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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.
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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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