Historical Worst Time for a Retiree

[bo_knows]

One thing I observed with historical simulations is that they all use annualized data, with portfolio rebalancing on Jan 1st. While that may be fine for an understanding of longer-term market conditions, the yearly sampling rate is just too coarse, and a real portfolio performance may differ significantly from the model.

For example, we all know how the market crashed hard in Mar 2009, then rebounded strongly by Dec 2009. If we only take sample points at Jan 2009, then Jan 2010, we would not know about that severe dip. Yet, in real life, many people, myself included, did some buy/sell or rebalancing throughout the year. One could end up very well, or left holding the bag depending on his execution. I am very sure the managers of Wellesley or Wellington do not rebalance only once a year on Jan 1st.

I have also wondered this... especially the "Sell in May, go away" phenomenon. There is monthly historical data out there. I'll have to work on that...

 

[Andre1969]

For example, we all know how the market crashed hard in Mar 2009, then rebounded strongly by Dec 2009. If we only take sample points at Jan 2009, then Jan 2010, we would not know about that severe dip. Yet, in real life, many people, myself included, did some buy/sell or rebalancing throughout the year.

Yep, same here. If you just look at year-end totals, I think I lost about 41% from 12/31/07 to 12/31/08. But going peak to trough, which for me was 10/31/07 to around Thanksgiving of 2008, I was probably down more like 50-55%. But, I had cut back on investing back in 2007 as things took off. I don't think I sold off anything at the market peak, but as the market tanked, I started ramping up investing again. And at those troughs around Thanksgiving of '08, and 3/9/09, I put a lot more in.

 

[Meadbh]

Oh I am so sorry I no longer have the link for exactly what you are asking about. It was at a website by someone who's last name was Merriman or Merrimack or something like that. I tried to Google it but can't find it.

If you Google "sequence of returns in retirement" or "sequence of returns" there are tons of links, you can read for the next 5 years!

What I wanted to find for you was a paper about this and a chart or 2 showing how a $1M 50/50 portfolio was broke in just 15 years because of the year of retirement combined with a 4% wr adjusting for inflation and the poor performance of the markets! The sequence of returns is very important in retirement because you can draw your nest egg down in just 6-8 years to a point that it can't recover at such a low dollar value even if the market recovers.

Retirement: The sequence of returns - MarketWatch check out the link in the 1st few sentences, it's a pdf so I can't link directly to it. Looks like what you'd be interested in, I did not read it.

This link has a somewhat similar chart to what I no longer have the link though it is for only $100k vs $1M. The idea is the same - sequence of events is critical! SunAmerica-What if You Retire at the Wrong Time

Is this the paper you were looking for?

http://www.ifid.ca/pdf_newsletters/PFA_2006FEB_sequencing.pdf

 

[NW-Bound]

...The 2000's (orange line) were lousy as we know and really a standout in a decade's context. So that maybe partially explains the continuing disbelief in markets as we all remember those years...

Looking at your chart, it's no wonder that they call the 2000-2010 the "lost decade". Yet, I doubled my portfolio in that decade, and also bought a 2nd home.

I was working part-time on and off during that time, and my expenses were high due to having two children in college. My wife also retired with no pension in 2007. I think our erratic income just barely covered expenses in that decade.

The problem was that I did not keep good accounting of income and expenses to see how much my investing efforts contributed to wealth building. Still, it could be all due to luck, and one should not push his luck as they always say.

 

[Lsbcal]

Looking at your chart, it's no wonder that they call the 2000-2010 the "lost decade". Yet, I doubled my portfolio in that decade, and also bought a 2nd home.

I was working part-time on and off during that time, and my expenses were high due to having two children in college. My wife also retired with no pension in 2007. I think our erratic income just barely covered expenses in that decade.

The problem was that I did not keep good accounting of income and expenses to see how much my investing efforts contributed to wealth building. Still, it could be all due to luck, and one should not push his luck as they always say.

