Historical Worst Time for a Retiree

[NW-Bound]

I hope most people here are prepared for what experts see as an inevitable stock market crash...

Though there are some doomsayers that there are looming crises still to come.

Student home loans, Medicare. Or China about to crash, etc.

All I can do personally is to diversify to foreign stocks. But with globalization, the entire world may go down the tube together. If I suffer, the consolation will be that I will have lots of company.

 

[oldtrig]

You know, I bought my dads business in 1979 and never knew things were bad. I worked many seven day weeks back then. I made more money in 1980 than I ever made in my life. I paid taxes on $125,000 that year. That was a lot of money 33 years ago. I guess I was to dumb to even know things were bad. I remember paying my dad 7% interest when he sold me the business. Wow, that was not a very smart move on my part but a good one on his part. I remember him getting 18% on his money in bank cd's in 1980. I think I am correct on that amount. He retired and had it made. I was paying him $600 a month. He had about $200,000.00 in the bank and was drawing his SS. I thought what a nice way to retire. I wish now he would have took that $200,000.00 and bought lake property. oldtrig

 

[Lsbcal]

All I can do personally is to diversify to foreign stocks. But with globalization, the entire world may go down the tube together. If I suffer, the consolation will be that I will have lots of company.

Depends a lot on the dollar which is followed by trillions of dollars of currency investments second to second. So no clue to it path.

One of my best backtests involves moving between US large value and a general foreign equity index based on just momentum on a monthly basis. Has done better then buy-hold over 40+ years.

 

[NW-Bound]

The problem with any back testing is that the political and historical events that influence the markets are one-time events, such as the industrialization of the US, the Cold War, and the Peace Dividend that followed, the technology boom, etc... What is coming down the line?

Abroad, now that China has surpassed Japan as the 2nd economic power, they are already projecting the year it will surpass the US. But I do not see China as an investable market because of its closed nature. It's nothing like the US in the past.

I have invested a bit in emerging and foreign markets, but all that has done is to hold me back behind the S&P index the last 12 months. However, there has been some action lately, so I will patiently wait.

 

[Lsbcal]

I'm not so patient but there are "many paths to Dublin" as one Bogelhead is fond of saying.

I've been running that backtest real time for 4 years now so it's not just theory. However, I just mention it as a curiosity and probably because it's been working fine so I'm cocky now.

 

[NW-Bound]

I did not mean to pick on your method. What you are doing is probably a lot safer than what I am doing, which is a bet on a macroeconomic level, which I should not be doing as I am no economist. It has not "worked" yet and I am still waiting, while yours is apparently working already.

So, I thank you for an idea, and may investigate on my own sometimes.

 

[Mejit]

Historically worst time to retire

As we contemplate retirement, we don't know what inflation will be, what earnings will be or how long the retirement will last. I think that dying before one retires would be the worst time and dying right after retirement to be just as bad. Historically speaking of course.
Bill

 

[NW-Bound]

I will repeat the story of a guy at megacorp who retired on Friday. On Monday, his tearful wife called work to let know that he died of a heart attack on Sunday. By the way, had he died a few days earlier, his widow would get some additional money for term life insurance that megacorp provided free.

Anyway, to balance that risk out, a long retirement in poverty is something one should avoid too.

It's a good thing, I think, that we do not know when we are going to die. Suppose you know for certain you will die at the age of 55, when you are still very young. What would you do? Work till 40 before throwing everything to the wind and take off to see the world? Or do it at 30? Why not start at 20?

 

[veremchuka]

But isn't the period of 2000-2013 like the above? We even had two dips, in 2003 then 2009. The missing thing was high inflation.

Yes and no, no time range is like another as there are some things that'll be different. In many respects it was.

I can't recall the unemployment rate but I suspect it was as bad as the past 4-5 years but, and this is a big but, the gubmint has changed the way they count this so the real rate is probably more like 14-18% and for minorities perhaps 25% so the rate is not 7.5% is my point nor was it back then.

Another thing was interest rates were astronomical, CD's paid 14 or 15%, 30 year Treasury bonds were 15 or 16% but that may have been by 1985 but mortgage rates were brutal. A co worker in 1980 had a 21% mortgage, yes 21%, though that was the end of the range we are comparing.

From 1970 to about 1986 things were really not so rosy but it would have been a fabulous time to pour money into equities - 1982 to 2000 the longest bull market in history that rose 1400%.

 

[Lsbcal]

I'm hoping this bull market has a few more years. We'll see.

 

[meierlde]

And there is never a recovery from inflation. Prices go up and they stay up. There has never been a significant, lasting recovery from inflation.

As point out to get a recovery for inflation you need a great depression, which did lead to deflation, but the medicine was worse than the disease. With about 8 and 10% deflation in 1931/1932 (partly due to money in banks just vanishing). Inflation was conquered, but at what price.
Plus long term recall that since most people have negative cash balances over most of their life, if you include the mortgage, but not the value of the property, inflation is a positive benefit to them, in that their mortgage takes less time to pay. The masses have always wanted inflation. Soft money which is part of inflation lead to Shay's rebellion in 1784, and of course Bryan in 1896 was all for it.

 

[Chuckanut]

By 1980 the CD rates hit 13% or so, and mortgages hit 18-20%. But its not clear even then that between inflation and the taxes due on interest you could have kept up with inflation in cash at the time.

True, keeping up with inflation was hard during those years. Yet I still remember those 10% 10 year CD's I bought back then, and the 15 year 8.75% bond I bought. Ahhhh.... How sweet it was!

