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Retiring at the Worst of Times.

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Retiring at the Worst of Times.


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This article was posted on May 1, 2003.

What if you retire at the worst possible time?

The Retire Early Study on Safe Withdrawal Rates values your retirement portfolio using the average of the daily closing S&P500 value for each trading day in January of each year. What happens to the safe withdrawal rate if you use the stock market high to value the portfolio? Three notable dates in the past 75 years were Sept. 16, 1929, Jan. 11, 1973, and March 24, 2000. Each marked a significant high for the S&P500 followed by a large stock market decline.

Date S&P500 High Subsquent
S&P500 Low
Date of
S&P500 Low
Percent
Decline
Sept. 16, 1929 31.86 5.01 July 1932 84.3%
Jan. 11, 1973 121.74 60.96 October 1974 49.9%
March 24, 2000 1552.87 768.63 October 2002 50.5%

The worst date to value a retirement portfolio in the past 130 years was Sept 16, 1929 -- the high value of the S&P500 just before the October 1929 crash. The table below shows what would have happened to the portfolio for asset allocations of 75% S&P500/25% fixed income and a 50%/50% asset allocation.

"100% Safe" Inflation-Adjusted Withdrawal Rate
30-Year Pay Out Period, portfolio depleted at end of period, $1,000 initial balance
O.20% exp. ratio, indexed to the CPI-U, rebalanced annually,
50% of annual withdrawal at begining of year, 50% at year end
Shiller 1871-2003 stock market database
Asset Allocation: 75% S&P500/25% Fixed Income
Start
Date
100% Safe
Withdrawal Rate
Portfolio Value
after 3 years
Portfolio Value
at S&P500 Low
Annual Withdrawal
at S&P500 Low
(% of Low Value)
Sept. 16, 1929 3.71% $407 (Jul 1932) $320 (9.7%) $31
Jan. 11, 1973 (Note 1)----4.56% $832 (Oct 1974) $624 (8.3%) $52
Jan. 11, 1973 (Note 2)----4.00% $854 (Oct 1974) $734 (6.3%) $46
March 24, 2000 (Note 3)----4.00% $579 (Oct 2002) $571 (7.2%) $41
Asset Allocation: 50% S&P500/50% Fixed Income
Start
Date
100% Safe
Withdrawal Rate
Portfolio Value
after 3 years
Portfolio Value
at S&P500 Low
Annual Withdrawal
at S&P500 Low
(% of Low Value)
Sept. 16, 1929 3.99% $559 (Jul 1932) $486 (7.0%) $34
Jan. 11, 1973 (Note 1)----4.72% $920 (Oct 1974) $760 (7.1%) $54
Jan. 11, 1973 (Note 2)----4.00% $947 (Oct 1974) $774 (5.9%) $46
March 24, 2000 (Note 3)----4.00% $690 (Oct 2002) $693 (5.9%) $41

Note 1: -- Despite the 50% drop in the S&P500 over the next 19 months and high inflation, January 1973 was not the worst time to retire. Initial withdrawal rates well above 4.00% (4.56% for 75% S&P500 and 4.72% for a 50% S&P500 allocation would have survived for 30 years.

Note 2: -- If we use a 4% withdrawal rate for a January 11, 1973 start date, there is $1,957 remaining in the account after 30 years for the 75%/25% asset allocation and $1,996 for the 50%/50% allocation.

Note 3: -- We won't know the actual 30-Year "safe" withdrawal rate for a March 2000 retiree until March 2030, so a 4.00% initial withdrawal was used.

How can you tell if things are even worse?

Since historical safe withdrawal rate analysis assumes that "the future is no worse than the past" (in this case, the past 130 years of stock market history), it would be nice if there was some way to fortell the future. The only early warning system I can think of is to monitor each year's annual withdrawal as a percentage of the portfolio balance and compare that to the worst pay out periods in the historical record. The table below shows the performance for a 30-Year period beginning Sept. 16, 1929.

At the stock market low in July 1932, the 1932 annual withdrawal equaled 9.70% of the portfolio balance on that date. Since we're assuming that the portfolio is depleted in the final year, the annual withdrawal in Year 29 is about 100% of the final balance. The 104.44% figure for 1958 reflects the fact that the portfolio saw some growth in the following period since we're taking 50% of the annual withdrawal at the start of the year and 50% at the end of the year.

"100% Safe" Inflation-Adjusted Withdrawal Rate
as a percent of ending balance

30-Year Pay Out Period starting Sept. 16, 1929,
portfolio depleted at end of period, $1,000 initial balance
75%S&P500/25% fixed income, 3.71% initial withdrawal rate
O.20% exp. ratio, indexed to the CPI-U, rebalanced annually,
50% of annual withdrawal at begining of year, 50% at year end
Shiller 1871-2003 stock market database
.          Annual
Year    Balance   With-   Percent
.                   drawal  of Balance
 
1929	      1,000 			   
1930	        750   (37.10)	4.95%	   
1931	        522   (34.50)	6.61%	   
07/1932         320   (31.03)	9.70%	   
09/1932         407   (31.03)	7.63%	   
1933	        474   (27.99)	5.90%	   
1934	        408   (28.64)	7.02%	   
1935	        480   (29.51)	6.15%	   
1936	        596   (29.94)	5.02%	   
1937	        543   (30.59)	5.63%	   
1938	        463   (30.81)	6.66%	   
1939	        476   (30.37)	6.38%	   
1940	        409   (30.16)	7.37%	   
1941	        388   (30.59)	7.89%	   
1942	        331   (34.06)	10.29%	   
1943	        395   (36.67)	9.28%	   
1944	        386   (37.75)	9.78%	   
1945	        429   (38.62)	9.00%	   
1946	        389   (39.49)	10.15%	   
1947	        356   (46.65)	13.09%	   
1948	        331   (51.42)	15.56%	   
1949	        290   (52.07)	17.93%	   
1950	        299   (50.99)	17.03%	   
1951	        305   (55.11)	18.06%	   
1952	        272   (57.49)	21.12%	   
1953	        216   (57.71)	26.78%	   
1954	        213   (58.36)	27.39%	   
1955	        217   (57.93)	26.70%	   
1956	        173   (58.15)	33.55%	   
1957	        112   (59.88)	53.37%	   
1958	         59   (62.05)	104.44%	   
1959	         1   (62.92)	  N/A	 
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Resources for more information

Feasible retirement withdrawal rates by Yun-Fang Juan
Interesting study using both the NYU dataset (1928 2010) and the Robert Shiller's (1871-2010) database.


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Copyright 2003 John P. Greaney, All rights reserved.

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