Tuesday, June 19, 2012

Grim News: Another Look at the 2000 Retiree

On Monday, I provided a fresh look at the situation 12 years later for someone who retired at the start of the year 2000.

I looked at the results for someone using a 4% withdrawal rate with inflation-adjusted withdrawal amounts who rebalances annually to an allocation of 50% stocks and 50% intermediate-term government bonds. The news was not as grim as I expected.

At the Early Retirement Forum, Running Man suggests that I cherry-picked my asset allocation to make things look better for the 2000 retiree. While it was not intentional, he may be right. Essentially, bonds have performed very well since 2000. He suggests that in 2000 a more common asset allocation would have been 75% stocks and 25% cash. He also says not to forget about fees.  Now I will show results for a few more scenarios, and things are now looking much worse for 2000 retirees than I reported first.

About fees, I will consider a 1% annual fee. This can be interpreted as investors underforming the index returns by 1%. I mean, the fee is not offset by additional returns from the fund manager.

There are four tables below. The first is for 75% stocks/25% bills and a 1% fee. The 2000 retiree is in the worst shape of anyone after 12 years, with a current withdrawal rate already about 12.5%. These are not conditions that will allow for a sustainable 30 year retirement unless a market boom begins very soon.

The second table is still 75/25, but removes the fee. The current withdrawal rate falls a bit to 10.22%, but it is still dangerously high.

In the 3rd table, I look at 50% stocks and 50% cash.  No bonds. No fee. Now the 2000 retiree is in a bit better shape than the 1937 retiree. The current withdrawal rate is 8.7%. But this is still uncomfortably high for someone only 12 years into retirement.

Finally, in the 4th table I add the 1% fee back to 50% stocks and 50% cash. The CWR is 10.48%.

So it does look like the bull market for bonds could be a saving grace for 2000 retirees, but only for those retirees who actually held bond mutual funds and enjoyed the capital gains from selling some bond holdings during that time.  Those focusing on stocks and cash will be in much worst shape.









Table 3.3a
Retirements Ranked By Lowest Remaining Real Wealth 12 Years After Retirement
For 4% Withdrawal Rate, 75% S&P 500 & 25% 90-Day T-Bills, Inflation-Adjusted Withdrawals, 1% Annual Fee
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds


12 Years Later
(i.e. these numbers are from the start of 2012 for a 2000 retiree)
Rank
Ret. Year
Remain. Real Wealth (%)
Current Withdrawal Rate
Remain. Nominal Wealth (%)
Cyclically-Adjusted Price Earnings Ratio (PE10)
Dividend Yield
10-Year Gov't Bond Yield
1
2000
32.0
12.49
41.7
21.21
2.06
1.97
2
1937
35.0
11.44
58.6
10.25
6.18
2.31
3
1973
36.3
11.02
86.5
10.00
4.41
11.38
4
1969
37.5
10.68
80.9
9.26
4.66
12.57
5
1968
37.8
10.58
75.5
8.85
5.14
10.80
6
1966
39.8
10.04
72.8
9.24
5.22
7.96
7
1970
42.4
9.45
96.9
7.39
5.68
14.59
8
1999
43.1
9.29
56.8
22.97
1.79
3.39
9
1972
45.3
8.83
107.6
9.89
4.28
11.67
10
1971
46.7
8.57
110.4
8.76
4.77
10.46
11
1967
48.0
8.33
90.7
9.26
5.12
9.10
12
1929
50.0
8.01
40.7
13.90
6.35
1.95
13
1965
50.8
7.87
90.3
11.44
3.95
7.21
14
1930
51.4
7.78
42.2
10.10
7.84
2.46
15
1964
56.1
7.13
94.3
11.19
3.80
7.74
Note: Data for PE10, Dividend Yield, and 10-Year Government Bond Yield are the values for the January occurring 12 years later. This data is from Robert Shiller's homepage.
















Table 3.3a
Retirements Ranked By Lowest Remaining Real Wealth 12 Years After Retirement
For 4% Withdrawal Rate, 75% S&P 500 & 25% 90-Day T-Bills, Inflation-Adjusted Withdrawals, No Fee
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds


12 Years Later
(i.e. these numbers are from the start of 2012 for a 2000 retiree)
Rank
Ret. Year
Remain. Real Wealth (%)
Current Withdrawal Rate
Remain. Nominal Wealth (%)
Cyclically-Adjusted Price Earnings Ratio (PE10)
Dividend Yield
10-Year Gov't Bond Yield
1
2000
39.1
10.22
51.0
21.21
2.06
1.97
2
1937
42.4
9.44
71.0
10.25
6.18
2.31
3
1973
44.6
8.96
106.4
10.00
4.41
11.38
4
1968
45.7
8.75
91.3
8.85
5.14
10.80
5
1969
45.7
8.75
98.8
9.26
4.66
12.57
6
1966
47.7
8.38
87.2
9.24
5.22
7.96
7
1970
50.8
7.87
116.3
7.39
5.68
14.59
8
1999
51.6
7.75
68.0
22.97
1.79
3.39
9
1972
54.8
7.30
130.2
9.89
4.28
11.67
10
1971
56.0
7.14
132.3
8.76
4.77
10.46
11
1967
57.0
7.02
107.6
9.26
5.12
9.10
12
1929
59.6
6.72
48.5
13.90
6.35
1.95
13
1965
60.4
6.62
107.3
11.44
3.95
7.21
14
1930
60.8
6.58
49.9
10.10
7.84
2.46
15
1964
66.0
6.06
110.9
11.19
3.80
7.74
Note: Data for PE10, Dividend Yield, and 10-Year Government Bond Yield are the values for the January occurring 12 years later. This data is from Robert Shiller's homepage.
























