We have a mountain in our lives. It’s called Mount Money. Early in our lives we have to climb the mountain. Later, when we no longer work, we descend it.
The climb always seems perilous. And it is. But the really dangerous part is the descent. The reason for this is simple. During the climb we’re accumulating money. But when we descend, we’re spending it.
It’s the spending that can get you
Big difference.
Spend too much and you’re in trouble. Lose too much and you’re in trouble, too. Spend and lose too much at the same time and it can be a disaster. Most people don’t understand the danger of the descent until they start it. The losses while climbing were scary enough, so it’s difficult to understand how it could be worse.
But it can be.
We can see the difference by comparing what happens to $100,000 invested over different time periods. One sum accumulates, reinvesting all dividends and capital gains. The other sum is subject to annual withdrawals. In this case, the annual withdrawals start at $4,000 (4 percent of original investment). That dollar amount is then inflation-adjusted each year to provide constant purchasing power.
Here’s what both sides of the mountain look like for different investment periods.
| Why You Need to Take Less Risk When You Retire | ||
| This table shows what happens to a $100,000 investment over different time periods, all ending March 31, 2020. In the first series, no distributions are taken. In the second, $4,000 is taken in each starting year, then adjusted upward for inflation each year. | ||
| Start Year | S&P 500 accumulating | S&P 500 distributing |
| 1989 | $1,763,031 | $1,037,288 |
| 1994 | $ 903,059 | $ 515,729 |
| 1999 | $ 308,507 | $ 69,305 |
| 2000 | $ 254,821 | $ 36,065 |
| 2005 | $ 287,470 | $ 151,929 |
| 2010 | $ 282,617 | $ 216,029 |
| 2015 | $ 138,800 | $ 115,968 |
| Source: www.portfoliovisualizer.com Figures shown are for investments in Vanguard 500 Index fund (ticker: VFINX) | ||
If you’re letting an investment grow, the results look pretty good. In time periods from five to 30 years, you’ve always gained. Your original investment is always intact, even if its growth is disappointing. And if you invested 25 or 30 years ago, your investment has multiplied as much as 17-fold.
But taking withdrawals is another story.
Retirement in this century? Dangerous
If you had retired in 1999 or 2000, you’d have lost a big part of your original investment. In fact, if you had retired at age 65 in 2000, you could be facing disaster. You’d be 85 years old. Your nest egg would be down to $36,000. But your life expectancy, for a man, would be six years or, for a woman, seven years.
Is disaster a certainty? Not at all. In many time periods the results are far better, as the table shows. The less fortunate can always remind themselves of an old Irish saying: “Only a fool dies solvent.”
But what can you do if you really like being solvent?
Less Risk=More staying power
You reduce your risk of loss. You diversify with bonds or cash.
| Why You Should Take Less Risk When You Retire | ||
| This table shows what happens to a $100,000 investment over different time periods, all ending March 31, 2020. In the first series, no distributions are taken. In the second, $4,000 is taken in each starting year, then adjusted upward for inflation each year. | ||
| Start Year | 50/50 stocks & bonds accumulating | 50/50 stocks and bonds distributing |
| 1989 | $1,185,574 | $ 599,923 |
| 1994 | $ 652,106 | $ 318,766 |
| 1999 | $ 315,504 | $ 107,155 |
| 2000 | $ 286,419 | $ 94,974 |
| 2005 | $ 247,961 | $ 131,734 |
| 2010 | $ 210,053 | $ 150,381 |
| 2015 | $ 130,764 | $ 107,305 |
| Source: www.portfoliovisualizer.com Figures shown are for investments in Vanguard 500 Index fund (ticker: VFINX) and Vanguard Total Bond Market Index (ticker: VBIMFX) | ||
In only one of these time periods – January 2000 through March 2020 – has the value of your investment dropped below your original $100,000, to $94,974.
Would it be nice to have more money? Of course! But you can’t reach for more without taking the chance of having less. What counts for the 20-year retiree who is now 85 is that what’s left is still likely to last as long as he does.
Reduce risk and you miss the fabled Upside Gravy Train. But you also miss much of the damage from colliding with the upheavals we have seen since 2000. Portfolio survival research has shown that all-stock or all-bond portfolios have poorer chances of surviving than portfolios that are between 50 percent and 75 percent stocks.
Related columns:
Scott Burns, “It’s 2020. Are you broke yet? Not hardly,” 4/11/2020
https://scottburns.com/its-2020-are-you-broke-yet-not-hardly/
Sources and References:
Social Security Period Life Table (2016): https://www.ssa.gov/oact/STATS/table4c6.html
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 by Eric Sanman from Pexels
(c) Scott Burns, 2020