What if you retired in Jan 2000 with 100% stock?? You're toast, right?

[amt]

I roughly calculated a hypothetical scenario in which someone retired in Jan 2000 with 100% stock in s and p 500 (VFINX), with 4% inflation adjusted withdrawals.  Most on this board will say that he must be a fool to do it.  The outcome is not great, but probably not as bad as some might expect.  In jan 05, that person still has 67.6% of the original amount, which is better than 50 to 80% drop some may expect from such an “undiversified”  portfolio.

Assumptions:  withdrawal is at the end of the year; first year’s expenses not figured in here, same as FIRECALC does.

Sources: yahoo finance for VFINX data and http://www.westegg.com/inflation/ for inflation data.




Date _____ Before VFINX adj Inflation adj ______ Money after  shares of inflation
_________ withdrawal close withdrawal _______ withdrawal ______VFINX



January-00 $2,500,000.00 119.18 ___________ ______________20976.67
January-01 $2,479,023.33 118.18 $102,400.00 $2,376,623.33 20110.2 0.024
January-02 $1,989,300.89 98.92 $104,038.00 $1,885,262.89 19058.46 0.016
January-03 $1,450,158.24 76.09 $105,703.00 $1,344,455.24 17669.28 0.016
January-04 $1,806,506.82 102.24 $108,134.00 $1,698,372.82 16611.63 0.023
January-05 $1,801,863.26 108.47 $111,054.00 $1,690,809.26 15587.81 0.027

 

[preben]

Does the Yahoo adjusted close include dividends? I recall that they somehow mess something up, and that it is better to look at total return nos. This might improve your end result.

That said you also start with 2.5M which makes the buffer seem higher - what if he started with 1M? 600k or so left - still not shabby but a lot of road to travel.
To retire with 100% stock in a rather undiversified portfolio (US largecap only) IS rather silly - but he is for sure not as bad of as some might have thought.
I like to use the Vanguard balanced fund VBINX for something closer to a typical 60/40% retiree portfolio and with 1M and first 40k w/d in 2000 followed by 40k+infl adjustments he ended 2004 with
883K - certainly not good - but just a bit more diversification (reits/foreign/commodities) would have had him in the black.

year w/r+CPI VBINX balance end year
2000 40000 -2 940800
2001 40640 -3 873155
2002 41615 -9.5 752543
2003 42364 19.9 851504
2004 43635 9.3 883001

 

[Michael]

The REHP shows the VBINX portfolio about breaking even. $204,995 on Dec 31, 1999 down to $203,194 on Dec 31, 2004. Some other portfolios are listed:

http://www.retireearlyhomepage.com/reallife05.html

 

[preben]

I am not sure why we have such a big difference - but my number is based on the full w/d for the year pulled on 1st Jan. I use the actual inflation number for the year - but even a slight difference in that should not make such a big difference. even without deducting any inflation I only end with 893k at the end of 2004 as per below. That is a PRETTY simple calculation and I am guessing that taking the results out of the middle of the period/having not taken the 2004 w/r yet might explain the REHP result.

year w/r+no cpi adjust VBINX return balance end year
2000 40000 -2 940800
2001 40000 -3 873776
2002 40000 -9.5 754567
2003 40000 19.9 856766
2004 40000 9.3 892725

The REHP shows the VBINX portfolio about breaking even.  $204,995 on Dec 31, 1999 down to $203,194 on Dec 31, 2004.  Some other portfolios are listed:

http://www.retireearlyhomepage.com/reallife05.html

 

[treypar]

.Looks like the STAR fund would have produced positive results for that period. How has the balanced index performed during rising interest rates?

 

[TromboneAl]

What result do you get with a 60/40 stock split?

 

[maddythebeagle]

This is an interesting idea to look at. I dont think that yahoo finance includes dividend reinvestment in the return. I think it is just stock price appreciation. Somebody mentioned that sharebuilder had some kind of calcuation tool (maybe it would have info. on etfs).

It seems like if I was planning to retire that I would slowly ratchet my portolio to a mix that I would need in retirement as I got closer esp. if the market is long in the tooth in the business cycle.

 

[preben]

Al; VBINX is 60/40% stock total market/bonds. Cheers!

 

[Michael]

I am not sure why we have such a big difference...

I just realized that 2000 withdrawals were based upon a CPI adjusted 1994 starting point, making the 2000 withdrawal closer to 2% of the balance. Doesn't apply to a Y2K starting point.

 

[preben]

Michael; yeah of course that is why - I missed that too :. No more Singha beer for this bloke!

Anyway; ending 2004 with close to 900K (in 2004 dollars) is still not too shabby in my book. VBINX is up 1% YTD so we will have to see if the ROY can assist in moving back to the $1M mark.

Cheers!

 

[Michael]

Anyway; ending 2004 with close to 900K (in 2004 dollars) is still not too shabby in my book.

Indeed. The time tested strategy seems to be working so far.

 

[cute fuzzy bunny]

You can pull a 1-5 year slice of financial returns out of any bucket and say the sky is falling. Over 20-30 year periods its all irrelevant.

Where ya been AMT? You dont seem to come around very often...

 

[moghopper]

You can pull a 1-5 year slice of financial returns out of any bucket and say the sky is falling. Over 20-30 year periods its all irrelevant.

Of course, if you actually feel like the sky is falling while this is happening, the ensuing panic can really hurt you. It is difficult for many people to be prepared for bear markets.

 

[maddythebeagle]

If you read some of Ben Grahm's stuff, you can dollar cost average and make money. I know that I was dollar cost investing in the sp500 index since 1997. I think the assumption that you put all of your money in right before a 20-40% correction isnt going to be the case. I feel sorry for the dudes that put down a large percentage in the nasdaq (some did) right be for this huge correction.

 

[al_bundy]

chances are you were reinvesting dividends and capital gains for new shares

if you started redeeming money in 2000 or 2001 can you report on your taxes that you are redeeming the last shares bought and that you took a loss on them and get a tax break?