No. of Recommendations: 2
Happy President's Day, everyone! Fellow board member very_stable_genius made the following very interesting observation.
The 1966-1982 bear market ([S&P 500 provided only] 5% total annual return. T-Bills earned 7% during this bear market, outperforming the S&P 500 by 2% per year over a 16 year period.So I asked myself - what does that mean, in practical terms, for someone who had the bad luck to retire in 1966? I decided to run the numbers and see for myself.
Suppose we have two people - No-risk Ned and Shrewd Sam - who both decided to retire early at age 60 in 1966. They both had annual expenses of $80,000 in TODAY's dollars, and they both retired with 20x their annual expenses = $1.6 million (again in TODAY's dollars.)
No-risk Ned heard scary stories about the Great Depression, and decided to stay 100% in cash or short-term T-bills. The stock market was just too scary for Ned.
But Shrewd Sam is a shrewd investor. Heck, he could have been a member of this board, had it existed back then. Sam decided to set aside 4 years of living expenses in cash (20% of the $1.6M), and put the rest (80%) in an S&P 500 index fund. Sam's plan was to withdraw from the cash portion during the first 4 years to avoid sequence-of-returns risk. (If you don't know what sequence-of-returns risk is, Google it.) After that, Sam would cash out only the annual amount needed for his living expenses from his index fund every year at the start of each year.
ResultsWell, you can guess what happened to Ned. By staying in cash, he ran out of money after 20 years, at age 80. Yes, he earned some paltry yields from T-bills, but that wasn't enough to keep up with inflation. Poor Ned lived a very meager, stressful life, since all he had was some SS income, so he had to take a job as a Walmart greeter.
But now let's look at what happened to Sam. Despite choosing one of the worst possible years to retire, with a looming bear market in the early 70s, Sam was a multi-millionaire at age 80! His portfolio had doubled from $1.6M in 1966 to $3.1M in 1986, despite his cashing out over $100K in living expenses during the final years of this period. He was also able to keep up with annual inflation of 2%, as shown in the figures below.
I hope you all can now see why retirement planners recommend keeping a good chunk of your portfolio in an index fund. Don't be like Ned. Be shrewd, like Sam.
Sam's Portfolio in Retirement Amount in Amount in S&P 500
Year Cash S&P 500 Total return
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1966 $320,000 $1,280,000 $1,600,000 -13.10%
1967 $240,000 $1,112,320 $1,352,320 20.10%
1968 $160,000 $1,335,896 $1,495,896 7.70%
1969 $80,000 $1,438,760 $1,518,760 -11.40%
1970 $81,600 $1,274,742 $1,356,342 0.10%
1971 $83,232 $1,276,342 $1,359,574 10.80%
1972 $84,897 $1,421,511 $1,506,408 15.60%
1973 $86,595 $1,654,813 $1,741,407 -17.40%
1974 $88,326 $1,350,076 $1,438,402 -29.70%
1975 $90,093 $921,104 $1,011,197 31.60%
1976 $91,895 $1,238,840 $1,330,735 19.20%
1977 $93,733 $1,492,503 $1,586,236 -11.50%
1978 $95,607 $1,308,212 $1,403,819 1.10%
1979 $97,520 $1,321,741 $1,419,261 12.30%
1980 $99,470 $1,494,360 $1,593,830 25.80%
1981 $101,459 $1,903,579 $2,005,038 -9.70%
1982 $103,489 $1,707,061 $1,810,550 14.80%
1983 $105,558 $1,972,953 $2,078,511 17.30%
1984 $107,669 $2,330,424 $2,438,093 1.40%
1985 $109,823 $2,362,404 $2,472,227 26.30%
1986 $112,019 $3,010,403 $3,122,422
Disclaimer - this is not financial advice. Consult your financial advisor for your own retirement planning. Everybody's situation is different.
Mechinv
