Meet the Wealthy Centenarian

            Try this imagination exercise.

            You’re about to turn 100 years old. You retired 35 years ago, in 1989, at age 65. When you retired you had $100,000 in savings. A strange voice in your head told you to put half of your money in the total U.S. bond market and half in large capitalization U.S. stocks. The only investment action you needed to take, the voice told you, was to “rebalance” your investments once a year so that you started the next year with half your money in each category.

            Simple enough, right?

The same voice also told you to take $4,500 a year from the total (4.5 percent of the initial investment) and adjust it upward each year by the rate of inflation. That way you would have consistent purchasing power every year, year after year.

            Now guess: How much money is left for your 100^th birthday party?

            Answer, according to PortfolioVisualizer.com: $670,279. Not a small sum. This might be the year for a real blow-out party!

            During the period, inflation caused your annual spending from the portfolio to hit $11,467. You have enough for a whole year of parties if your liver can take it.

            Most of us have trouble imagining turning 100. It’s not something we like to think about. For weirdos like me, a nerdy journalist whose idea of fun is reading actuarial tables, it’s hard to imagine turning 100 at all. It’s a rare event.

            But the truly weird thing has nothing to do with age. It would have been almost unimaginable to think about investing in such a simple way in 1989.  It was still the Dark Ages of Data. A large majority of mutual funds were actively managed. They were expensive. Index mutual funds were scarce and disdained. Exchange-traded funds (ETFs) wouldn’t be invented until 1993.

            Indeed, while I had been harping on the harm of high-cost investments for years before 1989, I didn’t have enough data to make a strong case for index funds and the Couch Potato Portfolio until 1991. 

            Had you retired and invested in 1989, you would have faced six years of negative total return. Three of those years would have been mild — a 0.74 percent loss in 1994, a 1.50 percent loss in 2001 and a 2.33 percent loss in 2018.  Three would have been scary – a 6.94 percent loss in 2002, a 15.98 percent loss in 2008 and a 15.74 percent loss in 2022.

            After the 2022 loss, the talking heads and gurus were all asking, “Is the balanced portfolio dead?”  For aged you, your portfolio plummeted from an all-time high of $712,399 to $589,184.  But you had some perspective. Having started with $100,000 and having much less time to live allowed you to take the loss in stride. The year that both stocks and bonds dropped was a non-event.

            As regular readers may have guessed, you’re reading my annual Pudding Report. That’s when I use an online data source to explore how a dirt-simple, dirt-cheap index fund portfolio would have done in dollars and cents. Not per cents. 

Cash: It’s the Proof of the Pudding.

You can see the results for investing periods from one to 35 years in the table below.

The 2023 Pudding Report: What’s Left After Years of Withdrawals
This table shows the amount of money left after periods of one to 35 years in a portfolio of $100,000 invested 50/50 in large cap domestic stocks/ domestic bonds when an annual inflation-adjusted amount of $4,500 is withdrawn at the end of each year. It assumes investment in asset classes and does not allow for the costs of investing in indexed mutual funds or exchange-traded index funds. This is a hypothetical investment. Vanguard Total Stock Market fund didn’t exist until 1992. Vanguard Total Bond Market fund didn’t exist until late 2001. Since inception, the cost of these and other index funds has come down dramatically. It can now be done for 0.03 percent a year.
Investing Period	End Value	End Income	End Income as % End Value
1 year	$111,055	$4,655	4.2%
3	$  94,619	$4,817	5.1
5	$122,351	$5,500	4.5
10	$127,355	$5,929	4.7
15	$199,054	$6,573	3.3
20	$133,621	$7,497	5.6
25	$  77,065	$8,430	10.9
30	$339,449	$9,477	2.8
35 years	$670,279	$11,467	1.7
Source: www.portfololiovisualizer.com

            The thing that kills portfolios has an ominous name: “variance sink.” It’s when the withdrawal rate from a portfolio becomes so large relative to the size of the portfolio that it begins a death spiral and extinguishes itself. But in this example only one end value – after 25 years – has what appears to be a fatal withdrawal rate, 10.6 percent.

            Scary, right?

            No. Think again. After 25 years of retirement, a person who retired at 65 would be 90 years old.  The most recent U.S. Life Tables tell us that for every 100,000 births, 81,181 people survive to age 65. Of those, only 20,447 survive to age 90, about 25 percent. Among the survivors to 90, life expectancy is 4.2 years. So the odds are pretty good that 90-year-old still won’t run out of money.

            I’m not even sure they should put off that blow-out birthday party.

Related columns:

Scott Burns, “The importance of being a dull investor,” 9/29/1991       https://scottburns.com/on-the-importance-of-being-a-dull-investor/

“The Portfolio of Nobel Prize Winners,” from 1999, retells behavioral economist Richard Thaler introducing a group of journalists to discovering how Nobel laureate Harry Markowitz invested his money — an even split between an index of stocks and an index of bonds. (The basic Couch Potato portfolio.)

Scott Burns, “The Couch Potato Hits the Big Time: New York,” 5/11/1999  https://scottburns.com/the-couch-potato-hits-the-big-time-new-york/

Scott Burns, “How to build the basic Couch Potato Portfolio anywhere, for next to nothing,” 9/12/2018 https://scottburns.com/how-to-build-the-basic-couch-potato-portfolio-anywhere-for-next-to-nothing/

Scott Burns, “The Simplicity Manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/

Scott Burns, “The High cost of Low Returns and Yields,” 7/24/2015   https://scottburns.com/the-high-cost-of-low-returns-and-yields/

Scott Burns, “The Longevity of the Couch Potato Portfolio,”2/9/2019  https://scottburns.com/the-longevity-of-the-couch-potato-portfolio/

Couch Potato Investing Annual Reports

Scott Burns, “Let’s Hear It for Sloth and Simplicity,” 1/18/2019,  https://scottburns.com/lets-hear-it-for-sloth-and-simplicity/ 

Scott Burns, “A Modest Year, But Way Better Than Hedge Funds,” 2/2/2014  https://scottburns.com/a-modest-year-but-way-better-than-hedge-funds/

Scott Burns, “Sloth Triumphs Again,” 2/15/2009  https://scottburns.com/sloth-triumphs-again/  

Scott Burns, “The Couch Potato Portfolio Smoothes Your Ride,” 1/20/2004 https://scottburns.com/sloth-triumphs-again/ 

Hard Data from the SPIVA reports:

Scott Burns, “SPIVA: The investment news that’s no longer news,” 6/19/2022 https://scottburns.com/index-funds-beat-managed-funds-again-and-again/

Scott Burns, “Two days of truth in 365 days of snake oil,” 4/17/2020 https://scottburns.com/two-days-of-truth-in-365-days-of-snake-oil/

Scott Burns, “SPIVA, Again and Again and Again,” 11/29/2019 https://scottburns.com/index-funds-beat-managed-funds-again-and-again/

Scott Burns, “Four milestones for successful investing, “12/9/2006  https://scottburns.com/four-milestones-for-successful-investing/

Sources and References:

Portfolio Visualizer website, Asset Allocation Portfolio Backtest tool:  https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Portfolio Visualizer website, Monte Carlo Simulation Tool:

https://www.portfoliovisualizer.com/monte-carlo-simulation

National Vital Statistics Reports, Vol 71, Number 1: United States Life Tables, 2020, 8/8/ 2022: https://www.cdc.gov/nchs/data/nvsr/nvsr71/nvsr71-01.pdf

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo:  © Pattie Freeman

Ó Scott Burns, 2023