Facing the Single Biggest Fear in Retirement

By Charlie Bilello

07 Jun 2022


After years of hard work, you’re ready to retire.

You’ve been a disciplined saver and investor, building up a sizable nest egg that should allow you to maintain your current lifestyle throughout your golden years.

Your biggest fear?

A devastating bear market that would significantly reduce the value of your portfolio and put you at risk of running out of money.

Looking back at history, is this fear justified?

Before attempting to answer that, let’s run through some assumptions:

  1. You have a $1 million portfolio at the start of your retirement, which will last 20 years (average length of retirement is 18 years).
  2. The $1 million is your only asset and source of income/principal (not a realistic assumption as 96% of people collect some form of social security during their lifetime and 79% of those 65 and older own their own home).
  3. The $1 million is invested in a Roth IRA where both earnings and withdrawals are non-taxable and minimum distributions are not required at any age.
  4. You are invested in a simple portfolio with only 2 positions: 50% US stocks (S&P 500 Index) and 50% US bonds (10-Year Treasury bond).
  5. You rebalance that portfolio on an annual basis at the end of each year. For simplicity, we’ll assume no fees, slippage or transaction costs (this is a much more accurate assumption today than in the past when fees/commissions were substantially higher).
  6. You believe in the “4% rule” and withdraw $40,000 (4% of $1 million) out of your portfolio at the start of your retirement for living expenses. At the end of each year thereafter, you adjust the $40,000 for inflation (CPI) and withdraw that amount.

Now let’s face your biggest fear (outliving your investments) head on, and assume that you had the misfortune of retiring at one of the worst possible times: the end of 1928 (Great Depression/World War II), 1961 (Vietnam War/Stagflationary Era), or 1998 (Dot-Com Bubble, Global Financial Crisis).

(Side note: I chose these three distinct periods as they include the most feared events for investors in the last hundred years and involve three different generations. Had I simply picked the worst three nominal returns, the analysis would be limited to the Great Depression/World War II era and my goal for this piece is to show how a retiree would have fared under various market environments.)

Data source for S&P 500 and 10-Year Treasury Bond Returns used throughout this post: Stern.nyu.edu/~adamodar.

How would you have fared? Let’s take a look…

1) The Great Depression, World War Stress Test: 1929 – 1948

The worst 20-year period in history for investors should come as no surprise, with the combination of the Great Depression and World War II putting the US economy and financial markets in dire straits.

The US stock market declined a record four consecutive years from 1929 through 1932, with a cumulative drawdown of nearly 65% (using annual total returns through the end of 1932).

While stocks declined, however, bonds advanced (15.5% over those same 4 years), cushioning the blow for diversified investors.

Still, by the end of 1932, your $1 million portfolio would have been reduced to $526,852, likely igniting your fear of running out of money.

But that fear would never materialize, as stocks would rally 187% in the subsequent 4 years (1933-36), replenishing your portfolio and rewarding you for buying low (re-balancing back to 50/50 by selling bonds and buying stocks) during the previous 4 years.

There would be another scare in the early 1940s after another deep bear market, but your portfolio would never breach the 1932 year-end low, and you would end the 20-year retirement period with a sizable estate ($715,920).

2) The Vietnam War, Stagflationary Environment Stress Test: 1962 – 1981

Another difficult period for equity investors occurred from 1962-1981, during which the US was confronted with the assassination of JFK (1963), the Vietnam War and the highest inflation rates we’ve ever seen (14.6% CPI in 1980).

You would make it through the 1960s relatively unscathed, and actually had a portfolio balance higher than where you started at the end of 1972 ($1.1 million). But then the 1973-74 bear market came, reducing your portfolio to $796,699 at the end of 1974 (stocks declined 36.5% cumulatively in 1973-74 on an annual basis). From there, high inflation was a constant headwind throughout the remainder of your retirement, but you would still have an estate worth $792,977 at the end of the 20-year period.

3) The Biggest Bubble in US History, Financial Crisis Stress Test: 1999 – 2018

In recent history, the worst 20-year period for retirees occurred from 1999 through 2018, which included the aftermath of the dot-com bubble (down years for the S&P 500 in 2000, 2001, and 2002) and the global financial crisis (longest recession since the Great Depression).

Once again, diversification and rebalancing proved invaluable, with bonds cushioning the blow from 2000-02 and again in 2008, after which stocks went on an incredible run (nine straight positive years from 2009-17).

By the end of the 20-year period, despite cumulative withdrawals of over $1 million, your portfolio would have been higher than where it started ($1,055,166).

The What-Ifs

As comforting as these examples might be, you still have concerns:

  • What if you lived 30 years during retirement instead of 20?

You would have been left with a much larger estate in both of the first two examples, as the additional 10-year periods were great ones for stocks (1949-58, 1982-91). We don’t yet have a 30-year period for the 1998 retirement example, but thus far the additional years have been beneficial as well (S&P 500 up 31.2% in 2019, 18.0% 2020, and 28.5% 2021).

  • What if you used a 5% withdrawal rate instead of 4%?

Not everyone agrees with the “4% rule,” with some saying it’s “too conservative,” arguing that spending 5% of your original portfolio balance (per year, adjusted for inflation) will work out just fine in most scenarios.

Indeed, this does seem to hold true in looking at the case studies above. You are left with a lower ending estate value and likely more anxiety along the way, but still don’t come close to running out of money.

  • What if the future is worse than the past has ever been?

Being a successful investor requires many things, but an optimistic view of the future is paramount. Why? Because without it, you won’t remain invested during the difficult times, of which there will be many. You must believe that through human ingenuity and grit, real economic growth and corporate profits will be higher 20 years from now than they are today.

If you believe that the next 20 years will be worse than a period in which we had a Great Depression (where an estimated 25% of the workforce was unemployed) and a World War (where an estimated 70 to 85 million people perished), then no amount of reason or analysis is going to allay your fears.

Mitigate Risk and Face Your Fears

What if you believe that the future will be better but don’t want to ever come close to running out of money? There a few things you can do to mitigate that risk: delay your retirement by a few years (save more), get a part-time job during retirement (supplement your portfolio income), or simply find a way to spend less (<4% withdrawal rate). None of these options may be palatable, but they are much more in your control than stock market returns which are often random and unpredictable.

What’s missing from this list?

Selling everything and putting the money under your mattress in fear of a devastating bear market. While that may provide comfort in the short run, that’s the surest path to hardship in the longer run, as you’re likely to lose considerable purchasing power over time. Which
means that for many, not taking enough risk may end up being the biggest risk of all.

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You can’t change what the markets will do in the future, but you can change the way you think about it. Knowing that retirees with a diversified portfolio would have made it through the worst periods in history should give you comfort that you’ll get through whatever challenges lie ahead.

Face your fears, have a plan, and enjoy your retirement. You’ve earned it.


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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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