Are You Lucky Enough To Make Money?

Are You Lucky Enough To Make Money?

Imagine two similar investors, Leslie and Bob.
  • They each retire with a $500,000 portfolio.
  • They each withdraw 4% of their portfolio in the first year of retirement, then adjust that amount upward each year to account for inflation (as measured by the Consumer Price Index).
  • Their portfolios are identical: 60% in Vanguard Total Stock Market Index Fund and 40% in Vanguard Total Bond Market Index Fund, rebalanced at the end of each year.
  • The only difference is that Leslie retired at the end of 1994, and Bob retired at the end of 1999.

The Result?

  • 10 years into her retirement, Leslie’s portfolio had more than doubled, with an ending value of $1,062,606. (And 5 years after that, it had grown further to $1,105,982.)
  • 10 years into his retirement, Bob’s portfolio was worth only $400,354.
They each followed the rules (more or less) with fairly conservative, low-cost portfolios, rebalanced annually. Yet because of when they retired, their retirements look very different. Leslie will be (mostly) free from money worries, and she’ll be able to give generously to her children, grandchildren, and charities of choice. In contrast, Bob will have to be careful so as to avoid running out of money.

Why such a difference?

For the first few years of Leslie’s retirement, the stock market was shooting upward. In contrast, Bob’s retirement began with a 3-year bear market. When Leslie liquidated investments to pay for living expenses, she was selling high. Bob was selling low. By the time the market began to rebound in 2003, Bob had already liquidated a good portion of his portfolio, so he didn’t benefit as much from the bull market as he would have if it had occurred at the beginning of his retirement. In short, if you follow conventional investing wisdom:
  • A bull market in the first few years of your retirement puts you on easy street, yet
  • A bear market in the first few years of your retirement can mean money worries for the rest of your life.

Ways to Protect Yourself

What can you do to avoid finding yourself in Bob’s position during retirement? 1) Most importantly, lower your withdrawal rate. Many experts argue that a 4% withdrawal rate involves taking on very real risk of outliving your money. 2) If you don’t have enough saved to use a withdrawal rate lower than 4%, annuitizing a portion of your portfolio can be help reduce the chance of outliving your money. (On the other hand, it also reduces the amount you’ll end up leaving to your heirs.) 3) Take valuation levels into account when determining your asset allocation. In other words, it was a mistake for Bob to have 60% of his portfolio in stocks at 1999 price levels.


* Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month. The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He is aggressively investing in real estate crowdfunding to arbitrage low valuations and take advantage of positive demographic trends away from expensive coastal cities. Updated for 2021 and beyond.

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