The road through retirement is threatened by a fire-breathing dragon with two heads.
In days of yore, each head would have had a dramatic name. Today, in the era of finance-feudalism, one head is called “Variance Sink.” The other is called “Sequence of Returns Risk.”
Yes, I know, sounds like the kind of dragon you’d find in a book called “Mythology for Actuaries.”
But both of those heads can turn our retirement into ashes.
That’s why I do an annual “Pudding Report,” in which we examine how much actual cash is left if you retired in different time periods starting 35 years ago. We could talk about rates of return, years of maximum gain or loss, and any number of other statistical wonders. But the proof of the pudding is just one thing: How much of your original nest egg is left?
This is serious stuff. It’s so serious that it was a major topic on a TV show I did in the mid-1970s in Boston. Back then the stock market had crashed, and inflation was soaring. Retirees with cash to burn in 1970 were running out of money.
Just so you know how serious that show was, singer Roberta Flack and actress Yvette Mimieux were there to ask questions.
Fast forward half a century and the topic has acquired enough math complication that the only people who can talk about it are folks who think computer science, financial calculus and electrical engineering are, well, just super fun.
But let’s get back to the cash. I’ve got good news and some worrisome news.
The Good News
If you retired at age 65 in 1990, you’ve got it made. If you had invested half your $100,000 nest egg in an index of the total U.S. stock market, the other half in an index of the total U.S. bond market and taken a starting amount of 4.5 percent that you adjusted upward for inflation each year, you’d now be 100 years old with $651,201 in your investment account.
Of course, you’d likely be dead.
Most people are by age 100. And unless you had opened the party faucet at, say, 90 or 95, odds are one of your grandchildren will be driving the Corvette you should have bought when you had the chance.
Whatever your choices, those are great results for an investment strategy that requires no attention or thought beyond dividing by the number 2 once a year with the aid of the calculator widget on your phone.
The Worrisome News
If you retired just 10 years later, picking up your gold watch at age 65 in the year 2000, you face a completely different situation. At age 90 your nest egg has shrunk to $72,819 after taking the same inflation-adjusted income each year. Your income would now be $8,439 a year.
But here’s where death is an angel. If you’re a typical American with a typical income, there’s a pretty good chance you’ve got nothing to worry about because you’re already dead. (Sorry, had to bring in those actuaries.) More important, even if you aren’t dead, that $72,819 has a pretty good shot at covering your bills another nine years or so until you’re 99.
You just might make it through.
The only people who need to worry – and not much at that – are all those misbegotten people who went to college and enjoyed an above average income when they were younger. They tend to live longer than average. But even so, getting past 100 is a big lift.
Your Nest Egg and Your Life, in Cash |
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This table shows the remaining balance in a $100,000 nest egg after adjusting an original 4.5% of balance income for inflation each year. The figures are for pure indexes and do not reflect the cost of the index funds that become available during the period and whose annual expenses have declined to nearly nothing in recent years. |
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| Start Year | Age in 2024 | Nest Egg Balance | Loss years |
| 1990 | 100 | $651,201 | 22,18,08,02,01,00 |
| 1995 | 95 | $545,631 | 22,18,08,02,01,00 |
| 2000 | 90 | $ 72,819 | 22,18,08,02,01,00 |
| 2005 | 85 | $169,875 | 22,18,08 |
| 2010 | 80 | $220,765 | 22,18,08 |
| 2015 | 75 | $140,747 | 22,18 |
| 2020 | 70 | $118,182 | 22 |
| 2022 | 68 | $ 94,613 | 22 |
| 2024 | 65 | $109,984 | none |
| Source: www.portfoliovisualizer.com | |||
Starting your retirement in a bad period for investments can engage both horns of the dragon. First, “Sequence of Returns Risk” can reduce your nest egg if you retire into a bear market. That’s what happened to the retirees of 2000. Second, having your principal reduced engages the other horn, “variance risk,” which happens when your withdrawal takes a larger and larger portion of your nest egg because its value is less but your withdrawal is more.
The only other year in which the ending nest egg is lower than its starting value is 2022. Does that mean those who retired in 2022 should be worried?
Unless you believe in the AI Tooth Fairy the answer is yes. Cutting spending, if you can, would be a good thing.
How much? Down to no more than 4.5 percent of the remaining nest egg balance.
Related columns:
Scott Burns, “Meet the Wealthy Centenarian,” 1/24/2024: https://scottburns.com/meet-the-wealthy-centenarian/
Scott Burns, “The Pudding Report: 2022,” 1/29/2023: https://scottburns.com/the-pudding-report-2022/
Scott Burns, “The Pudding Report, 2021: How much is that in dollars,” 2/13/2022: https://scottburns.com/the-pudding-report-2021-how-much-is-that-in-dollars/
Scott Burns, “The Pudding* Report, 2020: 1/30/2021”: https://scottburns.com/the-pudding-report-2020-the-proof-is-in-the-pudding/
Scott Burns, “The Longevity of the Couch Potato,” 2/9/2019: https://scottburns.com/the-longevity-of-the-couch-potato-portfolio/
Scott Burns, “Living (Well) with the Basic Couch Potato,” 7/15/2018: https://scottburns.com/living-well-with-the-basic-couch-potato/
Sources and References:
Roberta Flack Google search: https://www.google.com/search?client=safari&sca_esv=384eec729f70fd96&rls=en&sxsrf=AHTn8zrCemziyPh9EaDDG0ZS1v991GWWZQ:1738266136244&q=Roberta+Flack&sa=X&ved=2ahUKEwjyvM38mZ6LAxVwC0QIHeJRDx8Q7xYoAHoECAgQAQ&biw=1267&bih=558&dpr=2
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: Center for Aging Better on Pexels.com
(c) Scott Burns, 2025
Hi Scott
Thanks for the thousands of thought provoking and actionable articles! I have been a reader since the early 80’s when I was college student. I love how you combine real life and real numbers with analysis that is easy to understand.
What are your thoughts on the “retirement spending smile”? Can this spending smile concept be applied to the pudding report?
Is there way to mitigate the risk that spending during the last decade of life maybe highest due to medical/care expenses?
Hi Bob,
It could be applied to the Pudding Report but it would be difficult to do. The purpose of the Pudding Report is to show simple, raw cash balances left after different retirement periods. I like to think of the retirement spending smile as adding some margin for error.
The late life upswing in overall spending is due to medical spending increases offsetting declines in other spending. That doesn’t necessarily mean its a spending disaster. Here’s an example. The statistics show that a large percentage of seniors will eventually spend some time in a long term care facility. But when you examine the statistics for how much time is typically spent, only a minority spend a year or more. As a consequence, the actual percentage of retirees who will face crushing medical expenses is much smaller.
Diminishing a problem, however, is not the same as eliminating it. So we all face some risk. There are strategies for going on Medicaid. And there are strategies for protecting a spouse. These are best pursued with an elder law adviser/attorney.