 

[Mulligan]

True, keeping up with inflation was hard during those years. Yet I still remember those 10% 10 year CD's I bought back then, and the 15 year 8.75% bond I bought. Ahhhh.... How sweet it was!

Those high interest rates I remember very well, but not really the inflation end of it as I was in college then, and I didn't spend much money to notice inflation. But I did max borrow the limit on student loan money and rolled them the first 3 years of college into CDs of 12-15%. The interest alone was so much, it paid for my last year of college for free. In fact the CD rates continued to be higher than the student loan rates were, so I never did cash the CDs, and just paid the loans off out of pocket. That original loan money is still in CDs, but the percentage of return is now missing that key second digit!

 

[NW-Bound]

In 1980, we bought our 1st home with a 14% mortgage. At the start of my career, my salary was rising quicker than inflation, so I did not feel any pain. And as newlyweds starting a new life together, we were oblivious to misery if any around us.

My regret was that while I was booksmart, I was financially illiterate. Other than being frugal and saving money in a credit union account (paying 15-16% at times), I did not follow the stock market, nor lock in any of the high rate in longer term financial instruments. I did refinance that house when the interest rate went down. Twice in fact, before selling it 8 years later.

It is funny how, years later, when talking to some smart younger engineers, I observed how their awareness of financial matters was so lacking. I guess people who are good at their career often tune out everything else at their peril. I kept urging them to educate themselves about money, but did not know if that was any good.

One thing I observe is that engineers tend to be frugal and conservative. I have not seen a flamboyant playboy engineer. That's what saves their skin despite their ignorance, yours truly included. My son, another engineer, exhibits the same frugal trait.

 

[Flying Dutchman]

For a greedy guy like myself who wants to have his cake and eat it too, I am curious to see what chance a guy can live off his portfolio and yet does not draw it down.

Have you looked at Otar's book. His approach to minimize RDCA is to have 2 years in cash, 3 years in ST bonds, the rest in IT bonds and stocks. He also explains how to replenish depending on what the market is doing.

 

[NW-Bound]

I have downloaded Otar's book (does he have more than one?), and read it a while back.

I will go through the book again, but do not see how one can swim against the tide in the bad years, such as the stagflation of the 1960-1980 decades. When there's no real growth, the best one can do is to get even with inflation, be it stocks, bonds, or CDs, and only if your WR is 0.

Your WR of 3.5% or 4% will draw it down, and seeing one's status of a millionaire getting demoted down to thousandaire would hurt. But again, I am greedy, and if finding myself in that situation, should be grateful that I am still not living under a bridge.

 

[Flying Dutchman]

I have downloaded Otar's book (does he have more than one?), and read it a while back.

I will go through the book again, but do not see how one can swim against the tide in the bad years, such as the stagflation of the 1960-1980 decades. When there's no real growth, the best one can do is to get even with inflation, be it stocks, bonds, or CDs, and only if your WR is 0.

Your WR of 3.5% or 4% will draw it down, and seeing one's status of a millionaire getting demoted down to thousandaire would hurt. But again, I am greedy, and if finding myself in that situation, should be grateful that I am still not living under a bridge.

You're right you can't swim against the tide for a decade or two. I was referring to your comments about 1973 vs. 1974 vs. 1975 and avoiding withdrawing from stocks during a big drop in the market.

 

[explanade]

I don't know, do you want to be in your 80s or even mid 70s and still see millions in your portfolio and perhaps no longer have the energy to do anything interesting with the money?

Wouldn't it be more troubling to have a lot of money left when you pass on? Unless you really want to spoil your children and grandchildren that is.

 

[NW-Bound]

I don't know, do you want to be in your 80s or even mid 70s and still see millions in your portfolio and perhaps no longer have the energy to do anything interesting with the money?

I am not sure what I will do with the extra money. As I often said here, I do not care for bigger homes, fancy fast cars, or a class A RV. However, having saved this much money, it hurts me to see that bottom line in Quicken going down. That's particularly true if it may shrink to 1/4 or less of what it is now, according to the worst case run in retirement simulation. Yes, I am scroogy, and do not want to lose the millionaire status.

Well, I may change my mind when I get older. Or if I get sicker, then I would not give a crap. Perhaps seeing my stash growing proves to me that I manage my money properly, that I read the world economy correctly, the same way sports fans pat themselves on the back for winning a bet.

Anyway, right now, I am ogling a fancy class B RV called the E-Trek that costs $140K. I cannot see myself getting something like that, even though I may have the money for it. If the market cooperates, I can convince myself more readily. I need to get $5, so that I will be willing to spend $1.

 

[explanade]

And the best case simulation often shows the nest egg growing to well over $10 million by the time you're well into your 80s.

That has to be a cruel cosmic joke. Well, the heirs would be able to enjoy a lifestyle that the benefactor never could enjoy ...

 

[NW-Bound]

By tweaking my spending and the portfolio composition, I have seen the number as high as $30MM+ after 30 years. And that is inflation adjusted, so in nominal value it would be even higher. Wow!

But that ecstasy proved to be short-lived when I considered that I would not be able to constrain my expenses like that. Most importantly, the time period when Jack's bean stalk grew to the sky was gone, and it will not be repeated. Just one time in the US history. I do not see any development that parallels the Peace Dividend period of 1980-2000. Of course, I will be glad to be proven wrong.

So, I turned pessimistic (when was I ever optimistic?), and looked for downfall. Hence, the reason for this thread...