If you’ve built a globally diversified portfolio of low-cost ETFs, you should be able to withdraw an inflation-adjusted 4 percent per year. When doing so, your money should last at least 30 years. But what if the stock market threw some unexpected twists? Would you run out of money?
Anything is possible. So let’s imagine several horrible scenarios that all take place during one person’s retirement.
1. Imagine the U.S. stock market not making money for more than 10 years.
2. Imagine the International stock market not making money for more than 10 years.
3. Imagine global stocks crashing 51 percent, halfway through your retirement.
It might be tough to imagine this three-way punch. But this all happened between January 1989 and February 28, 2019. The American S&P 500 index went 10 years and 11 months without making a penny (January 2000 to November 30, 2010).
The S&P 500 Didn’t Make A Profit
January 2000 – November 30, 2010 (10 years, 11 months)
The International stock market index went almost 11 years, barely eking out a profit. It averaged 0.27 percent per year from January 2008 to December 2018.
International Stocks Languished: January 2008 to December 2018
Now imagine a retiree who had to live through these slumps. They had a globally diversified portfolio representing 60 percent in a global stock index and 40 percent in a bond index. If they retired in 1989 with $500,000, and if they withdrew an inflation-adjusted 4 percent per year, you might wonder if they would have anything left today.
During the first year of their retirement, they would have withdrawn $20,929 (that’s 4% of $500,000, plus an adjustment for inflation). The following year, they would have withdrawn $22,207. Each year, the retiree would have continued to make inflation-adjusted withdrawals.
At that rate, you might say, “There’s no way that money would last 30 years.” After all, it included two lost decades. U.S. stocks went nowhere from 2000-2010; international stocks languished from 2008-2018. What’s worse, global stocks fell 51 percent between January 2008 and March 2009.
Now here’s the shocking part. According to portfoliovisualizer.com, after 30 years of retirement, the investor would have withdrawn more than $900,000 from their initial $500,000 portfolio. And by February 28, 2019, their portfolio would have been worth almost $1.7 million. That’s right. Their withdrawals would have exceeded the amount that they retired with. And by February 28, 2019, they would have almost $1.7 million left, despite those withdrawals.