It has always intrigued me that successful individuals, who by bent of their education and accomplishments are anything but average, consider themselves average when planning for retirement. Our three decades of experience has shown us that there really are no average retirees, yet that is precisely what most investors think they will be.
The Bad Luck Scenario
Here’s the truth: Even with the above inflation (premium) average returns from the stock market, everyone is impacted by a powerful and uncontrollable force…luck. The “Bad Luck Scenario,” encountering a multi-year period of market decline, can impact even those who are well prepared.
The impact of luck is one reason we roundly reject the notion of a “one size fits all” retirement strategy. Regardless of what the “average” or “normal” might be, your retirement is unique. There are no “safe” withdrawal rates, just your withdrawal rate.
Few Years Are Average
Once you have fully retired, your available pool of investment resources becomes mostly fixed. A period of negative investment returns, particularly at the outset of retirement, can have a long-lasting impact on your available financial resources. Since markets move in both the positive and negative directions, you need to consider both. While it is comforting to realize that stock market returns are positive in about three of every four years, when you are retired, your withdrawals occur every year.
The chart below demonstrates just how few years are “average.” Only a handful of the past 91 years market returns have been at or near the average. In many years, the actual returns were above or below the average by a wide margin. It is critical to comprehend the full range of possible outcomes, not just the average.
Many canned financial planning programs spit out year-by-year projections that have basically no value from a financial planning perspective. If anything, these projections that focus on “success rates” have the effect of anesthetizing investors into thinking they can engineer outcomes. The truth is bad luck is a part of financial life. It can neither be planned away or controlled.
So, What’s the Answer?
Well, the only real remedy is to have enough margin of error that your retirement plan can withstand a multi-year market decline. The good news is the S&P 500 has only had two of these multi-year episodes in the past 50 years; 1973-74 and more recently 2000-2002.
From a practical perspective, it is prudent to have an “escape valve” on your retirement withdrawal plan. If portfolio values decline for more than one year, withdrawals should be reduced to lessen the impact. Conversely, when investment returns exceed long-term expectations, you have the option of consuming more. Start there. Ready for a real conversation?