It could be luck, true. However, sometimes we have to pull some levers for that luck to show up. Sometimes we have to take a stand for ourselves. Our methods do not have to work for anyone but us.

I've found that when the markets are really bad, there is nobody who is going to make me whole. We are truly on our own. It's true one can nowadays whine on the web and in the old days one could blame one's broker. When it comes right down to it, we are responsible for our destiny (well, there is always Social Security).

So is it skill or luck? Maybe more a combo.

 

[veremchuka]

Is this the paper you were looking for?

http://www.ifid.ca/pdf_newsletters/PFA_2006FEB_sequencing.pdf

No I saw that one but I accidentally closed the link and didn't post it. Oh if I even saw the website's front page I'd know it immediately. It's a pretty good site. Wait I may have printed stuff from it! Let me look.....

BINGO! well kinda

I found a printout from the website so now I can get to the website! Now if the website has the writeup, it was several years ago but they kept it up for years.

It is Merriman and here's the front page FundAdvice.com - Home

There are many articles to read FundAdvice.com - Articles but I can't find the one I am looking for. I am pretty sure it was at their website but to be honest I used to read so much and had so many sites bookmarked I can't be 100% certain it wasn't somewhere else but I was pretty sure this was the place.

This may be useful FundAdvice.com - Withdrawals in retirement: taking less can give you more

Hope this helps you.


eta: I think this is the article but now you have to subscribe to read it. http://www.fundadvice.com/articles/retirement/how-much-can-i-take-out-in-retirement-.html

 

[timwalsh300]

How can this period be worse than the Great Depression?

Deflation was the savior of a hypothetical balanced portfolio in the 1930s. My data set shows astonishing inflation rates of negative 8.9% in 1931 and negative 10.3% in 1932. So cash and Treasury notes did phenomenally well during the darkest days of the depression (10-year notes had a real return of almost 20% in 1932), and the massive nominal drop in stock prices was somewhat softened.

In reality, I'm guessing that retired people of that era were more affected by their children becoming unemployed, and with their former employers not being able to pay pensions.

Tim

 

[NW-Bound]

Deflation was the savior of a hypothetical balanced portfolio in the 1930s...

In reality, I'm guessing that retired people of that era were more affected by their children becoming unemployed, and with their former employers not being able to pay pensions.

Yes, I have observed that too. As you noted, in real life there were many other factors that added up to a lot of misery, while today we are only looking back at that period to see to how we could balance between stocks and bonds.

Back on the supposedly worse period of 1960-1980, nothing much stood out, but the low growth and high inflation just ground on and on. There were not even wild market gyrations like we have had recently in 2003 and 2009. With big dips in the market, the daring [-]market timers[/-] portfolio rebalancers could still make good money. Volatility provides opportunity for the strong stomachs to make money off the weak hearted. It's a cruel world.

 

[Shawn]

While this is speculation, my guess is that the percentage of people in 1967 who thought 1967 was a good time to retire was higher than the percentage of people in 1980 who thought 1980 was a good time to retire (to some degree, I am assuming access to equal retirement mechanisms). The financial outlook by the average person in 1980 was horrible.

From a financial perspective, it could be that the best time to retire is when people think it is the worst time to retire.

 

[Bikerdude]

From a financial perspective, it could be that the best time to retire is when people think it is the worst time to retire.

+1

 

[youbet]

A bad stock market is nasty, but inflation kills. High inflation tends to persist across multiple years. .

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.

Market returns, OTOH, have always eventually recovered. We're at new all time highs now despite all the crashes of the past.

I agree. Inflation kills. If you retire into significant inflation, you'll generally pay higher prices for life's necessities the rest of your life. If you retire into a market crash, your portfolio (minus whatever you spent during the crash) will undoubtedly recover.

 

[REWahoo]

If you retire into a market crash, your portfolio (minus whatever you spent during the crash) will undoubtedly recover.

