Living (Well) with the Basic Couch Potato

Millions of retirees were scared out of the stock market over the last 20 years. With two major bear markets, it’s not difficult to understand. It was scary. Not once, but twice. Some say we’ve had the worst financial crisis since the Great Depression. Others say it wasn’t quite so bad.

But what if you had been a basic Couch Potato investor, putting half your money in a fund representing the entire U.S. stock market and the other half in a fund representing the entire U.S. bond market. Suppose you had then gone to sleep, waking once a year to withdraw your spending money.  That’s when you rebalanced your portfolio to the starting 50/50 mix of equities/fixed income.

How would you have done?

The table below shows the dollar results, year-by-year, for the 25, 20, 15, 10, 5 and 3 years ending December 31, 2017. The bottom row, 2018, shows the balance of the portfolio at the end of May.  The first thing to notice is that every finishing portfolio value is greater than the original $100,000 investment.

Yes, you read that right: EVERY. This is in spite of a regular, inflation adjusted withdrawal at the end of each year with a starting base of 4 percent of the original $100,000 nest egg.

But you didn’t get to that positive ending without big-time angst.

1993-2017

Over the last 25 years your retirement savings more than tripled. But along the way you had to live through six years where the year-end value was lower than the previous year. Indeed, after peaking in 1999 at $192,032— nearly double your original investment in spite of annual withdrawals— you saw your portfolio value fall in each of the next three years—2000, 2001 and 2002.

You also saw it drop in 2008. (I didn’t need to remind you, did I?) And you had a small decline in 2015.

But over the entire period, your inflation-adjusted withdrawals rose from $4,110 at the end of 1993 to $6,949 at the end of 2017. That’s only 2.1 percent of the $333,084 remaining at the end of 2017. In other words, had you retired in 1993, the dividend and interest income from your portfolio would cover your annual withdrawal.

Is that too rosy a picture? Most likely. It helps to have a great running start when you retire. The 90s qualify as a great running start. Few decades have been so good for stock values. And they weren’t bad for bonds, either.

Finally, let’s consider the most important factor: Are you alive or dead? That’s a serious question.

For people who are 65 at retirement, only a small percentage will still be living 25 years later at age 90. According to a joint-life expectancy table from financial planner Michael Kitces, for instance, only 21.6 percent of men who survive to 65 are still living at 90 and 32.7 percent of women. The odds are 52.8 percent that neither will be alive and 47.2 percent that either will be alive.

And what are the chances that both will be alive? Only 7 percent.

What do all those percentage mean? Over this 25 year period, most retirees will have lived and died, leaving a comfortable amount of money behind— even as they enjoyed an inflation-adjusted income.

Of those who survive, most will be living alone. So their investment income will go further. And if you are alive and alone at 90 your remaining life expectancy will allow you to spend more money, if needed.

The elephant in the room isn’t investment performance; it’s whether a major health event will upend a life of smooth, inflation-adjusted spending.

Basic Couch Potato Investing Over Different Trailing Time Periods

Balances remaining after different time periods for a basic Couch Potato Portfolio. Assume you start with $100,000, invest at beginning of year, and withdraw $4,000 adjusted for inflation during that year at the end of the year. So that starting figure is what you have at the beginning of the second year.