Table 3.3a
Retirements Ranked By Lowest Remaining Real Wealth 12 Years After Retirement
For 4% Withdrawal Rate, 50% S&P 500 & 50% 90-Day T-Bills, Inflation-Adjusted Withdrawals, No Fee
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds


12 Years Later
(i.e. these numbers are from the start of 2012 for a 2000 retiree)
Rank
Ret. Year
Remain. Real Wealth (%)
Current Withdrawal Rate
Remain. Nominal Wealth (%)
Cyclically-Adjusted Price Earnings Ratio (PE10)
Dividend Yield
10-Year Gov't Bond Yield
1
1937
38.7
10.34
64.8
10.25
6.18
2.31
2
2000
46.0
8.70
59.9
21.21
2.06
1.97
3
1969
49.7
8.05
107.4
9.26
4.66
12.57
4
1968
49.9
8.02
99.7
8.85
5.14
10.80
5
1973
50.7
7.89
120.8
10.00
4.41
11.38
6
1966
52.0
7.69
95.0
9.24
5.22
7.96
7
1970
53.1
7.53
121.6
7.39
5.68
14.59
8
1939
54.3
7.37
91.5
11.90
7.02
2.57
9
1936
55.1
7.26
85.7
10.42
5.66
2.44
10
1999
55.6
7.19
73.3
22.97
1.79
3.39
11
1972
56.6
7.07
134.4
9.89
4.28
11.67
12
1971
56.6
7.06
133.9
8.76
4.77
10.46
13
1940
57.8
6.92
103.6
12.53
5.83
2.68
14
1967
58.0
6.90
109.4
9.26
5.12
9.10
15
1965
61.3
6.53
108.9
11.44
3.95
7.21
Note: Data for PE10, Dividend Yield, and 10-Year Government Bond Yield are the values for the January occurring 12 years later. This data is from Robert Shiller's homepage.
















Table 3.3a
Retirements Ranked By Lowest Remaining Real Wealth 12 Years After Retirement
For 4% Withdrawal Rate, 50% S&P 500 & 50% 90-Day T-Bills, Inflation-Adjusted Withdrawals, 1% Fees
Using SBBI Data, 1926-2011, S&P 500 and Intermediate-Term Government Bonds


12 Years Later
(i.e. these numbers are from the start of 2012 for a 2000 retiree)
Rank
Ret. Year
Remain. Real Wealth (%)
Current Withdrawal Rate
Remain. Nominal Wealth (%)
Cyclically-Adjusted Price Earnings Ratio (PE10)
Dividend Yield
10-Year Gov't Bond Yield
1
1937
31.9
12.53
53.5
10.25
6.18
2.31
2
2000
38.2
10.48
49.7
21.21
2.06
1.97
3
1969
41.1
9.72
88.9
9.26
4.66
12.57
4
1968
41.6
9.63
83.0
8.85
5.14
10.80
5
1973
41.8
9.58
99.6
10.00
4.41
11.38
6
1966
43.6
9.18
79.7
9.24
5.22
7.96
7
1970
44.4
9.01
101.6
7.39
5.68
14.59
8
1939
45.1
8.87
76.0
11.90
7.02
2.57
9
1936
46.4
8.62
72.2
10.42
5.66
2.44
10
1999
46.7
8.57
61.5
22.97
1.79
3.39
11
1972
47.0
8.51
111.7
9.89
4.28
11.67
12
1971
47.3
8.45
111.9
8.76
4.77
10.46
13
1940
48.1
8.32
86.2
12.53
5.83
2.68
14
1967
48.9
8.19
92.2
9.26
5.12
9.10
15
1965
51.7
7.74
91.8
11.44
3.95
7.21
Note: Data for PE10, Dividend Yield, and 10-Year Government Bond Yield are the values for the January occurring 12 years later. This data is from Robert Shiller's homepage.
























2 comments:

  1. Wade, Most of this is a rearview mirror analysis. What do thinks look like if you look at the 2013 retiree, facing possible bond yields in negative territory for the next 10 years?

    ReplyDelete
    Replies
    1. Hi,

      Having the negative yields for 10 years and then reverting to historical averages is one of the scenarios we looked at in Table 2 of an article summarized here (table included):

      http://wpfau.blogspot.jp/2013/01/new-research-article-4-rule-is-not-safe.html

      Delete