A once popular eigenshibboleth is the need for stocks to finance retirement. There are lots of graphs of historical compounding of the SP500 over various periods, but I was curious about account balances over periods of retirement consumption. This is a simple (* see note) study of hypothetical $1M retirement accounts invested in the SP500, for 5 different individuals each retiring at the beginning of a decade: 1950, 1960, 1970, 1980, and 1990.

For everyone (except Goldman Sachs employees), they say one needs about 80% of their pre-retirement income to retire comfortably. $8,000 per month is 80% of $120,000 annual income (average government employee). Each of the 5 retirees puts $1M into the SP500 at the beginning of his retirement (his because a woman's work is never done), and each month sells stock and draws out $8,000 - leaving the balance in stocks. The balance of each retirement portfolio varies due to monthly drawdown + stock exposure, and the running account-balances are graphed in the attachment to compare balance variability and time to depletion for the different periods.

1950 did very well, with his account varying about $1.5M from 1955-69, and he didn't run out of money until 1989. Men didn't live so long then, so his widow must have been smart. The money lasted 39 years.

1960 wasn't so lucky: his account dropped rapidly in value, and was gone by 1974. Hopefully his wife was a professor too, and for the rest of their days they read books from the library together. Money lasted 14 years.

1970 unfortunately had to go back to work after 10 years, when his $1M was gone. Fortunately he got a job as a photographer for Playboy.

1980 made Einstein look like a Troglodyte. His account is still nearly $1M in 2009, and at times approached $3M. 1980 is a widower, and is friends with 1970, who set him up and he is now happily wed to a centerfold. Has been spending for 29 years and no end in sight.

1990 got off to a great start, but the last decade put him into Cymbalta, Cialis, and Metamucil. His account, which was worth $1.6M in 2000, is worth only $280,000 now, and he is calling the Senate today to make sure his meds will be free. 19+years and looking precarious; money may be gone in 3 years.

Note: *(study is very simple: inflation not factored, ignore effects of taxes, SP without dividends, earlier periods hard to index, no one has 100% in stocks, etc).


Anton Johnson comments:

An excellent study that demonstrates the perils of excessive withdrawal rates and underfunded retirement savings.

If we account for dividends and inflation which are not trivial, add government retirement benefits, and the modeled retiree varies withdrawal rates to the widely recommended annual 4-5% of gross account value, certainly a rosier picture emerges.

Kim Zussman adds:

There are many ways the retardees [Ed.: spelling?] could or should have allocated/withdrawn, but here I was trying to elucidate the effect of luck: when you retire vs the market then.  The graphs are reverse of often shown compounding up to retirement — adding X per month to stock account (Famous example Mr. Hill, the engineer who used Value Line to compound millions).

One notes the effect here of changing cycles:  1977-00 worked for all stocks, not just growth.  And since then, well, it's been more difficult.  Even difficult for Value Line:

"November 10th, 2009

Last week the SEC charged Value Line Inc., an affiliated broker-dealer Value Line Securities (VLS), and two of Value Line’s senior officers with defrauding the firm’s family of mutual funds. Value Line’s CEO Jean Buttner and its former Chief Compliance Officer David Henigson have both settled the charged by consenting to the entry of a cease-and-desist order, though they have neither admitted to nor denied the SEC’s charges.

The Commission found that Value Line had been redirecting portions of the funds’ securities trades to VLS from 1986 until 2004 and that Buttner and Henigson overall received “over $24 million in bogus brokerage commissions from the funds pursuant to this scheme, as VLS did not perform any bona fide brokerage services for the funds on these trades.”

According to the SEC’s press release, Value Line, Buttner and Henigson further misrepresented VLS’s “phantom brokerage services” to Value Line’s shareholders, the Independent Directors/Trustees, and the SEC."

What if you invest in something other than the stock market? In the interest of ethnic diversity, attached is chart of $1M retirement accounts, each drawing $8000 per month, and compounding 1, 2,3,4,5% interest monthly on the remaining balances.  I left off the current 0% interest environment, as an exercise for the reader.

Alston Mabry replies:

That's funny, because one of the authors of one of the investment books you listed previously, recently penned a journalistic piece about how maybe it didn't make sense to go to college, because if you put the college money instead into a savings account earning "just 5%", then you would get a better lifetime return.

The whereabouts of this magical savings account was not given.

Jason Ruspini writes in:

The effects of demographics on the underlying returns can't be too auspicious for more recent vintages. The parallel the Sage drew between 1954 and today seems very shaky in that respect.





Speak your mind

6 Comments so far

  1. John on November 21, 2009 8:23 pm


  2. Rocky Humbert on November 22, 2009 12:03 pm

    If there is any lesson to be drawn from this study, it should be that any investor who puts 100% of their net worth in any asset class is acting imprudently. Putting 100% of one’s assets in T-bills is equally imprudent…

    As bad as the returns that some of Dr. Zussman’s retirees experienced in their stock portfolios, it still beats the fate faced by average nationalized and/or persecuted investors in Cuba, Germany, Russia, Armenia, and so on.

    Where was this post in December, 1999?

  3. Gary Rogan on November 23, 2009 12:07 am

    There is really no way to “retire” with any degree of permanence using only one’s holdings in a particular country’s stock market. As I wrote early this year, much to Rocky’s distress, the worldwide economic collapse couldn’t be stopped then, and it can’t be stopped now, it’s simply taking it’s own sweet time to play out. Just like in the ancient times, there is really no fundamental protection against those who want to take everything that you own nor against other type of calamities brought on by foolishness of the masses or nature, and certainly being investing in S&P500 isn’t a way to maximize one’s chance of making it to the other side. As the sheer horror our civilization is about to face is being reflected in the price of gold those who are bidding it up to 1200 will discover that gold isn’t very nutritious.

  4. Rocky Humbert on November 23, 2009 2:05 pm

    Mr. Rogan: Whence we last sparred, I was an unabashed bull on virtually all "risky" financial assets. Entirely by chance, I met the Chair for drinks on that memorable Thursday in March — at which time I re-affirmed my belief that any reasonable scenario would include double-digit S&P gains over a reasonable time horizon. I did not predict a 60% rally in eight months — and while it's been enjoyable, it has substantially reduced future expected returns. Please let the record show that while I am no longer wildly bullish about "risky" financial assets, I remain an unwavering bull on the future of civilization. Regrettably, the Chicago Board of Trade does not sell future-of-civilization futures!

  5. William Brauer on November 23, 2009 3:44 pm

    How dividends were accounted for is of interest — wouldn't we expect something like $20,000+ in dividends anually, reducing the need to sell stocks to fund withdrawls by a like amount?

  6. Gary Rogan on November 24, 2009 12:17 pm

    Rocky, the civilization, as I also indicated last time will be just fine in the long term. It’s the medium-term that’s looking dicey. The rise in risky assets has been truly amazing, but not nearly as amazing if calculated in constant dollars or relative to the price of gold, which is a relatively less-risky asset. What was even more amazing and hardly predicted by anyone is the near perfect negative correlation between the dollar and S&P500 since March of this year. As Keynesiasm minus the “accumulate surplaces during the good time” seems to be the reigning religion there is truly no way to get through this period without discrediting this ideology, and discrediting it is costly.


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