What If You Retire Right Before a Bear Market?
“Rick…….what if I retire right when stocks top out……..right before a bad bear market?”
I have fielded this question 5 times in the last month. And it is a question that runs through my mind often when I envision retirement for my wife and I. That’s why I stress-test for this scenario in my clients’ written financial plans.
So let’s take a look at it using history as our guide.
First, the 2 biggest financial risks to a long successful retirement are………
- The inevitable rising cost of living, which is best fought by stocks
- Inevitable temporary falling stock markets, which are best fought by bonds
So let’s start with the very reasonable assumption that most people will need to keep some of their savings in stocks to get through retirement without running out of money.
And 3 of the ugliest market peaks in the last 100 years were in:
- 1929 (the Great Depression),
- 1969 (just before 2 brutal bear markets and a weak 1970’s economy)
- and the year 2000 (at which time stocks entered a period when they generally made no sustainable upwards progress for almost 10 years).
So what would have happened if you retired right at the start of one of those periods?
I ran the numbers, and here they are:
|
Year of the Stock Market Peak & Your Retirement |
25 Years or 20 Years After Your Retired |
Your Portfolio Value At The Start of Retirement |
Total Retirement Portfolio Withdrawals |
Your Portfolio Value 25 or 20 Years After Retirement |
|
1929 |
1953 (25 yrs) |
$1,000,000 |
$1,071,516 |
$1,297,698 |
|
1969 |
1993 (25 yrs) |
$1,000,000 |
$2,712,881 |
$512,099 |
|
2000 |
2019 (20 yrs) |
$1,000,000 |
$667,784 |
$922,336 |
Assumptions: Portfolio is 50% S&P 500 stock index and 50% Five-Year US Treasury Bonds, rebalanced once/year. Withdrawal rate is 4%/year of the initial portfolio value, adjusted up for inflation (CPI) each year. The 2000-2019 time period is for only 20 years as only 20 full years of time have passed since the year 2000. Source: YCharts, Inc.
Important observations:
- Using history as our guide, even if you retired right at a peak in stocks, sticking to a simple discipline enabled you to make it through. Can you imagine how well a person may have done with a full-fledged written financial plan?
- Inflation can be much more troublesome than down stock markets. The 1969-1993 period shows the erosive effects of the very high inflation in the 1970’s.
- If you let the temporary but ugly down markets rattle you, and you make panicky sell decisions based on fear………all the successful numbers above go out the window.
- Whether you are decades from retirement, nearing it, or in retirement…….it is essential to have a written financial plan which evolves regularly over time.
I am here to help you when you need me.
The views expressed herein are those of the author and do not necessarily reflect the views of Raymond James & Associates or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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