Revisiting the worst times to retire in history (2012 update)

Now that 2012 is behind us I wanted to update my analysis of the worst times to retire in history. See here for the original post. Armed with my own annual return data base I can now show at lot more detail as to the progress of the portfolios of the worst case retirees. Looking at how these worst case portfolios evolved and comparing them to the experiences of the year 2000 and 2008 retiree can be quite instructive.

The worst time to retire since 1929 turns out not to be the Great Depression, as most people would believe. In fact, the worst time to retire in history was 1966, followed by 1965, then by the Great Depression year of 1929. The SWR (safe withdrawal rate) of 4.39% for a 70% stock 30% bond portfolio is solely determined by the retirement results of the 1966 retiree. Of course, we care about the present not the past. How are the year 2000 and the year 2008 retiree doing compared to those who retired during these worst of times? The table below (click for a larger image) shows the year by year progress for 5 retirees; the 1929 retiree, the 1965 retiree, the 1966 retiree, the 2000 retiree, and the year 2008 retiree. It uses a starting portfolio value of $1M, with a 70% stock 30% bond portfolio, which yielded a max SWR of 4.39%.

Worst times to retire in history 2012 update table comparison

The year 2000 retiree has now been retired for 13 years! Hard to believe I know. That’s almost half way through a 30 year retirement. The table compares the results of the first 13 years of retirement, 5 years for the 2008 retiree, in terms of portfolio value, withdrawals, and what percentage those withdrawals are of the current portfolio value, or the CWR as I’ve defined before. The 1966 retiree portfolio is highlighted since that was the worst case before. 13 years into retirement, at the end of 1978, the 1966 retiree had a portfolio of $769K, and was withdrawing $85K a year to maintain his/her living standard, which meant he/she was currently withdrawing (their CWR) 11.1% of their portfolio a year. Sounds pretty scary but they made it. Now, compare the 1966 retiree to the 1929 retiree. At first glance, the 1929 retiree looks a lot worse off. After 13 years their portfolio was down to $394K, almost 50% less than the 1966 retiree! However, look at the withdrawals. To maintain their standard of living the 1929 retiree was only withdrawing $35.8K thus their CWR was 9.07%, less than the 1966 reitree. So the 1929’s prospects of portfolio survival were better than the 1966 retiree. This just highlights that having your portfolio survive retirement is a function of both investments returns AND inflation. The 1966 retiree suffered poor real investment returns and high inflation – the worst of both worlds. Now lets turn to the modern retirees. This is why the CWR is such an important indicator.

The year 2000 retiree should be feeling a lot better today than at the end of 2008. At the end of 2008 the year 2000 retiree was in danger of taking the lead for the worst retirement in history with a CWR of over 9%. Now at the end of 2012 the year 2000 portfolio looks a lot better. After 13 years the year 200 retiree has a portfolio value of $697K, withdrawals of $59.9K, and a CWR of 8.6%. From a portfolio value perspective they have less than the 1966 retiree but are also withdrawing much less – again showing how successful retirement investing is a function of both returns and inflation. The year 2008 retiree is doing even better having only suffered only one bear market and after 5 years of retirement has a CWR 5.05% better than all the others listed. Of course these modern retirees could have avoided all of this stress by choosing better retirement investing approaches like the IVY timing portfolio or the Permanent Portfolio (see here and here). Those methods not only have higher initial SWRs but also have CWRs that are less than the starting SWR which is ideally what you want to see during a happy relaxing retirement.

One final note. Is there a CWR threshold above which there is no return? Retirement portfolios show a pretty strong resilience to high CWRs, after all even the 1966 with a CWR of 11% in 1978 survived retirement. But it was sure dicey there towards the end – they did end up with just above zero. Not an experience I’m sure anyone wants to have. I plotted the CWRs for all retiree portfolios through time since 1929 to see if we could discern any lines in the sand so to speak. The chart below shows the data.

Worst times to retire in history 2012 update CWR vs years

The vertical axis is the CWR and the horizontal axis is the years into retirement. The vertical line in the graph just marks the 13th year of retirement, where the year 2000 retiree currently is. As you can see from the chart a CWR of 12% seems to be the line in the sand. Once the CWR crosses 12% it has never recovered or stabilized. Again this doesn’t mean you run out of money, all these portfolios survived by definition, but it sure makes for a lot of stress late in retirement as your CWR just keeps trending up and up. Something to keep in mind.

In summary, the year 2000 and year 2008 retirees are doing OK even when using with the traditional retirement portfolio . Their current situation, while not great, is better than the other times in history, that determined their SWR in retirement. So far it looks like 1966 will remain the worst time in history to retire.

P.S. I only discuss the worst retirement periods in history and the worst current periods, 2000 and 2008. This means that any other starting year in retirement has better results than that shown here. For example, the 2001 retiree would be better off than the 2000 retiree.

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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6 Responses to Revisiting the worst times to retire in history (2012 update)

  1. Bob says:

    From a total value standpoint, this is clear. I have always had trouble, however, thinking through this if you live only on the income from your portfolio. When you rotate out of an investment, you lose all of the income. During serious bear markets, are you trying to replace income lost from sold investments through other means or are you just taking an additional amount from principal — which just raises the CWR?

    Eventually, you will be able to buy back the sold investment at a lower price (hopefully) and get more shares (more income). But, you have to make it until then.


  2. Bob says:

    P.S. I am thinking about the IVY portfolio, and its rotation in and out of investments, when I made my comments earlier. Sorry for any confusion. Thanks.

    • libertatemamo says:

      Hi Bob, with respect to the IVY or any other asset allocation (e.g. 60/40 stock bond) and the calculation of SWR or CWR, they are irrespective of how the portfolio returns are used to generate the withdrawals. The analysis assumes you take a chunk of cash at the beginning of the year (the withdrawal) to support your lifestyle for the coming year. Income and dividends are just one component of total returns which is what is used to calculate all this stuff.

      So, for example, lets say its the beginning of 2013. You ‘take out’ your 4.39% (e.g. $43,900 for a $1M portfolio). Since this time of year is re-balancing time, you take out the $43.9K then allocate the remaining funds ($956.1K) among the IVY asset classes. That $43.9K you take out for the year could come from cash if a few of the IVY asset classes are not invested, or it could come from selling a portion of some of the asset classes to generate the $43.9K.

      Another approach as you hint at is to live off the income generated by the IVY assets during the year. In most cases, especially these days, that won’t be enough to live on, so at the end of the year you would need to sell some assets to generate the balance. The downside of this approach is that you don’t get the advantage of re-invested dividends. The upside is you don’t have to worry about selling assets and capital gains to fund your lifestyle.

      In the end, the details of how you generate the withdrawals year after don’t really matter. Income and dividends are just one part of total return. the other being capital gains. The important thing is not to withdraw more than the SWR and to monitor the CWR to make sure you’re not headed for trouble.

      Hope that helps.


  3. heyduke50 says:

    not sure about the doom and gloom but I do know that my portfolio has had its best two months in my 15 years of trading as I netted 12.1 percent since Dec 1, needless to say I am moving more into cash to protect the profits that I had previously…

  4. Pingback: The 4% rule lives despite what the NY Times says | Investing For A Living

  5. Pingback: Revisiting the worst times to retire in history (2013 update) | Investing For A Living

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