...provided you 'stay the course' and don't panic sell.

 

[youbet]

...provided you 'stay the course' and don't panic sell.

Actually, there are an infinite number of things you can do to screw your portfolio. Panic selling would be one of those. Selling everything to buy expensive gifts for your young mistress would be another. And on and on.........

But old guys like us, who've seen a lot, should be able to step over most of the obvious land minds.

 

[oldtrig]

...provided you 'stay the course' and don't panic sell.

REWahoo, someone our age would probably panic. I doubt I would have time in my life to recover. If I had money in the market and it went down everyday I would probably take it out

 

[REWahoo]

REWahoo, someone our age would probably panic. I doubt I would have time in my life to recover. If I had money in the market and it went down everyday I would probably take it out

Yes, staying in the market is really tough to do when you see your nest egg shrink day after day. Many of us got to experience this first hand during the "market unpleasantness" of 2008/2009 - that was a real gut-check for me.

It was tempting to sell and stop the bleeding but history told me getting out would be a mistake. I held on and came out the other side in good financial shape - but bruised and battered from the ride.

 

[REWahoo]

But old guys like us, who've seen a lot, should be able to step over most of the obvious land minds.

+1

I hate it when someone blows a land mind - a terrible waist.

 

[NW-Bound]

Because I have too much time on hand (in convalescence and all that), I have played some more with historical simulation, and have some more to offer to entertain ya'all.

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.

So, what are the lucky years when a 50/50 portfolio can start and sustain a 4% initial WR with COLA, and still end up with at least the same value (inflation adjusted too) after 30 years?

The following were the years when those happy times occurred.

1870-1887
1918-1928
1942-1952
1974-1982?

Note the question mark at 1982. It's because we have not yet completed a 30-yr sequence from 1983.

In order to evaluate the recent years, I shortened the period to 10 years. I then found that 1997 was the last year that one would still retain his portfolio 10 years later. This makes sense, because the closer we got to the market top of 2000, the more inflated the portfolio would be, and the more devastation that would follow after that bubble.

Shortening the duration further from 10 years, the simulation showed that recent retirees who bailed out of work in recent years would still be in the red, except for those who started in 2003. Of course that makes sense because of the market bottom in that year.

I only stopped my earned income last year, but some posters have been fully retired for a few years now, and still have more than when they started. I think it was either because 1) they did not compensate for inflation, or 2) they have additional income, or 3) they are good traders or rebalancers, or a combination of the above.

 

[Lsbcal]

Deflation was the savior of a hypothetical balanced portfolio in the 1930s. My data set shows astonishing inflation rates of negative 8.9% in 1931 and negative 10.3% in 1932. So cash and Treasury notes did phenomenally well during the darkest days of the depression (10-year notes had a real return of almost 20% in 1932), and the massive nominal drop in stock prices was somewhat softened.

In reality, I'm guessing that retired people of that era were more affected by their children becoming unemployed, and with their former employers not being able to pay pensions.

Tim

Good point about the pensions. Makes you wonder about nowadays too.

In the 1930's, even in the "recovery" there were huge monthly swings in returns. Some 25% and 30% up months, and some -15% down months. I truly wonder if a retiree could have taken the heat back then and stayed the course --- doubt it. I actually bought this book because it did a good job of talking about the realities from a middle class lawyer's perspective Amazon.com: The Great Depression: A Diary eBook: Benjamin Roth, James Ledbetter, Daniel B. Roth: Kindle Store

 

[Lsbcal]

...(snip)...

Shortening the duration further from 10 years, the simulation showed that recent retirees who bailed out of work in recent years would still be in the red, except for those who started in 2003. Of course that makes sense because of the market bottom in that year.

I only stopped my earned income last year, but some posters have been fully retired for a few years now, and still have more than when they started. I think it was either because 1) they did not compensate for inflation, or 2) they have additional income, or 3) they are good traders or rebalancers, or a combination of the above.

