, what to do?  There are several options.  One is to save more in the accumulation phase.  Another is to invest for better returns.  That implies taking on more risk.

I decided to save more.  If we remove the emotional components there are choices.  These include working longer and adjusting our lifestyle.  Downsizing a home may free up cash which can be applied to retirement savings. Eliminating debt can also free up cash which can be saved.

The important thing to be aware of is this potential problem and take steps to address it.  Earlier is better as it affords more flexibility and with this comes additional choices.

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Personal observation =

I’ve experienced several lost decades since 1965.  At the age of 60 I faced a decision.  Continue working, or not. My numbers indicated I had sufficient wealth to retire.  However, I was very concerned about the macro environment and what a financial crisis could do to my finances.   I would also have social security to draw upon.

I adjusted the stock style and stock types in my portfolio.  I remained heavily invested in the stock market, at least 70%.  I decided to continue working and began a “phased”, gradual retirement.  I thought this would provide me with the best of all worlds.  I also began pursuing a side gig, which I continued for the next 20 years.

Within a few months of making preparations, the banking crisis began and my retirement portfolio decreased in value by 11%. Over the same period the S&P 500 decreased in value about 50%.  The S&P 500 took about 7 years to recover. However, within two years my portfolio had recovered and the value increased steadily thereafter.   Note:  the S&P 500 took 7 years to recover after the  2000 crash.  It would seem 7 years is typical.  Of course, the allocation and stock style of a portfolio has a bearing on individual performance.

We usually read that using a bucket strategy provides some protection from market downturns.  This negates the need to sell stocks in a down market.  Depending upon the sizes of the cash and bond buckets, we might go 5 or even 10 years before facing a need to sell stocks.  Dividend paying stocks can also add to our cash stash.  However, the bucket strategy does not provide a method to maintain a certain withdrawal amount, no matter what the market conditions.