I retired in 2003 but had a bit of income in 2005, 2006. We are just a tad ahead in inflation adjusted terms since 2003. We would have been more ahead if I'd taken SS at 62. We would have been way ahead if I'd been doing my current (backtested) investment approach -- but then what would you expect from such a statement ?

 

[oldtrig]

I hope most people here are prepared for what experts see as an inevitable stock market crash. Everyone I talked to around 2005 told me no way you could lose if you bought lake property in my area. Ask those who bought in that year how they stand today? I think people are feeling real good about the market again. It sort of reminds me of driving down the road and seeing a terrible car wreck. You drive real slow after you see the wreck. Then you seem to forget it and you are driving at 80 mph again. I am one who has made big financial mistakes. I was offered a very large sum of money for my commercial property in 2000. I wish I could get that today. I will just pass it on to my son when I check out. oldtrig

 

[NW-Bound]

In the 1930's, even in the "recovery" there were huge monthly swings in returns. Some 25% and 30% up months, and some -15% down months. I truly wonder if a retiree could have taken the heat back then and stayed the course --- doubt it. I actually bought this book because it did a good job of talking about the realities from a middle class lawyer's perspective Amazon.com: The Great Depression: A Diary eBook: Benjamin Roth, James Ledbetter, Daniel B. Roth: Kindle Store

Eh, it was a day trader's delight!

Just joking. During the market wild swings in 2000, I joked with my frustrated friends that we should embrace volatility because that's how a guy who could jump in/out of market would make a lot of money. Then, came 2003 and 2009 market crashes and it was not fun anymore.

PS. I will check at the local library for this book. Oops, it's an eBook.

 

[explanade]

It's hard to imagine someone retiring today being worse off than if they retired in 1929 or in 2000 or in 2008... unless they panic-sold all their stocks in 2008 and watched the equity recovery from the sidelines.

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

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

 

[NW-Bound]

I retired in 2003 but had a bit of income in 2005, 2006. We are just a tad ahead in inflation adjusted terms since 2003. We would have been more ahead if I'd taken SS at 62. We would have been way ahead if I'd been doing my current (backtested) investment approach -- but then what would you expect from such a statement ?

I still have a few more years till SS, hence have not even bothered to see what we will get. But I have been thinking that if the market is lousy from here till then, I may start SS early, or at least for my wife.

About back testing, yes, I also develop a strategy that I will deploy at the next downturn. In back testing, it would result in my getting all out of I-bonds and going all in in March of 2009 on the same stocks that I did nibble back then, then riding it up all the way till now.

$5MM? Way past it, baby, and on the way to 10 cool ones!

New bumper sticker: Oh God, another market crash please!

 

[veremchuka]

Back on the supposedly worse period of 1960-1980, nothing much stood out, but the low growth and high inflation just ground on and on. There were not even wild market gyrations like we have had recently in 2003 and 2009.

Nothing? Maybe you missed 1973-1974 recession. It lasted longer than the Great Recession and the market was down IIRC 45%, seems I have read that recession was really worse than the GR. Then inflation ate you alive in the 70's. I'm not sure but I think the markets did not do that well until 1982 when Reagan started to turn things around after the disastrous 70's and the Carter malaise. The 70's were no picnic.

 

[NW-Bound]

Nothing? Maybe you missed 1973-1974 recession. It lasted longer than the Great Recession and the market was down IIRC 45%, seems I have read that recession was really worse than the GR. Then inflation ate you alive in the 70's. I'm not sure but I think the markets did not do that well until 1982 when Reagan started to turn things around after the disastrous 70's and the Carter malaise. The 70's were no picnic.

I stand corrected. I was too cursory when I made the post. That was before my time to experience it personally. I only started to make a living as a young adult in the late 70s.

Yes, from the market top in Dec 1972, the Dow lost 40% at the bottom in Sep 74, 20 months later. The Dow languished for 10 years and did not set a new high until Dec 1982.

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.